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EX-23.6 - EX-23.6 - USD Partners LPd738487dex236.htm
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EX-23.1 - EX-23.1 - USD Partners LPd738487dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on September 22, 2014

Registration No. 333-198500

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

USD Partners LP

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   4610   30-0831007

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

811 Main Street, Suite 2800

Houston, Texas 77002

(281) 291-0510

(Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

Daniel K. Borgen

Chief Executive Officer and President

USD Partners LP

811 Main Street, Suite 2800

Houston, Texas 77002

(281) 291-0510

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

Sean T. Wheeler

Keith Benson

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

  

Douglas E. McWilliams

Sarah K. Morgan

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x     (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 2014

PRELIMINARY PROSPECTUS

LOGO                                 

Common Units

Representing Limited Partner Interests

 

This is the initial public offering of our common units representing limited partner interests. We are offering              common units. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $         and $         per common unit. We have applied to list our common units on the New York Stock Exchange under the symbol “USDP”.

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 28.

These risks include the following:

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

   

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

   

Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

   

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

   

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

   

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

   

Our general partner and its affiliates, including US Development Group LLC (USD), have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders.

   

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

   

Energy Capital Partners has substantial influence over USD and our general partner, and its interests may differ from those of USD, us and our public unitholders.

   

Affiliates of our general partner, including USD, and Energy Capital Partners and its affiliates may compete with us, and none of Energy Capital Partners, our general partner or any of their respective affiliates have any obligation to present business opportunities to us.

   

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and that may require you to sell your common units at an undesirable time or price.

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

   

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors” and “Summary—Implications of Being an Emerging Growth Company.”

 

     Per Common
Unit
     Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $                    $                

Proceeds to USD Partners LP (before expenses)

   $                    $                

 

(1)   Excludes an aggregate structuring fee of     % of the gross proceeds payable to Evercore Group L.L.C., Citigroup Global Markets Inc. and Barclays Capital Inc. and certain other reimbursable underwriting expenses paid by us. Please read “Underwriting.”

The underwriters may purchase up to an additional             common units from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2014 through the book-entry facilities of The Depository Trust Company.

 

Citigroup   Barclays   Credit Suisse   BofA Merrill Lynch

 

 

 

Evercore  

        BMO Capital Markets

  Deutsche Bank Securities     RBC Capital Markets   

 

Janney Montgomery Scott

 

                    , 2014


Table of Contents

Transloading Facility at Our Hardisty Rail Terminal

 

LOGO

 

Crude Oil Unit Train Staging Area and Loop Tracks at Our Hardisty Rail Terminal

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

SUMMARY

     1   

Overview

     1   

Industry Trends

     3   

Our Competitive Strengths

     5   

Our Business Strategies

     7   

Our Assets and Operations

     7   

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

     10   

Risk Factors

     10   

Our Management

     12   

Summary of Conflicts of Interest and Fiduciary Duties

     14   

Principal Executive Offices and Internet Address

     14   

Implications of Being an Emerging Growth Company

     15   

Formation Transactions

     15   

Simplified Organizational and Ownership Structure After this Offering

     17   

THE OFFERING

     19   

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     25   

RISK FACTORS

     28   

Risks Related to Our Business

     28   

Risks Inherent in an Investment in Us

     46   

Tax Risks

     57   

USE OF PROCEEDS

     63   

CAPITALIZATION

     64   

DILUTION

     65   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     67   

General

     67   

Our Minimum Quarterly Distribution

     69   

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December  31, 2013 and the Twelve Months Ended June 30, 2014

     71   

Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015

     73   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     83   

Distributions of Available Cash

     83   

Operating Surplus and Capital Surplus

     84   

Capital Expenditures

     86   

Subordinated Units and Conversion to Common Units

     87   

Distributions from Operating Surplus While Any Subordinated Units are Outstanding

     88   

Distributions from Operating Surplus After All Subordinated Units have Converted into Common Units

     89   

General Partner Interest and Incentive Distribution Rights

     89   

Percentage Allocations from Operating Surplus

     90   

General Partner’s Right to Reset Incentive Distribution Levels

     90   

Distributions from Capital Surplus

     92   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     93   

Distributions of Cash Upon Liquidation

     94   

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     97   

Non-GAAP Financial Measures

     99   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     101   

Overview

     101   

How We Generate Revenue

     101   

How We Evaluate Our Operations

     103   

 

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Table of Contents

Factors That May Impact Future Results of Operations

     104   

Factors Affecting the Comparability of Our Financial Results

     106   

Results of Operations

     108   

Year ended December 31, 2013 compared to year ended December 31, 2012

     108   

Six months ended June 30, 2014 compared to six months ended June 30, 2013

     110   

Liquidity and Capital Resources

     114   

Off-Balance Sheet Arrangements

     118   

Credit Risk

     119   

Contractual Cash Obligations and Other Commitments

     119   

Critical Accounting Policies and Estimates

     120   

Quantitative and Qualitative Disclosures About Market Risk

     122   

INDUSTRY OVERVIEW

     123   

The Role of Rail in the Energy Industry

     125   

Safety and Regulation

     127   

BUSINESS

     129   

Overview

     129   

Our Competitive Strengths

     131   

Our Business Strategies

     133   

Our Assets and Operations

     133   

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

     135   

Commercial Agreements

     136   

Competition

     138   

Seasonality

     138   

Insurance

     139   

Safety and Maintenance

     139   

Environmental Regulation

     139   

Title to Real Property Assets

     145   

Headquarters

     146   

Employees

     146   

Legal Proceedings

     146   

MANAGEMENT

     147   

Management of USD Partners LP

     147   

Directors and Executive Officers of USD Partners GP LLC

     148   

Board Leadership Structure

     151   

Board Role in Risk Oversight

     152   

Executive Compensation

     152   

Compensation of Our Directors

     153   

Our Long-Term Incentive Plan

     153   

Class A Units

     155   

SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     158   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     160   

Distributions and Payments to Our General Partner and Its Affiliates

     160   

Agreements Governing the Transactions

     161   

Other Agreements with USD and Related Parties

     163   

Procedures for Review, Approval and Ratification of Related Person Transactions

     164   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     166   

Conflicts of Interest

     166   

Fiduciary Duties

     170   

DESCRIPTION OF THE COMMON UNITS

     173   

The Units

     173   

Transfer Agent and Registrar

     173   

Transfer of Common Units

     173   

OUR PARTNERSHIP AGREEMENT

     175   

Organization and Duration

     175   

Purpose

     175   

 

ii


Table of Contents

Cash Distributions

     175   

Capital Contributions

     175   

Voting Rights

     176   

Applicable Law; Forum, Venue and Jurisdiction

     177   

Limited Liability

     178   

Issuance of Additional Interests

     178   

Amendment of Our Partnership Agreement

     179   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     181   

Dissolution

     182   

Liquidation and Distribution of Proceeds

     182   

Withdrawal or Removal of Our General Partner

     182   

Transfer of General Partner Interest

     184   

Transfer of Ownership Interests in Our General Partner

     184   

Transfer of Subordinated Units and Incentive Distribution Rights

     184   

Change of Management Provisions

     185   

Limited Call Right

     185   

Non-Taxpaying Holders; Redemption

     185   

Non-Citizen Assignees; Redemption

     186   

Meetings; Voting

     186   

Voting Rights of Incentive Distribution Rights

     187   

Status as Limited Partner

     187   

Indemnification

     187   

Reimbursement of Expenses

     188   

Books and Reports

     188   

Right to Inspect Our Books and Records

     188   

Registration Rights

     189   

UNITS ELIGIBLE FOR FUTURE SALE

     190   

Rule 144

     190   

Our Partnership Agreement and Registration Rights

     190   

Lock-up Agreements

     191   

Registration Statement on Form S-8

     191   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     192   

Partnership Status

     193   

Limited Partner Status

     194   

Tax Consequences of Unit Ownership

     194   

Tax Treatment of Operations

     200   

Disposition of Common Units

     201   

Uniformity of Units

     204   

Tax-Exempt Organizations and Other Investors

     204   

Administrative Matters

     205   

Recent Legislative Developments

     208   

State, Local, Foreign and Other Tax Considerations

     208   

NON-UNITED STATES TAX CONSEQUENCES

     210   

INVESTMENT IN USD PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     213   

UNDERWRITING

     215   

VALIDITY OF THE COMMON UNITS

     221   

EXPERTS

     221   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     221   

FORWARD-LOOKING STATEMENTS

     222   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A FORM OF SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF USD PARTNERS LP

     A-1   

APPENDIX B GLOSSARY OF TERMS

     B-1   

 

iii


Table of Contents

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor any of the underwriters have authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus. When you make a decision about whether to invest in our common units, you should not rely upon any information other than the information in this prospectus and any free writing prospectus. Neither the delivery of this prospectus nor the sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

 

Through and including                     , 2014 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

 

Industry and Market Data

 

The data included in this prospectus regarding the midstream energy industry, including descriptions of trends in the market and our position and the position of our competitors within the industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers and trade and business organizations and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in the industry in which we operate. Based on management’s knowledge and experience, we believe that the third-party sources cited in this prospectus are reliable and that the third-party information included in this prospectus or in our estimates is reasonably accurate and complete.

 

iv


Table of Contents

SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and, unless otherwise noted, that the underwriters’ over-allotment option to purchase additional common units from us is not exercised. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars.

 

All references in this prospectus, unless the context otherwise indicates, to (i) “USD Partners,” “we,” “our,” “us,” and “the Partnership” refer to USD Partners LP, a Delaware limited partnership, and its subsidiaries; (ii) “our general partner” refer to USD Partners GP LLC, a Delaware limited liability company; (iii) “our sponsor” and “USD” refer to US Development Group LLC, a Delaware limited liability company, and where the context requires, its subsidiaries; (iv) “USD Group LLC” refers to USD Group LLC, a Delaware limited liability company and currently the sole direct subsidiary of USD; (v) “Energy Capital Partners” refers to Energy Capital Partners III, LP and its parallel and co-investment funds and related investment vehicles; and (vi) “Goldman Sachs” refers to The Goldman Sachs Group, Inc. and its affiliates. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

 

USD Partners LP

 

Overview

 

We are a fee-based, growth-oriented master limited partnership formed by US Development Group LLC to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses. Our initial assets consist primarily of: (i) an origination crude-by-rail terminal in Hardisty, Alberta, Canada, with capacity to load up to two 120-railcar unit trains per day and (ii) two destination unit train-capable ethanol rail terminals in San Antonio, Texas, and West Colton, California, with a combined capacity of approximately 33,000 barrels per day (bpd). Our rail terminals provide critical infrastructure allowing our customers to transport energy-related products from multiple supply regions to multiple demand markets. In addition, we provide railcar services through the management of a railcar fleet consisting of 3,799 railcars, as of August 1, 2014, that are committed to customers on a long-term basis. We generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services. We do not take ownership of the underlying commodities that we handle nor do we receive any payments from our customers based on the value of such commodities. Rail transportation of energy-related products provides efficient and flexible access to key demand markets on a relatively low fixed-cost basis, and as a result has become an important part of North American midstream infrastructure.

 

The following table provides a summary of our initial assets:

 

Terminal Name

  

Location

   Designed
Capacity
(Bpd)
   

Commodity

Handled

  

Primary

Customers

  

Terminal

Type

Hardisty rail terminal

   Alberta, Canada      ~172,629 (1)    Crude Oil   

Producers/Refiners

/Marketers

   Origination

San Antonio rail terminal

   Texas, U.S.      20,000      Ethanol    Refiners/Blenders    Destination

West Colton rail terminal

   California, U.S.      13,000      Ethanol    Refiners/Blenders    Destination
     

 

 

         
        205,629           

 

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(1)   Based on two 120-railcar unit trains comprised of 31,800 gallon (approximately 757 barrels) railcars being loaded at 95% of volumetric capacity per day. Actual amount of crude oil loading capacity may vary based on factors including the size of the unit trains, the size, type and volumetric capacity of the railcars utilized and the type and specifications of crude oil loaded, among other factors.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Furthermore, approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions. In addition to terminalling services, we provide customers access to railcars under fleet services agreements which commit customers to railcars and fleet management services on a take-or-pay basis for periods ranging from five to nine years. These agreements are generally executed in conjunction with commitments to use our rail terminals.

 

For the six months ended June 30, 2014 and the year ended December 31, 2013, we had revenues of $10.9 million and $26.3 million, respectively, and net income (loss) of $(5.2) million and $6.4 million, respectively. These figures do not include the results of operations from our Hardisty rail terminal, which did not commence operations until June 30, 2014.

 

One of our key strengths is our relationship with our sponsor, USD. USD is an independent, growth-oriented developer, builder, operator and manager of energy-related infrastructure and was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 725,000 bpd. Ten of these terminals were subsequently divested in multiple transactions. From January 2006 through July 2014, USD has loaded and/or handled through its terminal network a total of over 75 MMbbls of crude oil and over 72 MMbbls of ethanol. Furthermore, USD has a nationally recognized safety record with no reportable spills at any of its terminals since its inception. USD is currently owned by Energy Capital Partners, Goldman Sachs and certain of USD’s management team members.

 

On September 19, 2014, Energy Capital Partners made a significant investment in USD, and indicated an intention to invest over an additional $1.0 billion of equity capital in USD, subject to market and other conditions, over five years to support USD’s growth and expansion plans. Energy Capital Partners, which together with its affiliates and affiliated funds, is a private equity firm with over $13.0 billion in capital commitments that primarily invests in North America’s energy infrastructure. Energy Capital Partners has significant energy infrastructure, midstream, master limited partnership and financial expertise to complement its investment in us. To date, Energy Capital Partners and its affiliated funds have 24 investment platforms with investments in the power generation, electric transmission, midstream and renewable sectors of the energy industry, including Summit Midstream Partners, LP, another public master limited partnership. Funds affiliated with Energy Capital Partners have invested a significant amount of capital in Summit Midstream Partners, LLC, the owner of the general partner of Summit Midstream Partners, LP in order to fund in part Summit’s continued development and acquisition of midstream assets.

 

USD, through USD Group LLC, currently has several major growth projects underway, including the development of strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.” At the

 

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closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group LLC will grant us a right of first offer on existing expansion projects at our Hardisty rail terminal for a period of seven years after the closing of this offering. USD and USD Group LLC will also grant us a right of first offer during this seven-year period on any additional midstream infrastructure assets and businesses that they may develop, construct or acquire. We cannot assure you that USD or USD Group LLC will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD or USD Group LLC to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

We believe USD intends for us to be its primary growth vehicle in North America. We intend to strategically expand our business by acquiring energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses from both USD and third parties. We also intend to grow organically by opportunistically pursuing growth projects and enhancing the profitability of our assets. We believe that USD’s successful project development and operating history, safety track record and industry relationships will allow us to execute our growth strategy.

 

Industry Trends

 

We expect to capitalize on the following trends in the energy industry:

 

   

New and growing supply sources.    U.S. and Canadian crude oil production has increased significantly in recent years. We expect this trend to continue as the U.S. Energy Information Administration (EIA) estimates that total U.S. crude oil production will grow 47.1% from 2012 to 2020. Similarly, the Canadian Association of Petroleum Producers (CAPP) estimates that total Canadian production of crude oil will grow 49.6% over the same time period. High-growth production areas in North America are often located at significant distances from refining centers, creating constantly evolving regional imbalances, which require the expedited development of flexible and sustainable transportation solutions. The extensive existing rail network, combined with rail transportation’s relatively low capital and fixed costs compared to other transportation alternatives, has strategically positioned rail as a long-term alternative transportation solution to the growing and evolving energy infrastructure needs.

 

   

Increased focus on flexibility, speed to market and sustainability.    The following benefits of rail have become a primary focus for producers, refiners, marketers and other energy-related market participants, and as such, have established, or have the potential to establish, rail as a preferred mode of transportation

 

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for crude oil as well as refined petroleum products, biofuels, natural gas liquids (NGLs) and frac sand/proppant:

 

   

Access to areas without existing or easily accessible transportation infrastructure.    Many of the emerging producing regions, such as the Western Canadian oil sands, have concentrated production in areas with either limited or virtually no existing cost-effective takeaway capacity. The extensive existing rail infrastructure network provides efficient takeaway capacity to these producing regions and access to multiple demand centers.

 

   

Faster deployment.    Rail terminals can be constructed at a fraction of the time required to lay a long-haul pipeline, providing a timely solution to meet new and evolving market demands. Relative to rail, new pipeline construction faces challenges such as lengthier build times and environmental permitting processes, geographic constraints and, in some cases, the lack of required political support.

 

   

Flexibility to deliver to different end markets.    Unlike pipelines, which typically transport product to a single demand market, rail offers producers and shippers access to many of the most advantageous demand centers throughout North America, enabling producers and shippers to obtain competitive prices for their products and to retain the flexibility to determine the ultimate destination until the time of transportation.

 

   

Comprehensive solution for refiners.    Rail provides refiners flexible access to multiple qualities and grades of crude oil (feedstock) from multiple production sources. Additionally, as refinery output grows, rail provides refiners access to the most attractive refined petroleum products and NGL markets.

 

   

Faster delivery to demand markets.    Rail can transport energy-related products to end markets much faster than pipelines, trucks or waterborne tankers. While a pipeline can take 30-45 days to transport crude oil to the Gulf Coast from Western Canada, unit trains can move crude oil along a similar path in approximately nine days.

 

   

Reduced shipper commitment requirements.    Whereas all of the pipeline transportation fee is typically subject to long-term shipper commitments, only a portion of rail transportation costs require long-term shipper commitments (railroads are typically contracted on a spot basis). Consequently, pipeline customers bear greater risk of shifts in regional price differentials and the location of demand markets.

 

   

Reduced shipper transportation cost.    Rail provides shippers significant operating cost advantages, particularly in situations where either (i) the amount of diluent required for the transportation of crude oil by pipeline is high, which is generally the case for production from the Canadian oil sands, or (ii) multiple modes of transportation are required to reach a particular end market.

 

   

Higher safety and regulatory standards.    Due to increased regulation and market focus on safety and reliability of operations, customers are placing additional value on utilizing established and reputable third-party providers to satisfy their rail terminalling and logistics needs. We believe this will allow us to increase market share relative to customer-owned operations or smaller operators that lack an established safety and regulatory compliance track record.

 

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Our Competitive Strengths

 

We believe that we are well positioned to capitalize on these industry trends because of the following competitive strengths:

 

   

Our relationship with USD.    We believe USD intends for us to be its primary growth vehicle in North America. We believe that USD, as the indirect owner of a     % limited partner interest, a 2.0% general partner interest and all of our incentive distribution rights, will be motivated to promote and support the successful execution of our principal business objectives and to pursue projects that directly or indirectly enhance the value of our business through, for example, the following:

 

   

Acquisition opportunities from a proven developer of unit train-capable rail terminals.    USD was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 725,000 bpd. USD currently has several major growth projects underway, including multiple expansion projects at our Hardisty rail terminal and the development of other strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.”

 

   

USD is backed by a proven energy infrastructure financial sponsor.    Energy Capital Partners has indicated an intention to invest over an additional $1.0 billion of equity capital in USD, subject to market and other conditions, over five years for the development, construction or acquisition of additional rail related and complementary midstream infrastructure assets and businesses. Energy Capital Partners and its affiliates are experienced energy investors with proven track records of making substantial, long-term investments in high-quality midstream energy assets, including other public master limited partnerships.

 

   

Market knowledge and industry relationships.    We believe that USD is an experienced innovator in the North American hydrocarbon-by-rail business and that its unique understanding of logistics and energy market trends as well as insights into business opportunities in our industry will help us identify, evaluate and pursue commercially attractive growth initiatives, which may include the acquisition of assets from our sponsor or third parties, the construction of new assets or the organic expansion of existing facilities. In addition, USD has established strong, long-standing relationships within the energy industry, which we believe will help us to grow and expand our business by creating opportunities with new customers and identifying new markets.

 

   

Longstanding strategic relationships with the railroads.    USD has extensive relationships with the railroads and is a significant revenue generator for several of them. Since its inception, USD has built 14 rail terminals that have provided service through connections to Class I railroads in North America, creating a strategic business relationship with the railroad industry. In addition, members of our senior executive management team have long distinguished careers with the railroads, including our Chief Operating Officer, who has over 40 years of experience working in key senior leadership roles on the Union Pacific and Missouri Pacific railroads and the Port Terminal Railroad Association. We believe these relationships will enable us to quickly identify and access strategic locations to grow our business.

 

   

Access to an experienced leadership team.    USD’s senior management team has an average of over 25 years of experience in the energy, transportation, railroad, refining, commodities trading, logistics and financial industries. Additionally, USD’s team has a demonstrated track record of sourcing and executing growth projects, as well as significant expertise with the financial, tax and legal structures required to effectively pursue acquisitions.

 

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Strong safety record.    USD has a nationally recognized record for safety. Its tradition of excellence in safety has been recognized by the National Safety Council, which has awarded USD its Superior Safety Performance Award, among others, for nine consecutive years from 2006 to 2014. USD also received two consecutive Stewardship Awards from Burlington Northern Santa Fe Railway for having zero incidents involving a hazardous spill or release. Additionally, it recently received the Safe Shipper Award from Canadian Pacific Railways. USD has loaded and/or handled through its terminal network a total of over 147 MMbbls of liquid hydrocarbons with no reportable spills as defined by the U.S. Department of Transportation (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) at any of its terminals since its inception.

 

   

Strategically located assets.    Our initial assets are located in critical supply and demand centers. Our Hardisty rail terminal offers strategic and flexible access to most North American refining markets to producers in Alberta’s Crude Oil Basin through the Hardisty hub. The Hardisty hub is one of the major crude oil supply centers in North America, serving as a large aggregation center for various grades of Canadian crude oil, and is an origination point for crude oil export pipelines to the United States. Our Hardisty rail terminal is the only unit train-capable crude-by-rail terminal located in the Hardisty hub and is ideally positioned to benefit from the continued growth in Western Canadian oil sands production, which has increased from 1.2 MMbpd in 2008 to 2.0 MMbpd in 2013 and is expected to reach 3.2 MMbpd by 2020 according to CAPP. Our San Antonio rail terminal is located within five miles of San Antonio’s gasoline blending terminals and is the only ethanol rail terminal in a 20-mile radius. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region of Southern California and is the only ethanol rail terminal in a ten-mile radius.

 

   

Stable and predictable cash flows.    Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay agreements with seven customers. Approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions.

 

   

Financial flexibility.    In connection with this offering, we intend to enter into a new $300.0 million senior secured credit agreement comprised of a $100.0 million term loan (drawn in Canadian dollars) and a $200.0 million revolving credit facility, which can expand to $300.0 million proportionately as the term loan principal is reduced. The revolving credit facility can be expanded further by $100.0 million, subject to receipt of additional lender commitments. The revolving credit facility will be undrawn at closing of this offering. In addition, we intend to retain a significant portion of the proceeds from this offering as cash on our balance sheet to fund potential future growth initiatives and general partnership purposes. We believe that this liquidity, combined with access to debt and equity capital markets, will provide us significant financial flexibility to execute our growth strategy effectively, efficiently and at competitive terms.

 

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Our Business Strategies

 

Our primary business objective is to increase the quarterly cash distribution we pay to our unitholders over time. We intend to accomplish this objective by executing the following business strategies:

 

   

Generate stable and predictable fee-based cash flows.    Substantially all of the operating cash flow we expect to generate is attributable to multi-year, take-or-pay agreements. We intend to continue to seek stable and predictable cash flows by executing fee-based agreements with existing and new customers.

 

   

Pursue accretive acquisitions.    We intend to pursue strategic and accretive acquisitions of energy-related rail terminals and high-quality and complementary midstream infrastructure assets and businesses from USD and third parties. We will consistently evaluate and monitor the marketplace to identify acquisitions within our existing geographies and in new regions that may be pursued independently or jointly with USD. We have not entered into, or begun to negotiate, any agreements to acquire any additional assets, including the Hardisty Phase II and Hardisty Phase III projects.

 

   

Pursue organic growth initiatives.    We intend to pursue organic growth projects and seek operational efficiencies that complement, optimize or improve the profitability of our assets. For example, we are currently in the process of seeking permits to construct a pipeline directly from our West Colton rail terminal to local gasoline blending terminals, which if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

   

Maintain a conservative capital structure.    We intend to maintain a conservative capital structure which, when combined with our focus on stable, fee-based cash flows, should afford us efficient and effective access to capital at a competitive cost. Consistent with our disciplined financial approach, we intend to fund the capital required for expansion and acquisition projects through a balanced combination of equity and debt financing. We believe this approach will provide us the flexibility to effectively pursue accretive acquisitions and organic growth projects as they become available.

 

   

Maintain safe, reliable and efficient operations.    We are committed to safe, efficient and reliable operations that comply with environmental and safety regulations. We will seek to improve operating performance through our commitment to technologically-advanced logistics and operations systems, employee training programs and other safety initiatives and programs with railroads, railcar producers and first responders. All of our facilities currently meet or exceed all government safety regulations and are in compliance with all recently enacted orders regarding the movement of crude-by-rail. We believe these objectives are integral to the success of our business as well as to our access to growth opportunities.

 

Our Assets and Operations

 

Hardisty Rail Terminal

 

Our Hardisty rail terminal is an origination terminal that commenced operations on June 30, 2014 and loads various grades of Canadian crude oil received from Alberta’s Crude Oil Basin through the Hardisty hub, which is one of the major crude oil supply centers in North America and is an origination point for export pipelines to the United States. The Hardisty rail terminal can load up to two 120-railcar unit trains per day and consists of a fixed loading rack with 30 railcar loading positions, a unit train staging area and loop tracks capable of holding five unit trains simultaneously. This facility is also equipped with an onsite vapor management system that allows our customers to minimize hydrocarbon loss while improving safety during the loading process. Our Hardisty rail terminal is designed to receive inbound deliveries of crude oil directly through a newly-constructed pipeline connected to the Gibson Energy Inc. (Gibson) Hardisty storage terminal. Gibson, which is one of the largest independent midstream companies in Canada, has 4.3 MMbbls of storage in Hardisty and has access to most of the major pipeline systems in the Hardisty hub. Gibson has announced that it is constructing an additional 2.3 MMbbls of storage capacity at its Hardisty terminal, with 1.7 MMbbls of additional capacity expected to be in

 

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service by early 2015 and an additional 0.6 MMbbls of capacity expected to be in service by early 2016. Pursuant to our facilities connection agreement with Gibson and subject to certain limited exceptions regarding manifest train facilities, our Hardisty rail terminal is the exclusive means by which crude oil from Gibson’s storage terminal can be transported by rail. The direct pipeline connection, in conjunction with USD’s terminal location, provides our Hardisty rail terminal with efficient access to the major producers in the region. Our Hardisty rail terminal is connected to Canadian Pacific Railroad’s North Main Line, which is a high capacity line with the ability to connect to all the key refining markets in North America.

 

Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Approximately 83% of our Hardisty rail terminal’s utilization is contracted with subsidiaries of five investment grade companies, including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators and all but one agreement has automatic renewal provisions.

 

San Antonio Rail Terminal

 

Our San Antonio rail terminal, completed in April 2010, is a unit train-capable destination terminal that transloads ethanol received by rail from Midwestern producers onto trucks to meet local ethanol demand in San Antonio and Austin, Texas. Our San Antonio rail terminal is located within five miles of San Antonio’s gasoline blending terminals and is the only ethanol rail terminal within a 20-mile radius. Due to corrosion concerns unique to biofuels such as ethanol, the long-haul transportation of biofuels by multi-product pipelines is less efficient and less economical than rail, which combined with our proximity to local demand markets, we believe positions our San Antonio rail terminal to benefit from anticipated changes in environmental and gasoline blending regulations that will make the role of ethanol more pervasive in the fuel for transportation market.

 

The San Antonio rail terminal can transload up to 20,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail from Union Pacific Railroad’s high speed line. We have entered into a terminal services agreement with a subsidiary of an investment grade company for our San Antonio rail terminal pursuant to which our customer pays us per gallon fees based on the amount of ethanol offloaded at the terminal. The San Antonio terminal services agreement will expire in August 2015, at which point the agreement will automatically renew for two subsequent three-year terms unless notice is provided by our customer. The current agreement entitles the customer to 100% of the terminal’s capacity, subject to our right to seek additional customers if minimum volume usage thresholds are not met.

 

West Colton Rail Terminal

 

Our West Colton rail terminal, completed in November 2009, is a unit train-capable destination terminal that transloads ethanol received by rail from regional and other producers onto trucks to meet local ethanol demand in the greater San Bernardino and Riverside County-Inland Empire region of Southern California. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region and is the only ethanol rail terminal within a ten-mile radius. Additionally, like our San Antonio rail terminal, we believe our West Colton rail terminal is strategically positioned to benefit from any increases in the utilization of ethanol in the fuel for transportation market.

 

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The West Colton rail terminal can transload up to 13,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail from Union Pacific Railroad’s high speed line. After receipt at our West Colton rail terminal, ethanol is then transported to end users by truck. We have been operating under a terminal services agreement at West Colton with a subsidiary of an investment grade company since July 2009, which is terminable at any time by either party. Under this agreement, we receive a per gallon, fixed-fee based on the amount of ethanol offloaded at the rail terminal. We are currently in the process of seeking permits to construct an approximately one-mile pipeline directly from our West Colton rail terminal to Kinder Morgan Energy Partners, L.P.’s gasoline blending terminals, which, if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

Railcar Fleet

 

We provide fleet services for a railcar fleet consisting of 3,799 railcars as of August 1, 2014, of which 988 railcars are in production or on order. We do not own any railcars. Affiliates of USD lease 3,096 of the railcars in our fleet from third parties. We directly lease 703 railcars from third parties. We have entered into master fleet services agreements with a number of customers for the use of the 703 railcars in our fleet, that we lease directly, on a take-or-pay basis for periods ranging from five to nine years. We have also entered into services agreements with the affiliates of USD for the provision of fleet services with respect to the 3,096 railcars which they lease from third parties. Under our master fleet services agreements with our customers and the services agreements with the affiliates of USD, we provide customers with railcar-specific fleet services associated with the transportation of crude oil, which may include, among other things, the provision of relevant administrative and billing services, the maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance as required in connection with the movement of railcars, and the negotiation for and sourcing of railcars. We typically charge our customers, including the affiliates of USD, monthly fees per railcar that include a component for railcar use (in the case of our directly-leased railcar fleet) and a component for fleet services. Approximately 65% of our current railcar fleet is dedicated to customers of our terminals. The remaining 35% of the railcar fleet is dedicated to a customer of terminals belonging to subsidiaries previously sold by our predecessor. We believe that our ability to provide customers with access to railcars provides an incentive to customers that do not otherwise have access to high-quality railcars to contract terminalling capacity at our facilities. We believe that the generally longer terms of fleet services agreements will incentivize our customers to extend their initial terminal services agreements with us.

 

Approximately 65% of our currently in-service railcars were constructed in 2013 and 2014. The average age of our currently in-service fleet is approximately four years as compared to the estimated 50-year life associated with these types of railcars. We have partnered with leaders in the railcar supply industry, such as CIT Rail, Union Tank Car Company, Trinity Industries and others. We believe that our strong relationships with these industry leaders enable us to obtain railcar market insight and to procure railcars on more advantageous terms, with shorter lead times than our competitors. Our current railcars are designed to a DOT Specification 111 (DOT-111) railcar standard and are built to carry between 28,000 to 31,800 gallons of bulk liquid volume. All of our railcar fleet is currently permitted to transport crude oil in the United States and Canada. Nearly 70% of our railcars are equipped with the most recent safety enhancements including thicker, more puncture-resistant tank shells, extra protective head shields and greater top fittings protection.

 

As of August 1, 2014, our railcar fleet consisted of a mix of 2,108 coiled and insulated (C&I) railcars and 1,691 non-coiled, non-insulated railcars. Our C&I railcars can reheat heavy viscous crude oil grades, reducing the need to blend these heavier crude grades with costly diluents. Of our 3,799 railcar fleet, 988 C&I railcars were in production as of August 1, 2014 and are scheduled to be delivered by March 2015, and 474 legacy non-coiled, non-insulated railcars will be retired by the end of 2015. Additionally, we have the option to procure another 425

 

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new C&I railcars as well as 500 pressurized railcars designed to transport crude oil, condensate and various natural gas liquids. The 925 railcars that we have the option to procure are scheduled for delivery in late 2015.

 

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

 

Our sponsor currently owns the right to construct and develop additional infrastructure at the Hardisty rail terminal, which could expand the number of 120-railcar unit trains that can be loaded from two unit trains to up to five unit trains per day. We refer to these expansion projects as Hardisty Phase II and Hardisty Phase III. USD is currently in the process of contracting, designing, engineering and permitting Hardisty Phase II, which would expand the capacity for handling and transportation of crude oil by two 120-railcar unit trains per day which we expect would be contracted under similar multi-year take-or-pay agreements to what we currently have in place at our Hardisty rail terminal. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, USD currently anticipates that Hardisty Phase II will commence operations in late 2015 or early 2016. Hardisty Phase III would expand capacity by one 120-railcar unit train per day and would target the loading of bitumen with very limited amount of diluent through the use of C&I railcars, which otherwise could not be transported by pipeline. Hardisty Phase III requires additional infrastructure to be designed, engineered, permitted and constructed. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, we currently anticipate that Hardisty Phase III will commence operations during 2017. We will enter into an omnibus agreement with USD and USD Group LLC that will grant us a right of first offer on Hardisty Phase II and Hardisty Phase III for a period of seven years after the closing of this offering. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.

 

We cannot assure you that USD will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project, including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

Risk Factors

 

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Please read carefully the risks described under “Risk Factors.”

 

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Risks Inherent in Our Business

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

 

   

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

 

   

The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

   

Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

 

   

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

 

   

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

 

   

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

 

   

Any reduction in our or our customers’ capability to utilize third-party pipelines, railroads or trucks that interconnect with our rail terminals or to continue utilizing them at current costs could cause a reduction of volumes transported through our rail terminals.

 

   

The fees charged to customers under our agreements with them for the transportation of crude oil may not escalate sufficiently to cover increases in costs, and the agreements may be temporarily suspended or terminated in some circumstances, which would affect our profitability.

 

   

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.

 

   

Our contracts subject us to renewal risks.

 

   

We depend on a limited number of customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, any one or more of these customers could adversely affect our ability to make cash distributions to our unitholders.

 

   

Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.

 

Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including USD, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders.

 

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Energy Capital Partners has substantial influence over USD and our general partner, and its interests may differ from those of USD, us and our public unitholders.

 

   

We intend to distribute a significant portion of our available cash, which could limit our ability to pursue growth projects and make acquisitions.

 

   

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion and our partnership agreement does not require us to pay any distributions at all. Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us.

 

   

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

   

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

   

Affiliates of our general partner, including USD, and Energy Capital Partners and its affiliates may compete with us, and none of Energy Capital Partners, our general partner or any of their respective affiliates have any obligation to present business opportunities to us.

 

   

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and that may require you to sell your common units at an undesirable time or price.

 

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

 

   

Notwithstanding our treatment for U.S. federal income tax purposes, we will be subject to certain non-U.S. taxes. If a taxing authority were to successfully assert that we have more tax liability than we anticipate or legislation were enacted that increased the taxes to which we are subject, the distributable cash flow to our unitholders could be further reduced.

 

   

The tax treatment of publicly traded partnerships, companies with multinational operations or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

   

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes.

 

Our Management

 

We are managed by the board of directors and executive officers of USD Partners GP LLC, our general partner. USD and Energy Capital Partners are each entitled to appoint three members of the board of directors of our general partner. Any independent directors appointed in accordance with the listing standards of the New York Stock Exchange (NYSE), will be designated by mutual consent of USD and Energy Capital Partners. Unlike shareholders in a publicly traded corporation, our common unitholders are not entitled to elect our general

 

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partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of USD. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of USD Partners GP LLC.”

 

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

 

Energy Capital Partners also has the right to appoint three of seven members of USD’s board of directors. For so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, USD will not, and will not permit its subsidiaries, including us and our general partner, to take or agree to take certain actions without the affirmative vote of Energy Capital Partners, including, among others, any acquisitions or dispositions and any issuances of additional equity interests in us. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us, any incurrence of debt by us and the approval, modification or revocation of any partnership budget. Please read “Risk Factors—Energy Capital Partners has substantial influence over USD and our general partner, and its interests may differ from those of USD, us and our public unitholders” and “Management—Special Approval Rights of Energy Capital Partners.”

 

In August 2014, the board of directors of our general partner granted 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holder to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights and will vest in four equal annual installments over the first four years following the consummation of this offering only if we grow our annualized distributions each year. If we do not achieve positive distribution growth in any of these years, the Class A Units that would otherwise vest for that year will be forfeited. The Class A Units contain a conversion feature, which, upon the vesting of the Class A Units, provides for the conversion of the Class A Units into common units based on a conversion factor that will be tied to the level of our distribution growth for the applicable year. The conversion factor will not be more than 1.25 for the first vesting tranche, 1.5 for the second vesting tranche, 1.75 for the third vesting tranche and 2.0 for the last vesting tranche. The maximum number of common units into which the Class A Units could convert is 406,250.

 

The Class A Units are intended as long-term equity incentives for our executive officers and other key employees and to align the economic interests of these executives and employees with the interests of our unitholders. By tying vesting and conversion rights of the Class A Units to annualized distribution increases, the ultimate value attained by the Class A Unit holders is expected to correspond closely to annualized distribution increases and capital appreciation for our public unitholders. The Class A Unit grants will also promote the retention of our key executives and employees as a result of the four year vesting schedule that will accompany these units. Please read “Management—Class A Units.”

 

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Summary of Conflicts of Interest and Fiduciary Duties

 

General

 

Our general partner has a legal duty to manage us in a manner it subjectively believes is not adverse to our best interest. However, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner beneficial to our sponsor and its owners, including Energy Capital Partners. Certain of the directors and officers of our general partner are also directors and officers of USD or of Energy Capital Partners. As a result of these relationships, conflicts of interest may arise in the future between us and holders of our common units, on the one hand, and our sponsor, Energy Capital Partners and our general partner, on the other hand. For example, our general partner and members of our general partner’s board of directors appointed by Energy Capital Partners will be entitled to make determinations that affect the amount of any cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner and its affiliates receive incentive cash distributions.

 

Partnership Agreement Replacement of Fiduciary Duties

 

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Pursuant to these provisions, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and the methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement and, pursuant to the terms of our partnership agreement, each holder of common units consents to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under applicable state law.

 

Our Sponsor and Energy Capital Partners May Compete Against Us

 

Our partnership agreement does not prohibit USD, Energy Capital Partners or their respective affiliates, other than our general partner, from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, Energy Capital Partners and its affiliates and affiliated funds are in the business of making investments in companies in the energy industry and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Please read “Risk Factors—Affiliates of our general partner, including USD, and Energy Capital Partners and its affiliates may compete with us, and none of Energy Capital Partners, our general partner or any of their respective affiliates have any obligation to present business opportunities to us” and “Risk Factors—Energy Capital Partners has substantial influence over USD and our general partner, and its interests may differ from those of USD, us and our public unitholders.”

 

For a more detailed description of the conflicts of interest and the duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties.” For a description of other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

Principal Executive Offices and Internet Address

 

Our principal executive offices are located at 811 Main Street, Suite 2800, Houston, Texas 77002, and our telephone number at that address is (281) 291-0510. Following the completion of this offering, our website will be located at www.usdpartners.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (SEC) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished

 

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to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute part of this prospectus.

 

Implications of Being an Emerging Growth Company

 

Our predecessor had less than $1.0 billion in revenue during its last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other obligations that are otherwise applicable generally to public companies. These provisions include:

 

   

the ability to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of its initial public offering;

 

   

exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies; and

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and financial statements.

 

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies. We are choosing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

 

Formation Transactions

 

General

 

We were formed on June 5, 2014 as a Delaware limited partnership.

 

At or prior to the closing of this offering, the following transactions will occur:

 

   

USD Group LLC will convey to us its ownership interests in each of its subsidiaries that own or operate the Hardisty, San Antonio and West Colton rail terminals and our railcar business;

 

   

we will issue to USD Group LLC              common units and all of our subordinated units, which will represent a     % limited partner interest in us following the issuance and sale of common units in this offering;

 

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we will issue to USD Partners GP LLC, a wholly owned subsidiary of USD Group LLC,              general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights, which will entitle USD Partners GP LLC to increasing percentages of the cash we distribute in excess of $         per unit per quarter;

 

   

we will enter into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility (undrawn) and a $100.0 million term loan (fully drawn in Canadian dollars);

 

   

we will sell              common units to the public in this offering, representing a     % limited partner interest in us; and

 

   

we will use the proceeds from this offering and borrowings under our term loan as set forth under “Use of Proceeds.”

 

In addition, at or prior to the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, our general partner and other affiliates of USD Group LLC governing, among other things:

 

   

USD and USD Group LLC’s grant of a right of first offer to us to acquire the Hardisty Phase II and Hardisty Phase III projects, and any additional midstream infrastructure assets and businesses that it may develop, construct or acquire, for a period of seven years after the closing of the offering, should USD decide to sell them;

 

   

USD Group LLC’s provision of certain indemnities to us; and

 

   

USD Group LLC’s provision of management and administrative services to us.

 

For further details on our agreements with USD and its affiliates, including amounts involved, please read “Certain Relationships and Related Party Transactions.”

 

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Simplified Organizational and Ownership Structure After this Offering

 

After giving effect to our formation transactions, assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised, our units will be held as follows:

 

     Number of
Units
     Percentage
Ownership
 

Public Common Units(1)

     

USD Common Units

     

Class A Units

     250,000      

USD Subordinated Units

     

General Partner Interest

        2.0
  

 

 

    

 

 

 
        100.0
  

 

 

    

 

 

 

 

(1)   Excludes up to              common units that may be purchased by certain of our officers, directors, employees and other persons associated with us pursuant to a directed unit program, as described in more detail in “Underwriting.”

 

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The following simplified diagram depicts our organizational structure after giving effect to our formation transactions.

 

LOGO

 

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THE OFFERING

 

Common units offered to the public

             common units; or

 

               common units if the underwriters exercise in full their over-allotment option to purchase additional common units.

 

Units outstanding after this offering

             common units (representing a          limited partner interest in us) and              subordinated units (representing a 49.0% limited partner interest in us. Our general partner will own              general partner units, representing a 2.0% general partner interest in us. Certain of our general partner’s executive management also own 250,000 Class A Units (representing a        % limited partner interest in us).

 

Use of proceeds

We intend to use the net proceeds from this offering (approximately $         million, after deducting underwriting discounts and commissions and structuring fees), together with borrowings of $         million under our new term loan facility, as follows:

 

   

to make a cash distribution to USD Group LLC of $         million;

 

   

to repay $         million of existing indebtedness; and

 

   

to pay $         million of fees and expenses in connection with our new revolving credit agreement and term loan.

 

The remaining approximately $         million will be retained by us for general partnership purposes, including to fund potential future acquisitions from USD and third parties and for funding potential future growth projects.

 

  An affiliate of an underwriter participating in this offering is a lender under the current USD credit facility and will receive a portion of the proceeds from this offering pursuant to the repayment of borrowings thereunder. Please read “Underwriting—Certain Relationships.”

 

  If the underwriters exercise their over-allotment option to purchase additional common units, we will use the net proceeds from that exercise to redeem from USD Group LLC a number of common units equal to the number of common units issued upon such exercise of the option at a price per unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee. Please read “Underwriting.”

 

Cash distributions

We intend to make minimum quarterly distributions of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after the establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

 

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  We will adjust the amount of our distribution for the period from and including the closing date of this offering through December 31, 2014, based on the actual length of that period.

 

  In general, we will pay any cash distributions we make each quarter in the following manner:

 

   

first, 98.0% to the holders of common units and Class A Units, pro rata, and 2.0% to our general partner, until each common unit and Class A Unit has received a minimum quarterly distribution of $         plus any arrearages on our common units (but not Class A Units) from prior quarters;

 

   

second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $        ; and

 

   

third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $        .

 

  Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.” Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us.

 

  If cash distributions to our unitholders exceed $         per unit in a quarter, holders of our incentive distribution rights (initially, our general partner) will receive increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” We will adopt a policy pursuant to which we will distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner’s board of directors to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. The board of directors of our general partner has broad discretion in setting the amount of cash reserves that may be established each quarter. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units.

 

 

If we had completed the transactions contemplated in this prospectus on January 1, 2013, we would not have generated positive pro forma distributable cash flow. Our unaudited pro forma distributable cash flow includes the estimated incremental expenses of being a public company as well as pre-operational costs related to our Hardisty rail terminal, without the corresponding revenues from that terminal. Our Hardisty rail terminal commenced operations on June 30, 2014, and we expect to generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Please read “Cash Distribution Policy and

 

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Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014.”

 

  We believe, based on the estimates contained in and the assumptions listed under “Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” that we will have sufficient distributable cash flow to enable us to pay the minimum quarterly distribution of $         on all of our common units, Class A Units and subordinated units for each quarter through September 30, 2015. However, unanticipated events may occur that could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned not to place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

Class A Units

Our partnership has issued 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holder to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights and will vest in four equal annual installments over the first four years following the consummation of this offering only if we grow our annualized distributions each year. If we do not achieve positive distribution growth in any of these years, the Class A Units that would otherwise vest for that year will be forfeited. The Class A Units contain a conversion feature, which, upon the vesting of the Class A Units, provides for the conversion of the Class A Units into common units based on a conversion factor that will be tied to the level of our distribution growth for the applicable year. The conversion factor will not be more than 1.25 for the first vesting tranche, 1.5 for the second vesting tranche, 1.75 for the third vesting tranche and 2.0 for the last vesting tranche. The maximum number of common units into which the Class A Units could convert is 406,250. Please read “Management—Class A Units.”

 

Subordinated units

USD Group LLC will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter prior to their conversion into common units, subordinated units are entitled to receive the minimum quarterly distribution of $         per unit only after the common units have received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

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  Subordinated units will convert into common units on a one-for-one basis in separate sequential tranches. Each tranche will be comprised of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but no more than once in any twelve-month period), provided on that date (i) distributions of available cash from operating surplus on each of the outstanding common units, Class A Units, subordinated units and general partner units equaled or exceeded $         (the annualized minimum quarterly distribution) for the four quarter period immediately preceding that date; (ii) the adjusted operating surplus generated during the four quarter period immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the common units, Class A Units, subordinated units and general partner units outstanding during that period on a fully diluted basis; and (iii) there are no arrearages in the payment of the minimum quarterly distribution on the common units. For each successive tranche, the four quarter period specified in clauses (i) and (ii) above must commence after the four quarter period applicable to any prior tranche of subordinated units. Accordingly, a tranche of subordinated units will not convert into common units more than once a year.

 

  Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Conversion to Common Units.”

 

Our general partner’s right to reset the target distribution levels

Our general partner, as the initial holder of all of our incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. If our general partner transfers all or a portion of the incentive distribution rights it holds in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the cash distribution amount per common unit for the fiscal quarter immediately preceding the reset election (we refer to such amount as the “reset minimum quarterly distribution amount”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount as our current target distribution levels.

 

 

In connection with resetting these target distribution levels, our general partner will be entitled to receive a number of common units equal to the quotient determined by dividing the amount of cash distributions received by our general partner in respect of its incentive distribution rights for the fiscal quarter immediately prior to the date of such reset election by the amount of cash distributed per common

 

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unit for such quarter. For a more detailed description of our general partner’s right to reset the target distribution levels upon which the incentive distribution payments are based, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

We can issue an unlimited number of additional units, including units that are senior to the common units in rights of distribution, liquidation and voting, on the terms and conditions determined by our general partner’s board of directors, without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our businesses. Our unitholders will have no right to elect our general partner or its directors on an annual or other 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, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, USD Group LLC will own              of our common units and all of our subordinated units, representing a     % limited partner interest in us. If the underwriters’ over-allotment option to purchase additional common units is exercised in full, USD Group LLC will own              of our common units and all of our subordinated units, representing a     % limited partner interest in us. As a result, you will initially be unable to remove our general partner without its consent, because USD Group LLC will own sufficient units upon completion of this offering to be able to prevent the general partner’s removal. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80.0% of the outstanding limited partner interests of any class, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. The partnership agreement will not obligate our general partner to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.

 

Material tax consequences

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 Federal Income Tax Consequences” and “Non-United States Tax Consequences.”

 

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Directed unit program

At our request, the underwriters have reserved up to     % of the units offered hereby at the initial public offering price for officers, directors, employees and certain other persons associated with us. The number of units available for sale to the general public will be reduced to the extent such persons purchase such reserved units. Any reserved units not so purchased will be offered by the underwriters to the general public on the same basis as the other units offered hereby. The directed unit program will be arranged through one of our underwriters, Barclays Capital Inc.

 

Exchange listing

We have applied to list the common units on the New York Stock Exchange under the symbol “USDP”.

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

 

The following table presents, in each case for the periods and as of the dates indicated, summary historical combined financial and operating data of our Predecessor and summary pro forma combined financial and operating data of USD Partners LP.

 

Our Predecessor consists of the assets, liabilities and results of operations of the wholly owned subsidiaries of USD that operate our Hardisty rail terminal, our San Antonio rail terminal, our West Colton rail terminal and that manage our railcar fleet. These subsidiaries will be conveyed to us in connection with this offering. Our Predecessor also includes the membership interests in five subsidiaries of USD which operated crude oil rail terminals that were sold in December 2012. The results of operations of these subsidiaries are reflected in our Predecessor’s summary historical combined financial and operating data as discontinued operations.

 

The summary historical combined financial and operating data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The summary historical combined financial and operating data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited combined financial statements of our Predecessor included elsewhere in this prospectus.

 

The summary pro forma combined financial data presented in the following table for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014, respectively, are derived from the unaudited pro forma combined financial data included elsewhere in this prospectus. The pro forma combined financial data assumes that the transactions to be effected at the closing of the offering and described under “—Formation Transactions” had taken place on June 30, 2014, in the case of the pro forma balance sheet, and on January 1, 2013, in the case of the pro forma statement of operations for the year ended December 31, 2013 and the six months ended June 30, 2014. These transactions primarily include, and the pro forma financial data give effect to, the following:

 

   

the issuance of 250,000 Class A Units in August 2014 to certain executive officers of our general partner and to other key employees of our general partner and its affiliates who provide services to us.

 

   

USD Group LLC’s contribution to us of all of our initial assets and operations, including the Hardisty rail terminal, the San Antonio rail terminal, the West Colton rail terminal and our railcar business;

 

   

the issuance of              common units to the public,              general partner units and the incentive distribution rights to our general partner, and              common units and              subordinated units to USD Group LLC in connection with this offering; and

 

   

our entry into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility (undrawn) and a $100.0 million term loan (fully drawn in Canadian dollars);

 

   

the payment of underwriting discounts and commissions and a structuring fee;

 

   

the cash distribution to USD Group LLC of $         million;

 

   

the repayment of $97.8 million of indebtedness under USD’s current credit facility, which bears interest at a rate of LIBOR plus an applicable margin, which equaled 3.90% as of June 30, 2014 and matures in March 2015; and

 

   

the payment of $             million of fees and expenses in connection with our new senior secured credit agreement, which is comprised of a revolving credit facility and a term loan.

 

The pro forma combined financial data does not give effect to the estimated $2.1 million in incremental annual general and administrative expenses that we expect to incur as a result of being a publicly traded partnership.

 

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The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical combined financial statements of our Predecessor and the notes thereto and our unaudited pro forma combined financial statements and the notes thereto, in each case included elsewhere in this prospectus. Among other things, those historical and pro forma combined financial statements include more detailed information regarding the basis of presentation for the information in the following table. Our financial position, results of operations and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of USD in the periods for which historical financial data are presented below, and such data may not be indicative of our future operating results or financial performance.

 

The following table presents Adjusted EBITDA, a financial measure that is not presented in accordance with generally accepted accounting principles in the United States, or GAAP. For a reconciliation of Adjusted EBITDA to net income attributable to our Predecessor and us and cash flows from operating activities, the most directly comparable financial measures calculated in accordance with GAAP, please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures” beginning on page 88. For a discussion of how we use Adjusted EBITDA to evaluate our operating performance, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Evaluate Our Operations—Adjusted EBITDA and Distributable Cash Flow” beginning on page 102.

 

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    USD Partners LP
Predecessor
    USD Partners LP
Pro Forma
 
    Year Ended
December 31,
    Six Months
Ended June 30,
    Year Ended
December 31,
    Six Months
Ended June 30,
 
    2013     2012     2014     2013     2013     2014  
    (in thousands)  
                (unaudited)     (unaudited)  

Statement of Operations

           

Revenues:

           

Terminalling services

  $ 7,130      $ 8,703      $ 3,448      $ 3,691      $ 7,130      $
3,448
  

Fleet leases

    13,572        15,964        4,596        8,546        13,572        4,596   

Fleet services

    1,197        5        956        375        1,197        956   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    26,301        24,875        10,921        13,380        26,301        10,921   

Operating Costs:

           

Operating costs other than freight and other reimbursables

    20,430        21,541        10,772        11,785        20,430        10,772   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs

    24,832        21,744        12,693        12,553        24,832        12,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    1,469        3,131        (1,772     827        1,469        (1,772

Interest expense

    3,241        2,050        1,984        1,645        4,884        2,418   

Loss on derivative contracts

   

  
   

  
    802                      802   

Other expenses and provision for income taxes

    69        26        712        17        488        1,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (1,841     1,055        (5,270     (835     (3,903     (6,039

Discontinued operations income and gain

    8,243        459,522        31        6,903       
 

 

 

   

 

 

   

 

 

   

 

 

     

Net income (loss)

  $ 6,402      $ 460,577      $ (5,239   $ 6,068       
 

 

 

   

 

 

   

 

 

   

 

 

     

General partner interest in net loss

          $        $     

Common unitholders’ interest in net loss

          $        $     

Subordinated unitholders’ interest in net loss

          $        $     

Pro forma net loss per common unit

          $        $     

Pro forma net loss per subordinated unit

          $        $     

Pro forma net loss per general partner unit

          $        $     

Weighted average common units outstanding

           

Weighted average subordinated units outstanding

           

Statement of Cash Flows

           

Net cash provided by operating activities

  $ 9,239      $ 1,798      $ 1,667      $ 2,064       

Net cash used in investing activities

    (56,114     (773     (30,327     (6,129    

Net cash provided by (used in) financing activities

    44,885        (25,227     26,999        10,134       

Net cash provided by discontinued operations

    5,168        25,687        26,941        643       

Operating Information

           

Average daily terminal throughput (bpd)

    15,533        15,871        14,099        15,909       

Non-GAAP Measures

           

Adjusted EBITDA

  $ 1,971      $ 3,621      $ (1,518   $ 1,078      $ 1,971      $ (1,518
    As of
December 31,
    As of
June 30,
                Pro forma
As of June 30,
 
    2013     2012     2014                 2014  
    (in thousands)                 (in thousands)  
                (unaudited)                 (unaudited)  

Balance Sheet

           

Property and equipment, net

  $ 61,364      $ 7,881      $ 92,394          $   92,394   

Total assets

    107,268        58,934        137,548         

Total liabilities

    104,665        45,548        126,696         

Owner’s equity

    2,603        13,386        10,852         

 

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RISK FACTORS

 

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.

 

Risks Related to Our Business

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution, or any distribution, to holders of our common and subordinated units.

 

In order to pay the minimum quarterly distribution of $         per unit per quarter, or $         per unit on an annualized basis, we will require available cash of approximately $         million per quarter, or $         million per year, based on the number of common and subordinated units to be outstanding immediately after completion of this offering. We may not have sufficient available cash from operating surplus each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

our entitlement to minimum monthly payments associated with our take-or-pay terminal services agreements;

 

   

the rates and terminalling fees we charge for the volumes we handle;

 

   

the volume of crude oil and other liquid hydrocarbons we handle;

 

   

damage to terminals, railroads, pipelines, facilities, related equipment and surrounding properties caused by hurricanes, earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism including damage to third party pipelines, railroads or facilities upon which we rely for transportation services;

 

   

leaks or accidental releases of products or other materials into the environment, including explosions, chemical fumes or other similar events, whether as a result of human error or otherwise;

 

   

prevailing economic and market conditions;

 

   

the level of our operating, maintenance and general and administrative costs; and

 

   

regulatory action affecting railcar design or the transportation of crude oil by rail, as well as the supply of, or demand for, crude oil and other liquid hydrocarbons, the maximum transportation rates we can charge at our rail terminals, our existing contracts, our operating costs or our operating flexibility.

 

In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:

 

   

the level and timing of capital expenditures we make;

 

   

the cost of acquisitions, if any;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions contained in our debt agreements;

 

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the amount of cash reserves established by our general partner; and

 

   

other business risks affecting our cash levels.

 

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

 

On a pro forma basis, we would not have generated positive distributable cash flow for the twelve months ended June 30, 2014.

 

We must generate approximately $         million of distributable cash flow to pay the aggregate minimum quarterly distributions for four quarters on all units that will be outstanding immediately following this offering. We would not have generated positive distributable cash flow during the twelve months ended June 30, 2014 on a pro forma basis, and would have not been able to pay a distribution from operating surplus on any of our common units, Class A Units or subordinated units for that period. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.” We may not be able to pay the full minimum quarterly distribution or any amount on our common units, Class A Units or subordinated units, which may cause the market price of our common units to decline materially.

 

The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

The forecast of distributable cash flow set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, Adjusted EBITDA and distributable cash flow for the twelve months ending September 30, 2015. The financial forecast has been prepared by management, and we have not received an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

 

The amount of cash we have available for distribution to holders of our common and subordinated units depends primarily on our cash flow rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

 

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses for financial accounting purposes and may not make cash distributions during periods when we record net earnings for financial accounting purposes.

 

Our business could be adversely affected if service on the railroads is interrupted or if more stringent regulations are adopted regarding railcar design or the transportation of crude oil by rail.

 

We do not own or operate the railroads on which crude-oil-carrying railcars are transported; however, we do manage a railcar fleet, which is subject to regulations governing railcar design and manufacture. As a result of hydraulic fracturing and other improvements in extraction technologies, there has been a substantial increase in the volume of crude oil and liquid hydrocarbons produced and transported in North America, and a geographic shift in that production versus historical production. The increase in volume and shift in geography has resulted in a growing percentage of crude oil being transported by rail. Recent high-profile accidents in Quebec, North

 

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Dakota and Virginia in July 2013, December 2013 and April 2014, respectively (all involving crude-oil-carrying trains), have raised concerns about the environmental and safety risks associated with crude oil transport by rail and the associated risks arising from railcar design.

 

In August 2013, the U.S. Department of Transportation (DOT) Federal Railroad Administration (FRA) issued both an Action Plan for Hazardous Materials Safety and an order imposing new standards on railroads for properly securing rolling equipment; a proposed rule with regard to the latter was subsequently released on September 9, 2014. In August 2013, the FRA and the DOT Pipeline Hazardous Materials Safety Administration (PHMSA) began conducting inspections of crude-oil-carrying railcars from the Bakken formation to make sure cargo is properly identified to railroads and emergency responders. In November 2013, the rail industry voluntarily called on the PHMSA to require that railcars used to transport flammable liquids, including crude oil, be retrofitted with enhanced safety features or be phased-out. In January 2014, the DOT (including the PHMSA and FRA) met with oil and rail industry leaders to develop strategies to prevent train derailments and reduce the risk of fire and explosions. As a result of those meetings, the DOT and transportation industry agreed in February 2014 to certain voluntary measures designed to enhance the safety of crude oil shipments by rail, which include lowering speed limits for crude oil unit trains traveling in high-risk areas, modifying routes to avoid such high-risk areas, increasing the frequency of track inspections, implementing improved breaking mechanisms and improving the training of certain emergency responders. On February 25, 2014, the DOT issued another order, immediately requiring all carriers who transport crude oil from the Bakken region by rail to ensure that the product is properly tested and classified in accordance with federal safety regulations, and further requiring that all crude oil shipments be designated in the two highest risk categories, effectively mandating that crude oil be transported in more robust railcars. Similarly, in February 2014, the Canadian Department of Transport (Transport Canada) finalized new regulations requiring shippers and carriers of crude oil by rail to properly sample, classify, certify and disclose certain characteristics of the crude oil being shipped, and gave shippers and carriers six months to comply with these new regulatory procedures. On April 23, 2014, the Canadian Minister of Transport, which oversees Transport Canada, announced a series of directives and other actions to address the Transportation Safety Board of Canada’s initial recommendations on rail safety. Effective immediately, Transport Canada prohibited the least crash-resistant DOT-111 railcars from carrying dangerous goods. Additionally, Transport Canada ordered that DOT-111 railcars used to transport crude oil and ethanol that are not compliant with required safety standards must be phased out or retrofitted within three years (by May 2017). We currently provide fleet services for 463 railcars that are subject to this directive, but which have leases that will expire before May 2017, and 383 railcars that will still be under contract and will be required to be retrofitted pursuant to this directive. We do not own any of the railcars in our railcar fleet and are not directly responsible for costs associated with the retrofitting of DOT-111 railcars. However, costs associated with the retrofitting of railcars would increase the incremental monthly cost of the applicable railcar lease, which cost would get passed through to our customers and could affect demand for our services. We intend to work with our railcar suppliers on modification scheduling in an attempt to avoid major disruptions. Transport Canada also identified key routes and revised operating practices put in place for the transportation of crude oil on those routes. On May 7, 2014, the DOT issued another order, immediately requiring railroads operating trains carrying more than one million gallons of Bakken crude oil to notify State Emergency Response Commissions (SERCs) regarding the estimated volume, frequency, and transportation route of those shipments. Also on May 7, 2014, the FRA and PHMSA issued a joint Safety Advisory to the rail industry advising those shipping or offering Bakken crude oil to use railcar designs with the highest available level of integrity, and to avoid using older legacy DOT-111 or CTC-111 railcars. On July 2, 2014, Transport Canada adopted the CPC-1232 technical standards as the minimum safety threshold for railcars transporting dangerous goods after May 2017. Transport Canada also proposed a new class of railcar (TC-140) specifically developed for the transport of flammable liquids in Canada, as well as a retrofit schedule for legacy DOT-111 and CPC-1232 railcars. The proposal is open for comment until September 1, 2014. Once the comments have been reviewed, the Canadian government will issue final regulations for the specifications of these railcars. On July 23, 2014, the DOT issued a Notice of Proposed Rulemaking and a companion Advanced Notice of Proposed Rulemaking addressing liquid flammable railcar requirements. This proposed rulemaking also addressed areas such as train speeds and oil testing, and other important issues such as emergency and spill response along the routes for flammable liquid unit trains. The newly proposed tank car standards would apply to railcars constructed after October 1, 2015 that are used to transport flammable liquids. The

 

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DOT proposed three options for this new standard. Under the proposal, existing railcars that are used to transport flammable liquids would be retrofitted to meet the selected option for performance requirements. Those not retrofitted would be retired, repurposed, or operated under speed restrictions for up to five years, based on packing group assignment of the flammable liquids being shipped by rail. The proposal is open for comment until September 30, 2014. Once the comments have been reviewed, the U.S. government will issue final regulations for the specifications of these flammable liquid railcars. Nearly 70% of our fleet was manufactured in 2013 and 2014 and has been constructed to the CPC-1232 standard. Were DOT to adopt more strict specifications for tank cars, it would likely result in increased difficulty and costs to obtain compliant cars after the applicable phase-out dates. While we may be able to pass some of these costs on to our customers, there may be additional costs that we cannot pass on. We will continue to monitor the railcar regulatory landscape and remain in close contact with railcar suppliers and other industry stakeholders to stay informed of railcar regulation rulemaking developments. Our ability to transport crude oil under our existing contracts could be affected if the final rulings result in more stringent design requirements and compressed compliance timelines than we currently anticipate. If the final rulings result in more stringent design requirements and compressed compliance timelines, then our ability to transport these volumes could be affected by a delay in the railcar industry’s ability to provide adequate railcar modification repair services. We may not have access to a sufficient number of compliant cars to transport the required volumes under our existing contracts. This may lead to a decrease in revenues and other consequences.

 

The adoption of additional federal, state, provincial or local laws or regulations, including any voluntary measures by the rail industry regarding railcar design or crude oil and liquid hydrocarbon rail transport activities, or efforts by local communities to restrict or limit rail traffic involving crude oil, could affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows. Moreover, any disruptions in the operations of railroads, including those due to shortages of railcars, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts or bottlenecks, could adversely impact our customers’ ability to move their product and, as a result, could affect our business.

 

Because we have a limited operating history, you may have difficulty evaluating our ability to pay cash distributions to our unitholders or our ability to be successful in implementing our business strategy.

 

We are dependent on our Hardisty rail terminal as our primary source of cash flow. As a newly constructed rail terminal, the operating performance of the Hardisty rail terminal over the short term and long term is not yet proven. We may encounter risks and difficulties frequently experienced by companies whose performance is dependent upon newly constructed facilities, such as the rail terminal not functioning as expected, higher than expected operating costs, breakdown or failures of equipment and operational errors.

 

Because of our limited operating history and performance record at the Hardisty rail terminal, it may be difficult for you to evaluate our business and results of operations to date and to assess our future prospects. Further, our historical financial statements present a period of limited operations, and therefore do not provide a meaningful basis for you to evaluate our operations or our ability to achieve our business strategy. We may be less successful in achieving a consistent operating level at the Hardisty rail terminal capable of generating cash flows from our operations sufficient to regularly pay a cash distribution or to pay any cash distribution to our unitholders than a company whose major facilities have had longer operating histories. Finally, we may be less equipped to identify and address operating risks and hazards in the conduct of our business at the Hardisty rail terminal than those companies whose major facilities have had longer operating histories.

 

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

 

Initially, our rail terminals will be located in Texas, California and Alberta, Canada. We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Due to our lack of diversification in assets and geographic location, an adverse development in our

 

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businesses or areas of operations, especially to our Hardisty rail terminal, including adverse developments due to catastrophic events, weather, regulatory action or decreases in demand for crude oil, could have a significantly greater impact on our results of operations and distributable cash flow to our common unitholders than if we maintained more diverse assets and locations.

 

The dangers inherent in our operations could cause disruptions and could expose us to potentially significant losses, costs or liabilities and reduce our liquidity. We are particularly vulnerable to disruptions in our operations because most of our rail terminalling operations are conducted at the Hardisty rail terminal.

 

Our operations are subject to significant hazards and risks inherent in transporting and storing crude oil, intermediate products and refined products. These hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline or railcar ruptures and spills, third party interference and mechanical failure of equipment at our rail terminals, any of which could result in disruptions, pollution, personal injury or wrongful death claims and other damage to our properties and the property of others. There is also risk of mechanical failure and equipment shutdowns both in the normal course of operations and following unforeseen events. Because most of our cash flow is generated from our rail terminalling operations conducted at our Hardisty rail terminal, any sustained disruption at the Hardisty rail terminal or the Gibson storage terminal, which is the source of all of the crude oil handled by our Hardisty rail terminal, would have a material adverse effect on our business, financial condition, results of operations and cash flows and, as a result, our ability to make distributions.

 

We may not be able to compete effectively and our business is subject to the risk of a capacity overbuild of midstream infrastructure and the entrance of new competitors in the areas where we operate.

 

We face competition in all aspects of our business and can give no assurances that we will be able to compete effectively. Our competitors include, but are not limited to, crude oil pipelines, ocean going tankers, major integrated oil companies, independent gatherers, trucking companies and crude oil marketers of widely varying sizes, financial resources and experience. We compete against these companies on the basis of many factors, including geographic proximity to production areas, market access, rates, terms of service, connection costs and other factors. Some of our competitors have capital resources many times greater than ours.

 

A significant driver of competition in some of the markets where we operate is the rapid development of new midstream infrastructure capacity driven by the combination of (i) significant increases in oil and gas production and development in the applicable production areas, both actual and anticipated, (ii) low barriers to entry and (iii) generally widespread access to relatively low cost capital. This environment exposes us to the risk that these areas become overbuilt, resulting in an excess of midstream infrastructure capacity. Most midstream projects require several years of “lead time” to develop and companies like us that develop such projects are exposed (to varying degrees depending on the contractual arrangements that underpin specific projects) to the risk that expectations for oil and gas development in the particular area may not be realized or that too much capacity is developed relative to the demand for services that ultimately materializes. In addition, as an established player in some markets, we also face competition from potential new entrants to the market. If we experience a significant capacity overbuild in one or more of the areas where we operate, it could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

We serve customers who are involved in drilling for, producing and transporting crude oil and other liquid hydrocarbons. Adverse developments affecting the fossil fuel industry or drilling activity, including a decline in prices of crude oil or biofuels, reduced demand for crude oil products and increased regulation of drilling, production or transportation could cause a reduction of volumes transported through our rail terminals.

 

Our business depends on our customers’ willingness to make operating and capital expenditures to develop and produce crude oil and other liquid hydrocarbons. Our customers’ willingness to engage in drilling and production of crude oil and other liquid hydrocarbons depends largely upon the markets for and prices of crude

 

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oil and other commodities, which depend on factors that are beyond our control. These factors include the supply of and demand for these commodities, which fluctuate with changes in market and economic conditions, and other factors, including:

 

   

worldwide economic conditions;

 

   

worldwide political events, including actions taken by foreign oil producing nations;

 

   

worldwide and local weather events and conditions, including natural disasters and seasonal changes that could decrease crude oil supply or demand;

 

   

the levels of domestic and international production and consumer demand;

 

   

the availability of transportation systems with adequate capacity;

 

   

fluctuations in demand for crude oil, such as those caused by refinery downtime or shutdowns;

 

   

fluctuations in the price of crude oil, which may have an impact on the spot prices for the transportation of crude oil by pipeline or railcar;

 

   

increased government regulation or prohibition of the transportation hydrocarbons by rail;

 

   

the volatility and uncertainty of world crude oil prices as well as regional pricing differentials;

 

   

fluctuations in gasoline consumption;

 

   

the price and availability of alternative fuels;

 

   

changes in mandates to blend renewable fuels, such as ethanol, into petroleum fuels;

 

   

the price and availability of the raw materials used to produce ethanol, such as corn;

 

   

the effect of energy conservation measures, such as more efficient fuel economy standards for automobiles;

 

   

the nature and extent of governmental regulation and taxation, including the amount of subsidies for ethanol;

 

   

fluctuations in demand from electric power generators and industrial customers; and

 

   

the anticipated future prices of oil and other commodities.

 

If our customers’ expenditures decline, our business is likely to be adversely affected.

 

Any reduction in our or our customers’ capability to utilize third-party pipelines, railroads or trucks that interconnect with our rail terminals or to continue utilizing them at current costs could cause a reduction of volumes transported through our rail terminals.

 

We and the customers of our rail terminals are dependent upon access to third-party pipelines, railroads and truck fleets to receive and deliver crude oil and other liquid hydrocarbons to or from us. The continuing operation of such third-party pipelines, railroads and other midstream facilities or assets is not within our control. Any interruptions or reduction in the capabilities of these third parties due to testing, line repair, reduced operating pressures, or other causes in the case of pipelines, or track repairs, in the case or railroads, could result in reduced volumes transported through our rail terminals. In particular, we entered into a facilities connection agreement with Gibson whereby Gibson would construct a pipeline to provide our Hardisty rail terminal with exclusive pipeline access to Gibson’s storage terminal, which is the source of all of the crude oil handled by our Hardisty rail terminal. Any disruption at Gibson’s storage terminal or at this newly-constructed pipeline could have a material adverse effect on our business, financial condition, results of operations and cash flows. Similarly, if additional shippers begin transporting volume over interconnecting pipelines, the allocations to our existing shippers on these interconnecting pipelines could be reduced, which could reduce volumes transported through

 

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our rail terminals. Allocation reductions of this nature are not infrequent and are beyond our control. Any such increases in cost, interruptions, or allocation reductions that, individually or in the aggregate, are material or continue for a sustained period of time could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

We do not own some of the land on which our rail terminals are located, which could disrupt our operations.

 

We do not own the land on which our West Colton and San Antonio rail terminals are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way or leases or if such rights-of-way or leases lapse or terminate at those facilities. We sometimes obtain the rights to land owned by railroads for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or leases, or otherwise, could cause us to cease operations on the affected land, increase costs related to continuing operations elsewhere and reduce our revenue.

 

A shortage in rail locomotives or railroad crews or increases in the price of diesel fuel may adversely affect our results of operations.

 

Transporters of hydrocarbons by rail compete with other parties, such as coal, grain and corn, which ship their product by rail. The increased demand for transportation of crude or other products by rail has recently caused shortages in available locomotives and railroad crews. Such shortages may ultimately increase the cost to transport hydrocarbons by rail. Additionally, diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of our control. Diesel fuel prices are a significant component of the costs to our customers of shipping hydrocarbons by rail. Increased costs to ship hydrocarbons by rail either as a result of a shortage of locomotives or railroad crews or increased diesel fuel costs could curtail demand for shipment of hydrocarbons by rail which would have an adverse effect on our results of operations and cash flows.

 

The fees charged to customers under our agreements with them for the transportation of crude oil may not escalate sufficiently to cover increases in costs, and the agreements may be temporarily suspended or terminated in some circumstances, which would affect our profitability.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements, which are subject to inflation-based rate escalators. Our costs may increase at a rate greater than the rate that the fees that we charge to customers increase pursuant to such inflation-based escalators. Additionally, some customers’ obligations under their agreements with us may be temporarily suspended upon the occurrence of certain events, some of which are beyond our control, or may be terminated in the case of uninterrupted force majeure events of over one year wherein the supply of crude oil is curtailed or cut off. Force majeure events include (but are not limited to) revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers, or any cause or causes of any kind or character (except financial) reasonably beyond the control of the party failing to perform. If the escalation of fees is insufficient to cover increased costs or if any customer suspends or terminates its contracts with us, our profitability could be materially and adversely affected.

 

Our right of first offer to acquire certain of USD’s assets and projects it will retain after the offering and certain assets or businesses that it may develop, construct or acquire in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets or businesses.

 

Our omnibus agreement provides us with a right of first offer for a period of seven years after the closing of this offering on certain of USD’s existing assets and projects as well as any additional midstream infrastructure

 

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assets or businesses that it may develop, construct or acquire in the future, subject to certain exceptions. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, USD’s continued development of midstream infrastructure projects and successful execution of such projects, USD’s willingness to offer assets for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions or successfully integrate assets acquired pursuant to our right of first offer. Furthermore, USD is under no obligation to accept any offer that we may choose to make. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” In addition, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by USD at any time in the event that it no longer controls our general partner. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

If we are unable to make acquisitions on economically acceptable terms from USD or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

 

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in cash flow. If we are unable to make acquisitions from USD or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase agreements, we are unable to obtain financing for these acquisitions on economically acceptable terms, we are outbid by competitors or we or the seller are unable to obtain any necessary consents, our future growth and ability to increase distributions to unitholders will be limited. Energy Capital Partners must also approve the acquisition of the securities of any entity by us if the acquisition exceeds specified thresholds. Furthermore, even if we do consummate acquisitions that we believe will be accretive, we may not realize the intended benefits, and the acquisition may in fact result in a decrease in cash flow. Any acquisition involves potential risks, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s attention from other business concerns;

 

   

unforeseen difficulties operating in new product areas or new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

 

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

 

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We may be unsuccessful in integrating any future acquisitions with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.

 

From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.

 

Growing our business by constructing new rail terminals subjects us to construction risks and risks that supplies for such systems and facilities will not be available upon completion thereof.

 

One of the ways we intend to grow our business is through the construction of new rail terminals. The construction of such facilities requires the expenditure of significant amounts of capital, which may exceed our resources, and involves numerous regulatory, environmental, political and legal uncertainties. If we undertake these projects, we may not be able to complete them on schedule or at all or at the budgeted cost. Moreover, our revenues may not increase upon the expenditure of funds on a particular project. For instance, if we build a new rail terminal, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until at least after completion of the project, if at all. Moreover, we may construct rail terminals to capture anticipated future growth in production in a region in which anticipated production growth does not materialize or for which we are unable to acquire new customers. We may also rely on estimates of proved, probable or possible reserves in our decision to build new rail terminals, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved, probable or possible reserves. As a result, new rail terminals may not be able to attract enough product to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition.

 

USD and its controlled affiliates, including us, are subject to a noncompete agreement that may limit our growth opportunities.

 

USD and certain of its controlled affiliates, including us, are subject to a noncompete agreement until December 2016 with respect to rail terminals we sold in 2012 in Carr, Colorado, Cotulla, Texas, Van Hook, North Dakota, Bakersfield, California and St. James Parish, Louisiana. The noncompete agreement prohibits us from owning, managing, operating or engaging in business activities related to terminalling services within a 200-mile radius of each of these facilities with respect to grades of crude oil and condensate historically handled by the facilities, or a 100-mile radius with respect to all other grades of crude oil or condensate. As a result of this noncompete agreement, our future growth may be limited during the term of the noncompete agreement.

 

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.

 

Our industry is subject to laws, regulations and other requirements including, but not limited to, those relating to the environment, safety, employment, labor, immigration, minimum wages and overtime pay, health care and benefits, working conditions, public accessibility and other requirements. These laws and regulations are enforced by federal agencies including the U.S. Environmental Protection Agency (EPA), the DOT, PHMSA, the FRA, the Federal Motor Carrier Safety Administration (FMCSA), the Occupational Safety and Health

 

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Administration (OSHA), and state and Canadian agencies such as the Texas Commission on Environmental Quality, the Railroad Commission of Texas, the California Environmental Protection Agency (Cal/EPA), the California Public Utilities Commission (CPUC), the Canadian Department of the Environment (Environment Canada) and Transport Canada as well as numerous other state and federal agencies. Ongoing compliance with, or a violation of, these laws, regulations and other requirements could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

In addition, these laws and regulations, and the interpretation or enforcement thereof, are subject to frequent change by regulatory authorities, and we are unable to predict the ongoing cost to us of complying with these laws and regulations or the future impact of these laws and regulations on our operations. Violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions and construction bans or delays.

 

Under various federal, state, provincial and local environmental requirements, as the owner or operator of terminals, we may be liable for the costs of removal or remediation of contamination at our existing locations, whether we knew of, or were responsible for, the presence of such contamination. The failure to timely report and properly remediate contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent our property or to borrow money using our property as collateral. Additionally, we may be liable for the costs of remediating third-party sites where hazardous substances from our operations have been transported for treatment or disposal, regardless of whether we own or operate that site. In the future, we may incur substantial expenditures for investigation or remediation of contamination that has not yet been discovered at our current or former locations or locations that we may acquire.

 

A discharge of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured or insurance is not otherwise available, subject us to substantial expense, including the cost to respond in compliance with applicable laws and regulations, fines and penalties, natural resource damages and claims made by employees, neighboring landowners and other third parties for personal injury and property damage. We may experience future catastrophic sudden or gradual releases into the environment from our terminals or discover historical releases that were previously unidentified or not assessed. Although our inspection and testing programs are designed to prevent, detect and address these releases promptly, damages and liabilities incurred due to any future environmental releases from our assets have the potential to substantially affect our business. Such discharges could also subject us to media and public scrutiny that could have a negative effect on the value of our common units.

 

Environmental regulation is becoming more stringent, and new environmental laws and regulations are continuously being enacted or proposed and interpretations of existing requirements change from time to time. While it is impractical to predict the impact that future environmental, health and safety requirements or changed interpretations of existing requirements may have, such future activity may result in material expenditures to ensure our continued compliance. Such future activity could also adversely affect our ability to expand production, result in damaging publicity about us, or reduce demand for our products.

 

We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.

 

Our operations require authorizations and permits that are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

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The adoption of derivatives legislation by the United States Congress could have an adverse effect on our ability to use derivatives contracts to reduce the effect of commodity price, interest rate and other risks associated with our business.

 

The United States Congress in 2010 adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, which, among other things, established federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. In connection with the Dodd-Frank Act, the Commodity Futures Trading Commission (CFTC) adopted regulations to set position limits for certain futures and option contracts in the major energy markets. Although these regulations were vacated by the U.S. District Court for the District of Columbia and the matter was remanded to the CFTC, the CFTC has appealed the District Court’s decision and that appeal is pending. The legislation may require the counterparties to our derivatives contracts to transfer or assign some of their derivatives contracts to a separate entity, which may not be as creditworthy as the current counterparty. The legislation and any new regulations could significantly increase the cost of derivatives contracts (including through requirements to post collateral), materially alter the terms of derivatives contracts, and reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivatives contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Any of these consequences could have a material adverse effect on us, our financial condition and our results of operations.

 

Our contracts subject us to renewal risks.

 

We provide crude oil and other liquid hydrocarbon rail terminalling services under contracts with terms of various durations and renewal. Each of the seven terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of a seventh agreement will commence on October 1, 2014. Our sole customer contract for our San Antonio rail terminal has an initial term of three years that began in 2012 and will automatically renew for two additional three-year terms unless notice is provided by our customer. Our sole customer contract for our West Colton rail terminal is terminable at any time.

 

As these contracts expire, we may have to negotiate extensions or renewals with existing suppliers and customers or enter into new contracts with other suppliers and customers. We may not be able to obtain new contracts on favorable commercial terms, if at all. We also may be unable to maintain the economic structure of a particular contract with an existing customer or maintain the overall mix of our contract portfolio if, for example, prevailing crude oil prices have decreased significantly. Depending on prevailing market conditions at the time of a contract renewal, customers with fee-based contracts may desire to enter into contracts under different fee arrangements. To the extent we are unable to renew our existing contracts on terms that are favorable to us or successfully manage our overall contract mix over time, our revenue and cash flows could decline and our ability to make cash distributions to our unitholders could be materially and adversely affected.

 

We depend on a limited number of customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, any one or more of these customers could adversely affect our ability to make cash distributions to our unitholders.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements. One customer has the right, but not the obligation, to exclusively use all of our capacity at our San Antonio rail terminal under a three-year contract that commenced in 2012, and was also the sole customer under contract at our West Colton rail terminal. The West Colton agreement is terminable at any time. If we were unable to renew our contracts with one or more of these customers on favorable terms, we may not be able to replace any of these customers in a timely fashion, on

 

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favorable terms or at all. In addition, some of our customers may have material financial or liquidity issues or may, as a result of operational incidents or other events, be disproportionately affected as compared to larger, better-capitalized companies. Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders. We expect our exposure to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively limited number of customers for a substantial portion of our revenue.

 

Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. If a significant accident or event occurs for which we are not adequately insured, or if we fail to recover anticipated insurance proceeds for significant accidents or events for which we are insured, our operations and financial results could be adversely affected.

 

Our operations are subject to all of the risks and hazards inherent in the provision of rail terminalling services, including:

 

   

damage to railroads and rail terminals, related equipment and surrounding properties caused by natural disasters, acts of terrorism and actions by third parties;

 

   

damage from construction, vehicles, farm and utility equipment or other causes;

 

   

leaks of crude oil and other hydrocarbons or regulated substances or losses of oil as a result of the malfunction of equipment or facilities;

 

   

ruptures, fires and explosions; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

 

These and similar risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other damage. These risks may also result in curtailment or suspension of our operations. A natural disaster or other hazard affecting the areas in which we operate could also have a material adverse effect on our operations. We are not fully insured against all risks inherent in our business. In addition, although we are insured for environmental pollution resulting from environmental accidents that occur on a sudden and accidental basis, we may not be insured against all environmental accidents that might occur, some of which may result in claims for remediation, damages to natural resources or injuries to personal property or human health. If a significant accident or event occurs for which we are not fully insured, it could adversely affect our operations and financial condition. Furthermore, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may substantially increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.

 

Terrorist or cyber-attacks and threats, escalation of military activity in response to these attacks or acts of war could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly distributions to our unitholders.

 

Terrorist attacks and threats, cyber-attacks, escalation of military activity or acts of war may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Future terrorist or cyber-attacks, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions may significantly affect our operations and those of our customers. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future attacks than other targets in the United States. We do not maintain specialized insurance for possible liability resulting from a cyber-attack on our assets that may shut down all or part of our business. Disruption or significant increases in energy prices could result in

 

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government-imposed price controls. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition, results of operations, and ability to make quarterly distributions to our unitholders.

 

The credit and risk profile of our general partner and its owner, USD Group LLC, could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital and additionally have a direct impact on our ability to pay our minimum quarterly distribution

 

The credit and business risk profiles of our general partner and USD Group LLC, neither of which has a rating from any credit agency, may be factors considered in credit evaluations of us. This is because our general partner, which is owned by USD Group LLC, controls our business activities, including our cash distribution policy and growth strategy. Any adverse change in the financial condition of USD Group LLC, including the degree of its financial leverage and its dependence on cash flow from us to service its indebtedness may adversely affect our credit ratings and risk profile. If we were to seek a credit rating in the future, our credit rating may be adversely affected by the leverage of our general partner or USD Group LLC, as credit rating agencies such as Standard & Poor’s Ratings Services and Moody’s Investors Service may consider the leverage and credit profile of USD Group LLC and its affiliates because of their ownership interest in and control of us. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which would impair our ability to grow our business and make distributions to common unitholders.

 

Our growth strategy requires access to new capital. Tightened capital markets or increased competition for investment opportunities could impair our ability to grow.

 

We continuously consider and enter into discussions regarding potential acquisitions or growth capital expenditures. Any limitations on our access to new capital will impair our ability to execute this strategy. If the cost of such capital becomes too expensive, our ability to develop or acquire strategic and accretive assets will be limited. We may not be able to raise the necessary funds on satisfactory terms, if at all. The primary factors that influence our initial cost of equity include market conditions, including our then current unit price, fees we pay to underwriters and other offering costs, which include amounts we pay for legal and accounting services. The primary factors influencing our cost of borrowing include interest rates, credit spreads, covenants, underwriting or loan origination fees and similar charges we pay to lenders.

 

Weak economic conditions and the volatility and disruption in the financial markets could increase the cost of raising money in the debt and equity capital markets substantially while diminishing the availability of funds from those markets. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to our current debt and reduced and, in some cases, ceased to provide funding to borrowers. These factors may impair our ability to execute our growth strategy.

 

In addition, we are experiencing increased competition for the types of assets we contemplate purchasing. Weak economic conditions and competition for asset purchases could limit our ability to fully execute our growth strategy.

 

While Energy Capital Partners has indicated an intention to invest over an additional $1.0 billion of equity capital in USD, subject to market and other conditions, it has not made a commitment to provide any direct or indirect financial assistance to us following the closing of this offering. Furthermore, Energy Capital Partners must approve any issuances of additional equity by us, which determination may be made free of any duty to us or our unitholders, and members of our general partner’s board of directors appointed by Energy Capital Partners must approve the incurrence by us or refinancing of our indebtedness outside of the ordinary course of business, which may limit our flexibility to obtain financing and to pursue other business opportunities.

 

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Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

 

Following the closing of this offering, we will have the ability to incur additional debt, including under our new senior secured credit facilities that we will enter into in connection with this offering. Our future level of debt could have important consequences for us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

our funds available for operations, future business opportunities and cash distributions to unitholders may be reduced by that portion of our cash flow required to make interest payments on our debt;

 

   

we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

our flexibility in responding to changing business and economic conditions may be limited.

 

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to take any of these actions on satisfactory terms or at all.

 

Restrictions in our new senior secured credit agreement could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.

 

We expect to enter into a new senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term in loan connection with the closing of this offering. We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our new senior secured credit agreement and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. Our new senior secured credit agreement is likely to limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make distributions on or redeem or repurchase units;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

merge or consolidate with other affiliates;

 

   

transfer, sell or otherwise dispose of assets;

 

   

engage in a materially different line of business;

 

   

enter into certain burdensome agreements; and

 

   

prepay other indebtedness.

 

Our new senior secured credit agreement also will include covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests.

 

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The provisions of our new senior secured credit agreement may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our new senior secured credit agreement could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable along with triggering the exercise of other remedies. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment.

 

Increased regulation of hydraulic fracturing could result in reductions or delays in oil production by our customers, which could adversely impact our revenues

 

A portion of our customers’ oil production is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing is an essential and common practice in the oil industry used to stimulate production of oil from dense subsurface rock formations in the U.S. and Canada. Hydraulic fracturing involves using water, sand, and a small amount of certain chemicals to fracture the hydrocarbon-bearing rock formation to allow the flow of hydrocarbons into the wellbore. The process is typically regulated by state and provincial oil and natural gas commissions.

 

Hydraulic fracturing has been subject to increased scrutiny due to public concerns that it could result in contamination of drinking water supplies, and there have been a variety of legislative and regulatory proposals to prohibit, restrict or more closely regulate various forms of hydraulic fracturing. For instance, on October 20, 2011, the EPA announced its intention to propose federal Clean Water Act regulations governing wastewater discharges from hydraulic fracturing and certain other natural gas operations by 2014. On January 9, 2014, the EPA published a rule requiring oil and gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. On August 16, 2012, the EPA published final regulations under the Clean Air Act that establish new air emissions controls for oil production operations. On May 24, 2013, the U.S. Bureau of Land Management (BLM) published a revised proposed rule that would continue to require public disclosure of chemicals used in hydraulic fracturing on federal and Indian lands, confirmation that wells used in fracturing operations meet appropriate construction standards, and development of appropriate plans for managing flowback water that returns to the surface. In addition, several U.S. states, including California and Texas, have adopted or are considering adopting additional regulatory programs or requirements governing hydraulic fracturing.

 

Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to increased operating costs in the production of oil or could make it more difficult to perform hydraulic fracturing, either of which could have an adverse effect on our operations. The adoption of any federal, state, provincial or local laws or the implementation of regulations regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil wells, increasing compliance costs and decreasing demand for our terminalling and other services, which could adversely affect our financial position, results of operations and cash flows.

 

We are subject to stringent environmental laws and regulations that may expose us to significant costs and liabilities.

 

Our operations are subject to stringent and complex federal, state, provincial and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise relate to environmental protection.

 

These laws and regulations may impose numerous obligations that are applicable to our operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from railcars and rail terminals, and the imposition of

 

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substantial liabilities and remedial obligations for pollution resulting from our operations or at locations currently or previously owned or operated by us. Numerous governmental authorities, such as the EPA, Environment Canada and analogous state and provincial agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly corrective actions or costly pollution control measures. Failure to comply with these laws, regulations and permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations. In addition, we may experience a delay in obtaining or be unable to obtain required permits or regulatory authorizations, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenue.

 

There is a risk that we may incur significant environmental costs and liabilities in connection with our operations due to historical industry operations and waste disposal practices, our handling of hydrocarbon and other wastes and potential emissions and discharges related to our operations. Joint and several, strict liability may be incurred, without regard to fault, under certain of these environmental laws and regulations in connection with discharges or releases of hydrocarbon wastes on, under or from our properties and rail terminals. In addition, changes in environmental laws occur frequently, and any such changes that result in additional permitting obligations or more stringent and costly waste handling, storage, transport, disposal or remediation requirements could have a material adverse effect on our operations or financial position. We may not be able to recover all or any of these costs from insurance. Please read “Business—Environmental Regulation” for more information.

 

Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the oil services we provide.

 

In response to recent studies suggesting that emissions of carbon dioxide, methane and certain other gases may be contributing to warming of the Earth’s atmosphere, Canada agreed to limit emissions of these greenhouse gases (GHG) pursuant to the 1997 United Nations Framework Convention on Climate Change, also known as the Kyoto Protocol. In December 2011, Canada withdrew from the Kyoto Protocol, but signed the Durban Platform committing it to a legally binding treaty to reduce GHG emissions, the terms of which are to be defined by 2015 and are to become effective in 2020.

 

While not a signatory to the Kyoto Protocol or the Durban Platform, the U.S. Congress has considered legislation to restrict or regulate emissions of GHGs. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although additional energy legislation and other initiatives may be proposed that address GHG and related issues. In addition, almost half of the states (including California and Texas, in which we operate), either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs. In California, the AB 32 program created a statewide cap on GHG emissions and requires that the state return to 1990 emission levels by 2020. AB 32 focuses on using market mechanisms, such as a cap-and-trade program and a low-carbon fuel standard (LCFS) to achieve emission reduction targets. Although most of the state-level initiatives have to date been focused on large sources of GHG emissions, such as electric power plants, it is possible that smaller sources could become subject to GHG-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for GHG emissions resulting from our operations, and to the extent measures such as the LCFS are successful in reaching hydrocarbon fuel usage, they could have an indirect effect on our business.

 

Independent of Congress, the EPA is beginning to adopt regulations controlling GHG emissions under its existing Clean Air Act authority. For example, in 2009, the EPA adopted rules regarding regulation of GHG emissions from motor vehicles. In addition, in September 2009, the EPA issued a final rule requiring the monitoring and reporting of GHG emissions from specified large GHG emission sources in the United States and, in November 2010, expanded this existing GHG emissions reporting rule for petroleum facilities, requiring

 

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reporting of GHG emissions by regulated petroleum facilities to the EPA beginning in 2012 and annually thereafter. We monitor and report our GHG emissions. However, operational or regulatory changes could require additional monitoring and reporting at some or all of our other facilities at a future date. In 2010, the EPA also issued a final rule, known as the “Tailoring Rule,” that makes certain large stationary sources and modification projects subject to permitting requirements for GHG emissions under the Clean Air Act. Several of the EPA’s GHG rules are being challenged in pending court proceedings and, depending on the outcome of such proceedings, such rules may be modified or rescinded or the EPA could develop new rules.

 

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, any future federal, state or provincial laws or implementing regulations that may be adopted to address GHG emissions could require us to incur increased operating costs and could adversely affect demand for the crude oil and other liquid hydrocarbons we handle in connection with our services. The potential increase in the costs of our operations resulting from any legislation or regulation to restrict emissions of GHGs could include new or increased costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to our GHG emissions and administer and manage a GHG emissions program. While we may be able to include some or all of such increased costs in the rates charged by our rail terminals, such recovery of costs is uncertain. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

 

Our ability to operate our business effectively could be impaired if we fail to attract and retain key management personnel.

 

We are managed and operated by the board of directors and executive officers of our general partner. All of the personnel that conduct our business are employed by affiliates of our general partner, but we sometimes refer to these individuals as our employees. Our ability to operate our business and implement our strategies will depend on our continued ability and the ability of affiliates of our general partner to attract and retain highly skilled management personnel. Competition for these persons is intense. Given our size, we may be at a disadvantage, relative to our larger competitors, in the competition for these personnel. We or affiliates of our general partner may not be able to attract and retain qualified personnel in the future, and the failure to retain or attract senior executives and key personnel could have a material adverse effect on our ability to effectively operate our business. Neither we nor our general partner maintains key person life insurance policies for any of our senior management team.

 

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results timely and accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

 

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

 

Although we will be required to disclose changes made in our internal control and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until our annual report for the fiscal year ending December 31, 2015.

 

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Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a material adverse effect on the trading price of our common units.

 

For as long as we are an emerging growth company, we will not be required to comply with certain disclosure requirements that apply to other public companies.

 

For as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.0 billion of revenues in a fiscal year, have more than $700.0 million in market value of our limited partner interests held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to “opt out” of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common units to be less attractive as a result, there may be a less active trading market for our common units and our trading price may be more volatile.

 

Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.

 

Currency exchange rate fluctuations could have an adverse effect on our results of operations. A substantial majority of the cash flows from our current assets will be generated in Canadian dollars, but we intend to make distributions to our unitholders in U.S. dollars. As such, a portion of our distributable cash flow will be subject to currency exchange rate fluctuations between U.S. dollars and Canadian dollars. For example, if the Canadian dollar weakens significantly, the corresponding distributable cash flow in U.S. dollars could be less than what is necessary to pay our minimum quarterly distribution.

 

A significant strengthening of the U.S. dollar could result in an increase in our financing expenses and could materially affect our financial results under GAAP. In addition, because we report our operating results in U.S. dollars, changes in the value of the U.S. dollar also result in fluctuations in our reported revenues and earnings. In addition, under GAAP, all foreign currency-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations are revalued and reported based on the prevailing exchange rate at the end of the reporting period. This revaluation may cause us to report significant non-monetary foreign currency exchange gains and losses in certain periods.

 

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Some of our customers’ operations cross the U.S./Canada border and are subject to cross-border regulation.

 

Our customers’ cross border activities subject them to regulatory matters, including import and export licenses, tariffs, Canadian and U.S. customs and tax issues and toxic substance certifications. Such regulations include the Short Supply Controls of the Export Administration Act, the North American Free Trade Agreement and the Toxic Substances Control Act. Violations of these licensing, tariff and tax reporting requirements could result in the imposition of significant administrative, civil and criminal penalties on our customers. Our revenue and cash flows could decline and our ability to make cash distributions to our unitholders could be materially and adversely affected.

 

Risks Inherent in an Investment in Us

 

Our general partner and its affiliates, including USD, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders.

 

Following the offering, USD will indirectly own a     % limited partner interest and will indirectly own and control our general partner, which will own a 2.0% general partner interest in us. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of its owner, USD. Conflicts of interest may arise between USD and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including USD, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

neither our partnership agreement nor any other agreement requires USD to pursue a business strategy that favors us, and the directors and officers of USD have a fiduciary duty to make these decisions in the best interests of the shareholders of USD. USD may choose to shift the focus of its investment and growth to areas not served by our assets;

 

   

USD may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;

 

   

our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period, the conversion ratio of vested Class A Units and the ability of the subordinated units to convert into common units;

 

   

our general partner will determine which costs incurred by it are reimbursable by us;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make

 

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incentive distributions, to affect the conversion ratio of Class A Units to common units or to satisfy the conditions required to convert subordinated units to common units;

 

   

our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights;

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;

 

   

our general partner intends to limit its liability regarding our contractual and other obligations;

 

   

our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80.0% of the common units;

 

   

our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

   

our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

 

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “Conflicts of Interest and Fiduciary Duties.”

 

Energy Capital Partners has substantial influence over USD and our general partner, and its interests may differ from those of USD, us and our public unitholders.

 

Energy Capital Partners initially has the right to appoint three of seven members of USD’s board of directors and three of nine members of our general partner’s board of directors and may in the future have the right to appoint the majority of USD’s board of directors if it invests a specified amount in USD or certain other conditions are met. For so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, USD will not, and will not permit its subsidiaries, including us and our general partner, to take or agree to take certain actions without the affirmative vote of Energy Capital Partners, including, among others, any acquisitions or dispositions and any issuances of additional equity interests in us. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us, any incurrence of debt by us and the approval, modification or revocation of any partnership budget. As a result, Energy Capital Partners is able to significantly influence the management and affairs of USD and our

 

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general partner, including the amount of distributions we make, if any, our policies and operations, the appointment of management, future issuances of securities, the incurrence of debt by us, amendments to our organizational documents and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with our common unitholders’ interests and, in certain situations, have no duty to us or our unitholders.

 

Energy Capital Partners may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to our common unitholders or Energy Capital Partners may have an interest in not pursuing transactions that would otherwise benefit us. For example, Energy Capital Partners could influence us to make acquisitions, investments and capital expenditures that increase our indebtedness or to sell revenue-generating assets or to not make such acquisitions, investments or capital expenditures. In addition, Energy Capital Partners may have different tax considerations which could influence its position, including regarding whether and when to dispose of assets and whether and when to incur new or refinance existing indebtedness. In addition, the structuring of future transactions by our general partner may take into consideration these tax or other considerations even where no similar benefit would accrue to our common unitholders or us. Energy Capital Partners may make the decisions to approve any acquisition or disposition by us free of any duty to us and our unitholders.

 

Energy Capital Partners’ influence on USD and our general partner may have the effect of delaying, preventing or deterring a change of control of our company. Energy Capital Partners and its affiliates and affiliated funds are in the business of making investments in companies in the energy industry and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. USD’s limited liability company agreement provides that Energy Capital Partners shall not have any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries, and that in the event that Energy Capital Partners acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us or any of our subsidiaries, neither we nor any of our subsidiaries shall, to the fullest extent permitted by law, have any expectancy in such corporate opportunity, and Energy Capital Partners shall not, to the fullest extent permitted by law, have any duty to communicate or offer such corporate opportunity to us or any of our subsidiaries and may pursue or acquire such corporate opportunity for itself or direct such corporate opportunity to another person. Energy Capital Partners and its affiliates may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. See “Certain Relationships and Related Transactions” and “Conflicts of Interest and Fiduciary Duties.”

 

At any time following the fifth anniversary of the date of Energy Capital Partners’ investment in USD, Energy Capital Partners, upon giving written notice, shall have the right to compel USD to effect the total sale of Energy Capital Partners’ interests in USD (an ECP Exit). Such a sale could include an acquisition by the remaining owners of USD of Energy Capital Partners’ interests in USD or an initial public offering of USD. If the ECP Exit has not been completed within 180 days of the date USD receives notice of Energy Capital Partners’ desire to sell, Energy Capital Partners shall have the right to compel USD to effect a total sale of USD pursuant to an auction process on terms and conditions determined by, and in a process managed by, the members of USD’s board of directors that are appointed by Energy Capital Partners, provided that certain conditions in connection with the sale are met.

 

We intend to distribute a significant portion of our available cash, which could limit our ability to pursue growth projects and make acquisitions.

 

We intend to distribute most of our available cash, as that term is defined in our partnership agreement, to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute most of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing

 

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operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our new senior secured credit agreement on our ability to issue additional units, including units ranking senior to the common units as to distribution or liquidation, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash available to distribute to our unitholders.

 

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion and our partnership agreement does not require us to pay any distributions at all. Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us.

 

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $         per unit on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion. Please read “Our Cash Distribution Policy and Restrictions on Distributions.” Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us. Our partnership agreement does not require us to pay distributions at all and our general partner’s board of directors has broad discretion in setting the amount of cash reserves each quarter. Investors are cautioned not to place undue reliance on the permanence of our cash distribution policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make and the decision to make any distribution will be determined by the board of directors of our general partner as well as the members of our general partner’s board of directors appointed by Energy Capital Partners, whose interests may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of our sponsor or its affiliates to the detriment of our common unitholders.

 

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

 

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

   

provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or

 

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take or decline to take such other action, in good faith and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

provides that our general partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement.

 

In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our general partner must be made in good faith, and that our conflicts committee and the board of directors of our general partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

 

Our general partner intends to limit its liability regarding our obligations.

 

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

 

If you are not both a citizenship eligible holder and a rate eligible holder, your common units may be subject to redemption.

 

In order to avoid (1) 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 the FERC or analogous regulatory body, and (2) any substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or other authorization, in which we have an interest, we have adopted certain requirements regarding those investors who may own our common units. Citizenship eligible holders are individuals or entities whose nationality, citizenship or other related status does not create a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement or authorization, in which we have an interest, and will generally include individuals and entities who are U.S. citizens. Rate eligible holders are individuals or entities subject to U.S. federal income taxation on the income generated by us or entities not subject to U.S. federal income taxation on the income generated by us, so long as all of the entity’s owners are subject to such taxation. Please read “Description of the Common Units—Transfer of Common Units.” If you are not a person who meets the requirements to be a citizenship eligible holder and a rate eligible holder, you run the risk of having your units redeemed by us at the market price as of the date three days before the date the notice of redemption is mailed. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. In addition, if you are not a person who meets the requirements to be a citizenship eligible holder, you will not be entitled to voting rights. Please read “Our Partnership Agreement—Non-Citizen Assignees; Redemption.”

 

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Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due to our general partner and its affiliates for services provided will be substantial and will reduce our distributable cash flow to you.

 

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be required to reimburse USD for providing certain general and administrative services to us. Our general partner and its affiliates also may provide us other services for which we will be charged fees. Payments to our general partner and its affiliates will be substantial and will reduce the amount of distributable cash flow to unitholders. For the twelve months ending September 30, 2015, we estimate that these expenses will be approximately $         million, which includes, among other items, compensation expense for all employees required to manage and operate our business. For a description of the cost reimbursements to our general partner, please read “Our Partnership Agreement—Reimbursement of Expenses” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of our general partner, which is indirectly owned by USD. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own     % of the outstanding units (excluding general partner units and common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program). Also, if our general partner is removed without cause during the time any subordinated units are outstanding and the subordinated units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units, and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Furthermore, all of the unvested Class A Units will immediately vest and convert into common units based on the maximum conversion factor that could have applied to such Class A Units. This conversion would adversely affect the common units by prematurely eliminating the liquidation preference of common units over the Class A Units, which would have otherwise continued while certain conditions remained unsatisfied.

 

“Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the automatic conversion to common units of all remaining outstanding subordinated units.

 

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Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20.0% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

 

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest to a third party at any time without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of USD Group LLC to transfer its membership interest in our general partner to a third party. The new partners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

 

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of USD selling or contributing additional midstream infrastructure assets and businesses to us, as USD would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

 

You will experience immediate and substantial dilution in pro forma net tangible book value of $         per common unit.

 

The assumed initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $         per unit. Based on an assumed initial public offering price of $         per common unit, you will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed by USD Group LLC are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”

 

We may issue additional units without unitholder approval, which would dilute unitholder interests.

 

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, neither our partnership agreement nor our new senior secured credit agreement prohibits the issuance of equity securities that may effectively rank senior to our common units as to distributions or liquidations. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of distributable cash flow on each unit may decrease;

 

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because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of our common units may decline.

 

USD Group LLC may sell our units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

 

After the sale of the common units offered by this prospectus, USD Group LLC will hold             common units and subordinated units assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised. All of the subordinated units will convert into common units on a one-for-one basis in separate, sequential tranches, with each tranche comprising of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but not more than once in any twelve-month period), assuming the conditions for conversion are satisfied. Additionally, we have agreed to provide USD Group LLC with certain registration rights. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

 

Our general partner’s discretion in establishing cash reserves may reduce the amount of distributable cash flow to unitholders.

 

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of distributable cash flow to unitholders.

 

Affiliates of our general partner, including USD, and Energy Capital Partners and its affiliates may compete with us, and none of Energy Capital Partners, our general partner or any of their respective affiliates have any obligation to present business opportunities to us.

 

Neither our partnership agreement nor our omnibus agreement will prohibit USD or any other affiliates of our general partner or Energy Capital Partners or its affiliates from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, USD and other affiliates of our general partner, and Energy Capital Partners and its affiliates may acquire, construct or dispose of additional midstream infrastructure assets and businesses in the future without any obligation to offer us the opportunity to purchase any of those assets. For example, USD Group LLC currently owns the right to construct and develop Hardisty Phase II and Hardisty Phase III at our Hardisty rail terminal. USD Group LLC currently anticipates that Hardisty Phase II will commence operations in late 2015 or early 2016, and Hardisty Phase III will commence operations during 2017. If we are unable to acquire these facilities from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. As a result, competition from USD and other affiliates of our general partner could materially adversely impact our results of operations and distributable cash flow to unitholders.

 

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Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

 

In some instances, our general partner may cause us to borrow funds under our revolving credit facility, from USD or otherwise from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to satisfy the conditions required to convert subordinated units into common units.

 

Our general partner has a limited call right that it may exercise at any time it or its affiliates own more than 80.0% of the outstanding limited partner interests and that may require you to sell your common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80.0% of the then issued and outstanding limited partner interests of any class, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units (excluding common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program) and     % of our common units assuming the conversion of all subordinated units into common units. For additional information about the call right, please read “Our Partnership Agreement—Limited Call Right.”

 

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made non-recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

 

Please read “Our Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

 

Unitholders may have to repay distributions that were wrongfully distributed to them.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and

 

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for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

Prior to this offering, there has been no public market for our common units. After this offering, assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised, there will be          publicly traded common units. In addition, assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised, USD Group LLC will own          common units and all of the subordinated units, representing an aggregate     % limited partner interest in us. All of the common units held by USD Group LLC will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters, which may be waived in the discretion of certain of the underwriters. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

The initial public offering price for the common units offered hereby was determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

other factors described in these “Risk Factors.”

 

Because our common units will be yield-oriented securities, increases in interest rates could adversely impact our unit price, our distributable cash flow, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

 

Interest rates may increase in the future. As a result, interest rates on our future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect our interest expense and distributable cash flow, the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.

 

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The holder of our incentive distribution rights may elect to cause us to issue common units and general partner units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or the holders of our common units. This could result in lower distributions to holders of our common units.

 

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48.0%, in addition to distributions paid on its 2.0% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and general partner units. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled the general partner to a quarterly cash distribution equal to distributions to our general partner on the incentive distribution rights in the prior quarter. Our general partner will also be issued the number of general partner units necessary to maintain our general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner units in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

 

We have applied to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to shareholders of corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of USD Partners LP.”

 

We will incur increased costs as a result of being a publicly traded partnership.

 

We have no history operating as a publicly traded partnership. As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. For example, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various corporate governance practices that will further increase our costs, including requirements to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting.

 

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In addition, following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make certain activities more time-consuming and costly.

 

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our general partner’s board or as executive officers.

 

We estimate that we will incur approximately $2.1 million of estimated incremental external costs per year and additional internal costs associated with being a publicly traded partnership. However, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be reduced by the costs associated with being a public company.

 

Tax Risks

 

In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35.0%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes, there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

 

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

 

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Notwithstanding our treatment for U.S. federal income tax purposes, we will be subject to certain non-U.S.-taxes. If a taxing authority were to successfully assert that we have more tax liability than we anticipate or legislation were enacted that increased the taxes to which we are subject, the distributable cash flow to our unitholders could be further reduced.

 

Some of our business operations and subsidiaries will be subject to income, withholding and other taxes in the non-U.S. jurisdictions in which they are organized or from which they receive income, reducing the amount of distributable cash flow. In computing our tax obligation in these non-U.S. jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing tax authorities, such as whether withholding taxes will be reduced by the application of certain tax treaties. Upon review of these positions the applicable authorities may not agree with our positions. A successful challenge by a taxing authority could result in additional tax being imposed on us, reducing the distributable cash flow to our unitholders. In addition, changes in our operations or ownership could result in higher than anticipated tax being imposed in jurisdictions in which we are organized or from which we receive income and further reduce the distributable cash flow. Although these taxes may be properly characterized as foreign income taxes, you may not be able to credit them against your liability for U.S. federal income taxes on your share of our earnings. For more details please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Foreign Tax Credits.”

 

If we were subjected to a material amount of additional entity-level taxation by individual states, counties or cities, it would reduce our distributable cash flow to our unitholders.

 

Changes in current state, county or city law may subject us to additional entity-level taxation by individual states, counties or cities. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the distributable cash flow to you and the value of our common units could be negatively impacted. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

 

The tax treatment of publicly traded partnerships, companies with multinational operations or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

The present federal income tax treatment of publicly traded partnerships, companies with multinational operations, 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 propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships, including the elimination of the qualifying income exception upon which we rely for our treatment as a partnership for federal income tax purposes. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences—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.

 

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be

 

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taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

 

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow to our unitholders.

 

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.

 

We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.

 

A portion of our business, relating to the railcar fleet services, may be conducted by a subsidiary that is treated as a corporation for U.S. federal income tax purposes.

 

In order to maintain our status as a partnership for U.S. federal income tax purposes, 90% or more of our gross income in each tax year must be qualifying income under Section 7704 of the Internal Revenue Code. For a discussion of qualifying income, please read “Material Federal Income Tax Consequences—Partnership Status.” Latham & Watkins LLP is unable to opine as to the qualifying nature of the income generated by certain portions of our business related to the railcar fleet services. Consequently, we are in the process of requesting a ruling from the IRS upon which, if granted, we may rely with respect to the qualifying nature of such income. In an attempt to ensure that 90% or more of our gross income in each tax year is qualifying income, we may conduct the portion of our business related to these operations in a separate subsidiary. If the IRS is unwilling or unable to provide a favorable ruling in a timely manner with respect to our income from these assets and operations, it may be necessary for us to elect to treat this subsidiary as a corporation for U.S. federal income tax purposes.

 

Any subsidiary that we elect to treat as a corporation for U.S. federal income tax purposes will be subject to corporate-level tax, which would reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that any subsidiary treated as a corporation for U.S. federal income tax purposes has more tax liability than we anticipate or legislation were enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.

 

Tax gain or loss on the disposition of our common units could be more or less than expected.

 

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed

 

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as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units, may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

 

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

 

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

 

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

 

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Latham & Watkins LLP is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

 

We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

 

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A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

 

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Latham & Watkins LLP has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our 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 loaning their common units.

 

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

 

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

 

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

 

The sale or exchange of 50.0% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

 

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50.0% or more of the total interests in our capital and profits within a twelve-month period. Immediately after this offering, USD Group LLC will own     % of the total interests in our capital and profits. Therefore, a transfer by USD Group LLC of all or a portion of its interests in us could result in a termination of us as a partnership for federal income tax purposes. For purposes of determining whether the 50.0% 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

 

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our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has provided 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. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

 

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

 

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We initially expect to own assets and conduct business in Alberta, Canada, California and Texas. Some of these jurisdictions currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Latham & Watkins LLP has not rendered an opinion on the state or local tax consequences of an investment in our common units. Please consult your tax advisor.

 

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USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $         million from the sale of             common units offered by this prospectus, based on an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, commissions and structuring fees. We intend to use these proceeds, together with the proceeds from borrowings of $         million under our new term loan facility, as follows:

 

   

to make a cash distribution to USD Group LLC of $         million;

 

   

to repay $         million of indebtedness under USD’s current credit facility; and

 

   

to pay $         million of fees and expenses in connection with our new senior secured credit agreement, which will be comprised of a revolving credit facility and a term loan.

 

The remaining approximately $             million will be retained by us for general partnership purposes, including potentially to fund future acquisitions from USD and third parties and potentially for funding future growth projects, such as the potential acquisition from USD Group LLC of the Hardisty Phase II and Phase III projects on which we have been granted rights of first offer. USD has not offered these assets to us, and we are under no obligation to acquire these assets from USD with the proceeds of this offering, or otherwise. We do not presently have definitive agreements with USD or any third parties with respect to acquisitions. The consummation and timing of any future acquisitions of our right of first offer assets are subject to various contingencies, including USD’s successful development of such projects, USD’s willingness to offer such projects for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such acquisitions and our ability to obtain financing on acceptable terms. See “Risk Factors—Our right of first offer to acquire certain of USD’s assets and projects it will retain after the offering and certain assets or businesses that it may develop, construct or acquire in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets or businesses.” We may also consider the acquisition of other assets from USD and third parties. Any such acquisitions, however, will also depend on various contingencies, including our ability to identify attractive acquisition candidates and successfully negotiate acceptable acquisition agreements and our ability to obtain financing.

 

USD’s current credit facility bears interest at LIBOR plus an applicable premium which equates to 3.90% as of June 30, 2014. An affiliate of an underwriter participating in this offering is a lender under the current USD credit facility and will receive a portion of the proceeds from this offering pursuant to the repayment of borrowings thereunder. Please read “Underwriting—Certain Relationships.” In April 2014, our Canadian subsidiary which owns our Hardisty rail terminal borrowed $67.8 million under the current credit facility to fund the repayment of $67.0 million of intercompany indebtedness owed to USD.

 

The net proceeds from any exercise of the underwriters’ over-allotment option to purchase additional common units (approximately $         million, if exercised in full, after deducting the underwriting discounts and commissions and structuring fees) will be used to redeem from USD Group LLC a number of common units equal to the number of common units issued upon such exercise of the option at a price per unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts, commissions and the structuring fee. Please read “Underwriting.”

 

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, the structuring fee and offering expenses, to increase or decrease by $             million, based on an assumed initial public offering price of $             per common unit. If the proceeds increase due to a higher initial public offering price or an increase in the number of units issued, or decrease due to a lower initial public offering price or a decrease in the number of units issued, then the amount of cash retained by us for general partnership purposes will increase or decrease accordingly.

 

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CAPITALIZATION

 

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of our predecessor as of June 30, 2014;

 

   

our pro forma as adjusted cash and cash equivalents and capitalization as of June 30, 2014, after giving effect to the following transactions:

 

   

the issuance of 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us;

 

   

USD Group LLC’s contribution to us of its ownership interests in each of its subsidiaries that own or operate the Hardisty, San Antonio and West Colton rail terminals and our railcar business;

 

   

our entry into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term loan facility and the borrowing of the full $100.0 million under such term loan facility;

 

   

the issuance of          common units and          subordinated units to USD Group LLC; and

 

   

the issuance to USD Partners GP LLC, a wholly owned subsidiary of USD Group LLC,          general partner units, representing a 2.0% general partner interest in us and all of our incentive distribution rights; and

 

   

our pro forma as further adjusted cash and cash equivalents and capitalization as of June 30, 2014, after giving effect to the issuance and sale of          common units in this offering at an assumed initial public offering price of $         per common unit (based on the mid-point of the price range set forth on the cover of this prospectus) and the application of the net proceeds therefrom and from the borrowings under our new term loan facility as described under “Use of Proceeds.”

 

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical interim combined financial statements and the accompanying notes and the pro forma combined financial data and accompanying notes included elsewhere in this prospectus

 

     As of June 30, 2014  
     Predecessor
Historical
     Pro Forma
As Adjusted
     Pro Forma
As Further
Adjusted
 
    

(unaudited)

(in millions)

 

Cash and cash equivalents

   $ 32.4       $         $                
  

 

 

    

 

 

    

 

 

 

Debt:

        

Existing credit facility

     97.8         97.8           

New term loan

             100.0         100.0   

New revolving credit facility

                       
  

 

 

    

 

 

    

 

 

 

Total long-term debt (including current maturities)

     97.8         197.8         100.0   
  

 

 

    

 

 

    

 

 

 

Owner’s equity:

        

Owner’s equity

     10.9         10.9      

Common Units—public (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

Common Units—USD Group LLC (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

Class A Units—management (no units on an actual basis; 250,000 units on a pro forma as adjusted basis; and 250,000 units on a pro forma as further adjusted basis)

             

Subordinated Units—USD Group LLC (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             

General partner equity (no units on an actual basis;              units on pro forma as adjusted basis; and              units on a pro forma as further adjusted basis)

             
  

 

 

    

 

 

    

 

 

 

Total equity

     10.9         
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 108.7       $                    $     
  

 

 

    

 

 

    

 

 

 

 

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DILUTION

 

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $         million, or $         per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

      $                

Pro forma net tangible book value per unit before the offering(2)

     

Increase in net tangible book value per unit attributable to purchasers in the offering

     

Decrease in net tangible book value per unit attributable to distributions made to USD Group LLC(3)

     
  

 

  

Less: Pro forma net tangible book value per unit after the offering(4)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(5)

      $     
     

 

 

 

 

(1)   The mid-point of the price range set forth on the cover of this prospectus.
(2)   Determined by dividing the number of units (             common units, 250,000 Class A Units,              subordinated units and              general partner units) to be issued to USD Group LLC, the general partner and their affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.
(3)   Determined by dividing the number of units to be outstanding after this offering (             common units, 250,000 Class A Units,              subordinated units and              general partner units) and the distribution to be made to USD Group LLC of $         million as well as the dilution of USD Group LLC’s investment.
(4)   Determined by dividing the number of units to be outstanding after this offering (             total common units, 250,000 Class A Units,              subordinated units and              general partner units) into the application of the related net proceeds into our pro forma net tangible book value after giving effect to the application of the net proceeds of this offering.
(5)   Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ over-allotment option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in this offering due to any such exercise of the option.

 

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total
Consideration
 
     Number    %     Amount      %  
     (in thousands)          (in millions)         

USD Group LLC, general partner and their affiliates(1)(2)(3)

                   $                              

Purchasers in this offering(2)

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

                   $                   
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)  

Upon the consummation of the transactions contemplated by this prospectus, assuming the underwriters’ option to purchase additional common units from us is not exercised, USD Group LLC, our general partner

 

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and their affiliates will own              common units, 250,000 Class A Units,              subordinated units and              general partner units.

(2)   Assumes the underwriters’ over-allotment option to purchase additional common units is not exercised.
(3)   The assets contributed by USD Group LLC, the general partner and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by USD Group LLC, the general partner and its affiliates, as of June 30, 2014, after giving effect to the application of the net proceeds of the offering, is as follows:

 

     (in millions)  

Book value of net assets contributed

   $                

Less: Distribution to USD Group LLC from net proceeds of this offering

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Forward-Looking Statements” and “Risk Factors” should be read for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

 

For additional information regarding our historical and pro forma results of operations, please refer to our audited historical combined financial statements and accompanying notes and the unaudited pro forma combined financial data and accompanying notes included elsewhere in this prospectus.

 

General

 

Rationale for our Cash Distribution Policy

 

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute at least the minimum quarterly distribution of $ per unit ($         per unit on an annualized basis) on all of our units to the extent we have sufficient available cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. We expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our earnings resulting from such growth. We expect our general partner may choose to reserve cash in the form of excess distribution coverage from time to time for the purpose of maintaining stability or growth in our quarterly distributions. In addition, our general partner may cause us to borrow amounts to fund distributions in quarters when we generate less cash than is necessary to sustain or grow our cash distributions per unit. Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing rather than retaining our cash.

 

The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis. The amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner.

 

Limitations on Cash Distributions and our Ability to Change our Cash Distribution Policy

 

There is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal or contractual obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the discretion of our general partner and the approval of members of our general partner’s board of directors that are appointed by Energy Capital Partners, which may change our cash distribution policy at any time from time to time without a vote from unitholders. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our cash distribution policy will be subject to restrictions on cash distributions under our new senior secured revolving credit agreement. One such restriction would prohibit us from making cash distributions while a default has occurred and is continuing under our senior secured credit agreement, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement.”

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by our general partner and the members of our board of directors appointed by Energy Capital Partners, taking into consideration the terms of our partnership agreement. Our general partner may change our cash distribution policy at any time from time to time without a vote from unitholders. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for

 

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future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our general partner’s board of directors has broad discretion in setting the amount of cash reserves each quarter. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders. Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us.

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our distributable cash flow is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. For the twelve months ending September 30, 2015, we estimate that our general and administrative expenses will be approximately $         million, which includes, among other items, compensation expense for all employees required to manage and operate our business. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash,” “Our Partnership Agreement—Reimbursement of Expenses” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

   

Our ability to make cash distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make cash distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

   

If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

 

To the extent that our general partner determines not to distribute the full minimum quarterly distribution with respect to any quarter while any subordinated units are outstanding, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. Any shortfall in the payment of the minimum quarterly distribution with respect to any quarter while any subordinated units remain outstanding may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Conversion to Common Units.”

 

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

 

We expect that we will rely primarily upon external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, our current cash distribution policy will significantly impair our ability to grow. In addition, because we intend to distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our revolving credit facility and term loan will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our new credit facility and term loan could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our common units.” To

 

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the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

 

Our Minimum Quarterly Distribution

 

Pursuant to our distribution policy, we intend to declare a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” We expect to pay distributions within 60 days after the end of each quarter, beginning with the quarter ending December 31, 2014, to unitholders of record on the applicable record date. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on July 1, 2014 and ends on the day prior to the closing of this offering other than the distribution to be made to USD Group LLC in connection with the closing of this offering as described in “Summary—Formation Transactions” and “Use of Proceeds.” We will pro rate the amount of our first distribution for the period from the closing of this offering through December 31, 2014 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, Class A Units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

    No Exercise of Option to Purchase
Additional Common  Units
    Full Exercise of Option to Purchase
Additional Common  Units
 
          Minimum Quarterly
Distributions
          Minimum Quarterly
Distributions
 
          (in thousands)           (in thousands)  
    Number of Units     One Quarter     Annualized
(Four
Quarters)
    Number of Units     One Quarter     Annualized
(Four
Quarters)
 

Publicly held common units

    $                   $                     $                   $                

Common units held by USD Group LLC

           

Class A Units

    250,000            250,000       

Subordinated units held by USD Group LLC

           

General partner units

           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $                   $                     $                   $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $         per unit per quarter.

 

While any subordinated units are outstanding, before we make any quarterly distributions to our subordinated unitholders, our common unitholders and holders of our Class A Units are entitled to receive

 

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payment of the full minimum quarterly distribution for such quarter plus, with respect to our common units, any arrearages in distributions of the minimum quarterly distribution from prior quarters. We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Conversion to Common Units.”

 

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any higher standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is not adverse to the best interests of our partnership. Please read “Conflicts of Interest and Fiduciary Duties.”

 

The actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.

 

Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution will also automatically be adjusted in connection with the resetting of the target distribution levels related to our general partner’s incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $        per unit for the twelve months ending September 30, 2015. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014,” in which we present our distributable cash flow for the year ended December 31, 2013 and the twelve months ended June 30, 2014, respectively, derived from our unaudited pro forma financial data that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” in which we provide our estimated forecast of our ability to generate sufficient distributable cash flow for us to pay the minimum quarterly distribution on all units for the twelve months ending September 30, 2015.

 

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Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014

 

If we had completed the transactions contemplated in this prospectus on January 1, 2013, we would not have generated positive pro forma distributable cash flow. Our unaudited pro forma distributable cash flow includes the estimated incremental expenses of being a public company as well as pre-operational costs related to our Hardisty rail terminal, without the corresponding revenues from that terminal. Our Hardisty rail terminal commenced operations on June 30, 2014, and we expect to generate the vast majority of our Adjusted EBITDA and distributable cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal.

 

As discussed above, our unaudited pro forma distributable cash flow for the year ended December 31, 2013 and the twelve months ended June 30, 2014 includes $2.1 million of estimated incremental annual general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership. This amount is an estimate, and our general partner will ultimately determine the actual amount of these incremental annual general and administrative expenses to be reimbursed by us in accordance with our partnership agreement. Incremental annual general and administrative expenses related to being a publicly traded partnership include expenses associated with annual, quarterly and current reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees, outside director fees and director and officer insurance expenses. These expenses are not reflected in our or our Predecessor’s historical financial statements.

 

The adjusted amounts below do not present our results of operations as if the transactions contemplated in this prospectus had actually been completed on January 1, 2013. In addition, cash available to pay distributions is primarily a cash accounting concept, while distributable cash flows is based on our historical combined financial statements which have been prepared on an accrual basis. As a result, you should view the amount of pro forma historical distributable cash flow only as a general indication of the amount of cash available to pay distributions that we might have generated had we completed this offering on January 1, 2013.

 

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The following table illustrates, on a pro forma basis, for the six months ended June 30, 2013, the year ended December 31, 2013, the six months ended June 30, 2014 and the twelve months ended June 30, 2014, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering had been completed on January 1, 2013.

 

USD PARTNERS LP

Unaudited Pro Forma Distributable Cash Flow

 

    Six
Months
Ended
June 30,
2013
    Year Ended
December 31,
2013
    Six
Months
Ended
June 30,
2014
    Twelve
Months
Ended
June 30,
2014(1)
 
    (in thousands)  

Revenues:

       

Terminalling services

  $ 3,691      $ 7,130      $ 3,448      $ 6,887   

Fleet leases

    8,546        13,572        4,596        9,622   

Fleet services

    99        235        238        374   

Fleet services—related party

    276        962        718        1,404   

Freight and other reimbursables

    768        1,778        1,702        2,712   

Freight and other reimbursables—related party

           2,624        219        2,843   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    13,380        26,301        10,921        23,842   

Operating Costs:

       

Subcontracted rail services

    944        1,898        2,109        3,063   

Fleet leases

    8,546        13,572        4,596        9,622   

Freight and other reimbursables

    768        4,402        1,921        5,555   

Selling, general & administrative(2)

    2,044        4,458        3,813        6,227   

Depreciation

    251        502        254        505   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    12,553        24,832        12,693        24,972   

Operating Income (Loss)

    827        1,469        (1,772     (1,130

Interest expense(3)

    2,418        4,884        2,418        4,884   

Loss on derivative contracts

                  802        802   

Other expense, net

           39        688        727   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for state income taxes

    (1,591     (3,454     (5,680     (7,543

Provision for income taxes

    148        449        359        660   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Loss

    (1,739     (3,903     (6,039     (8,203

Add:

       

Depreciation and amortization expense

    251        502        254        505   

Non-cash compensation expense related to Class A Units

                           

Interest expense(2)

    2,418        4,884        2,418        4,884   

Loss on derivative contracts

                  802        802   

Other expense, net

           39        688        727   

Provision for income taxes

    148        449        359        660   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Adjusted EBITDA(4)

    1,078        1,971        (1,518     (625

Less:

       

Provision for income taxes

    (148     (449     (359     (660

Cash interest expense(3)

    (2,217     (4,481     (2,217     (4,481

Maintenance capital expenditures(5)

                           

Expansion capital expenditures(5)

    (6,129     (56,114     (30,327     (80,312

Incremental general and administrative expenses of being a publicly traded partnership(6)

    (1,068     (2,135     (1,068     (2,135

Add:

       

Available cash and borrowings to fund expansion capital expenditures

    6,129        56,114        30,327        80,312   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma distributable cash flow deficit

  $ (2,354   $ (5,094   $ (5,161   $ (7,901
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)   Represents the combination of the results for the year ended December 31, 2013 and the six months ended June 30, 2014, less the results of the six months ended June 30, 2013.
(2)   Selling, general & administrative expense includes equity-based compensation expense related to the Class A Units deemed issued on January 1, 2013, which also is deemed to be the grant date for pro forma financial statements. We assumed on a pro forma basis that it is probable that the base vesting threshold for the First Class A Unit Tranche and Second Class A Unit Tranche would not have been met and the awards would not vest, nor would distributions have been made to Class A Unit holders. For the Third Class A Unit Tranche we assumed that it is probable that the base vesting threshold would be met but will not exceed the target amount and the awards would vest on a 1:1 basis. For the Fourth Class A Unit Tranche we made an assumption that it is probable that we will exceed the target threshold and the awards will vest at a 2.0x conversion. The mid-point price determined at pricing will be used as the grant-date fair value for these awards.
(3)   Interest expense and cash interest expense both include commitment fees and interest expense that would have been paid by our predecessor had our new senior secured credit agreement been in place during the period presented and we had borrowed $100.0 million under the term loan facility at the beginning of the period. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our new senior secured credit agreement. Cash interest expense excludes the amortization of debt issuance costs.
(4)   We define Adjusted EBITDA and provide a reconciliation to its most directly comparable financial measures calculated and presented in accordance with GAAP in “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(5)   Historically we did not necessarily distinguish between maintenance capital expenditures and expansion capital expenditures in the same manner that will be required under our partnership agreement following the closing of this offering. For purposes of this pro forma presentation, we have retroactively reclassified our total capital expenditures as either maintenance capital expenditures or expansion capital expenditures in the same manner that will be required prospectively under our partnership agreement following the closing of this offering. Based on the nature of our operations, our assets typically require minimal to no maintenance capital expenditures. Maintenance capital expenditures, as defined in our partnership agreement, are recorded in Other operating costs. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”
(6)   Reflects an adjustment for estimated cash expenses associated with being a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer insurance expenses; and incremental costs associated with operating our logistics assets as a growth-oriented business.

 

Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2015

 

We forecast that our estimated distributable cash flow for the twelve months ending September 30, 2015 will be approximately $27.0 million. This amount would exceed by $         million the amount of distributable cash flow we must generate to support the payment of the minimum quarterly distributions for four quarters on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for the twelve months ending September 30, 2015.

 

We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated distributable cash flow for the twelve months ending September 30, 2015, and related assumptions set forth below to substantiate our belief that we will have sufficient distributable cash flow to pay the full minimum quarterly distributions on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units for the twelve months ending

 

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September 30, 2015. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical combined financial statements and accompanying notes included elsewhere in this prospectus, our unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient distributable cash flow to pay the full minimum quarterly distributions on our common units, Class A Units and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2015. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

 

The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. UHY LLP has neither compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, UHY LLP does not express an opinion or any other form of assurance with respect thereto. The UHY LLP report included in this registration statement relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

 

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated distributable cash flow.

 

We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.

 

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USD Partners LP

Estimated Distributable Cash Flow

for the Twelve Months Ending September 30, 2015

(unaudited)

 

    Pro Forma
Twelve  Months
Ended
    Three Months Ending     Twelve
Months
Ending
 
($ in millions)   June 30,
2014(6)
    December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    September 30,
2015
 

Revenues:

           

Terminalling services(1)

  $ 6.9      $ 20.4      $ 20.3      $ 20.4      $ 20.6      $ 81.6   

Fleet leases

    9.6        3.8        4.3        2.3        1.8        12.1   

Fleet services

    1.8        1.0        1.1        1.0        0.8        3.9   

Freight and other reimbursables

    5.5        1.9        1.9        0.5        0.1        4.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 23.8      $ 27.2      $ 27.6      $ 24.0      $ 23.3      $ 102.0   

Operating costs:

           

Subcontracted rail services

  $ (3.1   $ (2.4   $ (2.4   $ (2.4   $ (2.4   $ (9.7

Fleet leases

    (9.6     (3.8     (4.3     (2.3     (1.8     (12.1

Freight and other reimbursables

    (5.6     (1.9     (1.9     (0.5     (0.1     (4.4

Pipeline fee(1)

    —          (5.6     (5.7     (5.7     (5.8     (22.8

Other operating costs(2)

    —          (1.8     (1.8     (1.8     (1.8     (7.2

Selling, general & administrative(3)

    (6.2     (1.8     (1.8     (1.8     (1.8     (7.0

Depreciation

    (0.5     (1.2     (1.2     (1.2     (1.2     (5.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs

  $  (25.0   $ (18.6   $ (19.1   $ (15.7   $ (14.9   $ (68.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (1.2     8.6        8.5        8.4        8.4        33.8   

Interest expense, net(4)

    (4.9     (0.9     (0.9     (0.9     (0.9     (3.6

Other expense, net

    (1.5     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

    (7.5     7.7        7.6        7.5        7.5        30.2   

Provision for income and withholding taxes(5)

    (0.7     (2.1     (2.2     (2.1     (2.1     (8.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (8.2   $ 5.5      $ 5.4      $ 5.3      $ 5.3      $ 21.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

           

Provision for income and withholding taxes(5)

  $ 0.7      $ 2.1      $ 2.2      $ 2.1      $ 2.1      $ 8.6   

Interest expense, net(4)

    4.9        0.9        0.9        0.9        0.9        3.6   

Depreciation expense

    0.5        1.2        1.2        1.2        1.2        5.0   

Non-cash compensation expense related to Class A Units

    —          —          —          —          —          —     

Other expense, net

    1.5        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted EBITDA

  $ (0.7   $ 9.8      $ 9.7      $ 9.6      $ 9.7      $ 38.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less:

           

Provision for income and withholding taxes(5)

  $ (0.7   $ (2.1   $ (2.2   $ (2.1   $ (2.1   $ (8.6

Cash interest paid, net

    (4.5     (0.8     (0.8     (0.8     (0.8     (3.2

Maintenance capital expenditures(2)

    —          —          —          —          —          —     

Incremental general and administrative expenses of being a publicly traded partnership(3)

    (2.1          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated distributable cash flow (deficit)

  $ (7.9   $ 6.9      $ 6.8      $ 6.7      $ 6.7      $ 27.0   

Pro forma cash distributions:

           

Minimum annual distribution per unit (based on minimum quarterly distribution rate of $             per unit)

           

Annual distributions to:

           

Public common unitholders

           

US Development Group:

           

Common units

           

Class A Units

           

Subordinated units

           

General partner units

           

Total distributions to US Development Group

           

Total distributions to our unitholders and general partner at the minimum distribution rate

  $        $        $        $        $        $     

Excess (shortfall) of cash available for distribution over aggregate minimum quarterly distributions

           

 

(1)   Does not include an aggregate of CAD $12.5 million of revenues associated with incentive payments from railroads and resulting pipeline fees and tax impacts. Please read “—Revenues—Railroad Incentive Payments.”
(2)   We record our routine maintenance expenses associated with our assets in Other operating costs, which are forecasted to be $0.6 million for the twelve months ending September 30, 2015.

 

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(3)   Selling, general & administrative expense for the pro forma twelve months period ended June 30, 2014 includes equity-based compensation expense related to the Class A Units deemed issued on January 1, 2013, which also is deemed to be the grant date for pro forma financial statements. We assumed on a pro forma basis that it is probable that the base vesting threshold for the First Class A Unit Tranche and the Second Class A Unit Tranche would not have been met and the awards would not vest, nor would distributions have been made to Class A Unit holders. For the Third Class A Unit Tranche we assumed that it is probable that the base vesting threshold would be met but will not exceed the target amount and the awards would vest on a 1:1 basis. For the Fourth Class A Unit Tranche we made an assumption that it is probable that we will exceed the target threshold and the awards will vest at a 2.0x conversion. The selling, general and administrative expense for the forecast periods includes equity-based compensation expense related to the Class A Units deemed issued on October 1, 2014, which also is deemed to be the grant date. We estimate that it is probable for the First Class A Unit Tranche that we will exceed the base vesting threshold, but will not exceed the target amount and the awards will vest 1:1. For the Second Class A Unit Tranche, the Third Class A Unit Tranche and the Fourth Class A Unit Tranche we estimate that it is probable that the base vesting threshold will exceed the target amount and the awards will vest at a 1.5, 1.75 and 2.0x conversion for the Second Class A Unit Tranche, the Third Class A Unit Tranche and the Fourth Class A Unit Tranche, respectively. The Partnership has concluded that the grant date, as defined within the accounting guidance, of these awards will be the day on which the IPO is considered effective and, as a result, the basis for the award valuation will be the initial public offering price. The mid-point of the price range set forth on the cover of this prospectus will be used as the grant-date fair value for these awards for purposes of calculating pro forma and forecast equity-based compensation expense. Selling, general and administrative expense for the pro forma twelve months period ended June 30, 2014 does not include estimated incremental general and administrative expenses of being a publicly traded partnership. We estimate incurring an aggregate of $2.1 million of such additional expenses during the forecast periods, and added an equivalent amount of expenses to the presentation of estimated distributable cash flow for the twelve months ended June 30, 2014 in order to improve comparability to the forecast periods.
(4)   Includes $0.4 million of amortized financing costs based on a $2.0 million financing cost associated with our new $300.0 million senior secured credit agreement. Interest expense for the pro forma twelve months ended June 30, 2014 is calculated based on an estimated interest rate of 3.48% (comprised of a LIBOR-based rate of 0.2307% plus an applicable margin of 3.25%), which is calculated based on the interest rate and spreads set forth in our new senior secured credit agreement. Interest expense for the twelve months ending September 31, 2015 is calculated based on an estimated interest rate for our revolving credit facility and our term loan. Interest expense with respect to our revolving credit facility for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.77% (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.50%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.82% (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.25%), which corresponds with the expected pricing under or new senior secured credit agreement. Interest expense with respect to our term loan for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.87% (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.60%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.92% (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.35%), which corresponds with the expected pricing under our new senior secured credit agreement. Forecasted interest expense includes a commitment fee based on 0.375% of the amount undrawn on our revolving credit facility. This also includes interest income generated from cash on the balance sheet at an assumed rate of 0.50%.
(5)   Represents provision for Canadian income and withholding taxes on distributions from our Canadian subsidiary which owns the Hardisty terminal. Also includes $1.4 million of income and withholding tax expense on revenues from our railcar business. We are currently seeking a ruling from the IRS on the qualifying nature of the revenues generated by our railcar business. We are assuming for purposes of this forecast that we will not receive the ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. See “Risk Factors—We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.” If we receive the ruling in a timely manner, we will not incur these income tax expenses and our distributable cash flow will increase by a corresponding amount.
(6)   The pro forma results for the twelve months ended June 30, 2014 give pro forma effect to the transactions to be effected at the closing of this offering described under “Summary—Formation Transactions.” For a further discussion of the pro forma adjustments, please see the Unaudited Pro Forma Combined Financial Statements appearing elsewhere in this prospectus.

 

Significant Forecast Assumptions

 

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2015. While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate.

 

Other than in connection with the commencement of operations at our Hardisty rail terminal on June 30, 2014, and the completion of this offering and the related formation transactions, we do not anticipate any material differences in distributable cash flow for the period from July 1, 2014 through September 30, 2014. The agreements with six of our customers at our Hardisty rail terminal contain four month ramp-up periods which commenced between June 2014 and August 2014. Pursuant to the ramp-up periods in these agreements, these customers’ take-or-pay minimum payment obligations increase from 25% of the total minimum payment due in

 

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the first month to 100% of the total minimum payment due in the fourth month, increasing in 25% monthly increments. The impact of this ramp-up period is reflected in our forecast and the period from July 1, 2014 through September 30, 2014.

 

General Considerations

 

We believe that our estimated distributable cash flow for the twelve months ending September 30, 2015 will not be less than $27.0 million. As we discuss in further detail below, the commencement of operations at our Hardisty rail terminal on June 30, 2014 will result in us generating significant distributable cash flow for the twelve months ending September 30, 2015. As discussed above, we did not generate positive distributable cash flow on a pro forma basis for the year ended December 31, 2013 or the twelve months ended June 30, 2014.

 

We intend to pay our unitholders distributions based on the cash flow generated from both our U.S. and Canadian-based assets and businesses. The vast majority of our cash flow is projected to be generated from our Hardisty rail terminal, which is Canadian dollar denominated. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect our earnings. As a result, we have entered into certain put and call options that will be in effect during the forecast period to secure a Canadian dollar to U.S. dollar exchange rate of at least 0.91 on approximately 97.3% of our forecasted Canadian dollar cash flow to substantially mitigate the impact of changes in foreign exchange rates. We have assumed for the purposes of the twelve months ending September 30, 2015 that Canadian dollars are converted into U.S. dollars at an average exchange rate of 0.91, which is the low end of the hedge mentioned above. The spot rate in effect as of September 16, 2014 was 0.9026.

 

The following table shows the relative contribution to distributable cash flow for each of our terminals as well as our fleet services business, which represents cash flows net of items directly associated with our assets including general and administrative expenses, income and withholding taxes and maintenance capital expenditures:

 

     Three Months Ending     Twelve
Months
Ending
 
     December 31,
2014
    March 31,
2015
    June 30,
2015
    September 30,
2015
    September 30,
2015
 

Hardisty rail terminal

   $ 7.5      $ 7.4      $ 7.4      $ 7.5      $  29.8   

West Colton rail terminal

     0.2        0.2        0.2        0.2        0.8   

San Antonio rail terminal

     0.4        0.4        0.4        0.4        1.8   

Fleet services

     0.7        0.7        0.6        0.5        2.5   

Partnership general and administrative expenses(1)

     (1.2     (1.2     (1.2     (1.2     (4.6

Cash interest paid, net

     (0.8     (0.8     (0.8     (0.8     (3.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Distributable Cash Flow

   $ 6.9      $ 6.8      $ 6.7      $ 6.7      $ 27.0   

 

(1)   Represents $2.5 million administrative fee payable to USD Group LLC and $2.1 million of additional general and administrative expenses associated with being a publicly traded partnership. Does not include general and administrative expenses directly associated with our assets.

 

The assumptions and estimates we have made to support our ability to generate the minimum estimated distributable cash flow are set forth below.

 

Revenues

 

We estimate that we will generate revenue of $102.0 million for the twelve months ending September 30, 2015, as compared to pro forma revenue of $23.8 million for the twelve months ended June 30, 2014.

 

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Terminalling Services.    For the twelve months ending September 30, 2015, we expect to generate approximately $81.6 million in Terminalling services revenue. The majority of our Terminalling services revenue is associated with our Hardisty rail terminal which was not in operation in historical periods.

 

   

Hardisty rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $74.8 million in revenue from our Hardisty rail terminal. For the twelve months ending September 30, 2015, we have assumed that approximately 98.0% of our Hardisty rail terminalling revenues are derived from minimum monthly payments from our customers under existing contracts. We expect that the remaining revenue will be generated by throughput fees from barrels of crude oil loaded in excess of the minimum volume commitments, based on preliminary volume indications from our customers; however, these volumes are not contractually committed and are subject to change. The operations of our Hardisty rail terminal commenced on June 30, 2014 and as such, there are no relevant periods to provide for comparability.

 

   

Railroad incentive payments.    Historically, we have received incentive payments from railroads in connection with events that are projected to increase incremental traffic on their network such as large capital projects. With respect to our Hardisty rail terminal, we have the right to receive up to CAD $12.5 million in gross incentive payments payable based on the number of railcars loaded. A portion of these incentive payments increases the pipeline fees payable to Gibson. We have not included in the forecast the effect of any of these incentive payments. We estimate the net impact to our distributable cash flow of these incentive payments over the next three to five years to be $7.5 million, which is net of Canadian income and withholding taxes and the related pipeline fees to Gibson. We and our sponsor expect to seek additional incentive payments in the future.

 

   

West Colton rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $2.9 million in revenue from our West Colton rail terminal, as compared to pro forma revenue of $2.8 million for the twelve months ended June 30, 2014. Our projected volumes of 4.6 thousand barrels of ethanol transloaded per day (5.9 million gallons per month) are based on actual historical volumes and preliminary indications from our customer.

 

   

San Antonio rail terminal.    For the twelve months ending September 30, 2015, we expect to generate approximately $3.9 million in revenue from our San Antonio rail terminal, as compared to pro forma revenue of $4.0 million for the twelve months ended June 30, 2014. Our projected volumes are based on actual historical volumes of 10.1 thousand barrels of ethanol transloaded per day (13.2 million gallons per month) and preliminary indications from our customer.

 

Throughput.    Aggregate terminalling throughput is forecasted to substantially increase between the historical period and the twelve months ending September 30, 2015, primarily as a result of the completion and commencement of operations at our Hardisty rail terminal on June 30, 2014.

 

The following table compares forecasted throughput for the twelve months ending September 30, 2015, to actual volumes for the twelve months ended June 30, 2014.

 

    

Actual

Twelve Months

    

Forecasted

Twelve Months

 
     Ended
June 30, 2014
     Ending
September 30,  2015
 
     (Throughput in Mbpd)  

Terminals

     

Hardisty rail terminal

     N/A         130.1   

West Colton rail terminal

     4.6         4.6   

San Antonio rail terminal

     10.1         10.1   

 

Fleet leases.    For the twelve months ending September 30, 2015, we expect to generate approximately $12.1 million in Fleet leases revenue from lease payments under existing contracts from customers that lease

 

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railcars directly from us. During the twelve months ended June 30, 2014 the pro forma revenue with respect to these railcars was $9.6 million. The increase is primarily due to an increased number of railcars leased in conjunction with the commencement of operations of the Hardisty rail terminal.

 

Fleet services.    For the twelve months ending September 30, 2015, we expect to generate approximately $3.9 million in Fleet services revenue from providing management services to customers. During the twelve months ended June 30, 2014, the pro forma fleet services revenue was $1.8 million. The increase is primarily due to the fact that most of the railcars in our fleet are contracted in conjunction with Hardisty rail terminal services agreements and the Hardisty rail terminal was not in operation in the historical periods.

 

Freight and other reimbursables.    For the twelve months ending September 30, 2015, we expect to generate $4.4 million in Freight and other reimbursables revenue from customer reimbursement of railroad freight fees. During the twelve months ended June 30, 2014, the pro forma freight and other reimbursables revenue was $5.5 million. The decrease is primarily due to a reduction in the number of new railcars being added to the fleet during the forecast period. Freight and other reimbursables revenue are offset by costs payable by us to railroads.

 

Operating Costs

 

We estimate that we will incur total operating costs of $68.2 million for the twelve months ending September 30, 2015, compared to pro forma total operating costs of $25.0 million for the twelve months ended June 30, 2014. The increase in our forecasted operating costs as compared to the pro forma twelve months ended June 30, 2014 is primarily due to the commencement of operations at our Hardisty rail terminal. Our forecasted operating costs for Hardisty are based on management’s historical experience with operating costs associated with similar types of terminals owned and operated in the past.

 

Terminalling services.    Operating costs associated with our Terminalling services business are comprised of labor expenses, rail service subcontracting costs, rent and utility costs and insurance premiums. Our subcontracting costs represent a large portion of our operating cost as a result of utilizing a subcontractor for in-plant rail switching and associated services at each of our terminals.

 

In addition, at our Hardisty rail terminal, we entered into a facilities connection agreement with Gibson whereby Gibson would construct a pipeline to provide our Hardisty rail terminal with exclusive pipeline access to Gibson’s storage terminal in exchange for a pipeline fee to Gibson. For the twelve months ending September 30, 2015, we expect to pay Gibson a pipeline fee of approximately $22.8 million. Our forecasted subcontracting costs, Gibson pipeline fee and insurance premiums are based on our current agreements with our subcontractors, the Gibson facilities connection agreement and our insurance policies, respectively.

 

Fleet leases.    As part of the operating expenses related to our Fleet leases business, we incur a monthly fleet lease rental expense for the railcars that we have under lease. Forecasted Fleet leases expenses represent contractual lease payments payable to third parties.

 

Freight and other reimbursables.    We pay railroad freight costs for arranging the shipment of railcars on behalf of our customers. These costs are offset and reimbursed by our customers.

 

Selling, General & Administrative Expenses

 

We estimate that our total selling, general and administrative expenses will be $7.0 million for the twelve months ending September 30, 2015 as compared to pro forma selling, general and administrative expenses of $6.2 million for the twelve months ended June 30, 2014. These expenses consist of:

 

   

an annual fee of $2.5 million per year that we will pay to USD Group LLC under the omnibus agreement for the provision of various centralized administrative services for our benefit;

 

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approximately $2.1 million of incremental annual expenses as a result of being a separate publicly traded partnership, including costs associated with annual and quarterly reports to unitholders, financial statement audit, tax return and Schedule K-1 preparation and distribution, investor relations, activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums, independent director compensation, and incremental costs associated with operating our assets as a growth-oriented business;

 

   

approximately $2.4 million in direct general and administrative expenses associated with our terminals, which we forecast based on historical expenses, existing contracts and management estimates; and

 

   

approximately $             million in equity-based compensation expense associated with Class A Units granted to certain executive officers and other key employees of our general partner.

 

Income and Withholding Taxes

 

Our income earned in Canada by our Canadian subsidiaries will be subject to Canadian income taxes at statutory rate of 25%. Furthermore, our Canadian subsidiaries will be required to withhold and remit Canadian withholding taxes equal to 5% on any dividends paid to us, subject to possible reduction under any applicable income tax treaty or convention. The Canadian subsidiaries are direct wholly owned subsidiaries of a Luxembourg Societe a Responsabilite Limitee (SARL). As such, we are of the view that the Canada-Luxembourg Treaty applies to the extent that dividends are paid by the Canadian subsidiaries to a SARL.

 

We have assumed a combined Canadian federal/provincial corporate income tax rate of 25% on our income earned in Canada during the forecast period. We have assumed that no Canadian distributions (such as dividends), other than an immaterial amount relating to our railcar business, will be made to the non-resident parent companies during the forecast period, and therefore no applicable withholding tax, other than an immaterial amount relating to our railcar business, will be payable, as we anticipate that all of the cash flow generated by our Canadian subsidiaries will be used to repay borrowings under the $100.0 million term loan (fully drawn in Canadian dollars). We expect to repay approximately $27.2 million of borrowings under our term loan during the twelve months ending September 30, 2015.

 

We have also assumed $1.4 million of income and withholding tax expense on revenues from our railcar business. We are currently seeking a ruling from the IRS on the qualifying nature of the revenues generated by our railcar business. We are assuming for purposes of this forecast that we will not receive the ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. See “Risk Factors—We may choose to conduct a portion of our operations, which may not generate qualifying income, in a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes. Corporate federal income tax would reduce our cash available for distribution.” If we receive the ruling in a timely manner, we will not incur these income tax expenses and our distributable cash flow will increase by a corresponding amount.

 

Depreciation Expense

 

We estimate that depreciation expense will be approximately $5.0 million for the twelve months ending September 30, 2015, compared to pro forma depreciation expense of $0.5 million for the twelve months ended June 30, 2014. We have assumed property and equipment being recorded at historical cost, with interest on borrowings for construction being capitalized and depreciated when the asset is available for service. Forecasted depreciation is calculated using the straight-line method over the estimated useful lives of depreciable assets with a total cost basis of $94.5 million, which range from 5 to 20 years. Depreciation expense is expected to increase due to completion of the construction of the Hardisty rail terminal.

 

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Financing

 

We estimate that net interest expense for the twelve months ending September 30, 2015 will be approximately $3.6 million based on the following assumptions:

 

   

We will enter into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term loan (borrowed in Canadian dollars). Borrowings under the credit agreement bear interest based on pre-determined pricing grids that allow us to choose between base rate and Canadian prime rate loans or London Interbank Offered Rate (LIBOR) and Canadian Dollar Offered Rate (CDOR) rate loans. We have assumed interest rates with respect to our revolving credit facility for the five months ending February 28, 2015 of 2.77% (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.50%) and 2.82% for the seven months ending September 30, 2015 of (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.25%). We have assumed interest rates with respect to our term loan of 2.87% for the five months ending February 28, 2015 (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.60%) and 2.92% for the seven months ending September 30, 2015 (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.35%). We assume that there is a $2.0 million financing cost associated with our $300.0 million credit agreement that is amortized over five years. We assume that there will be $86.4 million in average borrowings under the term loan and $8.7 million in average borrowings under the revolving credit facility during the forecast period;

 

   

Our interest expense will include annual commitment fees associated with undrawn capacity on our revolving credit facility, as well as the amortization of estimated deferred issuance costs incurred in connection with our new senior secured credit agreement;

 

   

Interest income generated from cash on the balance sheet at an assumed rate of 0.50%; and

 

   

We will remain in compliance with the financial and other covenants in our new senior secured credit agreement.

 

Interest expense for the pro forma twelve months ended June 30, 2014 is calculated based on an estimated interest rate of 3.48% (comprised of a LIBOR-based rate of 0.2307% plus an applicable margin of 3.25%). Interest expense for the twelve months ending September 31, 2015 is calculated based on an estimated interest rate for our revolving credit facility and our term loan. Interest expense with respect to our revolving credit facility for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.77% (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.50%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.82% (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.25%), which corresponds with the expected pricing under or new senior secured credit agreement. Interest expense with respect to our term loan for the twelve months ending September 30, 2015 is calculated based on an estimated interest rate for the five months ending February 28, 2015 of 2.87% (comprised of a LIBOR-based rate of 0.27% plus an applicable margin of 2.60%) and then based on an estimated interest rate for the seven months ending September 30, 2015 of 2.92% (comprised of a LIBOR-based rate of 0.57% plus an applicable margin of 2.35%), which corresponds with the expected pricing under our new senior secured credit agreement. Forecasted interest expense includes a commitment fee based on 0.375% of the amount undrawn on our revolving credit facility. This also includes interest income generated from cash on the balance sheet at an assumed rate of 0.50%. The decrease in interest expense for the twelve months ending September 30, 2015 compared to the pro forma twelve months ended June 30, 2014 is primarily due to an improvement in the leverage ratio for the twelve months ending September 30, 2015 as compared to the leverage ratio for the pro forma twelve months ended June 30, 2014 which resulted in a lower interest rate.

 

Capital Expenditures

 

We do not forecast incurring any maintenance capital expenditures during the twelve months ending September 30, 2015, and we did not incur any maintenance capital expenditures during the twelve months ended

 

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June 30, 2014. Based on the nature of our operations, our assets typically require minimal to no maintenance capital expenditures. We record our routine maintenance expenses associated with our assets in other operating costs, which are forecasted to be $0.6 million for the twelve months ending September 30, 2015 and none for the twelve months ended June 30, 2014. Management estimates our maintenance costs based on experience with similar types of terminals owned and operated in the past, taking into account average estimated asset useful life, average throughput and regulatory safety requirements. Management also includes certain expenses that are necessary to maintain operating capacity as well as safe operations at its terminals in its projections.

 

For the twelve months ending September 30, 2015, we are not currently projecting any growth capital expenditures. Our total growth capital expenditures for the twelve months ended June 30, 2014 were $80.3 million and were primarily in connection with the construction of our Hardisty rail terminal. We have not included any future acquisitions in our budgeted capital expenditures for the twelve months ending September 30, 2015.

 

Regulatory, Industry and Economic Factors

 

Our forecast of estimated Adjusted EBITDA for the twelve months ending September 30, 2015 is based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

Our third-party customers and our sponsor will not default under or terminate any of our commercial agreements, or reduce, suspend or terminate their obligations thereunder, nor will any events occur that would be deemed a force majeure event under such agreements;

 

   

there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the refining or transportation and logistics industries in which we operate that will be materially adverse to our business;

 

   

there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets;

 

   

there will not be a shortage of skilled labor; and

 

   

there will not be any material adverse changes in the refining industry, the transportation and logistics sector or market, or overall economic conditions.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

 

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

 

Distributions of Available Cash

 

General

 

Our partnership agreement provides that our general partner will make a determination as to whether to make a distribution, but our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner will adopt a cash distribution policy to be effective as of the closing of this offering that will set forth our general partner’s intention with respect to the distributions to be made to unitholders. Pursuant to our cash distribution policy, within 60 days after the end of each quarter, beginning with the quarter ending December 31, 2014, we intend to make a minimum quarterly distribution of $             per unit, or $             on an annualized basis, to the extent we have sufficient available cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will prorate the distribution for the period after the closing of the offering through December 31, 2014.

 

The board of directors of our general partner may change the foregoing distribution policy at any time and from time to time, and even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner.

 

Definition of Available Cash

 

Available cash generally means, for any quarter, all cash on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements subsequent to that quarter);

 

   

comply with applicable law, any of our debt instruments or other agreements; or

 

   

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);

 

   

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.

 

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 unitholders and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

 

General Partner Interest and Incentive Distribution Rights

 

Initially, our general partner will be entitled to 2.0% of all quarterly distributions from inception that we make prior to our liquidation. This general partner interest will be represented             by general partner units.

 

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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’s initial 2.0% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.

 

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common, Class A, subordinated or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights” for additional information.

 

Class A Units

 

In August 2014, the board of directors of our general partner granted 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are limited partner interests in our partnership that entitle the holders to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from prior quarters). The Class A Units do not have voting rights and will vest in four equal annual installments over the first four years following the consummation of this offering only if we grow our annualized distributions each year. If we do not achieve positive distribution growth in any of these years, the Class A Units that would otherwise vest for that year will be forfeited. The Class A Units contain a conversion feature, which, upon the vesting of the Class A Units, provides for the conversion of the Class A Units into common units based on a conversion factor that will be tied to the level of our distribution growth for the applicable year. The conversion factor will not be more than 1.25 for the first vesting tranche, 1.5 for the second vesting tranche, 1.75 for the third vesting tranche and 2.0 for the last vesting tranche. The maximum number of common units into which the Class A Units could convert is 406,250.

 

Prior to conversion into common units, the Class A Unit recipients will be entitled to the same distributions, on a per unit (one-for-one) basis, as the holders of our common units, except that Class A Units will not be entitled to receive any distributions that relate to arrearages of unpaid minimum quarterly distributions from prior quarters.

 

Operating Surplus and Capital Surplus

 

General

 

Any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Distributions from operating surplus are made differently than cash distributions that we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights.

 

Operating Surplus

 

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below), provided that cash receipts from the termination of a commodity hedge or interest rate hedge prior to its specified termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge; plus

 

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working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to pay interest and related fees on debt incurred, or to pay distributions on equity issued, to finance the expansion capital expenditures referred to in the prior bullet; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less

 

   

any cash loss realized on disposition of an investment capital expenditure.

 

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         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 (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (ii) issuances of equity securities and (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements.

 

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

 

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installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or commodity hedge contract will be amortized over the life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

   

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

   

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

investment capital expenditures;

 

   

payment of transaction expenses (including taxes) relating to interim capital transactions;

 

   

distributions to our partners; or

 

   

repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans);

 

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:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

   

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.

 

Characterization of Cash Distributions

 

Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

 

Capital Expenditures

 

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of terminals and railcars from USD or third parties and the construction or development of new terminals or additional capacity at our existing rail terminals to the extent such capital expenditures are expected to expand our 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. Expansion capital expenditures are not included in operating expenditures and thus will not reduce operating surplus.

 

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Maintenance capital expenditures are cash expenditures 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 of terminals. Maintenance capital expenditures are included in operating expenditures and thus will reduce operating surplus.

 

Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but that are not expected to expand our operating capacity or operating income over the long term.

 

Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

 

Subordinated Units and Conversion to Common Units

 

General

 

Our partnership agreement provides that, while any subordinated units remain outstanding, the common units and Class A Units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus (with respect to the common units) any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” prior to their conversion into common units. The subordinated units will not be entitled to receive any distributions until the common units and Class A Units have received the minimum quarterly distribution plus (with respect to the common units) any arrearages on the common units from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, while the subordinated units are outstanding, there will be available cash to be distributed on the common units.

 

The subordinated units will convert into common units on a one-for-one basis in separate, sequential tranches as described below. Each tranche will be comprised of 20.0% of the subordinated units outstanding immediately following this offering. A separate tranche will convert on each business day occurring on or after October 1, 2015 (but not more than once in any twelve-month period), provided that on such date the following conditions are satisfied:

 

   

distributions of available cash from operating surplus on each of the outstanding common units, Class A Units, subordinated units and general partner units equaled or exceeded $         (the annualized minimum quarterly distribution) for the four quarter period immediately preceding that date;

 

   

the adjusted operating surplus generated during the four quarter period immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the common units, Class A Units, subordinated units and general partner units outstanding during that period on a fully diluted basis; and

 

   

there are no arrearages in the payment of the minimum quarterly distribution on the common units.

 

For each successive tranche, the four quarter period specified in the first and second bullet above must commence after the four quarter period applicable to any prior tranche of subordinated units.

 

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If more than one person owns our subordinated units, our general partner will determine which subordinated units will be converted on each conversion date.

 

Conversion upon Removal of the General Partner

 

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner;

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished; and

 

   

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.

 

Adjusted Operating Surplus

 

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash generated in prior periods. Adjusted operating surplus consists of:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet of the definition of operating surplus); less

 

   

any net increase in working capital borrowings with respect to that period; less

 

   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods.

 

Distributions from Operating Surplus While Any Subordinated Units are Outstanding

 

If we make a distribution of cash from operating surplus for any quarter while any subordinated units remain outstanding, our partnership agreement requires we make the distribution in the following manner:

 

   

first, 98.0% to the common unitholders and Class A Unitholders, and 2.0% to our general partner, until we distribute for each outstanding common unit and Class A Unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

 

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The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

Distributions from Operating Surplus After All Subordinated Units have Converted into Common Units

 

If we make a distribution from operating surplus for any quarter after all subordinated units have converted into common units, our partnership agreement requires that we make the distribution in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

 

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

General Partner Interest and Incentive Distribution Rights

 

Our partnership agreement provides that our general partner initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest if we issue additional units. Our general partner’s 2.0% interest, and the percentage of our cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their over-allotment option to purchase additional common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. 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 (13.0%, 23.0% and 48.0%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights at any time.

 

The following discussion assumes that our general partner maintains its 2.0% general partner interest, and that our general partner continues to own the incentive distribution rights.

 

If for any quarter:

 

   

we have distributed cash from operating surplus to the common unitholders, holders of our Class A Units and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

 

then, we will make additional distributions from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

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third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

 

Percentage Allocations from Operating Surplus

 

The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any distributions 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 unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest that our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

     Total Quarterly Distribution
Per Unit Target Amount
     Marginal Percentage Interest in
Distributions
 
      Unitholders     General Partner  

Minimum Quarterly Distribution

        $                     98.0     2.0

First Target Distribution

     above $                    up to $                    98.0     2.0

Second Target Distribution

     above $                    up to $                    85.0     15.0

Third Target Distribution

     above $                    up to $                    75.0     25.0

Thereafter

        above $                    50.0     50.0

 

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 to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments 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 target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding, and after we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for the prior four consecutive fiscal quarters. The reset target distribution levels will be higher than the target distribution levels prior to the reset such that our general partner will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

 

In connection with the resetting of the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the cash distributions related to the incentive distribution rights received by our general partner for the quarter prior to the reset event as compared to

 

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the cash distribution per common unit in such quarter. 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 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 amount of cash distributions received by our general partner in respect of its incentive distribution rights for the fiscal quarter ended immediately prior to the date of such reset election by (y) the amount of cash distributed per common unit with respect to such quarter. Our general partner would be entitled to receive distributions in respect of these common units pro rata in subsequent periods.

 

Following a reset election, a baseline minimum quarterly distribution amount will be calculated as an amount equal to the cash distribution amount per unit for the fiscal quarter immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would make distributions from operating surplus for each quarter thereafter as follows:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of our incentive distribution rights, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of our incentive distribution rights, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to the holders of our incentive distribution rights.

 

Because a reset election can only occur after all subordinated units have converted into common units, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

 

The following table illustrates the percentage allocation of distributions from operating surplus between the unitholders and our general partner at various distribution levels (i) pursuant to the cash distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (ii) following a hypothetical reset of the target distribution levels based on the assumption that the quarterly distribution amount per common unit during the fiscal quarter immediately preceding the reset election was $        .

 

    Quarterly Distribution
Per Unit Prior to  Reset
    Marginal Percentage Interest
in Distributions
       
    Common
Unitholders
and Holders
of Class A
Units
    General
Partner
Interest
    Incentive
Distribution
Rights
    Quarterly  Distribution
Per Unit Following
Hypothetical Reset
 

Minimum Quarterly Distribution

      $                98.0     2.0         $        (1)   

First Target Distribution

    above $               up to $               98.0     2.0     above $             up to $        (2)   

Second Target Distribution

    above $               up to $               85.0     2.0     13.0   above $         (2)        up to $        (3)   

Third Target Distribution

    above $               up to $               75.0     2.0     23.0   above $         (3)        up to $        (4)   

Thereafter

      above $               50.0     2.0     48.0       above $        (4)   

 

(1)   This amount is equal to the hypothetical reset minimum quarterly distribution.
(2)   This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
(3)   This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
(4)   This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

 

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The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders, our general partner and the holders of our incentive distribution rights, based on the amount distributed for the quarter immediately prior to the reset. The table assumes that immediately prior to the reset there would be             common units outstanding, our general partner’s 2.0% interest has been maintained, and the average distribution to each common unit would be $         per quarter for the quarter prior to the reset.

 

    Quarterly
Distribution Per
Unit Prior to Reset
    Cash
Distributions
to Common
Unitholders
Prior to
Reset
    Cash Distribution to General
Partner and Our Sponsor Prior to
Reset
    Total
Distributions
 
      Common
Units
    2.0%
General
Partner
Interest
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

      $                 $                   $                   $                   $                   $                   $                

First Target Distribution

  above $                up to $                          

Second Target Distribution

  above $                    up to $                          

Third Target Distribution

  above $                    up to $                          

Thereafter

      above $                          
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $                   $                   $                   $                   $                   $                
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders, the general partner and the holders of our incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that, as a result of the reset, there would be             common units outstanding, our general partner has maintained its 2.0% general partner interest, and the distribution to each common unit would be $        . The number of common units issued as a result of the reset was calculated by dividing (x)             as the amount received by the general partner in respect of its incentive distribution rights for the quarter prior to the reset as shown in the table above, by (y) the cash distributions made on each common unit for the quarter prior to the reset as shown in the table above, or $        .

 

    Quarterly
Distribution Per
After Reset
    Cash
Distributions
to Common
Unitholders
After
Reset
    Cash Distribution to General
Partner and Our Sponsor After Reset
    Total
Distributions
 
      Common
Units
    2.0%
General
Partner
Interest
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

              $                 $                   $                  $                   $                   $                   $                

First Target Distribution

  above $                    up to $                          

Second Target Distribution

  above $                    up to $                          

Third Target Distribution

  above $                    up to $                          

Thereafter

      above $                          
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $                   $                   $                   $                   $                   $                
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Our general partner will be entitled to cause the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

 

Distributions from Capital Surplus

 

How Distributions from Capital Surplus Will Be Made

 

Our partnership agreement requires that we make distributions from capital surplus, if any, in the following manner:

 

   

first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below;

 

 

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second, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit, an amount from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the outstanding common units; and

 

thereafter, as if they were from operating surplus.

 

The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.

 

Effect of a Distribution from Capital Surplus

 

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. 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 relation to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

 

Once we reduce the minimum quarterly distribution and the target distribution levels to zero, all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 2.0% to our general partner and 48.0% to the holder of our incentive distribution rights.

 

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

 

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

target distribution levels;

 

   

the initial unit price, as described below under “—Distributions of Cash Upon Liquidation”;

 

   

the number of general partner units comprising the general partner interest; and

 

   

the arrearages in payment of the minimum quarterly distribution on the common units.

 

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. Our partnership agreement provides that we do not make any adjustment by reason of the issuance of additional units for cash or property.

 

In addition, if as a result of a change in law or interpretation thereof, we or any of our subsidiaries is treated as an association taxable as a corporation or are otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is cash for that quarter (after deducting our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation) and the denominator of which is the

 

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sum of cash for that quarter, plus our general partner’s estimate of our aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

 

Distributions of Cash Upon Liquidation

 

General

 

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

 

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of units to a repayment of the initial value contributed by unitholders for their units in this offering, which we refer to as the “initial unit price” for each unit. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be distributable cash flow to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.

 

Manner of Adjustments for Gain

 

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs while any subordinated units remain outstanding, we will allocate any gain to our partners in the following manner:

 

   

first, to our general partner to the extent of any negative balance in its capital account;

 

   

second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until the capital account for each common unit is equal to the sum of:

 

  (1)   the initial unit price;

 

  (2)   the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and

 

  (3)   any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until the capital account for each subordinated unit is equal to the sum of:

 

  (1)   the initial unit price; and

 

  (2)   the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

fourth, 98.0% to all unitholders, pro rata, and 2.0% 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

 

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  (2)   the cumulative amount per unit of any distributions from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98.0% to the unitholders, pro rata, and 2.0% to our general partner, for each quarter of our existence;

 

   

fifth, 85.0% to all unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of our incentive distribution rights, 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 from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, 2.0% to our general partner and 13.0% to the holders of our incentive distribution rights for each quarter of our existence;

 

   

sixth, 75.0% to all unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of our incentive distribution rights, 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 from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, 2.0% to our general partner and 23.0% to the holders of our incentive distribution rights for each quarter of our existence;

 

   

thereafter, 50.0% to all unitholders, pro rata, 2.0% to our general partner and 48.0% to the holders of our incentive distribution rights.

 

The percentages set forth above are based on the assumption that USD Group LLC has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

 

If the liquidation occurs after all subordinated units have converted into common units, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the third bullet point above will no longer be applicable.

 

Manner of Adjustments for Losses

 

If our liquidation occurs while any subordinated units remain outstanding, after making allocations of loss to the general partner and the unitholders in a manner intended to offset in reverse order the 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, 98.0% to the holders of subordinated units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

   

second, 98.0% to the holders of common units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

thereafter, 100.0% to our general partner.

 

If the liquidation occurs after all subordinated units have converted into common units, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

 

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Adjustments to Capital Accounts

 

We will make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner 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. In this manner, while any subordinated units remain outstanding, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

 

The following table presents, in each case for the periods and as of the dates indicated, selected historical combined financial and operating data of our Predecessor and summary pro forma combined financial and operating data of USD Partners LP.

 

Our Predecessor consists of the assets, liabilities and results of operations of the wholly owned subsidiaries of USD that operate our Hardisty rail terminal, our San Antonio rail terminal, our West Colton rail terminal and that manage our railcar fleet. These subsidiaries will be conveyed to us in connection with this offering. Our Predecessor also includes the membership interests in five subsidiaries of USD which operated crude oil rail terminals that were sold in December 2012. The results of operations of these subsidiaries are reflected in our Predecessor’s summary historical combined financial and operating data as discontinued operations.

 

The selected historical combined financial and operating data of our Predecessor as of and for the years ended December 31, 2012 and 2013 are derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The selected historical condensed combined financial and operating data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2013 and 2014 are derived from the unaudited condensed combined financial statements of our Predecessor included elsewhere in this prospectus.

 

The selected pro forma combined financial data presented in the following table for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014, respectively, are derived from the unaudited pro forma combined financial data included elsewhere in this prospectus. The pro forma combined financial data assumes that the transactions to be effected at the closing of the offering and described under “Summary—Formation Transactions” had taken place on June 30, 2014, in the case of the pro forma balance sheet, and on January 1, 2013, in the case of the pro forma statement of operations for the year ended December 31, 2013 and the six months ended June 30, 2014. These transactions primarily include, and the pro forma financial data give effect to, the following:

 

   

the issuance of 250,000 Class A Units in August 2014 to certain executive officers and other key employees of our general partner and its affiliates who provide services to us;

 

   

USD Group LLC’s contribution to us of all of our initial assets and operations, including the Hardisty rail terminal, the San Antonio rail terminal, the West Colton rail terminal and our railcar business;

 

   

the issuance of              common units to the public,              general partner units and the incentive distribution rights to our general partner, and              common units and              subordinated units to USD Group LLC in connection with this offering;

 

   

our entry into a new $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility (undrawn) and a $100.0 million term loan (fully drawn in Canadian dollars);

 

   

the payment of underwriting discounts and commissions and a structuring fee;

 

   

the cash distribution to USD Group LLC of $         million;

 

   

the repayment of $97.8 million of indebtedness under USD’s current credit facility, which bears interest at a rate of LIBOR plus an applicable margin, which equaled 3.90% as of June 30, 2014 and matures in March 2015; and

 

   

the payment of $             million of fees and expenses in connection with our new senior secured credit agreement, which is comprised of a revolving credit facility and a term loan.

 

The pro forma combined financial data does not give effect to the estimated $2.1 million in incremental annual general and administrative expenses that we expect to incur as a result of being a publicly traded partnership.

 

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The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical combined financial statements of our Predecessor and the notes thereto and our unaudited pro forma combined financial statements and the notes thereto, in each case included elsewhere in this prospectus. Among other things, those historical and pro forma combined financial statements include more detailed information regarding the basis of presentation for the information in the following table. Our financial position, results of operations and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of USD in the periods for which historical financial data are presented below, and such data may not be indicative of our future operating results or financial performance.

 

    USD Partners LP
Predecessor
    USD Partners LP
Pro Forma
 
    Year Ended
December 31,
    Six Months
Ended June 30,
    Year Ended
December 31,
    Six Months
Ended June 30,
 
    2013     2012     2014     2013     2013     2014  
    (in thousands)  
                (unaudited)     (unaudited)  

Statement of Operations

           

Revenues:

           

Terminalling services

  $ 7,130      $ 8,703      $ 3,448      $ 3,691      $ 7,130      $ 3,448   

Fleet leases

    13,572        15,964        4,596        8,546        13,572        4,596   

Fleet services

    1,197        5        956        375        1,197        956   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    26,301        24,875        10,921        13,380        26,301        10,921   

Operating Costs:

           

Subcontracted rail services(1)

    1,898        1,847        2,109        944        1,898        2,109   

Fleet leases

    13,572        15,964        4,596        8,546        13,572        4,596   

Freight and other reimbursables

    4,402        203        1,921        768        4,402        1,921   

Selling, general and administrative

    4,458        3,240        3,813        2,044        4,458        3,813   

Depreciation

    502        490        254        251        502        254   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs

    24,832        21,744        12,693        12,553        24,832        12,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    1,469        3,131        (1,772     827        1,469        (1,772

Interest expense

    3,241        2,050        1,984        1,645        4,884        2,418   

Loss on derivative contracts

                  802                      802   

Other expense, net

    39               688               39        688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

    (1,811     1,081        (5,246     (818     (3,454     (5,680

Provision for income taxes

    30        26        24        17        449        359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (1,841     1,055        (5,270     (835     (3,903     (6,039

Discontinued operations:

           

Income from discontinued operations

    948        65,204        31        498       

Gain on sale from discontinued operations

    7,295        394,318               6,405       
 

 

 

   

 

 

   

 

 

   

 

 

     

Net income (loss)

  $ 6,402      $ 460,577      $ (5,239   $ 6,068       
 

 

 

   

 

 

   

 

 

   

 

 

     
           

General partner interest in net loss

          $        $     

Common unitholders’ interest in net loss

          $        $     

Subordinated unitholders’ interest in net loss

          $        $     

Pro forma net loss per common unit

          $        $     

Pro forma net loss per subordinated unit

          $        $     

Pro forma net loss per general partner unit

          $        $     

Weighted average common units outstanding

           

Weighted average subordinated units outstanding

           

Statement of Cash Flows

           

Net cash provided by operating activities

  $ 9,239      $ 1,798      $ 1,667      $ 2,064       

Net cash used in investing activities

    (56,114     (773     (30,327     (6,129    

Net cash provided by (used in) financing activities

    44,885        (25,227     26,999        10,134       

Net cash provided by discontinued operations

    5,168        25,687        26,941        643       

Operating Information

           

Average daily terminal throughput (bpd)

    15,533        15,871        14,099        15,909       

Non-GAAP Measures

           

Adjusted EBITDA

  $ 1,971      $ 3,621      $ (1,518   $ 1,078      $ 1,971      $ (1,518
    As of
December 31,
    As of
June 30,
                Pro Forma As
of June 30,
 
    2013     2012     2014                 2014  
    (in thousands)                 (in thousands)  
                (unaudited)                 (unaudited)  

Balance Sheet

           

Property and equipment, net

  $ 61,364      $ 7,881      $ 92,394          $   92,394   

Total assets

    107,268        58,934        137,548         

Total liabilities

    104,665        45,548        126,696         

Owner’s equity

    2,603        13,386        10,852         

 

(1)   Represents costs incurred for the offloading of railcars at the West Colton and San Antonio rail terminals by independent contractors pursuant to offloading service agreements. We pay a fixed, monthly fee under these agreements and an additional rate for each hour in excess of a monthly threshold.

 

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Non-GAAP Financial Measures

 

We define Adjusted EBITDA as net income attributable to our Predecessor or us before the following items: depreciation and amortization, interest and other income, interest and other expense expense, gains and losses on derivative contracts, income and withholding taxes, non-cash compensation related to our equity compensation programs and discontinued operations. Adjusted EBITDA is used as both a supplemental financial performance and liquidity measure by management and by external users of our financial statements, such as investors and commercial banks. Set forth below is additional detail on how management and external users use Adjusted EBITDA as a measure of performance and liquidity.

 

Performance.    Our management and external users use Adjusted EBITDA in a number of ways to assess our combined financial and operating performance, and we believe this measure is helpful to management and external users in identifying trends in our performance. Adjusted EBITDA helps management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance, while neutralizing the impact of capital structure on results. Accordingly, we believe this metric measures our financial performance based on operational factors that management can impact in the short-term, namely our cost structure and expenses.

 

Liquidity.    Our management and external users use Adjusted EBITDA in a number of ways to assess our liquidity, and we believe this measure is helpful to management and external users in identifying trends in our liquidity. Adjusted EBITDA helps management assess the ability of our assets to generate sufficient cash flow to make distributions to our partners and our ability to incur and service debt and fund capital expenditures, while neutralizing the impact of capital structure on results. Accordingly, we believe this metric measures our liquidity based on factors that management can impact in the short-term, namely our cost structure and expenses.

 

We believe that the presentation of Adjusted EBITDA in this prospectus provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA are net income attributable to our Predecessor or us and cash flow from operating activities. Adjusted EBITDA should not be considered an alternative to net income attributable to our Predecessor or us, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income attributable to our Predecessor or us, and these measures may vary among other companies. As a result, Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

 

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The following table presents a reconciliation of Adjusted EBITDA to net income attributable to our Predecessor or us and cash flow from operating activities, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     USD Partners LP
Predecessor Combined
    USD Partners LP
Pro Forma
 
     Year Ended
December 31,
    Six Months Ended
June 30,
    Year Ended
December 31,
    Six Months Ended
June 30,
 
     2013     2012     2014     2013     2013     2014  
     (in thousands)  
                 (unaudited)     (unaudited)  

Reconciliation of Net Income (Loss) Attributable to Our Predecessor or Us to Adjusted EBITDA

            

Net income (loss)

   $ 6,402      $ 460,577      $ (5,239   $ 6,068      $ (3,903   $ (6,039

Provision for income taxes

     30        26        24        17        449        359   

Interest expense

     3,241        2,050        1,984        1,645        4,884        2,418   

Depreciation

     502        490        254        251        502        254   

Non-cash compensation expense related to Class A Units

                                

Loss on derivative contracts

                   802                      802   

Other expense, net(1)

     39               688               39        688   

Discontinued operations

     (8,243     (459,522     (31     (6,903    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,971      $ 3,621      $ (1,518   $ 1,078      $ 1,971      $ (1,518
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Net Cash Flows Provided by Operating Activities to Adjusted EBITDA

            

Net cash provided by operating activities

   $ 9,239      $ 1,798      $ 1,667      $ 2,064       

Provision for income taxes

     30        26        24        17       

Interest expense

     3,241        2,050        1,984        1,645       

Other expense, net(1)

     39               688              

Bad debt expense

                   (610           

Amortization of deferred financing costs

     (1,420     (1,216     (657     (648    

Change in operating assets and liabilities

     (9,158     963        (4,614     (2,000    
  

 

 

   

 

 

   

 

 

   

 

 

     

Adjusted EBITDA

   $ 1,971      $ 3,621      $ (1,518   $ 1,078       
  

 

 

   

 

 

   

 

 

   

 

 

     

Net cash provided by operating activities

   $ 9,239      $ 1,798      $ 1,667      $ 2,064       

Net cash used in investing activities

     (56,114     (773     (30,327     (6,129    

Net cash provided by (used in) financing activities

     44,885        (25,227     26,999        10,134       

Net cash provided by discontinued operations

     5,168        25,687        26,941        643       

 

(1)   Represents foreign exchange transactional expenses associated with our Hardisty rail terminal.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the historical combined financial statements and notes of our Predecessor and our pro forma combined financial data included elsewhere in this prospectus. Among other things, those historical combined financial statements and pro forma combined data include more detailed information regarding the basis of presentation for the following information. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

 

Overview

 

We are a fee-based, growth-oriented master limited partnership formed by USD to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses. Our initial assets consist primarily of: (i) an origination crude-by-rail terminal in Hardisty, Alberta, Canada, with capacity to load up to two 120-railcar unit trains per day and (ii) two destination unit train-capable ethanol rail terminals in San Antonio, Texas, and West Colton, California, with a combined capacity of approximately 33,000 bpd. Our rail terminals provide critical infrastructure allowing our customers to transport energy-related products from multiple supply regions to multiple demand markets. In addition, we provide railcar services through the management of a railcar fleet consisting of approximately 3,799 railcars, as of August 1, 2014, that are committed to customers on a long-term basis. We generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services. We do not take ownership of the underlying commodities that we handle nor do we receive any payments from our customers based on the value of such commodities. Rail transportation of energy-related products provides efficient and flexible access to key demand markets on a relatively low fixed-cost basis, and as a result has become an important part of North American midstream infrastructure.

 

How We Generate Revenue

 

We manage our business in two reportable segments: the Terminalling services segment and the Fleet services segment.

 

Terminalling Services Segment

 

We generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services. We do not take ownership of the underlying products that we handle nor do we receive any payments from our customers based on the value of such products. Thus, we have no direct exposure to risks associated with fluctuating commodity prices, although these risks could indirectly influence our activities and results of operations over the long term.

 

Hardisty Rail Terminal Services Agreements.    We have entered into terminal services agreements with seven high-quality counterparties or their subsidiaries: Cenovus Energy, Gibson Energy, Phillips 66, J. Aron & Company, Suncor Energy, Total and USD Marketing LLC. Substantially all of the terminalling capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements subject to inflation-based escalators. Furthermore, approximately 83% of the contracted utilization at our Hardisty rail terminal is contracted with subsidiaries of five investment grade companies, including major integrated oil companies, refiners and marketers. All of these counterparties are obligated to pay a minimum monthly commitment fee and can load a maximum allotted number of unit trains. If a customer loads fewer unit trains in any given month than its maximum allotted number, that customer will pay us a minimum monthly payment commitment fee but will also receive a six-month credit that will allow our customers to load the unutilized unit

 

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trains, subject to availability. We will receive a per-barrel fee on any volumes handled in excess of the customers maximum allowed volume. If a force majeure event occurs, a customer’s obligation to pay us may be suspended, in which case the length of the contract term will be extended by the same duration as the force majeure event. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014.

 

San Antonio and West Colton Rail Terminal Services Agreements.    We have entered into terminal services agreements with a subsidiary of an investment grade company for our San Antonio rail terminal and our West Colton rail terminal pursuant to which that customer pays us per gallon fees based on the amount of ethanol offloaded at the terminals. The San Antonio terminal services agreement will expire in August 2015, at which point the agreement will automatically renew for two subsequent three-year terms unless notice is provided by our customer. The current agreement entitles the customer to 100% of the terminal’s capacity, subject to our right to seek additional customers if minimum volume usage thresholds are not met. Our San Antonio rail terminal is located within five miles from San Antonio’s gasoline blending terminals and is the only ethanol rail terminal in a 20-mile radius. The West Colton terminal services agreement has been in place since July 2009 and is terminable at any time by either party. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region of Southern California and is the only ethanol rail terminal in a ten-mile radius. We are currently in the process of seeking permits to construct an approximately one-mile pipeline directly from our West Colton rail terminal to Kinder Morgan Energy Partners, L.P.’s gasoline blending terminals, which, if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

Fleet Services Segment

 

We provide fleet services for a railcar fleet consisting of 3,799 railcars as of August 1, 2014, of which 988 railcars are in production or on order. We do not own any railcars. Affiliates of USD lease 3,096 of the railcars in our fleet from third parties. We directly lease 703 railcars from third parties. We have entered into master fleet services agreements with a number of customers for the use of the 703 railcars in our fleet, that we lease directly, on a take-or-pay basis for periods ranging from five to nine years. We have also entered into services agreements with the affiliates of USD for the provision of fleet services with respect to the 3,096 railcars which they lease from third parties. Under our master fleet services agreements with our customers and the services agreements with the affiliates of USD, we provide customers with railcar-specific fleet services associated with the transportation of crude oil, which may include, among other things, the provision of relevant administrative and billing services, the maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance as required in connection with the movement of railcars, and the negotiation for and sourcing of railcars. We typically charge our customers, including the affiliates of USD, monthly fees per railcar that include a component for railcar use (in the case of our directly-leased railcar fleet) and a component for fleet services. Approximately 65% of our current railcar fleet is dedicated to customers of our terminals. The remaining 35% of the railcar fleet is dedicated to a customer of terminals belonging to subsidiaries previously sold by our predecessor. As of August 1, 2014, our master fleet services agreements dedicated to customers of our Hardisty rail terminal had a weighted-average remaining life of approximately 7.0 years with an overall weighted-average life of 5.5 years if agreements dedicated to customers of previously sold terminals are included.

 

We also contract with railroads on behalf of some of our customers to arrange the movement of railcars from our Hardisty rail terminal to the destinations selected by our customers. We are the contracting party with the railroads for these shipments, and are responsible to the railroads for the related fees charged by the railroads, for which we are reimbursed by our customers. Both the fees charged by the railroads to us and the reimbursement of these fees by our customers are included in our combined statements of income and comprehensive income in the revenues and operating costs line items entitled “Freight and other reimbursables.”

 

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How We Evaluate Our Operations

 

Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) volumes; (ii) Adjusted EBITDA and distributable cash flow; and (iii) operating and maintenance expenses. We define Adjusted EBITDA and distributable cash flow below.

 

Volumes

 

The amount of Terminalling services revenue we generate depends on minimum customer commitments and volumes of crude oil and biofuels that we throughput at our rail terminals in excess of those minimum commitments. These volumes are primarily affected by the supply of and demand for crude oil, refined products and biofuels in the markets served directly or indirectly by our assets. Although our customers at our Hardisty rail terminal have committed to minimum volumes under their terminal services agreements with us that will generate the vast majority of our Terminalling services revenue, our results of operations will be impacted by:

 

   

our customers’ utilization of our terminals in excess of their minimum volume commitments;

 

   

our ability to identify and execute accretive acquisitions and organic expansion projects, and capture our customers’ incremental volumes; and

 

   

our ability to renew contracts with existing customers, enter into contracts with new customers, increase customer commitments and throughput volumes at our rail terminals and provide additional ancillary services at those terminals.

 

Adjusted EBITDA and Distributable Cash Flow

 

We define Adjusted EBITDA as net income attributable to our Predecessor before the following items: depreciation and amortization, interest and other income, interest and other expense, gains and losses on derivative contracts, income and withholding taxes, non-cash compensation expense related to our equity compensation program and discontinued operations. Although we have not quantified distributable cash flow on a historical basis, after the closing of this offering we intend to use distributable cash flow, which we define as Adjusted EBITDA less net cash interest paid, Canadian income and withholding taxes and maintenance capital expenditures, to analyze our performance. Distributable cash flow will not reflect changes in working capital balances. Adjusted EBITDA and distributable cash flow are non-GAAP, supplemental financial measures used by management and by external users of our financial statements, such as investors and commercial banks, to assess:

 

   

our operating performance as compared to those of other companies in the midstream sector, without regard to financing methods, historical cost basis or capital structure;

 

   

the ability of our assets to generate sufficient cash flow to make distributions to our partners;

 

   

our ability to incur and service debt and fund capital expenditures; and

 

   

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

 

We believe that the presentation of Adjusted EBITDA in this prospectus provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA are net income attributable to our Predecessor and cash flow from operating activities. Adjusted EBITDA should not be considered an alternative to net income attributable to our Predecessor, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income attributable to our Predecessor, and these measures may vary among other companies. As a result, Adjusted EBITDA may not be comparable to similarly titled measures of other companies. For a reconciliation of

 

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Adjusted EBITDA to net income attributable to our Predecessor and net cash flows provided by operating activities, please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

 

Operating and Maintenance Expenses

 

Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. Given that we will generate a vast majority of our Adjusted EBITDA and distributable cash flow from our newly constructed Hardisty rail terminal, which was completed on June 30, 2014, we do not expect to incur capital expenditures to maintain our assets and associated cash flow. We record our routine maintenance expense associated with our assets in Other operating costs. Our operating and maintenance expenses are comprised primarily of repairs and maintenance expenses, subcontracted rail expenses, utility costs, insurance premiums and related property taxes. In addition, our expenses also include the cost of leasing railcars from third-party railcar suppliers and the shipping fees charged by railroads, which costs are generally passed through to our customers. Our expenses generally remain relatively stable but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses.

 

Factors That May Impact Future Results of Operations

 

Demand for Rail Transportation of Crude Oil and Biofuels

 

U.S. and Canadian crude oil production has increased significantly in recent years. We expect this trend to continue as the U.S. Energy Information Administration (EIA) estimates that total U.S. crude oil production will grow 47.1% from 2012 to 2020. Similarly, the Canadian Association of Petroleum Producers (CAPP) estimates that total Canadian production of crude oil will grow 49.6% over the same time period. High-growth production areas in North America are often located at significant distances from refining centers, creating constantly evolving regional imbalances, which require the expedited development of flexible and sustainable transportation solutions. The extensive existing rail network, combined with rail transportation’s relatively low capital and fixed costs compared to other transportation alternatives, has strategically positioned rail as a long-term alternative transportation solution to the growing and evolving energy infrastructure needs. In the event that additional pipeline capacity is constructed, or crude oil production decreases significantly, demand for transportation of crude oil by rail may be impacted.

 

Due to corrosion concerns unique to biofuels such as ethanol, the long-haul transportation of biofuels via multi-product pipelines is less efficient and less economical than rail. Rail also helps aggregate fragmented ethanol production across the country, which, due to expected changes in environmental and gasoline blending regulations, we expect will play a more pervasive role in the fuel for transportation market over time. In the event that dedicated pipelines are constructed, or additional technologies are developed to allow for more economical transportation of biofuels on multi-product pipelines, demand for transportation of biofuels by rail may be impacted.

 

Please read “Industry Overview” for additional information on the demand for rail transportation of crude oil and biofuels.

 

Supply and Demand for Crude Oil and Refined Products

 

The volume of crude oil and biofuels that we handle at our terminals and the number of railcars we provide and perform railcar-specific fleet services for ultimately depends on refining and blending margins. Refining and blending margins are dependent mostly upon the price of crude oil or other refinery feedstocks and the price of refined products. These prices are affected by numerous factors beyond our control, including the global supply and demand for crude oil and gasoline and other refined products. The supply of crude oil will depend on numerous factors, including commodity pricing, improvements in extractive technology, environmental regulation and other factors. In the near-term, we expect supply and demand for crude oil and biofuels to remain

 

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stable. We believe that our Adjusted EBITDA and distributable cash flow will not be materially impacted in the near term because of our multi-year take-or-pay terminal services agreements. However, our ability to grow through expansion or acquisitions and our ability to renew or extend our terminal services agreements could be impacted by a long-term reduction in supply or demand.

 

Regulatory Environment

 

Our operations are subject to federal, state, and local laws and regulations relating to the protection of health and the environment, including laws and regulations that govern the handling of crude oil and other liquid hydrocarbon materials. Additionally, we are subject to regulations governing railcar design and evolving regulations pertaining to the shipment of liquid hydrocarbons by rail, although our master fleet services agreements allow us to pass any costs associated with complying with new railcar regulations to our customers. Please read “Business—Environmental Regulation.” Similar to other industry participants, compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, operate, and upgrade equipment and facilities. Our master fleet services agreements generally obligate our customers to pay for modifications and other required repairs to our leased and managed railcar fleet. However, we cannot assure that we will successfully be able to pass all such regulatory costs on to our customers. While changes in these laws and regulations could indirectly affect Adjusted EBITDA and distributable cash flow, we believe that consumers of our services are, as a result, placing additional value on utilizing established and reputable third-party providers to satisfy their rail terminalling and logistics needs, which will allow us to increase market share relative to customer-owned operations or smaller operators that lack an established track record of safety and regulatory compliance.

 

Acquisition Opportunities

 

We plan to pursue strategic acquisitions that complement our existing assets and that will provide attractive returns to our unitholders. We intend to acquire high-quality and complementary midstream infrastructure assets and businesses from both USD as well as third parties. Furthermore, we believe our industry relationships and market knowledge will allow us to effectively target and consummate potentially accretive third-party acquisitions. We intend to pursue these opportunities both independently and jointly with USD. At the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group LLC will grant us a right of first offer on the Hardisty Phase II and Hardisty Phase III projects for a period of seven years after the closing of this offering. Please read “Business—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.” USD and USD Group LLC will also grant us a right of first offer during this seven-year period on any additional midstream infrastructure assets and businesses that they may develop, construct or acquire. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.” We cannot assure you that USD will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new

 

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terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects. However, if we do not make acquisitions on economically acceptable terms, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our distributable cash flow.

 

Interest Rate Environment

 

The credit markets recently have experienced near-record lows in interest rates. As the overall economy strengthens, it is likely that monetary policy will tighten to counter possible inflation, resulting in higher interest rates. Should interest rates rise, our financing costs would increase accordingly. This could affect our ability to access the debt capital markets to the extent we may need to in the future to fund our growth. Additionally, as with other yield-oriented securities, our unit price will be impacted by the level of our cash distributions and an associated implied distribution yield. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and, as such, a rising interest rate environment could have an adverse impact on our unit price and our ability to issue additional equity, or increase the cost of issuing equity. However, we expect that our cost of capital would remain competitive, as our competitors would face similar circumstances.

 

Factors Affecting the Comparability of Our Financial Results

 

Our future results of operations will not be comparable to our Predecessor’s historical results of operations for the reasons described below.

 

Hardisty Operations and Discontinued Operations

 

Our Predecessor’s historical results of operations include revenues and expenses related to (i) the construction of our Hardisty rail terminal, (ii) the operation of our San Antonio and West Colton rail terminals and (iii) our railcar fleet services throughout North America. Our Predecessor’s historical results of operations do not include revenues from the Hardisty rail terminal as it was not operational until June 30, 2014. Costs incurred in the Predecessor periods with respect to the Hardisty rail terminal are primarily related to pre-operational activities. In addition, our results of operations for the fiscal year ended December 31, 2012 include five subsidiaries of USD which operated crude oil rail terminals that were sold in December 2012. The results of operations of these subsidiaries are reflected in our Predecessor’s summary historical combined financial and operating data as discontinued operations.

 

Selling, General and Administrative Costs

 

Our Predecessor’s historical results of operations include a $1.2 million management fee each year for the West Colton and San Antonio rail terminals. In addition, our historical selling, general and administrative costs include certain expenses allocated by our sponsor for corporate costs including insurance, professional fees, facilities, information services, human resources and other support departments, as well as direct expenses. These allocated expenses were charged or allocated to us primarily on the basis of direct usage when identifiable, with the remainder allocated evenly across the number of operating subsidiaries or allocated based on budgeted volumes or projected revenues. Following the closing of this offering, our sponsor will charge us for the management and operation of our assets, including an annual fee of approximately $2.5 million for the provision of various centralized administrative services and allocated general and administrative costs and expenses incurred by them on our behalf.

 

We expect to incur approximately $             million in direct general and administrative expenses associated with our terminals, which we forecast based on historical expenses, existing contracts and management

 

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estimates. We expect to incur approximately $             million in equity-based compensation expense associated with Class A units granted to certain executive officers and other key employees of our general partner. We also expect to incur additional general and administrative expenses of approximately $2.1 million annually as a result of being a publicly traded partnership, consisting of costs associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, Sarbanes-Oxley Act compliance, stock exchange listing, registrar and transfer agent fees, incremental director and officer liability insurance and director compensation. These additional general and administrative expenses are not reflected in our historical or our pro forma financial statements.

 

Canadian Income and Withholding Tax Expense

 

Prior to this offering, we were included in our sponsor’s consolidated U.S. federal income tax return, in which we were treated as an entity disregarded as separate from our sponsor for income tax purposes. Following the closing of this offering, we will be treated as a partnership for U.S. federal income tax purposes, with each partner being separately taxed on its share of taxable income; therefore, there will be no U.S. federal income tax expense in our financial statements. However, our Hardisty rail terminal will be subject to Canadian income and withholding taxes that result from taxable and cash flow distributions income generated by our Canadian operations and certain distributions from our Canadian subsidiaries. We anticipate paying income taxes on our Canadian income at a rate of 25% and will be required to pay withholding taxes on cash distributed to us from our Canadian subsidiaries at a rate of 5%. We initially do not anticipate paying withholding taxes as we intend to use cash flows generated in Canada to repay our $100.0 million term loan (borrowed in Canadian dollars).

 

Financing

 

Historically, our operations were financed by cash generated from operations and intercompany loans from our sponsor. In connection with this offering, we intend to enter into a new five-year $300.0 million senior secured credit agreement comprised of a $100.0 million term loan (due in four years and nine months) (borrowed in Canadian dollars) and a $200.0 million revolving credit facility (terminating in five years), which can expand to $300.0 million proportionately as the term loan principal is reduced. The revolving credit facility can be expanded further by $100.0 million, subject to receipt of additional lender commitments. The revolving credit facility will be undrawn at closing and available for working capital and other general partnership purposes. Please read “—Liquidity and Capital Resources.”

 

We anticipate using our cash flows generated in Canada initially to repay borrowings under our term loan and anticipate making equivalent borrowings under our revolving credit facility to fund distributions to our unitholders. Following repayment of the term loan and absent the incurrence of additional Canadian debt, we anticipate distributing Canadian cash flows to partially fund distributions to our unitholders.

 

Cash Distributions

 

At the closing of this offering, we intend to make minimum quarterly distributions of $         per common unit ($         per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. We expect to pay distributions within 60 days after the end of each quarter, beginning with the quarter ending December 31, 2014, to unitholders of record on the applicable record date. Please read “The Offering—Cash distributions” and “Cash Distribution Policy and Restrictions on Distributions” for additional information regarding our cash distributions contained elsewhere in this registration statement.

 

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Results of Operations

 

The following table sets forth our results of operations for the periods indicated.

 

     Year Ended December 31,     Six Months
Ended June 30,
 
         2013             2012             2014             2013      
     (in thousands)  
                 (unaudited)  

Revenues:

        

Terminalling services

   $ 7,130      $ 8,703      $ 3,448      $ 3,691   

Fleet leases

     13,572        15,964        4,596        8,546   

Fleet services

     1,197        5        956        375   

Freight and other reimbursables

     4,402        203        1,921        768   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     26,301        24,875        10,921        13,380   

Operating costs:

        

Subcontracted rail services(1)

     1,898      $ 1,847        2,109        944   

Fleet leases

     13,572        15,964        4,596        8,546   

Freight and other reimbursables

     4,402        203        1,921        768   

Selling, general & administrative

     4,458        3,240        3,813        2,044   

Depreciation

     502        490        254        251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs

     24,832        21,744        12,693        12,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,469        3,131        (1,772     827   

Interest expense

     (3,241     (2,050     (1,984     (1,645

Loss on derivative contracts

                   (802       

Other expense, net

     (39            (688       
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

     (1,811     1,081        (5,246     (818

Provision for income taxes

     30        26        24        17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

   $ (1,841   $ 1,055      $ (5,270   $ (835
  

 

 

   

 

 

   

 

 

   

 

 

 

Average daily terminal throughput (bpd)

     15,533        15,871        14,099        15,909   

 

(1)   Represents costs incurred for the offloading of railcars at the West Colton and San Antonio rail terminals by independent contractors pursuant to offloading service agreements. We pay a fixed, monthly fee under these agreements and an additional rate for each hour in excess of a monthly threshold.

 

Year ended December 31, 2013 compared to year ended December 31, 2012

 

Revenues

 

Total revenues increased $1.4 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily due to an increase in Freight and other reimbursables revenues of $4.2 million, and an increase in fleet services revenue of $1.2 million, offset by a decrease of $1.6 million in Terminalling services revenue and a decrease in $2.4 million in Fleet leases revenue.

 

Terminalling Services Segment

 

Terminalling services segment revenue decreased $1.6 million, primarily due to (i) a decrease in average daily terminal throughput volumes of 338 bpd from 15,871 bpd for the year ended December 31, 2012 to 15,533 bpd for the year ended December 31, 2013 and (ii) a decrease in average realized rates per gallon of $0.006 from $0.036 for the year ended December 31, 2012 to $0.030 for the year ended December 31, 2013. The decrease in average realized rates was primarily attributable to a reduction in the rates payable at our San Antonio rail terminal as a result of a rate concession negotiated with our customer in August 2012.

 

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Fleet Services Segment

 

Fleet services segment revenue increased $3.0 million due to a $4.2 million increase in Freight and other reimbursables revenues and a $1.2 million increase in Fleet services revenue partially offset by a $2.4 million decrease in Fleet leases revenues.

 

Fleet leases.    Fleet leases revenue decreased $2.4 million, primarily due to a decrease in railcar lease payments from customers, which payments, together with our obligations to make rental payments to the owners of the railcars, were assigned to an affiliate of USD. The assignment of these lease payments does not impact our Adjusted EBITDA and distributable cash flow or net income as these lease payments were historically offset by our rental payments to the owners of the railcars.

 

Fleet services.    Fleet services revenue increased by $1.2 million primarily due to an increase in railcar services provided to an affiliate of USD.

 

Freight and other reimbursables.    Freight and other reimbursables revenues increased $4.2 million, primarily due to an increase in customer reimbursement of railroad freight fees incurred in connection with an increase in the number of railcars and shipments which we arranged for our customers primarily in connection with the start-up of our Hardisty rail terminal. Freight and other reimbursables revenues were exactly offset by Freight and other reimbursables costs payable to the railroads.

 

Operating Costs

 

Total operating costs increased $3.1 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Terminalling Services Segment

 

Terminalling services segment operating costs increased $1.0 million, primarily due to an increase of $0.9 million in Selling, general and administrative expense.

 

Subcontracted rail services.    Subcontracted rail services costs remained flat for the year ended December 31, 2013 as compared to the year ended December 31, 2012, as these costs are generally fixed.

 

Selling, general and administrative.    Selling, general and administrative expenses for our Terminalling services segment increased $0.9 million to $4.0 million in the year ended December 31, 2013 compared to $3.1 million the year ended December 31, 2012. The increase was primarily due to pre-operational costs associated with the Hardisty rail terminal and increased direct general and administrative charges.

 

Depreciation.    Depreciation expense remained flat for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Fleet Services Segment

 

Fleet services segment operating costs increased $2.1 million, primarily due to (i) an increase of $4.2 million in Freight and other reimbursables costs and (ii) an increase of $0.4 million in Selling, general and administrative expenses, which was partially offset by a decrease of $2.4 million in Fleet leases costs.

 

Fleet leases costs.    Fleet leases costs decreased $2.4 million, from $16.0 million for the year ended December 31, 2012 to $13.6 million for the year ended December 31, 2013, primarily due to the assignment of railcar leases to an affiliate of USD.

 

Freight and other reimbursables costs.    Freight and other reimbursables costs increased $4.2 million from $0.2 million for the year ended December 31, 2012 to $4.4 million for the year ended December 31, 2013

 

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primarily due to an increase in railroad freight costs payable by us for arranging the shipment of railcars on behalf of our customers, which costs were exactly offset and reimbursed by our customers and reflected in Freight and other reimbursables revenues.

 

Selling, general and administrative.    Selling, general and administrative expenses for our Fleet services segment increased $0.4 million to $0.5 million in the year ended December 31, 2013 compared to $0.1 million the year ended December 31, 2012. The increase was primarily due to an increase in insurance costs.

 

Depreciation.    Our Fleet services segment did not record any depreciation expense for either the year ended December 31, 2013 or the year ended December 31, 2012.

 

Other Expenses

 

Terminalling Services Segment

 

Interest expense.    Interest expense for our Terminalling services segment increased $1.1 million to $3.2 million in the year ended December 31, 2013 compared to $2.1 million in the year ended December 31, 2012. The increase was primarily due to an increase in the average debt balance maintained from continuing operations in 2013.

 

Loss on derivative contracts.    Our Terminalling services segment did not record any loss on derivative contracts for either the year ended December 31, 2013 or the year ended December 31, 2012.

 

Other expense, net.    Other expense for our Terminalling services segment remained flat for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Provision for income taxes.    Provision for income taxes for our Terminalling services segment remained flat for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Fleet Services Segment

 

Interest expense.    Our Fleet services segment did not record any interest expense for either the year ended December 31, 2013 or the year ended December 31, 2012.

 

Loss on derivative contracts.    Our Fleet services segment did not record any loss on derivative contracts for either the year ended December 31, 2013 or the year ended December 31, 2012.

 

Other expense, net.    Our Fleet services segment did not record any other expense for either the year ended December 31, 2013 or the year ended December 31, 2012.

 

Provision for income taxes.    Provision for income taxes for our Fleet services segment remained flat for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

 

Six months ended June 30, 2014 compared to six months ended June 30, 2013

 

Revenues

 

Total combined revenues decreased $2.4 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to a decrease in Fleet leases revenues of $4.0 million and a decrease in Terminalling services revenues of $0.2 million, partially offset by an increase in Freight and other reimbursables revenues of $1.2 million, and in Fleet services revenue of $0.6 million.

 

Terminalling Services Segment

 

Terminalling services revenue decreased $0.2 million primarily due to a decrease in ethanol volumes handled at the West Colton and San Antonio rail terminals.

 

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Fleet Services Segment

 

Revenues from our Fleet services segment decreased $2.2 million in the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The decrease was due to a $4.0 million decrease in Fleet leases revenue partially offset by a $0.6 million increase in Fleet services revenue and a $1.2 increase in Freight and other reimbursables revenues.

 

Fleet leases.    Fleet leases revenues decreased $4.0 million primarily due to a decrease in railcar lease payments from customers, which payments, together with our obligations to make rental payments to the owners of the railcars, were assigned to an affiliate of USD. The assignment of these lease payments does not impact our Adjusted EBITDA and cash available for distribution or net income as these lease payments were historically offset by our rental payments to the owners of the railcars.

 

Fleet services.    Fleet services revenue increased by $0.6 million primarily due to an increase in railcar services provided to an affiliate of USD.

 

Freight and other reimbursables.    Freight and other reimbursables revenues increased $1.2 million primarily due to an increase in customer reimbursement of railroad freight fees incurred in connection with an increase in the number of railcars and shipments which we arranged for our customers, primarily in connection with the start-up of our Hardisty rail terminal. Freight and other reimbursables revenues were exactly offset by freight and other reimbursables costs payable to the railroads USD. Please read “—How We Generate Revenue—Fleet Services Segment” for a discussion of how we lease and provide railcar management fleet services.

 

Operating Costs

 

Total operating costs increased $0.1 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

 

Terminalling Services Segment

 

Terminalling services segment operating costs increased $2.0 million, primarily due to (i) an increase of $1.2 million in Subcontracted rail services costs and (ii) an increase of $0.8 million in Selling, general and administrative expense.

 

Subcontracted rail services.    Subcontracted rail services costs increased $1.2 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily due to additional costs incurred in Canada related to new activity at the Hardisty terminal.

 

Selling, general and administrative.    Selling, general and administrative expenses for our Terminalling services segment increased $0.8 million to $2.7 million in the six months ended June 30, 2014 compared to $1.9 million the six months ended June 30, 2013. The increase was primarily due to pre-operational costs associated with the Hardisty rail terminal, as well as the provision for bad debts associated with the aging of certain reimbursable freight costs related to a portion of the new railcar fleet.

 

Depreciation.    Depreciation expense remained flat for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

 

Fleet Services Segment

 

Fleet services segment operating costs decreased $1.9 million, primarily due to (i) an increase of $1.1 million in Freight and other reimbursables costs and (ii) an increase of $1.0 million in Selling, general and administrative expenses, which was partially offset by a decrease of $4.0 million in Fleet leases costs.

 

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Fleet leases costs.    Fleet leases costs decreased $4.0 million, from $8.5 million in the six months ended June 30, 2013, to $4.5 million in the six months ended June 30, 2014, primarily due (i) to the assignment of railcar leases to an affiliate of USD and (ii) the assignment of railcar leases associated with the sale of five subsidiaries of USD to a third party in December 2012.

 

Freight and other reimbursables costs.    Freight and other reimbursables costs increased $1.1 million from $0.8 million in the six months ended June 30, 2013, to $1.9 million in the six months ended June 30, 2014, primarily due to an increase in railroad freight costs payable by us for arranging the shipment of railcars on behalf of our customers, which costs were exactly offset and reimbursed by our customers and reflected in Freight and other reimbursables revenues.

 

Selling, general and administrative.    Selling, general and administrative expenses for our Fleet services segment increased $1.0 million to $1.1 million in the six months ended June 30, 2014 compared to no expense in the six months ended June 30, 2013. The increase was primarily due to an increase in direct general and administrative costs.

 

Depreciation.    Our Fleet services segment did not record depreciation expense for either the six months ended June 30, 2014 or the six months ended June 30, 2013.

 

Other Expenses

 

Terminalling Services Segment.

 

Interest expense.    Interest expense for our Terminalling services segment increased $0.3 million to $2.0 million in the six months ended June 30, 2014 compared to $1.7 million the six months ended June 30, 2013. The increase was primarily due to the amortization of deferred finance costs associated with an amendment to the existing credit facility in late 2013, as well as newly incurred interest on Canadian debt.

 

Loss on derivative contracts.    Loss on derivative contracts for our Terminalling services segment increased $0.8 million to $0.8 million on the six months ended June 30, 2014 compared to no loss on derivative contracts in the six months ended June 30, 2013. The increase was due to our newly implemented use of foreign currency derivative instruments to hedge exposure to foreign currency fluctuations associated with our Canadian operations.

 

Other expense, net.    Other expense for our Terminalling services segment increased $0.7 million, to $0.7 million in the six months ended June 30, 2014 compared to none for the six months ended June 30, 2013. The increase was primarily due to foreign exchange transaction costs incurred in connection with the Hardisty rail terminal.

 

Provision for income taxes.    Provision for income taxes for our Terminalling services segment remained flat for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

 

Fleet Services Segment.

 

Interest expense.    Our Fleet services segment did not record any interest expense for either the six months ended June 30, 2014 or the six months ended June 30, 2013.

 

Loss on derivative contracts.    Our Fleet services segment did not record any loss on derivative contracts for either the six months ended June 30, 2014 or the six months ended June 30, 2013.

 

Other expense, net.    Our Fleet services segment did not record any other expense for either the six months ended June 30, 2014 or the six months ended June 30, 2013.

 

Provision for income taxes.    Provision for income taxes for our Fleet services segment remained flat for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

 

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Segment Adjusted EBITDA

 

Our chief operating decision maker, or CODM, regularly reviews financial information about both segments in deciding how to allocate resources and evaluate performance. Our CODM assesses segment performance based on income (loss) from continuing operations before interest expense, other expense, net, taxes, depreciation and amortization (Segment Adjusted EBITDA). See Note 8 to our Predecessor’s combined financial statement for the years ended December 31, 2013 and 2012 and Note 8 to our Predecessor’s condensed combined financial statements for the six months ended June 30, 2014 and 2013 included elsewhere in this prospectus.

 

     Year Ended
December 31,
        Six Months Ended    
June 30,
 
     2013      2012     2014     2013  
     (in thousands)  
                  (unaudited)  

Terminalling services

   $ 1,210       $ 3,778      $ (1,384   $ 841   

Fleet services

     761         (157     (134     237   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 1,971       $ 3,621      $ (1,518   $ 1,078   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

Terminalling Services Segment.

 

Adjusted EBITDA from our Terminalling services segment decreased $2.6 million to $1.2 million in the year ended December 31, 2013 compared to $3.8 million in the year ended December 31, 2012. The decrease was due to (i) a decrease in revenues of $1.6 million largely due to a rate concession negotiated with our customer in San Antonio in August 2012 and (ii) an increase in Selling, general and administrative expenses driven by pre-operational costs associated with the Hardisty rail terminal as well as an increase in direct general and administrative expenses.

 

Adjusted EBITDA from our Terminalling services segment decreased $2.2 million to $(1.4) million in the six months ended June 30, 2014 compared to $0.8 million in the six months ended June 30, 2013. The decrease was due to a decrease in revenues of $0.2 million related to ethanol volumes handled, as well increases of $1.2 million and $0.8 million in Subcontracted rail service costs and Selling, general and administrative expenses, respectively.

 

Fleet Services Segment.

 

Adjusted EBITDA from our Fleet services segment increased $1.0 million to $0.8 million in the year ended December 31, 2013 compared to $(0.2) million in the year ended December 31, 2012. The increase was due to largely due to an increase in railcar fleet services provided to an affiliate of USD.

 

Adjusted EBITDA from our Fleet services segment decreased $0.3 million to $(0.1) million in the six months ended June 30, 2014 compared to $0.2 million in the six months ended June 30, 2013. The decrease was due to a decrease in segment revenue of $2.2 million, supplemented by (i) an increase of $1.1 million in Freight and other reimbursables costs, and (ii) an increase of $1.0 million in Selling, general and administrative expenses, offset by a $4.0 million decrease in Fleet leases costs.

 

Discontinued Operations

 

On December 12, 2012, USD sold all of its membership interests in five of its subsidiaries included in our predecessor’s Terminalling services segment to a large energy transportation, terminalling and pipeline company. The sales price of the subsidiaries was $502.6 million, net of working capital adjustments. USD used a portion of these proceeds to pay down bank debt and for distributions to its members. For the years ended December 31, 2013 and 2012, our predecessor had recorded $7.3 million and $394.3 million, respectively, as gain on sale of

 

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discontinued operations. A sixth subsidiary also included in our predecessor’s Terminalling services segment ceased operations. Income from these discontinued operations decreased $64.3 million from $65.2 million for the year ended December 31, 2012 to $0.9 million for the year ended December 31, 2013. Income from discontinued operations decreased $0.5 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to a recording of a provision for bad debts associated with the aging of certain receivables related to a discontinued operation.

 

Liquidity and Capital Resources

 

Our principal liquidity requirements are to finance current operations, fund capital expenditures, including acquisitions from time to time and the costs to construct new assets, and to service our debt. Historically, our operations were financed by cash generated from operations, borrowings under our credit facility and intercompany loans from our sponsor.

 

In connection with this offering, we intend to refinance the current portion of our existing indebtedness in order to eliminate our current working capital deficit. We expect our ongoing sources of liquidity following this offering to include cash generated from operations, borrowings under our new revolving credit facility, and issuances of additional debt and equity securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and to make quarterly cash distributions. In addition, we intend to retain a significant portion of the proceeds from this offering as cash on our balance sheet to fund potential future growth initiatives and general partnership purposes. We do not expect the absence of cash flows from discontinued operations to have any impact on our future liquidity or capital resources.

 

Energy Capital Partners must approve any additional issuances of equity by us, which determinations may be made free of any duty to us or our unitholders, and members of our general partner’s board of directors appointed by Energy Capital Partners must approve the incurrence by or refinancing of our indebtedness outside of the ordinary course of business.

 

USD is currently borrower under a $150.0 million revolving credit facility with Bank of Oklahoma, as administrative agent, and a syndicate of lenders. This USD credit facility has a maturity date of March 30, 2015.

 

The USD credit facility may be used to finance renovation, expansion, development and acquisitions of projects. The credit facility includes a $15.0 million sublimit for standby letters of credit and a $100.0 million sublimit for projects within Canada. Obligations under the USD credit facility are guaranteed by all of USD’s subsidiaries, including us and our subsidiaries, and are secured by a first priority lien on the capital stock of USD’s subsidiaries, certain terminal projects and all of our personal property and that of our restricted subsidiaries, other than certain excluded assets. Borrowings under the USD credit facility bear interest at LIBOR plus an applicable margin ranging from 3.75% to 4.50%. The applicable margin varies based upon USD’s net leverage ratio, as defined in the credit facility. USD is subject to various covenants associated with the credit facility, including but not limited to, maintaining certain levels of debt service coverage, tangible net worth, and leverage. The Bank of Oklahoma and USD’s syndicate of lenders issued a waiver of certain existing defaults under the existing credit agreement for failure to maintain required covenants as of June 30, 2014. We anticipate negotiating an amendment to this credit facility in connection with the closing of this offering before terminating it in connection with the new senior secured credit agreement. Additionally, the USD credit facility includes a 0.50% per annum commitment fee on unused commitments.

 

The USD credit facility will be fully repaid in connection with this offering and the consummation of the new senior secured credit agreement.

 

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Cash Flows

 

The following table and discussion presents a summary of our Predecessor’s combined net cash provided by operating activities, investing activities and financing activities for the periods indicated.

 

     Year Ended
December  31,
    Six Months Ended
June 30,
 
       2013             2012             2014             2013      
   (in thousands)  
                 (unaudited)  

Net cash provided by (used in):

        

Operating activities

   $ 9,239      $ 1,798      $ 1,667      $ 2,064   

Investing activities

     (56,114     (773     (30,327     (6,129

Financing activities

     44,885        (25,227     26,999        10,134   

Discontinued operations

     5,168        25,687        26,941        643   

Effect of exchange rates on cash

     (1,498     (5     1,010        265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 1,680      $ 1,480      $ 26,290      $ 6,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Operating Activities

 

Net cash provided by operating activities increased by $7.4 million from $1.8 million for the year ended December 31, 2012 to $9.2 million for the year ended December 31, 2013. The increase was primarily due to an increase in construction-related retention payables at the Hardisty rail terminal, as well as an increase in deferred revenues associated with the railcar fleet.

 

Net cash provided by operating activities decreased by $0.4 million from $2.1 million for the six months ended June 30, 2013 to $1.7 million in the six months ended June 30, 2014. The decrease was primarily due to a decrease in net income, partially offset by an increase with respect to net changes to working capital.

 

Investing Activities

 

Net cash used in investing activities increased by $55.3 million from $0.8 million for the year ended December 31, 2012 to $56.1 million for the year ended December 31, 2013. The increase was primarily due to capital expenditures made in association with the development of the Hardisty rail terminal.

 

Net cash used in investing activities increased by $24.2 million from $6.1 million for the six months ended June 30, 2013 to $30.3 million for the six months ended June 30, 2014. The increase was primarily due to capital expenditures made in association with the development of the Hardisty rail terminal.

 

Financing Activities

 

Net cash provided by (used in) financing activities increased by $70.1 million from $(25.2) million for the year ended December 31, 2012 to $44.9 million for the year ended December 31, 2013. The increase was primarily due to an intercompany loan from USD to fund the development of the Hardisty rail terminal.

 

Net cash provided by financing activities increased by $16.9 million from $10.1 million for the six months ended June 30, 2013 to $27.0 million for the six months ended June 30, 2014. The increase was primarily due to an increase in proceeds from notes payable related to Canadian debt, offset by a repayment of affiliate payables.

 

Discontinued Operations

 

Net cash provided by discontinued operations decreased by $20.5 million from $25.7 million for the year ended December 31, 2012 to $5.2 million in the year ended December 31, 2013. The decrease was primarily due to the sale of five subsidiaries of USD in December 2012.

 

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Net cash provided by discontinued operations increased by $26.3 million from $0.6 million for the six months ended June 30, 2013 to $26.9 million in the six months ended June 30, 2014. The increase was primarily due to the release of sale proceeds previously held in escrow related to discontinued operations.

 

We do not expect the absence of cash flows from discontinued operations to have any impact on our future liquidity or capital resources.

 

Capital Requirements

 

Our historical capital expenditures have primarily consisted of the costs to construct our assets. Our operations are expected to require investments to expand, upgrade or enhance existing operations and to meet environmental and operational regulations.

 

Our partnership agreement will require that we categorize our capital expenditures as either expansion capital expenditures, maintenance capital or investment capital expenditures.

 

   

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long-term. Examples of expansion capital expenditures include the acquisition of terminals, rail lines and railcars or other complementary midstream assets from USD or third parties and the construction or development of new terminals or additional capacity at our existing rail terminals to the extent such capital expenditures are expected to expand our 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 disposed of or abandoned.

 

   

Maintenance capital expenditures are cash expenditures made to maintain, over the long term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair and refurbish our terminals.

 

   

Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures will largely consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but that are not expected to expand our operating capacity or operating income over the long term.

 

Our historical accounting records did not differentiate between expansion, maintenance and investment capital expenditures. We do not forecast incurring any maintenance capital expenditures during the twelve months ending September 30, 2015, and we did not incur any maintenance capital expenditures during the twelve months ended June 30, 2014. Based on the nature of our operations, our assets typically require minimal to no maintenance capital expenditures. We record our routine maintenance expenses associated with our assets in Other operating costs, which are forecasted to be $0.6 million for the twelve months ending September 30, 2015. For the twelve months ending September 30, 2015, we are not currently projecting any growth capital expenditures. Our total growth capital expenditures for the twelve months ended June 30, 2014 were $80.3 million and were primarily in connection with the construction of our Hardisty rail terminal. We currently have not included any potential future acquisitions in our budgeted capital expenditures for the twelve months ending September 30, 2015. We expect to fund future capital expenditures from cash on our balance sheet, cash flow generated from our operations, borrowings under our revolving credit facility, the issuance of additional partnership units or debt offerings.

 

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Distributions

 

We intend to pay a minimum quarterly distribution of $         per unit per quarter, which equates to $         million per quarter, or $         million per year, based on the number of common, Class A, subordinated and general partner units to be outstanding immediately after completion of this offering. We do not have a legal obligation to distribute any particular amount per common unit. Please read “Cash Distribution Policy and Restrictions on Distributions.” Additionally, members of our general partner’s board of directors appointed by Energy Capital Partners, if any, must approve any distributions made by us.

 

Credit Agreement

 

In connection with this offering, we will enter into a new five-year, $300.0 million senior secured credit agreement comprised of a $200.0 million revolving credit facility and a $100.0 million term loan (borrowed in Canadian dollars) with Citibank, N.A., as administrative agent, and a syndicate of lenders.

 

Our revolving credit facility and issuances of letters of credit will be available for working capital, capital expenditures, permitted acquisitions and general corporate purposes, including distributions. As the term loan is paid off, availability equal to the amount of the term loan pay-down will be transferred from the term loan to the revolving credit facility automatically, ultimately increasing availability on the revolving credit facility to $300.0 million once the term loan is fully repaid. In addition, we also have the ability to increase the maximum amount of the revolving credit facility by an aggregate amount of up to $100.0 million, to a total facility size of $400.0 million, subject to receiving increased commitments from lenders or other financial institutions and satisfaction of certain conditions. The revolving credit facility includes an aggregate $20.0 million sublimit for standby letters of credit and a $20.0 million sublimit for swingline loans. Obligations under the revolving credit facility will be guaranteed by our restricted subsidiaries, and will be secured by a first priority lien on our assets and those of our restricted subsidiaries other than certain excluded assets.

 

The term loan will be used to fund a distribution to USD Group LLC and the term loan will be guaranteed by USD Group LLC. The term loan will not be subject to any scheduled amortization. Mandatory prepayments of the term loan will be required from certain non-ordinary course asset sales subject to customary exceptions and reinvestment rights.

 

Borrowings under the senior secured credit agreement for revolving loans will bear interest at either a base rate and Canadian prime rate, as applicable plus an applicable margin ranging from 1.25% to 2.25%, or at LIBOR or CDOR, as applicable, plus an applicable margin ranging from 2.25% to 3.25%. Borrowings under the term loan will bear interest at either the base rate and Canadian prime rate, as applicable, plus a margin ranging from 1.35% to 2.35% or at LIBOR or CDOR, as applicable, plus an applicable margin ranging from 2.35% to 3.35%. The applicable margin, as well as a commitment fee on the revolving credit facility, ranging from 0.375% per annum to 0.50% per annum on unused commitments, will vary based upon our consolidated net leverage ratio, as defined in the credit agreement.

 

The new senior secured credit agreement contains affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of our restricted subsidiaries to incur or guarantee debt, incur liens, make investments, make restricted payments, engage in business activities, engage in mergers, consolidations and other organizational changes, sell, transfer or otherwise dispose of assets or enter into burdensome agreements or enter into transactions with affiliates on terms that are not arm’s length, in each case, subject to certain exceptions.

 

Additionally, we will be required to maintain the following financial ratios, each tested on a quarterly basis for the immediately preceding four quarter period then ended (or such shorter period as shall apply, on an annualized basis):

 

   

Consolidated Interest Coverage Ratio (as defined in the credit agreement), of at least 2.50 to 1.00;

 

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Consolidated Total Leverage Ratio of not greater than 4.50 to 1.00 (or 5.00 to 1.00 at any time after (i) we have issued at least $150.0 million of unsecured notes and (ii) in addition (and without prejudice) to clause (i), upon the consummation of a Material Acquisition (as defined in the credit facility), for the fiscal quarter in which the Material Acquisition is consummated and for two fiscal quarters immediately following such fiscal quarter (the “Material Acquisition Period”), if elected by us by written notice to the Administrative Agent given on or prior to the date of such acquisition, the maximum permitted ratio shall be increased by 0.50 to 1.00 above the otherwise relevant level); and

 

   

after we have issued at least $150.0 million of unsecured notes, Consolidated Senior Secured Leverage Ratio (as defined in the credit agreement) of not greater than 3.50 to 1.00 (or 4.00 to 1.00 during a Material Acquisition Period).

 

The senior secured credit agreement generally prohibits us from making cash distributions (subject to certain exceptions) except so long as no default exists or would be caused thereby, we may make cash distributions to unitholders up to the amount of our available cash (as defined in our partnership agreement).

 

The credit agreement contains events of default, including, but not limited to (and subject to grace periods in certain circumstances), the failure to pay any principal, interest or fees when due, failure to perform or observe any covenant that does not have certain materiality qualifiers contained in the credit agreement or related loan documentation, any representation, warranty or certification made or deemed made in the agreements or related loan documentation being untrue in any material respect when made, default under certain material debt agreements, commencement of bankruptcy or other insolvency proceedings, certain changes in our ownership or the ownership of our general partner, material judgments or orders, certain judgment defaults, ERISA events or the invalidity of the loan documents. Upon the occurrence and during the continuation of an event of default under the agreements, the lenders may, among other things, terminate their commitments, declare any outstanding loans to be immediately due and payable and/or exercise remedies against us and the collateral as may be available to the lenders under the agreements and related documentation or applicable law.

 

Borrowings under our revolving credit facility and the term loan are subject to a number of customary conditions, including the negotiation, execution and delivery of definitive documentation and the closing of this offering.

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we are a party to off-balance sheet arrangements relating to various operating leases and railcar lease agreements, whereby we have agreed to assign payment and obligations to affiliates of USD that are not consolidated with us. We have also entered into agreements to provide administrative services to these special purpose entities for fixed servicing fees and reimbursement of out-of-pocket expenses. The purpose of these transactions is to remove the risk of non-payment by our railcar lessees from negatively impacting our financial condition and results of operations. For more information on these special purpose entities see the discussion of our relationship with the variable interest entities described in Note 6 to our Predecessor’s combined financial statements for years ended December 31, 2012 and 2013 included elsewhere in this prospectus. Liabilities related to these arrangements are generally not reflected in our combined balance sheets and, we do not expect any material impact on our cash flows, results of operations or financial condition as a result from these off-balance sheet arrangements.

 

Related party sales to the special purpose entities were $1.0 million and $0 during the years ended December 31, 2013 and 2012, respectively. These sales are recorded in Fleet services—related party on the accompanying combined statements of income and comprehensive income.

 

Related party deferred revenues from the special purpose entities were $1.0 million and $0 during the years ended December 31, 2013 and 2012, respectively, which are recorded in Deferred revenue—related party on the accompanying combined balance sheets.

 

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Credit Risk

 

Our exposure to credit risk may be affected by the concentration of customers due to changes in economic or other conditions. Customers include commercial and industrial enterprises that may react differently to changing conditions. We believe that our credit-review procedures, loss reserves, customer deposits and collection procedures have adequately provided for amounts that may be uncollectible in the future.

 

Contractual Cash Obligations and Other Commitments

 

In the ordinary course of business activities, we enter into a variety of contractual cash obligations and other commitments. The following table summarizes the significant contractual cash obligations as of December 31, 2013:

 

     Payments Due by Year  
     Total      2014      2015      2016      2017      2018      2019  
     (in thousands)  

Operating services agreements(1)

   $ 2,012       $ 1,768       $ 244       $       $       $       $   

Operating leases(2)

     17,389         12,283         4,929         87         90                   

Purchase obligations(3)

     22,944         22,944                                           

Loan due to affiliate(4)

     50,991         50,991                                           

Credit facility(5)

     30,000                 30,000                                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 123,336       $ 87,986       $ 35,173       $ 87       $ 90       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   These future obligations represent labor service agreements at our rail terminal facilities.
(2)   Future land, building, track, and railcar lease payments.
(3)   Expected future payments for construction services at the Hardisty rail terminal.
(4)   Unsecured non-interest bearing loan facility with USD for the construction and operation of the Hardisty rail terminal.
(5)   USD’s revolving credit facility, which will be fully repaid in connection with this offering.

 

After giving effect to this offering and the related transactions, on a pro forma basis, our contractual obligations as of December 31, 2013 would have been:

 

     Payments Due by Year  
     Total      2014      2015      2016      2017      2018      2019  
     (in thousands)  

Operating services agreements(1)

   $ 2,012       $ 1,768       $ 244       $       $       $       $   

Operating leases(2)

     17,389         12,283         4,929         87         90                   

Purchase obligations(3)

     22,944         22,944                                           

Term loan(4)

     100,000                                                 100,000   

Omnibus agreement(5)

     2,500         2,500                                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 144,845       $ 39,495       $ 5,173       $ 87       $ 90       $       $ 100,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   These future obligations represent labor service agreements at our rail terminal facilities.
(2)   Future land, building, track, and railcar lease payments.
(3)   Expected future payments for construction services at the Hardisty rail terminal.
(4)   Term loan, which is part of the credit agreement we will enter into in connection with this offering, is due in four years and nine months.
(5)   Annual fee due under the omnibus agreement for the provision of various centralized administrative services.

 

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Critical Accounting Policies and Estimates

 

The following discussion relates to the critical accounting policies and estimates for both USD Partners LP and our Predecessor. Our combined financial statements are prepared in accordance with accounting principles generally accepted in the United States (US GAAP). The preparation of combined financial statements requires management to make judgments, assumptions and estimates based on the best available information at the time. The following accounting policies are considered critical because they are important to the portrayal of our financial condition and results, and involve a higher degree of complexity and judgment on the part of management. Actual results may differ based on the accuracy of the information utilized and subsequent events, some over which we may have little or no control. Significant estimates by management include the estimated lives of depreciable property and equipment, recoverability of long-lived assets, and the allowance for doubtful accounts.

 

Accounts Receivable

 

Accounts receivable are primarily due from oil and ethanol producing, and petroleum refining companies. Management performs ongoing credit evaluations of its customers. When appropriate, the Predecessor estimates allowances for doubtful accounts based on its customers’ financial condition and collection history, and other pertinent factors. Accounts are written-off against the allowance when significantly past due and deemed uncollectible by management. During the six months ended June 30, 2014, we recognized $1.0 million in bad debt expense, of which $0.6 million is reported in selling, general & administrative expense within continuing operations and the remaining $0.4 million is included in income from discontinued operations, net of tax on the accompanying condensed combined statements of operations and comprehensive income (loss).

 

Depreciation

 

Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from 5 to 20 years. We assign asset lives based on reasonable estimates when an asset is placed into service. We periodically evaluate the estimated useful lives of our property and equipment and revise our estimates as appropriate.

 

Impairment of Long-lived Assets

 

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when the sum of the estimated, undiscounted future cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset. Factors that indicate potential impairment include: a significant decrease in the market value of the asset, operating or cash flow losses associated with the use of the asset, and a significant change in the asset’s physical condition or use.

 

When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the long-lived asset.

 

Revenue Recognition

 

Revenues are derived from railcar loading and offloading services for bulk liquid products including crude oil, biofuels, and related products, as well as sourcing railcar fleets and related logistics and maintenance services. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collectability is reasonably assured. In accordance with FASB ASC 605, Revenue Recognition, the Predecessor records revenues for Fleet services on a

 

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gross basis when the Predecessor is deemed the primary obligor for the services. The Predecessor also records its revenues from reimbursable costs on a gross basis as reimbursements for out-of-pocket expenses included in revenues and operating costs.

 

Revenues for Terminalling services are recognized when provided based on the contractual rates related to throughput volumes. Certain agreements contain “take-or-pay” provisions whereby we are entitled to a minimum throughput fee. We recognize these minimum fees when the customer’s ability to make up the minimum volume has expired, in accordance with the terms of these agreements. Revenue for Fleet services and related party administrative services is recognized ratably over the contract period. Revenue for reimbursable costs is recognized as the costs are incurred. Our Predecessor has deferred revenues for amounts collected from customers in its Fleet services segment, which will be recognized as revenue when earned pursuant to contractual terms. Our Predecessor has prepaid rent associated with these deferred revenues on its railcar leases, which will be recognized as expense when incurred.

 

Equity-Based Awards

 

The board of directors of our general partner has approved incentive awards of 250,000 Class A Units representing limited partner interests in us to certain employees. The awards issued are performance-based awards that contain distribution equivalent rights.

 

Under ASC 718, Compensation-Stock Compensation, we classify the Class A Unit awards as equity grants. The fair value for award grants is determined on the grant date of the award and we recognize this value as compensation expense ratably over the requisite service period, which is the vesting period of each unit award. As the Partnership is minimally capitalized, has no operations or operating subsidiaries and will not have any operations or operating subsidiaries until they are contributed by USD Group LLC on the date of the IPO, the Partnership has determined the basis for determining the fair value of the award will be the price of the common units at the time of the initial public offering. Therefore, the Partnership considers the grant date, as defined within the accounting guidance, of these awards to be the day on which the IPO is considered effective. Commencement of the vesting of the Class A Units also begins upon the completion of our initial public offering.

 

The Class A Unit awards vest in four tranches over the one, two, three and four year periods following the IPO. The Class A Units receive distributions on a 1:1 basis with the common units during the vesting period, irrespective of the ultimate percentage of shares vesting. The ultimate percentage of shares vesting in each tranche depends on a performance condition: specifically, the distributions paid in the last year of the vesting period for each tranche. If distributions meet or fall below a threshold, the Class A Units in that tranche are forfeited. If distributions exceed a threshold by less than a target amount, the Class A Units in that tranche vest and become convertible into one common unit. If distributions exceed the threshold by more than the target amount, the Class A Units in that tranche vest and become convertible into more than one common unit (1.25 to 2.0x common units per Class A Unit, depending on the tranche). Distributions over the vesting period are not paid in arrearage if the Class A Units become convertible into more than one common unit.

 

Each tranche is recorded as a separate award and compensation expense for each tranche is calculated based on the performance scenario that is most probable for each tranche. At the grant date, our expectation is that it is probable that the minimum required distribution threshold for the First Class A Tranche will be exceeded but it will not exceed the target amount. Our expectation is that it is probable that the base vesting thresholds for the Second Class A Tranche through the Fourth Class A Tranche will be exceeded by more than the target amount. Therefore, we estimated the expense for each tranche as the number of unit equity awards, multiplied by the per unit grant date fair value of those awards less estimated forfeitures in the probable vesting scenario for each tranche (equaling the applicable conversion multiple times the value of the stock excluding the expected distributions paid over the vesting period (the common unit price at IPO less the present value of the expected distributions) plus the present value of the expected distributions for any tranches that vest). We recognize this

 

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total as compensation expense ratably over the requisite service period for each tranche. The probable outcome of each performance condition will be reassessed at each reporting period and changes will be recorded as a cumulative catch-up adjustment to equity-based compensation expense. The use of alternate judgments and assumptions could result in the recognition of different levels of equity-based incentive compensation costs. We will record equity-based compensation expense corresponding to the total awards that ultimately vest for each tranche.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to the crude oil, biofuels or related products that we handle at our facilities. We do not intend to hedge the minimal exposure to risks associated with the fluctuating commodity prices.

 

Interest Rate Risk

 

We anticipate that our new credit agreement will contain a variable interest rate that exposes us to volatility in interest rates. The credit markets have recently experienced historical lows in interest rates. As the overall economy strengthens, it is possible that monetary policy will tighten further, resulting in higher interest rates to counter possible inflation. Interest rates on floating rate credit facilities and future debt offerings could be higher than current levels, causing our financing costs to increase accordingly. We may use derivative instruments to hedge our exposure to variable interest rates in the future.

 

Foreign Currency Risk

 

Our cash flow related to our Hardisty rail terminal is reported in the U.S. dollar equivalent of such amounts received in Canadian dollars. Monetary assets and liabilities of our Canadian subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues, expenses and cash flow are translated using the average exchange rate during the reporting period.

 

In addition, currency exchange rate fluctuations could have an adverse effect on our results of operations. A substantial majority of the cash flows from our initial assets will be generated in Canadian dollars, but we intend to make distributions to our unitholders in U.S. dollars. As such, a portion of our distributable cash flow will be subject to currency exchange rate fluctuations between U.S. dollars and Canadian dollars. For example, if the Canadian dollar weakens significantly, the corresponding distributable cash flow in U.S. dollars could be less than what is necessary to pay our minimum quarterly distribution.

 

We use certain financial instruments to minimize the impact of changes in currency exchange rates, including options, swaps and forward contracts. In May 2014 we entered into a collar using put and call options with a notional value of $37.2 million as of the time of execution. These put and call options pertain to the three months ending December 31, 2014, March 31, 2015, June 30, 2015, September 30, 2015 and December 31, 2015. The collar was executed to secure $37.2 million Canadian dollars at an exchange rate range of between 0.91 and 0.93 United States dollars to 1.00 Canadian dollar.

 

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INDUSTRY OVERVIEW

 

U.S. and Canadian crude oil production has increased significantly in recent years. We expect this trend to continue as the EIA estimates that total U.S. crude oil production will grow 47.1% from 2012 to 2020. Similarly, the CAPP estimates that total Canadian production of crude oil will grow 49.6% over the same time period.

 

Crude Oil Production (MMbpd)

 

Canada   United States
LOGO   LOGO
Source: CAPP   Source: EIA

 

High-growth production areas in North America are often located at significant distances from refining centers, creating constantly evolving regional imbalances, which require the expedited development of flexible and sustainable transportation solutions. The extensive existing rail network, combined with rail transportation’s relatively low capital and fixed costs compared to other transportation alternatives, has strategically positioned rail as a long-term alternative transportation solution to the growing and evolving energy infrastructure needs.

 

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Crude Oil Flows to U.S. Refining Centers

 

LOGO

 

Additionally, with an increasing supply of crude oil production, refinery throughput has increased by over 1.0 million bpd since 2009 and, as a result, refined product exports have similarly increased.

 

U.S. Refining Throughput

 

U.S. Petroleum Product Exports (MMbpd)

LOGO   LOGO
Source: EIA   Source: EIA

 

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The Role of Rail in the Energy Industry

 

Railroads are an integral and indispensable part of the North American transportation system, serving nearly every industrial, wholesale, retail and resource-based sector while providing safe, efficient, flexible and low-cost transportation service. The rail industry continues to gain market share over other forms of transportation due to infrastructure upgrades and technological improvements as well as increases in track, railcar capacity and significantly improving logistical efficiency and system velocity. Particularly as it relates to crude oil, the North American railroad network is more geographically extensive than the crude oil pipeline network, with nearly 140,000 miles of track representing more than double the 57,000 miles of crude oil pipelines in the United States.

 

Crude Pipeline Network

 

LOGO

 

Source: CAPP

 

North America Rail Network

 

LOGO

 

Source: AAR

 

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This extensive footprint has strategically positioned rail transportation as a sustainable transportation solution to meet the growing and evolving demands of the energy industry, including but not limited to:

 

   

Access to areas without existing or easily accessible transportation infrastructure.    Many of the emerging producing regions, such as the Western Canadian oil sands, have concentrated production in areas with either limited or virtually no existing cost-effective takeaway capacity. The extensive existing rail infrastructure network provides efficient takeaway capacity to these producing regions and access to multiple demand centers.

 

   

Faster deployment.    Rail terminals can be constructed at a fraction of the time required to lay a long-haul pipeline, providing a timely solution to meet new and evolving market demands. Relative to rail, new pipeline construction faces challenges such as lengthier build times and environmental permitting processes, geographic constraints and, in some cases, the lack of required political support.

 

   

Flexibility to deliver to different end markets.    Unlike pipelines, which typically transport product to a single demand market, rail offers producers and shippers access to many of the most advantageous demand centers throughout North America, enabling producers and shippers to obtain competitive prices for their products and to retain the flexibility to determine the ultimate destination until the time of transportation.

 

   

Comprehensive solution for refiners.    Rail provides refiners flexible access to multiple qualities and grades of crude oil (feedstock) from multiple production sources. Additionally, as refinery output grows, rail provides refiners access to the most attractive refined petroleum products and NGL markets.

 

   

Faster delivery to demand markets.    Rail can transport energy-related products to end markets much faster than pipelines, trucks or waterborne tankers. While a pipeline can take 30-45 days to transport crude oil to the Gulf Coast from Western Canada, unit trains can move crude oil along a similar path in approximately nine days.

 

   

Reduced shipper commitment requirements.    Whereas all of the pipeline transportation fee is typically subject to long-term shipper commitments, only a portion of rail transportation costs require long-term shipper commitments (railroads are typically contracted on a spot basis). Consequently, pipeline customers bear greater risk of shifts in regional price differentials and the location of demand markets.

 

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Reduced shipper transportation cost.    Rail provides shippers significant operating cost advantages, particularly in situations where either (i) the amount of diluent required for the transportation of crude oil by pipeline is high, which is generally the case for production from the Canadian oil sands, or (ii) multiple modes of transportation are required to reach a particular end market.

 

North American Class I Crude Oil Carloads (In Thousands by Quarter)

 

LOGO

 

Source: AAR, Statistics Canada.

 

Given the above benefits of rail transportation, and in combination with similar market dynamics in other energy-related products, rail has either established itself, or has the potential to be established, as a preferred mode of transportation for the energy industry:

 

   

Refined Petroleum Products.    Rail transport provides refiners complementary cost-efficient takeaway capacity to end markets. As an example, rail transportation could provide a solution for the otherwise deficient takeaway capacity for refined petroleum products out of the midcontinent into more profitable markets.

 

   

Biofuels.    Due to corrosion concerns unique to biofuels such as ethanol, the long-haul transportation of biofuels via multi-product pipelines is less efficient and less economical than rail. Additionally, rail helps aggregate highly-fragmented ethanol production across the country to efficiently serve end markets.

 

   

Natural Gas Liquids (NGLs).    Rail is utilized to move NGLs from processing facilities and refineries (which produce NGLs as a byproduct of the refining process) with limited takeaway capacity to fractionation facilities and export terminals.

 

   

Frac Sand / Proppant.    With the boom of the production of shale oil, frac sand has become increasingly important around high growth production regions. Since transportation expenses represent a large portion of frac sand costs, producers favor rail transport due to its lower costs versus other forms of transportation such as trucking.

 

   

Coal.    More than 70% of coal is currently delivered to power plants by rail.

 

Safety and Regulation

 

Historically, railroads have had an excellent transportation safety record. According to the Association of American Railroads (AAR), railroads delivered more than 2.47 million carloads of hazardous materials in 2012, with approximately 99.998% of hazardous material carloads reaching destination without a release caused by an accident. Additionally, rail hazardous material accident rates have declined approximately 91% since 1980. However, a number of high-profile accidents have led to an increased focus on rail safety and regulation.

 

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The rail industry has been aggressively working to improve the safety of crude oil transport. For example, the AAR Tank Car Committee, which is comprised of railcar owners, manufacturers and rail hazardous materials customers, petitioned the Pipeline and Hazardous Materials Safety Administration (PHMSA) to adopt stringent requirements for new railcars used to transport certain types of hazardous materials, including crude oil. These tougher standards call for thicker, more puncture resistant railcar shells, extra protective “head shields” at both ends of railcars and enhanced protection for the fittings on the top of a railcar to protect those fittings in the event of a railcar rollover. Transport Canada, the Canadian transportation regulatory body, has also proposed similar standards.

 

In January 2014, the National Transportation Safety Board issued a series of recommendations in coordination with the Transportation Safety Board of Canada. These recommendations to the Federal Railroad Association and PHMSA would require:

 

   

expanded hazardous materials route planning for railroads to avoid populated and other sensitive areas;

 

   

development of an audit program to ensure that rail carriers that carry petroleum products have adequate response capabilities to address worst-case discharges of the entire quantity of product carried on a train; and

 

   

audits of shippers and rail carriers to ensure the proper classification of hazardous materials in transport and that adequate safety and security plans are in place.

 

In February 2014, the Department of Transportation (DOT) issued an order, effective immediately, imposing stricter standards on the transport of crude oil from the Bakken region by rail. The new requirements include proper testing and classification of petroleum products prior to being offered into transportation.

 

The DOT also agreed in February 2014 to a number of voluntary safety measures proposed by the AAR, including lower speed limits for crude oil trains traveling in high-risk areas, redirecting trains around high-risk areas, and implementing improved braking mechanisms.

 

In April 2014, Transport Canada announced its intentions to require more robust railcars, effectively mandating the current AAR enhanced railcar design, for the transportation of hazardous materials in Canada within a three-year time period.

 

In May 2014, the DOT issued an order requiring railroads to notify State Emergency Response Commissions in each state in which they operate trains transporting more than one million gallons of Bakken crude oil. This notification must include details related to the number of trains moving through each location each week and the various train travel routes. In that same month, the DOT also issued a separate safety advisory urging offerors and carriers of Bakken crude oil to avoid using older legacy DOT-111 railcars for the shipment of Bakken crude oil. The DOT, also in May 2014, sent its proposed, comprehensive rulemaking package for updating railcar standards to the White House Office of Management and Budget for review. The proposed rulemaking package is anticipated to be issued to the public for comment in late summer of 2014.

 

In addition to the rules imposed by regulatory bodies, the railroads also plan to implement a number of safety-focused policies. Most notably, Canadian National Railway and Canadian Pacific have adopted pricing structures that charge more for crude oil shipped using legacy DOT 111 railcars, creating an economic incentive for shippers to utilize the more expensive, DOT-111 railcars that meet newer safety standards.

 

We believe that the increased focus on safety and reliability of crude-by-rail operations will shift new business from customers, and opportunities from railroads, to crude-by-rail industry participants with a track record of safety and experience relative to less established industry participants. Additionally, we expect that producers, marketers and refiners will be less likely to develop crude-by-rail terminal infrastructure in-house given its non-core nature and the additional regulatory and safety exposure. We believe that we are ideally positioned to take advantage of these trends.

 

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BUSINESS

 

Overview

 

We are a fee-based, growth-oriented master limited partnership formed by USD to acquire, develop and operate energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses. Our initial assets consist primarily of: (i) an origination crude-by-rail terminal in Hardisty, Alberta, Canada, with capacity to load up to two 120-railcar unit trains per day and (ii) two destination unit train-capable ethanol rail terminals in San Antonio, Texas, and West Colton, California, with a combined capacity of approximately 33,000 barrels per day (bpd). Our rail terminals provide critical infrastructure allowing our customers to transport energy-related products from multiple supply regions to multiple demand markets. In addition, we provide railcar services through the management of a railcar fleet consisting of approximately 3,799 railcars, as of August 1, 2014, that are committed to customers on a long-term basis. We generate substantially all of our operating cash flow by charging fixed fees for handling energy-related products and providing related services. We do not take ownership of the underlying commodities that we handle nor do we receive any payments from our customers based on the value of such commodities. Rail transportation of energy-related products provides efficient and flexible access to key demand markets on a relatively low fixed-cost basis, and as a result, has become an important part of North American midstream infrastructure.

 

The following table provides a summary of our initial assets:

 

Terminal Name

  

Location

   Designed
Capacity

(Bpd)
   

Commodity

Handled

  

Primary

Customers

  

Terminal

Type

Hardisty rail terminal    Alberta, Canada      ~172,629 (1)    Crude Oil   

Producers/Refiners

/Marketers

   Origination
San Antonio rail terminal    Texas, U.S.      20,000      Ethanol    Refiners/Blenders    Destination
West Colton rail terminal    California, U.S.      13,000      Ethanol    Refiners/Blenders    Destination
     

 

 

         
        205,629           

 

(1)   Based on two 120-railcar unit trains comprised of 31,800 gallon (approximately 757 barrels) railcars being loaded at 95% of volumetric capacity per day. Actual amount of crude oil loading capacity may vary based on factors including the size of the unit trains, the size, type and volumetric capacity of the railcars utilized and the type and specifications of crude oil loaded, among other factors.

 

We generate the vast majority of our operating cash flow in connection with providing crude oil terminalling services at our Hardisty rail terminal. Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Furthermore, approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions. In addition to terminalling services, we provide customers access to railcars under fleet services agreements which commit customers to railcars and fleet management services on a take-or-pay basis for periods ranging from five to nine years. These agreements are generally executed in conjunction with commitments to use our rail terminals.

 

For the six months ended June 30, 2014 and the year ended December 31, 2013, we had revenues of $10.9 million and $26.3 million, respectively, and net income (loss) of $(5.2) million and $6.4 million, respectively. These figures do not include the results of operations from our Hardisty rail terminal, which did not commence operations until June 30, 2014.

 

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One of our key strengths is our relationship with our sponsor, USD. USD is an independent, growth-oriented developer, builder, operator and manager of energy-related infrastructure and was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 725,000 bpd. Ten of these terminals were subsequently divested in multiple transactions. From January 2006 through July 2014, USD has loaded and/or handled through its terminal network a total of over 75 MMbbls of crude oil and over 72 MMbbls of ethanol. Furthermore, USD has a nationally recognized safety record with no reportable spills at any of its terminals since its inception. USD is currently owned by Energy Capital Partners, Goldman Sachs and certain of its management team members.

 

On September 19, 2014, Energy Capital Partners made a significant investment in USD, and indicated an intention to invest over an additional $1.0 billion of equity capital in USD, subject to market and other conditions, over five years to support USD’s growth and expansion plans. Energy Capital Partners, together with its affiliates and affiliated funds, is a private equity firm with over $13.0 billion in capital commitments that primarily invests in North America’s energy infrastructure. Energy Capital Partners has significant energy infrastructure, midstream, master limited partnership and financial expertise to complement its investment in us. To date, Energy Capital Partners and its affiliated funds have 24 investment platforms with investments in the power generation, electric transmission, midstream and renewable sectors of the energy industry, including Summit Midstream Partners, LP, another public master limited partnership. Funds affiliated with Energy Capital Partners have invested a significant amount of capital in Summit Midstream Partners, LLC, the owner of the general partner of Summit Midstream Partners, LP in order to fund in part Summit’s continued development and acquisition of midstream assets.

 

USD, through USD Group LLC, currently has several major growth projects underway, including the development of strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.” At the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group LLC will grant us a right of first offer on the Hardisty Phase II and Hardisty Phase III projects for a period of seven years after the closing of this offering. USD and USD Group LLC will also grant us a right of first offer during this seven-year period on any additional midstream infrastructure assets and businesses that they may develop, construct or acquire.

 

We cannot assure you that USD or USD Group LLC will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD or USD Group LLC to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements, including with our existing customers, following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

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We believe USD intends for us to be its primary growth vehicle in North America. We intend to strategically expand our business by acquiring energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses from both USD and third parties. We also intend to grow organically by opportunistically pursuing growth projects and enhancing the profitability of our assets. We believe that USD’s successful project development and operating history, safety track record and industry relationships will allow us to execute our growth strategy.

 

Our Competitive Strengths

 

We believe that we are well positioned to capitalize on trends in our industry because of the following competitive strengths:

 

   

Our relationship with USD.    We believe USD intends for us to be its primary growth vehicle in North America. We believe that USD, as the indirect owner of a     % limited partner interest, a 2.0% general partner interest and all of our incentive distribution rights, will be motivated to promote and support the successful execution of our principal business objectives and to pursue projects that directly or indirectly enhance the value of our business through, for example, the following:

 

   

Acquisition opportunities from a proven developer of unit train-capable rail terminals.    USD was among the first companies to successfully develop the hydrocarbon-by-rail concept. USD has developed, built and operated 14 unit train-capable origination and destination terminals with an aggregate capacity of over 725,000 bpd. USD currently has several major growth projects underway, including multiple expansion projects at our Hardisty rail terminal and the development of other strategically located destination and origination rail terminals for crude oil and other energy-related products. Please read “—Our Growth Opportunities—Hardisty Phase II and Phase III Expansions.”

 

   

USD is backed by a proven energy infrastructure financial sponsor.    Energy Capital Partners has indicated an intention to invest over an additional $1.0 billion of equity capital in USD, subject to market and other conditions, over five years for the development, construction or acquisition of additional rail related and complementary midstream infrastructure assets and businesses. Energy Capital Partners and its affiliates are experienced energy investors with proven track records of making substantial, long-term investments in high-quality midstream energy assets, including other public master limited partnerships.

 

   

Market knowledge and industry relationships.    We believe that USD is an experienced innovator in the North American hydrocarbon-by-rail business and that its unique understanding of logistics and energy market trends as well as insights into business opportunities in our industry will help us identify, evaluate and pursue commercially attractive growth initiatives, which may include the acquisition of assets from our sponsor or third parties, the construction of new assets or the organic expansion of existing facilities. In addition, USD has established strong, long-standing relationships within the energy industry, which we believe will help us to grow and expand our business by creating opportunities with new customers and identifying new markets.

 

   

Longstanding strategic relationships with the railroads.    USD has extensive relationships with the railroads and is a significant revenue generator for several of them. Since its inception, USD has built 14 rail terminals that have provided service through connections to Class I railroads in North America, creating a strategic business relationship with the railroad industry. In addition, members of our senior executive management team have long distinguished careers with the railroads, including our Chief Operating Officer, who has over 40 years of experience working in key senior leadership roles on the Union Pacific and Missouri Pacific railroads and the Port Terminal Railroad Association. We believe these relationships will enable us to quickly identify and access strategic locations to grow our business.

 

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Access to an experienced leadership team.    USD’s senior management team has an average of over 25 years of experience in the energy, transportation, railroad, refining, commodities trading, logistics and financial industries. Additionally, USD’s team has a demonstrated track record of sourcing and executing growth projects, as well as significant expertise with the financial, tax and legal structures required to effectively pursue acquisitions.

 

   

Strong safety record.    USD has a nationally recognized record for safety. Its tradition of excellence in safety has been recognized by the National Safety Council, which has awarded USD its Superior Safety Performance Award, among others, for nine consecutive years from 2006 to 2014. USD also received two consecutive Stewardship Awards from Burlington Northern Santa Fe Railway for having zero incidents involving a hazardous spill or release. Additionally, it recently received the Safe Shipper Award from Canadian Pacific Railways. USD has loaded and/or handled through its terminal network a total of over 147 MMbbls of liquid hydrocarbons with no reportable spills as defined by the U.S. Department of Transportation (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) at any of its terminals since its inception.

 

   

Strategically located assets.    Our initial assets are located in critical supply and demand centers. Our Hardisty rail terminal offers strategic and flexible access to most North American refining markets to producers in Alberta’s Crude Oil Basin through the Hardisty hub. The Hardisty hub is one of the major crude oil supply centers in North America, serving as a large aggregation center for various grades of Canadian crude oil, and is an origination point for crude oil export pipelines to the United States. Our Hardisty rail terminal is the only unit train-capable crude-by-rail terminal located in the Hardisty hub and is ideally positioned to benefit from the continued growth in Western Canadian oil sands production, which has increased from 1.2 MMbpd in 2008 to 2.0 MMbpd in 2013 and is expected to reach 3.2 MMbpd by 2020 according to CAPP. Our San Antonio rail terminal is located within five miles of San Antonio’s gasoline blending terminals and is the only ethanol rail terminal in a 20-mile radius. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region of Southern California and is the only ethanol rail terminal in a ten-mile radius.

 

   

Stable and predictable cash flows.    Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay agreements with seven customers. Approximately 83% of the contracted utilization at our Hardisty rail terminal is with subsidiaries of five investment grade companies. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions.

 

   

Financial flexibility.    In connection with this offering, we intend to enter into a new $300.0 million senior secured credit agreement comprised of a $100.0 million term loan (drawn in Canadian dollars) and a $200.0 million revolving credit facility, which can expand to $300.0 million proportionately as the term loan principal is reduced. The revolving credit facility can be expanded further by $100.0 million, subject to receipt of additional lender commitments. The revolving credit facility will be undrawn at closing of this offering. In addition, we intend to retain a significant portion of the proceeds from this offering as cash on our balance sheet to fund potential future growth initiatives and general partnership purposes. We believe that this liquidity, combined with access to debt and equity capital markets, will provide us significant financial flexibility to execute our growth strategy effectively, efficiently and at competitive terms.

 

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Our Business Strategies

 

Our primary business objective is to increase the quarterly cash distribution we pay to our unitholders over time. We intend to accomplish this objective by executing the following business strategies:

 

   

Generate stable and predictable fee-based cash flows.    Substantially all of the operating cash flow we expect to generate is attributable to multi-year, take-or-pay agreements. We intend to continue to seek stable and predictable cash flows by executing fee-based agreements with existing and new customers.

 

   

Pursue accretive acquisitions.    We intend to pursue strategic and accretive acquisitions of energy-related rail terminals and high-quality and complementary midstream infrastructure assets and businesses from USD and third parties. We will consistently evaluate and monitor the marketplace to identify acquisitions within our existing geographies and in new regions that may be pursued independently or jointly with USD. We have not entered into, or begun to negotiate, any agreements to acquire any additional assets, including the Hardisty Phase II and Hardisty Phase III projects.

 

   

Pursue organic growth initiatives.    We intend to pursue organic growth projects and seek operational efficiencies that complement, optimize or improve the profitability of our assets. For example, we are currently in the process of seeking permits to construct a pipeline directly from our West Colton rail terminal to local gasoline blending terminals, which if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

   

Maintain a conservative capital structure.    We intend to maintain a conservative capital structure which, when combined with our focus on stable, fee-based cash flows, should afford us efficient and effective access to capital at a competitive cost. Consistent with our disciplined financial approach, we intend to fund the capital required for expansion and acquisition projects through a balanced combination of equity and debt financing. We believe this approach will provide us the flexibility to effectively pursue accretive acquisitions and organic growth projects as they become available.

 

   

Maintain safe, reliable and efficient operations.    We are committed to safe, efficient and reliable operations that comply with environmental and safety regulations. We will seek to improve operating performance through our commitment to technologically-advanced logistics and operations systems, employee training programs and other safety initiatives and programs with railroads, railcar producers and first responders. All of our facilities currently meet or exceed all government safety regulations and are in compliance with all recently enacted orders regarding the movement of crude-by-rail. We believe these objectives are integral to the success of our business as well as to our access to growth opportunities.

 

Our Assets and Operations

 

Hardisty Rail Terminal

 

Our Hardisty rail terminal is an origination terminal that commenced operations on June 30, 2014 and loads various grades of Canadian crude oil received from Alberta’s Crude Oil Basin through the Hardisty hub, which is one of the major crude oil supply centers in North America and is an origination point for export pipelines to the United States. The Hardisty rail terminal can load up to two 120-railcar unit trains per day and consists of a fixed loading rack with 30 railcar loading positions, a unit train staging area and loop tracks capable of holding five unit trains simultaneously. This facility is also equipped with an onsite vapor management system that allows our customers to minimize hydrocarbon loss while improving safety during the loading process. Our Hardisty rail terminal is designed to receive inbound deliveries of crude oil directly through a newly-constructed pipeline connected to the Gibson Energy Inc. (Gibson) Hardisty storage terminal. Gibson, which is one of the largest independent midstream companies in Canada, has 4.3 MMbbls of storage in Hardisty and has access to most of the major pipeline systems in the Hardisty hub. Gibson has announced that it is constructing an additional 2.3 MMbbls of storage capacity at its Hardisty terminal, with 1.7 MMbbls of additional capacity expected to be in service by early 2015 and an additional 0.6 MMbbls of capacity expected to be in service by early 2016. Pursuant to our facilities connection agreement with Gibson and subject to certain limited exceptions regarding

 

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manifest train facilities, our Hardisty rail terminal is the exclusive means by which crude oil from Gibson’s storage terminal can be transported by rail. The direct pipeline connection, in conjunction with USD’s terminal location, provides our Hardisty rail terminal with efficient access to the major producers in the region. Our Hardisty rail terminal is connected to Canadian Pacific Railroad’s North Main Line, which is a high capacity line with the ability to connect to all the key refining markets in North America.

 

Substantially all of the capacity at our Hardisty rail terminal is contracted under multi-year, take-or-pay terminal services agreements with seven customers. Approximately 83% of our Hardisty rail terminal’s utilization is contracted with subsidiaries of five investment grade companies, including major integrated oil companies, refiners and marketers. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of these agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Additionally, each of these agreements is subject to inflation-based rate escalators, and all but one agreement has automatic renewal provisions.

 

San Antonio Rail Terminal

 

Our San Antonio rail terminal, completed in April 2010, is a unit train-capable destination terminal that transloads ethanol received by rail from Midwestern producers onto trucks to meet local ethanol demand in San Antonio and Austin, Texas. Our San Antonio rail terminal is located within five miles from San Antonio’s gasoline blending terminals and is the only ethanol rail terminal within a 20-mile radius. Due to corrosion concerns unique to biofuels such as ethanol, the long-haul transportation of biofuels by multi-product pipelines is less efficient and less economical than rail, which combined with our proximity to local demand markets, we believe positions our San Antonio rail terminal to benefit from anticipated changes in environmental and gasoline blending regulations that will make the role of ethanol more pervasive in the fuel for transportation market.

 

The San Antonio rail terminal can transload up to 20,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail on Union Pacific Railroad’s high speed line. We have entered into a terminal service agreement with a subsidiary of an investment grade company for our San Antonio rail terminal pursuant to which our customer pays us per gallon fees based on the amount of ethanol offloaded at the terminal. The San Antonio terminal services agreement will expire in August 2015, at which point the agreement will automatically renew for two subsequent three-year terms unless notice is provided by our customer. The current agreement entitles the customer to 100% of the terminal’s capacity, subject to our right to seek additional customers if minimum volume usage thresholds are not met.

 

West Colton Rail Terminal

 

Our West Colton rail terminal, completed in November 2009, is a unit train-capable destination terminal that transloads ethanol received by rail from regional and other producers onto trucks to meet local ethanol demand in the greater San Bernardino and Riverside County-Inland Empire region of Southern California. Our West Colton rail terminal is located less than one mile from gasoline blending terminals that supply the greater San Bernardino and Riverside County-Inland Empire region and is the only ethanol rail terminal within a ten-mile radius. Additionally, like our San Antonio rail terminal, we believe our West Colton rail terminal is strategically positioned to benefit from any increases in the utilization of ethanol in the fuel for transportation market.

 

The West Colton rail terminal can transload up to 13,000 bbls of ethanol per day with 20 railcar offloading positions and three truck loading positions. The facility receives inbound deliveries exclusively by rail from Union Pacific Railroad’s high speed line. After receipt at our West Colton rail terminal, ethanol is then transported to end users by truck. We have been operating under a terminal services agreement at West Colton with a subsidiary of an investment grade company since July 2009, which is terminable at any time by either party. Under this agreement, we receive a per gallon, fixed-fee based on the amount of ethanol offloaded at the rail terminal. We are currently in

 

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the process of seeking permits to construct an approximately one-mile pipeline directly from our West Colton rail terminal to Kinder Morgan Energy Partners, L.P.’s gasoline blending terminals, which, if approved and constructed, may result in additional long-term volume commitments and cash flows.

 

Railcar Fleet

 

We provide fleet services for a railcar fleet consisting of 3,799 railcars as of August 1, 2014, of which 988 railcars are in production or on order. We do not own any railcars. Affiliates of USD lease 3,096 of the railcars in our fleet from third parties. We directly lease 703 railcars from third parties. We have entered into master fleet services agreements with a number of customers for the use of the 703 railcars in our fleet, that we lease directly, on a take-or-pay basis for periods ranging from five to nine years. We have also entered into services agreements with the affiliates of USD for the provision of fleet services with respect to the 3,096 railcars which they lease from third parties. Under our master fleet services agreements with our customers and the services agreements with the affiliates of USD, we provide customers with railcar-specific fleet services associated with the transportation of crude oil, which may include, among other things, the provision of relevant administrative and billing services, the maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance as required in connection with the movement of railcars, and the negotiation for and sourcing of railcars. We typically charge our customers, including the affiliates of USD, monthly fees per railcar that include a component for railcar use (in the case of our directly-leased railcar fleet) and a component for fleet services. Approximately 65% of our current railcar fleet is dedicated to customers of our terminals. The remaining 35% of the railcar fleet is dedicated to a customer of terminals belonging to subsidiaries previously sold by our predecessor. We believe that our ability to provide customers with access to railcars provides an incentive to customers that do not otherwise have access to high-quality railcars to contract terminalling capacity at our facilities. We believe that the generally longer terms of fleet services agreements will incentivize our customers to extend their initial terminal services agreements with us.

 

Approximately 65% of our currently in-service railcars were constructed in 2013 and 2014. The average age of our currently in-service fleet is approximately four years as compared to the estimated 50-year life associated with these types of railcars. We have partnered with leaders in the railcar supply industry, such as CIT Rail, Union Tank Car Company, Trinity Industries and others. We believe that our strong relationships with these industry leaders enable us to obtain railcar market insight and to procure railcars on more advantageous terms, with shorter lead times than our competitors. Our current railcars are designed to a DOT-111 railcar standard and are built to carry between 28,000 to 31,800 gallons of bulk liquid volume. All of our railcar fleet is currently permitted to transport crude oil in the U.S. and Canada. Nearly 70% of our railcars are equipped with the most recent safety enhancements including thicker, more puncture-resistant tank shells, extra protective head shields and greater top fittings protection.

 

As of August 1, 2014, our railcar fleet consisted of a mix of 2,108 C&I railcars and 1,691 non-coiled, non-insulated railcars. Our C&I railcars can reheat heavy viscous crude oil grades, reducing the need to blend these heavier crude grades with costly diluents. Of our 3,799 railcar fleet, 988 C&I railcars were in production as of August 1, 2014 and are scheduled to be delivered by March 2015, and 474 legacy non-coiled, non-insulated railcars will be retired by the end of 2015. Additionally, we have the option to procure another 425 new C&I railcars and 500 pressure railcars that are scheduled for delivery in late 2015.

 

Our Growth Opportunities—Hardisty Phase II and Phase III Expansions

 

Our sponsor currently owns the right to construct and develop additional infrastructure at the Hardisty rail terminal, which could expand the number of 120-railcar unit trains that can be loaded from two unit trains to up to five unit trains per day. We refer to these expansion projects as Hardisty Phase II and Hardisty Phase III. USD is currently in the process of contracting, designing, engineering and permitting Hardisty Phase II, which would expand the capacity for handling and transportation of crude oil by two 120-railcar unit trains per day which we expect would be contracted under similar multi-year take-or-pay agreements to what we currently have in place

 

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at our Hardisty rail terminal. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, USD currently anticipates that Hardisty Phase II will commence operations in late 2015 or early 2016. Hardisty Phase III would expand capacity by one 120-railcar unit train per day and would target the loading of bitumen with very limited amount of diluent through the use of C&I railcars, which otherwise could not be transported by pipeline. Hardisty Phase III requires additional infrastructure to be designed, engineered, permitted and constructed. Subject to receiving required regulatory approvals and obtaining required permits on a timely basis, successful contracting of the expanded capacity, and the absence of unanticipated delays in construction, we currently anticipate that Hardisty Phase III will commence operations during 2017. We will enter into an omnibus agreement with USD and USD Group LLC, pursuant to which USD Group will grant us a right of first offer on Hardisty Phase II and Hardisty Phase III for a period of seven years after the closing of this offering. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.

 

We cannot assure you that USD will be able to develop or construct, or that we will be able to acquire, any other midstream infrastructure project including the Hardisty Phase II or Hardisty Phase III projects. Among other things, the ability of USD to develop the Hardisty Phase II and Hardisty Phase III projects, or any other project, and our ability to acquire such projects, will depend upon USD’s and our ability to raise additional equity and debt financing. We are under no obligation to make any offer, and USD and USD Group LLC are under no obligation to accept any offer we make, with respect to any asset subject to our right of first offer, including the Hardisty Phase II and Hardisty Phase III projects. Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.” If we are unable to acquire the Hardisty Phase II or Hardisty Phase III projects from USD Group LLC, these expansions may compete directly with our Hardisty rail terminal for future throughput volumes, which may impact our ability to enter into new terminal services agreements including with our existing customers following the termination of our existing agreements or the terms thereof and our ability to compete for future spot volumes. Furthermore, cyclical changes in the demand for crude oil and other liquid hydrocarbons may cause USD or us to reevaluate any future expansion projects, including the Hardisty Phase II and Hardisty Phase III projects.

 

Commercial Agreements

 

Following the closing of this offering, substantially all of our operating cash flow will be generated under multi-year, fee-based terminal services agreements. We believe these terminal services arrangements will promote stable cash flows and no direct commodity price exposure.

 

Hardisty Rail Terminal Services Agreements

 

Under the terminal services agreements we have entered into with our Hardisty rail terminal, our customers are obligated to either pay the greater of a minimum monthly payment commitment fee or a throughput fee based on the amount of crude oil loaded at our Hardisty rail terminal. If a customer loads fewer unit trains in any given month than its maximum allotted number, that customer will receive a six-month credit that will allow it to load an additional number of unit trains, subject to availability. The number of additional unit trains that can be loaded will be equal to the number of additional unit trains that the customer could have loaded under our agreement, subject to our best efforts to accommodate the additional number. Each of the terminal services agreements with our Hardisty rail terminal customers has an initial contract term of five years. The initial terms of six of those agreements commenced between June 30, 2014 and August 1, 2014, and the initial term of the seventh agreement will commence on October 1, 2014. Six of our seven agreements have evergreen automatic one-year renewal

 

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provisions and will terminate only if written notice is given by either party within a specified time period before the end of the initial term or renewal term. The seventh agreement will renew upon written consent at least six months prior to the end of the initial term or current renewal term. Each of our terminal services agreements contain annual inflation-based rate escalators whereby customer payments will increase by 100% of either the consumer price index of Canada or Alberta. If a force majeure event occurs, a customer’s obligation to pay us may be suspended, in which case the length of the contract term will be extended by the same duration as the force majeure event. We will not be liable for any losses of crude oil handled at our Hardisty rail terminal unless due to our negligence.

 

San Antonio and West Colton Rail Terminal Services Agreements

 

We have entered into a terminal service agreement with an investment grade company for our San Antonio rail terminal pursuant to which that customer pays us per gallon fees based on the amount of ethanol offloaded at the terminal. The San Antonio terminal services agreement will expire in August 2015, at which point the agreement will automatically renew for two subsequent three-year terms unless notice is provided by our customer. The agreement entitles the customer to 100% of the terminal’s capacity, subject to our right to seek additional customers if minimum volume usage thresholds are not met. To date, our customer has met its minimum utilization requirements since inception of the contract. We also have a contract with the same customer in which that customer pays us a fixed fee to offload ethanol at our West Colton rail terminal. The West Colton terminal services agreement has been in place since July 2009 and is currently terminable at any time by either party. We will not be liable for any losses of ethanol handled at our rail terminals unless due to our negligence.

 

Master Fleet Services Agreements

 

We have entered into a multi-year, fee-based master fleet services agreement for the use and service of our railcars with a number of our rail terminal customers. Under these agreements, we provide our customers with railcar-specific fleet services associated with the transportation of crude oil, which may include, among other things, the provision of relevant administrative and billing services, the maintenance of railcars in accordance with standard industry practice and applicable law, the management and tracking of the movement of railcars, the regulatory and administrative reporting and compliance in connection with the movement of railcars, and in the case of our leased railcar fleet, the negotiation for and sourcing of railcars. We typically charge our customers monthly fees per railcar that include a component for railcar use (if applicable) and a component for fleet services. These agreements are generally structured as five to nine-year contracts, with a weighted-average remaining life of 7.0 years as of August 1, 2014 for agreements dedicated to customers of our Hardisty rail terminal. Overall, our master fleet services agreements have a weighted-average life of 5.5 years if agreements dedicated to customers of previously sold terminals are included. These agreements will expire unless notice to renew is provided by both parties.

 

Gibson Facilities Connection Agreement

 

We have entered into a facilities connection agreement with Gibson Energy Inc. under which Gibson developed and constructed and will operate, maintain and repair a 24-inch diameter pipeline and related facilities connecting Gibson’s storage terminal with our Hardisty rail terminal, and we developed and constructed and will operate, maintain and repair the Hardisty rail terminal. Gibson will be responsible for transporting product through the pipeline. The Gibson storage terminal is the exclusive means by which our Hardisty rail terminal can receive crude oil. Subject to certain limited exceptions regarding manifest train facilities, this newly constructed pipeline is also the exclusive means by which crude oil from Gibson’s storage terminal can be transferred by rail. All revenues associated with the pipeline and our Hardisty rail terminal will be split between us and Gibson based on a predetermined formula. This facilities connection agreement also gives Gibson a right of first refusal in the event of a sale of our Hardisty rail terminal to a third party. The agreement has a 20-year term and will expire unless renewed. Our and Gibson’s obligations thereunder may be suspended in the case of a force majeure

 

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event. Additionally, the agreement may be terminated by the non-defaulting party in case of specified events of default.

 

Competition

 

The crude oil and hydrocarbon logistics business is highly competitive. The ability to secure additional agreements for rail terminalling and railcar fleet services is primarily based on the reputation, efficiency, flexibility, location, market economies and reliability of the service provided and the pricing of services.

 

With respect to our Hardisty rail terminal, we believe that we will face competition from other logistics services providers, such as pipelines and other rail terminalling service providers, for barrels of crude oil in excess of the minimum volume commitments under our terminal services agreements with customers. If our customers choose to ship excess crude oil via alternative means, we may only receive the minimum volumes through our Hardisty rail terminal, which would cause a decrease in our revenues. With respect to our San Antonio and West Colton rail terminals, we face competition from other terminals and trucks that may be able to supply end-user markets with ethanol and other biofuels on a more competitive basis, due to terminal location, and price, versatility and services provided. Both facilities are served by the Union Pacific (UP) Railroad. In the Southern California market, we compete directly with Burlington Northern Santa Fe (BNSF) served ethanol facilities in Fontana and Carson, as well BNSF served terminals in the San Diego area. A combination of rail freight and trucking economics, which make up the largest share of the value chain, make it very difficult to compete with other facilities in this market on terminalling throughput fees alone. In the San Antonio market, we also compete with a BNSF served facility, although our UP served facility is closer to the San Antonio metro area allowing advantaged trucking rates for certain end-user customers.

 

With respect to the railcar fleet services we provide, we may face competition from other providers of railcars in excess of the railcars currently contracted for under our master fleet services agreements. This competition may limit our ability to increase the number of railcars under contract, and thus, limit our ability to increase our revenues. Furthermore, we may face competition from other parties interested in procuring railcars equipped to carry crude oil. We believe, however, that with our strong relationships with leaders in the railcar supply industry such as CIT Rail, Union Tank Car Company and Trinity Industries, we will be able to continue to procure railcars on more advantageous terms, with shorter lead times than our competitors.

 

We believe that, generally, we are favorably positioned to compete in our industry due to the strategic location of our terminals, quality of service provided at our terminals, independent strategy, our reputation and industry relationships, and the quality, versatility and complementary nature of our services. The competitiveness of our service offerings could be significantly impacted by the entry of new competitors into the markets in which we operate. However, we believe that significant barriers to entry exist in the crude oil logistics business. These barriers include significant costs and execution risk, a lengthy permitting and development cycle, financing challenges, shortage of personnel with the requisite expertise, and a finite number of sites suitable for development.

 

Seasonality

 

The amount of throughput at our rail terminals is affected by the level of supply and demand for crude oil, refined products and biofuels as well as seasonality. Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic and construction work. Decreased demand during the winter months can lower gasoline prices. However, many effects of seasonality on our revenues will be substantially mitigated due to our terminal service agreements with our customers that include minimum volume commitments as well as our master fleet services agreements which commit our customers to pay a base monthly fee per railcar under contract. Furthermore, because there are multiple end markets for the crude oil and biofuels we handle at our rail terminals, the effect of seasonality otherwise attributable to one particular end market is mitigated.

 

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Insurance

 

Our rail terminals and railcars may experience damage as a result of an accident or natural disaster. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. We will maintain insurance and/or be insured under the property, liability and business interruption policies of our sponsor and/or certain of its subsidiaries, subject to the deductibles and limits under those policies, which we believe are reasonable and prudent under the circumstances to cover our operations and assets. However, such insurance does not cover every potential risk associated with our logistics assets, and we cannot ensure that such insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage, or that these levels of insurance will be available in the future at commercially reasonable prices. As we continue to grow, we will continue to monitor our policy limits and retentions as they relate to the overall cost and scope of our insurance program.

 

Safety and Maintenance

 

We will perform preventive and normal maintenance on all of our facilities and make repairs and replacements when necessary or appropriate. We will also conduct routine and required inspections of those assets as required by regulation.

 

Our rail terminal facilities have response plans, spill prevention and control plans, and other programs to respond to emergencies. Our rail terminal facilities are also protected with fire systems, actuated either by sensors or an emergency switch. We continually strive to maintain compliance with applicable air, solid waste, and wastewater regulations.

 

Environmental Regulation

 

General

 

Our operations are subject to complex and frequently-changing federal, state, and local laws and regulations relating to the protection of health and the environment, including laws and regulations that govern the handling and release of crude oil and other liquid hydrocarbon materials. As with the industry generally, compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, operate, and upgrade equipment and facilities. While these laws and regulations affect our maintenance capital expenditures and net income, we believe customers are placing additional value on utilizing established and reputable third-party providers to satisfy their rail terminalling and logistics needs. We believe this will allow us to increase market share relative to customer-owned operations or smaller operators that lack an established track record of safety.

 

Violations of environmental laws or regulations can result in the imposition of significant administrative, civil and criminal fines and penalties and, in some instances, injunctions banning or delaying certain activities. We believe our facilities are in substantial compliance with applicable environmental laws and regulations. However, these laws and regulations are subject to frequent change at the federal, state, provincial and local levels, and the legislative and regulatory trend has been to place increasingly stringent limitations on activities that may affect the environment.

 

There are also risks of accidental releases into the environment associated with our operations, such as releases of crude oil, ethanol or hazardous substances from our rail terminals. To the extent an event is not covered by our insurance policies, such accidental releases could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage, and fines or penalties for any related violations of environmental laws or regulations.

 

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Hydraulic Fracturing

 

Hydraulic fracturing is an important and common practice that is used to stimulate production of natural gas and/or oil from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, sand, and chemicals under pressure through a cased and cemented wellbore into targeted subsurface formations to fracture the surrounding rock and stimulate production. Some of our customers use hydraulic fracturing as part of their operations, as does most of the domestic oil and natural gas industry. Hydraulic fracturing typically is regulated by state oil and natural gas commissions, but the EPA has asserted federal regulatory authority pursuant to the Safe Drinking Water Act (SDWA) over certain hydraulic fracturing activities involving the use of diesel fuels and published draft permitting guidance in May 2012 addressing the performance of such activities using diesel fuels. In November 2011, the EPA announced its intent to develop and issue regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing, and the agency currently plans to issue a Notice of Proposed Rulemaking that would seek public input on the design and scope of such disclosure regulations. Moreover, the EPA is developing effluent limitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities and plans to propose these standards by 2014. On August 16, 2012, the EPA published final rules under the Clean Air Act requiring new measures to address well flow back emissions and requiring in the future that regulated wells employ “green completion” technology after January 1, 2015 to address GHG, especially methane, a highly-potent GHG. In addition, the U.S. Department of the Interior published a revised proposed rule on May 24, 2013, that would implement updated requirements for hydraulic fracturing activities on federal lands, including new requirements relating to public disclosure, well bore integrity and handling of flowback water.

 

In addition, Congress has from time to time considered legislation to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. At the state level, several states have adopted or are considering legal requirements that could impose more stringent permitting, disclosure, and well construction requirements on hydraulic fracturing activities. For example, in Ohio, the Department of Natural Resources recently proposed draft regulations that would require a minimum distance between the hydraulic fracturing facilities and streams, require operators to take spill-containment measures, and regulate the types of liners required for waste storage. Local government also may seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular. If new or more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where our customers operate, our customers could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from drilling wells. Any such added costs or delays for our customers could significantly affect our operations.

 

Certain governmental reviews also have been conducted or are underway that focus on environmental aspects of hydraulic fracturing practices. The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices. The EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with a first progress report outlining work currently underway by the agency released on December 21, 2012, and a final report drawing conclusions about the potential impacts of hydraulic fracturing on drinking water resources expected to be available for public comment and peer review this year. Other governmental agencies, including the U.S. Department of Energy, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies, depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms.

 

Air Emissions

 

Our operations are subject to and affected by the Clean Air Act, as amended, and its implementing regulations, as well as comparable state and local statutes and regulations. Our operations are subject to the Clean

 

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Air Act’s permitting requirements and related emission control requirements relating to specific air pollutants, as well as the requirement to maintain a risk management program to help prevent accidental releases of certain regulated substances. We are currently required to obtain and maintain various construction and operating permits under the Clean Air Act, and have incurred capital expenditures to maintain compliance with all applicable federal and state laws regarding air emissions. We may nonetheless be required to incur additional capital expenditures in the near future for the installation of certain air pollution control devices at our rail terminals when regulations change or we add new equipment or modify our existing equipment. Our Canadian operations are similarly subject to federal and provincial air emission regulations.

 

Our customers are also subject to, and similarly affected by, environmental regulations restricting air emissions. These include U.S. and Canadian federal and state or provincial actions to develop programs for the reduction of GHG emissions as well as proposals to create a cap-and-trade system that would require companies to purchase carbon dioxide (CO2) emission allowances for emissions at manufacturing facilities and emissions caused by the use of the fuels sold. In addition, the EPA has indicated that it intends to regulate CO2 emissions. As a result of these regulations, our customers could be required to undertake significant capital expenditures, operate at reduced levels, and/or pay significant penalties. It is uncertain what our customers’ responses to these emerging issues will be. Those responses could reduce throughput at our rail terminals, and impact our cash flows and ability to make distributions or satisfy debt obligations.

 

Climate Change

 

United States.    Following its December 2009 “endangerment finding” that GHG emissions pose a threat to public health and welfare, the EPA has begun to regulate GHG emissions under the authority granted to it by the federal Clean Air Act. Based on these findings, the EPA has adopted regulations under existing provisions of the federal Clean Air Act that require Prevention of Significant Deterioration (PSD) pre-construction permits and Title V operating permits for GHG emissions from certain large stationary sources. Under these regulations, facilities required to obtain PSD permits must meet “best available control technology” standards for their GHG emissions established by the states or, in some cases, by the EPA on a case-by-case basis. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States, including, among others, certain onshore oil and natural gas processing and fractionating facilities. We believe we are in substantial compliance with all GHG emissions permitting and reporting requirements applicable to our operations.

 

While Congress has from time to time considered legislation to reduce emissions of GHGs, the prospect for adoption of significant legislation at the federal level to reduce GHG emissions is perceived to be low at this time. Nevertheless, the Obama administration has announced it intends to adopt additional regulations to reduce emissions of GHGs and to encourage greater use of low-carbon technologies. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations that limit emissions of GHGs could adversely affect demand for the oil, which could thereby reduce demand for our services. Finally, it should be noted that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events; if any such effects were to occur, it is uncertain if they would have an adverse effect on our financial condition and operations.

 

Canada.    In response to recent studies suggesting that emissions of CO2, methane and certain other gases may be contributing to warming of the Earth’s atmosphere, many nations, including Canada, have agreed to limit emissions of these GHGs pursuant to the 1997 United Nations Framework Convention on Climate Change, also known as the “Kyoto Protocol.” The Kyoto Protocol required Canada to reduce its emissions of GHG to 6% below 1990 levels by 2012. However, by 2009, emissions in Canada were 17% higher than 1990 levels. In December 2011, Canada withdrew from the Kyoto Protocol, but signed the “Durban Platform” committing it to a legally binding treaty to reduce GHG emissions, the terms of which are to be defined by 2015 and are to become effective in 2020. Environment Canada continues to promote the domestic GHG initiatives implemented while

 

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Canada was signatory to the Kyoto Protocol. With regard to the oil and gas industry, it is unclear at this time what direction the government plans to take. Increased costs associated with compliance with any future legislation or regulation of GHG emissions, if it occurs, may have a material adverse effect on our results of operations, financial condition and cash flows. In addition, climate change legislation and regulations may result in increased costs not only for our business but also for our customers, thereby potentially decreasing demand for our services. Decreased demand for our services may have a material adverse effect on our results of operations, financial condition and cash flows.

 

Waste Management and Related Liabilities

 

To a large extent, the environmental laws and regulations affecting our operations relate to the release of hazardous substances or solid wastes into soils, groundwater, and surface water, and include measures to control pollution of the environment. These laws generally regulate the generation, storage, treatment, transportation, and disposal of solid and hazardous waste. They also require corrective action, including investigation and remediation, at a facility where such waste may have been released or disposed.

 

Site Remediation.    The federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) and comparable state laws impose liability without regard to fault or to the legality of the original conduct on certain classes of persons regarding the presence or release of a “hazardous substance” in (or into) the environment. Those persons include the former and present owner or operator of the site where the release occurred and the transporters and generators of the hazardous substance found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances and for damages to natural resources. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. Although petroleum is excluded from CERCLA’s definition of “hazardous substance,” in the course of ordinary operations, we may handle wastes that may be designated as hazardous substances and, as a result, we could be liable under CERCLA for all or part of the costs required to clean up sites at which these hazardous substances have been released into the environment. Costs for any such remedial actions, as well as any related claims, could have a material adverse effect on our maintenance capital expenditures and operating expenses to the extent not covered by insurance. Canadian and provincial laws also impose liabilities for releases of certain substances into the environment.

 

We currently own or lease properties where hydrocarbons are being or have been handled for many years. Although we have utilized operating and disposal practices that were standard in the industry at the time, petroleum hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where these wastes have been taken for disposal. These properties and wastes disposed thereon may be subject to CERCLA, the U.S. federal Resource Conservation and Recovery Act, as amended, (RCRA), and comparable state and Canadian federal and provincial laws regulations. Under these laws and regulations, we could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater), or to perform remedial operations to prevent future contamination. We have not been identified by any state or federal agency as a Potentially Responsible Party under CERCLA in connection with the transport and/or disposal of any waste products to third-party disposal sites. We maintain insurance of various types with varying levels of coverage that we consider adequate under the circumstances to cover our operations and properties. The insurance policies are subject to deductibles and retention levels that we consider reasonable and not excessive. Consistent with insurance coverage generally available in the industry, in certain circumstances our insurance policies provide limited coverage for losses or liabilities relating to certain pollution events, including gradual pollution or sudden and accidental occurrences.

 

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Solid and Hazardous Wastes.    Our operations generate solid wastes, including some hazardous wastes, which are subject to the requirements of RCRA and analogous state and Canadian federal and provincial laws that impose requirements on the handling, storage, treatment and disposal of hazardous wastes. Many of the wastes that we generate are not subject to the most stringent requirements of RCRA because our operations generate primarily oil and gas wastes, which currently are excluded from consideration as RCRA hazardous wastes. Specifically, RCRA excludes from the definition of hazardous waste produced waters and other wastes intrinsically associated with the exploration, development, or production of crude oil and natural gas. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations. It is also possible that in the future oil and gas wastes may be included as hazardous wastes under RCRA, in which event our wastes as well as the wastes of our competitors will be subject to more rigorous and costly disposal requirements, resulting in additional capital expenditures or operating expenses.

 

Water

 

The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (CWA), and analogous state and Canadian federal and provincial laws impose restrictions and strict controls regarding the discharge of pollutants into navigable waters of the United States and Canada, as well as state and provincial waters. Federal, state and provincial regulatory agencies can impose administrative, civil and/or criminal penalties for non-compliance with discharge permits or other requirements of the CWA.

 

The Oil Pollution Act of 1990 (OPA) amended certain provisions of the CWA, as they relate to the release of petroleum products into navigable waters. OPA subjects owners of facilities to strict, joint and potentially unlimited liability for containment and removal costs, natural resource damages, and certain other consequences of an oil spill. These laws impose regulatory burdens on our operations. We believe that we are in substantial compliance with applicable OPA requirements. State and Canadian federal and provincial laws also impose requirements relating to the prevention of oil releases and the remediation of areas affected by releases when they occur. We believe that we are in substantial compliance with all such federal, state and Canadian requirements.

 

Endangered Species Act

 

The Endangered Species Act restricts activities that may affect endangered species or their habitats. While some of our facilities are in areas that may be designated as habitat for endangered species, we believe that we are in substantial compliance with the Endangered Species Act. However, the discovery of previously unidentified endangered species could cause us to incur additional costs or become subject to operating restrictions or bans in the affected area.

 

Rail Safety

 

We facilitate the transport of crude oil and related products by rail in the United States and Canada. We do not own or operate the railroads on which crude-oil-carrying railcars are transported; however, we currently lease or manage a large railcar fleet on behalf of our customers. Accordingly, we are indirectly subject to regulations governing railcar design and manufacture, and increasingly stringent regulations pertaining to the shipment of crude oil by rail.

 

Recent high-profile accidents in Quebec, North Dakota and Virginia in July 2013, December 2013 and April 2014, respectively (all involving crude oil unit trains), have raised concerns about the environmental and safety risks associated with crude oil transport by rail, and the associated risks arising from railcar design. In August 2013, the FRA issued both an Action Plan for Hazardous Materials Safety, and an order imposing new standards on railroads for properly securing rolling equipment; a proposed rule with regard to the latter was subsequently released on September 9, 2014. In August 2013, the FRA and PHMSA began conducting inspections of crude-oil-carrying railcars from the Bakken formation to make sure cargo is properly identified to railroads and emergency responders. In November 2013, the rail industry called on the PHMSA to require that legacy railcars

 

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used to transport flammable liquids, including crude oil, be retrofitted with enhanced safety features or be phased-out. In January 2014, the DOT (including the PHMSA and FRA) met with oil and rail industry leaders to develop strategies to prevent train derailments and reduce the risk of fire and explosions. As a result of those meetings, the DOT and transportation industry agreed in February 2014 to certain voluntary measures designed to enhance the safety of crude oil shipments by rail, which include lowering speed limits for crude oil trains traveling in high-risk areas, modifying routes to avoid such high-risk areas, increasing the frequency of track inspections, implementing improved braking mechanisms, and improving the training of certain emergency responders. On February 25, 2014, the DOT issued another order, immediately requiring all carriers who transport crude oil from the Bakken region by rail to ensure that the product is properly tested and classified in accordance with federal safety regulations, and further requiring that all crude oil shipments be designated in the two highest risk categories, effectively mandating that crude oil be transported in more robust railcars. Similarly, in February 2014, Transport Canada finalized new regulations requiring shippers and carriers of crude oil by rail to properly sample, classify, certify and disclose certain characteristics of the crude oil being shipped, and gave shippers and carriers six months to comply with these new regulatory procedures. On April 23, 2014, the Canadian Minister of Transport, which oversees Transport Canada, announced a series of directives and other actions to address the Transportation Safety Board of Canada’s initial recommendations on rail safety. Effective immediately, Transport Canada prohibited the least crash-resistant DOT-111 railcars from carrying dangerous goods. Additionally, Transport Canada ordered that DOT-111 railcars used to transport crude oil and ethanol that are not compliant with required safety standards must be phased out or retrofitted within three years (by May 2017). We currently provide railcar services for 463 railcars that are subject to this directive, but which have leases that will expire before May 2017, and 383 railcars that will still be under contract and will be required to be retrofitted pursuant to this directive. We do not own any of the railcars in our railcar fleet and are not directly responsible for costs associated with the retrofitting of DOT-111 railcars. However, costs associated with the retrofitting of railcars would increase the incremental monthly cost of the applicable railcar lease, which cost would get passed through to our customers and could affect demand for our services. We intend to work with our railcar suppliers on modification scheduling in an attempt to avoid major disruptions. Transport Canada also identified key routes and revised operating practices put in place for the transportation of crude oil on those routes. On May 7, 2014, the DOT issued another order, immediately requiring railroads operating trains carrying more than one million gallons of Bakken crude oil to notify State Emergency Response Commissions regarding the estimated volume, frequency, and transportation route of those shipments. Also on May 7, 2014, the FRA and PHMSA issued a joint Safety Advisory to the rail industry advising those shipping or offering Bakken crude oil to use railcar designs with the highest available level of integrity, and to avoid using older legacy DOT-111 or CTC-111 railcars. On July 2, 2014, Transport Canada adopted the CPC-1232 technical standards as the minimum safety threshold for railcars transporting dangerous goods after May 2017. Transport Canada also proposed a new class of railcar (TC-140) specifically developed for the transport of flammable liquids in Canada, as well as a retrofit schedule for legacy DOT-111 and CPC-1232 railcars. The proposal is open for comment until September 1, 2014. Once the comments have been reviewed, the Canadian government will issue final regulations for the specifications of these railcars. On July 23, 2014, the DOT issued a Notice of Proposed Rulemaking and a companion Advanced Notice of Proposed Rulemaking addressing liquid flammable railcar requirements. This proposed rulemaking also addressed areas such as train speeds and oil testing, and other important issues such as emergency and spill response along the routes for flammable liquid unit trains. The newly proposed tank car standards would apply to railcars constructed after October 1, 2015 that are used to transport flammable liquids. The DOT proposed three options for this new standard. Under the proposal, existing railcars that are used to transport flammable liquids would be retrofitted to meet the selected option for performance requirements. Those not retrofitted would be retired, repurposed, or operated under speed restrictions for up to five years, based on packing group assignment of the flammable liquids being shipped by rail. The proposal is open for comment until September 30, 2014. Once the comments have been reviewed, the U.S. government will issue final regulations for the specifications of these flammable liquid railcars. Nearly 70% of our fleet was manufactured in 2013 and 2014 and has been constructed to the CPC-1232 standard. Were DOT to adopt more strict specifications for tank cars, it would likely result in increased difficulty and costs to obtain compliant cars after the applicable phase-out dates. While we may be able to pass some of these costs on to our customers, there may be additional costs that we cannot pass on. 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remain in close contact with railcar suppliers and other industry stakeholders to stay informed of railcar regulation rulemaking developments. Given the current railcar design compliance requirements and timelines outlined in the most recent Transport Canada and DOT proposals, we do not anticipate a material impact to our ability to transport crude oil under our existing contracts. If the final rulings result in more stringent design requirements and compressed compliance timelines, then our ability to transport these volumes could be affected by a delay in the railcar industry’s ability to provide adequate railcar modification repair services. We may not have access to a sufficient number of compliant cars to transport the required volumes under our existing contracts. This may lead to a decrease in revenues and other consequences.

 

The adoption of additional federal, state, provincial or local laws or regulations, including any voluntary measures by the rail industry regarding railcar design or crude oil and liquid hydrocarbon rail transport activities, or efforts by local communities to restrict or limit rail traffic involving crude oil, could affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows.

 

Employee Safety

 

We are subject to the requirements of the U.S. federal Occupational Safety and Health Act (OSHA) and comparable state and Canadian federal and provincial statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with OSHA and comparable requirements, including general industry standards, record keeping requirements, and monitoring of occupational exposure to regulated substances.

 

Security

 

While we are not currently subject to governmental standards for the protection of computer-based systems and technology from cyber threats and attacks, proposals to establish such standard are being considered in the U.S. Congress and by U.S. Executive Branch departments and agencies, including the DHS, and we may become subject to such standards in the future. We currently are implementing our own cyber security programs and protocols; however, we cannot guarantee their effectiveness. A significant cyber-attack could have a material effect on operations and those of our customers.

 

Title to Real Property Assets

 

The leases that will be transferred to us may require the consent of the lessor to transfer these rights. Our general partner believes that it has obtained or will obtain sufficient third-party consents, permits, and authorizations for the transfer of the real property assets necessary for us to operate our business in all material respects as described in this prospectus. With respect to consents, permits, or authorizations that have not been obtained, if any, our general partner believes any such consents, permits, or authorizations will be obtained after the closing of this offering, or that the failure to obtain these consents, permits, or authorizations will not have a material adverse effect on the operation of our business.

 

Our general partner believes that we will have satisfactory title to all of the real estate assets that will be contributed to us at the closing of this offering. Under the contribution agreement, our sponsor has agreed to indemnify us for any materially adverse title defects as of the closing date. In addition, under the omnibus agreement, our sponsor will indemnify us for any materially adverse title defects and for failures to obtain certain consents and permits necessary to conduct our business, in each case, that are identified prior to the fifth anniversary of the closing of this offering. Record title to some of our assets may continue to be held by subsidiaries of our sponsor until we have made the appropriate filings in the jurisdictions in which such assets are located and obtained any consents and approvals that are not obtained prior to transfer. We will make these

 

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filings, if necessary, and obtain these consents, if necessary, upon closing of this offering. Although title to the real property necessary for us to operate our business may be subject to encumbrances in some cases, such as customary interests generally retained in connection with acquisition of real property, liens that can be imposed in some jurisdictions for government-initiated action to clean up environmental contamination, liens for current taxes and other burdens, and easements, restrictions, and other encumbrances to which the underlying properties were subject at the time of lease or acquisition by our Predecessor or us, our general partner believes that none of these burdens should materially detract from the value of these properties or from our interest in these properties or should materially interfere with their use in the operation of our business.

 

Headquarters

 

Our corporate headquarters are located at 811 Main Street, Suite 2800, Houston, TX 77002. Our lease expires in December 31, 2026, unless terminated earlier under certain circumstances specified in our lease. We believe that our current facilities are adequate to meet our needs for the immediate future.

 

Employees

 

We are managed and operated by the board of directors and executive officers of USD Partners GP LLC, our general partner. 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. All of the employees that conduct our business are employed by affiliates of our general partner. Immediately after the closing of this offering, we expect that our general partner and its affiliates will have approximately 43 employees performing services for our operations. We believe that our general partner and its affiliates have a satisfactory relationship with those employees.

 

Legal Proceedings

 

In the ordinary course of business we may become subject to various legal and regulatory claims and proceedings. While the amounts claimed may be substantial, we may be unable to predict with certainty the ultimate outcome of such claims and proceedings.

 

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MANAGEMENT

 

Management of USD Partners LP

 

We are managed by the directors and executive officers of our general partner, USD Partners GP LLC. Our general partner is not elected by our unitholders and will not be subject to re-election by our unitholders in the future. USD indirectly owns all of the membership interests in our general partner. Our general partner has a board of directors, and our unitholders are not entitled to elect the directors or directly or indirectly to participate in our management or operations. Our general partner will be liable, as general partner, for all of our debts (to the extent not paid from our assets), except for indebtedness or other obligations that are made specifically nonrecourse to it. Whenever possible, we intend to incur indebtedness that is nonrecourse to our general partner.

 

Immediately following the closing of this offering, our general partner will have seven directors. USD and Energy Capital Partners will each appoint three members to the board of directors of our general partner and one independent director will be designated by mutual consent of USD and Energy Capital Partners. In accordance with the NYSE’s phase-in rules, we will have at least three independent directors within one year of the date our common units are first listed on the NYSE. Our board has determined that             is independent under the independence standards of the NYSE.

 

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. All of the employees that conduct our business are employed by affiliates of our general partner, but we sometimes refer to these individuals in this prospectus as our employees.

 

Director Independence

 

Although most companies listed on the NYSE are required to have a majority of independent directors serving on the board of directors of the listed company, the NYSE does not require a publicly traded limited partnership like us to have a majority of independent directors on the board of directors of our general partner or to establish a compensation or a nominating and corporate governance committee. We are, however, required to have an audit committee of at least three members subject to certain phase-in exemptions, and all of our audit committee members are required to meet the independence and financial literacy tests established by the NYSE and the Exchange Act.

 

Committees of the Board of Directors

 

The board of directors of our general partner will have an audit committee and a conflicts committee, and may have such other committees as the board of directors shall determine from time to time. Each committee of the board of directors will have the composition and responsibilities described below.

 

Audit Committee

 

                             will serve as the initial member of our audit committee and the initial chair of our audit committee, and satisfies the SEC and NYSE rules regarding independence and as the audit committee financial expert. Our general partner will rely on the phase-in rules of the SEC and the NYSE with respect to the independence of our audit committee. Those rules permit our general partner to have an audit committee that has one independent member by the date our common units are first listed on the NYSE, a majority of independent members within 90 days thereafter and all independent members within one year thereafter. Our audit committee will assist the board of directors in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and corporate policies and controls. Our audit committee will have the sole authority to retain and terminate our independent registered public accounting firm, approve all auditing services and related fees and the terms thereof, and pre-approve any non-audit services to be rendered by our

 

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independent registered public accounting firm. Our audit committee will also be responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public accounting firm will be given unrestricted access to our audit committee.

 

Conflicts Committee

 

At least two members of the board of directors of our general partner will serve on our conflicts committee to review specific matters that may involve conflicts of interest in accordance with the terms of our partnership agreement. Our conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The members of our conflicts committee may not be officers or employees of our general partner or directors, officers, or employees of its affiliates, and must meet the independence and experience standards established by the NYSE and the Exchange Act to serve on an audit committee of a board of directors. In addition, the members of our conflicts committee may not own any interest in our general partner or any interest in us or our subsidiaries other than common units or awards under our incentive compensation plan. We anticipate that once appointed to our general partner’s board of directors, the additional independent members appointed to our audit committee will also serve on the conflicts committee. Any matters approved by our conflicts committee will be presumed to have been approved in good faith, will be deemed to be approved by all of our partners and will not be a breach by our general partner of any duties it may owe us or our unitholders.

 

Directors and Executive Officers of USD Partners GP LLC

 

Directors are elected by the sole member of our general partner and hold office until their successors have been elected or qualified or until their earlier death, resignation, removal or disqualification. Executive officers are appointed by, and serve at the discretion of, the board of directors. The following table shows information for the directors and executive officers of USD Partners GP LLC:

 

Name

  

Age

    

Position with USD Partners GP LLC

Dan Borgen

     53       Chairman of the Board, Chief Executive Officer and President

Paul Tucker

     74       Senior Vice President, Chief Operating Officer

Adam Altsuler

     40       Vice President, Chief Financial Officer

Chris Robbins

     42       Vice President, Chief Accounting Officer

Guillermo Sierra

     30       Vice President, Chief Strategy Officer and Head of M&A

Mike Curry

     60       Director

Sara Graziano

     31       Director Nominee

Douglas Kimmelman

     54       Director Nominee

Thomas Lane

     57       Director Nominee

Brad Sanders

     57       Director Nominee

 

Dan Borgen.    Mr. Borgen became Chief Executive Officer and President of our general partner in June 2014 and is a director nominee who will be appointed to the board of our general partner prior to the close of this offering and will serve as Chairman of the Board. Mr. Borgen is a co-founder of USD and its predecessor companies and has served as chairman, CEO and President of USD since its inception. Additionally, Mr. Borgen has served as President of U.S. Right-of-Way Corporation, a private company, since 1993. Prior to USD, Mr. Borgen worked for 11 years in investment banking in mergers and acquisitions, portfolio management and strategic planning. He began his career with a private investment firm focused on the oil and gas industry. Mr. Borgen has served on the board of directors of several corporations and currently serves on the board of Vertex Energy Inc., an environmental services company that recycles industrial waste streams and off-specification commercial chemical products. Active in several community organizations, he is chair of the USD Foundation and a trustee of Boys and Girls Club of America. Mr. Borgen received a degree in Petroleum Management and Finance from the University of Oklahoma. He was recognized by Goldman Sachs as one of 100 Most Intriguing Entrepreneurs in 2013. He is currently a finalist for Ernst and Young’s 2014 Gulf Coast Entrepreneur of the Year. We believe Mr. Borgen’s experience in founding and leading USD and its

 

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predecessors, along with his extensive business and leadership experience in the financial and energy industries qualifies him to be a member of the board.

 

Paul Tucker.    Mr. Tucker became Senior Vice President and Chief Operating Officer of our general partner in June 2014. Paul Tucker has been the Chief Operating Officer for USD since its inception and, as such, is responsible for the management of all company operating facilities. Mr. Tucker’s career in the rail transportation industry spans over 41 years and includes key senior leadership roles on the Union Pacific, Missouri Pacific and Port Terminal Railroad Association (PTRA). Mr. Tucker’s career also includes service on the board of directors of the Texas City Terminal (TCT), the Galveston, Houston and Henderson (GH&H), the Wichita Terminal Association (WTA) and the Houston Belt and Terminal (HBT) Railroads, on which he also served on the Executive Committee. Mr. Tucker received a BA in Psychology from Henderson State University and received post-graduate executive leadership development at the University of Pittsburgh and Eckerd College, St. Petersburg, Florida.

 

Adam Altsuler.    Mr. Altsuler became Vice President and Chief Financial Officer of our general partner in June 2014. Mr. Altsuler joined USD in April 2014 as Vice President, Finance and is primarily focused on corporate finance, capital markets and investor relations activities. From 2009 to 2014, Mr. Altsuler served in various leadership roles at Eagle Rock Energy Partners, a master limited partnership headquartered in Houston, Texas most recently serving as Vice President and Treasurer. Prior to joining Eagle Rock, Mr. Altsuler was an Investment Analyst at Kenmont Investments, an energy-focused hedge fund located in Houston, where he managed the fund’s master limited partnership investment portfolio from 2007 to 2009. Prior to Kenmont, Mr. Altsuler worked the majority of his career in investment banking with Donaldson, Lufkin and Jenrette/Credit Suisse First Boston and a boutique investment bank in Dallas and San Francisco. Mr. Altsuler graduated from the University of Texas at Austin with a BBA in Finance and received an MBA from Rice University, graduating Beta Gamma Sigma.

 

Chris Robbins.    Mr. Robbins became Vice President and Chief Accounting Officer of our general partner in June 2014. Mr. Robbins joined USD in August 2007 as Chief Accounting Officer and became Vice President, Chief Financial and Accounting Officer in June 2014. Mr. Robbins is primarily focused on corporate finance, accounting and reporting, planning and tax. Prior to joining USD, Mr. Robbins served as Director of Finance for SGS Group’s North American Oil, Gas & Chemicals Division from 1997 to 2007. Mr. Robbins is a Certified Public Accountant, Chartered Global Management Accountant, and holds a B.S. in Accounting from Grove City College in Pennsylvania.

 

Guillermo Sierra.    Mr. Sierra became Vice President, Chief Strategy Officer and Head of M&A of our general partner in June 2014. Mr. Sierra joined USD in September 2013 as Vice President, Head of Corporate Strategy and M&A and became Vice President, Chief Strategy Officer and Head of M&A in June 2014. Mr. Sierra is primarily focused on USD’s corporate and capital strategy, acquisitions and other capital markets activities. From September 2009 to September 2013, Mr. Sierra was part of the midstream/master limited partnership M&A team for Evercore Partners in Houston where he executed over 40 announced advisory and IPO transactions representing a combined total transaction value of over $90.0 billion. Prior to Evercore, Mr. Sierra was part of the Natural Resources Group of Barclays Capital, previously Lehman Brothers, where he executed numerous advisory engagements and capital markets transactions with a focus on midstream businesses and master limited partnerships. Mr. Sierra graduated Cum Laude from the Wharton School of the University of Pennsylvania, where he received a B.S. in Economics with concentrations in Finance and Operations & Information Management.

 

Mike Curry.    Mr. Curry is a member of the board of our general partner. Mr. Curry is co-founder of USD and its predecessor companies, and currently serves as Executive Vice President and Head of Finance and Risk. From 2006 to June 2014, Mr. Curry served as Chief Financial Officer of USD. Throughout the years he has been extensively involved with and directed numerous aspects of USD, including strategic planning, project development, construction and heading finance. Prior to USD, Mr. Curry served as Treasurer and Chief

 

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Accounting Officer for integrated oil and gas producer An-Son Corp., Oklahoma City from 1982 to 1985 and was employed by Arthur Andersen & Co. from 1978 to 1981. Mr. Curry is a Certified Public Accountant and holds a Master’s Degree in Accountancy from the University of Illinois. We believe that Mr. Curry’s extensive experience and involvement from the founding of USD to its present day operations, along with his accounting background, qualifies him to be a member of the board.

 

Sara Graziano.    Ms. Graziano is a Vice President at Energy Capital Partners. She is involved in all areas of the firm’s investment activities, including the midstream, oilfield services and power generation sectors. Ms. Graziano serves on the board of ProPetro Holding Corp. Prior to joining Energy Capital Partners in 2011, Ms. Graziano worked as a Summer Associate for Energy Capital Partners during business school. Prior to that, Ms. Graziano led the Strategies & Analysis group at FirstLight Power Enterprises, Inc., an Energy Capital Partners’ Fund I portfolio company from 2007 to 2009, focusing on commodity trading and hedging strategies and business development activities. Before joining FirstLight, Ms. Graziano spent four years at Charles River Associates, consulting for clients in the power and natural gas industries, with a particular focus on the development of proprietary tools for fundamental and statistical modeling of commodity prices and volatility. Ms. Graziano received a B.A. in Economics from Wellesley College and an M.B.A. from Harvard Business School where she was a Baker Scholar. We believe that Ms. Graziano’s extensive experience in the energy industry including her extensive involvement in Energy Capital Partners’ energy investment activities qualifies her to be a member of the board.

 

Douglas Kimmelman.     Mr. Kimmelman founded Energy Capital Partners in April 2005 and serves as its Senior Partner. Mr. Kimmelman currently serves on the boards of CE2 Carbon Capital, LLC, PLH Group, Inc. and Nesco Holdings, LP. Prior to founding Energy Capital, Mr. Kimmelman spent 22 years with Goldman Sachs, starting in 1983 in the firm’s Pipeline and Utilities Department within the Investment Banking Division. He remained exclusively focused on the energy and utility sectors in the Investment Banking Division until 2002 when he transferred to the firm’s J. Aron commodity group. He was named a General Partner of the firm in 1996. From 2002 to 2005, Mr. Kimmelman played a leadership role at Goldman Sachs in building a power generation asset portfolio through the J. Aron commodity group. Mr. Kimmelman received a B.A. in Economics from Stanford University and an M.B.A. from the Wharton School at the University of Pennsylvania. We believe Mr. Kimmelman’s experience as founder and Senior Partner of Energy Capital Partners, knowledge of the energy industry and his financial and business expertise qualifies him to be a member of the board.

 

Thomas Lane.     Mr. Lane is a Partner of Energy Capital Partners. He is involved in all areas of the firm’s investment activities, with a particular emphasis on the midstream sector. Mr. Lane serves on the boards of Summit Midstream Partners, LLC and Summit Midstream Partners, L.P. (NYSE: SMLP). Prior to realization, Mr. Lane served on the board of FirstLight Power Enterprises, Inc. and Cardinal Gas Storage Partners, LLC. Prior to joining Energy Capital in 2005, Mr. Lane worked for 17 years in the Investment Banking Division at Goldman Sachs. As a Managing Director at Goldman Sachs, Mr. Lane had senior-level coverage responsibility for electric and gas utilities, independent power companies and midstream gas companies throughout the United States. Mr. Lane received a B.A. in Economics from Wheaton College and an M.B.A. from the University of Chicago. We believe Mr. Lane’s affiliation with Energy Capital Partners, knowledge of the energy industry and his financial and business expertise qualifies him to be a member of the board.

 

Brad Sanders.    Mr. Sanders is a director nominee who will be appointed to the board of our general partner prior to the close of this offering. Mr. Sanders has been the Head of Market Strategy for USD since May 2014. Mr. Sanders’ main focus at USD is working with the leadership team to identify, develop and execute strategic commercial and market opportunities. Prior to USD, Mr. Sanders spent 32 years at Koch Industries where he was primarily responsible for building and managing several of Koch’s global trading businesses, including businesses in the crude oil, NGLs, distillates, gasoline and gasoline components, and plastics value chains. He is a 1979 Graduate of University of Kansas with a degree in business. He is a current Trustee for KU Endowment, and a current member for the KU Endowment Investment Committee. We believe Mr. Sanders’ extensive experience in the energy industry qualifies him to be a member of the board.

 

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Board Leadership Structure

 

The chief executive officer of our general partner will serve as the chairman of the board. The board of directors of our general partner has no policy with respect to the separation of the offices of chairman of the board of directors and chief executive officer. Instead, that relationship is defined and governed by the amended and restated limited liability company agreement of our general partner, which permits the same person to hold both offices. Directors of the board of directors of our general partner are designated or elected by USD. Accordingly, unlike holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business or governance, subject in all cases to any specific unitholder rights contained in our partnership agreement.

 

Special Approval Rights of Energy Capital Partners

 

For so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, USD will not, and will not permit its subsidiaries, including us and our general partner, to take or agree to take any of the following actions (or take or agree to take any action that is reasonably likely to require or result in any of the following actions) without the affirmative vote of the directors of USD appointed by Energy Capital Partners (or, with respect to distributions by us or our subsidiaries, the members of our general partner’s board of directors appointed by Energy Capital Partners):

 

   

any sale of USD, any subsidiary of USD, including us, or any of their assets (other than asset sales in the ordinary course of business), including by way of merger, consolidation, public offering or otherwise, other than to USD or a wholly owned subsidiary of USD;

 

   

(A) any capital contribution or issuance of or redemption of securities of USD or any subsidiary of USD, including us, (B) any issuance of profits interests in USD, (C) any distributions, except distributions by us and our subsidiaries (which distributions shall be subject to the affirmative vote of the members of our general partner’s board of directors appointed by Energy Capital Partners), (D) any incurrence or refinancing of indebtedness (whether directly, through a guaranty or otherwise) outside of the ordinary course of business, other than any incurrence or refinancing of indebtedness by us or our subsidiaries (which incurrences and refinancings shall be subject to the affirmative vote of the members of our general partner’s board of directors appointed by Energy Capital Partners), (E) any acquisition of securities of any other entity in excess of specified thresholds or (F) any making of any loan or advance to any entity other than a wholly owned subsidiary of USD;

 

   

the approval, modification or revocation of any budget or a material deviation from or a material expenditure not part of any such budget (including any material change with respect to the nature of any budgeted capital expenditure), other than the approval, modification or revocation of any budget related to us or our subsidiaries (which approvals, modifications or revocations shall be subject to the affirmative vote of the members of our general partner’s board of directors appointed by Energy Capital Partners);

 

   

(A) amending the organizational documents of USD in a manner adverse to the holders of the common membership interests of USD, (B) amending the organizational documents of any subsidiary of USD, including us (C) expanding the purpose of any of USD or any of its subsidiaries, including us, (D) causing or taking any action with the purpose or effect of causing the bankruptcy, liquidation, dissolution or winding up of USD or any of its subsidiaries, (E) making any material change to USD or any its subsidiaries’ federal tax treatment, (F) entering into or amending any transaction with any member of USD or their affiliates or (G) creating or materially amending any employee incentive plan; or

 

   

the determination of significant regulatory issues or litigation, including any decision to initiate, forego or settle any material litigation or arbitration, or the entering into discussions, or negotiations, with any governmental authority in connection with any investigation, proceedings or threatened investigation or proceedings, or any material inquiry.

 

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Energy Capital Partners’ Right to Sell USD or Its Interests in USD

 

At any time following the fifth anniversary of the date of Energy Capital Partners’ investment in USD, Energy Capital Partners, upon giving written notice, shall have the right to compel USD to effect the total sale of Energy Capital Partners’ interests in USD (an ECP Exit). Such a sale could include an acquisition by the remaining owners of USD of Energy Capital Partners’ interests in USD or an initial public offering of USD. If the ECP Exit has not been completed within 180 days of the date USD receives notice of Energy Capital Partners’ desire to sell, Energy Capital Partners shall have the right to compel USD to effect a total sale of USD pursuant to an auction process on terms and conditions determined by, and in a process managed by, the members of USD’s board of directors that are appointed by Energy Capital Partners, provided that certain conditions in connection with the sale are met.

 

Board Role in Risk Oversight

 

Our corporate governance guidelines will provide that the board of directors of our general partner is responsible for reviewing the process for assessing the major risks facing us and the options for their mitigation. This responsibility will be largely satisfied by our audit committee, which is responsible for reviewing and discussing with management and our registered public accounting firm our major risk exposures and the policies that management has implemented to monitor such exposures.

 

Executive Compensation

 

We and our general partner were formed in June 2014 and did not pay or accrue any obligations with respect to compensation for directors or officers for the 2013 fiscal year or for any prior period. In addition, we do not directly employ any of the persons responsible for managing our business. Our general partner, under the direction of its board of directors, is responsible for managing our operations and for obtaining the services of the employees that operate our business. However, we sometimes refer to the employees and officers of our general partner as our employees and officers in this prospectus.

 

The compensation payable to the officers of our general partner, who are employees of USD or its affiliates, is determined and paid by USD or its affiliates. Prior to the completion of this offering, we and our general partner will enter into an omnibus agreement with USD pursuant to which, among other matters:

 

   

USD and its affiliates will make available to our general partner the services of their employees who will serve as the executive officers of our general partner; and

 

   

Our general partner will reimburse USD and its affiliates for an allocated portion of the costs that they incur in providing compensation and benefits to their employees who provide services to our general partner, including executive officers.

 

Pursuant to the applicable provisions of our partnership agreement, we will reimburse our general partner for the costs it incurs in relation to the USD employees, including executive officers, who provide services to operate our business.

 

For 2013 and all prior periods, the individuals who served as executive officers of our business were employed by USD and, in addition to their responsibilities related to our business, also performed services for USD that were unrelated to us. For 2013, none of the individuals who served as executive officers of our business received in excess of $100,000 of total compensation with respect to their services that would pertain or be allocable to us. In addition, for Mr. Borgen, who was the principal executive officer of our business in 2013, no amounts of compensation were separately allocated to us and, following the consummation of this offering, we anticipate that he will devote substantially less than a majority of his working time to matters relating to our business, such that any compensation he receives in relation to services performed for us will not comprise a material amount of his total compensation. Following the consummation of this offering, compensation for all of

 

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our executive officers will continue to be determined and paid by USD or its affiliates, subject to partial reimbursement by us, as described above, except for awards that may be granted under our equity compensation plans, which are described below, which awards will be determined and granted by the board of directors of our general partner or one of its applicable committees.

 

For additional information, please refer to the discussion below under the heading “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

Compensation of Our Directors

 

Following the consummation of this offering, we expect our general partner to implement a director compensation policy for directors who are not officers, employees or paid consultants or advisors of us or our general partner. Such directors will receive an annual compensation package valued at approximately $200,000, of which one-third is expected to be paid in the form of a cash retainer and the remaining two-thirds is expected to be provided in the form of a unit-based award (with distribution equivalent rights) under the USD Partners LP 2014 Long-Term Incentive Plan. For additional information, please refer to the discussion below under the heading “Our Long-Term Incentive Plan.” The unit awards for our directors are each expected to vest in a single installment after one year. Such directors will also receive reimbursement for out-of-pocket expenses associated with attending board or committee meetings and director and officer liability insurance coverage. Officers, employees or paid consultants or advisors of us or our general partner or its affiliates who also serve as directors will not receive additional compensation for their service as directors. All directors will be indemnified by us for actions associated with being a director to the fullest extent permitted under Delaware law.

 

Our Long-Term Incentive Plan

 

Our general partner intends to adopt the USD Partners LP 2014 Long-Term Incentive Plan, or the LTIP, for officers, directors and employees of our general partner or its affiliates, and any consultants, affiliates of our general partner or other individuals who perform services for us. Our general partner may issue our executive officers and other service providers long-term equity based awards under the plan. These awards will be intended to compensate the recipients based on the performance of our common units and the recipient’s continued service during the vesting period, as well as to align recipients’ long-term interests with those of our unitholders. The plan will be administered by the board of directors of our general partner or any committee thereof that may be established for such purpose or to which the board of directors or such committee may delegate such authority, subject to applicable law. All determinations with respect to awards to be made under our LTIP will be made by the plan administrator and we will be responsible for the cost of awards granted under our LTIP. The following description reflects the terms that are currently expected to be included in the LTIP.

 

General

 

The LTIP will provide for the grant, from time to time at the discretion of the plan administrator or any delegate thereof, subject to applicable law, of unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit-based awards. The purpose of awards under the LTIP is to provide additional incentive compensation to employees any other individuals providing services to us, and to align the economic interests of such employees and individuals with the interests of our unitholders. The plan administrator may grant awards under the LTIP to reward the achievement of individual or partnership performance goals; however, no specific performance goals that might be utilized for this purpose have yet been determined. In addition, the plan administrator may grant awards under the LTIP without regard to performance factors or conditions. The LTIP will limit the number of units that may be delivered pursuant to vested awards to             common units, subject to proportionate adjustment in the event of unit splits and similar events. Common units subject to awards that are cancelled, forfeited, withheld to satisfy exercise prices or tax withholding obligations or otherwise terminated without delivery of the common units will be available for delivery pursuant to other awards.

 

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Restricted Units and Phantom Units

 

A restricted unit is a common unit that is subject to forfeiture. Upon vesting, the forfeiture restrictions lapse and the recipient holds a common unit that is not subject to forfeiture. A phantom unit is a notional unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or on a deferred basis upon specified future dates or events or, in the discretion of the plan administrator, cash equal to the fair market value of a common unit. The plan administrator of the LTIP may make grants of restricted and phantom units under the LTIP that contain such terms, consistent with the LTIP, as the plan administrator may determine are appropriate, including the period over which restricted or phantom units will vest. The plan administrator may, in its discretion, base vesting on the grantee’s completion of a period of service or upon the achievement of specified financial objectives or other criteria or upon a change of control (as defined in the LTIP) or as otherwise described in an award agreement.

 

Distributions made by us with respect to awards of restricted units may be subject to the same vesting requirements as the restricted units.

 

Distribution Equivalent Rights

 

The plan administrator, in its discretion, may also grant distribution equivalent rights, either as standalone awards or in tandem with other awards. Distribution equivalent rights are rights to receive an amount in cash, restricted units or phantom units equal to all or a portion of the cash distributions made on units during the period an award remains outstanding.

 

Unit Options and Unit Appreciation Rights

 

The LTIP may also permit the grant of options and appreciation rights covering common units. Unit options represent the right to purchase a number of common units at a specified exercise price. Unit appreciation rights represent the right to receive the appreciation in the value of a number of common units over a specified exercise price, either in cash or in common units. Unit options and unit appreciation rights may be granted to such eligible individuals and with such terms as the plan administrator may determine, consistent with the LTIP; however, a unit option or unit appreciation right must have an exercise price equal to at least the fair market value of a common unit on the date of grant.

 

Unit Awards

 

Awards covering common units may be granted under the LTIP with such terms and conditions, including restrictions on transferability, as the administrator of the LTIP may establish.

 

Profits Interest Units

 

Awards granted to grantees who are partners, or granted to grantees in anticipation of the grantee becoming a partner or granted as otherwise determined by the administrator, may consist of profits interest units. The administrator will determine the applicable vesting dates, conditions to vesting and restrictions on transferability and any other restrictions for profits interest awards.

 

Other Unit-Based Awards

 

The LTIP may also permit the grant of “other unit-based awards,” which are awards that, in whole or in part, are valued or based on or related to the value of a common unit. The vesting of an other unit-based award may be based on a participant’s continued service, the achievement of performance criteria or other measures. On vesting or on a deferred basis upon specified future dates or events, an other unit-based award may be paid in cash and/or in units (including restricted units), or any combination thereof as the plan administrator may determine.

 

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Source of Common Units

 

Common units to be delivered with respect to awards may be newly issued units, common units acquired by us or our general partner in the open market, common units already owned by our general partner or us, common units acquired by our general partner directly from us or any other person or any combination of the foregoing.

 

Anti-Dilution Adjustments and Change in Control

 

If an “equity restructuring” event occurs that could result in an additional compensation expense under applicable accounting standards if adjustments to awards under the LTIP with respect to such event were discretionary, the plan administrator will equitably adjust the number and type of units covered by each outstanding award and the terms and conditions of such award to equitably reflect the restructuring event and will adjust the number and type of units with respect to which future awards may be granted under the LTIP. With respect to other similar events, including, for example, a combination or exchange of units, a merger or consolidation or an extraordinary distribution of our assets to unitholders, that would not result in an accounting charge if adjustment to awards were discretionary, the plan administrator shall have discretion to adjust awards in the manner it deems appropriate and to make equitable adjustments, if any, with respect to the number of units available under the LTIP and the kind of units or other securities available for grant under the LTIP. Furthermore, upon any such event, including a change in control of us or our general partner, or a change in any law or regulation affecting the LTIP or outstanding awards or any relevant change in accounting principles, the plan administrator will generally have discretion to (i) accelerate the time of exercisability or vesting or payment of an award, (ii) require awards to be surrendered in exchange for a cash payment or substitute other rights or property for the award, (iii) provide for the award to assumed by a successor or one of its affiliates, with appropriate adjustments thereto, (iv) cancel unvested awards without payment or (v) make other adjustments to awards as the administrator deems appropriate to reflect the applicable transaction or event.

 

Termination of Service

 

The consequences of the termination of a grantee’s employment, membership on our general partner’s board of directors or other service arrangement will generally be determined by the plan administrator in the terms of the relevant award agreement.

 

Amendment or Termination of Long-Term Incentive Plan

 

The plan administrator, at its discretion, may terminate the LTIP at any time with respect to the common units for which a grant has not previously been made. The LTIP automatically terminates on the tenth anniversary of the date it was initially adopted by our general partner. The plan administrator also has the right to alter or amend the LTIP or any part of it from time to time or to amend any outstanding award made under the LTIP, provided that no change in any outstanding award may be made that would materially impair the vested rights of the participant without the consent of the affected participant or result in taxation to the participant under Section 409A of the Code.

 

Awards to Be Granted Under the LTIP

 

In the future, following the completion of this offering, we expect that our general partner will make grants of phantom units to certain of our executive officers and other key employees. These awards will be in amounts and subject to such terms and conditions, including vesting restrictions, which have not yet been determined.

 

Class A Units

 

Our partnership agreement authorized the issuance of 250,000 Class A Units. The Class A Units are limited partner interests in our partnership that entitle the holder to distributions that are equivalent to the distributions paid in respect of our common units (excluding any arrearages of unpaid minimum quarterly distributions from

 

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prior quarters). The Class A Units do not have voting rights and will vest in four equal annual installments over the first four years following the consummation of this offering only if we grow our annualized distributions each year. If we do not achieve positive distribution growth in any of these years, the Class A Units that would otherwise vest for that year will be forfeited. The Class A Units contain a conversion feature, which, upon the vesting of the Class A Units, provides for the conversion of the Class A Units into common units based on a conversion factor that will be tied to the level of our distribution growth for the applicable year. The conversion factor will not be more than 1.25 for the first vesting tranche, 1.5 for the second vesting tranche, 1.75 for the third vesting tranche and 2.0 for the last vesting tranche. The maximum number of common units into which the Class A Units could convert is 406,250. The material features of the Class A Units are described in more detail below.

 

Class A Unit Awards

 

In August 2014, the board of directors of our general partner granted 250,000 Class A Units to certain executive officers and other key employees of our general partner and its affiliates who provide services to us. The Class A Units are intended as long-term equity incentives for our executive officers and other key employees to align the economic interests of these executives and employees with the interests of our unitholders. By tying vesting and conversion rights of the Class A Units to annual distribution increases, the ultimate value attained by the Class A Unit holders is expected to correspond closely to annual distribution increases and capital appreciation for our public unitholders. The Class A Unit grants will also promote the retention of our key executives and employees as a result of the four year vesting schedule that will accompany these units and which are described below.

 

Vesting of Class A Units

 

The Class A Units are eligible to vest, subject to a holder’s continued employment, in four equal annual installments, each of which we refer to as a Class A Vesting Tranche. The first Class A Vesting Tranche is eligible to vest on the first business day following the making of our regular quarterly distribution in respect of the calendar quarter ended December 31, 2015 and each subsequent Class A Vesting Tranche is eligible to vest on the same business day in each subsequent year. The first Class A Vesting Tranche will vest only if our aggregate distributions for the four calendar quarters in 2015 exceed the greater of 100% of our minimum quarterly distribution on all of our outstanding common units, Class A Units, subordinated units and general partner units for 2015 and the for such period. Each subsequent Class A Vesting Tranche will vest only if our aggregate distributions for the succeeding year exceed the aggregate amount of our total distributions for the prior year. If we do not achieve the distribution growth required for an applicable installment of the Class A Units to vest, the Class A Unit holders will forfeit that installment without consideration. In the event a Class A Unit recipient’s employment is terminated without cause or the recipient resigns his or her employment for good reason, the Class A Units will fully vest on an accelerated basis as of the date of termination. The Class A Units will also fully vest upon a change in control of our partnership or upon the recipient’s death or termination of employment due to disability. Upon any other termination of employment prior to vesting, unless otherwise determined by our general partner’s board of directors, all unvested Class A Units would be forfeited. From and after the consummation of this offering (and unless and until the Class A Units are forfeited as a result of a termination of employment), the recipients have the right to receive distributions and all other rights relating to the Class A Units, regardless of whether or not the units are vested. The Class A Units will not convert to common units until the Class A Units have vested.

 

“Cause” when defined for purposes of the Class A Units generally means (i) an act of gross negligence or willful misconduct that adversely affects us or our affiliates, (ii) an act of fraud, theft or embezzlement, (iii) a conviction of or guilty or nolo contendere plea with respect to certain crimes, (iv) a breach of our or our affiliates material policies or (v) the refusal to perform reasonable duties following notice and opportunity to cure. “Good Reason” is generally defined as (x) a material diminution in duties or responsibilities, (y) a material diminution in base salary or (z) a relocation of principal place of employment by more than 50 miles, in each case subject to a notice and cure right for us or our affiliates.

 

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Distributions

 

The Class A Unit recipients will be entitled to the same distributions, on a per unit (one-for-one) basis, as the holders of our common units, except that Class A Units will not be entitled to receive any distributions that relate to arrearages of unpaid minimum quarterly distributions from prior quarters.

 

Conversion

 

The Class A Units will convert into our common units upon vesting of the Class A Units.

 

The number of common units into which the Class A Units will convert upon vesting will depend upon how much we have grown our annualized distribution over the greater of our aggregate minimum quarterly distributions for calendar year 2015 and our annualized distribution from the prior year (or, with respect to the first Class A Vesting Tranche, above our aggregate minimum quarterly distributions for calendar year 2015). If the Class A Units in a Class A Vesting Tranche vest but we grow our annualized distribution by less than 10%, the Class A Units in that Class A Vesting Tranche will convert into common units based upon a conversion factor of 1.0 as outlined in the table below. If we grow our annualized distribution by 10% or more, the Class A Units in that Class A Vesting Tranche will convert into common units based on a conversion factor of 1.25, 1.50, 1.75 or 2.0, depending on the Class A Vesting Tranche, as outlined in the table below:

 

Class A Vesting Tranche

   Conversion Factor if
Distributions grow
less than by 10%
     Conversion Factor if
Distributions grow
10% or more
 

First Class A Vesting Tranche

     1.0         1.25   

Second Class A Vesting Tranche

     1.0         1.50   

Third Class A Vesting Tranche

     1.0         1.75   

Fourth Class A Vesting Tranche

     1.0         2.0   

 

In the event that (i) a Class A Unit recipient’s employment is terminated without cause or due to his or her disability, (ii) the recipient resigns his or her employment for good reason, (iii) the recipient dies or (iv) there is a change in control of our partnership, then any Class A Units that vest as a result of such event will convert into common units based on the maximum conversion factor that could have applied to such Class A Units, as set forth in the table above.

 

The following table illustrates the number of common units into which the Class A Units would convert at different distribution growth levels, assuming each Class A Unit recipient remains continuously employed with us or our affiliates throughout the entire four year vesting period and no change in control of our partnership occurs.

 

Class A Vesting Tranche

   Total Class A
Units in Class A
Vesting Tranche
     Number of
common units if
no distribution
growth
     Number of
common units if
distribution
growth is
<10%
     Number of
common units if
distribution
growth is
³10%
 

First Class A Vesting Tranche

     62,500                 62,500         78,125   

Second Class A Vesting Tranche

     62,500                 62,500         93,750   

Third Class A Vesting Tranche

     62,500                 62,500         109,375   

Fourth Class A Vesting Tranche

     62,500                 62,500         125,000   

Totals:

     250,000                 250,000         406,250   

 

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SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth the beneficial ownership of units of USD Partners LP that will be issued upon the consummation of this offering and the related transactions and held by beneficial owners of 5.0% or more of the units, by each director of USD Partners GP LLC, our general partner, by each named executive officer and by all directors and officers of our general partner as a group and assumes no exercise of the underwriters’ over-allotment option to purchase additional common units.

 

The amounts and percentage of units beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. In computing the number of common units beneficially owned by a person and the percentage ownership of that person, common units subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of                 , 2014, if any, are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect to all units shown as beneficially owned by them, subject to community property laws where applicable. The percentage of units beneficially owned is based on a total of             common units 250,000 Class A Units and             subordinated units outstanding immediately following this offering.

 

The following table does not include any common units that officers, directors, employees and certain other persons associated with us purchase in this offering through the directed unit program described under “Underwriting.”

 

Name of Beneficial Owner(1)

  Common
Units to Be
Beneficially
Owned
  Percentage
of Common
Units to Be
Beneficially
Owned
  Class A
Units to Be
Beneficially
Owned
  Percentage of
Class A Units
to Be

Beneficially
Owned
  Subordinated
Units to Be
Beneficially
Owned
  Percentage of
Subordinated
Units to Be
Beneficially
Owned
  Percentage
of Total
Common
Units, Class A
Units and
Subordinated
Units to Be
Beneficially
Owned

US Development Group LLC(2)

             

USD Holdings, LLC(3)

             

Energy Capital Partners III, LP(4)(5)

             

Energy Capital Partners III-A, LP(4)(5)

             

Energy Capital Partners III-B, LP(4)(5)

             

Energy Capital Partners III-C, LP(4)(5)

             

Directors/Named Executive Officers

             

Dan Borgen

             

Mike Curry

             

Sara Graziano

             

Douglas Kimmelman

             

Thomas Lane

             

Brad Sanders

             

All Directors and Executive Officers as a group (7 persons)

             

 

(1)   Unless otherwise indicated, the address for all beneficial owners in this table is 811 Main Street, Suite 2800, Houston, TX 77002.

 

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(2)   USD, assuming the underwriters’ over-allotment option to purchase additional common units from us is not exercised, is the indirect owner of                 common units and                 subordinated units. USD is the parent company of USD Group LLC and is the sole owner of the member interests of our general partner. USD Group LLC is managed by USD. USD is deemed the indirect beneficial owner of the units held by USD Group LLC. USD is managed by a seven person board of directors that includes Dan Borgen, Mike Curry, James Hutson-Wiley, Sara Graziano, Douglas Kimmelman, Thomas Lane and Al Crown. The board of directors of USD exercises voting and dispositive power over the units held by USD Group LLC , and acts by majority vote, with the exception of certain veto rights held by the three directors appointed by Energy Capital Partners. Please read “Management—Special Approval Rights of Energy Capital Partners.” Ms. Graziano and Messrs. Borgen, Curry, Hutson-Wiley, Kimmelman, Lane and Crown are thus not deemed to have beneficial ownership of the units owned by USD Group LLC.
(3)   USD Holdings, LLC is a member of USD and may therefore be deemed to beneficially own the              common units and              subordinated units held by USD. As holders of a         % voting interest of USD, USD Holdings, LLC is entitled to elect three directors of USD. USD Holdings LLC is managed by a two managers, Mike Curry and James Hutson-Wiley. Neither Mr. Curry nor Mr. Hutson-Wiley are deemed to beneficially own, and they disclaim beneficial ownership of, any common units or subordinated units held by our general partner or USD.
(4)   The address for this person or entity is 51 John F. Kennedy Parkway, Suite 200, Short Hills, New Jersey 07078.
(5)   The Energy Capital Partners funds are members of USD and may therefore be deemed to beneficially own              common units and              subordinated units held by USD. As holders of a         % voting interest of USD, the Energy Capital Partners funds are entitled to elect three directors of USD and have veto rights over certain actions by USD and its subsidiaries. Douglas Kimmelman, Thomas Lane and Sara Graziano are each member of the board of directors of our general partner. In addition, Mr. Kimmelman is a managing member and partner, and Mr. Lane is a managing member and partner, at Energy Capital Partners III, LLC, the general partner of the general partner of the Energy Capital Partners funds. None of Mr. Kimmelman, Mr. Lane nor Ms. Graziano are deemed to beneficially own, and they disclaim beneficial ownership of, any common units or subordinated units held by our general partner or USD.
*   The percentage of units beneficially owned by each director or each executive officer does not exceed 1.0% of the common units outstanding. The percentage of units beneficially owned by all directors and executive officers as a group does not exceed 1.0% of the common units outstanding.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

After this offering, USD Group LLC will own              common units and subordinated units representing a     % limited partner interest in us (or     % if the underwriters’ option to purchase additional common units is exercised in full). In addition, our general partner will own              general partner units representing a 2.0% general partner interest in us.

 

Distributions and Payments to Our General Partner and Its Affiliates

 

The following table summarizes the distributions and payments to be made by us to our general partner and its affiliates in connection with the formation, ongoing operation, and liquidation of USD Partners LP. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm’s-length negotiations.

 

Formation Stage

 

The consideration received by our general partner and its affiliates prior to or in connection with this offering for the contribution of the assets and liabilities to us

             common units;

 

               subordinated units;

 

               general partner units representing a 2.0% general partner interest in us;

 

  the incentive distribution rights; and

 

  $         million cash distribution of the net proceeds of the offering.

 

Operational Stage

 

Distributions of available cash to our general partner and its affiliates

We will generally make cash distributions of 98.0% to the unitholders pro rata, including USD Group LLC, as holder of an aggregate of              common units and              subordinated units, and 2.0% to our general partner, assuming it makes any capital contributions necessary to maintain its 2.0% general partner interest in us. In addition, if distributions exceed the minimum quarterly distribution and target distribution levels, the incentive distribution rights held by our general partner will entitle USD Group LLC to increasing percentages of the distributions, up to 48.0% of the distributions above the highest target distribution level.

 

  Additionally, certain executive officers and other key employees of our general partner and its affiliates who provide services to us own 250,000 Class A Units that may be convertible into our common units, as described in “Management—Class A Units.”

 

  Assuming we have sufficient available cash to pay the full minimum quarterly distribution on all of our outstanding units for four quarters, USD Group LLC, our general partner and their affiliates would receive an annual distribution of approximately $         million on the 2.0% general partner interest and $         million on their common units and subordinated units.

 

  Holders of our Class A Units would receive an annualized distribution of approximately $         million on their Class A Units.

 

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Payments to our general partner and its affiliates

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement, our general partner determines the amount of these expenses and such determinations must be made in good faith under the terms of our partnership agreement. Under our omnibus agreement, we will pay to USD Group LLC an annual fee for the provision of various centralized administrative services for our benefit. We will also reimburse USD Group LLC for any additional out-of-pocket costs and expenses incurred by USD Group LLC and its affiliates in providing general and administrative expenses associated with our terminals to us. For the twelve months ending September 30, 2015, we estimate that these expenses, including the annual fee, will be approximately $     million, which includes, among other items, compensation expense for all employees required to manage and operate our business. Please read “—Agreements Governing the Transactions—Omnibus Agreement” below and “Management—Executive Compensation.”

 

Withdrawal or removal of our general partner

If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. Please read “Our Partnership Agreement—Withdrawal or Removal of Our General Partner.”

 

Liquidation Stage

 

Liquidation

Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their respective capital account balances.

 

Agreements Governing the Transactions

 

We and other parties have entered into or will enter into the various agreements that will affect the transactions, including the vesting of assets in, and the assumption of liabilities by, us and our subsidiaries, and the application of the proceeds of this offering. While not the result of arm’s-length negotiations, we believe the terms of all of our initial agreements with USD Group LLC will be generally no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. All of the transaction expenses incurred in connection with these transactions, including the expenses associated with transferring assets into our subsidiaries, will be paid for with the proceeds of this offering.

 

Omnibus Agreement

 

At the closing of this offering, we will enter into an omnibus agreement with USD and USD Group LLC, certain of our subsidiaries and our general partner that will address the following matters:

 

   

our payment of an annual amount to USD Group LLC, initially in the amount of approximately $             million, for providing certain general and administrative services by USD Group LLC and its affiliates, which annual amount includes a fixed annual fee of $2.5 million for providing certain executive management services by certain officers of our general partner. Other portions of this annual amount will be based on the costs actually incurred by USD Group LLC and its affiliates in providing the services;

 

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our right of first offer to acquire the Hardisty Phase II and Hardisty Phase III projects as well as other additional midstream infrastructure assets and businesses that USD and USD Group LLC may construct or acquire in the future;

 

   

our obligation to reimburse USD Group LLC for any out-of-pocket costs and expenses incurred by USD Group LLC in providing general and administrative services (which reimbursement is in addition to certain expenses of our general partner and its affiliates that are reimbursed under our partnership agreement), as well as any other out-of-pocket expenses incurred by USD Group LLC on our behalf;

 

   

an indemnity by USD Group LLC for certain environmental and other liabilities, and our obligation to indemnify USD Group LLC and its subsidiaries for events and conditions associated with the operation of our assets that occur after the closing of this offering and for environmental liabilities related to our assets to the extent USD Group LLC is not required to indemnify us; and

 

   

so long as USD Group LLC controls our general partner, the omnibus agreement will remain in full force and effect. If USD Group LLC ceases to control our general partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.

 

Payment of Annual Fee and Reimbursement of Expenses

 

We will pay USD Group LLC, in equal monthly installments, the annual amount USD Group LLC estimates will be payable by us to USD Group LLC during that calendar year for providing services for our benefit. The omnibus agreement provides that this amount may be adjusted annually to reflect, among other things, changes in the scope of the general and administrative services provided to us due to a contribution, acquisition or disposition of assets by us or our subsidiaries or for changes in any law, rule or regulation applicable to us affecting the cost of providing the general and administrative services. We will reimburse USD Group LLC for any out-of-pocket costs and expenses incurred by USD Group LLC in providing general and administrative services to us. This reimbursement will be in addition to our reimbursement of our general partner and its affiliates for certain costs and expenses incurred on our behalf for managing and controlling our business and operations as required by our partnership agreement.

 

Right of First Offer

 

Under the omnibus agreement, until the 7th anniversary of the closing of this offering, prior to engaging in any negotiation regarding the sale, transfer or disposition of (i) the Hardisty Phase II project, (ii) the Hardisty Phase III project or (iii) any other midstream infrastructure assets and business that USD or USD Group LLC may develop, construct or acquire, USD or USD Group LLC will deliver a written notice to us setting forth the material terms and conditions upon which USD or USD Group LLC would sell or transfer such assets or businesses to us. Following the receipt of such notice, we will have 60 days to determine whether the asset is suitable for our business at that particular time, and to propose a transaction with USD or USD Group LLC. We and USD or USD Group LLC will then have 60 days to negotiate in good faith to reach an agreement on such transaction. If we and USD or USD Group LLC, as applicable, are unable to agree on such terms during such 60-day period, then USD or USD Group LLC, as applicable, may transfer such asset to any third party during a 180-day period following the expiration of such 60-day period on terms generally no less favorable to the third party than those included in the written notice.

 

Our decision to make any offer will require the approval of the conflicts committee of the board of directors of our general partner. The consummation and timing of any acquisition by us of the assets covered by our right of first offer will depend on, among other things, USD or USD Group LLC’s decision to sell an asset covered by our right of first offer, our ability to reach an agreement with USD or USD Group LLC on price and other terms and our ability to obtain financing on acceptable terms. Accordingly, we can provide no assurance whether, when or on what terms we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and USD or USD Group LLC are under no obligation to accept any offer that we may choose to make.

 

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Additionally, the approval of Energy Capital Partners is required for the sales or acquisitions of any assets by USD or its subsidiaries, including us, which exceed specified materiality thresholds. Energy Capital Partners may make these decisions free of any duty to us and our unitholders. This approval would be required for the potential acquisition by us of the Hardisty Phase II and Hardisty Phase III projects, as well as any other projects or assets that USD may develop or acquire in the future or any third party acquisition we may intend to pursue jointly or independently from USD. Energy Capital Partners is under no obligation to approve any such transaction. Please read “Management—Special Approval Rights of Energy Capital Partners.”

 

Indemnification

 

Under the omnibus agreement, USD Group LLC will indemnify us for all known and certain unknown environmental liabilities that are associated with the ownership or operation of our assets and due to occurrences on or before the closing of this offering. Indemnification for any unknown environmental liabilities will be limited to liabilities due to occurrences on or before the closing of this offering and identified prior to the third anniversary of the closing of this offering, and will be subject to an aggregate deductible of $500,000 before we are entitled to indemnification. There will be a $10.0 million cap on the amount for which USD Group LLC will indemnify us under the omnibus agreement with respect to environmental claims once we meet the deductible, if applicable. USD Group LLC will also indemnify us for certain defects in title to the assets contributed to us and failure to obtain certain consents, licenses and permits necessary to conduct our business, including the cost of curing any such condition and certain tax liabilities attributable to the operation of the assets contributed to us prior to the time they were contributed.

 

USD Group LLC will also indemnify us for liabilities, subject to an aggregate deductible of $500,000, relating to:

 

   

the assets contributed to us, other than environmental liabilities, that arise out of the ownership or operation of the assets prior to the closing of this offering and that are asserted prior to the third anniversary of the closing of this offering;

 

   

events and conditions associated with any assets retained by USD Group LLC; and

 

   

all tax liabilities attributable to the assets contributed to us arising prior to the closing of this offering or otherwise related to USD Group LLC’s contribution of those assets to us in connection with this offering.

 

Other Agreements with USD Group LLC and Related Parties

 

Terminal Services Agreement

 

We have entered into a terminal services agreement with USD Marketing LLC, a wholly owned subsidiary of USD Group LLC, to provide terminalling services at our Hardisty rail terminal. This agreement has an initial contract term of five years that will commence on October 1, 2014. The terms and conditions of this agreement are similar to the terms and conditions of third-party terminal services agreements at the Hardisty rail terminal. Please read “Business—Hardisty Rail Terminal Services Agreements.” The aggregate payment under this agreement will be approximately $40.0 million Canadian dollars over the agreement’s five-year term.

 

Purchase and Sale Agreement

 

Prior to the closing of this offering, our subsidiary that owns the Hardisty rail terminal will enter into a Purchase and Sale Agreement with a subsidiary of USD Group pursuant to which:

 

   

our subsidiary will agree to sell and transfer to USD Group’s subsidiary approximately 320 acres of undeveloped land currently owned by our subsidiary and located immediately to the north of the Hardisty rail terminal;

 

   

USD Group’s subsidiary will deliver to our subsidiary a note for the entire purchase price, the only condition for the payment obligations under the note being the transfer and conveyance of the

 

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undeveloped land from our subsidiary to USD Group’s subsidiary, free and clear of all monetary liens and encumbrances. Prior to the closing of this offering, our subsidiary will distribute its interest in this note and the note will be held by USD Group;

 

   

our subsidiary will agree to transfer and convey fee simple title to the undeveloped land to USD Group’s subsidiary, free and clear of all monetary liens, as soon as practicable following the closing of this offering; and

 

   

concurrently with the transfer and conveyance of the undeveloped land from our subsidiary to USD Group’s subsidiary, our subsidiary and USD Group’s subsidiary will enter into the development rights and cooperation agreement described below.

 

Development Rights and Cooperation Agreement

 

In connection with the transfer and conveyance of the undeveloped land under the Purchase and Sale Agreement described above, our subsidiary that owns the Hardisty rail terminal will enter into a Development Rights and Cooperation Agreement with USD Group pursuant to which:

 

   

our subsidiary will to grant to USD Group the right to develop, construct and operate certain aspects of the Hardisty Phase II and Phase III projects in, on, over, across and under the property on which the Hardisty rail terminal is located, including the exclusive right to develop and construct such expansions for a period of seven years after the closing of this offering;

 

   

our subsidiary will grant to USD Group the right to use (both on a temporary and permanent basis) certain portions of the property on which the Hardisty rail terminal is located in connection with the development, construction and operation of the Hardisty Phase II and Phase III projects;

 

   

our subsidiary will cooperate with USD Group in connection with the development, construction and operation of the Phase II and Phase III projects;

 

   

our subsidiary will enter into such further agreements or instruments with or for the benefit of USD Group and any land owned by USD Group (including the undeveloped land being acquired by USD Group under the Purchase and Sale Agreement described above) and will grant further rights in, on, over, across and under the property on which the Hardisty rail terminal is located to or for the benefit of USD Group and any land owned by USD Group (including the undeveloped land being acquired by USD Group under the Purchase and Sale Agreement described above), as USD Group ‘may reasonably request in connection with the Phase II and/or Phase II projects;

 

   

both the Phase II and Phase III projects will be at the sole cost and expense of USD Group, and will be subject to the observance by USD Group of certain customary construction-related requirements and obligations; and

 

   

all improvements constructed or installed by USD Group in connection with the Phase II and/or Phase III projects will be owned by USD Group and USD Group will be entitled to grant liens on such improvements and/or in and to any rights acquired by USD Group under the Development Rights and Cooperation Agreement.

 

Procedures for Review, Approval and Ratification of Related Person Transactions

 

The board of directors of our general partner will adopt a related party transactions policy in connection with the closing of this offering that will provide that the board of directors of our general partner or its authorized committee will review on at least a quarterly basis all related person transactions that are required to be disclosed under SEC rules and, when appropriate, initially authorize or ratify all such transactions. In the event that the board of directors of our general partner or its authorized committee considers ratification of a related person transaction and determines not to so ratify, the code of business conduct and ethics will provide that our management will make all reasonable efforts to cancel or annul the transaction.

 

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The related party transactions policy will provide that, in determining whether or not to recommend the initial approval or ratification of a related person transaction, the board of directors of our general partner or its authorized committee should consider all of the relevant facts and circumstances available, including (if applicable) but not limited to: (i) whether there is an appropriate business justification for the transaction; (ii) the benefits that accrue to us as a result of the transaction; (iii) the terms available to unrelated third parties entering into similar transactions; (iv) the impact of the transaction on a director’s independence (in the event the related person is a director, an immediate family member of a director or an entity in which a director or an immediate family member of a director is a partner, shareholder, member or executive officer); (v) the availability of other sources for comparable products or services; (vi) whether it is a single transaction or a series of ongoing, related transactions; and (vii) whether entering into the transaction would be consistent with the code of business conduct and ethics.

 

The related party transactions policy described above will be adopted in connection with the closing of this offering, and as a result the transactions described above were not reviewed under such policy.

 

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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

 

Conflicts of Interest

 

Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its affiliates, including USD, on the one hand, and us and our limited partners, on the other hand. The directors and officers of our general partner have fiduciary duties to manage our general partner in a manner beneficial to USD. At the same time, our general partner has a duty to manage our partnership in a manner it believes is in our best interests. Our partnership agreement specifically defines the remedies available to unitholders for actions taken that, without these defined liability standards, might constitute breaches of fiduciary duty under applicable Delaware law. The Delaware Revised Uniform Limited Partnership Act, which we refer to as the Delaware Act, provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to the limited partners and the partnership.

 

Whenever a conflict arises between our general partner or its affiliates, on the one hand, and us or our limited partners, on the other hand, the resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all our limited partners and shall not constitute a breach of our partnership agreement, of any agreement contemplated thereby or of any duty, if the resolution or course of action in respect of such conflict of interest is:

 

   

approved by the conflicts committee of our general partner, although our general partner is not obligated to seek such approval; or

 

   

approved by the holders of a majority of the outstanding common units, excluding any such units owned by our general partner or any of its affiliates, although our general partner is not obligated to seek such approval.

 

Our general partner may, but is not required to, seek the approval of such resolutions or courses of action from the conflicts committee of its board of directors or from the holders of a majority of the outstanding common units as described above. If our general partner does not seek approval from the conflicts committee or from holders of common units as described above and the board of directors of our general partner takes or declines the course of action taken with respect to the conflict of interest, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of us or any of our unitholders, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, the board of directors of our general partner or the conflicts committee of the board of directors of our general partner may consider any factors they determine in good faith to consider when resolving a conflict. An independent third-party is not required to evaluate the resolution. Under our partnership agreement, a determination, other action or failure to act by our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) will be deemed to be “in good faith” unless our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) believed such determination, other action or failure to act was adverse to the interests of the partnership. Please read “Management—Management of USD Partners LP—Conflicts Committee” for information about the conflicts committee of our general partner’s board of directors.

 

Conflicts of interest could arise in the situations described below, among others.

 

Actions taken by our general partner may affect the amount of cash available to pay distributions to unitholders or accelerate the right to convert subordinated units.

 

The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:

 

   

amount and timing of asset purchases and sales;

 

   

cash expenditures;

 

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borrowings;

 

   

entry into and repayment of current and future indebtedness;

 

   

issuance of additional units; and

 

   

the creation, reduction or increase of reserves in any quarter.

 

In addition, borrowings by us and our affiliates do not constitute a breach of any duty owed by our general partner to our unitholders, including borrowings that have the purpose or effect of:

 

   

enabling our general partner or its affiliates to receive distributions on any subordinated units held by them or the incentive distribution rights; or

 

   

hastening the expiration of the subordination period.

 

In addition, our general partner may use an amount, initially equal to $     million, which would not otherwise constitute operating surplus, in order to permit the payment of distributions on subordinated units and the incentive distribution rights. All of these actions may affect the amount of cash or equity distributed to our unitholders and our general partner and may facilitate the conversion of subordinated units into common units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

For example, in the event we have not generated sufficient cash from our operations to pay the minimum quarterly distribution on our common units, Class A Units and our subordinated units, our partnership agreement permits us to borrow funds, which would enable us to make such distribution on all outstanding units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Operating Surplus and Capital Surplus—Operating Surplus.”

 

The directors and officers of USD have a fiduciary duty to make decisions in the best interests of the owners of USD, including Energy Capital Partners, which may be contrary to our interests.

 

Because certain officers and certain directors of our general partner are also directors and/or officers of affiliates of our general partner, including USD, they have fiduciary duties to USD that may cause them to pursue business strategies that disproportionately benefit USD or which otherwise are not in our best interests.

 

Furthermore, for so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, USD will not, and will not permit its subsidiaries, including us and our general partner, to, take or agree to take certain actions without the affirmative vote of the directors appointed by Energy Capital Partners including, among others, any acquisitions or dispositions and any issuance of additional equity interests in us. Energy Capital Partners may make these decisions free of any duty to us our our unitholders. Please read “Management—Special Approval Rights of Energy Capital Partners.”

 

Our general partner is allowed to take into account the interests of parties other than us, such as USD, in exercising certain rights under our partnership agreement.

 

Our partnership agreement contains provisions that permissibly reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its call right, its voting rights with respect to any units it owns, its registration rights and its determination whether or not to consent to any merger or consolidation.

 

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Our partnership agreement limits the liability of, and replaces the duties owed by, our general partner and also restricts the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty.

 

In addition to the provisions described above, our partnership agreement contains provisions that restrict the remedies available to our unitholders for actions that might otherwise constitute breaches of fiduciary duty. For example, our partnership agreement provides that:

 

   

our general partner shall not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed that the decision was not adverse to the interests of our partnership;

 

   

our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those other persons acted in bad faith or, in the case of a criminal matter, acted with knowledge that its conduct was criminal; and

 

   

in resolving conflicts of interest, it will be presumed that in making its decision the general partner, the board of directors of the general partner or the conflicts committee of the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.

 

By purchasing a common unit, a common unitholder will agree to become bound by the provisions in our partnership agreement, including the provisions discussed above. Please read “—Fiduciary Duties.”

 

Common unitholders have no right to enforce obligations of our general partner and its affiliates under agreements with us.

 

Any agreements between us, on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

 

Contracts between us, on the one hand, and our general partner and its affiliates, on the other, are not and will not be the result of arm’s-length negotiations.

 

Neither our partnership agreement nor any of the other agreements, contracts and arrangements between us and our general partner and its affiliates are or will be the result of arm’s-length negotiations. Our general partner will determine, in good faith, the terms of any of such future transactions.

 

Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.

 

Under our partnership agreement, our general partner has full power and authority to do all things, other than those items that require unitholder approval, necessary or appropriate to conduct our business including, but not limited to, the following actions:

 

   

expending, lending, or borrowing money, assuming, guaranteeing, or otherwise contracting for, indebtedness and other liabilities, issuing evidences of indebtedness, including indebtedness that is convertible into our securities, and incurring any other obligations;

 

   

preparing and transmitting tax, regulatory and other filings, periodic or other reports to governmental or other agencies having jurisdiction over our business or assets;

 

   

acquiring, disposing, mortgaging, pledging, encumbering, hypothecating, or exchanging our assets or merging or otherwise combining us with or into another person;

 

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negotiating, executing and performing contracts, conveyance or other instruments;

 

   

distributing cash;

 

   

selecting or dismissing employees and agents, outside attorneys, accountants, consultants and contractors and determining their compensation and other terms of employment or hiring;

 

   

maintaining insurance for our benefit;

 

   

forming, acquiring an interest in, and contributing property and loaning money to, any further limited partnerships, joint ventures, corporations, limited liability companies or other relationships;

 

   

controlling all matters affecting our rights and obligations, including bringing and defending actions at law or in equity or otherwise litigating, arbitrating or mediating, and incurring legal expense and settling claims and litigation;

 

   

indemnifying any person against liabilities and contingencies to the extent permitted by law;

 

   

purchasing, selling or otherwise acquiring or disposing of our partnership interests, or issuing additional options, rights, warrants, appreciation rights, phantom or tracking interests relating to our partnership interests; and

 

   

entering into agreements with any of its affiliates to render services to us or to itself in the discharge of its duties as our general partner.

 

Please read “Our Partnership Agreement” for information regarding the voting rights of unitholders.

 

Common units are subject to USD Group LLC’s call right.

 

If at any time USD Group LLC and its controlled affiliates own more than 80% of the then-issued and outstanding limited partner interests of any class, USD Group LLC will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at the market price calculated in accordance with the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. USD Group LLC is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. USD Group LLC may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. Please read “Our Partnership Agreement—Limited Call Right.”

 

We may not choose to retain separate counsel for ourselves or for the holders of common units.

 

The attorneys, independent accountants and others who perform services for us have been retained by our general partner. Attorneys, independent accountants and others who perform services for us are selected by our general partner or the conflicts committee of the board of directors of our general partner and may perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the conflict committee in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending on the nature of the conflict, although we may choose not to do so.

 

Our general partner’s affiliates, and Energy Capital Partners and its affiliates, may compete with us, and neither our general partner nor its affiliates nor Energy Capital Partners and its affiliates have any obligation to present business opportunities to us.

 

Our partnership agreement provides that our general partner is restricted from engaging in any business other than those incidental to its ownership of interests in us. However, neither affiliates of our general partner nor Energy Capital Partners or its affiliates are prohibited from engaging in other businesses or activities,

 

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including those that might be in direct competition with us, and may acquire, construct or dispose of assets in the future without any obligation to offer us the opportunity to acquire those assets. In addition, under our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to our general partner and its affiliates. As a result, neither our general partner, any of its affiliates nor Energy Capital Partners have any obligation to present business opportunities to us.

 

The holder or holders of our incentive distribution rights may elect to cause us to issue common units to it in connection with a resetting of incentive distribution levels without the approval of our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

 

The holder or holders of a majority of our incentive distribution rights (initially our sponsor) have the right, at any time when there are no subordinated units outstanding and they have received incentive distributions at the highest level to which they are entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution levels at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the cash distribution per common unit for the fiscal quarter immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

We anticipate that our sponsor would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per unit without such conversion. However, our sponsor may transfer the incentive distribution rights at any time. It is possible that our general partner or a transferee could exercise this reset election at a time when we are experiencing declines in our aggregate cash distributions or at a time when the holders of the incentive distribution rights expect that we will experience declines in our aggregate cash distributions in the foreseeable future. In such situations, the holders of the incentive distribution rights may be experiencing, or may expect to experience, declines in the cash distributions it receives related to the incentive distribution rights and may therefore desire to be issued our common units, which are entitled to specified priorities with respect to our distributions and which therefore may be more advantageous for them to own in lieu of the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued new common units to the holders of the incentive distribution rights in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner Interest and Incentive Distribution Rights.”

 

Fiduciary Duties

 

Duties owed to unitholders by our general partner are prescribed by law and in our partnership agreement. The Delaware Act provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership.

 

Our partnership agreement contains various provisions that eliminate and replace the fiduciary duties that might otherwise be owed by our general partner. We have adopted these provisions to allow our general partner or its affiliates to engage in transactions with us that otherwise might be prohibited by state law fiduciary standards and to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. We believe this is appropriate and necessary because the board of directors of our general partner has a duty to manage our partnership in good faith and a duty to manage our general partner in a manner beneficial to its owner. Without these modifications, our general partner’s ability to make decisions involving conflicts of interest would be restricted. Replacing the fiduciary duty standards in this manner benefits our general partner by enabling it to take into consideration all parties involved in the proposed action. Replacing the fiduciary duty standards also strengthens the ability of our general partner to attract and retain experienced and

 

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capable directors. Replacing the fiduciary duty standards represents a detriment to our public unitholders because it restricts the remedies available to our public unitholders for actions that, without those limitations, might constitute breaches of fiduciary duty, as described below, and permits our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interests.

 

The following is a summary of the material restrictions of the fiduciary duties owed by our general partner to the limited partners:

 

State law fiduciary duty standards

Fiduciary duties are generally considered to include an obligation to act in good faith and with due care and loyalty. The duty of care, in the absence of a provision in a partnership agreement providing otherwise, would generally require a general partner to act for the partnership in the same manner as a prudent person would act on his own behalf. The duty of loyalty, in the absence of a provision in a partnership agreement providing otherwise, would generally require that any action taken or transaction engaged in be entirely fair to the partnership.

 

Partnership agreement modified standards

Our partnership agreement contains provisions that waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues as to compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that when our general partner is acting in its capacity as our general partner, as opposed to in its individual capacity, it must act in “good faith” and will not be subject to any higher standard under applicable law. In addition, when our general partner is acting in its individual capacity, as opposed to in its capacity as our general partner, it may act without any fiduciary obligation to us or the unitholders whatsoever. These standards replace the obligations to which our general partner would otherwise be held.

 

  Our partnership agreement generally provides that our general partner will not be in breach of its obligations with respect to transactions with our affiliates and resolutions of conflicts of interest if such transaction or resolution is approved by the conflicts committee of our general partner’s board of directors or approved by the vote of a majority of the outstanding common units (excluding any common units owned by our general partner or any of its affiliates). If approval of the conflicts committee is sought, then it will be presumed that, in making its decision, the conflicts committee acted in good faith.

 

  If our general partner does not obtain approval from the conflicts committee of the board of directors of our general partner or our common unitholders, excluding any such units owned by our general partner or its affiliates, and the board of directors of our general partner takes or declines the course of action taken with respect to the conflict of interest, then it will be presumed that, in making its decision, its board, which may include board members affected by the conflict of interest, acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. These standards replace the obligations to which our general partner would otherwise be held.

 

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Rights and remedies of unitholders

The Delaware Act generally provides that a limited partner may institute legal action on behalf of the partnership to recover damages from a third-party where a general partner has refused to institute the action or where an effort to cause a general partner to do so is not likely to succeed. These actions include actions against a general partner for breach of its duties or of our partnership agreement. In addition, the statutory or case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the limited partners.

 

  The Delaware Act provides that, unless otherwise provided in a partnership agreement, a partner or other person shall not be liable to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement for breach of fiduciary duty for the partner’s or other person’s good faith reliance on the provisions of the partnership agreement. Under our partnership agreement, to the extent that, at law or in equity an indemnitee has duties (including fiduciary duties) and liabilities relating thereto to us or to our partners, our general partner and any other indemnitee acting in connection with our business or affairs shall not be liable to us or to any partner for its good faith reliance on the provisions of our partnership agreement.

 

By purchasing our common units, each common unitholder automatically agrees to be bound by the provisions in our partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited partner to sign a partnership agreement does not render the partnership agreement unenforceable against that person.

 

Under our partnership agreement, we must indemnify our general partner and its officers, directors, managers and certain other specified persons, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other persons. We must provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith. We must also provide this indemnification for criminal proceedings unless our general partner or these other persons acted with knowledge that their conduct was criminal. Thus, our general partner could be indemnified for its negligent acts if it meets the requirements set forth above. To the extent these provisions purport to include indemnification for liabilities arising under the Securities Act in the opinion of the SEC, such indemnification is contrary to public policy and, therefore, unenforceable. Please read “Our Partnership Agreement—Indemnification.”

 

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DESCRIPTION OF THE COMMON UNITS

 

The Units

 

The common units represent limited partner interests in us. The holders of common units, along with the holders of subordinated 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. For a description of the relative rights and preferences of holders of common units, Class A Units and subordinated units in and to partnership distributions, please read this section and “Cash Distribution Policy and Restrictions on Distributions.” For a description of the rights and privileges of limited partners under our partnership agreement, including voting rights, please read “Our Partnership Agreement.”

 

Transfer Agent and Registrar

 

Duties

 

Computershare Trust Company, N.A. will serve as the registrar and transfer agent for our common units. We will pay all fees charged by the transfer agent for transfers of common units, except the following that must be paid by our unitholders:

 

   

surety bond premiums to replace lost or stolen certificates, or to cover taxes and other governmental charges in connection therewith;

 

   

special charges for services requested by a holder of a common unit; and

 

   

other similar fees or charges.

 

There will be no charge to our unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their respective 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.

 

Resignation or Removal

 

The transfer agent may resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and has accepted the appointment within 30 days after notice of the resignation or removal, our general partner may act as the transfer agent and registrar until a successor is appointed.

 

Transfer of Common Units

 

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission are reflected in our books and records. Each transferee:

 

   

automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our partnership agreement;

 

   

represents and warrants that the transferee has the right, power, authority and capacity to enter into our partnership agreement; and

 

   

gives the consents, waivers and approvals contained in our partnership agreement, such as the approval of all transactions and agreements that we are entering into in connection with our formation and this offering.

 

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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 transferable according to the laws governing the transfer of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.

 

Until a common unit has been transferred on our books, we and the transfer agent may treat the record holder of the common unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

 

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OUR PARTNERSHIP AGREEMENT

 

The following is a summary of the material provisions of our partnership agreement. The form of our partnership agreement is included in this prospectus as Appendix A. We will provide prospective investors with a copy of our partnership agreement upon request at no charge.

 

We summarize the following provisions of our partnership agreement elsewhere in this prospectus:

 

   

with regard to distributions, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions”;

 

   

with regard to the duties of, and standard of care applicable to, our general partner, please read “Conflicts of Interest and Fiduciary Duties”;

 

   

with regard to the transfer of common units, please read “Description of the Common Units—Transfer of Common Units”; and

 

   

with regard to allocations of taxable income and taxable loss, please read “Material Federal Income Tax Consequences.”

 

Organization and Duration

 

Our partnership was organized in June 2014 and will have a perpetual existence unless terminated pursuant to the terms of our partnership agreement.

 

Purpose

 

Our purpose, as set forth in our partnership agreement, is limited to any business activity that is approved by our general partner and that lawfully may be conducted by a limited partnership organized under Delaware law; provided that our general partner shall not cause us to take any action that the general partner determines would be reasonably likely to cause us to be treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes.

 

Although our general partner has the ability to cause us and our current or future subsidiaries to engage in activities other than the business of acquiring, developing and operating energy-related rail terminals and other high-quality and complementary midstream infrastructure assets and businesses, our general partner may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners. Our general partner is generally authorized to perform all acts it determines to be necessary or appropriate to carry out our purposes and to conduct our business.

 

Cash Distributions

 

Our partnership agreement specifies the manner in which we will make cash distributions to holders of our common units and other partnership securities as well as to our general partner in respect of its general partner interest and its incentive distribution rights. For a description of these cash distribution provisions, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

Capital Contributions

 

Unitholders are not obligated to make additional capital contributions, except as described below under “—Limited Liability.” For a discussion of our general partner’s right to contribute capital to maintain its 2.0% general partner interest if we issue additional units, please read “—Issuance of Additional Interests.”

 

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Voting Rights

 

The following is a summary of the unitholder vote required for approval of the matters specified below. Matters that require the approval of a “unit majority” require:

 

   

while any subordinated units remain outstanding, the approval of a majority of the common units, excluding those common units held by USD Group LLC and its affiliates, and a majority of the subordinated units, voting as separate classes; and

 

   

after all subordinated units have been converted into common units, the approval of a majority of the common units, voting as a single class.

 

In voting their common and subordinated units, our USD Group LLC and its affiliates will have no duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners.

 

Holders of Class A Units and the incentive distribution rights may be entitled to vote in certain circumstances as may be expressly provided in our partnership agreement.

 

Issuance of additional units    No approval right.
Amendment of the partnership agreement   

Certain amendments may be made by our general partner without the approval of the unitholders. Other amendments generally require the approval of a unit majority. Please read “—Amendment of Our Partnership Agreement.”

 

For so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, Energy Capital Partners must approve any amendment to our partnership agreement. Please read “Management—Special Approval Rights of Energy Capital Partners.”

Modification of cash distribution policy    No approval right.
Merger of our partnership or the sale of all or substantially all of our assets    Unit majority in certain circumstances. Please read “—Merger, Consolidation, Conversion, Sale or Other Disposition of Assets.”
Dissolution of our partnership    Unit majority. Please read “—Dissolution.”
Continuation of our business upon dissolution    Unit majority. Please read “—Dissolution.”
Withdrawal of the general partner    Under most circumstances, the approval of a majority of the common units, excluding common units held by our general partner and its affiliates, is required for the withdrawal of our general partner prior to September 30, 2024 in a manner that would cause a dissolution of our partnership. Please read “—Withdrawal or Removal of Our General Partner.”

 

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Removal of the general partner    Not less than 66 2/3% of the outstanding units, voting as a single class, including units held by our general partner and its affiliates. Please read “—Withdrawal or Removal of Our General Partner.”
Transfer of the general partner interest    Our general partner may transfer any or all of its general partner interest to an affiliate of another person without a vote of our unitholders. Please read “—Transfer of General Partner Interest.”
Transfer of incentive distribution rights    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 Subordinated Units and Incentive Distribution Rights.”
Reset of incentive distribution levels    No approval right.
Transfer of ownership interests in our general partner    No approval right. Please read “—Transfer of Ownership Interests in Our General Partner.”

 

If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20.0% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the units from our general partner or its affiliates and any transferees of that person or group approved by our general partner or to any person or group who acquires the units with the specific prior approval of our general partner.

 

Applicable Law; Forum, Venue and Jurisdiction

 

Our partnership agreement is governed by Delaware law. Our partnership agreement requires that any claims, suits, actions or proceedings:

 

   

arising out of or relating in any way to the partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of the partnership agreement or the duties, obligations or liabilities among limited partners or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us);

 

   

brought in a derivative manner on our behalf;

 

   

asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of us or our general partner, or owed by our general partner, to us or the limited partners;

 

   

asserting a claim arising pursuant to any provision of the Delaware Act; or

 

   

asserting a claim governed by the internal affairs doctrine

 

shall be exclusively brought in the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction), regardless of whether such claims, suits, actions or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or are derivative or direct claims. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware in connection with any such claims, suits, actions or proceedings.

 

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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 Act and that he otherwise acts in conformity with the provisions of the partnership agreement, his liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to us for his common units plus his share of any undistributed profits and assets. The Delaware Act generally provides that a limited partner does not participate in the control of the business within the meaning of the Delaware Act by virtue of possessing or exercising the right or power to admit, remove or retain the general partner, amend the partnership agreement or certificate of limited partnership, or cause the taking or refraining from taking of any action with respect to such other matters as are stated in the partnership agreement. However, if a court were to determine that the right, or exercise of the right, by the limited partners as a group to take any action under the partnership agreement 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 under the reasonable belief that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.

 

Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years.

 

Following the closing of this offering, we expect that we and our subsidiaries will conduct business in several jurisdictions and we may have subsidiaries that conduct business in other states or countries in the future. Maintenance of our limited liability as a member of our operating subsidiaries through which we conduct operations in the future may require compliance with legal requirements in the jurisdictions in which the operating subsidiaries conduct business, including qualifying ourselves and 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 any subsidiaries we may have in the future, or otherwise, it were determined that we were conducting business in any jurisdiction without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace our general partner, to approve some amendments to our partnership agreement, or to take other action under our partnership agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent as our general partner under the circumstances. We will operate in a manner that our general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.

 

Issuance of Additional Interests

 

Our partnership agreement authorizes us to issue an unlimited number of additional partnership interests for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders.

 

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It is possible that we will fund acquisitions through the issuance of additional common units, subordinated units or other partnership interests. Holders of any additional common units we issue will be entitled to share equally with the then-existing common unitholders in our distributions. In addition, the issuance of additional common units or other partnership interests may dilute the value of the interests of the then-existing common unitholders in our net assets.

 

In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership interests that, as determined by our general partner, may have rights to distributions or special voting rights to which the common units are not entitled. In addition, our partnership agreement does not prohibit our current or future subsidiaries from issuing 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 upon exercise by the underwriters of their over-allotment option to purchase additional common units, the issuance of common units in connection with a rest 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 2.0% general partner interest in us. Our general partner’s 2.0% 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 2.0% general partner interest. Moreover, our general partner will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase common units, subordinated units or other partnership interests or to make additional capital contributions to us whenever, and on the same terms that, we issue partnership interests to persons other than our general partner and its affiliates, to the extent necessary to maintain the percentage interest of the general partner and its affiliates, including such interest represented by common units and subordinated units, that existed immediately prior to each issuance. The common unitholders will not have preemptive rights under our partnership agreement to acquire additional common units or other partnership interests.

 

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 fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners. In order to adopt a proposed amendment, other than the amendments discussed below, our general partner is required to seek written approval of the holders of the number of units required to approve the amendment or to call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a unit majority.

 

For so long as Energy Capital Partners is able to appoint more than one member to USD’s board of directors, Energy Capital Partners must approve any amendment to our partnership agreement. Please read “Management—Special Approval Rights of Energy Capital Partners.”

 

Prohibited Amendments

 

No amendment may be made that would:

 

   

enlarge the obligations of any limited partner without his consent, unless approved by at least a majority of the type or class of limited partner interests so affected; or

 

   

enlarge the obligations of, restrict, change or modify in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by us to our general partner or any of its affiliates without the consent of our general partner, which consent may be given or withheld in its sole discretion.

 

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The provision of our partnership agreement preventing the amendments having the effects described in the clauses above can be amended upon the approval of the holders of at least 90.0% of the limited partner interests (excluding the consideration of Class A Units), voting as a single class (including units owned by our general partner and its affiliates). Upon completion of the offering, USD Group LLC will own approximately     % of the limited partner interests (excluding the consideration of Class A Units), including     % of our subordinated units (excluding common units purchased by officers, directors, employees and certain other persons affiliated with us under our directed unit program).

 

No Unitholder Approval

 

Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner to reflect:

 

   

a change in our name, the location of our principal place of business, our registered agent or our registered office;

 

   

the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement;

 

   

a change that our general partner determines to be necessary or appropriate to qualify or continue our qualification as a limited partnership or other entity in which the limited partners have limited liability under the laws of any state or to ensure that neither we nor any of our subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for U.S. federal income tax purposes (to the extent not already so treated or taxed);

 

   

an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees from in any manner being subjected to the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974 (ERISA), whether or not substantially similar to plan asset regulations currently applied or proposed;

 

   

an amendment that our general partner determines to be necessary or appropriate in connection with the creation, authorization or issuance of additional partnership interests or the right to acquire partnership interests;

 

   

any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone;

 

   

an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our partnership agreement;

 

   

any amendment that our general partner determines to be necessary or appropriate for the formation by us of, or our investment in, any corporation, partnership or other entity, as otherwise permitted by our partnership agreement;

 

   

a change in our fiscal year or taxable year and related changes;

 

   

conversions into, mergers with or conveyances to another limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the conversion, merger or conveyance other than those it receives by way of the conversion, merger or conveyance; or

 

   

any other amendments substantially similar to any of the matters described in the clauses above.

 

In addition, our general partner may make amendments to our partnership agreement, without the approval of any limited partner, if our general partner determines that those amendments:

 

   

do not adversely affect the limited partners, considered as a whole, or any particular class of limited partners, in any material respect;

 

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are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;

 

   

are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are or will be listed for trading;

 

   

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;

 

   

are necessary or appropriate in connection with the creation, authorization or issuance of any class or series of partnership securities; or

 

   

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.

 

Opinion of Counsel and Unitholder Approval

 

Any amendment that our general partner determines adversely affects in any material respect one or more particular classes of limited partners will require the approval of at least a majority of the class or classes so affected, but no vote will be required by any class or classes of limited partners that our general partner determines are not adversely affected in any material respect. Any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that would reduce the voting percentage required to take any action other than to remove our general partner or call a meeting of unitholders is required to be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced. Any amendment that would increase the percentage of units required to remove the general partner or call a meeting of unitholders must be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the percentage sought to be increased. For amendments of the type not requiring unitholder approval, our general partner will not be required to obtain an opinion of counsel that an amendment will neither result in a loss of limited liability to the limited partners nor result in our being treated as a taxable entity for federal income tax purposes in connection with any of the amendments. No other amendments to our partnership agreement will become effective without the approval of holders of at least 90.0% of the outstanding units, voting as a single class, unless we first obtain an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any of our limited partners.

 

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

 

A merger, consolidation or conversion of us requires the prior consent of our general partner and Energy Capital Partners. However, neither our general partner nor Energy Capital Partners will have any duty or obligation to consent to any merger, consolidation or conversion and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interest of us or the limited partners.

 

In addition, our partnership agreement generally prohibits our general partner, without the prior approval of the holders of a unit majority, from causing us to sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without such approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without such approval. Finally, our general partner may consummate any merger without the prior approval of our unitholders if we are the surviving entity in the transaction, our general partner has received an opinion of counsel regarding limited

 

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liability and tax matters, the transaction would not result in a material amendment to the partnership agreement (other than an amendment that the general partner could adopt without the consent of other partners), each of our units will be an identical unit of our partnership following the transaction and the partnership securities to be issued do not exceed 20% of our outstanding partnership interests (other than incentive distribution rights) immediately prior to the transaction.

 

If the conditions specified in our partnership agreement are satisfied, our general partner may convert us or any of our subsidiaries into a new limited liability entity or merge us or any of our subsidiaries into, or convey all of our assets to, a newly formed entity, if the sole purpose of that conversion, merger or conveyance is to effect a mere change in our legal form into another limited liability entity, we have received an opinion of counsel regarding limited liability and tax matters and the governing instruments of the new entity provide the limited partners and our general partner with the same rights and obligations as contained in our partnership agreement. Our unitholders are not entitled to dissenters’ rights of appraisal under our partnership agreement or applicable Delaware law in the event of a conversion, merger or consolidation, a sale of substantially all of our assets or any other similar transaction or event.

 

Dissolution

 

We will continue as a limited partnership until dissolved under our partnership agreement. We will dissolve upon:

 

   

the election of our general partner to dissolve us, if approved by the holders of units representing a unit majority;

 

   

there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law;

 

   

the entry of a decree of judicial dissolution of our partnership; or

 

   

the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner other than by reason of a transfer of its general partner interest in accordance with our partnership agreement or its withdrawal or removal following the approval and admission of a successor.

 

Upon a dissolution under the last clause above, the holders of a unit majority may also elect, within specific time limitations, to continue our business on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of units representing a unit majority, subject to our receipt of an opinion of counsel to the effect that:

 

   

the action would not result in the loss of limited liability under Delaware law of any limited partner; and

 

   

neither we nor any of our subsidiaries would be treated as an association taxable as a corporation or otherwise be taxable as an entity for U.S. federal income tax purposes upon the exercise of that right to continue (to the extent not already so treated or taxed).

 

Liquidation and Distribution of Proceeds

 

Upon our dissolution, unless our business is continued, the liquidator authorized to wind up our affairs will, acting with all of the powers of our general partner that are necessary or appropriate, liquidate our assets and apply the proceeds of the liquidation as described in “Provisions of Our Partnership Agreement Relating to Cash 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, 2024 without obtaining the approval of the holders of at least a majority of the outstanding

 

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common units, excluding common units held by our general partner and its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after September 30, 2024 our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of our partnership agreement. Notwithstanding the information above, our general partner may withdraw without unitholder approval upon 90 days’ written notice to the limited partners if at least 50.0% of the outstanding common units are held or controlled by one person and its affiliates other than our general partner and its affiliates. In addition, our partnership agreement permits our general partner to sell or otherwise transfer all of its general partner interest in us and its incentive distribution rights without the approval of the unitholders. Please read “—Transfer of General Partner Interest” and “—Transfer of Subordinated Units and Incentive Distribution Rights.”

 

Upon withdrawal of our general partner under any circumstances, other than as a result of a transfer by our general partner of all or a part of its general partner interest in us, the holders of a unit majority may appoint a successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within a specified period after that withdrawal, the holders of a unit majority agree in writing to continue our business and to appoint a successor general partner. Please read “—Dissolution.”

 

Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 66   2/3% of the outstanding units, voting together as a single class, including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding common units, voting as a class, and the outstanding subordinated units, voting as a class. The ownership of more than 33  1/3% of the outstanding units by our general partner and its affiliates gives them the ability to prevent our general partner’s removal. At the closing of this offering, an affiliate of our general partner will own     % of the outstanding units (excluding common units purchased by officers, directors, employees and certain other persons affiliated with us of our general partner under our directed unit program).

 

Our partnership agreement also provides that if our general partner is removed as our general partner under circumstances where cause does not exist:

 

   

all outstanding subordinated units held by any person who did not, and whose affiliates did not, vote any units in favor of removal of the general partner, will immediately and automatically will convert into common units on a one-for-one basis, if such person is not an affiliate of the successor general partner; and

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished.

 

In the event of the removal of our general partner under circumstances where cause exists or withdrawal of our general partner where that withdrawal violates our partnership agreement, a successor general partner will have the option to purchase the general partner interest and incentive distribution rights of the departing general partner and its affiliates for a cash payment equal to the fair market value of those interests. Under all other circumstances where our general partner withdraws or is removed by the limited partners, the departing general partner will have the option to require the successor general partner to purchase the general partner interest and the incentive distribution rights of the departing general partner and its affiliates for fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. Or, if the departing general partner and the successor general partner cannot agree upon an expert, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.

 

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If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partner interest and all its and its affiliates’ incentive distribution rights will automatically convert into common units equal to the fair market value of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.

 

In addition, we will be required to reimburse the departing general partner for all amounts due to the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities, incurred as a result of the termination of any employees employed for our benefit by the departing general partner or its affiliates.

 

Transfer of General Partner Interest

 

At any time, USD Group LLC 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. 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.

 

Transfer of Ownership Interests in Our General Partner

 

At any time, USD Group LLC 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 Subordinated Units and Incentive Distribution Rights

 

By transfer of subordinated units or incentive distribution rights in accordance with our partnership agreement, each transferee of subordinated units or incentive distribution rights will be admitted as a limited partner with respect to the subordinated units or incentive distribution rights transferred when such transfer and admission is reflected in our books and records. Each transferee:

 

   

represents that the transferee has the capacity, power and authority to become bound by our partnership agreement;

 

   

automatically becomes bound by the terms and conditions of our partnership agreement; and

 

   

gives the consents, waivers and approvals contained in our partnership agreement, such as the approval of all transactions and agreements we are entering into in connection with our formation and this offering.

 

Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly.

 

We may, at our discretion, treat the nominee holder of subordinated units or incentive distribution rights as the absolute owner. In that case, the beneficial 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.

 

Subordinated units and incentive distribution rights are securities and any transfers are subject to the laws governing transfer of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a limited partner for the transferred subordinated units or incentive distribution rights.

 

Until a subordinated unit or incentive distribution right has been transferred on our books, we and the transfer agent may treat the record holder of the unit or right as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

 

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Change of Management Provisions

 

Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove USD Partners GP LLC as our general partner or from otherwise changing our management. Please read “—Withdrawal or Removal of Our General Partner” for a discussion of certain consequences of the removal of our general partner. If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20.0% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the units from our general partner or its affiliates and any transferees of that person or group who are notified by our general partner that they will not lose their voting rights or to any person or group who acquires the units with the prior approval of the board of directors of our general partner. Please read “—Withdrawal or Removal of Our General Partner.”

 

Limited Call Right

 

If at any time USD Group LLC and its controlled affiliates own more than 80.0% of the then-issued and outstanding limited partner interests of any class, USD Group LLC will have the right, which it may assign in whole or in part to any of its affiliates or beneficial owners or to us, to acquire all, but not less than all, of the limited partner interests of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at least 10, but not more than 60, days’ notice.

 

The purchase price in the event of this purchase is the greater of:

 

   

the highest price paid by 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

 

   

the average of the daily closing prices of the partnership securities of such class over the 20 consecutive trading days preceding the date that is three days before the date the notice is mailed.

 

As a result of USD Group LLC’s right to purchase outstanding limited partner interests, a holder of limited partner interests may have his limited partner interests purchased at an undesirable time or 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. USD Group LLC is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call right. 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.”

 

Non-Taxpaying Holders; Redemption

 

To avoid any adverse effect on the maximum applicable rates chargeable to customers by us or any of our future subsidiaries, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement provides our general partner the power to amend the agreement. If our general partner, with the advice of counsel, determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by our subsidiaries, then our general partner may adopt such amendments to our partnership agreement as it determines necessary or advisable to:

 

   

obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant); and

 

   

permit us to redeem the units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures

 

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instituted by our general partner to obtain proof of the federal income tax status. The redemption price in the case of such a redemption will be the average of the daily closing prices per unit for the 20 consecutive trading days immediately prior to the date set for redemption.

 

Non-Citizen Assignees; Redemption

 

If our general partner, with the advice of counsel, determines we are subject to U.S. federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, then our general partner may adopt such amendments to our partnership agreement as it determines necessary or advisable to:

 

   

obtain proof of the nationality, citizenship or other related status of our limited partners (and their owners, to the extent relevant); and

 

   

permit us to redeem the units held by any person whose nationality, citizenship or other related status creates substantial risk of cancellation or forfeiture of any property or who fails to comply with the procedures instituted by the general partner to obtain proof of the nationality, citizenship or other related status. The redemption price in the case of such a redemption will be the average of the daily closing prices per unit for the 20 consecutive trading days immediately prior to the date set for redemption.

 

Meetings; Voting

 

Except as described below regarding a person or group owning 20.0% or more of any class of units then outstanding, record holders of units on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited.

 

Our general partner does not anticipate that any meeting of our unitholders will be called in the foreseeable future. Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20.0% of the outstanding units of the class for which a meeting is proposed. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called, represented in person or by proxy, will constitute a quorum, unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.

 

Each record holder of a unit has a vote according to his percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read “—Issuance of Additional Interests.” However, if at any time any person or group, other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates and purchasers specifically approved by our general partner, acquires, in the aggregate, beneficial ownership of 20.0% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise. Except as our partnership agreement otherwise provides, subordinated units will vote together with common units, as a single class.

 

Any notice, demand, request, report or proxy material required or permitted to be given or made to record common unitholders under our partnership agreement will be delivered to the record holder by us or by the transfer agent.

 

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Voting Rights of Incentive Distribution Rights

 

If a majority of the incentive distribution rights are held by our general partner and its affiliates, the holders of the incentive distribution rights will have no right to vote in respect of such rights on any matter, unless otherwise required by law, and the holders of the incentive distribution rights shall be deemed to have approved any matter approved by our general partner.

 

If less than a majority of the incentive distribution rights are held by our general partner and its affiliates, the incentive distribution rights will be entitled to vote on all matters submitted to a vote of unitholders, other than amendments and other matters that our general partner determines do not adversely affect the holders of the incentive distribution rights in any material respect. On any matter in which the holders of incentive distribution rights are entitled to vote, such holders will vote together with the subordinated units, prior to the end of the subordination period, or together with the common units, thereafter, in either case as a single class, and such incentive distribution rights shall be treated in all respects as subordinated units or common units, as applicable, when sending notices of a meeting of our limited partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under our partnership agreement. The relative voting power of the holders of the incentive distribution rights and the subordinated units or common units, depending on which class the holders of incentive distribution rights are voting with, will be set in the same proportion as cumulative cash distributions, if any, in respect of the incentive distribution rights for the four consecutive quarters prior to the record date for the vote bears to the cumulative cash distributions in respect of such class of units for such four quarters.

 

Status as Limited Partner

 

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the common units transferred when such transfer and admission are reflected in our books and records. Except as described under “—Limited Liability,” the common units will be fully paid, and unitholders will not be required to make additional contributions.

 

Indemnification

 

Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:

 

   

our general partner;

 

   

any departing general partner;

 

   

any person who is or was an affiliate of our general partner or any departing general partner;

 

   

any person who is or was a manager, managing member, general partner, director, officer, employee, agent, fiduciary or trustee of our partnership, our subsidiaries, our general partner, any departing general partner or any of their affiliates;

 

   

any person who is or was serving at the request of a general partner, any departing general partner or any of their respective affiliates as a manager, managing member, general partner, director, officer, employee, agent, fiduciary or trustee of another person owing a fiduciary duty to us or our subsidiaries;

 

   

any person who controls our general partner or any departing general partner; and

 

   

any person designated by our general partner.

 

Any indemnification under these provisions will only be out of our assets. Unless our general partner otherwise agrees, it will not be personally liable for, or have any obligation to contribute or lend funds or assets to us to enable us to effectuate, indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our partnership agreement.

 

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Reimbursement of Expenses

 

Our partnership agreement requires us to reimburse our general partner and its affiliates for all direct and indirect expenses they incur or payments they make on our behalf and all other expenses allocable to us or otherwise incurred by our general partner and its affiliates in connection with operating our business. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses may 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. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

 

Books and Reports

 

Our general partner is required to keep appropriate books of our business at our principal offices. These books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, our fiscal year is the calendar year.

 

We will furnish or make available to record holders of our common units, within 105 days after the close of each fiscal year, an annual report containing audited consolidated financial statements and a report on those consolidated financial statements by our independent public accountants. Except for our fourth quarter, we will also furnish or make available summary financial information within 50 days after the close of each quarter. We will be deemed to have made any such report available if we file such report with the SEC on EDGAR or make the report available on a publicly available website which we maintain.

 

We will furnish each record holder with information reasonably required for U.S. federal and state tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary information to our unitholders will depend on their cooperation in supplying us with specific information. Every unitholder will receive information to assist him in determining his U.S. federal and state tax liability and in filing his U.S. federal and state income tax returns, regardless of whether he supplies us with the necessary information.

 

Right to Inspect Our Books and Records

 

Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable written demand stating the purpose of such demand and at his own expense, have furnished to him:

 

   

a current list of the name and last known address of each record holder;

 

   

information as to the amount of cash, and a description and statement of the agreed value of any other capital contribution, contributed or to be contributed by each partner and the date on which each became a partner;

 

   

copies of our partnership agreement, our certificate of limited partnership, related amendments and powers of attorney under which they have been executed;

 

   

information regarding the status of our business and financial condition (provided that obligation shall be satisfied to the extent the limited partner is furnished our most recent annual report and any subsequent quarterly or periodic reports required to be filed (or which would be required to be filed) with the SEC pursuant to Section 13(a) of the Exchange Act); and

 

   

any other information regarding our affairs that our general partner determines is just and reasonable.

 

Under our partnership agreement, however, each of our limited partners and other persons who acquire interests in our partnership do not have rights to receive information from us or any of the persons we indemnify

 

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as described above under “—Indemnification” for the purpose of determining whether to pursue litigation or assist in pending litigation against us or those indemnified persons relating to our affairs, except pursuant to the applicable rules of discovery relating to the litigation commenced by the person seeking information.

 

Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which our general partner believes in good faith is not in our best interests or that we are required by law or by agreements with third parties to keep confidential.

 

Registration Rights

 

Under our partnership agreement, we have agreed to register for resale under the Securities Act and applicable state securities laws any common units, subordinated units or other limited partner interests proposed to be sold by our general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. These registration rights continue for two years following any withdrawal or removal of USD Partners GP LLC as our general partner. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts. Please read “Units Eligible for Future Sale.”

 

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UNITS ELIGIBLE FOR FUTURE SALE

 

After the sale of the common units offered by this prospectus and assuming that the underwriters do not exercise their over-allotment option to purchase additional common units, our general partner and its affiliates will hold an aggregate of              common units and              subordinated units (or              common units and              subordinated units if the underwriters exercise their over-allotment option to purchase additional units in full). The              subordinated units will convert into common units on a one-for-one basis in separate, sequential tranches, with each tranche comprising 20.0% of the subordinated units outstanding immediately following this offering, and will convert on each business day occurring on or after October 1, 2015. All of the common units and subordinated units held by our general partner and its affiliates are subject to lock-up restrictions described below. Additionally, certain executive officers and other key employees of our general partner and its affiliates who provide services to us own 250,000 Class A Units that may be convertible into our common units, as described in “Management—Class A Units.” The sale of these units could have an adverse impact on the price of the common units or on any trading market that may develop.

 

Rule 144

 

The common units sold in this offering will generally be freely transferable without restriction or further registration under the Securities Act, other than any units purchased in this offering by officers, directors, employees and certain other persons affiliated with us under our directed unit program, which will be subject to the lock-up restrictions described below. None of the directors or officers of our general partner own any common units prior to this offering; however, they may purchase common units through the directed unit program or otherwise. Please read “Underwriting” for a description of these lock-up provisions. Additionally, any common units owned by an “affiliate” of ours may not be resold publicly except in compliance with the registration requirements of the Securities Act or under an exemption under Rule 144 or otherwise. Rule 144 permits securities acquired by an affiliate of the issuer to be sold into the market in an amount that does not exceed, during any three-month period, the greater of:

 

   

1.0% of the total number of the common units outstanding, which will equal approximately units immediately after this offering; or

 

   

the average weekly reported trading volume of the common units for the four calendar weeks prior to the sale.

 

At the closing of this offering, the following common units will be restricted and may not be resold publicly except in compliance with the registration requirements of the Securities Act, Rule 144 or otherwise:

 

   

common units owned by our general partner and its affiliates; and

 

   

any units acquired by our general partner or any of its affiliates, including the directors and officers of our general partner under the directed unit program.

 

Sales under Rule 144 are also subject to specific manner of sale provisions, holding period requirements, notice requirements and the availability of current public information about us. A person who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned his common units for at least six months (provided we are in compliance with the current public information requirement) or one year (regardless of whether we are in compliance with the current public information requirement), would be entitled to sell those common units under Rule 144 without regard to the volume limitations, manner of sale provisions and notice requirements of Rule 144.

 

Our Partnership Agreement and Registration Rights

 

Our partnership agreement provides that we may issue an unlimited number of limited partner interests of any type without a vote of the unitholders. Any issuance of additional common units or other limited partner interests would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect the cash distributions to and market price of, common units then outstanding. Please read “Our Partnership Agreement—Issuance of Additional Interests.”

 

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Under our partnership agreement, our general partner and its affiliates, other than individuals, have the right to cause us to register under the Securities Act and applicable state securities laws the offer and sale of any units that they hold. Subject to the terms and conditions of our partnership agreement, these registration rights allow our general partner and its affiliates or their assignees holding any common units or other limited partner interests to require registration of any of these common units or other limited partner interests and to include any of these common units in a registration by us of other common units, including common units offered by us or by any unitholder. Our general partner and its affiliates will continue to have these registration rights for two years after it ceases to be our general partner. In connection with any registration of this kind, we will indemnify each unitholder participating in the registration and its officers, directors, and controlling persons from and against any liabilities under the Securities Act or any applicable state securities laws arising from the registration statement or prospectus. We will bear all costs and expenses incidental to any registration, excluding any underwriting discounts. Our general partner and its affiliates also may sell their common units or other limited partner interests in private transactions at any time, subject to compliance with applicable laws.

 

Lock-up Agreements

 

USD Group LLC and certain of its affiliates, including our general partner and each of our general partner’s directors and officers, have agreed that for a period of 180 days from the date of this prospectus they will not, without the prior written consent of Citigroup Global Markets Inc. and Barclays Capital Inc., dispose of or hedge any common units or any securities convertible into or exchangeable for our common units. Participants in our directed unit program will be subject to similar restrictions. Please read “Underwriting” for a description of these lock-up provisions.

 

Registration Statement on Form S-8

 

We intend to file a registration statement on Form S-8 under the Securities Act following this offering to register all common units issued or reserved for issuance under the LTIP. We expect to file this registration statement as soon as practicable after this offering. Common units covered by the registration statement on Form S-8 will be eligible for sale in the public market, subject to applicable vesting requirements and the terms of applicable lock-up agreements described above.

 

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MATERIAL FEDERAL INCOME TAX CONSEQUENCES

 

This section is a discussion of the material tax considerations that may be relevant to prospective unitholders who are individual citizens or residents of the U.S. and, unless otherwise noted in the following discussion, is the opinion of 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 USD 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 U.S. and has only limited application to corporations, estates, entities treated as partnerships for U.S. federal income tax purposes, trusts, nonresident aliens, U.S. expatriates and former citizens or long-term residents of the United States or other unitholders subject to specialized tax treatment, such as banks, insurance companies and other financial institutions, tax-exempt institutions, foreign persons (including, without limitation, controlled foreign corporations, passive foreign investment companies and non-U.S. persons eligible for the benefits of an applicable income tax treaty with the United States), IRAs, real estate investment trusts (REITs) or mutual funds, dealers in securities or currencies, traders in securities, U.S. persons whose “functional currency” is not the U.S. dollar, persons holding their units as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction transaction, and persons deemed to sell their units under the constructive sale provisions of the Code. In addition, the discussion only comments to a limited extent on state, local and foreign tax consequences. Accordingly, we encourage each prospective unitholder to consult his own tax advisor in analyzing the state, local and foreign tax consequences particular to him of the ownership or disposition of common units and potential changes in applicable tax laws.

 

No ruling has been requested from 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 the common units and the prices at which common units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in distributable cash flow 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 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.

 

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 our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read “—Disposition of Common Units—Allocations Between Transferors and Transferees”) and (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”).

 

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Partnership Status

 

A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, regardless of whether cash distributions are made to him by the partnership. Distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to him is in excess of the 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 90.0% or more of the gross income for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the transportation, processing, storage and marketing of crude oil, natural gas and products thereof. Other types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than     % 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 90.0% of our current gross income constitutes qualifying income. The portion of our income that is qualifying income may change from time to time.

 

Although we are in the process of seeking a ruling from the IRS regarding the qualifying nature of a portion of our income, the IRS has made no determination with respect to our treatment as a partnership for federal income tax purposes, and it is not certain that the IRS will provide a favorable ruling with respect to our request. 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:

 

   

We will be classified as a partnership for federal income tax purposes; and

 

   

Except for a subsidiary that we may elect to treat as a corporation for U.S. federal income tax purposes, each of our operating subsidiaries will be treated as a partnership or will be disregarded as an entity separate from us for federal income tax purposes.

 

In rendering its opinion, 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:

 

   

Except for a subsidiary that we may elect to treat as a corporation for U.S. federal income tax purposes, neither we nor any of the operating subsidiaries has elected or will elect to be treated as a corporation; and

 

   

For each taxable year, more than 90.0% 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.

 

We believe that these representations have been true in the past and expect that these representations will continue to be true in the future.

 

If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery (in which case the IRS may also require us to make adjustments with respect to our unitholders or pay other amounts), we will be treated as if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in us. This deemed contribution and liquidation should be tax-free to unitholders and us so long as we, at that time, do not have liabilities in excess of the tax basis of our assets. Thereafter, we would be treated as a corporation for federal income tax purposes.

 

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If we were treated as an association taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to our unitholders, and our net income would be taxed to us at corporate rates. In addition, any distribution made to a unitholder would be treated as taxable dividend income, to the extent of our current and accumulated earnings and profits, 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 USD Partners LP will be treated as partners of USD 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 USD 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 USD Partners LP. The references to “unitholders” in the discussion that follows are to persons who are treated as partners in USD Partners LP for federal income tax purposes.

 

Tax Consequences of Unit Ownership

 

Flow-through of Taxable Income

 

Subject to the discussion below under “—Tax Consequences of Unit Ownership—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 “—Tax Consequences of Unit Ownership—Limitations on Deductibility of Losses.”

 

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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.

 

Ratio of Taxable Income to Distributions

 

We estimate that a purchaser of common units in this offering who owns those common units from the date of closing of this offering through the record date for distributions for the period ending December 31, 2017, will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed with respect to that period. Thereafter, we anticipate that the ratio of allocable taxable income to cash distributions to the unitholders will increase. Our estimate is based upon many assumptions regarding our business operations, including assumptions as to our revenues, capital expenditures, cash flow, net working capital and anticipated cash distributions. These estimates and assumptions are subject to, among other things, numerous business, economic, regulatory, legislative, competitive and political uncertainties beyond our control. Further, the estimates are based on current tax law and tax reporting positions that we will adopt and with which the IRS could disagree. Accordingly, we cannot assure you that these estimates will prove to be correct.

 

The actual percentage of distributions that will constitute taxable income could be higher or lower than expected, and any differences could be material and could materially affect the value of the common units. For example, the ratio of allocable taxable income to cash distributions to a purchaser of common units in this offering will be greater, and perhaps substantially greater, than our estimate with respect to the period described above if:

 

   

gross income from operations exceeds the amount required to make minimum quarterly distributions on all units, yet we only distribute the minimum quarterly distributions on all units; or

 

   

we make a future offering of common units and use the proceeds of the offering in a manner that does not produce substantial additional deductions during the period described above, such as to repay indebtedness outstanding at the time of this offering or to acquire property that is not eligible for depreciation or amortization for federal income tax purposes or that is depreciable or amortizable at a rate significantly slower than the rate applicable to our assets at the time of this offering.

 

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 regulations 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.”

 

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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 50.0% 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:

 

   

interest on indebtedness properly allocable to property held for investment;

 

   

our interest expense attributed to portfolio income; and

 

   

the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.

 

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,

 

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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 the intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under our partnership agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of an individual unitholder in which event the unitholder would be required to file a claim in order to obtain a credit or refund.

 

Allocation of Income, Gain, Loss and Deduction

 

In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among our general partner and the unitholders in accordance with their percentage interests in us. At any time that distributions are made to the common units in excess of distributions to the subordinated units, or incentive distributions are made to our general partner, gross income will be allocated to the recipients to the extent of these distributions. If we have a net loss, that loss will be allocated first to our general partner and the unitholders in accordance with their percentage interests in us to the extent of their positive capital accounts, as adjusted to take into account the unitholders’ share of nonrecourse debt, and, second, to our general partner.

 

Specified items of our income, gain, loss and deduction will be allocated to account for (i) any difference between the tax basis and fair market value of our assets at the time of this offering and (ii) any difference between the tax basis and fair market value of any property contributed to us by the general partner and its affiliates (or by a third party) that exists at the time of such contribution, together 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 this 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 this 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 unitholders immediately prior to such issuance or other transactions to account for the difference between the “book” basis for purposes of maintaining capital accounts and the fair market value of all property held by us at the time of such issuance or future transaction. In addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by some unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and manner sufficient to eliminate the negative balance as quickly as possible.

 

An allocation of items of our income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference between a 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

 

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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:

 

   

his relative contributions to us;

 

   

the interests of all the partners in profits and losses;

 

   

the interest of all the partners in cash flow; and

 

   

the rights of all the partners to distributions of capital upon liquidation.

 

Latham & Watkins LLP is of the opinion that, with the exception of the issues described in “—Tax Consequences of Unit Ownership—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:

 

   

any of our income, gain, loss or deduction with respect to those units would not be reportable by the unitholder;

 

   

any cash distributions received by the unitholder as to those units would be fully taxable; and

 

   

while not entirely free from doubt, all of these distributions would appear to be ordinary income.

 

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 20.0%. Such rates are subject to change by new legislation at any time.

 

In addition, a 3.8% Medicare tax, or NIIT, on certain net investment income earned by individuals, estates and trusts currently applies. For these purposes, net investment income generally includes a 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 (1) the unitholder’s net investment income and (2) 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 (1) undistributed net investment income and (2) the excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins. The U.S. Department of the Treasury and the IRS have issued guidance in

 

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the form of proposed and final Treasury Regulations regarding the NIIT. Prospective 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 will make 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 will generally permit 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 will adopt 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 150.0% 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 intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the property’s unamortized Book-Tax Disparity, or treat that portion as non-amortizable to the extent attributable to property which is not amortizable. This method is consistent with the methods employed by other publicly traded partnerships but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. To the extent this Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read “—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 the common 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.

 

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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. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation deductions and his share of any gain or loss on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the 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.

 

Foreign Tax Credits

 

Subject to detailed limitations set forth in the Internal Revenue Code, a unitholder may elect to claim a credit against its liability for U.S. federal income tax for its share of certain non-U.S. taxes paid by us. The amount and availability of such credit will be dependent upon several factors, such as whether the unitholder has sufficient income from foreign sources, whether such income is in the same foreign tax credit category as our income, and the rate of foreign tax to which our income is subject. Given the complexity of the rules relating to the determination of the foreign tax credit, prospective unitholders are urged to consult their own tax advisors to determine whether or to what extent they would be entitled to such credit. Unitholders who do not elect to claim foreign tax credits may instead claim a deduction for their shares of foreign taxes paid by us.

 

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.”

 

Initial Tax Basis, Depreciation and Amortization

 

The tax basis of our assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to (i) this offering

 

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will be borne by our general partner and its affiliates, and (ii) any other offering will be borne by our general partner and all of our unitholders as of that time. Please read “—Tax Consequences of Unit 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 federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values, and the initial tax bases, of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.

 

Disposition of Common Units

 

Recognition of Gain or Loss

 

Gain or loss will be recognized on a sale of units equal to the difference between the amount realized and the 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,

 

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will be separately computed and taxed as ordinary income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to depreciation recapture or other “unrealized receivables” or to “inventory items” we own. The term “unrealized receivables” includes potential recapture items, including depreciation recapture. Ordinary income attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized upon the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and a capital loss upon a sale of units. Capital losses may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gains in the case of corporations. Both ordinary income and capital gain recognized on a sale of units may be subject to the NIIT in certain circumstances. Please read “—Tax Consequences of Unit 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:

 

   

a short sale;

 

   

an offsetting notional principal contract; or

 

   

a futures or forward contract;

 

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 and will be subsequently apportioned among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month, which we refer to in this prospectus as the “Allocation Date.” However, gain or loss realized on a sale or other disposition of our

 

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assets other than in the ordinary course of business will be allocated among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.

 

Although simplifying conventions are contemplated by the Internal Revenue Code and most publicly traded partnerships use similar simplifying conventions, the use of this method may not be permitted under existing Treasury Regulations as there is no direct or indirect controlling authority on this issue. The U.S. Department of the Treasury and the IRS have issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders, although such tax items must be prorated on a daily basis. Existing publicly traded partnerships are entitled to rely on these proposed Treasury Regulations; however, they are not binding on the IRS and are subject to change until final Treasury Regulations are issued. Accordingly, Latham & Watkins LLP is unable to opine on the validity of this method of allocating income and deductions between transferor and transferee unitholders because the issue has not been finally resolved by the IRS or the courts. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the unitholder’s interest, our taxable income or losses might be reallocated among the unitholders. We are authorized to revise our method of allocation between transferor and transferee unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury Regulations. A unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter but will not be entitled to receive that cash distribution.

 

Notification Requirements

 

A unitholder who sells any of his units is generally required to notify us in writing of that sale within 30 days after the sale (or, if earlier, January 15 of the year following the sale). A purchaser of units who purchases units from another unitholder is also generally required to notify us in writing of that purchase within 30 days after the purchase. Upon receiving such notifications, we are required to notify the IRS of that transaction and to furnish specified information to the transferor and transferee. Failure to notify us of a purchase may, in some cases, lead to the imposition of penalties. However, these reporting requirements do not apply to a sale by an individual who is a citizen of the U.S. and who effects the sale or exchange through a broker who will satisfy such requirements.

 

Constructive Termination

 

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50.0% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50.0% threshold has been met, multiple sales of the same interest will be counted only once. Immediately after this offering, USD Group LLC will own     % of the total interests in our capital and profits. Therefore, a transfer by USD Group LLC of all or a portion of its interests in us could result in a termination of us as a partnership for federal income tax purposes. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has provided a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically

 

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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 intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the 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 non-U.S. person, you should consult your tax advisor before investing in our common units. Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of our income allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to it.

 

Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the U.S. because of the ownership of units. As a consequence, they will be required to file

 

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federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships, our quarterly distribution to foreign unitholders will be subject to withholding at the highest applicable effective tax rate. Each foreign unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8BEN, W-8BEN-E or applicable substitute form in order to obtain credit for these withholding taxes. A change in applicable law may require us to change these procedures.

 

In addition, because a foreign corporation that owns units will be treated as engaged in a U.S. trade or business, that corporation may be subject to the U.S. branch profits tax at a rate of 30.0%, in addition to regular 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 U.S. and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.

 

A foreign unitholder who sells or otherwise disposes of a common unit will be subject to U.S. federal income tax on gain realized from the sale or disposition of that unit to the extent the gain is effectively connected with a U.S. trade or business of the foreign unitholder. Under a ruling published by the IRS, interpreting the scope of “effectively connected income,” a foreign unitholder would be considered to be engaged in a trade or business in the U.S. by virtue of the U.S. activities of the partnership, and part or all of that 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 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 5.0% of our common units at any time during the five-year period ending on the date of such disposition and (ii) 50.0% 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.

 

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 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 our general partner as our Tax Matters Partner.

 

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The Tax Matters Partner will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1.0% 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 1.0% interest in profits or by any group of unitholders having in the aggregate at least a 5.0% 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.

 

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 non-U.S. entities. Specifically, a 30.0% 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 which 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. 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 30.0% on payments to noncompliant foreign financial institutions and certain other account holders.

 

These rules generally will apply to payments of FDAP Income made on or after July 1, 2014 and to payments of relevant Gross Proceeds made on or after January 1, 2017. Thus, to the extent we have FDAP Income or Gross Proceeds after these dates that are not treated as effectively connected with a U.S. trade or business (please read “—Tax-Exempt Organizations and Other Investors”), unitholders who are foreign financial institutions or certain other non-US entities may be subject to withholding on distributions they receive from us, or their distributive share of our income, pursuant to the rules described above.

 

Prospective investors should consult their own tax advisors regarding the potential application of these withholding provisions to their investment in our common units.

 

Nominee Reporting

 

Persons who hold an interest in us as a nominee for another person are required to furnish to us:

 

   

the name, address and taxpayer identification number of the beneficial owner and the nominee;

 

   

whether the beneficial owner is:

 

  (1)   a person that is not a U.S. person;

 

  (2)   a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or

 

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  (3)   a tax-exempt entity;

 

   

the amount and description of units held, acquired or transferred for the beneficial owner; and

 

   

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.

 

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 $100 per failure, up to a maximum of $1,500,000 per calendar year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.

 

Accuracy-related Penalties

 

An additional tax equal to 20.0% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.

 

For individuals, a substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10.0% of the tax required to be shown on the return for the taxable year or $5,000 ($10,000 for most corporations). The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:

 

   

for which there is, or was, “substantial authority”; or

 

   

as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return.

 

If any item of income, gain, loss or deduction included in the distributive shares of unitholders might result in that kind of an “understatement” of income for which no “substantial authority” exists, we must disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make adequate disclosure on their returns and to take other actions as may be appropriate to permit unitholders to avoid liability for this penalty. More stringent rules apply to “tax shelters,” which we do not believe includes us, or any of our investments, plans or arrangements.

 

A substantial valuation misstatement exists if (a) the value of any property, or the adjusted basis of any property, claimed on a tax return is 150.0% or more of the amount determined to be the correct amount of the valuation or adjusted basis, (b) the price for any property or services (or for the use of property) claimed on any such return with respect to any transaction between persons described in Internal Revenue Code Section 482 is 200.0% or more (or 50.0% or less) of the amount determined under Section 482 to be the correct amount of such price, or (c) the net Internal Revenue Code Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5.0 million or 10.0% of the taxpayer’s gross receipts. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a return is 200.0% or more than the correct valuation or certain other thresholds are met, the penalty imposed increases to 40.0%. We do not anticipate making any valuation misstatements.

 

In addition, the 20.0% accuracy-related penalty also applies to any portion of an underpayment of tax that is attributable to transactions lacking economic substance. To the extent that such transactions are not disclosed, the penalty imposed is increased to 40.0%. Additionally, there is no reasonable cause defense to the imposition of this penalty to such transactions.

 

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Reportable Transactions

 

If we were to engage in a “reportable transaction,” we (and possibly you and others) would be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or that it produces certain kinds of losses for partnerships, individuals, S corporations, and trusts in excess of $2.0 million in any single year, or $4.0 million in any combination of six successive tax years. Our participation in a reportable transaction could increase the likelihood that our federal income tax information return (and possibly your tax return) would be audited by the IRS. Please read “—Administrative Matters—Information Returns and Audit Procedures.”

 

Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you may be subject to the following additional consequences:

 

   

accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at “—Administrative Matters—Accuracy-related Penalties”;

 

   

for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability; and

 

   

in the case of a listed transaction, an extended statute of limitations.

 

We do not expect to engage in any “reportable transactions.”

 

Recent Legislative Developments

 

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.

 

State, Local, Foreign and Other Tax Considerations

 

In addition to federal income taxes, you likely will be subject to other taxes, such as state, local and foreign income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which we do business or own property or in which you are a resident. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on his investment in us. We will initially own property or do business in Alberta, Canada, California and Texas. Most of these jurisdictions imposes an income tax on corporations and other entities and also imposes a personal income tax on individuals. We may also own property or do business in other jurisdictions in the future. Although you may not be required to file a return and pay taxes in some jurisdictions because your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many of these jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those requirements. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to offset income in subsequent taxable years. Some of the jurisdictions may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the jurisdiction. Withholding, the amount of which may be greater or less than 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

 

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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 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, local, alternative minimum tax or foreign tax consequences of an investment in us.

 

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NON-UNITED STATES TAX CONSEQUENCES

 

Canadian Tax Consequences

 

The following is a discussion of the material Canadian tax consequences that may be relevant to prospective unitholders who are not (and have not been) resident in Canada for Canadian tax purposes, or “non-Canadian Holders” and, unless otherwise noted in the following discussion, is the opinion of Fasken Martineau DuMoulin LLP, counsel to our general partner and us, insofar as it relates to legal conclusions with respect to matters of Canadian tax law.

 

All statements as to matters of Canadian 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 Fasken Martineau DuMoulin LLP and are based on the accuracy of the representatives by us.

 

Prospective unitholders who are (or have been) resident in Canada for Canadian tax purposes are urged to consult their own tax advisors regarding the potential Canadian tax consequences to them of an investment in our common units.

 

The discussion that follows is based upon existing Canadian legislation, case law and current Canadian tax authorities’ practice and policy as of the date of this prospectus, all of which may change, possibly with retroactive effect. Changes in legislation, case law and the practice and policy of Canadian tax authorities may cause the tax consequences to vary substantially from the consequences of unit ownership described below. For example, although no specific legislation has been proposed, the Department of Finance (Canada) has indicated that it is considering proposing legislation that would deny certain non-Canadian persons benefits under Canadian tax treaties.

 

Taxation of Income

 

Our Canadian operations are held through indirect wholly owned subsidiaries (Canadian Subsidiaries) of USD Partners LP, which are considered corporations resident in Canada for purposes of the Income Tax Act (Canada) (Canadian Tax Act).

 

A resident of Canada is subject to Canadian federal income taxation on its worldwide income. Accordingly, the Canadian Subsidiaries will be subject to Canadian federal and provincial income taxes based on the income of the Canadian Subsidiaries computed for purposes of the Canadian Tax Act. As a result, the amount of cash available for distribution to the unitholders of USD Partners LP will be reduced by any Canadian income tax obligations or any withholding tax obligations of the Canadian Subsidiaries, both as discussed in more detail below.

 

Distributions by the Canadian Subsidiaries to their parent will be considered dividends, or in certain limited circumstances, a return of capital. A dividend from a corporation resident in Canada to a non-resident of Canada would generally be subject to withholding tax under the Canadian Tax Act, subject to possible reduction under any applicable income tax treaty or convention. The Canadian Subsidiaries are direct wholly owned subsidiaries of a Luxembourg Societe a Responsabilite Limitee (SARL) that is wholly owned by USD Partners LP. As such, we are of the view that the Canada-Luxembourg Treaty applies to the extent that dividends are paid by the Canadian Subsidiaries to the SARL.

 

Taxation of Unitholders

 

Non-Canadian Holders generally will not be subject to Canadian federal income tax or have any tax filing obligations in Canada with respect to their ownership of units in USD Partners LP. A non-Canadian Holder will be, generally speaking, only subject to Canadian federal income tax on: (1) income from carrying on business in

 

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Canada, (2) gains realized on the disposition of “taxable Canadian property” as defined in the Canadian Tax Act and (3) certain types of Canadian source income from property such as interest, dividends, rents and royalties.

 

A non-Canadian Holder, and USD Partners LP itself, will generally not be considered to be carrying on business in Canada by virtue only of its indirect ownership interest in the Canadian Subsidiaries.

 

The units of USD Partners LP will not be considered “taxable Canadian property” provided that such units do not, at any time during the prior 60-month period, derive more than 50% of their fair market value, directly or indirectly, from (i) real property situated in Canada, (ii) Canadian resource properties, as defined in the Canadian Tax Act, (iii) timber resource properties, as defined in the Canadian Tax Act, and (iv) options in respect of, or interests in property described in (i) to (iii), whether or not such property exists. Although this determination is based on future facts and circumstances and potentially subject to challenge, at the time of this offering, we are of the view that the units of USD Partners LP are not taxable Canadian property for purposes of the Canadian Tax Act.

 

We do not expect to receive direct payments of Canadian source income from property. As such, we do not expect a non-Canadian holder to be subject to tax liabilities associated with this type of income.

 

Luxembourg Tax Consequences

 

The following is a discussion of the material Luxembourg tax consequences that may be relevant to prospective unitholders who are not and have not been resident of Luxembourg for Luxembourg tax purposes.

 

Prospective unitholders who are, or have been, resident of Luxembourg for Luxembourg tax purposes are urged to consult their own tax advisors regarding the potential Luxembourg tax consequences to them of an investment in our common units.

 

The discussion that follows is based upon existing Luxembourg legislation, case law and current Luxembourg tax authorities’ practice and policy as of the date of this prospectus, all of which may change, possibly with retroactive effect. Changes in legislation, case law and the practice and policy of Luxembourg tax authorities may cause the tax consequences to vary substantially from the consequences of unit ownership described below.

 

Distributions

 

We hold our equity interests in the Canadian Subsidiaries through Luxembourg SARLs. The SARLs are Luxembourg tax resident companies and are each liable to corporate tax in Luxembourg on their respective worldwide income.

 

The participation held by each of the SARLs in the Canadian Subsidiaries is, under certain conditions, eligible to a participation exemption regime in Luxembourg. Therefore, dividend income and capital gains derived from the Canadian Subsidiaries are exempt from corporation tax in Luxembourg to the extent that (i) their holding percentage in the share capital of their respective Canadian Subsidiary will not drop below 10.0% and (ii) the minimum participation referred to under (i) above will ultimately be held for an uninterrupted period of at least 12 month (following the initial acquisition of the shares in the Canadian Subsidiaries). A participation referred to under (i) above is also exempt from net worth tax in Luxembourg under the same conditions as for dividend albeit no minimum holding period required.

 

We expect to receive distributions from the SARLs primarily in the form of buy-back proceeds following the buy-back of an entire class of shares of each of the SARLs, which is not subject to dividend withholding tax in Luxembourg under certain conditions that are expected to be met. We may, however, under certain circumstances receive a dividend distribution from the SARLs, which would be subject to a 15.0% withholding tax in Luxembourg (subject to any reduction under the applicable double tax treaty).

 

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We will be subject to taxation in Luxembourg only in the event we derive income from a permanent establishment or permanent representative in Luxembourg. We are of the view that we will not be regarded as having a fixed place of business, established for undertaking an industrial or commercial activity in Luxembourg, and should therefore not be considered to have a permanent establishment or permanent representative in Luxembourg.

 

Finally, should we realize any capital gain upon disposal of shares in the SARLs occurring within 6 months following the acquisition of such shares, those capital gains may be subject to taxation in Luxembourg. In the event we qualify as transparent entities for Luxembourg tax purposes, any capital gain realized by any of our investors upon disposal of their investment within a period of six months following its acquisition, may be subject to taxation in Luxembourg but only to the extent such investor is deemed to hold a substantial shareholding in the SARLs which is the case if such interest represents an indirect investment of more than 10.0% in the share capital of one of the SARLs.

 

EACH PROSPECTIVE UNITHOLDER IS URGED TO CONSULT ITS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THE LEGAL AND TAX CONSEQUENCES OF UNIT OWNERSHIP UNDER ITS PARTICULAR CIRCUMSTANCES.

 

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INVESTMENT IN USD 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, non-U.S. 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 IRAs or annuities 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, collectively, “Employee Benefit Plans.” Among other things, consideration should be given to:

 

   

whether the investment is prudent under Section 404(a)(1)(B) of ERISA and any other applicable Similar Laws;

 

   

whether in making the investment, the plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA and any other applicable Similar Laws;

 

   

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 Federal Income Tax Consequences—Tax-Exempt Organizations and Other Investors”; and

 

   

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.

 

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 from engaging, either directly or indirectly, in specified transactions involving “plan assets” with parties that, with respect to the Employee Benefit 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 Employee Benefit Plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that our general partner would also be a fiduciary of such Employee Benefit 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 U.S. Department of Labor regulations and Section 3(42) of ERISA 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 rules, 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;

 

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(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 25.0% of the value of each class of equity interest, disregarding any such interests held by our general partner, its affiliates and certain other persons, is held generally by Employee Benefit Plans.

 

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. The foregoing discussion of issues arising for employee benefit plan investments under ERISA and the Internal Revenue Code is general in nature and is not intended to be all inclusive, nor should it be construed as legal advice. 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.

 

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UNDERWRITING

 

Citigroup Global Markets Inc. and Barclays Capital Inc. are acting as joint book-running managers of the offering and as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has severally agreed to purchase, and we have agreed to sell to that underwriter, the number of common units set forth opposite the underwriter’s name.

 

Underwriter

   Number
of Common
Units

Citigroup Global Markets Inc.

  

Barclays Capital Inc.

  

Credit Suisse Securities (USA) LLC

  

Merrill Lynch, Pierce, Fenner & Smith

                          Incorporated

  

Evercore Group L.L.C.

  

BMO Capital Markets Corp.

  

Deutsche Bank Securities Inc.

  

RBC Capital Markets, LLC

  

Janney Montgomery Scott LLC

  
  

 

Total

  
  

 

 

The underwriting agreement provides that the obligations of the underwriters to purchase the common units included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the common units (other than those covered by the underwriters’ over-allotment option to purchase additional common units described below) if they purchase any of the common units.

 

Common units sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any common units sold by the underwriters to securities dealers may be sold at a discount from the initial public offering price not to exceed $         per common unit. If all the common units are not sold at the initial offering price, the underwriters may change the offering price and the other selling terms. The representatives have advised us that the underwriters do not intend to make sales to discretionary accounts.

 

If the underwriters sell more common units than the total number set forth in the table above, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to                      additional common units at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional common units approximately proportionate to that underwriter’s initial purchase commitment. Any common units issued or sold under the option will be issued and sold on the same terms and conditions as the other common units that are the subject of this offering.

 

We, our officers and directors, our general partner and USD Group LLC have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc. and Barclays Capital Inc., dispose of or hedge any common units or any securities convertible into or exchangeable for our common units, subject to specified exceptions. Citigroup Global Markets Inc. and Barclays Capital Inc. in their sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice.

 

At our request, the underwriters have reserved up to     % of the units for sale at the initial public offering price to persons who are for officers, directors, employees and certain other persons associated with us through a

 

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directed unit program. The number of units available for sale to the general public will be reduced by the number of directed units purchased by participants in the program. Except for certain of our officers, directors and employees who have entered into lock-up agreements as contemplated in the immediately preceding paragraph, each person buying units through the directed units program has agreed that, for a period of 180 days from the date of this prospectus, he or she will not, without the prior written consent of Citigroup Global Markets Inc. and Barclays Capital Inc., dispose of or hedge any units or any securities convertible into or exchangeable for our common units with respect to units purchased in the program. For certain officers, directors and employees purchasing units through the directed units program, the lock-up agreements contemplated in the immediately preceding paragraph shall govern with respect to their purchases. Citigroup Global Markets Inc. and Barclays Capital Inc. in their sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. Any directed units not purchased will be offered by the underwriters to the general public on the same basis as all other units offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed units.

 

Prior to this offering, there has been no public market for our common units. Consequently, the initial public offering price for the common units was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the price at which the common units will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common units will develop and continue after this offering.

 

We have applied to list our common units on the New York Stock Exchange under the symbol “USDP”.

 

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional common units from us.

 

     No Exercise      Full Exercise  

Per common unit

   $                    $                

Total

   $         $     

 

We will pay Evercore Group, L.L.C., Citigroup Global Markets Inc. and Barclays Capital Inc. an aggregate structuring fee equal to     % of the gross proceeds of this offering for the evaluation, analysis and structuring of our partnership.

 

We estimate that our portion of the total expenses of this offering, not including the underwriting discount and structuring fee, will be approximately $        .

 

In connection with the offering, the underwriters may purchase and sell common units in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the underwriters’ over-allotment option to purchase additional common units, and stabilizing purchases.

 

   

Short sales involve secondary market sales by the underwriters of a greater number of common units than they are required to purchase in the offering.

 

   

“Covered” short sales are sales of common units in an amount up to the number of common units represented by the underwriters’ over-allotment option to purchase additional common units.

 

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“Naked” short sales are sales of common units in an amount in excess of the number of common units represented by the underwriters’ over-allotment option to purchase additional common units.

 

   

Covering transactions involve purchases of common units either pursuant to the underwriters’ over-allotment option to purchase additional common units or in the open market after the distribution has been completed in order to cover short positions.

 

   

To close a naked short position, the underwriters must purchase common units in the open market after the distribution has been completed. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common units in the open market after pricing that could adversely affect investors who purchase in the offering.

 

   

To close a covered short position, the underwriters must purchase common units in the open market after the distribution has been completed or must exercise the over-allotment option to purchase additional common units. In determining the source of common units to close the covered short position, the underwriters will consider, among other things, the price of common units available for purchase in the open market as compared to the price at which they may purchase common units through the underwriters’ over-allotment option to purchase additional common units.

 

   

Stabilizing transactions involve bids to purchase common units so long as the stabilizing bids do not exceed a specified maximum.

 

Purchases to cover short positions and stabilizing purchases, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our common units. They may also cause the price of our common units to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the New York Stock Exchange, in the over-the-counter market or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

 

Certain Relationships

 

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The underwriters and their respective affiliates have in the past performed commercial banking, investment banking and advisory services for us or our affiliates from time to time for which they have received customary fees and reimbursement of expenses and may, from time to time, engage in transactions with and perform services for us or our affiliates in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses.

 

Specifically, an affiliate of BMO Capital Markets Corp. is a lender under the USD credit facility. Additionally, an affiliate of Citigroup Global Markets Inc. is expected to be the administrative agent, and affiliates of              ,              and              are expected to be lenders under our new credit facility. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments or those of our affiliates.

 

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 Rule 2310 of

 

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the FINRA Rules. Investor suitability with respect to the common units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange.

 

Notice to Prospective Investors in Australia

 

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (“ASIC”), in relation to the offering. This registration statement does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

Any offer in Australia of the common units may only be made to persons (the “Exempt Investors”), who are:

 

  (a)   “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act; and

 

  (b)   “wholesale clients” (within the meaning of section 761G of the Corporations Act),

 

so that it is lawful to offer the common units without disclosure to investors under Chapters 6D and 7 of the Corporations Act.

 

The common units applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapters 6D and 7 of the Corporations Act would not be required pursuant to an exemption under both section 708 and Subdivision B of Division 2 of Part 7.9 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapters 6D and 7 of the Corporations Act. Any person acquiring common units must observe such Australian on-sale restrictions.

 

This registration statement contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this registration statement is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

Notice to Prospective Investors in the European Economic Area

 

In relation to each member state of the European Economic Area (each, a relevant member state), other than Germany, an offer of securities described in this registration statement may not be made to the public in that relevant member state other than:

 

   

to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

   

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or

 

   

in any other circumstances falling within Article 3(2) of the Prospectus Directive; provided that no such offer of securities shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For purposes of this provision, the expression an “offer of securities to the public” in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer

 

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and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and includes any relevant implementing measure in each relevant member state. The expression 2010 PD Amending Directive means Directive 2010/73/EU.

 

We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the securities as contemplated in this prospectus. Accordingly, no purchaser of the securities, other than the underwriters, is authorized to make any further offer of the securities on behalf of us or the underwriters.

 

Notice to Prospective Investors in Germany

 

This registration statement has not been prepared in accordance with the requirements for a securities or sales prospectus under the German Securities Prospectus Act (Wertpapierprospektgesetz), the German Sales Prospectus Act (Verkaufsprospektgesetz), or the German Investment Act (Investmentgesetz). Neither the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht — BaFin) nor any other German authority has been notified of the intention to distribute the common units in Germany. Consequently, the common units may not be distributed in Germany by way of public offering, public advertisement or in any similar manner and this prospectus and any other document relating to this offering, as well as information or statements contained therein, may not be supplied to the public in Germany or used in connection with any offer for subscription of the common units to the public in Germany or any other means of public marketing. The common units are being offered and sold in Germany only to qualified investors which are referred to in Section 3, paragraph 2 no. 1, in connection with Section 2, no. 6, of the German Securities Prospectus Act, Section 8f paragraph 2 no. 4 of the German Sales Prospectus Act, and in Section 2 paragraph 11 sentence 2 no. 1 of the German Investment Act. This prospectus is strictly for use of the person who has received it. It may not be forwarded to other persons or published in Germany.

 

This offering of our common units does not constitute an offer to buy or the solicitation or an offer to sell the common units in any circumstances in which such offer or solicitation is unlawful.

 

Notice to Prospective Investors in Hong Kong

 

No advertisement, invitation or document relating to the common units has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to common units which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

Notice to Prospective Investors in the Netherlands

 

The common units may not be offered or sold, directly or indirectly, in the Netherlands, other than to qualified investors (gekwalificeerde beleggers) within the meaning of Article 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht).

 

Notice to Prospective Investors in Switzerland

 

This registration statement is being communicated in Switzerland to a small number of selected investors only. Each copy of this prospectus is addressed to a specifically named recipient and may not be copied,

 

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reproduced, distributed or passed on to third parties. The common units are not being offered to the public in Switzerland, and neither this registration statement, nor any other offering materials relating to the common units may be distributed in connection with any such public offering.

 

We have not been registered with the Swiss Financial Market Supervisory Authority FINMA as a foreign collective investment scheme pursuant to Article 120 of the Collective Investment Schemes Act of June 23, 2006 (“CISA”). Accordingly, the common units may not be offered to the public in or from Switzerland, and neither this registration statement, nor any other offering materials relating to the common units may be made available through a public offering in or from Switzerland. The common units may only be offered and this registration statement may only be distributed in or from Switzerland by way of private placement exclusively to qualified investors (as this term is defined in the CISA and its implementing ordinance).

 

Notice to Prospective Investors in the United Kingdom

 

Our partnership may constitute a “collective investment scheme” as defined by section 235 of the Financial Services and Markets Act 2000 (“FSMA”) that is not a “recognised collective investment scheme” for the purposes of FSMA (“CIS”) and that has not been authorised or otherwise approved. As an unregulated scheme, it cannot be marketed in the United Kingdom to the general public, except in accordance with FSMA. This registration statement is only being distributed in the United Kingdom to, and is only directed at:

 

  (i)   if we are a CIS and are marketed by a person who is an authorised person under FSMA, (a) investment professionals falling within Article 14(5) of the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) Order 2001, as amended (the “CIS Promotion Order”) or (b) high net worth companies and other persons falling within Article 22(2)(a) to (d) of the CIS Promotion Order; or

 

  (ii)   otherwise, if marketed by a person who is not an authorised person under FSMA, (a) persons who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Financial Promotion Order”) or (b) Article 49(2)(a) to (d) of the Financial Promotion Order; and

 

  (iii) in both cases (i) and (ii) to any other person to whom it may otherwise lawfully be made, (all such persons together being referred to as “relevant persons”). The common units are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such common units will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this prospectus or any of its contents.

 

An invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) in connection with the issue or sale of any common units which are the subject of the offering contemplated by this prospectus will only be communicated or caused to be communicated in circumstances in which Section 21(1) of FSMA does not apply to us.

 

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VALIDITY OF THE COMMON UNITS

 

The validity of our common units will be passed upon for us by Latham & Watkins LLP, Houston, Texas. Certain legal matters in connection with our common units offered hereby will be passed upon for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.

 

EXPERTS

 

The combined financial statements of USD Partners LP Predecessor as of December 31, 2013 and 2012, and for the years then ended, included in this prospectus have been audited by UHY LLP, an independent registered public accounting firm as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report, given on the authority of such firm as experts in auditing and accounting.

 

The balance sheet of USD Partners LP as of June 5, 2014 included in this prospectus has been audited by UHY LLP, an independent registered public accounting firm as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report, given on the authority of such firm as experts in auditing and accounting.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 regarding our common units. This prospectus does not contain all of the information described in the registration statement and related exhibits, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information regarding us and the common units offered by this prospectus, you may desire to review the full registration statement, including its exhibits and schedules, filed under the Securities Act. The registration statement of which this prospectus forms a part, including its exhibits and schedules, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of the materials may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

 

The SEC maintains a website on the internet at http://www.sec.gov. Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC’s website and can also be inspected and copied at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

 

Upon completion of this offering, we will file with or furnish to the SEC periodic reports and other information. These reports and other information may be inspected and copied at the public reference facilities maintained by the SEC or obtained from the SEC’s website as provided above. Our website on the Internet is located at www.usdpartners.com and we will make our periodic reports and other information filed with or furnished to the SEC available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

 

We intend to furnish or make available to our unitholders annual reports containing our audited financial statements and furnish or make available to our unitholders quarterly reports containing our unaudited interim financial information, including the information required by Form 10-Q, for the first three fiscal quarters of each fiscal year.

 

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FORWARD-LOOKING STATEMENTS

 

Some of the information in this prospectus may contain forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue,” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state other “forward-looking” information. These forward-looking statements involve risks and uncertainties. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. The risk factors and other factors noted throughout this prospectus could cause our actual results to differ materially from those contained in any forward-looking statement.

 

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

   

changes in general economic conditions;

 

   

competitive conditions in our industry;

 

   

actions taken by our customers and competitors;

 

   

the supply of, and demand for, crude oil and biofuel rail terminalling services;

 

   

our ability to successfully implement our business plan;

 

   

our ability to complete internal growth projects on time and on budget;

 

   

the price and availability of debt and equity financing;

 

   

operating hazards and other risks incidental to handling crude oil and biofuels;

 

   

natural disasters, weather-related delays, casualty losses and other matters beyond our control;

 

   

interest rates;

 

   

labor relations;

 

   

large customer defaults;

 

   

change in availability and cost of capital;

 

   

changes in tax status;

 

   

the effect of existing and future laws and government regulations;

 

   

changes in insurance markets impacting cost and the level and types of coverage available;

 

   

disruptions due to equipment interruption or failure at our facilities or third-party facilities on which our business is dependent;

 

   

the effects of future litigation; and

 

   

certain factors discussed elsewhere in this prospectus.

 

Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to the securities law.

 

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INDEX TO FINANCIAL STATEMENTS

 

USD Partners LP Unaudited Pro Forma Combined Financial Statements:

  

Introduction

     F-2   

Unaudited Pro Forma Combined Balance Sheet as of June 30, 2014

     F-4   

Unaudited Pro Forma Combined Statement of Operations for the Six Months Ended June 30, 2013

     F-5   

Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 2013

     F-6   

Unaudited Pro Forma Combined Statement of Operations for the Six Months Ended June 30, 2014

     F-7   

Notes to the Unaudited Pro Forma Combined Financial Statements

     F-8   

USD Partners LP Predecessor Condensed Combined Financial Statements:

  

Condensed Combined Balance Sheets as of June 30, 2014 and December 31, 2013

     F-11   

Condensed Combined Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2014 and 2013

     F-12   

Condensed Combined Statement of Owner’s Equity for the Six Months Ended June 30, 2014

     F-13   

Condensed Combined Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     F-14   

Notes to the Condensed Combined Financial Statements

     F-15   

USD Partners LP Predecessor Combined Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     F-25   

Combined Balance Sheets as of December 31, 2013 and 2012

     F-26   

Combined Statements of Income and Comprehensive Income for the Years Ended December  31, 2013 and 2012

     F-27   

Combined Statements of Owner’s Equity for the Years Ended December 31, 2013 and 2012

     F-28   

Combined Statements of Cash Flows for the Years Ended December 31, 2013 and 2012

     F-29   

Notes to Combined Financial Statements

     F-30   

USD Partners LP Historical Balance Sheet:

  

Report of Independent Registered Public Accounting Firm

     F-45   

Balance Sheet as of June 5, 2014

     F-46   

Notes to Balance Sheet

     F-47   

 

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USD PARTNERS LP

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

Introduction

 

Set forth below are the unaudited pro forma condensed combined balance sheet of USD Partners, LP (the “Partnership”), as of June 30, 2014, and the unaudited pro forma combined statement of operations of the Partnership for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014. The pro forma combined financial statements of the Partnership have been derived from the historical combined financial statements of USD Partners LP Predecessor (the “Predecessor”), set forth elsewhere in this prospectus. The unaudited pro forma combined financial statements have been prepared on the basis that the Partnership will be treated as a partnership for U.S. federal income tax purposes. The unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes and with the historical combined financial statements and related notes set forth elsewhere in this prospectus.

 

The Partnership will own and operate the assets of the Predecessor effective as of the closing of this offering. The contribution of the Predecessor’s assets to us by USD Group LLC (“USD” or the “Parent”), a subsidiary of US Development Group LLC, will be recorded at historical cost as it is considered to be a reorganization of entities under common control.

 

The pro forma adjustments have been prepared as if certain transactions to be effected at the closing of this offering had taken place on June 30, 2014 in the case of the pro forma balance sheet, or on January 1, 2013 in the case of the pro forma statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014. The pro forma adjustments described below are based upon currently available information and certain estimates and assumptions. As a result, actual adjustments will differ from the pro forma adjustments. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the contemplated transactions and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the pro forma combined financial information.

 

The unaudited pro forma financial data gives pro forma effect to the matters described in the notes hereto, including:

 

   

the issuance by the Partnership of 250,000 Class A Units to certain executive officers and other key employees of the Partnership’s general partner and its affiliates who provide services to the Partnership;

 

   

the contribution to the Partnership of the subsidiaries of USD comprising the Predecessor;

 

   

the execution of a new $300.0 million senior secured credit facility, which is comprised of a $200.0 million revolving credit facility and a $100.0 million term loan facility that we have assumed was fully drawn in the amount of $100.0 million during the pro forma periods presented, and the amortization of deferred financing costs and unused commitment fees associated with the revolving credit facility;

 

   

the payment of $         million of fees and expenses in connection with our new senior secured credit agreement, which is comprised of a revolving credit facility and a term loan;

 

   

the consummation of this offering and our issuance of              common units to the public,              general partner units to our general partner and              common units,              subordinated units and the incentive distribution rights to affiliates of USD;

 

   

the payment of underwriting discounts and commissions and a structuring fee;

 

   

the addition of deferred taxes and changes in the Predecessor’s provision for income taxes as a result of uncertainty around the qualification of income from the railcar business as qualifying income under the Internal Revenue Code;

 

   

the cash distribution to USD Group LLC of $         million; and

 

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the repayment of $97.8 million of existing indebtedness under our existing credit facility, which bears interest at a rate of LIBOR plus an applicable margin which equaled 3.90% as of June 30, 2014 and matures in March 2015.

 

The pro forma financial data does not give effect to an estimated $2.1 million in incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly-traded partnership. In addition, we do not give pro forma effect for the costs we will incur under the omnibus agreement that we will enter into with USD as of the closing of this offering, as those adjustments in the aggregate yielded a similar result to the costs that our Predecessor incurred historically.

 

The unaudited pro forma combined financial statements may not be indicative of the results that actually would have occurred or that would be obtained in the future if the Partnership had assumed the operations of USD and consummated the transactions described above on the dates indicated or that would be obtained in the future.

 

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USD PARTNERS LP

UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 2014

(in thousands)

 

    Predecessor
Historical
    Pro Forma
Adjustments
          Pro
Forma
 
ASSETS        

Current assets:

       

Cash and cash equivalents

  $ 32,441      $          (a   $     
        (b  
      (98,291     (c  
      100,000        (d  
      (2,015     (e  
        (h  

Accounts receivable, net

    3,139                 3,139   

Prepaid rent, current portion

    968                 968   

Prepaid expenses and other current assets

    1,078                 1,078   

Current assets — discontinued operations

    636                 636   
 

 

 

   

 

 

     

 

 

 

Total current assets

    38,262         

Total property and equipment, net

    92,394                 92,394   

Prepaid rent, net of current portion

    6,076                 6,076   

Deferred financing costs, net

    816        1,199        (e     2,015   

Deferred tax asset

           555        (i     555   
 

 

 

   

 

 

     

 

 

 

Total assets

  $ 137,548      $          $     
 

 

 

   

 

 

     

 

 

 
LIABILITIES AND MEMBERS’ EQUITY        

Current liabilities:

       

Accounts payable and accrued expenses

    9,480        (446     (c     9,034   

Credit facility, current portion

    97,845        (97,845     (c       

Deferred revenue, current portion

    2,652                 2,652   

Deferred revenue, current portion — related party

    219                 219   

Other current liabilities

    4,586                 4,586   

Derivative liability, current portion

    233                 233   

Current liabilities — discontinued operations

    3,336                 3,336   
 

 

 

   

 

 

     

 

 

 

Total current liabilities

    118,351        (98,291       20,060   

Term loan

      100,000        (d     100,000   

Derivative liability, net of current portion

    103                 103   

Deferred revenue, net of current portion

    6,540                 6,540   

Deferred revenue — related party

    1,702                 1,702   

Commitments and contingencies

       

Owners’ equity:

       

Owners’ equity

    10,852          (b  
        (h  
      (816     (e  
      555        (i  

Common units — public (no units outstanding at June 30, 2014;              units outstanding pro forma at June 30, 2014 (unaudited))

        (a  

Common units — USD (no units outstanding at June 30, 2014;              units outstanding pro forma at June 30, 2014 (unaudited))

        (f  

Class A units — management (no units outstanding at June 30, 2014; 250,000 units outstanding pro forma at June 30, 2014 (unaudited))

        (g  

Subordinated units — USD (no units outstanding at June 30, 2014;              units outstanding pro forma at June 30, 2014 (unaudited))

        (f  

General partner equity (no units outstanding at June 30, 2014;              units outstanding pro forma at June 30, 2014 (unaudited))

        (f  
 

 

 

   

 

 

     

 

 

 

Total equity

    10,852         
 

 

 

   

 

 

     

 

 

 

Total liabilities and owners’ equity

  $ 137,548      $          $     
 

 

 

   

 

 

     

 

 

 

 

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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USD PARTNERS LP

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2013

(in thousands, except unit and per unit data)

 

     Predecessor
Historical
    Pro forma
Adjustments
          Pro
Forma
 

Revenues:

        

Terminalling services

   $ 3,691      $        $ 3,691   

Fleet leases

     8,546                 8,546   

Fleet services

     375                 375   

Freight and other reimbursables

     768                 768   
  

 

 

   

 

 

     

 

 

 

Total revenues

     13,380                 13,380   
  

 

 

   

 

 

     

 

 

 

Operating costs:

        

Subcontracted rail services

     944                 944   

Fleet leases

     8,546                 8,546   

Freight and other reimbursables

     768                 768   

Selling, general & administrative

     2,044          (o     2,044   

Depreciation

     251                 251   
  

 

 

   

 

 

     

 

 

 

Total operating costs

     12,553                 12,553   
  

 

 

   

 

 

     

 

 

 

Operating income

     827            827   

Interest expense

     (1,645     1,645        (j     (2,418
       (1,717     (k  
       (201     (l  
       (500     (m  

Other expense, net

                       
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations before provision for income taxes

     (818     (773       (1,591

Provision for income taxes

     17        131        (n     148   
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations

   $ (835   $ (904     $ (1,739
  

 

 

   

 

 

     

 

 

 

General partner’s interest in loss from continuing operations

         $     

Limited partners’ interest in loss from continuing operations

         $     

Common units

         $     

Subordinated units

         $     

Weighted average number of limited partner units outstanding:

        

Common units (basic and diluted)

        

Subordinated units (basic and diluted)

        

 

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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USD PARTNERS LP

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2013

(in thousands, except unit and per unit data)

 

     Predecessor
Historical
    Pro forma
Adjustments
          Pro
Forma
 

Revenues:

        

Terminalling services

   $ 7,130      $        $ 7,130   

Fleet leases

     13,572                 13,572   

Fleet services

     1,197                 1,197   

Freight and other reimbursables

     4,402                 4,402   
  

 

 

   

 

 

     

 

 

 

Total revenues

     26,301                 26,301   
  

 

 

   

 

 

     

 

 

 

Operating costs:

        

Subcontracted rail services

     1,898                 1,898   

Fleet leases

     13,572                 13,572   

Freight and other reimbursables

     4,402                 4,402   

Selling, general & administrative

     4,458          (o     4,458   

Depreciation

     502                 502   
  

 

 

   

 

 

     

 

 

 

Total operating costs

     24,832                 24,832   
  

 

 

   

 

 

     

 

 

 

Operating income

     1,469            1,469   

Interest expense

     (3,241     3,241        (j     (4,884
       (3,481     (k  
       (403     (l  
       (1,000     (m  

Other expense, net

     (39              (39
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations before provision for income taxes

     (1,811     (1,643       (3,454

Provision for income taxes

     30        419        (n     449   
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations

   $ (1,841   $ (2,062     $ (3,903
  

 

 

   

 

 

     

 

 

 

General partner’s interest in loss from continuing operations

         $     

Limited partners’ interest in loss from continuing operations

         $     

Common units

         $     

Subordinated units

         $     

Weighted average number of limited partner units outstanding:

        

Common units (basic and diluted)

        

Subordinated units (basic and diluted)

        

 

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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USD PARTNERS LP

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2014

(in thousands, except unit and per unit data)

 

     Predecessor
Historical
    Pro forma
Adjustments
          Pro
Forma
 

Revenues:

        

Terminalling services

   $ 3,448      $        $ 3,448   

Fleet leases

     4,596            4,596   

Fleet services

     956                 956   

Freight and other reimbursables

     1,921                 1,921   
  

 

 

   

 

 

     

 

 

 

Total revenues

     10,921                 10,921   
  

 

 

   

 

 

     

 

 

 

Operating costs:

        

Subcontracted rail services

     2,109                 2,109   

Fleet leases

     4,596                 4,596   

Freight and other reimbursables

     1,921                 1,921   

Selling, general & administrative

     3,813          (o     3,813   

Depreciation

     254                 254   
  

 

 

   

 

 

     

 

 

 

Total operating costs

     12,693                 12,693   
  

 

 

   

 

 

     

 

 

 

Operating loss

     (1,772         (1,772

Interest expense

     (1,984     1,984        (j     2,418   
       (1,717     (k  
       (201     (l  
       (500     (m  

Loss associated with derivative instruments

     (802              (802

Other expense, net

     (688              (688
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations before provision for income taxes

     (5,246     (434       (5,680

Provision for income taxes

     24        335        (n     359   
  

 

 

   

 

 

     

 

 

 

Loss from continuing operations

   $ (5,270   $ (769     $ (6,039
  

 

 

   

 

 

     

 

 

 

General partner’s interest in loss from continuing operations

         $     

Limited partners’ interest in loss from continuing operations

         $     

Common units

         $     

Subordinated units

         $     

Weighted average number of limited partner units outstanding:

        

Common units (basic and diluted)

        

Subordinated units (basic and diluted)

        

 

See Notes to Unaudited Pro Forma Combined Financial Statements.

 

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Table of Contents

USD PARTNERS LP

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Note 1. Basis of Presentation

 

The unaudited pro forma condensed combined balance sheet of USD Partners LP (“USD Partners”) as of June 30, 2014, and the related unaudited pro forma combined statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014 are derived from the historical combined financial statements of our Predecessor included elsewhere in the prospectus.

 

Upon completion of this offering, USD Partners anticipates incurring $2.1 million of incremental selling, general and administrative expenses as a result of being a publicly traded partnership, consisting of costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, registered independent auditor fees, investor relations activities, Sarbanes-Oxley Act compliance, NYSE listing, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation. The unaudited pro forma combined financial statements do not reflect these incremental external general and administrative expenses.

 

Note 2. Unaudited Pro Forma Combined Balance Sheet Adjustments

 

The following adjustments to the unaudited pro forma condensed combined balance sheet assume the following transactions occurred on June 30, 2014:

 

  (a)   Reflects the estimated proceeds to USD of $             million from the issuance of              common units at an assumed public offering price of $             per common unit,

 

  (b)   Reflects the payment of estimated underwriter discounts and commissions and structuring fees totaling $             million. These fees will be allocated to the public common units.

 

  (c)   Represents proceeds from the public offering of common units used to pay down the existing revolving credit facility of $97.8 million and the related interest payable of $0.4 million.

 

  (d)   Reflects $100.0 million from borrowings under our new term loan.

 

  (e)   Represents $2.0 million of debt issuance costs incurred in connection with entering into our new revolving credit facility net of $0.8 million of historical debt issuance costs written off due to repayment of the existing revolving credit facility.

 

  (f)   Reflects the conversion of the adjusted equity of the Predecessor of $                 million from owner’s equity to common and subordinated limited partner equity of the Partnership and the general partner’s equity in the Partnership. The conversion is as follows:

 

     As of
June 30, 2014
 
     (in thousands)  

Owners’ equity

   $                   

Common units - USD

  

Subordinated units - USD

  

General partner equity

  

 

  (g)   Represents the granting of 250,000 Class A Units. No equity is recorded related to the Class A Units on the date of the transaction as none of the units are assumed to have vested as of June 30, 2014.

 

  (h)   Reflects a $             million cash distribution to USD.

 

  (i)  

The Partnership is currently seeking a revenue ruling from the IRS on the qualifying nature of the revenues generated by its railcar business. Historically, revenues from the railcar business were treated as pass through revenues not subject to federal income tax. The Partnership is assuming for purposes of these pro forma financial statements that it will not receive the revenue ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. Pretax earnings from the railcar business are subject to a statutory rate of 35%. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using

 

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Table of Contents

USD PARTNERS LP

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

 

enacted tax rates in effect for the year in which differences are expected to be recovered or settled pursuant to the provisions of ASC 740-Income Taxes. The resulting deferred tax asset of approximately $0.6 million is recorded in equity.

 

Note 3. Unaudited Pro Forma Combined Statements of Operations Adjustments

 

The following adjustments to the pro forma condensed combined statements of operations assume the above-noted transactions occurred as of January 1, 2013:

 

  (j)   Reflects the impact of removing $3.2 million, $1.6 million, and $2.0 million of interest expense and amortization of deferred financing costs related to the existing revolving credit facility for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively.

 

  (k)   Represents $3.5 million, $1.7 million, and $1.7 million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively, in interest expense relating to our new $100.0 million term loan borrowings under our new senior secured credit agreement to be executed at the closing of this offering. Interest expense has been estimated based on an interest rate of 3.48%, which includes a base rate of 0.2307% plus an applicable margin of 3.25%. A 0.125% change in the assumed interest rate of 3.48% would change aggregate pro forma interest expense by approximately $0.1 million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014.

 

  (l)   Represents $0.4 million, $0.2 million and $0.2 million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively, of amortization of deferred financing costs relating to our new $100.0 million term loan borrowings to be executed at the closing of this offering that will be amortized over the term of the loan, which is four years and nine months.

 

  (m)   Represents $1.0 million, $0.5 million, and $0.5 million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively, of commitment fees on our new $200.0 million revolving credit facility to be executed at the closing of this offering. Such commitment fees are charged at 0.50% on the unused portion of the facility.

 

  (n)   The Partnership is currently seeking a revenue ruling from the IRS on the qualifying nature of the revenues generated by its railcar business. Historically, revenues from the railcar business were treated as pass through revenues not subject to federal income tax. The Partnership is assuming for purposes of these pro forma financial statements that it will not receive the revenue ruling in a timely manner and will elect to pay taxes on the revenues generated by our railcar business. All of the pretax earnings recorded in Fleet leases and Fleet services on the accompanying pro forma combined statements of operations for the twelve months ended December 31, 2013 and the six months ended June 30, 2013 and 2014, of $1.2 million, $0.4 million, and $1.0 million, respectively, are subject to a statutory rate of 35%. The adjustment represents an increase in provision for income taxes of $0.4 million, $0.1 million, and $0.3 million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively.

 

  (o)   Represents $     million, $     million, and $     million for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, respectively, in incremental compensation expense relating to the issuance of 250,000 Class A Units to certain executive officers of our general partner and to other key employees of our general partner and its affiliates. The Class A Unit awards vest in four tranches. The Partnership assumed that Tranche 1 and 2 would not have vested nor would distributions have been made to Class A Unit holders. For Tranche 3 the Partnership assumed that it was probable that the base vesting threshold would be met but would not exceed the target amount and the awards would vest on a 1:1 basis. For Tranche 4 the Partnership assumed that it was probable that it would exceed the target threshold and the awards would vest on a 2:1 basis.

 

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Table of Contents

USD PARTNERS LP

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Note 4. Unaudited Pro Forma Net Loss per Unit

 

Unaudited pro forma loss from continuing operations per unit is determined by dividing the unaudited pro forma net loss attributable to common unitholders of USD Partners by the number of common units to be issued to our Parent in exchange for all of the outstanding equity interests in USD Partners, plus the number of common units expected to be sold to fund the distribution and debt repayment. For purposes of this calculation, the number of common units outstanding was assumed to be              units. If the underwriters exercise their option to purchase additional common units in full, the total number of common units outstanding on a pro forma basis will not change. If the incentive distribution rights to be issued to our controlling shareholder and our parent had been outstanding from January 1, 2013, then based on the amount of unaudited pro forma net income for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014, no distribution in respect of the incentive distribution rights would have been made. Accordingly, no effect has been given to the incentive distribution rights in computing unaudited pro forma earnings per common unit for the year ended December 31, 2013 and the six months ended June 30, 2013 and 2014.

 

All units were assumed to have been outstanding since the beginning of the periods presented. Basic and diluted pro forma net earnings per unit are the same, as there are no potentially dilutive units expected to be outstanding at the closing of the offering.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

CONDENSED COMBINED BALANCE SHEETS

(in thousands)

 

     Supplemental
Pro Forma
June 30,

2014
     June 30,
2014
     December 31,
2013
 
     (unaudited)         
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 32,441       $ 32,441       $ 6,151   

Accounts receivable, net

     3,139         3,139         1,587   

Accounts receivable — related party

                     402   

Prepaid rent, current portion

     968         968         983   

Prepaid expenses and other current assets

     1,078         1,078         1,977   

Current assets — discontinued operations

     636         636         30,076   
  

 

 

    

 

 

    

 

 

 

Total current assets

     38,262         38,262         41,176   

Property and equipment, net

     92,394         92,394         61,364   

Prepaid rent, net of current portion

     6,076         6,076         4,278   

Deferred financing costs, net

     816         816         450   
  

 

 

    

 

 

    

 

 

 

Total assets

     137,548       $ 137,548       $ 107,268   
  

 

 

    

 

 

    

 

 

 
LIABILITIES AND OWNER’S EQUITY         

Current liabilities:

        

Accounts payable and accrued expenses

     9,480         9,480         7,073   

Loan from parent

                     50,991   

Credit facility, current portion

     97,845         97,845           

Deferred revenue, current portion

     2,652         2,652         1,563   

Deferred revenue, current portion — related party

     219         219           

Other current liabilities

     4,586         4,586         3,656   

Derivative liability, current portion

     233         233           

Current liabilities — discontinued operations

     3,336         3,336         5,835   

Distribution payable to USD

                  
  

 

 

    

 

 

    

 

 

 

Total current liabilities

        118,351         69,118   

Credit facility, net of current portion

                     30,000   

Deferred revenue, net of current portion

     6,540         6,540         4,585   

Deferred revenue — related party, net of current portion

     1,702         1,702         962   

Derivative liability, net of current portion

     103         103           

Commitments and contingencies

        

Owner’s equity (deficit)

        10,852         2,603   
  

 

 

    

 

 

    

 

 

 

Total liabilities and owner’s equity

      $ 137,548       $ 107,268   
  

 

 

    

 

 

    

 

 

 

 

See Notes to Condensed Combined Financial Statements.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

CONDENSED COMBINED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

     Six Months Ended June 30,  
             2014                     2013          

Revenues:

    

Terminalling services

   $ 3,448      $ 3,691   

Fleet leases

     4,596        8,546   

Fleet services

     238        99   

Fleet services — related party

     718        276   

Freight and other reimbursables

     1,702        768   

Freight and other reimbursables — related party

     219          
  

 

 

   

 

 

 

Total revenues

     10,921        13,380   
  

 

 

   

 

 

 

Operating costs:

    

Subcontracted rail services

     2,109        944   

Fleet leases

     4,596        8,546   

Freight and other reimbursables

     1,921        768   

Selling, general & administrative

     3,813        2,044   

Depreciation

     254        251   
  

 

 

   

 

 

 

Total operating costs

     12,693        12,553   
  

 

 

   

 

 

 

Operating income (loss)

     (1,772     827   

Interest expense

     1,984        1,645   

Loss on derivative contracts

     802          

Other expense, net

     688          
  

 

 

   

 

 

 

Loss from continuing operations before provision for income taxes

     (5,246     (818

Provision for income taxes

     24        17   
  

 

 

   

 

 

 

Loss from continuing operations

     (5,270     (835

Discontinued operations:

    

Income from discontinued operations, net of tax

     31        498   

Gain on sale of discontinued operations

            6,405   
  

 

 

   

 

 

 

Net income (loss)

     (5,239     6,068   

Other comprehensive income — foreign currency translation

     1,270        337   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (3,969   $ 6,405   
  

 

 

   

 

 

 

 

See Notes to Condensed Combined Financial Statements.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

CONDENSED COMBINED STATEMENTS OF OWNER’S EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014

(in thousands)

(unaudited)

 

     Contributed
Capital and
Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total  

Balance, December 31, 2013

   $ 4,003      $ (1,400   $ 2,603   
  

 

 

   

 

 

   

 

 

 

Net loss

     (5,239            (5,239

Net contributions from Parent

     12,218               12,218   

Cumulative translation adjustment

            1,270        1,270   
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 10,982      $ (130   $ 10,852   
  

 

 

   

 

 

   

 

 

 

 

See Notes to Condensed Combined Financial Statements.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended June 30,  
             2014                     2013          

Cash flows from operating activities:

    

Net income (loss)

   $ (5,239   $ 6,068   

Income from discontinued operations

     (31     (498

Gain on sale of discontinued operations

            (6,405
  

 

 

   

 

 

 

Loss from continuing operations

     (5,270     (835

Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:

    

Depreciation of property and equipment

     254        251   

Loss on derivative contracts

     802          

Bad debt expense

     610          

Amortization of deferred financing costs

     657        648   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,105     (509

Accounts receivable — related party

     402          

Prepaid rent

     (1,783     (882

Prepaid expenses and other current assets

     889        (72

Accounts payable and accrued expenses

     2,350        (225

Deferred revenue and other liabilities

     4,642        3,412   

Deferred revenue — related party

     219        276   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,667        2,064   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment

     (30,327     (6,129
  

 

 

   

 

 

 

Net cash used in investing activities

     (30,327     (6,129
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments for deferred financing costs

     (1,023     (19

Contributions from parent

     12,249        2,675   

Purchase of derivative contracts

     (466       

Proceeds from the credit facility

     65,986          

Proceeds from (repayment of) loan from parent

     (49,747     7,478   
  

 

 

   

 

 

 

Net cash provided by financing activities

     26,999        10,134   
  

 

 

   

 

 

 

Cash provided by (used in) discontinued operations:

    

Net cash provided by (used in) operating activities

     (2,501     2,546   

Net cash provided by investing activities

     29,473        5,000   

Net cash used in financing activities

     (31     (6,903
  

 

 

   

 

 

 

Net cash provided by discontinued operations

     26,941        643   
  

 

 

   

 

 

 

Effect of exchange rates on cash

     1,010        265   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     26,290        6,977   
  

 

 

   

 

 

 

Cash and cash equivalents — beginning of period

     6,151        4,471   
  

 

 

   

 

 

 

Cash and cash equivalents — end of period

   $ 32,441      $ 11,448   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION:

    

Cash paid for income taxes

   $ 25      $ 17   

Cash paid for interest

   $ 1,135      $ 1,009   

 

See Notes to Condensed Combined Financial Statements

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Organization and Description of Business

 

USD Partners LP (the “Partnership”) is a Delaware limited partnership organized on June 5, 2014 and is owned by USD Group, LLC (“USD”, or “Parent”). USD is owned by US Development Group, LLC (“USDG”), a consolidated group of logistics facilities and service companies that currently operates in Texas, California, and Canada. In anticipation of an initial public offering (“IPO”) of common units by USD Partners LP, USD identified certain subsidiaries: San Antonio Rail Terminal LLC (“SART”), USD Rail LP (“USDR”), USD Rail Canada ULC (“USDRC”), USD Terminals Canada ULC (“USDTC”), West Colton Rail Terminal LLC (“WCRT”), USD Terminals International (“USDT SARL”), and USD Rail International (“USDR SARL”) (combined, the “Contributed Subsidiaries”) that will be contributed to USD Partners LP.

 

On December 12, 2012, USDG sold all of its membership interests in five of its subsidiaries (the “Sale”) to a large energy transportation, terminalling, and pipeline company (the “Acquirer”). These subsidiaries included: Bakersfield Crude Terminal LLC (“BCT”), Eagle Ford Crude Terminal LLC (“EFCT”), Niobrara Crude Terminal LLC (“NCT”), St. James Rail Terminal LLC (“SJRT”), and Van Hook Crude Terminal LLC (“VHCT”), collectively known as (the “Discontinued Operations”). See Note 10 — Discontinued Operations for additional details. As a result of the sale, a sixth subsidiary, USD Services LLC (“USDS”) ceased operations and is also included in the results of Discontinued Operations.

 

The accompanying condensed combined financial statements consist of entities that provide rail logistics services and railcar fleet services and operate terminal facilities for liquid hydrocarbons and petroleum based products. References to “Predecessor,” “we,” “our,” “us,” and similar expressions refer to the Contributed Subsidiaries and the Discontinued Operations.

 

The Predecessor generates the majority of its revenue and cash flows by providing terminalling services such as railcar loading and unloading for bulk liquid products including crude oil, biofuels, and related products. Since we do not own any of the crude oil or refined petroleum products that we handle and do not engage in the trading of crude oil or refined petroleum products, the Predecessor has 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. The Predecessor’s operations consist of two reportable segments. See Note 8 — Segment Reporting for additional details.

 

Note 2. Basis of Presentation

 

These condensed combined financial statements reflect the historical financial position, results of operations, changes in owner’s equity and cash flows of the Predecessor for the periods presented as the Predecessor was historically managed within USDG. The condensed combined financial statements have been prepared on a “carve-out” basis and are derived from the consolidated financial statements and accounting records of USDG, including the following subsidiaries of the Parent: SART, USDR, USDRC, USDTC, WCRT, USDT SARL, and USDR SARL. The condensed combined financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Predecessor’s condensed combined financial statements may not be indicative of the Predecessor’s future performance and do not necessarily reflect what the results of operations, financial position and cash flows would have been had it operated as an independent company during the periods presented. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Certain information and note disclosures commonly included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. Accordingly, the accompanying

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

condensed combined financial statements and notes should be read in conjunction with the Predecessor’s annual financial statements and notes thereto included elsewhere in the Partnership’s Registration Statement on Form S-1. Management believes that the disclosures made are adequate to make the information not misleading.

 

The accompanying condensed combined financial statements have been prepared also in accordance with Regulation S-X, Article 3, General Instructions as to Financial Statements and Staff Accounting Bulletin (“SAB”) Topic 1-B, Allocations of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity. The condensed combined financial statements include expense allocations for certain functions provided by USDG, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, insurance, utilities, and executive compensation. These expenses have been allocated to the Predecessor on the basis of direct usage when identifiable, budgeted volumes or projected revenues, with the remainder allocated evenly across the number of operating entities. During the six months ended June 30, 2014 and 2013, the Predecessor was allocated general corporate expenses incurred by USDG which are included within selling, general and administrative expenses in the condensed combined statements of operations and comprehensive income (loss). Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to or for the benefit received by the Predecessor during the periods presented. The allocations may not, however, reflect the expenses the Predecessor would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if the Predecessor had been a stand-alone entity would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. The Predecessor is unable to determine what such costs would have been had the Predecessor been independent. The Partnership’s general partner will provide services to the Partnership pursuant to an omnibus agreement and a service agreement between the parties. The allocations and related estimates and assumptions are described more fully in Note 6 — Transactions with Related Parties.

 

Staff Accounting Bulletin 1.B.3 requires that certain distributions to owners prior to or coincident with an initial public offering be considered as distributions in contemplation of that offering. Upon completion of the Partnership’s proposed initial public offering, the Predecessor intends to distribute approximately $         million to USD. The supplemental unaudited pro forma condensed combined balance sheet as of June 30, 2014, gives pro forma effect to the assumed distribution as though it had been declared and payable as of that date.

 

Subsequent events have been evaluated through the date these financial statements are issued. Any material subsequent events that occurred prior to such date have been properly recognized or disclosed in the condensed combined financial statements.

 

Note 3. Significant Accounting Policies and Recent Accounting Pronouncements

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates by management include the estimated lives of depreciable property and equipment, recoverability of long-lived assets, and the allowance for doubtful accounts.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

Accounts Receivable

 

Accounts receivable are primarily due from oil and ethanol producing, and petroleum refining companies. Management performs ongoing credit evaluations of its customers. When appropriate, the Predecessor estimates allowances for doubtful accounts based on its customers’ financial condition and collection history, and other pertinent factors. Accounts are written-off against the allowance when significantly past due and deemed uncollectible by management. During the six months ended June 30, 2014, we recognized $1.0 million in bad debt expense, of which $0.6 million is reported in selling, general and administrative expense within continuing operations, and the remaining $0.4 million is included in income from discontinued operations, net of tax on the accompanying condensed combined statements of operations and comprehensive income (loss).

 

Revenue Recognition

 

The Predecessor’s revenues are derived from railcar loading and unloading services for bulk liquid products, including crude oil, biofuels, and related products, as well as sourcing railcar fleets and related logistics and maintenance services. The Predecessor recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collectability is reasonably assured. In accordance with FASB ASC 605, Revenue Recognition, the Predecessor records revenues for fleet leases on a gross basis as the Predecessor is deemed the primary obligor for the services. The Predecessor also records its revenues from reimbursable costs on a gross basis as reimbursements for out-of-pocket expenses incurred in revenues and operating costs.

 

Terminalling services revenue is recognized when provided based on the contractual rates related to throughput volumes. Certain agreements contain “take-or-pay” provisions whereby the Predecessor is entitled to a minimum throughput fee. We recognize these minimum fees when the customer’s ability to make up the minimum volume has expired, in accordance with the terms of the agreements. Revenue for fleet services and related party administrative services is recognized ratably over the contract period. Revenue for reimbursable costs is recognized as the costs are incurred. The Predecessor has deferred revenues for amounts collected from customers in its Fleet services segment, which will be recognized as revenue when earned pursuant to contractual terms. The Predecessor has prepaid rent associated with these deferred revenues on its railcar leases, which will be recognized as expense when incurred.

 

Net Earnings (Loss) Per Unit

 

The Predecessor has omitted net earnings (loss) per unit because the Predecessor has operated under a sole member equity structure for the periods presented.

 

Fair Value

 

FASB ASC 820, Fair Value Measurement, establishes a single authoritative definition of fair value when accounting rules require the use of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities).

 

   

Level 3 — Significant unobservable inputs (including the Predecessor’s own assumptions in determining fair value).

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

When the Predecessor is required to measure fair value, and there is not a market-observable price for the asset or liability or a market-observable price for a similar asset or liability, the Predecessor utilizes the cost, income, or market valuation approach depending on the quality of information available to support management’s assumptions.

 

Financial Instruments

 

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt, and derivative financial instruments. Except for derivative financial instruments, the estimated fair value of our financial instruments at June 30, 2014 and December 31, 2013 approximates their carrying value as reflected in our condensed combined balance sheets.

 

We monitor our exposure to foreign currency exchange rates and use derivative financial instruments to manage these risks. Our policies do not permit the use of derivative financial instruments for speculative purposes.

 

We have a program that primarily utilizes foreign currency collar derivative contracts to reduce the risks associated with the effects of foreign currency exposures related to our Canadian subsidiaries which have cash inflows denominated in Canadian dollars (CAD). Under this program, our strategy is to have gains or losses on the derivative contracts mitigate the foreign currency transaction gains or losses to the extent practical. Economically, the collars help us to limit our exposure such that the exchange rate will effectively lie between the floor and the ceiling rate in the table below.

 

During the six months ended June 30, 2014, we entered into foreign currency collar contracts to hedge exposure to CAD fluctuations. The following derivative contracts are outstanding at June 30, 2014:

 

Expiration of Foreign Currency Collars

   Notional Amount
(CAD$ millions)
     Floor
(CAD/USD)
     Ceiling
(CAD/USD)
 

12/31/2014

     7.4         0.91         0.93   

3/31/2015

     7.3         0.91         0.93   

6/30/2015

     7.4         0.91         0.93   

9/30/2015

     7.5         0.91         0.93   

12/31/2015

     7.5         0.91         0.93   

 

We record all derivative contracts as of the end of our reporting period in our condensed combined balance sheets at fair value. We have elected not to apply hedge accounting to our derivative contracts. Accordingly, changes in the fair value of these derivative contracts that are recognized in earnings and are included in loss on derivative contracts in the condensed combined statements of operations and comprehensive income (loss). For the six months ended June 30, 2014, we recognized a loss of $0.8 million related to these derivative contracts.

 

Prior to April 1, 2014, we had no foreign currency derivative contracts. Our derivative contracts are classified as Level 2; the fair value of all outstanding derivatives were determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data.

 

Recent Accounting Pronouncements

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU is intended to improve comparability of revenue recognition

 

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USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

practices across entities, industries, jurisdictions and capital markets. ASU 2014-09 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Predecessor is evaluating the effect that ASU 2014-09 will have on our condensed combined financial statements and related disclosures. The Predecessor has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting.

 

Note 4. Property and Equipment

 

The Predecessor’s property and equipment consist of the following, in thousands:

 

     As of     Estimated
Useful  Lives
(Years)
     June 30, 2014     December 31, 2013    

Land

   $ 6,274      $ 6,148      N/A

Trackage and facilities

     87,664        8,007      20

Equipment

     507        488      5-10

Furniture

     6        5      5
  

 

 

   

 

 

   

Total property and equipment

     94,451        14,648     

Accumulated depreciation

     (2,057     (1,803  

Construction in progress

            48,519     
  

 

 

   

 

 

   

Property and equipment, net

   $ 92,394      $ 61,364     
  

 

 

   

 

 

   

 

The cost of property and equipment classified as “Construction in progress” pertains to our Hardisty terminal and is excluded from costs being depreciated. These amounts represent property that is not yet suitable to be placed into productive service as of the respective balance sheet date. The property and equipment at our Hardisty terminal were placed into service on June 30, 2014.

 

Note 5. Credit Facility

 

In November 2008, the Predecessor, through USDG, entered into a credit agreement (the “Credit Agreement”) with the Bank of Oklahoma consisting of a revolving credit facility with a borrowing capacity of $150.0 million. The Credit Agreement is guaranteed by all USDG subsidiaries. The outstanding balance as of June 30, 2014 and December 31, 2013 was $97.8 million and $30.0 million, respectively. Interest is at the London Interbank Offered Rate (“LIBOR”) plus a margin based on USDG’s leverage ratio, as defined in the Credit Agreement. The interest rate at June 30, 2014 and December 31, 2013 was 3.90% and 3.92% respectively. A fee of 0.50% is charged on the unused portion of the revolving credit facility. The maturity date of the credit facility is March 30, 2015, at which time the principal and the unpaid interest is due and payable.

 

In January 2014, the Credit Agreement was amended and restated to reflect certain changes in its organization structure, to include future additional subsidiaries, and to transfer certain ownership interests in existing subsidiaries. In April 2014, the Predecessor drew $67.8 million on the credit facility to pay its loan then outstanding from USDG. The Predecessor is subject to various covenants associated with the credit facility, including but not limited to, maintaining certain levels of debt service coverage, tangible net worth, and leverage. The Bank of Oklahoma issued a waiver of certain existing defaults under the Credit Agreement for failure to maintain required covenants as of June 30, 2014.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

A detail of interest expense from continuing operations is as follows (in thousands):

 

     Six Months Ended June 30,  
           2014                  2013        

Interest expense on credit facility

   $ 1,327       $ 997   

Amortization of deferred financing costs

     657         648   
  

 

 

    

 

 

 

Total interest expense

   $ 1,984       $ 1,645   
  

 

 

    

 

 

 

 

6. Transactions with Related Parties

 

We have entered into purchase, assignment and assumption agreements to assign payment and performance obligations for certain operating lease agreements with lessors and customer fleet service payments related to these operating leases with LRT Logistics Funding LLC (“LRTLF”), USD Fleet Funding LLC (“USDFF”), USD Fleet Funding Canada Inc. (“USDFFCI’), and USD Logistics Funding Canada Inc. (“USDLFCI”), which are unconsolidated variable-interest entities (the “VIEs”) with the Predecessor. The managing member of the VIEs is majority-owned by related parties of the Predecessor. We are not the primary beneficiary of the VIEs, as we do not have power to direct the activities that most significantly affect the economic performance of the VIEs. Accordingly, we do not consolidate the results of the VIEs in our condensed combined financial statements.

 

Related Party Revenue and Deferred Revenue

 

We have entered into agreements to provide administrative services to our unconsolidated VIEs for fixed servicing fees and reimbursement of out-of-pocket expenses.

 

Related party sales to the VIEs were $0.7 million and $0.3 million during the six months ended June 30, 2014 and 2013, respectively. These sales are recorded in fleet services — related party on the accompanying condensed combined statements of operations and comprehensive income (loss).

 

Related party deferred revenues from the VIEs were $1.9 million and $1.0 million at the periods ended June 30, 2014 and December 31, 2013, respectively. These deferred revenues are recorded in deferred revenue — related party on the accompanying condensed combined balance sheets.

 

We have also entered into agreements with J. Aron & Company (“J. Aron”), a wholly owned subsidiary of The Goldman Sachs Group, Inc. (“GS”), to provide terminalling and fleet services, which include reimbursement for certain out-of-pocket expenses, related to the Hardisty rail terminal operations. GS is a principal shareholder of USDG. The terms and conditions of these agreements are similar to the terms and conditions of third-party agreements at the Hardisty rail terminal. J. Aron has entered into assignment arrangements with third parties in respect to portions of these services and may do so again in the future.

 

Related party sales to J. Aron were $0.2 million and $0 during the six months ended June 30, 2014 and 2013, respectively. These sales are recorded in freight and other reimbursables — related party on the accompanying condensed combined statements of operations and comprehensive income (loss). As of June 30, 2014 and December 31, 2013, there was a balance of $0 and $0.4 million, respectively, due from J. Aron recorded on the accompanying condensed combined balance sheets.

 

Cost Allocations

 

The total amount charged to the Predecessor for overhead cost allocations for the six months ended June 30, 2014 and 2013, which is recorded in selling, general and administrative costs was $3.2 million and $2.0 million, respectively.

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

Loan from Parent

 

USDTC (“the Borrower”) entered into an unsecured loan facility with USDG (the “USDG Loan”) for an initial loan amount of $45.2 million (CAD) with the capacity to increase to $70.0 million (CAD). Under the USDG Loan agreement, the Borrower agreed to repay amounts advanced as requested by USDG. The USDG Loan was restricted for purposes of constructing the Borrower’s terminal at Hardisty, Alberta and expenses relating to its operation. There were no interest charges for advanced amounts outstanding nor was there a termination date included within the USDG Loan agreement. These amounts were repaid in full during the six months ended June 30, 2014. The outstanding balance as of December 31, 2013, as included on the accompanying condensed combined balance sheets, was $51.0 million.

 

7. Commitments and Contingencies

 

At June 30, 2014, the Predecessor had major construction contracts for approximately $71.3 million, which include approximately $71.1 million in contracts that were completed since inception and $0.2 million to be incurred in future periods.

 

Of the $4.6 million classified as other current liabilities on the condensed combined balance sheet as of June 30, 2014, $4.3 million consisted of funds necessary to pay construction retention balances related to the build-out of the Hardisty terminal.

 

From time to time, the Predecessor may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Management does not believe that we are a party to any litigation that will have a material impact on our financial condition or results of operations.

 

8. Segment Reporting

 

The Predecessor manages the business in two reportable segments: Terminalling services segment and Fleet services segment. The Terminalling services segment operates by terminalling and transloading crude oil and biofuels under multi-year, fixed-fee contracts with minimum volume commitments. The Fleet services segment manages a fleet of rail cars to ensure customers’ products are handled safely and efficiently.

 

The Predecessor’s reportable segments offer different services and are managed accordingly. The Predecessor’s chief operating decision maker (“the CODM”) regularly reviews financial information about both segments in deciding how to allocate resources and evaluate performance. The CODM assesses segment performance based on income (loss) from continuing operations before interest expense, other expense, net, taxes, depreciation, and amortization (“Adjusted EBITDA”).

 

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USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

The following tables summarize the Predecessor’s reportable segment data for continuing operations, in thousands:

 

     For the Six Months Ended June 30, 2014  
       Terminalling  
services
    Fleet
  services  
      Total    

Revenues

      

Third party

   $ 3,448      $ 6,536      $ 9,984   

Related party

            937        937   

Operating costs (excluding depreciation)

     4,832        7,607        12,439   

Depreciation

     254               254   

Interest expense

     1,984               1,984   

Loss on derivative contracts

     802               802   

Other expense, net

     688               688   

Provision for income taxes

     22        2        24   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

   $ (5,134   $ (136   $ (5,270
  

 

 

   

 

 

   

 

 

 

 

     For the Six Months Ended June 30, 2013  
       Terminalling  
services
    Fleet
  services  
       Total    

Revenues

       

Third party

   $ 3,691      $ 9,413       $ 13,104   

Related party

            276         276   

Operating costs (excluding depreciation)

     2,850        9,452         12,302   

Depreciation

     251                251   

Interest expense

     1,645                1,645   

Provision for income taxes

     17                17   
  

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations

   $ (1,072   $ 237       $ (835
  

 

 

   

 

 

    

 

 

 

 

The following table provides a reconciliation of Adjusted EBITDA to loss from continuing operations, in thousands:

 

     For the Six Months
Ended June 30,
 
         2014             2013      

Adjusted EBITDA

    

Terminalling Services Adjusted EBITDA

   $ (1,384   $ 841   

Fleet Services Adjusted EBITDA

     (134     237   

Depreciation

     (254     (251

Interest expense

     (1,984     (1,645

Loss associated with derivative instruments

     (802       

Other expense, net

     (688       

Provision for income taxes

     (24     (17
  

 

 

   

 

 

 

Loss from continuing operations

   $ (5,270   $ (835

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

The following tables summarize the Predecessor’s total assets by segment from continuing operations, in thousands:

 

     As of  
     June 30, 2014      December 31, 2013  

Terminalling Services

   $ 124,892       $ 68,995   

Fleet Services

     12,020         8,197   
  

 

 

    

 

 

 

Total assets

   $ 136,912       $ 77,192   

 

9. Income Taxes

 

The Predecessor is treated as a partnership for federal and most state income tax purposes, with each partner being separately taxed on its share of taxable income. The provision for income taxes for the six months presented includes franchise taxes and tax on the Predecessor’s Canadian operations. For the six months ended June 30, 2014 and 2013, the Predecessor’s provision for U.S. income taxes consisted of current expenses for state franchise taxes of $24 thousand and $17 thousand, respectively. There was no benefit recorded for losses associated with our Canadian operations since it is currently more likely than not that the benefit from the loss carryover will not be realized.

 

10. Discontinued Operations

 

On December 12, 2012, USDG sold all of its membership interests in five of its subsidiaries included in the Predecessor’s Terminalling services segment to the Acquirer. The sales price of the subsidiaries was $502.6 million, net of working capital adjustments. For the six months ended June 30, 2014 and 2013, the Predecessor had $31 thousand and $6.9 million, respectively, recorded as discontinued operations on the condensed combined statement of operations and comprehensive income (loss). At the time of the Sale, a sixth subsidiary also included in the Predecessor’s Terminalling services segment, USDS, ceased operations. The financial results of the Predecessor’s operations related to the Discontinued Operations and USDS are reflected as discontinued operations, net of tax in the condensed combined statements of operations and comprehensive income (loss).

 

Assets and liabilities of our Discontinued Operations are as follows, in thousands:

 

     As of  
     June 30,
2014
     December 31,
2013
 

Assets:

     

Receivables, net

   $ 636       $ 603   

Cash proceeds placed in escrow related to the Sale

             29,473   
  

 

 

    

 

 

 

Total assets

   $ 636       $ 30,076   
  

 

 

    

 

 

 

Liabilities:

     

Bonus accrued for payment to employees

   $ 3,336       $ 5,835   
  

 

 

    

 

 

 

Total liabilities

   $ 3,336       $ 5,835   
  

 

 

    

 

 

 

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(unaudited)

 

The following table shows the Predecessor’s results from its Discontinued Operations, in thousands:

 

     For the Six Months Ended June 30,  
             2014                      2013          

Discontinued operations:

     

Revenues and other income

   $ 452       $ 6,918   

Bad debt expense

     420           

Income before provision for income taxes

     32         6,918   

Provision for income taxes

     1         15   

Net income

   $ 31       $ 6,903   

 

Continuing Cash Flows from Discontinued Operations

 

At the time of the Sale, SJRT had an existing contract (the “Contract”) with one of its customers (the “Customer”) in which the Customer would pay SJRT an Incremental Throughput Fee, as defined, for certain volumes coming through SJRT (“Incremental Throughput Fee”). The Incremental Throughput Fee allowed SJRT to participate with the Customer in the value created due to increased market spreads on the price of crude oil. The Incremental Throughput Fee was calculated at a certain percentage of the net differential between the market price of the crude oil volumes and an agreed upon minimum price. Upon the sale of SJRT, the Acquirer agreed to remit the Incremental Throughput Fee to the Predecessor until the expiration of the Contract. The Predecessor received these cash flows through September of 2013. During the six months ended June 30, 2014 and 2013, $0 and $6.4 million, respectively are recorded in gain on sale of discontinued operations.

 

In conjunction with the Sale, the Predecessor ceased its operations at USDS. USDS’s primary operations revolved around a service agreement with the Acquirer related to loading and unloading services. Effective at the closing date of the sale, USDS assigned or terminated any obligations it had in relation to its operations, but continues to receive indirect cash flows. The Predecessor has not participated in any revenue producing activities and expects the cash flows to terminate upon the expiration of the assigned service agreement on February 15, 2015. The proceeds from the assigned service agreement are recorded as income from discontinued operations and are $0.5 million for the six months ended June 30, 2014 and 2013, respectively. In the first quarter of 2014, the Predecessor received approximately $29.5 million that was held in escrow related to the Sale.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The General Partner of

USD Partners LP

 

We have audited the accompanying combined balance sheets of the predecessor to USD Partners LP (the “Predecessor”) as of December 31, 2013 and 2012, and the related combined statements of income and comprehensive income, owner’s equity and cash flows for the years then ended. These combined financial statements are the responsibility of the Predecessor’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. The Predecessor is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Predecessor’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Predecessor as of December 31, 2013 and 2012, and the combined results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ UHY LLP

Houston, Texas

July 18, 2014

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

COMBINED BALANCE SHEETS

(in thousands)

 

     As of December 31,  
     2013      2012  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 6,151       $ 4,471   

Accounts receivable

     1,587         1,019   

Accounts receivable — related party

     402           

Prepaid rent, current portion

     983         1,566   

Prepaid expenses and other current assets

     1,977         153   

Current assets — discontinued operations

     30,076         11,840   
  

 

 

    

 

 

 

Total current assets

     41,176         19,049   

Property and equipment, net

     61,364         7,881   

Prepaid rent, net of current portion

     4,278         934   

Deferred financing costs, net

     450         1,609   

Other assets — discontinued operations

             29,461   
  

 

 

    

 

 

 

Total assets

   $ 107,268       $ 58,934   
  

 

 

    

 

 

 
LIABILITIES AND OWNER’S EQUITY      

Current liabilities:

     

Accounts payable and accrued expenses

     7,073         718   

Loan from parent

     50,991         266   

Deferred revenue, current portion

     1,563         1,648   

Other current liabilities

     3,656         67   

Current liabilities — discontinued operations

     5,835         11,892   
  

 

 

    

 

 

 

Total current liabilities

     69,118         14,591   

Credit facility

     30,000         30,000   

Deferred revenue, net of current portion

     4,585         957   

Deferred revenue — related party

     962           

Commitments and contingencies

     

Owner’s equity

     2,603         13,386   
  

 

 

    

 

 

 

Total liabilities and owner’s equity

   $ 107,268       $ 58,934   
  

 

 

    

 

 

 

 

See Notes to Combined Financial Statements.

 

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USD PARTNERS LP PREDECESSOR

COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands)

 

       Year Ended December 31,    
         2013             2012      

Revenues:

    

Terminalling services

   $ 7,130      $ 8,703   

Fleet leases

     13,572        15,964   

Fleet services

     235        5   

Fleet services — related party

     962          

Freight and other reimbursables

     1,778        203   

Freight and other reimbursables — related party

     2,624          
  

 

 

   

 

 

 

Total revenues

     26,301        24,875   
  

 

 

   

 

 

 

Operating costs:

    

Subcontracted rail services

     1,898        1,847   

Fleet leases

     13,572        15,964   

Freight and other reimbursables

     4,402        203   

Selling, general & administrative

     4,458        3,240   

Depreciation

     502        490   
  

 

 

   

 

 

 

Total operating costs

     24,832        21,744   
  

 

 

   

 

 

 

Operating income

     1,469        3,131   

Interest expense

     3,241        2,050   

Other expense, net

     39          
  

 

 

   

 

 

 

Total interest and other expense, net

     3,280        2,050   
  

 

 

   

 

 

 

Income (loss) from continuing operations before provision for income taxes

     (1,811     1,081   

Provision for income taxes

     30        26   
  

 

 

   

 

 

 

Income (loss) from continuing operations

     (1,841     1,055   

Discontinued operations:

    

Income from discontinued operations

     948        65,204   

Gain on sale of discontinued operations

     7,295        394,318   
  

 

 

   

 

 

 

Net income

     6,402        460,577   

Other comprehensive loss — foreign currency translation

     (1,395     (5
  

 

 

   

 

 

 

Comprehensive income

   $ 5,007      $ 460,572   
  

 

 

   

 

 

 

 

See Notes to Combined Financial Statements.

 

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USD PARTNERS LP PREDECESSOR

COMBINED STATEMENTS OF OWNER’S EQUITY

(in thousands)

 

     Contributed
Capital and
Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total  

Balance, December 31, 2011

   $ 25,119      $      $ 25,119   
  

 

 

   

 

 

   

 

 

 

Net income

     460,577               460,577   

Net distributions to Parent

     (472,305            (472,305

Cumulative translation adjustment

            (5     (5
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     13,391        (5     13,386   
  

 

 

   

 

 

   

 

 

 

Net income

     6,402               6,402   

Net distributions to Parent

     (15,790            (15,790

Cumulative translation adjustment

            (1,395     (1,395
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ 4,003      $ (1,400   $ 2,603   
  

 

 

   

 

 

   

 

 

 

 

See Notes to Combined Financial Statements.

 

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USD PARTNERS LP PREDECESSOR

COMBINED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended December 31,  
             2013                     2012          

Cash flows from operating activities:

    

Net income

   $ 6,402      $ 460,577   

Income from discontinued operations

     (948     (65,204

Gain on sale of discontinued operations

     (7,295     (394,318
  

 

 

   

 

 

 

Income (loss) from continuing operations

     (1,841     1,055   

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:

    

Depreciation of property and equipment

     502        490   

Amortization of deferred financing costs

     1,420        1,216   

Changes in operating assets and liabilities:

    

Accounts receivable

     (602     (1,019

Accounts receivable — related party

     (402       

Prepaid rent

     (2,761     (2,500

Prepaid expenses and other current assets

     (1,892       

Accounts payable and accrued expenses

     6,590        1,888   

Deferred revenue and other liabilities

     7,263        668   

Deferred revenue — related party

     962          
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,239        1,798   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions of property and equipment

     (56,114     (773
  

 

 

   

 

 

 

Net cash used in investing activities

     (56,114     (773
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments on credit facility

            (15,668

Payments for deferred financing costs

     (261     (926

Distributions to parent

     (7,547     (8,899

Proceeds from loan from parent

     52,693        266   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     44,885        (25,227
  

 

 

   

 

 

 

Cash provided by (used in) discontinued operations:

    

Net cash provided by operating activities

     3,411        52,331   

Net cash provided by investing activities

     10,000        436,762   

Net cash used in financing activities

     (8,243     (463,406
  

 

 

   

 

 

 

Net cash provided by discontinued operations

     5,168        25,687   
  

 

 

   

 

 

 

Effect of exchange rates on cash

     (1,498     (5
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     1,680        1,480   
  

 

 

   

 

 

 

Cash and cash equivalents — beginning of year

     4,471        2,991   
  

 

 

   

 

 

 

Cash and cash equivalents — end of year

   $ 6,151      $ 4,471   
  

 

 

   

 

 

 

SUPPLEMENTAL INFORMATION:

    

Cash paid for income taxes

   $ 26      $ 38   

Cash paid for interest

   $ 1,829      $ 2,563   

 

See Notes to Combined Financial Statements.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Note 1. Organization and Description of Business

 

USD Partners LP (the “Partnership”) is a Delaware limited partnership organized on June 5, 2014 and is owned by USD Group, LLC (“USD” or “Parent”), USD is owned by US Development Group, LLC (“USDG”), a consolidated group of logistics facilities and service companies that currently operates in Texas, California, and Canada. In anticipation of an initial public offering (“IPO”) of common units by USD Partners LP, USD identified certain subsidiaries: San Antonio Rail Terminal LLC (“SART”), USD Rail LP (“USDR”), USD Rail Canada ULC (“USDRC”), USD Terminals Canada ULC (“USDTC”), West Colton Rail Terminal LLC (“WCRT”), USD Terminals International (“USDT SARL”), and USD Rail International (“USDR SARL”) (combined, the “Contributed Subsidiaries”) that will be contributed to USD Partners LP.

 

On December 12, 2012, USDG sold all of its membership interests in five of its subsidiaries (the “Sale”) to a large energy transportation, terminalling, and pipeline company (the “Acquirer”). These subsidiaries included: Bakersfield Crude Terminal LLC (“BCT”), Eagle Ford Crude Terminal LLC (“EFCT”), Niobrara Crude Terminal LLC (“NCT”), St. James Rail Terminal LLC (“SJRT”), and Van Hook Crude Terminal LLC (“VHCT”), collectively known as (the “Discontinued Operations”). See Note 11 — Discontinued Operations for additional details. As a result of the sale, a sixth subsidiary, USD Services LLC (“USDS”) ceased operations and is also included in the results of Discontinued Operations.

 

The accompanying combined financial statements consist of entities that provide rail and fleet logistics services and railcar fleet leasing and operate terminal facilities for liquid hydrocarbons and petroleum based products. References to “Predecessor,” “we,” “our,” “us,” and similar expressions refer to the Contributed Subsidiaries and the Discontinued Operations.

 

The Predecessor’s principal operations include:

 

   

San Antonio Rail Terminal — A rail terminal facility located in San Antonio, Texas, that provides ethanol logistics services in the form of railcar-to-truck transfer. The terminal commenced operations in April 2010.

 

   

West Colton Rail Terminal — A rail terminal facility located in West Colton, California, that provides ethanol logistics services in the form of railcar-to-truck transfer. The terminal commenced operations in November 2009.

 

   

Hardisty Rail Terminal — A rail terminal facility currently under construction in Hardisty, Alberta, Canada, that will provide crude oil logistics services in the form of pipeline to railcar transfer at the Hardisty hub.

 

   

USD Rail LP & USD Rail Canada ULC — Railcar fleet sourcing and logistics service providers that operate throughout North America.

 

The Predecessor generates the majority of its revenue and cash flows by providing terminalling services, including railcar loading and unloading services for bulk liquid products including crude oil, biofuels, and related products. Since we do not own any of the crude oil or refined petroleum products that we handle and do not engage in the trading of crude oil or refined petroleum products, the Predecessor has 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. The Predecessor’s operations consist of two reportable segments see Note 8 — Segment Reporting for additional details.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Note 2. Basis of Presentation

 

These combined financial statements reflect the historical financial position, results of operations, changes in owner’s equity and cash flows of the Predecessor for the periods presented as the Predecessor was historically managed within USDG. The combined financial statements have been prepared on a “carve-out” basis and are derived from the consolidated financial statements and accounting records of USDG, including the following subsidiaries of the Parent: SART, USDR, USDRC, USDTC, WCRT, USDT SARL, and USDR SARL. The combined financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Predecessor’s combined financial statements may not be indicative of the Predecessor’s future performance and do not necessarily reflect what the results of operations, financial position and cash flows would have been had it operated as an independent company during the periods presented. All significant intercompany transactions and balances have been eliminated in consolidation.

 

The accompanying combined financial statements have been prepared also in accordance with Regulation S-X, Article 3, General Instructions as to Financial Statements and Staff Accounting Bulletin (“SAB”) Topic 1-B, Allocations of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity. The combined financial statements include expense allocations for certain functions provided by USDG, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, insurance, utilities, and executive compensation. These expenses have been allocated to the Predecessor on the basis of direct usage when identifiable, budgeted volumes or projected revenues, with the remainder allocated evenly across the number of operating entities. During the years ended December 31, 2013 and 2012, the Predecessor was allocated general corporate expenses incurred by USDG, which are included within selling, general and administrative expenses in the combined statements of income and comprehensive income. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to or the benefit received by the Predecessor during the periods presented. The allocations may not, however, reflect the expenses the Predecessor would have incurred as an independent company for the periods presented. Actual costs that may have been incurred if the Predecessor had been a stand-alone entity would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. The Predecessor is unable to determine what such costs would have been had the Predecessor been independent. USD Partners LP’s general partner will provide services to the Partnership pursuant to an omnibus agreement and a service agreement between the parties. The allocations and related estimates and assumptions are described more fully in Note 6 — Transactions with Related Parties.

 

Subsequent events have been evaluated through the issuance date of these financial statements. Any material subsequent events that occurred prior to such date have been properly recognized or disclosed in the combined financial statements.

 

Note 3. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates made by management include the estimated lives of depreciable property and equipment, recoverability of long-lived assets, and the allowance for doubtful accounts.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of all unrestricted demand deposits and funds invested in highly liquid instruments with original maturities of three months or less. The Predecessor periodically assesses the financial condition of the institutions where these funds are held and believes that its credit risk is minimal.

 

Accounts Receivable

 

Accounts receivable are primarily due from oil and ethanol producing, and petroleum refining companies. Management performs ongoing credit evaluations of its customers. When appropriate, the Predecessor estimates allowances for doubtful accounts based on its customers’ financial condition and collection history, and other pertinent factors. Accounts are written-off against the allowance when significantly past due and deemed uncollectible by management. The Predecessor did not have an allowance for doubtful accounts in 2013 or 2012.

 

Deferred Financing Costs

 

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense using the effective interest method over the life of the related debt.

 

Property and Equipment

 

Property and equipment is recorded at cost. Interest on borrowings for construction is capitalized and depreciated as a part of the cost once the asset is available for service. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from 5 to 20 years. The Predecessor assigns asset lives based on reasonable estimates when an asset is placed into service. Expenditures for repairs and maintenance are charged to operations as incurred. Renewals and betterments are capitalized. Upon the sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized in the results of operations.

 

Fair Value

 

FASB ASC 820, Fair Value Measurement, establishes a single authoritative definition of fair value when accounting rules require the use of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities).

 

   

Level 3 — Significant unobservable inputs (including the Predecessor’s own assumptions in determining fair value).

 

When the Predecessor is required to measure fair value, and there is not a market-observable price for the asset or liability or a market-observable price for a similar asset or liability, the Predecessor utilizes the cost, income, or market valuation approach depending on the quality of information available to support management’s assumptions.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reported on the combined balance sheets approximate fair value due to the short-term nature of these items. The fair value of the Predecessor’s accounts receivable with affiliates and payables with affiliates cannot be determined due to the related party nature of these items.

 

Revenue Recognition

 

The Predecessor’s revenues are derived from railcar loading and unloading services for bulk liquid products, including crude oil, biofuels, and related products, as well as sourcing railcar fleets and related logistics and maintenance services. The Predecessor recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collectability is reasonably assured. In accordance with FASB ASC 605, Revenue Recognition, the Predecessor records revenues for fleet leases on a gross basis as the Predecessor is deemed the primary obligor for the services. The Predecessor also records its revenues from reimbursable costs on a gross basis as reimbursements for out-of-pocket expenses incurred in revenues and operating costs.

 

Terminalling services revenue is recognized when provided based on the contractual rates related to throughput volumes. Certain agreements contain “take-or-pay” provisions whereby the Predecessor is entitled to a minimum throughput fee. We recognize these minimum fees when the customer’s ability to make up the minimum volume has expired, in accordance with the terms of the agreements. Revenue for fleet leases and related party administrative services is recognized ratably over the contract period. Revenue for reimbursable costs is recognized as the costs are incurred. The Predecessor has deferred revenues for amounts collected from customers in its Fleet services segment, which will be recognized as revenue when earned pursuant to contractual terms. The Predecessor has prepaid rent associated with these deferred revenues on its railcar leases, which will be recognized as expense when incurred.

 

Impairment of Long-lived Assets

 

The Predecessor evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when the sum of the estimated, undiscounted future cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset. Factors that indicate potential impairment include a significant decrease in the market value of the asset, operating or cash flow losses associated with the use of the asset and a significant change in the asset’s physical condition or use. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the long-lived asset is not recoverable based on the estimated future undiscounted cash flows, an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the long-lived asset. There were no asset impairment indicators in 2013 and 2012.

 

Income Taxes

 

For U.S. Federal, and certain state income tax purposes, the Parent has elected to be treated as a partnership, whereby the taxable income or losses of the Parent flow through to its members. The provision for income taxes primarily reflects franchise taxes. Income taxes associated with the Predecessor’s Canadian operations have been considered within the historical results of the Canadian operations of the Predecessor. In the years presented, there was no benefit recorded for losses associated with our Canadian operations since it is currently more likely than not the benefit from the loss carryover will not be realized.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Although the Predecessor’s income or loss is taxed directly to the members of its Parent, the effects of uncertain tax positions, if any, may have an impact on the tax return of the member. Therefore, US GAAP requires that the financial effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur. Under this criterion, the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that would likely be sustained under examination. As of December 31, 2013 and 2012, the Predecessor has no uncertain tax positions that qualify for either recognition or disclosure in the combined financial statements.

 

The Parent’s income tax returns for the periods filed from January 1, 2009 through December 31, 2013 are subject to examination by the taxing authorities. The results of such examinations may impact the Predecessor as the results of any findings could pass down to the Predecessor. Income tax returns for the Predecessor’s Canadian operations filed for the period ended December 31, 2013 are subject to examination by the taxing authorities. At December 31, 2013, neither the Parent nor the Canadian operations are currently under examination. See Note 10 — Income Taxes for additional information.

 

Foreign Currency

 

Results of operations for the Predecessor’s foreign subsidiaries have been translated from their local currencies to the U.S. dollar using average exchange rates during the period, while assets and liabilities are translated at the exchange rate in effect at the reporting date. Gains or losses resulting from translating foreign currency financial statements are reported as accumulated other comprehensive loss and are shown as a separate component of owner’s equity. Cumulative translation losses as of December 31, 2013 and 2012 were $1.4 million and $5 thousand, respectively. Foreign currency transaction losses related to the years ended December 31, 2013 and 2012 were $41 thousand and $0, respectively, and are included in other expense on the combined statements of income and comprehensive income.

 

Net Income per Unit

 

The Predecessor has omitted earnings per unit because the Predecessor has operated under a sole member equity structure for the periods presented.

 

Asset Retirement Obligations

 

FASB ASC 410, Asset Retirement and Environmental Obligations, requires the Predecessor to evaluate whether any future asset retirement obligations exist as of December 31, 2013 and 2012, and whether the expected retirement date of the related costs of retirement can be estimated. The Predecessor has concluded that its terminalling services assets, which include tracks and transloading facilities, have an indeterminate life because they will be owned and operated for an indeterminate future period when properly maintained. A liability for these asset retirement obligations will be recorded only if there is a legal future retirement obligation with a determinable life is identified. The Predecessor did not record any asset retirement obligations as of December 31, 2013 and 2012 because there is no legal obligation.

 

Recent Accounting Pronouncements

 

Obligations Resulting from Joint and Several Liability Arrangements

 

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”), regarding accounting for obligations resulting from

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

joint and several liability arrangements. ASU 2013-04 is effective for interim and annual periods beginning January 1, 2014. Early adoption is permitted with retrospective application. The Predecessor adopted the new guidance as of January 1, 2012 and the adoption did not have an impact on the Predecessor’s combined financial position, results of operations or cash flows.

 

Reporting Amounts Reclassified Out of Accumulated Comprehensive Income

 

In February 2013, the FASB issued Accounting Standards Update ASU No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Comprehensive Income (“ASU 2013-02”). This guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the related notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2012. The Predecessor adopted the new guidance as of January 1, 2012 and the adoption did not have an impact on the Predecessor’s combined financial position, results of operations or cash flows.

 

Note 4. Property and Equipment

 

The Predecessor’s property and equipment consist of the following:

 

     As of December 31,     Estimated
Useful  Lives
(Years)
     2013     2012    
     (in thousands)      

Land

   $ 6,148      $      N/A

Trackage and facilities

     8,007        8,007      20

Equipment

     488        415      5-10

Furniture

     5             5
  

 

 

   

 

 

   

Total property and equipment

     14,648        8,422     

Accumulated depreciation

     (1,803     (1,301  

Construction in progress

     48,519        760     
  

 

 

   

 

 

   

Property and equipment, net

   $ 61,364      $ 7,881     
  

 

 

   

 

 

   

 

The cost of property and equipment classified as “Construction in progress” is excluded from costs being depreciated. These amounts represent property that is not yet suitable to be placed into productive service as of the respective balance sheet date.

 

Note 5. Credit Facility

 

In November 2008, the Predecessor, through USDG, entered into a credit agreement (the “Credit Agreement”) with the Bank of Oklahoma consisting of a revolving credit facility with a borrowing capacity of $150.0 million. The Credit Agreement is guaranteed by all USDG subsidiaries. The outstanding balance as of December 31, 2013 and 2012 was $30.0 million. Interest is at the London Interbank Offered Rate (“LIBOR”) plus a margin based on USDG’s leverage ratio, as defined in the Credit Agreement. The interest rate at December 31, 2013 and 2012 was 3.92% and 3.96%, respectively. A fee of 0.50% is charged on the unused portion of the

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

revolving credit facility. Subsequent to December 31, 2013, the maturity date on the revolving credit facility was extended to March 30, 2015, at which time the principal and all unpaid interest is due and payable.

 

During 2012 and 2013, the Credit Agreement was amended to, among other things, release the guarantees from certain subsidiaries sold in 2012 and to add USDTC as a guarantor and borrower under the Credit Agreement. The Predecessor is subject to various covenants associated with the credit facility, including but not limited to, maintaining certain levels of debt service coverage, tangible net worth, and leverage. The Predecessor was in compliance with all of the covenants as of December 31, 2013.

 

A detail of interest expense from continuing operations is as follows (in thousands):

 

     For the Years Ended December 31,  
         2013              2012      

Interest expense on credit facility

   $ 1,821       $ 834   

Amortization of deferred financing costs

     1,420         1,216   
  

 

 

    

 

 

 

Total interest expense

   $ 3,241       $ 2,050   
  

 

 

    

 

 

 

 

Note 6. Transactions with Related Parties

 

We have entered into purchase, assignment and assumption agreements to assign payment and performance obligations for certain operating lease agreements with lessors and customer fleet service payments related to these operating leases with LRT Logistics Funding LLC (“LRTLF”), USD Fleet Funding LLC (“USDFF”), USD Fleet Funding Canada Inc. (“USDFFCI”), and USD Logistics Funding Canada Inc. (“USDLFCI”), which are unconsolidated variable-interest entities (the “VIEs”) with the Predecessor. The managing member of the VIEs is majority-owned by related parties of the Predecessor. We are not the primary beneficiary of the VIEs, as we do not have power to direct the activities that most significantly affect the economic performance of the VIEs. Accordingly, we do not consolidate the results of the VIEs in our combined financial statements.

 

Related Party Revenue and Deferred Revenue

 

We have entered into agreements to provide administrative services to the VIEs for fixed servicing fees and reimbursement of out-of-pocket expenses.

 

Related party sales to the VIEs were $1.0 million and $0 during the years ended December 31, 2013 and 2012, respectively. These sales are recorded in Fleet services — related party on the accompanying combined statements of income and comprehensive income.

 

Related party deferred revenues from the VIEs were $1.0 million and $0 during the years ended December 31, 2013 and 2012, respectively, which are recorded in Deferred revenue — related party on the accompanying combined balance sheets.

 

We have also entered into agreements with J. Aron & Company (“J. Aron”), a wholly owned subsidiary of The Goldman Sachs Group, Inc. (“GS”), to provide terminalling and fleet services, which include reimbursement for certain out-of-pocket expenses, related to the Hardisty rail terminal operations. GS is a principal shareholder of USDG. The terms and conditions of these agreements are similar to the terms and conditions of third-party agreements at the Hardisty rail terminal. J. Aron has entered into assignment arrangements with third parties in respect to these services and may do so again in the future.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Related party sales to J. Aron were $2.6 million and $0 during the years ended December 31, 2013 and 2012, respectively. These sales are recorded in Freight and other reimbursables — related party on the accompanying combined statements of income and comprehensive income. Outstanding balances due from J. Aron as of December 31, 2013 and 2012 are $0.4 million and $0, respectively, and are recorded on the accompanying combined balance sheets.

 

Cost Allocations

 

USDG allocated certain overhead costs associated with general and administrative services, including insurance, professional fees, facilities, information services, human resources and other support departments to us. Where costs incurred on our behalf cannot be determined by specific identification, the costs are primarily allocated evenly across the number of operating subsidiaries or allocated based on budgeted volumes or projected revenues. We believe these allocations are a reasonable reflection of the utilization of services provided. However, the allocations may not fully reflect the expenses that would have been incurred had we been a stand-alone company during the periods presented.

 

The total amount charged to the Predecessor for overhead cost allocations for the years ended December 31, 2013 and 2012, which is recorded in selling, general and administrative costs, was $3.0 million and $1.2 million, respectively.

 

Loan from USDG

 

USDTC (“the Borrower”), entered into an unsecured loan facility with USDG (the “USDG Loan”) for an initial loan amount of $45.2 million Canadian dollars (“CAD”) with the capacity to increase to $70.0 million CAD. Under the USDG Loan agreement, the Borrower agreed to repay amounts advanced as requested by USDG. The loan facility is restricted for purposes of constructing the Borrower’s terminal at Hardisty, Alberta and expenses relating to its operation. There are no interest charges for advanced amounts outstanding nor is there a termination date included within the USDG Loan agreement. The outstanding balance as of December 31, 2013 and 2012, as included on the accompanying combined balance sheets, was $51.0 million and $0.3 million, respectively.

 

Note 7. Commitments and Contingencies

 

Fleet Lease Income

 

The Predecessor serves as a lessor on non-cancelable operating leases with customers who are required to pay minimum balances under an agreement for railcars that are currently being leased by the Predecessor under non-cancelable operating leases. These agreements run through 2015. Under these agreements, the Predecessor recognized lease income of $13.6 million and $16.0 million in 2013 and 2012, respectively, which are recorded in fleet leases on the combined statements of income and comprehensive income. The company did not have any contingent rentals at December 31, 2013 and 2012.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The following table presents future minimum lease rentals due to the Predecessor from non-cancelable railcar operating leases (in thousands):

 

As of December 31,

      

2014

   $ 12,024   

2015

     4,844   
  

 

 

 

Total

   $ 16,868   
  

 

 

 

 

Rail Service Agreements

 

The Predecessor has rail service agreements at its terminal facilities with labor service providers that expire at various dates from 2014 through 2015.

 

After the initial term of the agreements, the rail service contracts will continue to be in effect for consecutive one-year terms unless either party provides the other party written notice prior to end of the term. Under these agreements, the Predecessor incurred approximately $1.9 million and $1.8 million in service fees in 2013 and 2012 from continuing operations, respectively, which are recorded in subcontracted rail services on the combined statements of income and comprehensive income.

 

The future minimum payments for these rail services agreements are as follows (in thousands):

 

As of December 31,

      

2014

   $ 1,768   

2015

     244   
  

 

 

 

Total

   $ 2,012   
  

 

 

 

 

Operating Leases

 

The Predecessor has various non-cancellable operating leases for buildings, office facilities, railroad tracks, land surfaces, and railcars that expire at various dates from 2014 through 2017. The Predecessor incurred $0.3 million and $0.2 million in lease expenses related to buildings, offices, tracks, and land in 2013 and 2012, respectively, which are recorded in selling, general, & administration on the combined statements of income and comprehensive income.

 

The Predecessor incurred fleet service expenses of $13.6 million and $16.0 million in 2013 and 2012, respectively, which are recorded in fleet services on the combined statements of income and comprehensive income.

 

The future approximate minimum payments for the aforementioned operating leases are as follows (in thousands):

 

As of December 31,

      

2014

   $ 12,283   

2015

     4,929   

2016

     87   

2017

     90   
  

 

 

 
   $ 17,389   
  

 

 

 

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

At December 31, 2013, the Predecessor had major construction contracts for approximately $67.9 million, which include approximately $45.0 million in contracts that were completed and $22.9 million to be incurred in future periods.

 

Of the $3.7 million classified as other current liabilities on the combined balance sheet as of December 31, 2013, $3.6 million consisted of funds necessary to pay construction retention balances related to the build-out of the Hardisty rail terminal.

 

From time to time, the Predecessor may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Management does not believe that we are currently a party to any litigation that will have a material impact on our financial condition or results of operations.

 

Note 8. Segment Reporting

 

The Predecessor manages its business in two reportable segments: Terminalling services segment and Fleet services segment. The Terminalling services segment operates by terminalling and transloading crude oil and biofuels under multi-year, fee-based contracts. The Fleet services segment manages a fleet of rail cars to ensure customer’s products are handled safely and efficiently.

 

The Predecessor’s reportable segments offer different services and are managed accordingly. The Predecessor’s chief operating decision maker (the “CODM”) regularly reviews financial information about both segments in deciding how to allocate resources and evaluate performance. The CODM assesses segment performance based on income (loss) from continuing operations before interest expense, other expense, net, taxes, depreciation, and amortization (“Adjusted EBITDA”). The following tables summarize the Predecessor’s reportable segment data for continuing operations:

 

     For the Year Ended December 31, 2013  
     Terminalling
        services         
    Fleet
services
     Total  
     (in thousands)  

Revenues

       

Third party

   $ 7,130      $ 15,585       $ 22,715   

Related party

            3,586         3,586   

Operating costs (excluding depreciation)

     5,920        18,410         24,330   

Depreciation

     502                502   

Interest expense

     3,241                3,241   

Other expense, net

     39                39   

Provision for income taxes

     21        9         30   
  

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations

   $ (2,593   $ 752       $ (1,841
  

 

 

   

 

 

    

 

 

 

Total assets

     68,995        8,197         77,192   

Capital expenditures

   $ 56,114      $       $ 56,114   

 

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Table of Contents

USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

     For the Year Ended December 31, 2012  
     Terminalling
        services         
     Fleet
services
    Total  
     (in thousands)  

Revenues

       

Third party

   $ 8,703       $ 16,172      $ 24,875   

Operating costs (excluding depreciation)

     4,925         16,329        21,254   

Depreciation

     490                490   

Interest expense

     2,050                2,050   

Provision for income taxes

     26                26   
  

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

   $ 1,212       $ (157   $ 1,055   
  

 

 

    

 

 

   

 

 

 

Total assets

     14,128         3,505       17,633   

Capital expenditures

   $ 773       $      $ 773   

 

The following table provides a reconciliation of Adjusted EBITDA to income (loss) from continuing operations:

 

     For the Year Ended December 31,  
               2013                          2012             
     (in thousands)  

Adjusted EBITDA

    

Terminalling services Adjusted EBITDA

   $ 1,210      $ 3,778   

Fleet services Adjusted EBITDA

     761        (157

Interest expense

     (3,241     (2,050

Other expense, net

     (39       

Depreciation

     (502     (490

Provision for income taxes

     (30     (26
  

 

 

   

 

 

 

Income (loss) from continuing operations

   $ (1,841   $ 1,055   

 

The following tables summarize the Predecessor’s geographic data for continuing operations:

 

     For the Year Ended December 31, 2013  
         U.S.              Canada              Total      
     (in thousands)  

Revenues

        

Third party

   $ 22,715       $       $ 22,715   

Related party

     3,586                 3,586   

Total assets

   $ 17,825       $ 59,367       $ 77,192   

 

     For the Year Ended December 31, 2012  
         U.S.              Canada              Total      
     (in thousands)  

Revenues

        

Third party

   $ 24,875       $       $ 24,875   

Total assets

   $ 16,890       $ 743       $ 17,633   

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

Note 9. Major Customers and Concentration of Credit Risk

 

The following table provides the percentage of total revenues attributable to a single customer from which 10% or more of total revenues are derived:

 

     Percent of Total Revenues for Years Ended December  31,  
     2013     2012  

Customer A

     52     43

Customer B

     23        25   

Customer C

     10          

Customer D

     3        20   

All Others

     12        12   
  

 

 

   

 

 

 
     100     100

 

A substantial portion of the Predecessor’s revenues are from a limited number of customers. The Predecessor’s revenues are derived mainly from railcar loading and unloading services for bulk liquid products, switching, other terminalling services, and railcar fleet services. The industry concentration of these customers may impact the Predecessor’s overall exposure to credit risk, either positively or negatively, as its customers may be similarly affected by changes in commodity prices, regulation, and other economic factors. The Predecessor seeks high-quality customers with investment grade credit ratings and performs ongoing credit evaluations of its customers.

 

Note 10. Income Taxes

 

The Predecessor is treated as a partnership for federal and most state income tax purposes, with each partner being separately taxed on its share of taxable income. The provision for income taxes for the years presented includes franchise taxes and tax on the Predecessor’s Canadian operations. For the years ended December 31, 2013 and 2012, the Predecessor’s provision for U.S. income taxes consisted of current expense for state franchise taxes of $30 thousand and $26 thousand, respectively. There was no benefit recorded for losses associated with our Canadian operations since it is currently more likely than not the benefit from the loss carryover will not be realized. The Predecessor had no unrecognized tax benefits or any tax reserves for uncertain tax positions at December 31, 2013 or 2012.

 

The components of income (loss) before taxes with reconciliation between tax at the federal statutory rate and actual income tax expense for continuing operations follow:

 

     Years Ended December 31,  
         2013             2012      
     (in thousands)  

Domestic

   $ (1,527   $ 1,081   

Foreign

     (284       
  

 

 

   

 

 

 

Total income (loss) before taxes

   $ (1,811   $ 1,081   
  

 

 

   

 

 

 

Tax expense (benefit) at the statutory rate

   $ (634   $ 378   

Loss (income) attributable to partnership not subject to tax

     536        (378

Foreign tax rate differential

     28          

Other

     10          

State income tax

     30        26   

Change in valuation allowance

     60          
  

 

 

   

 

 

 

Provision for income taxes

   $ 30      $ 26   
  

 

 

   

 

 

 

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The Predecessor’s deferred income taxes reflect the tax effect of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred income tax assets for continuing operations follow:

 

     As of December 31,  
         2013             2012      
     (in thousands)  

Deferred income tax assets

    

Property and equipment

   $ 25      $   

Capital and operating loss carryovers

     35          

Valuation allowance

     (60       
  

 

 

   

 

 

 

Net deferred income tax assets

   $      $   
  

 

 

   

 

 

 

 

Note 11. Discontinued Operations

 

On December 12, 2012, USDG sold all of its membership interests in five of its subsidiaries included in the Predecessor’s Terminalling services segment to the Acquirer. The sales price of the subsidiaries was $502.6 million, net of working capital adjustments. USDG used a portion of these proceeds to pay down its bank debt to $30 million at the time of the Sale and for distributions to its members during the periods presented. For the years ended December 31, 2013 and 2012, the Predecessor has $7.3 million and $394.3 million, respectively, recorded as gain on sale of discontinued operations. At the time of the Sale, a sixth subsidiary also included in the Predecessor’s Terminalling services segment, USDS, ceased operations. The financial results of the Predecessor’s operations related to the Discontinued Operations and USDS are reflected as discontinued operations in the combined statements of income and comprehensive income.

 

Assets and liabilities of our Discontinued Operations are as follows:

 

     As of December 31,  
     2013      2012  
     (in thousands)  

Assets:

     

Cash

   $       $ 1,698   

Receivables

     603         142   

Cash proceeds placed in escrow related to the Sale

     29,473         39,461   
  

 

 

    

 

 

 

Total assets

   $ 30,076       $ 41,301   
  

 

 

    

 

 

 

Liabilities:

     

Payables

   $       $ 3,608   

Bonus accrued for payment to employees

     5,835         8,284   
  

 

 

    

 

 

 

Total liabilities

   $ 5,835       $ 11,892   
  

 

 

    

 

 

 

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

The following table shows the Predecessor’s results from its Discontinued Operations:

 

     For the Years Ended December 31,  
             2013                      2012          
     (in thousands)  

Discontinued operations:

     

Revenues

   $ 951       $ 107,714   

Income before provision for income taxes

     951         65,245   

Provision for income taxes

     3         41   

Net income

   $ 948       $ 65,204   

 

The following table provides a reconciliation of the Predecessor’s sales price for its Discontinued Operations to its gain on sale of discontinued operations:

 

     For the Year Ended
December 31, 2012
 
     (in thousands)  

Sales price

   $ 502,554   

Subsidiaries sold at cost

     (72,564

Transaction costs and other

     (35,672
  

 

 

 

Gain on sale of discontinued operations

   $ 394,318   
  

 

 

 

 

The following table provides a reconciliation of the Predecessor’s sales price for its Discontinued Operations to the net cash provided by investing activities for its Discontinued Operations:

 

     For the Year Ended
December 31, 2012
 
     (in thousands)  

Sales price

   $ 502,554   

Gross cash proceeds placed in escrow

     (40,000

Additions of property and equipment

     (26,644

Working capital adjustment

     852   
  

 

 

 

Net cash provided by investing activities

   $ 436,762   
  

 

 

 

 

During 2013, $10.0 million of escrow payments was received.

 

Continuing Cash Flows from Discontinued Operations

 

At the time of the Sale, SJRT had an existing contract (the “Contract”) with one of its customers (the “Customer”) in which the Customer would pay SJRT an Incremental Throughput Fee, as defined, for certain volumes coming through SJRT (“Incremental Throughput Fee”). The Incremental Throughput Fee allowed SJRT to participate with the Customer in the value created due to increased market spreads on the price of crude oil. The Incremental Throughput Fee was calculated at a certain percentage of the net differential between the market price of the crude oil volumes and an agreed upon minimum price. Upon the sale of SJRT, the Acquirer agreed to remit the Incremental Throughput Fee to the Predecessor until the expiration of the Contract. The Predecessor received these cash flows through September of 2013. These proceeds are recorded as income from discontinued operations prior to the Sale and in gain on sale of discontinued operations after the Sale as the remittance of the Incremental Throughput Fee after the Sale is deemed a resolution of a purchase price adjustment with the Acquirer. During the years ended December 31, 2013 and 2012, $7.3 million and $0.9 million, respectively, are recorded in gain on sale of discontinued operations.

 

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USD PARTNERS LP PREDECESSOR

NOTES TO COMBINED FINANCIAL STATEMENTS

 

In conjunction with the Sale, the Predecessor ceased its operations at USDS. USDS’s primary operations revolved around a service agreement with the Acquirer related to loading and unloading services. Effective at the closing date of the sale, USDS assigned or terminated any obligations it had in relation to its operations, but continues to receive indirect cash flows. The Predecessor has not participated in any revenue producing activities and expects the cash flows to terminate upon the expiration of the assigned service agreement on February 15, 2015. The earnings from the assigned service agreement are recorded as income from discontinued operations and are $1.0 million and $46 thousand for the years ended December 31, 2013 and 2012, respectively.

 

Note 12. Subsequent Events

 

On January 21, 2014, the remaining $29.5 million of cash proceeds placed in escrow related to the Sale was released to the Predecessor.

 

In April 2014, the Predecessor drew $67.8 million on the credit facility to pay its loan then outstanding from USDG. As of July 18, 2014, the Predecessor had $97.8 million outstanding under the credit facility.

 

To manage its foreign currency exchange risk at its Canadian operations, USDG, on behalf of the Predecessor entered into foreign currency hedge contracts on May 20, 2014 with a total notional amount of $37.2 million. The hedge contracts expire on various dates between December 2014 and December 2015.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The General Partner of

USD Partners LP

 

We have audited the accompanying balance sheet of USD Partners LP (the “Partnership”) as of June 5, 2014. This balance sheet is the responsibility of the Partnership’s management. Our responsibility is to express an opinion on this balance sheet based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of the Partnership as of June 5, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ UHY LLP

Houston, Texas

July 14, 2014

 

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USD PARTNERS LP

BALANCE SHEET

JUNE 5, 2014

 

ASSETS   

Current assets:

  

Receivable — affiliate

   $ 1,000   
  

 

 

 

Total Assets

   $ 1,000   
  

 

 

 
PARTNERS’ CAPITAL   

Limited partner

   $ 980   

General partner

     20   
  

 

 

 

Total Partners’ Capital

   $ 1,000   
  

 

 

 

 

See Notes to Balance Sheet.

 

F-46


Table of Contents

USD PARTNERS LP

NOTES TO BALANCE SHEET

 

Note 1. Nature of Operations

 

USD Partners LP (the “Partnership”) is a Delaware limited partnership organized on June 5, 2014. USD Partners GP LLC (the “General Partner”) is a limited liability company formed on June 5, 2014 to become the general partner of the Partnership.

 

On June 5, 2014, in connection with the formation of the Partnership, the General Partner committed to contribute $20 to the Partnership in exchange for 2.0% general partner interest, and U.S. Development Group LLC (the “Limited Partner”) committed to contribute $980 to the Partnership in exchange for 98.0% limited partner interest. On July 14, 2014, the Partnership received $980 from the Limited Partner and $20 from the General Partner. There have been no other transactions involving the Partnership as of July 14, 2014.

 

Note 2. Subsequent Events

 

We have evaluated subsequent events through July 14, 2014. Any material subsequent events that have occurred during this time have been properly recognized or disclosed in our balance sheet or notes to the balance sheet.

 

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Table of Contents

 

APPENDIX A

FORM OF

THIRD AMENDED AND RESTATED

AGREEMENT OF

LIMITED PARTNERSHIP OF USD PARTNERS LP

A Delaware Limited Partnership

Dated as of             , 2014

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ARTICLE I. DEFINITIONS

     1   

Section 1.1

   Definitions      1   

Section 1.2

   Construction      20   

ARTICLE II. ORGANIZATION

     21   

Section 2.1

   Formation      21   

Section 2.2

   Name      21   

Section 2.3

   Registered Office; Registered Agent; Principal Office; Other Offices      21   

Section 2.4

   Purpose and Business      21   

Section 2.5

   Powers      22   

Section 2.6

   Term      22   

Section 2.7

   Title to Partnership Assets      22   

ARTICLE III. RIGHTS OF LIMITED PARTNERS

     22   

Section 3.1

   Limitation of Liability      22   

Section 3.2

   Management of Business      22   

Section 3.3

   Outside Activities of the Limited Partners      22   

Section 3.4

   Rights of Limited Partners.      23   

ARTICLE IV. CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS

     24   

Section 4.1

   Certificates      24   

Section 4.2

   Mutilated, Destroyed, Lost or Stolen Certificates      24   

Section 4.3

   Record Holders      25   

Section 4.4

   Transfer Generally      25   

Section 4.5

   Registration and Transfer of Limited Partner Interests      25   

Section 4.6

   Transfer of the General Partner’s General Partner Interest      26   

Section 4.7

   Transfer of Incentive Distribution Rights      26   

Section 4.8

   Restrictions on Transfers      27   

Section 4.9

   Eligibility Certificates; Ineligible Holders      27   

Section 4.10

   Redemption of Partnership Interests of Ineligible Holders      28   

ARTICLE V. CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

     29   

Section 5.1

   Organizational Contributions; Issuance of Class A Units      29   

Section 5.2

   Contributions by the General Partner      29   

Section 5.3

   Contributions by Limited Partners      30   

Section 5.4

   Interest and Withdrawal      30   

Section 5.5

   Capital Accounts      30   

Section 5.6

   Issuances of Additional Partnership Interests      33   

Section 5.7

   Conversion of Subordinated Units      34   

Section 5.8

   Limited Preemptive Right      35   

Section 5.9

   Splits and Combinations.      35   

Section 5.10

   Fully Paid and Non-Assessable Nature of Limited Partner Interests      36   

Section 5.11

  

Issuance of Common Units in Connection with Reset of Incentive Distribution Rights

     36   

Section 5.12

   Rights of Holders of Class A Units      37   

ARTICLE VI. ALLOCATIONS AND DISTRIBUTIONS

     41   

Section 6.1

   Allocations for Capital Account Purposes      41   

Section 6.2

   Allocations for Tax Purposes      49   

Section 6.3

   Distributions; Characterization of Distributions; Distributions to Record Holders      51   


Table of Contents

Section 6.4

   Distributions from Operating Surplus      51   

Section 6.5

   Distributions from Capital Surplus      53   

Section 6.6

   Adjustment of Target Distribution Levels      53   

Section 6.7

  

Special Provisions Relating to the Holders of Subordinated Units and Affiliate Retained Units

     53   

Section 6.8

   Special Provisions Relating to the Holders of IDR Reset Common Units      54   

Section 6.9

   Entity-Level Taxation      54   

Section 6.10

   Special Provisions Relating to the Holders of Class A Units      54   

ARTICLE VII. MANAGEMENT AND OPERATION OF BUSINESS

     55   

Section 7.1

   Management      55   

Section 7.2

   Certificate of Limited Partnership      57   

Section 7.3

   Restrictions on the General Partner’s Authority      57   

Section 7.4

   Reimbursement of the General Partner      57   

Section 7.5

   Outside Activities      58   

Section 7.6

   Indemnification      59   

Section 7.7

   Liability of Indemnitees      60   

Section 7.8

   Standards of Conduct and Modification of Duties      60   

Section 7.9

   Other Matters Concerning the General Partner and Indemnitees      62   

Section 7.10

   Purchase or Sale of Partnership Interests      63   

Section 7.11

   Registration Rights of the General Partner and its Affiliates      63   

Section 7.12

   Reliance by Third Parties      65   

Section 7.13

   Replacement of Fiduciary Duties      65   

ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS

     65   

Section 8.1

   Records and Accounting      65   

Section 8.2

   Fiscal Year      66   

Section 8.3

   Reports      66   

ARTICLE IX. TAX MATTERS

     66   

Section 9.1

   Tax Returns and Information      66   

Section 9.2

   Tax Elections      66   

Section 9.3

   Tax Controversies      67   

Section 9.4

   Withholding      67   

ARTICLE X. ADMISSION OF PARTNERS

     67   

Section 10.1

   Admission of Limited Partners      67   

Section 10.2

   Admission of Successor General Partner      68   

Section 10.3

   Amendment of Agreement and Certificate of Limited Partnership      68   

ARTICLE XI. WITHDRAWAL OR REMOVAL OF PARTNERS

     68   

Section 11.1

   Withdrawal of the General Partner      68   

Section 11.2

   Removal of the General Partner      69   

Section 11.3

   Interest of Departing General Partner and Successor General Partner      70   

Section 11.4

  

Termination of Subordination Period, Conversion of Subordinated Units and Extinguishment of Cumulative Common Unit Arrearages

     71   

Section 11.5

   Withdrawal of Limited Partners      71   

ARTICLE XII. DISSOLUTION AND LIQUIDATION

     71   

Section 12.1

   Dissolution      71   

Section 12.2

   Continuation of the Business of the Partnership After Dissolution      72   

Section 12.3

   Liquidator      72   

 

ii


Table of Contents

Section 12.4

   Liquidation      72   

Section 12.5

   Cancellation of Certificate of Limited Partnership      73   

Section 12.6

   Return of Contributions      73   

Section 12.7

   Waiver of Partition      73   

Section 12.8

   Capital Account Restoration      73   

ARTICLE XIII. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

     74   

Section 13.1

   Amendments to be Adopted Solely by the General Partner      74   

Section 13.2

   Amendment Procedures      75   

Section 13.3

   Amendment Requirements      75   

Section 13.4

   Special Meetings      76   

Section 13.5

   Notice of a Meeting      76   

Section 13.6

   Record Date      76   

Section 13.7

   Adjournment      77   

Section 13.8

   Waiver of Notice; Approval of Meeting; Approval of Minutes      77   

Section 13.9

   Quorum and Voting      77   

Section 13.10

   Conduct of a Meeting      77   

Section 13.11

   Action Without a Meeting      78   

Section 13.12

   Right to Vote and Related Matters      78   

Section 13.13

   Voting of Incentive Distribution Rights      78   

ARTICLE XIV. MERGER OR CONSOLIDATION

     79   

Section 14.1

   Authority      79   

Section 14.2

   Procedure for Merger, Consolidationor Conversion      79   

Section 14.3

   Approval by Limited Partners      80   

Section 14.4

   Certificate of Merger      82   

Section 14.5

   Effect of Merger or Consolidation or Conversion      82   

ARTICLE XV. RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS

     83   

Section 15.1

   Right to Acquire Limited Partner Interests      83   

ARTICLE XVI. GENERAL PROVISIONS

     84   

Section 16.1

   Addresses and Notices; Written Communications      84   

Section 16.2

   Further Action      84   

Section 16.3

   Binding Effect      84   

Section 16.4

   Integration      84   

Section 16.5

   Creditors      84   

Section 16.6

   Waiver      84   

Section 16.7

   Third-Party Beneficiaries      85   

Section 16.8

   Counterparts      85   

Section 16.9

   Applicable Law; Forum, Venue and Jurisdiction      85   

Section 16.10

   Invalidity of Provisions      86   

Section 16.11

   Consent of Partners      86   

Section 16.12

   Facsimile Signatures      86   

 

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THIRD AMENDED AND RESTATED AGREEMENT

OF LIMITED PARTNERSHIP OF USD PARTNERS LP

THIS THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF USD PARTNERS LP dated as of             , 2014, is entered into by and between USD Partners GP LLC, a Delaware limited liability company, as the General Partner, USD Group LLC, a Delaware limited liability company, as the Organizational Limited Partner, and the other Limited Partners party hereto, together with any other Persons who become Partners in the Partnership or parties hereto as provided herein. In consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby agree as follows:

ARTICLE I.

DEFINITIONS

Section 1.1 Definitions. The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

Additional Book Basis” means, with respect to any Adjusted Property, the portion of the Carrying Value of such Adjusted Property that is attributable to positive adjustments made to such Carrying Value as determined in accordance with the provisions set forth below in this definition of Additional Book Basis. For purposes of determining the extent to which Carrying Value constitutes Additional Book Basis:

(a) Any negative adjustment made to the Carrying Value of an Adjusted Property as a result of either a Book-Down Event or a Book-Up Event shall first be deemed to offset or decrease that portion of the Carrying Value of such Adjusted Property that is attributable to any prior positive adjustments made thereto pursuant to a Book-Up Event or Book-Down Event; and

(b) If Carrying Value that constitutes Additional Book Basis is reduced as a result of a Book-Down Event and the Carrying Value of other property is increased as a result of such Book-Down Event, an allocable portion of any such increase in Carrying Value shall be treated as Additional Book Basis; provided, that the amount treated as Additional Book Basis pursuant hereto as a result of such Book-Down Event shall not exceed the amount by which the Aggregate Remaining Net Positive Adjustments after such Book-Down Event exceeds the remaining Additional Book Basis attributable to all of the Partnership’s Adjusted Property after such Book-Down Event (determined without regard to the application of this clause (b) to such Book-Down Event).

Additional Book Basis Derivative Items” means any Book Basis Derivative Items that are computed with reference to Additional Book Basis. To the extent that the Additional Book Basis attributable to all of the Partnership’s Adjusted Property as of the beginning of any taxable period exceeds the Aggregate Remaining Net Positive Adjustments as of the beginning of such period (the “Excess Additional Book Basis”), the Additional Book Basis Derivative Items for such period shall be reduced by the amount that bears the same ratio to the amount of Additional Book Basis Derivative Items determined without regard to this sentence as the Excess Additional Book Basis bears to the Additional Book Basis as of the beginning of such period. With respect to a Disposed of Adjusted Property, the Additional Book Basis Derivative Items shall be the amount of Additional Book Basis taken into account in computing gain or loss from the disposition of such Disposed of Adjusted Property; provided that the provisions of the immediately preceding sentence shall apply to the determination of the Additional Book Basis Derivative Items attributable to Disposed of Adjusted Property.

Adjusted Capital Account” means, with respect to any Partner, the balance in such Partner’s Capital Account at the end of each taxable period of the Partnership after giving effect to the following adjustments: (a) credit to such Capital Account any amount which such Partner is (i) obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) or (ii) deemed obligated to restore pursuant to the penultimate sentences of Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5)) and (b) debit to such

 

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Capital Account the items described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The “Adjusted Capital Account” of a Partner in respect of any Partnership Interest shall be the amount that such Adjusted Capital Account would be if such Partnership Interest were the only interest in the Partnership held by such Partner from and after the date on which such Partnership Interest was first issued.

Adjusted Operating Surplus” means, with respect to any period, (a) Operating Surplus generated with respect to such period (excluding clause (a)(i) of the definition thereof); (b) less (i) the amount of any net increase in Working Capital Borrowings (or the Partnership’s proportionate share of any net increase in Working Capital Borrowings in the case of Subsidiaries that are not wholly owned) with respect to that period; and (ii) the amount of any net decrease in cash reserves (or the Partnership’s proportionate share of any net decrease in cash reserves in the case of Subsidiaries that are not wholly owned) for Operating Expenditures with respect to such period not relating to an Operating Expenditure made with respect to such period; and (c) plus (i) the amount of any net decrease in Working Capital Borrowings (or the Partnership’s proportionate share of any net decrease in Working Capital Borrowings in the case of Subsidiaries that are not wholly owned) with respect to that period; (ii) the amount of any net increase in cash reserves (or the Partnership’s proportionate share of any net increase in cash reserves in the case of Subsidiaries that are not wholly owned) for Operating Expenditures with respect to such period required by any debt instrument for the repayment of principal, interest or premium; and (iii) the amount of any net decrease made in subsequent periods in cash reserves for Operating Expenditures initially established with respect to such period to the extent such decrease results in a reduction in Adjusted Operating Surplus in subsequent periods pursuant to clause (b)(ii). Adjusted Operating Surplus does not include that portion of Operating Surplus included in clause (a)(i) of the definition of Operating Surplus.

Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Section 5.5(d).

Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

Affiliate Retained Units” means Units held by the Organizational Limited Partner or any Affiliate of the Organizational Limited Partner.

Aggregate Quantity of IDR Reset Common Units” is defined in Section 5.11(a).

Aggregate Remaining Net Positive Adjustments” means, as of the end of any taxable period, the sum of the Remaining Net Positive Adjustments of all the Partners.

Agreed Allocation” means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of Section 6.1, including a Curative Allocation (if appropriate to the context in which the term “Agreed Allocation” is used).

Agreed Value” of (a) a Contributed Property means the fair market value of such property or asset at the time of contribution and (b) an Adjusted Property means the fair market value of such Adjusted Property on the date of the Revaluation Event, in each case as determined by the General Partner. The General Partner shall use such method as it determines to be appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Partnership in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property.

Agreement” means this Third Amended and Restated Agreement of Limited Partnership of USD Partners LP, as it may be amended, supplemented or restated from time to time.

 

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Annualized MQD” means (a) the Minimum Quarterly Distribution multiplied by (b) four.

Associate” means, when used to indicate a relationship with any Person, (a) any corporation or organization of which such Person is a director, officer, manager, general partner or managing member or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.

Available Cash” means, with respect to any Quarter ending prior to the Liquidation Date:

(a) the sum of:

(i) all cash and cash equivalents of the Partnership Group (or the Partnership’s proportionate share of cash and cash equivalents in the case of Subsidiaries that are not wholly owned) on hand at the end of such Quarter; and

(ii) if the General Partner so determines, all or any portion of additional cash and cash equivalents of the Partnership Group (or the Partnership’s proportionate share of cash and cash equivalents in the case of Subsidiaries that are not wholly owned) on hand on the date of determination of Available Cash with respect to such Quarter resulting from Working Capital Borrowings made subsequent to the end of such Quarter, less

(b) the amount of any cash reserves established by the General Partner (or the Partnership’s proportionate share of cash reserves in the case of Subsidiaries that are not wholly owned) to:

(i) provide for the proper conduct of the business of the Partnership Group (including cash reserves for future capital expenditures and for anticipated future debt service requirements of the Partnership Group) subsequent to such Quarter;

(ii) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which any Group Member is a party or by which it is bound or its assets are subject; or

(iii) provide funds for distributions under Section 6.4 or Section 6.5 in respect of any one or more of the next four Quarters;

provided, however, that the General Partner may not establish cash reserves pursuant to subclause (b)(iii) above if the effect of such reserves would be that the Partnership is unable to distribute the Minimum Quarterly Distribution on all Common Units, plus any Cumulative Common Unit Arrearage on all Common Units, with respect to such Quarter; and, provided further, that disbursements made by a Group Member or cash reserves established, increased or reduced after the end of such Quarter but on or before the date of determination of Available Cash with respect to such Quarter shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such Quarter if the General Partner so determines.

Notwithstanding the foregoing, “Available Cash” with respect to the Quarter in which the Liquidation Date occurs and any subsequent Quarter shall equal zero.

Board of Directors” means the board of directors of the General Partner.

Book Basis Derivative Items” means any item of income, deduction, gain or loss that is computed with reference to the Carrying Value of an Adjusted Property (e.g., depreciation, depletion, or gain or loss with respect to an Adjusted Property).

Book-Down Event” means a Revaluation Event that gives rise to a Net Termination Loss.

 

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Book-Tax Disparity” means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for U.S. federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Section 5.5 and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with U.S. federal income tax accounting principles.

Book-Up Event” means a Revaluation Event that gives rise to a Net Termination Gain.

Business Day” means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States of America or the States of New York and Delaware shall not be regarded as a Business Day.

Capital Account” means the capital account maintained for a Partner pursuant to Section 5.5. The “Capital Account” of a Partner in respect of any Partnership Interest shall be the amount that such Capital Account would be if such Partnership Interest were the only interest in the Partnership held by such Partner from and after the date on which such Partnership Interest was first issued.

Capital Contribution” means (a) any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Partner contributes to the Partnership or that is contributed or deemed contributed to the Partnership on behalf of a Partner (including, in the case of an underwritten offering of Units, the amount of any underwriting discounts or commissions) or (b) current distributions that a Partner is entitled to receive but otherwise waives.

Capital Improvement” means any (a) replacement, improvement or expansion of capital assets owned by any Group Member, (b) acquisition (through an asset acquisition, merger, stock acquisition or other form of investment), construction or development of new capital assets by any Group Member, or (c) Capital Contribution by a Group Member to a Person that is not a Subsidiary in which a Group Member has, or after such Capital Contribution will have, directly or indirectly, an equity interest, to fund such Group Member’s pro rata share of the cost of any replacement, improvement or expansion of existing capital assets or acquisition, construction or development of new capital assets, by such Person, in each case if and to the extent such replacement, improvement, expansion, acquisition, construction or development is made to increase over the long-term, the operating capacity, operating income or asset base of the Partnership Group, in the case of clauses (a) and (b), or such Person, in the case of clause (c), from the operating capacity, operating income or asset base of the Partnership Group or such Person, as the case may be, existing immediately prior to such replacement, improvement, expansion, acquisition, construction, development or Capital Contribution.

Capital Surplus” means cash and cash equivalents distributed by the Partnership in excess of Operating Surplus, as described in Section 6.3(b).

Carrying Value” means (a) with respect to a Contributed Property or an Adjusted Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, amortization and other cost recovery deductions charged to the Partners’ Capital Accounts in respect of such property and (b) with respect to any other Partnership property, the adjusted basis of such property for U.S. federal income tax purposes, all as of the time of determination; provided, however, that the Carrying Value of any property shall be adjusted from time to time in accordance with Section 5.5(d) to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.

Cause” means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner is liable to the Partnership or any Limited Partner for actual fraud or willful or wanton misconduct in its capacity as a general partner of the Partnership.

 

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Certificate” means a certificate in such form (including in global form if permitted by applicable rules and regulations) as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more Partnership Interests. The initial form of certificate approved by the General Partner for Common Units is attached as Exhibit A to this Agreement.

Certificate of Limited Partnership” means the Certificate of Limited Partnership of the Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 7.2, as such Certificate of Limited Partnership may be amended, supplemented or restated from time to time.

Citizenship Eligibility Trigger” is defined in Section 4.9(a)(ii).

claim” (as used in Section 7.11(c)) is defined in Section 7.11(c).

Class A Cause” means the occurrence or existence of any of the following events: (i) the Class A Holder’s commission of any act of gross negligence or willful misconduct that adversely affects, or may reasonably be expected to adversely affect, the business of the Partnership Group; (ii) the Class A Holder’s commission of fraud, theft, or embezzlement; (iii) the Class A Holder’s conviction of, or plea of guilty or nolo contendere to, any felony crime (or state law equivalent) or any crime involving moral turpitude, deceit or dishonesty; (iv) the Class A Holder’s breach of any of material policy or procedure of the Partnership Group; or (v) the Class A Holder’s refusal (other than as a result of any physical or mental incapacity) to perform his duties as reasonably required by the Board of Directors (including following any reasonable directive from the Board of Directors in connection therewith), which breach or failure or refusal (if curable) is not cured by the Class A Holder within thirty (30) days after the General Partner has provided written notice of such breach or refusal, provided that the Class A Holder shall not be permitted the opportunity to repeatedly cure breaches or failures of the same type. The determination of whether or not such breach or refusal is curable shall be made by the Board of Directors acting reasonablyafter affording the Class A Holder and its counsel notice and a reasonable opportunity to be heard by the Board of Directors.

Class A Conversion Date” means, with respect to each Class A Unit, the day such Class A Unit is converted to a Common Unit pursuant to Section 5.12(b)(vi).

Class A Holder” means each Person identified as a Class A Holder in a joinder to this Agreement or each such Person’s Permitted Transferees.

Class A Issuance Date” means the date the Class A Units were first issued to the Class A Holders.

Class A Unit” means a Partnership Interest representing a fractional part of the Partnership Interests of all Limited Partners and having the rights and obligations specified with respect to Class A Units in this Agreement.

Closing Date” means the first date on which Common Units are issued and delivered by the Partnership to the Underwriters pursuant to the provisions of the Underwriting Agreement.

Closing Price” means, in respect of any class of Limited Partner Interests, as of the date of determination, the last sale price on such day, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices on such day, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal National Securities Exchange on which the respective Limited Partner Interests are listed or admitted to trading or, if such Limited Partner Interests are not listed or admitted to trading on any National Securities Exchange, the last quoted price on such day or, if not so quoted, the average of the high bid and low asked prices on such day in the over-the-counter market, as reported by the primary reporting system then in use in relation to such Limited Partner Interests of such class, or, if on any such day such Limited Partner Interests of such class are not quoted by any such organization, the average of the closing bid and asked prices on such day as furnished by a

 

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professional market maker making a market in such Limited Partner Interests of such class selected by the General Partner, or if on any such day no market maker is making a market in such Limited Partner Interests of such class, the fair value of such Limited Partner Interests on such day as determined by the General Partner.

Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any successor law.

Combined Interest” is defined in Section 11.3(a).

Commences Commercial Service” means the date a Capital Improvement or capital asset, as applicable, is first put into commercial service by a Group Member following, if applicable, completion of replacement, improvement, expansion, acquisition, construction or development and testing, as applicable.

Commission” means the United States Securities and Exchange Commission.

Common Unit” means a Partnership Interest having the rights and obligations specified with respect to Common Units in this Agreement. The term “Common Unit” does not refer to or include any Subordinated Unit or Class A Unit prior to its conversion into a Common Unit pursuant to the terms hereof.

Common Unit Arrearage” means, with respect to any Common Unit, whenever issued, with respect to any Quarter within the Subordination Period, the excess, if any, of (a) the Minimum Quarterly Distribution with respect to a Common Unit in respect of such Quarter over (b) the sum of all cash and cash equivalents distributed with respect to a Common Unit in respect of such Quarter pursuant to Section 6.4(a)(i).

Common Unit Trading Price” means current trading price of the Common Units as determined in the reasonable discretion of the General Partner.

Conflicts Committee” means a committee of the Board of Directors composed entirely of two or more directors, each of whom (a) is not an officer or employee of the General Partner, (b) is not an officer or employee of any Affiliate of the General Partner or a director of any Affiliate of the General Partner (other than any Group Member), (c) is not a holder of any ownership interest in the General Partner or any of its Affiliates, including any Group Member, other than Common Units and awards that are granted to such director under the LTIP and (d) is determined by the Board of Directors to be independent under the independence standards for directors who serve on an audit committee of a board of directors established by the Securities Exchange Act and the rules and regulations of the Commission thereunder and by the National Securities Exchange on which any class of Partnership Interests is listed or admitted to trading.

Continuous Employment” means continued employment by Ultimate Parent (or any successor), any subsidiary of Ultimate Parent (or any successor), the Partnership, the General Partner or any Affiliate of the Partnership or the General Partner.

Contributed Property” means each property, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 5.5(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property.

Contribution Agreement” means that certain Contribution, Conveyance and Assumption Agreement to be dated as of the Closing Date among the General Partner, the Partnership and certain other parties, together with the additional conveyance documents and instruments contemplated or referenced thereunder, as such may be amended, supplemented or restated from time to time.

 

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Cumulative Common Unit Arrearage” means, with respect to any Common Unit, whenever issued, and as of the end of any Quarter, the excess, if any, of (a) the sum of the Common Unit Arrearages with respect to an Initial Common Unit for each of the Quarters wholly within the Subordination Period ending on or before the last day of such Quarter over (b) the sum of any distributions theretofore made pursuant to Section 6.4(a)(ii) and the second sentence of Section 6.5 with respect to an Initial Common Unit (including any distributions to be made in respect of the last of such Quarters).

Curative Allocation” means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).

Current Market Price” means, in respect of any class of Limited Partner Interests, as of the date of determination, the average of the daily Closing Prices per Limited Partner Interest of such class for the 20 consecutive Trading Days immediately prior to such date.

Delaware Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del C. Section 17-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.

Departing General Partner” means a former General Partner from and after the effective date of any withdrawal or removal of such former General Partner pursuant to Section 11.1 or 11.2.

Disposed of Adjusted Property” is defined in Section 6.1(d)(xii)(B).

Economic Risk of Loss” has the meaning set forth in Treasury Regulation Section 1.752-2(a).

Eligibility Certificate” is defined in Section 4.9(b).

Eligible Holder” means a Person that satisfies the eligibility requirements established by the General Partner for Partners pursuant to Section 4.9.

Estimated Incremental Quarterly Tax Amount” is defined in Section 6.9.

Event Issue Value” means, with respect to any Common Unit as of any date of determination, (i) in the case of a Revaluation Event that includes the issuance of Common Units pursuant to a public offering and solely for cash, the price paid for such Common Units, or (ii) in the case of any other Revaluation Event, the Closing Price of the Common Units on the date of such Revaluation Event or, if the General Partner determines that a value for the Common Unit other than such Closing Price more accurately reflects the Event Issue Value, the value determined by the General Partner.

Event of Withdrawal” is defined in Section 11.1(a).

Excess Additional Book Basis” is defined in the definition of Additional Book Basis Derivative Items.

Excess Distribution” is defined in Section 6.1(d)(iii)(A).

Excess Distribution Unit” is defined in Section 6.1(d)(iii)(A).

Expansion Capital Expenditures” means cash expenditures for Capital Improvements, and shall not include Maintenance Capital Expenditures or Investment Capital Expenditures. Expansion Capital Expenditures shall include interest (and related fees) on debt incurred and distributions on equity issued to finance all or any portion of a Capital Improvement and paid in respect of the period beginning on the date that a Group Member enters into a binding obligation to commence a Capital Improvement and ending on the earlier to occur of (i) the date that such Capital Improvement Commences Commercial Service and (ii) the date that such Capital Improvement is abandoned or disposed of. Debt incurred to pay or equity issued to fund the construction period

 

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interest payments, or such construction period distributions on equity, shall also be deemed to be debt or equity, as the case may be, incurred to finance the construction of a Capital Improvement and the incremental Incentive Distributions paid relating to newly issued equity to finance the construction of a Capital Improvement. Where capital expenditures are made in part for Expansion Capital Expenditures and in part for other purposes, the General Partner shall determine the allocation between the amounts paid for each.

Fifth Subordinated Unit Tranche” means the fifth Subordinated Unit Tranche to convert into Common Units pursuant to Section 5.7. The Fifth Subordinated Unit Tranche shall be comprised                  of the Subordinated Units issued on the Closing Date pursuant to the Contribution Agreement.

Final Prospectus” means the final prospectus filed by the Partnership under the Rule 424 of the Securities Act with respect to the Initial Offering.

Final Subordinated Units” is defined in Section 6.1(d)(x)(A).

First Class A Unit Tranche” means 62,500 Class A Units issued on the Class A Issuance Date.

First Class A Unit Tranche Vesting Date” is defined in Section 5.12(b)(i)(A).

First Class A Unit Tranche Distribution Amount” is defined in Section 5.12(b)(i)(A).

First Class A Unit Tranche Distribution Threshold” is defined in Section 5.12(b)(i)(A).

First Subordinated Unit Tranche” means the first Subordinated Unit Tranche to convert into Common Units pursuant to Section 5.7. The First Subordinated Unit Tranche shall be comprised                  of the Subordinated Units issued on the Closing Date pursuant to the Contribution Agreement.

First Target Distribution” means 115% of the Minimum Quarterly Distribution per Unit per Quarter (or, with respect to periods of more or less than one fiscal quarter, it means the product of such amount multiplied by a fraction of which the numerator is the number of days in such period, and the denominator is the total number of days in such fiscal quarter), subject to adjustment in accordance with Section 5.11, Section 6.6 and Section 6.9.

Fourth Class A Unit Tranche” means 62,500 Class A Units issued on the Class A Issuance Date.

Fourth Class A Unit Tranche Vesting Date” is defined in Section 5.12(b)(i)(D).

Fourth Class A Unit Tranche Distribution Amount” is defined in Section 5.12(b)(i)(D).

Fourth Subordinated Unit Tranche” means the fourth Subordinated Unit Tranche to convert into Common Units pursuant to Section 5.7. The Fourth Subordinated Unit Tranche shall be comprised                  of the Subordinated Units issued on the Closing Date pursuant to the Contribution Agreement.

Fully Diluted Weighted Average Basis” means, when calculating the number of Outstanding Units for any period, a basis that includes (1) the weighted average number of Outstanding Units during such period plus (2) all Partnership Interests and options, rights, warrants, phantom units and appreciation rights relating to an equity interest in the Partnership (a) that are convertible into or exercisable or exchangeable for Units or for which Units are issuable, in each case that are senior to or pari passu with the Subordinated Units, (b) whose conversion, exercise or exchange price is less than the Current Market Price on the date of such calculation, (c) that may be converted into or exercised or exchanged for such Units prior to or during the Quarter immediately following the end of the period for which the calculation is being made without the satisfaction of any contingency beyond the control of the holder other than the payment of consideration and the compliance with administrative mechanics applicable to such conversion, exercise or exchange and (d) that were not

 

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converted into or exercised or exchanged for such Units during the period for which the calculation is being made; provided, however, that for purposes of determining the number of Outstanding Units on a Fully Diluted Weighted Average Basis when calculating whether the Subordination Period has ended or a tranche of Subordinated Units are entitled to convert into Common Units pursuant to Section 5.7, such Partnership Interests, options, rights, warrants and appreciation rights shall be deemed to have been Outstanding Units only for the four Quarters that comprise the last four Quarters of the measurement period; provided, further, that if consideration will be paid to any Group Member in connection with such conversion, exercise or exchange, the number of Units to be included in such calculation shall be that number equal to the difference between (i) the number of Units issuable upon such conversion, exercise or exchange and (ii) the number of Units that such consideration would purchase at the Current Market Price.

General Partner” means USD Partners GP LLC, a Delaware limited liability company, and its successors and permitted assigns that are admitted to the Partnership as general partner of the Partnership, in their capacities as general partner of the Partnership (except as the context otherwise requires).

General Partner Interest” means the equity interest of the General Partner in the Partnership (in its capacity as a general partner without reference to any Limited Partner Interest held by it), which is evidenced by General Partner Units, and includes any and all rights, powers and benefits to which the General Partner is entitled as provided in this Agreement, together with all obligations of the General Partner to comply with the terms and provisions of this Agreement.

General Partner Unit” means a fractional part of the General Partner Interest having the rights and obligations specified with respect to the General Partner Interest. A General Partner Unit shall not constitute a “Unit” for any purpose under this Agreement.

Good Reason” means the occurrence of any of the following events from and after the Closing Date without the Class A Holder’s written consent: (i) material diminution in the Class A Holder’s duties or responsibilities; (ii) material diminution in the Class A Holder’s base salary in effect from time to time; or (iii) relocation of the Class A Holder’s principal place of employment to a location more than 50 miles from such holder’s principal place of employment as of the date of this Agreement. Notwithstanding the foregoing, the Class A Holder’s termination shall not be considered to be on account of Good Reason unless: (A) within ninety (90) days after the date on which the Class A Holder has actual knowledge of the initial occurrence of one of the events set forth in clauses (i)-(iii), the Class A Holder provides written notice to the Board of Directors of the applicable facts and circumstances, (B) the General Partner does not remedy, cure or rectify the event within thirty (30) days from the date on which written notice is received from the Class A Holder, and (C) the Class A Holder terminates his employment within one hundred twenty-five (125) days after the occurrence of the event.

Gross Liability Value” means, with respect to any Liability of the Partnership described in Treasury Regulation Section 1.752-7(b)(3)(i), the amount of cash that a willing assignor would pay to a willing assignee to assume such Liability in an arm’s-length transaction.

Group” means two or more Persons that with or through any of their respective Affiliates or Associates have any contract, arrangement, understanding or relationship for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to 10 or more Persons), exercising investment power or disposing of any Partnership Interests.

Group Member” means a member of the Partnership Group.

Group Member Agreement” means the partnership agreement of any Group Member, other than the Partnership, that is a limited or general partnership, the limited liability company agreement of any Group Member that is a limited liability company, the certificate of incorporation and bylaws or similar organizational documents of any Group Member that is a corporation, the joint venture agreement or similar governing

 

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document of any Group Member that is a joint venture and the governing or organizational or similar documents of any other Group Member that is a Person other than a limited or general partnership, limited liability company, corporation or joint venture, as such may be amended, supplemented or restated from time to time.

Hedge Contract” means any exchange, swap, forward, cap, floor, collar, option or other similar agreement or arrangement entered into for the purpose of reducing the exposure of the Partnership Group to fluctuations in the price of hydrocarbons or interest rates, basis differentials or currency exchange rates in their operations or financing activities, in each case, other than for speculative purposes.

Holder” as used in Section 7.11, is defined in Section 7.11(a).

IDR Reset Common Unit” is defined in Section 5.11(a).

IDR Reset Election” is defined in Section 5.11(a).

Incentive Distribution Right” means a Limited Partner Interest having the rights and obligations specified with respect to Incentive Distribution Rights in this Agreement.

Incentive Distributions” means any amount of cash distributed to the holders of the Incentive Distribution Rights pursuant to Section 6.4.

Incremental Income Taxes” is defined in Section 6.9.

Indemnified Persons” is defined in Section 7.11(c).

Indemnitee” means (a) any General Partner, (b) any Departing General Partner, (c) any Person who is or was an Affiliate of the General Partner or any Departing General Partner, (d) any Person who is or was a manager, managing member, general partner, director, officer, employee, agent, fiduciary or trustee of any Group Member, a General Partner, any Departing General Partner or any of their respective Affiliates, (e) any Person who is or was serving at the request of a General Partner, any Departing General Partner or any of their respective Affiliates as an officer, director, manager, managing member, general partner, employee, agent, fiduciary or trustee of another Person owing a fiduciary or similar duty to any Group Member; provided that a Person shall not be an Indemnitee by reason of providing, on a fee-for-services basis, trustee, fiduciary or custodial services, (f) any Person who controls a General Partner or Departing General Partner and (g) any Person the General Partner designates as an “Indemnitee” for purposes of this Agreement because such Person’s service, status or relationship exposes such Person to potential claims, demands, actions, suits or proceedings relating to the Partnership Group’s business and affairs.

Ineligible Holder” is defined in Section 4.9(c).

Initial Common Units” means the Common Units sold in the Initial Offering.

Initial Limited Partners” means the Organizational Limited Partner (with respect to the Common Units and Subordinated Units to be received by it at the time of the Initial Offering), and the Underwriters, in each case upon being admitted to the Partnership in accordance with Section 10.1.

Initial Offering” means the initial offering and sale of Common Units to the public, as described in the Registration Statement, including any offer and sale of Common Units pursuant to the exercise of the Over-Allotment Option.

Initial Unit Price” means (a) with respect to the Common Units and the Subordinated Units, the initial public offering price per Common Unit at which the Underwriters offered the Common Units to the public for sale as set forth on the cover page of the Final Prospectus or (b) with respect to any other class or series of Units,

 

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the price per Unit at which such class or series of Units is initially sold by the Partnership, as determined by the General Partner, in each case adjusted as the General Partner determines to be appropriate to give effect to any distribution, subdivision or combination of Units.

Interim Capital Transactions” means the following transactions if they occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings of indebtedness (other than Working Capital Borrowings and other than for items purchased on open account or for a deferred purchase price in the ordinary course of business) by any Group Member and sales of debt securities of any Group Member; (b) sales of equity interests of any Group Member and (c) sales or other voluntary or involuntary dispositions of any assets of any Group Member other than (i) sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business, and (ii) sales or other dispositions of assets as part of normal retirements or replacements.

Investment Capital Expenditures” means capital expenditures other than Maintenance Capital Expenditures and Expansion Capital Expenditures.

Liability” means any liability or obligation of any nature, whether accrued, contingent or otherwise.

Limited Partner” means, unless the context otherwise requires, each Initial Limited Partner, each additional Person that becomes a Limited Partner pursuant to the terms of this Agreement and any Departing General Partner upon the change of its status from General Partner to Limited Partner pursuant to Section 11.3, in each case, in such Person’s capacity as a limited partner of the Partnership; provided, however, that when the term “Limited Partner” is used herein in the context of any vote or other approval, including Articles XIII and XIV, such term shall not, solely for such purpose, include any holder of a Class A Unit or any holder of Incentive Distribution Rights (solely with respect to its Class A Units or Incentive Distribution Rights and not with respect to any other Limited Partner Interest held by such Person) except as may otherwise be required by law or Section 13.13.

Limited Partner Interest” means the equity interest of a Limited Partner in the Partnership, which may be evidenced by Common Units, Subordinated Units, Incentive Distribution Rights, Class A Units or other Partnership Interests or a combination thereof or interest therein, and includes any and all benefits to which such Limited Partner is entitled as provided in this Agreement, together with all obligations of such Limited Partner to comply with the terms and provisions of this Agreement; provided, however, that when the term “Limited Partner Interest” is used herein in the context of any vote or other approval, including Articles XIII and XIV, such term shall not, solely for such purpose, include a Class A Unit except as may otherwise be required by law or Section 13.13.

Liquidation Date” means (a) in the case of an event giving rise to the dissolution of the Partnership of the type described in clauses (a) and (b) of the first sentence of Section 12.2, the date on which the applicable time period during which the holders of Outstanding Units have the right to elect to continue the business of the Partnership has expired without such an election being made, and (b) in the case of any other event giving rise to the dissolution of the Partnership, the date on which such event occurs.

Liquidator” means one or more Persons selected pursuant to Section 12.3 to perform the functions described in Section 12.4 as liquidating trustee of the Partnership within the meaning of the Delaware Act.

lower tier partnership” is defined in Section 6.1(d)(xii)(D).

LTIP” means the Long-Term Incentive Plan of the General Partner, as may be amended, or any equity compensation plan successor thereto.

Maintenance Capital Expenditures” means cash expenditures (including expenditures for the replacement, improvement or expansion of the capital assets owned by any Group Member or for the acquisition

 

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of existing, or the construction or development of new capital assets) by a Group Member if such expenditures are made to maintain, over the long-term, the operating capacity, operating income or asset base of the Partnership Group.

Merger Agreement” is defined in Section 14.1.

Minimum Quarterly Distribution” means $             per Unit per Quarter (or with respect to periods of more or less than a full fiscal quarter, it means the product of such amount multiplied by a fraction of which the numerator is the number of days in such period and the denominator is the total number of days in such fiscal quarter), subject to adjustment in accordance with Section 5.11, Section 6.6 and Section 6.9.

National Securities Exchange” means an exchange registered with the Commission under Section 6(a) of the Securities Exchange Act (or any successor to such Section) and any other securities exchange (whether or not registered with the Commission under Section 6(a) (or successor to such Section) of the Securities Exchange Act) that the General Partner shall designate as a National Securities Exchange for purposes of this Agreement.

Net Agreed Value” means (a) in the case of any Contributed Property, the Agreed Value of such property or other asset reduced by any Liabilities either assumed by the Partnership upon such contribution or to which such property or other asset is subject when contributed and (b) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property (as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is distributed, reduced by any Liabilities either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution, in either case as determined and required by the Treasury Regulations promulgated under Section 704(b) of the Code.

Net Income” means, for any taxable period, the excess, if any, of the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable period over the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Section 5.5 but shall not include any items specially allocated under Section 6.1(d); provided, that the determination of the items that have been specially allocated under Section 6.1(d) shall be made without regard to any reversal of such items under Section 6.1(d)(xii).

Net Loss” means, for any taxable period, the excess, if any, of the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable period over the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Section 5.5 but shall not include any items specially allocated under Section 6.1(d); provided, that the determination of the items that have been specially allocated under Section 6.1(d) shall be made without regard to any reversal of such items under Section 6.1(d)(xii).

Net Positive Adjustments” means, with respect to any Partner, the excess, if any, of the total positive adjustments over the total negative adjustments made to the Capital Account of such Partner pursuant to Book-Up Events and Book-Down Events.

Net Termination Gain” means, for any taxable period, (a) the sum, if positive, of all items of income, gain, loss or deduction (determined in accordance with Section 5.5(b)) that are recognized by the Partnership (i) after the Liquidation Date or (ii) upon the sale, exchange or other disposition of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions (excluding any disposition to a member of the Partnership Group), or (b) the excess, if any, of the aggregate amount of Unrealized Gain over the aggregate amount of Unrealized Loss deemed recognized by the Partnership

 

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pursuant to Section 5.5(d) on the date of a Revaluation Event; provided, however, that the items included in the determination of Net Termination Gain shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

Net Termination Loss” means, for any taxable period, (a) the sum, if negative, of all items of income, gain, loss or deduction (determined in accordance with Section 5.5(b)) that are recognized by the Partnership (i) after the Liquidation Date or (ii) upon the sale, exchange or other disposition of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions (excluding any disposition to a member of the Partnership Group), or (b) the excess, if any, of the aggregate amount of Unrealized Loss over the aggregate amount of Unrealized Gain deemed recognized by the Partnership pursuant to Section 5.5(b) on the date of a Revaluation Event; provided, however, that the items included in the determination of Net Termination Loss shall not include any items of income, gain or loss specially allocated under Section 6.1(d).

Noncompensatory Option” has the meaning set forth in Treasury Regulation Section 1.721-2(f).

Nonrecourse Built-in Gain” means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 6.2(b) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability.

Nonrecourse Liability” has the meaning set forth in Treasury Regulation Section 1.752-1(a)(2).

Notice of Election to Purchase” is defined in Section 15.1(b).

Omnibus Agreement” means that certain Omnibus Agreement to be dated the Closing Date among Ultimate Parent, the General Partner and the Partnership, as such may be amended, supplemented or restated from time to time.

Operating Expenditures” means all Partnership Group cash expenditures (or the Partnership’s proportionate share of expenditures in the case of Subsidiaries that are not wholly owned), including taxes, reimbursements of expenses of the General Partner and its Affiliates, payments made in the ordinary course of business under any Hedge Contracts, officer compensation, repayment of Working Capital Borrowings, debt service payments and Maintenance Capital Expenditures, subject to the following:

(a) repayments of Working Capital Borrowings deducted from Operating Surplus pursuant to clause (b)(iii) of the definition of “Operating Surplus” shall not constitute Operating Expenditures when actually repaid;

(b) payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and premium on indebtedness other than Working Capital Borrowings shall not constitute Operating Expenditures;

(c) Operating Expenditures shall not include (i) Expansion Capital Expenditures, (ii) Investment Capital Expenditures, (iii) payment of transaction expenses (including taxes) relating to Interim Capital Transactions, (iv) distributions to Partners (including in respect of Incentive Distribution Rights) or (v) repurchases of Partnership Interests, other than repurchases of Partnership Interests to satisfy obligations under employee benefit plans, or reimbursements of expenses of the General Partner for such purchases. Where capital expenditures are made in part for Maintenance Capital Expenditures and in part for other purposes, the General Partner shall determine the allocation between the amounts paid for each; and

 

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(d) (i) payments made in connection with the initial purchase of any Hedge Contract shall be amortized over the life of such Hedge Contract and (ii) payments made in connection with the termination of any Hedge Contract prior to the expiration of its stipulated settlement or termination date shall be included in equal quarterly installments over what would have been the remaining scheduled term of such Hedge Contract had it not been so terminated.

Operating Surplus” means, with respect to any period ending prior to the Liquidation Date, on a cumulative basis and without duplication,

(a) the sum of (i) $             million, (ii) all cash receipts of the Partnership Group (or the Partnership’s proportionate share of cash receipts in the case of Subsidiaries that are not wholly owned) for the period beginning on the Closing Date and ending on the last day of such period, but excluding cash receipts from Interim Capital Transactions and provided that cash receipts from the termination of any Hedge Contract prior to its stipulated settlement or termination date shall be included in equal quarterly installments over what would have been the remaining scheduled term of such Hedge Contract had it not been so terminated, (iii) all cash receipts of the Partnership Group (or the Partnership’s proportionate share of cash receipts in the case of Subsidiaries that are not wholly owned) after the end of such period but on or before the date of determination of Operating Surplus with respect to such period resulting from Working Capital Borrowings, and (iv) the amount of cash distributions paid (including incremental Incentive Distributions) in respect of equity issued, other than equity issued in the Initial Offering, to finance all or a portion of the Expansion Capital Expenditures and paid in respect of the period beginning on the date that the Group Member enters into a binding obligation to commence a Capital Improvement and ending on the earlier to occur of the date the Capital Improvement Commences Commercial Service and the date that it is abandoned or disposed of (equity issued, other than equity issued in the Initial Offering, to fund the construction period interest payments on debt incurred, or construction period distributions on equity issued, to finance the Expansion Capital Expenditures shall also be deemed to be equity issued to finance the replacement, improvement, expansion, acquisition, construction or development of a Capital Improvement for purposes of this clause (iv)); less

(b) the sum of (i) Operating Expenditures for the period beginning on the Closing Date and ending on the last day of such period; (ii) the amount of cash reserves established by the General Partner (or the Partnership’s proportionate share of cash reserves in the case of Subsidiaries that are not wholly owned) to provide funds for future Operating Expenditures; (iii) all Working Capital Borrowings not repaid within twelve (12) months after having been incurred or repaid within such twelve-month period with the proceeds of additional Working Capital Borrowings and (iv) any cash loss realized on disposition of an Investment Capital Expenditure;

provided, however, that the General Partner’s estimates of disbursements made (including contributions to a Group Member or disbursements on behalf of a Group Member), the General Partner’s estimates of cash received, or cash reserves established, increased or reduced after the end of such period but on or before the date of determination of cash or cash equivalents to be distributed with respect to such period shall be deemed to have been made, received, established, increased or reduced, for purposes of determining Operating Surplus, within such period if the General Partner so determines.

Notwithstanding the foregoing, “Operating Surplus” with respect to the Quarter in which the Liquidation Date occurs and any subsequent Quarter shall equal zero. Cash receipts from an Investment Capital Expenditure shall be treated as cash receipts only to the extent they are a return on principal, but in no event shall a return of principal be treated as cash receipts. Customer payments that are paid no more than several days after their due date will be treated as paid on their due date.

Opinion of Counsel” means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) acceptable to the General Partner.

Option Closing Date” means the date or dates on which any Common Units are sold by the Partnership to the Underwriters upon exercise of the Over-Allotment Option.

 

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Organizational Limited Partner” means USD Group LLC, a Delaware limited liability company, in its capacity as the organizational limited partner of the Partnership pursuant to this Agreement.

Outstanding” means, with respect to Partnership Interests, all Partnership Interests that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination; provided, however, that if at any time any Person or Group (other than the General Partner or its Affiliates) beneficially owns 20% or more of the Outstanding Partnership Interests of any class then Outstanding, none of the Partnership Interests owned by such Person or Group shall be entitled to be voted on any matter or be considered to be Outstanding when sending notices of a meeting of Limited Partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under this Agreement, except that Partnership Interests so owned shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Partnership Interests shall not, however, be treated as a separate class of Partnership Interests for purposes of this Agreement or the Delaware Act); provided, further, that the foregoing limitation shall not apply to (i) any Person or Group who acquired 20% or more of the Outstanding Partnership Interests of any class then Outstanding directly from the General Partner or its Affiliates (other than the Partnership), (ii) any Person or Group who acquired 20% or more of the Outstanding Partnership Interests of any class then Outstanding directly or indirectly from a Person or Group described in clause (i) provided that the General Partner shall have notified such Person or Group in writing that such limitation shall not apply, or (iii) any Person or Group who acquired 20% or more of any Partnership Interests issued by the Partnership with the prior approval of the Board of Directors provided that the General Partner shall have notified such Person or Group in writing that such limitation shall not apply.

Over-Allotment Option” means the over-allotment option granted to the Underwriters by the Partnership pursuant to the Underwriting Agreement.

Partner Nonrecourse Debt” has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4).

Partner Nonrecourse Debt Minimum Gain” has the meaning set forth in Treasury Regulation Section 1.704-2(i)(2).

Partner Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(i), are attributable to a Partner Nonrecourse Debt.

Partners” means the General Partner and the Limited Partners.

Partnership” means USD Partners LP, a Delaware limited partnership.

Partnership Change in Control” means (a) a “Change in Control” as defined in the Partnership’s 2014 Incentive Stock Plan, as such plan may be adopted, amended, supplemented or restated from time to time, (b) any Person or group, other than Ultimate Parent or its Affiliates, becomes the beneficial owner, by way of merger, consolidation, recapitalization, reorganization or otherwise, of 50% or more of the combined voting power of the equity interests in the General Partner or the Partnership, (c) the Limited Partners approve, in one or a series of transactions, a plan of complete liquidation of the Partnership, (d) the sale or other disposition by either the General Partner or the Partnership of all or substantially all of its assets in one or more transactions to any Person other than the General Partner or an Affiliate of the General Partner, (e) a transaction resulting in a Person other than USD Partners GP LLC or one of its Affiliates being the general partner of the Partnership, or (f) a transaction resulting in the general partner of the Partnership ceasing to be an Affiliate of Ultimate Parent.

Partnership Group” means, collectively, the Partnership and its Subsidiaries.

Partnership Interest” means any equity interest, including any class or series of equity interest, in the Partnership, which shall include any General Partner Interest and Limited Partner Interests but shall exclude any options, rights, warrants and appreciation rights relating to an equity interest in the Partnership.

 

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Partnership Minimum Gain” means that amount determined in accordance with the principles of Treasury Regulation Sections 1.704-2(b)(2) and 1.704-2(d).

Percentage Interest” means as of any date of determination (a) as to the General Partner with respect to General Partner Units and as to any Unitholder with respect to Units, as the case may be, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) below by (ii) the quotient obtained by dividing (A) the number of General Partner Units held by the General Partner or the number of Units held by such Unitholder, as the case may be, by (B) the total number of Outstanding Units and General Partner Units, and (b) as to the holders of other Partnership Interests issued by the Partnership in accordance with Section 5.6, the percentage established as a part of such issuance. The Percentage Interest with respect to an Incentive Distribution Right shall at all times be zero, except as provided in Section 13.13(b).

Permitted Transferee” means (i) the Partnership and (ii) a Class A Holder’s Relatives, any trust of which there are no principal beneficiaries other than such Class A Holder or one or more of such Class A Holder’s Relatives, or a corporation, partnership, limited liability company or other Person of which there are no owners other than such Class A Holder, one or more of such Class A Holder’s Relatives or another entity of which there are no other owners other than such Class A Holder or one or more of such Class A Holder’s Relatives (provided that each such transferee agrees to be bound by the terms of this Agreement as if it were an original party hereto and further agrees that it shall not thereafter transfer such Class A Units to any Person to whom such transferor would not be permitted to transfer such Class A Units pursuant to the terms of this Agreement).

Person” means an individual or a corporation, firm, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

Per Unit Capital Amount” means, as of any date of determination, the Capital Account, stated on a per Unit basis, underlying any class of Units held by a Person other than the General Partner or any Affiliate of the General Partner who holds Units.

Plan of Conversion” has the meaning given such term in Section 14.1.

Pro Rata” means (a) when used with respect to Units or any class thereof, apportioned equally among all designated Units in accordance with their relative Percentage Interests, (b) when used with respect to Partners or Record Holders, apportioned among all Partners or Record Holders in accordance with their relative Percentage Interests, (c) when used with respect to holders of Incentive Distribution Rights, apportioned equally among all holders of Incentive Distribution Rights in accordance with the relative number or percentage of Incentive Distribution Rights held by each such holder and (d) when used with respect to holders of Class A Units, apportioned equally among all holders of Class A Units in accordance with the relative number or percentage of Class A Units held by each such holder.

Purchase Date” means the date determined by the General Partner as the date for purchase of all Outstanding Limited Partner Interests of a certain class (other than Limited Partner Interests owned by the General Partner and its Affiliates) pursuant to Article XV.

Quarter” means, unless the context requires otherwise, a fiscal quarter of the Partnership, or, with respect to the fiscal quarter of the Partnership in which the Closing Date occurs, the portion of such fiscal quarter after the Closing Date.

Rate Eligibility Trigger” is defined in Section 4.9(a)(i).

Recapture Income” means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

 

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Record Date” means the date established by the General Partner or otherwise in accordance with this Agreement for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners or (b) the identity of Record Holders entitled to receive any report or distribution or to participate in any offer.

Record Holder” means (a) with respect to any class of Partnership Interests for which a Transfer Agent has been appointed, the Person in whose name a Partnership Interest of such class is registered on the books of the Transfer Agent as of the closing of business on a particular Business Day, or (b) with respect to other classes of Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books that the General Partner has caused to be kept as of the closing of business on such Business Day.

Redeemable Interests” means any Partnership Interests for which a redemption notice has been given, and has not been withdrawn, pursuant to Section 4.10.

Registration Statement” means the Registration Statement on Form S-1 filed with respect to the Initial Offering as it may be amended or supplemented from time to time, filed by the Partnership with the Commission under the Securities Act to register the offering and sale of the Common Units in the Initial Offering.

Relatives” means, collectively, a Class A Holder’s spouse, parents, children, grandchildren, siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.

Remaining Net Positive Adjustments” means as of the end of any taxable period, (i) with respect to the Unitholders holding Common Units or Subordinated Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding Common Units or Subordinated Units as of the end of such period over (b) the sum of those Partners’ Share of Additional Book Basis Derivative Items for each prior taxable period, (ii) with respect to the General Partner (as holder of the General Partner Interest), the excess of (a) the Net Positive Adjustments of the General Partner as of the end of such period over (b) the sum of the General Partner’s Share of Additional Book Basis Derivative Items with respect to the General Partner Interest for each prior taxable period, (iii) with respect to the holders of Incentive Distribution Rights, the excess of (a) the Net Positive Adjustments of the holders of Incentive Distribution Rights as of the end of such period over (b) the sum of the Share of Additional Book Basis Derivative Items of the holders of the Incentive Distribution Rights for each prior taxable period, and (iv) with respect to the Unitholders holding Class A Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding Class A Units as of the end of such period over (b) the sum of those Partners’ Share of Additional Book Basis Derivative Items of the holders of the Class A Units for each prior taxable period.

Required Allocations” means any allocation of an item of income, gain, loss or deduction pursuant to Section 6.1(d)(i), Section 6.1(d)(ii), Section 6.1(d)(iv), Section 6.1(d)(v), Section 6.1(d)(vi), Section 6.1(d)(vii) or Section 6.1(d)(ix).

Reset MQD” is defined in Section 5.11(a).

Reset Notice” is defined in Section 5.11(b).

Retained Converted Subordinated Units” is defined in Section 5.5(c)(ii).

Revaluation Event” means an event that results in adjustment of the Carrying Value of each Partnership property pursuant to Section 5.5(d).

Second Class A Unit Tranche” means 62,500 Class A Units issued on the Class A Issuance Date.

Second Class A Unit Tranche Vesting Date” is defined in Section 5.12(b)(i)(B).

 

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Second Class A Unit Tranche Distribution Amount” is defined in Section 5.12(b)(i)(B).

Second Class A Unit Tranche Distribution Threshold” is defined in Section 5.12(b)(i)(B).

Second Subordinated Unit Tranche” means the second Subordinated Unit Tranche to convert into Common Units pursuant to Section 5.7. The Second Subordinated Unit Tranche shall be comprised                      of the Subordinated Units issued on the Closing Date pursuant to the Contribution Agreement.

Second Target Distribution” means 125% of the Minimum Quarterly Distribution per Unit per Quarter (or, with respect to periods of more or less than a full fiscal quarter, it means the product of such amount multiplied by a fraction of which the numerator is the number of days in such period, and the denominator is the total number of days in such fiscal quarter), subject to adjustment in accordance with Section 5.11, Section 6.6 and Section 6.9.

Securities Act” means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute.

Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time and any successor to such statute.

Share of Additional Book Basis Derivative Items” means in connection with any allocation of Additional Book Basis Derivative Items for any taxable period, (i) with respect to the Unitholders holding Common Units or Subordinated Units, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Unitholders’ Remaining Net Positive Adjustments as of the end of such taxable period bear to the Aggregate Remaining Net Positive Adjustments as of that time, (ii) with respect to the General Partner (as holder of the General Partner Interest), the amount that bears the same ratio to such Additional Book Basis Derivative Items as the General Partner’s Remaining Net Positive Adjustments as of the end of such taxable period bear to the Aggregate Remaining Net Positive Adjustment as of that time, (iii) with respect to the Partners holding Incentive Distribution Rights, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments of the Partners holding the Incentive Distribution Rights as of the end of such taxable period bears to the Aggregate Remaining Net Positive Adjustments as of that time, and (iv) with respect to the Unitholders holding Class A Units, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments of the Unitholders holding the Class A Units as of the end of such taxable period bears to the Aggregate Remaining Net Positive Adjustments as of that time.

Special Approval” means approval by a majority of the members of the Conflicts Committee.

Subordinated Unit” means a Partnership Interest having the rights and obligations specified with respect to Subordinated Units in this Agreement. The term “Subordinated Unit” does not refer to or include a Common Unit. A Subordinated Unit that is convertible into a Common Unit shall not constitute a Common Unit until such conversion occurs.

Subordinated Unit Tranche” means each of the First Subordinated Unit Tranche, the Second Subordinated Unit Tranche, the Third Subordinated Unit Tranche, the Fourth Subordinated Unit Tranche and the Fifth Subordinated Unit Tranche.

Subordination Period” means the period commencing on the Closing Date and expiring on the date that the Fifth Subordinated Unit Tranche has converted into Common Units pursuant to Section 5.7.

Subsidiary” means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors

 

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or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if such Person, directly or by one or more Subsidiaries of such Person, or a combination thereof, controls such partnership on the date of determination or (c) any other Person in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.

Surviving Business Entity” is defined in Section 14.2(b)(ii).

Target Distribution” means each of the Minimum Quarterly Distribution, the First Target Distribution, Second Target Distribution and Third Target Distribution.

Third Class A Unit Tranche” means 62,500 Class A Units issued on the Class A Issuance Date.

Third Class A Unit Tranche Vesting Date” is defined in Section 5.12(b)(i)(C).

Third Class A Unit Tranche Distribution Threshold” is defined in Section 5.12(b)(i)(C).

Third Class A Unit Tranche Distribution Amount” is defined in Section 5.12(b)(i)(C).

Third Subordinated Unit Tranche” means the third Subordinated Unit Tranche to convert into Common Units pursuant to Section 5.7. The Third Subordinated Unit Tranche shall be comprised                      of the Subordinated Units issued on the Closing Date pursuant to the Contribution Agreement.

Third Target Distribution” means 150% of the Minimum Quarterly Distribution per Unit per Quarter (or, with respect to periods of more or less than a full fiscal quarter, it means the product of such amount multiplied by a fraction of which the numerator is the number of days in such period, and the denominator is the total number of days in such fiscal quarter), subject to adjustment in accordance with Section 5.11, Section 6.6 and Section 6.9.

Trading Day” means, for the purpose of determining the Current Market Price of any class of Limited Partner Interests, a day on which the principal National Securities Exchange on which such class of Limited Partner Interests is listed or admitted to trading is open for the transaction of business or, if Limited Partner Interests of a class are not listed or admitted to trading on any National Securities Exchange, a day on which banking institutions in New York City generally are open.

transfer” is defined in Section 4.4(a).

Transfer Agent” means such bank, trust company or other Person (including the General Partner or one of its Affiliates) as may be appointed from time to time by the Partnership to act as registrar and transfer agent for any class of Partnership Interests; provided, that if no Transfer Agent is specifically designated for any class of Partnership Interests, the General Partner shall act in such capacity.

Treasury Regulation” means the United States Treasury regulations promulgated under the Code.

Ultimate Parent” means US Development Group, LLC, a Delaware limited liability company.

Underwriter” means each Person named as an underwriter in Schedule I to the Underwriting Agreement who purchases Common Units pursuant thereto.

Underwriting Agreement” means that certain Underwriting Agreement to be entered into among the Underwriters, the Partnership, the General Partner and the other parties thereto, providing for the purchase of Common Units by the Underwriters.

 

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Unit” means a Partnership Interest that is designated as a “Unit” and shall include Common Units, Subordinated Units and Class A Units but shall not include (i) General Partner Units (or the General Partner Interest represented thereby) or (ii) Incentive Distribution Rights.

Unitholders” means the holders of Units.

Unit Majority” means (i) during the Subordination Period, at least a majority of the Outstanding Common Units (excluding Common Units owned by the General Partner and its Affiliates), voting as a class, and at least a majority of the Outstanding Subordinated Units, voting as a class, and (ii) after the end of the Subordination Period, at least a majority of the Outstanding Common Units.

Unpaid MQD” is defined in Section 6.1(c)(i)(B).

Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date (as determined under Section 5.5(d)) over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date).

Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.5(d) as of such date) over (b) the fair market value of such property as of such date (as determined under Section 5.5(d)).

Unrecovered Initial Unit Price” means at any time, with respect to a Unit, the Initial Unit Price less the sum of all distributions constituting Capital Surplus theretofore made in respect of an Initial Common Unit and any distributions of cash (or the Net Agreed Value of any distributions in kind) in connection with the dissolution and liquidation of the Partnership theretofore made in respect of an Initial Common Unit, adjusted as the General Partner determines to be appropriate to give effect to any distribution, subdivision, or combination of such Units.

Unrestricted Person” means (a) each Indemnitee, (b) each Partner, (c) each Person who is or was a member, partner, director, officer, employee or agent of any Group Member, a General Partner or any Departing General Partner or any Affiliate of any Group Member, a General Partner or any Departing General Partner and (d) any Person the General Partner designates as an “Unrestricted Person” for purposes of this Agreement.

U.S. GAAP” means United States generally accepted accounting principles, as in effect from time to time, consistently applied.

Vesting Date” is defined in Section 5.12(b)(i)(D).

Withdrawal Opinion of Counsel” is defined in Section 11.1(b).

Working Capital Borrowings” means borrowings used solely for working capital purposes or to pay distributions to Partners, made pursuant to a credit facility, commercial paper facility or other similar financing arrangement; provided that when incurred it is the intent of the borrower to repay such borrowings within 12 months from sources other than additional Working Capital Borrowings.

Section 1.2 Construction. Unless the context requires otherwise: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms; (b) references to Articles and Sections refer to Articles and Sections of this Agreement; (c) the terms “include”, “includes”, “including” and words of like import shall be deemed to be followed by the words “without limitation”; and (d) the terms “hereof”, “herein” and “hereunder” refer to this Agreement as a whole and not to any particular provision of this Agreement. The table of contents and headings contained in this Agreement are for reference purposes only, and shall not affect in any way the meaning or interpretation of this Agreement. The General Partner has the power to

 

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construe and interpret this Agreement and to act upon any such construction or interpretation. To the fullest extent permitted by law, any construction or interpretation of this Agreement by the General Partner, any action taken pursuant thereto and any determination made by the General Partner in good faith shall, in each case, be conclusive and binding on all Record Holders, each other Person or Group who acquires an interest in a Partnership Interest and all other Persons for all purposes.

ARTICLE II.

ORGANIZATION

Section 2.1 Formation. The General Partner and the Ultimate Parent have previously formed the Partnership as a limited partnership pursuant to the provisions of the Delaware Act and hereby amend and restate the Amended and Restated Agreement of Limited Partnership of the Partnership in its entirety. This amendment and restatement shall become effective on the date of this Agreement. Except as expressly provided to the contrary in this Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act.

Section 2.2 Name. The name of the Partnership shall be “USD Partners LP”. Subject to applicable law, the Partnership’s business may be conducted under any other name or names as determined by the General Partner, including the name of the General Partner. The words “Limited Partnership,” “LP,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices. Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be The Corporation Trust Company. The principal office of the Partnership shall be located at 811 Main Street, Suite 2800, Houston, Texas 77002, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner determines to be necessary or appropriate. The address of the General Partner shall be 811 Main Street, Suite 2800, Houston, Texas 77002, or such other place as the General Partner may from time to time designate by notice to the Limited Partners.

Section 2.4 Purpose and Business. The purpose and nature of the business to be conducted by the Partnership shall be to (a) engage directly in, or enter into or form, hold and dispose of any corporation, partnership, joint venture, limited liability company or other arrangement to engage indirectly in, any business activity that is approved by the General Partner, in its sole discretion, and that lawfully may be conducted by a limited partnership organized pursuant to the Delaware Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership pursuant to the agreements relating to such business activity, and (b) do anything necessary or appropriate to the foregoing, including the making of capital contributions or loans to a Group Member; provided, however, that the General Partner shall not cause the Partnership to engage, directly or indirectly, in any business activity that the General Partner determines would be reasonably likely to cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes. To the fullest extent permitted by law, the General Partner shall have no duty or obligation to propose or approve, and may, in its sole discretion, decline to propose or approve, the conduct by the Partnership of any business and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner or any other Person bound by this Agreement and, in declining to so propose or approve, shall not be required to act in good faith or pursuant to any other standard imposed by this

 

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Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

Section 2.5 Powers. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described in Section 2.4 and for the protection and benefit of the Partnership.

Section 2.6 Term. The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue until the dissolution of the Partnership in accordance with the provisions of Article XII. The existence of the Partnership as a separate legal entity shall continue until the cancellation of the Certificate of Limited Partnership as provided in the Delaware Act.

Section  2.7 Title to Partnership Assets. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use reasonable efforts to cause record title to such assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be vested in the Partnership or one or more of the Partnership’s designated Affiliates as soon as reasonably practicable; provided, further, that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer of record title to the Partnership and, prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the successor General Partner. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership assets is held.

ARTICLE III.

RIGHTS OF LIMITED PARTNERS

Section 3.1 Limitation of Liability. The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act.

Section 3.2 Management of Business. No Limited Partner, in its capacity as such, shall participate in the operation, management or control (within the meaning of the Delaware Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. All actions taken by any Affiliate of the General Partner or any officer, director, employee, manager, member, general partner, agent or trustee of the General Partner or any of its Affiliates, or any officer, director, employee, manager, member, general partner, agent or trustee of a Group Member, in its capacity as such, shall not be deemed to be participating in the control of the business of the Partnership by a limited partner of the Partnership (within the meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement.

Section 3.3 Outside Activities of the Limited Partners. Subject to (i) the provisions of Section 7.5, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners, and (ii) the terms of the Omnibus Agreement, each Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership Group. Neither the

 

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Partnership nor any of the other Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner.

Section 3.4 Rights of Limited Partners.

(a) Each Limited Partner shall have the right, for a purpose that is reasonably related, as determined by the General Partner, to such Limited Partner’s interest as a Limited Partner in the Partnership, upon reasonable written demand stating the purpose of such demand and at such Limited Partner’s own expense, to obtain:

(i) true and full information regarding the status of the business and financial condition of the Partnership (provided that the requirements of this Section 3.4(a)(i) shall be satisfied to the extent the Limited Partner is furnished the Partnership’s most recent annual report and any subsequent quarterly or periodic reports required to be filed (or which would be required to be filed) with the Commission pursuant to Section 13 of the Securities Exchange Act);

(ii) a current list of the name and last known business, residence or mailing address of each Record Holder;

(iii) a copy of this Agreement and the Certificate of Limited Partnership and all amendments thereto, together with copies of the executed copies of all powers of attorney pursuant to which this Agreement, the Certificate of Limited Partnership and all amendments thereto have been executed;

(iv) information as to the amount of cash, and a description and statement of the agreed value of any other capital contribution, contributed or to be contributed by each Partner and the date on which each became a Partner; and

(v) such other information regarding the affairs of the Partnership as the General Partner determines is just and reasonable.

To the fullest extent permitted by law, the rights to information granted to the Limited Partners pursuant to this Section 3.4(a) replace in their entirety any rights to information provided for in Section 17-305(a) of the Delaware Act, and each of the Limited Partners, each other Person or Group who acquires an interest in a Partnership Interest and each other Person bound by this Agreement hereby agrees to the fullest extent permitted by law that they do not have any rights as Limited Partners, interest holders or otherwise to receive any information either pursuant to Sections 17-305(a) of the Delaware Act or otherwise except for the information identified in this Section 3.4(a).

(b) The General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner deems reasonable, (i) any information that the General Partner reasonably believes to be in the nature of trade secrets or (ii) other information the disclosure of which the General Partner believes (A) is not in the best interests of the Partnership Group, (B) could damage the Partnership Group or its business or (C) that any Group Member is required by law or by agreement with any third-party to keep confidential (other than agreements with Affiliates of the Partnership the primary purpose of which is to circumvent the obligations set forth in this Section 3.4).

(c) Notwithstanding any other provision of this Agreement or Section 17-305 of the Delaware Act, each of the Limited Partners, each other Person or Group who acquires an interest in a Partnership Interest and each other Person bound by this Agreement hereby agrees to the fullest extent permitted by law that they do not have rights to receive information from the Partnership or any Indemnitee for the purpose of determining whether to pursue litigation or assist in pending litigation against the Partnership or any Indemnitee relating to the affairs of the Partnership except pursuant to the applicable rules of discovery relating to litigation commenced by such Person or Group.

 

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ARTICLE IV.

CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;

REDEMPTION OF PARTNERSHIP INTERESTS

Section 4.1 Certificates. Notwithstanding anything to the contrary herein, unless the General Partner shall determine otherwise in respect of some or all of any or all classes of Partnership Interests, Partnership Interests shall not be evidenced by certificates. Certificates that may be issued shall be executed by the General Partner on behalf of the Partnership by the Chairman of the Board, Chief Executive Officer, President or any Executive Vice President or Vice President and the Chief Financial Officer or the Secretary or any Assistant Secretary of the General Partner. No Certificate for a class of Partnership Interests shall be valid for any purpose until it has been countersigned by the Transfer Agent for such class of Partnership Interests; provided, however, that if the General Partner elects to cause the Partnership to issue Partnership Interests of such class in global form, the Certificate shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Partnership Interests have been duly registered in accordance with the directions of the Partnership. Subject to the requirements of Section 6.7(c), if Common Units are evidenced by Certificates, on or after the date on which Subordinated Units are converted into Common Units, the Record Holders of such Subordinated Units (i) if the Subordinated Units are evidenced by Certificates, may exchange such Certificates for Certificates evidencing Common Units or (ii) if the Subordinated Units are not evidenced by Certificates, shall be issued Certificates evidencing Common Units. Subject to the requirements of Section 6.10, if Common Units are evidenced by Certificates, on or after the date on which Class A Units are converted into Common Units, the Record Holders of such Class A Units (i) if the Class A Units are evidenced by Certificates, may exchange such Certificates for Certificates evidencing Common Units or (ii) if the Class A Units are not evidenced by Certificates, shall be issued Certificates evidencing Common Units.

Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.

(a) If any mutilated Certificate is surrendered to the Transfer Agent, the appropriate officers of the General Partner on behalf of the Partnership shall execute, and the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number and type of Partnership Interests as the Certificate so surrendered.

(b) The appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and the Transfer Agent shall countersign, a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:

(i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;

(ii) requests the issuance of a new Certificate before the General Partner has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

(iii) if requested by the General Partner, delivers to the General Partner a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may direct to indemnify the Partnership, the Partners, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and

(iv) satisfies any other reasonable requirements imposed by the General Partner or the Transfer Agent.

If a Limited Partner fails to notify the General Partner within a reasonable period of time after such Limited Partner has notice of the loss, destruction or theft of a Certificate, and a transfer of the Limited Partner Interests represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Limited Partner shall, to the fullest extent permitted by law, be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate.

 

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(c) As a condition to the issuance of any new Certificate under this Section 4.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.

Section 4.3 Record Holders. The Partnership and the General Partner shall be entitled to recognize the Record Holder as the Partner with respect to any Partnership Interest and, accordingly, shall not be bound to recognize any equitable or other claim to, or interest in, such Partnership Interest on the part of any other Person, regardless of whether the Partnership or the General Partner shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Partnership Interests, as between the Partnership on the one hand, and such other Persons on the other, such representative Person shall be (a) the Record Holder of such Partnership Interest and (b) bound by this Agreement and shall have the rights and obligations of a Limited Partner hereunder as, and to the extent, provided herein.

Section 4.4 Transfer Generally.

(a) The term “transfer,” when used in this Agreement with respect to a Partnership Interest, shall mean a transaction (i) by which the General Partner assigns its General Partner Interest (represented by General Partner Units) to another Person or by which a holder of Class A Units assigns its Class A Units to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise or (ii) by which the holder of a Limited Partner Interest (other than a Class A Unit) assigns all or part such Limited Partner Interest to another Person who is or becomes a Limited Partner, and includes a sale, assignment, gift, exchange or any other disposition by law or otherwise, excluding a pledge, encumbrance, hypothecation or mortgage but including any transfer upon foreclosure of any pledge, encumbrance, hypothecation or mortgage.

(b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article IV. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article IV shall be, to the fullest extent permitted by law, null and void.

(c) Nothing contained in this Agreement shall be construed to prevent a disposition by any stockholder, member, partner or other owner of any Partner of any or all of the shares of stock, membership interests, limited liability company interests, partnership interests or other ownership interests in such Partner and the term “transfer” shall not mean any such disposition.

Section 4.5 Registration and Transfer of Limited Partner Interests.

(a) The General Partner shall keep or cause to be kept on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 4.5(b), the Partnership will provide for the registration and transfer of Limited Partner Interests.

(b) The Partnership shall not recognize any transfer of Limited Partner Interests evidenced by Certificates until the Certificates evidencing such Limited Partner Interests are surrendered for registration of transfer. No charge shall be imposed by the General Partner for such transfer; provided, that as a condition to the issuance of any new Certificate under this Section 4.5, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto. Upon surrender of a Certificate for registration of transfer of any Limited Partner Interests evidenced by a Certificate, and subject to the provisions hereof, the appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and in the case of Certificates evidencing Limited Partner Interests, the Transfer Agent shall

 

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countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number and type of Limited Partner Interests as was evidenced by the Certificate so surrendered.

(c) By acceptance of the transfer of any Limited Partner Interests in accordance with this Section 4.5 and except as provided in Section 4.8, each transferee of a Limited Partner Interest (including any nominee holder or an agent or representative acquiring such Limited Partner Interests for the account of another Person) (i) shall be admitted to the Partnership as a Limited Partner with respect to the Limited Partner Interests so transferred to such Person when any such transfer or admission is reflected in the books and records of the Partnership and such Limited Partner becomes the Record Holder of the Limited Partner Interests so transferred, (ii) shall become bound, and shall be deemed to have agreed to be bound, by the terms of this Agreement, (iii) represents that the transferee has the capacity, power and authority to enter into this Agreement and (iv) makes the consents, acknowledgements and waivers contained in this Agreement, all with or without execution of this Agreement by such Person. The transfer of any Limited Partner Interests and the admission of any new Limited Partner shall not constitute an amendment to this Agreement.

(d) Subject to (i) the foregoing provisions of this Section 4.5, (ii) Section 4.3, (iii) Section 4.7, (iv) with respect to any class or series of Limited Partner Interests, the provisions of any statement of designations or an amendment to this Agreement establishing such class or series, (v) any contractual provisions binding on any Limited Partner and (vi) provisions of applicable law including the Securities Act, Limited Partner Interests shall be freely transferable.

(e) The General Partner and its Affiliates shall have the right at any time to transfer their Subordinated Units, Common Units and Incentive Distribution Rights to one or more Persons without Unitholder approval.

(f) Notwithstanding the foregoing, no Class A Holder may transfer any Class A Unit, except to a Permitted Transferee, without the prior written consent of the General Partner, and any such purported transfer in conflict with the foregoing is void.

Section 4.6 Transfer of the General Partner’s General Partner Interest.

(a) The General Partner may at its option transfer all or any part of its General Partner Interest without Unitholder approval.

(b) Notwithstanding anything herein to the contrary, no transfer by the General Partner of all or any part of its General Partner Interest to another Person shall be permitted unless (i) the transferee agrees to assume the rights and duties of the General Partner under this Agreement and to be bound by the provisions of this Agreement, (ii) the Partnership receives an Opinion of Counsel that such transfer would not result in the loss of limited liability under Delaware law of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already so treated or taxed) and (iii) such transferee also agrees to purchase all (or the appropriate portion thereof, if applicable) of the partnership or membership interest held by General Partner as the general partner or managing member, if any, of each other Group Member. In the case of a transfer pursuant to and in compliance with this Section 4.6, the transferee or successor (as the case may be) shall, subject to compliance with the terms of Section 10.2, be admitted to the Partnership as the General Partner effective immediately prior to the transfer of the General Partner Interest, and the business of the Partnership shall continue without dissolution.

Section 4.7 Transfer of Incentive Distribution Rights. The General Partner or any other holder of Incentive Distribution Rights may transfer any or all of its Incentive Distribution Rights without the approval of any Limited Partner or any other Person.

 

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Section 4.8 Restrictions on Transfers.

(a) Notwithstanding the other provisions of this Article IV, no transfer of any Partnership Interests shall be made if such transfer would (i) violate the then applicable federal or state securities laws or rules and regulations of the Commission, any state securities commission or any other governmental authority with jurisdiction over such transfer, (ii) terminate the existence or qualification of the Partnership under the laws of the jurisdiction of its formation, or (iii) cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already so treated or taxed).

(b) The General Partner may impose restrictions on the transfer of Partnership Interests if it determines, with the advice of counsel, that such restrictions are necessary or advisable to (i) avoid a significant risk of the Partnership becoming taxable as a corporation or otherwise becoming taxable as an entity for U.S. federal income tax purposes or (ii) preserve the uniformity of the Limited Partner Interests (or any class or classes thereof). The General Partner may impose such restrictions by amending this Agreement; provided, however, that any amendment that would result in the delisting or suspension of trading of any class of Limited Partner Interests on the principal National Securities Exchange on which such class of Limited Partner Interests is then listed or admitted to trading must be approved, prior to such amendment being effected, by the holders of at least a majority of the Outstanding Limited Partner Interests of such class.

(c) Nothing contained in this Agreement, other than Section 4.8(a), shall preclude the settlement of any transactions involving Partnership Interests entered into through the facilities of any National Securities Exchange on which such Partnership Interests are listed or admitted to trading.

(d) The transfer of a Subordinated Unit that has converted into a Common Unit shall be subject to the restrictions imposed by Section 6.7.

(e) The transfer of a Class A Unit that has converted into a Common Unit shall be subject to the restrictions imposed by Section 6.10.

Section 4.9 Eligibility Certificates; Ineligible Holders.

(a) If at any time the General Partner determines, with the advice of counsel, that:

(i) The U.S. federal income tax status (or lack of proof of the U.S. federal income tax status) of one or more Limited Partners or their beneficial owners has or is reasonably likely to have a material adverse effect on the rates that can be charged to customers by any Group Member with respect to assets that are subject to regulation by the Federal Energy Regulatory Commission or similar regulatory body (a “Rate Eligibility Trigger”); or

(ii) any Group Member is subject to any federal, state or local law or regulation that would create a substantial risk of cancellation or forfeiture of any property in which the Group Member has an interest based on the nationality, citizenship or other related status of a Limited Partner (a “Citizenship Eligibility Trigger”);

then, the General Partner, without the approval of any Limited Partner or any other Person, may adopt such amendments to this Agreement as it determines to be necessary or appropriate to (x) in the case of a Rate Eligibility Trigger, obtain such proof of the U.S. federal income tax status of the Limited Partners and, to the extent relevant, their beneficial owners, as the General Partner determines to be necessary or appropriate to reduce the risk of the occurrence of a material adverse effect on the rates that can be charged to customers by any Group Member or (y) in the case of a Citizenship Eligibility Trigger, obtain such proof of the nationality, citizenship or other related status of the Limited Partner, and to the extent relevant, its beneficial owners as the General Partner determines to be necessary or appropriate to eliminate or mitigate a significant risk of cancellation or forfeiture of any properties or interests therein of a Group Member.

 

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(b) Such amendments may include provisions requiring all Limited Partners to certify as to their (and their beneficial owners’) status as Eligible Holders upon demand and on a regular basis, as determined by the General Partner, and may require transferees of Units to so certify prior to being admitted to the Partnership as a Limited Partner or its beneficial owners (any such required certificate, an “Eligibility Certificate”).

(c) Such amendments may provide that any Limited Partner who fails to furnish to the General Partner within a reasonable period requested proof of its (and its beneficial owners’) status as an Eligible Holder or if upon receipt of such Eligibility Certificate or other requested information the General Partner determines that a Limited Partner (or its beneficial owner) is not an Eligible Holder (an “Ineligible Holder”), the Limited Partner Interests owned by such Limited Partner shall be subject to redemption in accordance with the provisions of Section 4.10. In addition, the General Partner shall be treated as the owner of all Limited Partner Interests owned by an Ineligible Holder and the Limited Partner with respect thereto.

(d) The General Partner shall, in exercising voting rights in respect of Limited Partner Interests held by it on behalf of Ineligible Holders, cast such votes in the same manner and in the same ratios as the votes of Limited Partners (including the General Partner and its Affiliates) in respect of Limited Partner Interests other than those of Ineligible Holders are cast.

(e) Upon dissolution of the Partnership, an Ineligible Holder shall have no right to receive a distribution in kind pursuant to Section 12.4 but shall be entitled to the cash equivalent thereof, and the Partnership shall provide cash in exchange for an assignment of the Ineligible Holder’s share of any distribution in kind. Such payment and assignment shall be treated for purposes hereof as a purchase by the Partnership from the Ineligible Holder of the portion of his Limited Partner Interest representing his right to receive his share of such distribution in kind.

(f) At any time after an Ineligible Holder can and does certify that he has become an Eligible Holder, an Ineligible Holder may, upon application to the General Partner, request that with respect to any Limited Partner Interests of such Ineligible Holder not redeemed pursuant to Section 4.10, such Ineligible Holder be admitted as a Limited Partner, and upon approval of the General Partner, such Ineligible Holder shall be admitted as a Limited Partner and shall no longer constitute an Ineligible Holder and the General Partner shall cease to be deemed to be the owner and Limited Partner in respect of such Ineligible Holder’s Limited Partner Interests.

Section 4.10 Redemption of Partnership Interests of Ineligible Holders.

(a) If at any time a Limited Partner fails to furnish an Eligibility Certificate or other information requested within the period of time specified in amendments adopted pursuant to Section 4.9, or if upon receipt of such Eligibility Certificate or other information the General Partner determines, with the advice of counsel, that a Limited Partner is an Ineligible Holder, the Partnership may, unless the Limited Partner establishes to the satisfaction of the General Partner that such Limited Partner is an Eligible Holder or has transferred his Partnership Interests to a Person who is an Eligible Holder and who furnishes an Eligibility Certificate to the General Partner prior to the date fixed for redemption as provided below, redeem the Limited Partner Interest of such Limited Partner as follows:

(i) The General Partner shall, not later than the 30th day before the date fixed for redemption, give notice of redemption to the Limited Partner, at his last address designated on the records of the Partnership or the Transfer Agent, as applicable, by registered or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Redeemable Interests, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon redemption of the Redeemable Interests (or, if later in the case of Redeemable Interests evidenced by Certificates, upon surrender of the Certificate evidencing the Redeemable Interests) and that on and after the date fixed for redemption no further allocations or distributions to which the Limited Partner would otherwise be entitled in respect of the Redeemable Interests will accrue or be made.

 

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(ii) The aggregate redemption price for Redeemable Interests shall be an amount equal to the Current Market Price (the date of determination of which shall be the date fixed for redemption) of Limited Partner Interests of the class to be so redeemed multiplied by the number of Limited Partner Interests of each such class included among the Redeemable Interests. The redemption price shall be paid, as determined by the General Partner, in cash or by delivery of a promissory note of the Partnership in the principal amount of the redemption price, bearing interest at the rate of 8% annually and payable in three equal annual installments of principal together with accrued interest, commencing one year after the redemption date.

(iii) The Limited Partner or his duly authorized representative shall be entitled to receive the payment for the Redeemable Interests at the place of payment specified in the notice of redemption on the redemption date (or, if later in the case of Redeemable Interests evidenced by Certificates, upon surrender by or on behalf of the Limited Partner at the place specified in the notice of redemption, of the Certificate evidencing the Redeemable Interests, duly endorsed in blank or accompanied by an assignment duly executed in blank).

(iv) After the redemption date, Redeemable Interests shall no longer constitute issued and Outstanding Limited Partner Interests.

(b) The provisions of this Section 4.10 shall also be applicable to Limited Partner Interests held by a Limited Partner as nominee of a Person determined to be an Ineligible Holder.

(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of redemption from transferring his Limited Partner Interest before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such a transfer, the General Partner shall withdraw the notice of redemption, provided the transferee of such Limited Partner Interest certifies to the satisfaction of the General Partner that he is an Eligible Holder. If the transferee fails to make such certification, such redemption will be effected from the transferee on the original redemption date.

ARTICLE V.

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

Section 5.1 Organizational Contributions; Issuance of Class A Units.

(a) In connection with the formation of the Partnership under the Delaware Act, the General Partner made an initial Capital Contribution to the Partnership in the amount of $20.00, in exchange for a 2% General Partner Interest in the Partnership and was admitted as the General Partner of the Partnership. The Ultimate Parent made an initial Capital Contribution to the Partnership in the amount of $980.00 in exchange for a Limited Partner Interest equal to a 98% Percentage Interest and was admitted as a Limited Partner of the Partnership.

(b) On July 23, 2014, the Ultimate Parent contributed all of its assets and liabilities, including its Limited Partner Interest in the Partnership to the Organizational Limited Partner, the Organizational Limited Partner was admitted as a substitute limited partner of the Partnership, immediately following such admission the Ultimate Parent ceased to be a limited partner of the Partnership and the Partnership was continued without dissolution.

(c) On August 18, 2014, the Partnership issued 250,000 Class A Units to employees and other service providers of the Partnership or its Affiliates.

Section  5.2 Contributions by the General Partner. On the Closing Date and pursuant to the Contribution Agreement, the General Partner is contributing to the Partnership, as a Capital Contribution, the Interest (as defined in the Contribution Agreement) in exchange for the issuance of (i) General Partner Units representing a continuation of its 2% General Partner Interest, subject to all of the rights, privileges and duties of the General Partner under this Agreement, and (ii) the Incentive Distribution Rights, all as set forth in the Contribution Agreement.

 

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Section 5.3 Contributions by Limited Partners.

(a) On the Closing Date, pursuant to and as described in the Contribution Agreement, the Organizational Limited Partner is contributing to the Partnership, as a Capital Contribution, the USDG Contribution Interest (as defined in the Contribution Agreement) in exchange for the issuance by the Partnership of Common Units and Subordinated Units, all as set forth in the Contribution Agreement.

(b) On the Closing Date and pursuant to the Underwriting Agreement, each Underwriter is contributing cash to the Partnership in exchange for the issuance by the Partnership of Common Units to each Underwriter, all as set forth in the Underwriting Agreement.

(c) Upon the exercise, if any, of the Over-Allotment Option, each Underwriter shall contribute cash to the Partnership on the Option Closing Date in exchange for the issuance by the Partnership of Common Units to each Underwriter, all as set forth in the Underwriting Agreement. Upon receipt of the Capital Contribution from the Underwriters as provided in Section 5.3(a), the Partnership shall use such cash to redeem from the Organizational Limited Partner that number of Common Units held by the Organizational Limited Partner, equal to the number of Common Units issued to the Underwriters as provided in Section 5.3(a). The Organizational Limited Partner hereby continues as a limited partner of the Partnership with respect to the portion of its interest not redeemed.

(d) No Limited Partner Interests will be issued or issuable as of or at the Closing Date other than (i) the Common Units and Subordinated Units issued to the Organizational Limited Partner pursuant to Section 5.3(a), (ii) the Common Units issued to the Underwriters as described in Section 5.3(b), (iii) the Class A Units issued to employees and other service providers of the Partnership or its affiliates, and (iv) the Incentive Distribution Rights issued to the General Partner.

(e) No Limited Partner will be required to make any additional Capital Contribution to the Partnership pursuant to this Agreement.

Section 5.4 Interest and Withdrawal. No interest shall be paid by the Partnership on Capital Contributions. No Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner shall have priority over any other Partner either as to the return of Capital Contributions or as to profits, losses or distributions. Any such return shall be a compromise to which all Partners agree within the meaning of Section 17-502(b) of the Delaware Act.

Section 5.5 Capital Accounts.

(a) The Partnership shall maintain for each Partner (or a beneficial owner of Partnership Interests held by a nominee, agent or representative in any case in which such nominee, agent or representative has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner) owning a Partnership Interest a separate Capital Account with respect to such Partnership Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). The initial Capital Account balance attributable to the General Partner Interest issued to the General Partner pursuant to Section 5.2 shall equal the Net Agreed Value of the Capital Contribution specified in Section 5.2, which shall be deemed to equal the product of the number of hypothetical limited partner units set forth in the definition of “General Partner Interest” and the Initial Unit Price for each Common Unit (and the initial Capital Account balance attributable to each hypothetical limited partner unit representing the General Partner Interest shall equal the Initial Unit Price for each Common Unit). The initial Capital Account balance attributable to the Common Units and Subordinated Units issued to the Organizational Limited Partner pursuant to Section 5.3(a) shall equal the respective Net Agreed Value of the Capital Contributions specified in Section 5.3(a), which shall be deemed to equal the product of the number of Common Units and Subordinated Units issued to the Organizational Limited Partner pursuant to Section 5.3(a) and the Initial Unit Price for each such Common Unit and Subordinated Unit (and the initial Capital Account balance attributable to each such Common Unit and Subordinated Unit shall equal its Initial

 

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Unit Price). The initial Capital Account balance attributable to the Common Units issued to the Underwriters pursuant to Section 5.3(b) and, to the extent applicable, Section 5.3(c) shall equal the product of the number of Common Units so issued to the Underwriters and the Initial Unit Price for each Common Unit (and the initial Capital Account balance attributable to each such Common Unit shall equal its Initial Unit Price). The initial Capital Account attributable to the Incentive Distribution Rights and the Class A Units shall be zero. Thereafter, the Capital Account shall in respect of each such Partnership Interest be increased by (i) the amount of all Capital Contributions made to the Partnership with respect to such Partnership Interest and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to such Partnership Interest and (y) all items of Partnership deduction and loss computed in accordance with Section 5.5(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1.

(b) For purposes of computing the amount of any item of income, gain, loss or deduction that is to be allocated pursuant to Article VI and is to be reflected in the Partners’ Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for U.S. federal income tax purposes (including any method of depreciation, cost recovery or amortization used for that purpose), provided, that:

(i) Solely for purposes of this Section 5.5, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner based upon the provisions of the applicable Group Member Agreement or governing, organizational or similar documents) of all property owned by (x) any other Group Member that is classified as a partnership or disregarded entity for U.S. federal income tax purposes and (y) any other partnership, limited liability company, unincorporated business or other entity classified as a partnership or disregarded entity for U.S. federal income tax purposes of which a Group Member is, directly or indirectly, a partner, member or other equity holder.

(ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 6.1.

(iii) The computation of all items of income, gain, loss and deduction shall be made, except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), without regard to any election under Section 754 of the Code that may be made by the Partnership. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code (including pursuant to Treasury Regulation Section 1.734-2(b)(1)) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment in the Capital Accounts shall be treated as an item of gain or loss.

(iv) In the event the Carrying Value of Partnership property is adjusted pursuant to Section 5.5(d), any Unrealized Gain resulting from such adjustment shall be treated as an item of gain, and any Unrealized Loss resulting from such adjustment shall be treated as an item of loss.

(v) An item of income of the Partnership that is described in Section 705(a)(1)(B) of the Code (with respect to items of income that are exempt from tax) shall be treated as an item of income for the purpose of this Section 5.5(b), and an item of expense of the Partnership that is described in Section 705(a)(2)(B) of the Code (with respect to expenditures that are not deductible and not chargeable to capital accounts), shall be treated as an item of deduction for the purpose of this Section 5.5(b).

(vi) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery or amortization attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 5.5(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery or amortization, any further deductions for such

 

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depreciation, cost recovery or amortization attributable to such property shall be determined under the rules prescribed by Treasury Regulation Section 1.704-3(d)(2) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment.

(vii) The Gross Liability Value of each Liability of the Partnership described in Treasury Regulation Section 1.752-7(b)(3)(i) shall be adjusted at such times as provided in this Agreement for an adjustment to Carrying Values. The amount of any such adjustment shall be treated for purposes hereof as an item of loss (if the adjustment increases the Carrying Value of such Liability of the Partnership) or an item of gain (if the adjustment decreases the Carrying Value of such Liability of the Partnership).

(c) (i) Except as otherwise provided in this Section 5.5(c), a transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred.

(ii) Subject to Section 6.7(b), immediately prior to the transfer of a Subordinated Unit or of a Subordinated Unit that has converted into a Common Unit pursuant to Section 5.7 by a holder thereof, (other than a transfer to an Affiliate unless the General Partner elects to have this subparagraph 5.5(c)(ii) apply), the Capital Account maintained for such Person with respect to its Subordinated Units or converted Subordinated Units will (A) first, be allocated to the Subordinated Units or converted Subordinated Units to be transferred in an amount equal to the product of (x) the number of such Subordinated Units or converted Subordinated Units to be transferred and (y) the Per Unit Capital Amount for a Common Unit, and (B) second, any remaining balance in such Capital Account will be retained by the transferor, regardless of whether it has retained any converted Subordinated Units (“Retained Converted Subordinated Units”) or converted Subordinated Units. Following any such allocation, the transferor’s Capital Account, if any, maintained with respect to the retained Subordinated Units or Retained Converted Subordinated Units, if any, will have a balance equal to the amount allocated under clause (B) above, and the transferee’s Capital Account established with respect to the transferred Subordinated Units or converted Subordinated Units will have a balance equal to the amount allocated under clause (A) above.

(iii) Subject to Section 6.8(b), immediately prior to the transfer of an IDR Reset Common Unit by a holder thereof (other than a transfer to an Affiliate unless the General Partner elects to have this subparagraph 5.5(c)(iii) apply), the Capital Account maintained for such Person with respect to its IDR Reset Common Units will (A) first, be allocated to the IDR Reset Common Units to be transferred in an amount equal to the product of (x) the number of such IDR Reset Common Units to be transferred and (y) the Per Unit Capital Amount for a Common Unit, and (B) second, any remaining balance in such Capital Account will be retained by the transferor, regardless of whether it has retained any IDR Reset Common Units. Following any such allocation, the transferor’s Capital Account, if any, maintained with respect to the retained IDR Reset Common Units, if any, will have a balance equal to the amount allocated under clause (B) hereinabove, and the transferee’s Capital Account established with respect to the transferred IDR Reset Common Units will have a balance equal to the amount allocated under clause (A) above.

(iv) Subject to Section 6.10(b), immediately prior to the transfer of a Class A Unit or of a Class A Unit that has converted into a Common Unit pursuant to Section 5.12(b)(vi) by a holder thereof (in each case, other than a transfer to an Affiliate unless the General Partner elects to have this subparagraph 5.5(c)(iv) apply), the Capital Account maintained for such Person with respect to its Class A Units or converted Class A Units will (A) first, be allocated to the Class A Units or converted Class A Units to be transferred in an amount equal to the product of (x) the number of such Class A Units or converted Class A Units to be transferred and (y) the Per Unit Capital Amount for a Common Unit, and (B) second, any remaining balance in such Capital Account will be retained by the transferor, regardless of whether it has retained any Class A Units or converted Class A Units. Following any such allocation, the transferor’s Capital Account, if any, maintained with respect to the retained Class A Units or retained converted Class A Units, if any, will have a balance equal to the amount allocated under clause (B) above, and the transferee’s Capital Account established with respect to the transferred Class A Units or transferred converted Class A Units will have a balance equal to the amount allocated under clause (A) above.

 

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(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for cash or Contributed Property, the issuance of Partnership Interests as consideration for the provision of services, the issuance of IDR Reset Common Units pursuant to Section 5.11, or the conversion of the General Partner’s Combined Interest to Common Units pursuant to Section 11.3(b), the Capital Account of each Partner and the Carrying Value of each Partnership property immediately prior to such issuance or conversion shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, and any such Unrealized Gain or Unrealized Loss shall be treated, for purposes of maintaining Capital Accounts, as if it had been recognized on an actual sale of each such property for an amount equal to its fair market value immediately prior to such issuance and had been allocated among the Partners at such time pursuant to Section 6.1(c) and Section 6.1(d) in the same manner as any item of gain or loss actually recognized following an event giving rise to the dissolution of the Partnership would have been allocated; provided, however, that in the event of an issuance of Partnership Interests for a de minimis amount of cash or Contributed Property, or in the event of an issuance of a de minimis amount of Partnership Interests as consideration for the provision of services, the General Partner may determine that such adjustments are unnecessary for the proper administration of the Partnership. If, upon the occurrence of a Revaluation Event described in this Section 5.4(d), a Noncompensatory Option of the Partnership is outstanding, the Partnership shall adjust the Carrying Value of each Partnership property in accordance with Treasury Regulation Sections 1.704-1(b)(2)(iv)(f)(1) and 1.704-1(b)(2)(iv)(h)(2). In determining such Unrealized Gain or Unrealized Loss, the aggregate fair market value of all Partnership property (including cash or cash equivalents) immediately prior to the issuance of additional Partnership Interests (or, in the case of an issuance of a Noncompensatory Option, immediately after such issuance if required pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(s)(1)) shall be determined by the General Partner using such method of valuation as it may adopt. In making its determination of the fair market values of individual properties, the General Partner may first determine an aggregate value for the assets of the Partnership that takes into account the current trading price of the Common Units, the fair market value of all other Partnership Interests at such time, and the amount of Partnership Liabilities. The General Partner may allocate such aggregate value among the individual properties of the Partnership (in such manner as it determines appropriate). Absent a contrary determination by the General Partner, the aggregate fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to a Revaluation Event shall be the value that would result in the Capital Account for each Common Unit that is Outstanding prior to such Revaluation Event being equal to the Event Issue Value.

(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Partner of any Partnership property (other than a distribution of cash that is not in redemption or retirement of a Partnership Interest), the Capital Accounts of all Partners and the Carrying Value of all Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, and any such Unrealized Gain or Unrealized Loss shall be treated, for purposes of maintaining Capital Accounts, as if it had been recognized on an actual sale of each such property for an amount equal to its fair market value immediately prior to such issuance and had been allocated among the Partners, at such time, pursuant to Section 6.1(c) and Section 6.1(d) in the same manner as any item of gain or loss actually recognized following an event giving rise to the dissolution of the Partnership would have been allocated. In determining such Unrealized Gain or Unrealized Loss the aggregate fair market value of all Partnership property (including cash or cash equivalents) immediately prior to a distribution shall (A) in the case of a distribution other than a distribution that is not made pursuant to Section 12.4 or in the case of a deemed distribution, be determined in the same manner as that provided in Section 5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section 12.4, be determined by the Liquidator using such method of valuation as it may adopt.

Section 5.6 Issuances of Additional Partnership Interests.

(a) The Partnership may issue additional Partnership Interests (other than General Partner Interests (except for General Partner Interests issued pursuant to Section 5.11)) and options, rights, warrants and appreciation

 

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rights relating to the Partnership Interests for any Partnership purpose at any time and from time to time to such Persons for such consideration and on such terms and conditions as the General Partner shall determine, all without the approval of any Limited Partners.

(b) Each additional Partnership Interest authorized to be issued by the Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership Interests), as shall be fixed by the General Partner, including (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and liquidation of the Partnership; (iv) whether, and the terms and conditions upon which, the Partnership may or shall be required to redeem the Partnership Interest (including sinking fund provisions); (v) whether such Partnership Interest is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Interest will be issued, evidenced by certificates and assigned or transferred; (vii) the method for determining the Percentage Interest as to such Partnership Interest; and (viii) the right, if any, of each such Partnership Interest to vote on Partnership matters, including matters relating to the relative rights, preferences and privileges of such Partnership Interest.

(c) The General Partner shall take all actions that it determines to be necessary or appropriate in connection with (i) each issuance of Partnership Interests and options, rights, warrants and appreciation rights relating to Partnership Interests pursuant to this Section 5.6, (ii) the conversion of the Combined Interest or any Class A Units into Units pursuant to the terms of this Agreement, (iii) the issuance of Common Units pursuant to Section 5.11, (iv) reflecting admission of such additional Limited Partners in the books and records of the Partnership as the Record Holders of such Limited Partner Interests and (v) all additional issuances of Partnership Interests. The General Partner shall determine the relative rights, powers and duties of the holders of the Units or other Partnership Interests being so issued. The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Interests or in connection with the conversion of the Combined Interest or any Class A Units into Units pursuant to the terms of this Agreement, including compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency or any National Securities Exchange on which the Units or other Partnership Interests are listed or admitted to trading.

(d) No fractional Units shall be issued by the Partnership.

Section 5.7 Conversion of Subordinated Units.

(a) (i) The First Subordinated Unit Tranche shall convert into Common Units on a one-for-one basis on the first Business Day following the distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect of any Quarter beginning with the Quarter ending December 31, 2015 in respect of which (A)(1) distributions of Available Cash from Operating Surplus on each of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Subordinated Units, in each case with respect to the four consecutive-Quarter period immediately preceding such date, equaled or exceeded 100% of the Minimum Quarterly Distribution on all of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Subordinated Units, in each case in respect of such period, and (2) the Adjusted Operating Surplus for the four consecutive-Quarter period immediately preceding such date equaled or exceeded 100% of the Minimum Quarterly Distribution on all of the Common Units, Subordinated Units, Class A Units and General Partner Units and any other Units that are senior or equal in right of distribution to the Subordinated Units, in each case that were Outstanding during such period on a Fully Diluted Weighted Average Basis, and (B) there are no Cumulative Common Unit Arrearages.

(ii) Each successive Subordinated Unit Tranche shall convert into Common Units on the same basis as the First Subordinated Unit Tranche pursuant to Section 5.7(a)(i) above with the four consecutive-Quarter

 

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period referenced therein commencing no earlier than the Quarter in which the preceding Subordinated Unit Tranche converted into Common Units pursuant to Section 5.7(a); provided, that no more than one Subordinated Unit Tranche shall convert into Common Units pursuant to Section 5.7(a)(i) with respect to any four consecutive-Quarter period.

(b) Notwithstanding any other provision of this Agreement, all of the then Outstanding Subordinated Units may convert into Common Units on a one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.

(c) A Subordinated Unit that has converted into a Common Unit shall be subject to the provisions of Section 6.7.

Section 5.8 Limited Preemptive Right. Except as provided in this Section 5.8, Section 5.11 or as otherwise provided in a separate agreement by the Partnership, no Person shall have any preemptive, preferential or other similar right with respect to the issuance of any Partnership Interest, whether unissued, held in the treasury or hereafter created. The General Partner shall have the right, which it may from time to time assign in whole or in part to any of its Affiliates, to purchase Partnership Interests from the Partnership whenever, and on the same terms that, the Partnership issues Partnership Interests to Persons other than the General Partner and its Affiliates, to the extent necessary to maintain the Percentage Interests of the General Partner and its Affiliates equal to that which existed immediately prior to the issuance of such Partnership Interests.

Section 5.9 Splits and Combinations.

(a) Subject to Section 5.9(e) the Partnership may make a Pro Rata distribution of Partnership Interests to all Record Holders or may effect a subdivision or combination of Partnership Interests so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event, and any amounts calculated on a per Unit basis (including any Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of Units (including the number of Subordinated Units that may convert prior to the end of the Subordination Period and including the number of Class A Units that may convert on or after the Vesting Date) are proportionately adjusted retroactive to the beginning of the Partnership.

(b) Whenever such a distribution, subdivision or combination of Partnership Interests is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause a firm of independent public accountants selected by it to calculate the number of Partnership Interests to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.

(c) If a Pro Rata distribution of Partnership Interests, or a subdivision or combination of Partnership Interests, is made as contemplated in this Section 5.9, the number of General Partner Units constituting the Percentage Interest of the General Partner (as determined immediately prior to the Record Date for such distribution, subdivision or combination) shall be appropriately adjusted as of the date of payment of such distribution, or the effective date of such subdivision or combination, to maintain such Percentage Interest of the General Partner.

(d) Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Interests as of the applicable Record Date representing the new number of Partnership Interests held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Interests Outstanding, the Partnership shall require, as a condition to the delivery to a Record Holder of such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.

 

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(e) The Partnership shall not issue fractional Units upon any distribution, subdivision or combination of Units. If a distribution, subdivision or combination of Units would result in the issuance of fractional Units but for the provisions of Section 5.6(d) and this Section 5.9(e), each fractional Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit).

Section  5.10 Fully Paid and Non-Assessable Nature of Limited Partner Interests. All Limited Partner Interests issued pursuant to, and in accordance with the requirements of, this Article V shall be fully paid and non-assessable Limited Partner Interests in the Partnership, except as such non-assessability may be affected by Section 17-303(a), 17-607 or 17-804 of the Delaware Act.

Section 5.11 Issuance of Common Units in Connection with Reset of Incentive Distribution Rights.

(a) Subject to the provisions of this Section 5.11, the holder of the Incentive Distribution Rights (or, if there is more than one holder of the Incentive Distribution Rights, the holders of a majority in interest of the Incentive Distribution Rights) shall have the right, at any time when there are no Subordinated Units outstanding and the Partnership has made a distribution pursuant to Section 6.4(b)(v) for each of the four most recently completed Quarters, to make an election (the “IDR Reset Election”) to cause the Target Distributions to be reset in accordance with the provisions of Section 5.11(e) and, in connection therewith, the holder or holders of the Incentive Distribution Rights will become entitled to receive their respective proportionate share of a number of Common Units (the “IDR Reset Common Units”) derived by dividing (i) the amount of cash distributions made by the Partnership for the two-Quarter period immediately preceding the giving of the Reset Notice (as defined in Section 5.11(b)) in respect of the Incentive Distribution Rights by (ii) the average of the cash distributions made by the Partnership in respect of each Common Unit during each of the two Quarters immediately preceding the giving of the Reset Notice (the “Reset MQD”) (the number of Common Units determined by such quotient is referred to herein as the “Aggregate Quantity of IDR Reset Common Units”). If at the time of any IDR Reset Election the General Partner and its Affiliates are not the holders of a majority in interest of the Incentive Distribution Rights, then the IDR Reset Election shall be subject to the prior written concurrence of the General Partner that the conditions described in the immediately preceding sentence have been satisfied. Upon the issuance of such IDR Reset Common Units, the Partnership will issue to the General Partner that number of additional General Partner Units equal to the product of (x) the quotient obtained by dividing (A) the Percentage Interest of the General Partner immediately prior to such issuance by (B) a percentage equal to 100% less such Percentage Interest by (y) the number of such IDR Reset Common Units, and the General Partner shall not be obligated to make any additional Capital Contribution to the Partnership in exchange for such issuance. The making of the IDR Reset Election in the manner specified in Section 5.11(b) shall cause the Minimum Quarterly Distribution and the Target Distributions to be reset in accordance with the provisions of Section 5.11(e) and, in connection therewith, the holder or holders of the Incentive Distribution Rights will become entitled to receive Common Units and the General Partner will become entitled to receive General Partner Units on the basis specified above, without any further approval required by the General Partner or the Unitholders, at the time specified in Section 5.11(c) unless the IDR Reset Election is rescinded pursuant to Section 5.11(d).

(b) To exercise the right specified in Section 5.11(a), the holder of the Incentive Distribution Rights (or, if there is more than one holder of the Incentive Distribution Rights, the holders of a majority in interest of the Incentive Distribution Rights) shall deliver a written notice (the “Reset Notice”) to the Partnership. Within 10 Business Days after the receipt by the Partnership of such Reset Notice, the Partnership shall deliver a written notice to the holder or holders of the Incentive Distribution Rights of the Partnership’s determination of the aggregate number of Common Units that each holder of Incentive Distribution Rights will be entitled to receive.

(c) The holder or holders of the Incentive Distribution Rights will be entitled to receive the Aggregate Quantity of IDR Reset Common Units and the General Partner will be entitled to receive the related additional General Partner Units on the fifteenth Business Day after receipt by the Partnership of the Reset Notice; provided, however, that the issuance of Common Units to the holder or holders of the Incentive Distribution Rights shall not occur prior to the approval of the listing or admission for trading of such Common Units by the

 

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principal National Securities Exchange upon which the Common Units are then listed or admitted for trading if any such approval is required pursuant to the rules and regulations of such National Securities Exchange.

(d) If the principal National Securities Exchange upon which the Common Units are then traded has not approved the listing or admission for trading of the Common Units to be issued pursuant to this Section 5.11 on or before the 30th calendar day following the Partnership’s receipt of the Reset Notice and such approval is required by the rules and regulations of such National Securities Exchange, then the holder of the Incentive Distribution Rights (or, if there is more than one holder of the Incentive Distribution Rights, the holders of a majority in interest of the Incentive Distribution Rights) shall have the right to either rescind the IDR Reset Election or elect to receive other Partnership Interests having such terms as the General Partner may approve, with the approval of the Conflicts Committee, that will provide (i) the same economic value, in the aggregate, as the Aggregate Quantity of IDR Reset Common Units would have had at the time of the Partnership’s receipt of the Reset Notice, as determined by the General Partner, and (ii) for the subsequent conversion (on terms acceptable to the National Securities Exchange upon which the Common Units are then traded) of such Partnership Interests into Common Units within not more than 12 months following the Partnership’s receipt of the Reset Notice upon the satisfaction of one or more conditions that are reasonably acceptable to the holder of the Incentive Distribution Rights (or, if there is more than one holder of the Incentive Distribution Rights, the holders of a majority in interest of the Incentive Distribution Rights).

(e) The Target Distributions shall be adjusted at the time of the issuance of Common Units or other Partnership Interests pursuant to this Section 5.11 such that (i) the Minimum Quarterly Distribution shall be reset to be equal to the Reset MQD, (ii) the First Target Distribution shall be reset to equal 115% of the Reset MQD, (iii) the Second Target Distribution shall be reset to equal 125% of the Reset MQD and (iv) the Third Target Distribution shall be reset to equal 150% of the Reset MQD.

(f) Upon the issuance of IDR Reset Common Units pursuant to Section 5.11(a) (or other Partnership Interests as described in Section 5.11(d)), the Capital Account maintained with respect to the Incentive Distribution Rights shall (A) first, be allocated to IDR Reset Common Units (or other Partnership Interests) in an amount equal to the product of (x) the Aggregate Quantity of IDR Reset Common Units (or other Partnership Interests) and (y) the Per Unit Capital Amount for an Initial Common Unit, and (B) second, any remaining balance in such Capital Account will be retained by the holder of the Incentive Distribution Rights. In the event that there is not a sufficient Capital Account associated with the Incentive Distribution Rights to allocate the full Per Unit Capital Amount for an Initial Common Unit to the IDR Reset Common Units in accordance with clause (A) of this Section 5.11(f), the IDR Reset Common Units shall be subject to Sections 6.1(d)(x)(B) and (C).

Section 5.12 Rights of Holders of Class A Units

(a) General. The Partnership hereby confirms the designation and creation of a class of Units designated as “Class A Units” and consisting of a total of 250,000 Class A Units, having the same rights, preferences and privileges, and subject to the same duties and obligations, as the Common Units, except as set forth in this Section 5.12 and Section 6.10 or elsewhere in this Agreement. Immediately following the Class A Issuance Date and thereafter no additional Class A Units shall be designated, created or issued without the prior written approval of the General Partner.

(b) Rights of Class A Units. The Class A Units shall have the following rights, preferences and privileges and shall be subject to the following duties and obligations:

(i) Vesting. If a Class A Holder remains in Continuous Employment, then the Class A Units held by such Class A Holder shall vest as follows, subject to earlier vesting as provided in Section 5.12(b)(i)(A) and Section 5.12(b)(i)(C):

(A) the First Class A Unit Tranche shall vest, if at all, on the first Business Day following the distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect of the Quarter ending December 31, 2015 (such date, the “First Class A Unit Tranche Vesting Date”) if, and only if,

 

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distributions of Available Cash from Operating Surplus on each of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Class A Units with respect to the four consecutive-Quarter period immediately preceding such date (the “First Class A Unit Tranche Distribution Amount”) exceeded 100% of the Minimum Quarterly Distribution on all of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Class A Units, in each case in respect of such period (such threshold, the “First Class A Unit Tranche Distribution Threshold”);

(B) the Second Class A Unit Tranche shall vest, if at all, on the first Business Day following the distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect of the Quarter ending December 31, 2016 (such date, the “Second Class A Unit Tranche Vesting Date”) if, and only if, distributions of Available Cash from Operating Surplus on each of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Class A Units with respect to the four consecutive-Quarter period immediately preceding such date (the “Second Class A Unit Tranche Distribution Amount”) exceeded the First Class A Unit Tranche Distribution Threshold (the greater of such distributions and the First Class A Unit Tranche Distribution Threshold is hereinafter referred to as the “Second Class A Unit Tranche Distribution Threshold”);

(C) the Third Class A Unit Tranche shall vest, if at all, on the first Business Day following the distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect of the Quarter ending December 31, 2017 (such date, the “Third Class A Unit Tranche Vesting Date”) if, and only if, distributions of Available Cash from Operating Surplus on each of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Class A Units with respect to the four consecutive-Quarter period immediately preceding such date (the “Third Class A Unit Tranche Distribution Amount”) exceeded the Second Class A Unit Tranche Distribution Threshold (the greater of such distributions and the Second Class A Unit Tranche Distribution Threshold is hereinafter referred to as the “Third Class A Unit Tranche Distribution Threshold”); and

(D) the Fourth Class A Unit Tranche shall vest, if at all, on the first Business Day following the distribution of Available Cash to Partners pursuant to Section 6.3(a) in respect of the Quarter ending December 31, 2018 (such date, the “Fourth Class A Unit Tranche Vesting Date” and, together with the First Class A Unit Tranche Vesting Date, the Second Class A Unit Tranche Vesting Date and the Third Class A Unit Tranche Vesting Date, each a “Vesting Date”) if, and only if, distributions of Available Cash from Operating Surplus on each of the Outstanding Common Units, Subordinated Units, Class A Units and General Partner Units and any other Outstanding Units that are senior or equal in right of distribution to the Class A Units with respect to the four consecutive-Quarter period immediately preceding such date (the “Fourth Class A Unit Tranche Distribution Amount”) exceeded the Third Class A Unit Tranche Distribution Threshold.

Notwithstanding the foregoing, the General Partner may extend the vesting dates set forth in this Section 5.12(b)(i) to effectuate the intent of these provisions if the Closing Date does not occur before December 31, 2014.

(ii) If a Class A Holder ceases to be in Continuous Employment, or if the conditions set forth in Section 5.12(b)(i) are not satisfied, any unvested Class A Units shall be immediately forfeited to the Partnership, except as provided below:

(A) Upon termination of a Class A Holder’s Continuous Employment as a result of the death or disability of such Class A Holder, the conditions in Section 5.12(b)(i) shall be deemed satisfied with respect to the Class A Holder’s unvested Class A Units, and the restrictions on such units shall lapse and such units shall vest in the Class A Holder or such Class A Holder’s legal representative,

 

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beneficiary or heir. The disability of a Class A Holder shall mean (1) the total disability of the Class A Holder as determined in accordance with Ultimate Parent’s long-term disability insurance benefit plan (or any successor long-term disability insurance benefit plan in which the Class A Holder participates that is maintained by any Affiliate of Ultimate Parent from time to time) or (2) the total and permanent disability as determined by the Board of Directors in its sole discretion.

(B) Upon termination of a Class A Holder’s Continuous Employment as a result of Good Reason or by Ultimate Parent or its applicable Affiliate without Class A Cause, the conditions in Section 5.12(b)(i) shall be deemed satisfied with respect to the Class A Holder’s unvested Class A Units, and the restrictions on such units shall lapse and such units shall vest in the Class A Holder as of the date of such termination.

(C) Upon termination of a Class A Holder’s Continuous Employment prior to any Vesting Date for any reason other than as described in subsections (A) or (B) above, all unvested Class A Units held by such Class A Holder shall be immediately forfeited to the Partnership.

(iii) Allocations. Except as otherwise provided in this Agreement, during the period commencing upon issuance of the Class A Units and ending on the Class A Conversion Date, all items of Partnership income, gain, loss, deduction and credit shall be allocated to the Class A Units to the same extent as such items would be so allocated if such Class A Units were Common Units that were then Outstanding.

(iv) Distributions.

(A) From and after the Closing Date, the holders of the Class A Units as of an applicable Record Date shall be entitled to receive distributions in an amount and payable at such times as are applicable to the holders of Common Units as if such Class A Units had been converted into Common Units on a one-for-one basis, except that no Class A Unit shall be entitled to Common Unit Arrearages. Prior to the Closing Date, the holders of the Class A Units shall not be entitled to any distributions under any circumstances.

(B) Notwithstanding anything in this Section 5.12(b)(iii) to the contrary, with respect to Class A Units that are converted into Common Units, the holder thereof shall not be entitled to a Class A Unit distribution and a Common Unit distribution with respect to the same period, but shall be entitled only to the distribution to be paid based upon the class of Units held as of the close of business on the applicable Record Date. For the avoidance of doubt, if the Class A Conversion Date occurs prior to the close of business on a Record Date for payment of a distribution on the Common Units, the applicable holder of Class A Units shall receive only the Common Unit distribution with respect to such period.

(v) Voting and Other Rights. A Class A Holder shall not be entitled to any voting rights (under the Act or this Agreement) or any Percentage Interest with respect to a Class A Unit and, except as expressly set forth in this Agreement, for all other purposes a Class A Holder shall have all of the rights and obligations of a Limited Partner holding Common Units hereunder.

(vi) Conversion of Class A Units.

(A) Except as otherwise provided in this Section 5.12(b)(vi), Class A Units that have vested shall convert into Common Units, in whole and not in part (with any fractional Common Units otherwise issuable pursuant to this Section 5.12(b)(vi) being rounded up to the next whole Common Unit), on the applicable Vesting Date as follows:

(i) First Class A Unit Tranche: If the First Class A Unit Tranche Distribution Amount is greater than the First Class A Unit Tranche Distribution Threshold and less than the First Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the First Class A Unit Tranche shall be converted into 1.00 Common Units. If the First Class A Unit Tranche Distribution Amount is equal to or greater than the First Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the First Class A Unit Tranche shall be converted into 1.25 Common Units.

 

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(ii) Second Class A Unit Tranche: If the Second Class A Unit Tranche Distribution Amount is greater than the First Class A Unit Tranche Distribution Threshold and less than the First Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Second Class A Unit Tranche shall be converted into 1.00 Common Units. If the Second Class A Unit Tranche Distribution Amount is equal to or greater than the First Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Second Class A Unit Tranche shall be converted into 1.50 Common Units.

(iii) Third Class A Unit Tranche: If the Third Class A Unit Tranche Distribution Amount is greater than the Second Class A Unit Tranche Distribution Threshold and less than the Second Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Third Class A Unit Tranche shall be converted into 1.00 Common Units. If the Third Class A Unit Distribution Amount is equal to or greater than the Second Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Third Class A Unit Tranche shall be converted into 1.75 Common Units.

(iv) Fourth Class A Unit Tranche: If the Fourth Class A Unit Tranche Distribution Amount is greater than the Third Class A Unit Tranche Distribution Threshold and less than the Third Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Fourth Class A Unit Tranche shall be converted into 1.00 Common Units. If the Fourth Class A Unit Tranche Distribution Amount is equal to or greater than the Third Class A Unit Tranche Distribution Threshold multiplied by 1.10, then each Class A Unit in the Fourth Class A Unit Tranche shall be converted into 2.00 Common Units.

(B) In the event a Partnership Change in Control has occurred prior to a Vesting Date, then all unvested Class A Units shall convert into the maximum number of Common Units into which such Class A Units would have otherwise converted pursuant to the provisions of Section 5.12(b)(vi)(A).

(C) Notwithstanding the foregoing, a Class A Unit that has converted into a Common Unit pursuant to this Section 5.12(b) shall be subject to the provisions of Section 6.10.

(D) If a Class A Holder ceases Continuous Employment other than by reason of death or disability, Good Reason or Class A Cause, then the Board of Directors may, in its sole discretion, elect to vest and convert all or a portion of the unvested Class A Units held by such Class A Holder into Common Units on a one-for-one basis.

(E) If a Class A Holder ceases Continuous Employment due to death or disability (as described in Section 5.12(b)(i)(B)), then all unvested Class A Units shall convert into the maximum number of Common Units into which such Class A Units would have otherwise converted pursuant to the provisions of Section 5.12(b)(vi)(A).

(F) If a Class A Holder ceases Continuous Employment for Good Reason or is terminated without Class A Cause, then all unvested Class A Units shall vest and convert into the maximum number of Common Units into which such Class A Units could have otherwise converted pursuant to the provisions of Section 5.12(b)(vi)(A).

(vii) Class A Award Agreements. The Class A Units shall be evidenced by Class A Award Agreements in such form as the General Partner may approve; unless and until the General Partner determines to assign the responsibility to another Person, the Partnership will act as the registrar and transfer agent for the Class A Units. The Class A Award Agreements evidencing Class A Units shall be separately identified and shall not bear the same CUSIP number as the Certificates evidencing Common Units.

(viii) Distributions, Combinations, Subdivisions and Reclassifications by the Partnership. If the Partnership (i) makes a distribution on its Common Units in Common Units, (ii) subdivides or splits its outstanding Common Units into a greater number of Common Units, (iii) combines or reclassifies its Common Units into a smaller number of Common Units or (iv) issues by reclassification of its Common

 

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Units any Partnership Interests (including any reclassification in connection with a merger, consolidation or business combination in which the Partnership is the surviving Person), then the Class A Units shall be proportionately adjusted.

(ix) Fully Paid and Nonassessable. Any Common Unit(s) delivered upon conversion of the Class A Units pursuant to this Section 5.12 shall be validly issued, fully paid and nonassessable (except as such nonassessability may be affected by matters described in Sections 17-303, 17-607 and 17-804 of the Delaware Act), free and clear of any liens, claims, rights or encumbrances other than those arising under the Delaware Act or this Agreement or created by the holders thereof.

ARTICLE VI.

ALLOCATIONS AND DISTRIBUTIONS

Section 6.1 Allocations for Capital Account Purposes. For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership’s items of income, gain, loss and deduction (computed in accordance with Section 5.5(b)) for each taxable period shall be allocated among the Partners as provided herein below.

(a) Net Income. After giving effect to the special allocations set forth in Section 6.1(d), Net Income for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Income for such taxable period shall be allocated as follows:

(i) First, to the General Partner until the aggregate of the Net Income allocated to the General Partner pursuant to this Section 6.1(a)(i) for the current and all previous taxable periods is equal to the aggregate of the Net Loss allocated to the General Partner pursuant to Section 6.1(b)(ii) for all previous taxable periods; and

(ii) The balance, if any, (x) to the General Partner in accordance with its Percentage Interest, and (y) to all Unitholders, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest.

(b) Net Loss. After giving effect to the special allocations set forth in Section 6.1(d), Net Loss for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Loss for such taxable period shall be allocated as follows:

(i) First, to the General Partner and the Unitholders, Pro Rata; provided, however, that Net Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the extent that such allocation would cause any Unitholder to have a deficit balance in its Adjusted Capital Account at the end of such taxable period (or increase any existing deficit balance in its Adjusted Capital Account); and

(ii) The balance, if any, 100% to the General Partner.

(c) Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 6.1(d), Net Termination Gain or Net Termination Loss (including a pro rata part of each item of income, gain, loss and deduction taken into account in computing Net Termination Gain or Net Termination Loss) for such taxable period shall be allocated in the manner set forth in this Section 6.1(c). All allocations under this Section 6.1(c) shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 6.1 and after all distributions of Available Cash provided under Section 6.4 and Section 6.5 have been made; provided, however , that solely for purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for distributions made pursuant to Section 12.4.

(i) Except as provided in Section 6.1(c)(iv) and subject to the provisions set forth in the last sentence of this Section 6.1(c)(i), Net Termination Gain (including a pro rata part of each item of income, gain, loss, and

 

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deduction taken into account in computing Net Termination Gain) shall be allocated in the following order and priority:

(A) First, to the General Partner until the aggregate of the Net Termination Gain allocated to the General Partner pursuant to this Section 6.1(c)(i)(A) for the current and all previous taxable periods is equal to the Net Termination Loss allocated to the General Partner pursuant to Section 6.1(c)(ii)(D) or Section 6.1(c)(iii)(C) for all previous taxable periods;

(B) Second, (x) to the General Partner in accordance with its Percentage Interest and (y) to all Unitholders holding Common Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until the Capital Account in respect of each Common Unit then Outstanding is equal to the sum of (1) its Unrecovered Initial Unit Price, (2) the Minimum Quarterly Distribution for the Quarter during which the Liquidation Date occurs, reduced by any distribution pursuant to Section 6.4(a)(i) or Section 6.4(b)(i) with respect to such Common Unit for such Quarter (the amount determined pursuant to this clause (2) is hereinafter referred to as the “Unpaid MQD”) and (3) any then existing Cumulative Common Unit Arrearage;

(C) Third, if such Net Termination Gain is recognized (or is deemed to be recognized) prior to the conversion of the last Outstanding Subordinated Unit into a Common Unit, (x) to the General Partner in accordance with its Percentage Interest and (y) to all Unitholders holding Subordinated Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until the Capital Account in respect of each Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered Initial Unit Price, determined for the taxable period (or portion thereof) to which this allocation of gain relates, and (2) the Minimum Quarterly Distribution for the Quarter during which the Liquidation Date occurs, reduced by any distribution pursuant to Section 6.4(a)(iii) with respect to such Subordinated Unit for such Quarter;

(D) Fourth, 100% to the General Partner and all Unitholders, Pro Rata, until the Capital Account in respect of each Common Unit then Outstanding is equal to the sum of (1) its Unrecovered Initial Unit Price, (2) the Unpaid MQD, (3) any then existing Cumulative Common Unit Arrearage, and (4) the excess of (aa) the First Target Distribution less the Minimum Quarterly Distribution for each Quarter after the Closing Date or the date of the most recent IDR Reset Election, if any, over (bb) the cumulative per Unit amount of any distributions of Available Cash that is deemed to be Operating Surplus made pursuant to Section 6.4(a)(iv) and Section 6.4(b)(ii) for such period (the sum of subclauses (1), (2), (3) and (4) is hereinafter referred to as the “First Liquidation Target Amount”);

(E) Fifth, (x) to the General Partner in accordance with its Percentage Interest, (y) 13% to the holders of the Incentive Distribution Rights, Pro Rata, and (z) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (x) and (y) of this clause (E), until the Capital Account in respect of each Common Unit then Outstanding is equal to the sum of (1) the First Liquidation Target Amount, and (2) the excess of (aa) the Second Target Distribution less the First Target Distribution for each Quarter after the Closing Date or the date of the most recent IDR Reset Election, if any, over (bb) the cumulative per Unit amount of any distributions of Available Cash that is deemed to be Operating Surplus made pursuant to Section 6.4(a)(v) and Section 6.4(b)(iii) for such period (the sum of subclauses (1) and (2) is hereinafter referred to as the “Second Liquidation Target Amount”);

(F) Sixth, (x) to the General Partner in accordance with its Percentage Interest, (y) 23% to the holders of the Incentive Distribution Rights, Pro Rata, and (z) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (x) and (y) of this clause (F), until the Capital Account in respect of each Common Unit then Outstanding is equal to the sum of (1) the Second Liquidation Target Amount, and (2) the excess of (aa) the Third Target Distribution less the Second Target Distribution for each Quarter after the Closing Date or the date of the most recent IDR Reset Election, if any, over (bb) the cumulative per Unit amount of any distributions of Available Cash that is deemed to be Operating Surplus made pursuant to Section 6.4(a)(vi) and Section 6.4(b)(iv) for such period; and

 

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(G) Finally, (x) to the General Partner in accordance with its Percentage Interest, (y) 48% to the holders of the Incentive Distribution Rights, Pro Rata, and (z) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (x) and (y) of this clause (G).

Notwithstanding the foregoing provisions in this Section 6.1(c)(i), the General Partner may adjust the amount of any Net Termination Gain arising in connection with a Revaluation Event that is allocated to the holders of Incentive Distribution Rights in a manner that will result (i) in the Capital Account for each Common Unit that is Outstanding prior to such Revaluation Event being equal to the Event Issue Value and (ii) to the greatest extent possible, the Capital Account with respect to the Incentive Distribution Rights that are Outstanding prior to such Revaluation Event being equal to the amount of Net Termination Gain that would be allocated to the holders of the Incentive Distribution Rights pursuant to this Section 6.1(c)(i) if the Capital Accounts with respect to all Partnership Interests that were Outstanding immediately prior to such Revaluation Event and the Carrying Value of each Partnership property were equal to zero.

(ii) Except as otherwise provided by Section 6.1(c)(iii), Net Termination Loss (including a pro rata part of each item of income, gain, loss, and deduction taken into account in computing Net Termination Loss) shall be allocated:

(A) First, if Subordinated Units remain Outstanding, (x) to the General Partner in accordance with its Percentage Interest and (y) to all Unitholders holding Subordinated Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until the Adjusted Capital Account in respect of each Subordinated Unit then Outstanding has been reduced to zero;

(B) Second, (x) to the General Partner in accordance with its Percentage Interest and (y) to all Unitholders holding Common Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until the Adjusted Capital Account in respect of each Common Unit then Outstanding has been reduced to zero;

(C) Third, to the General Partner and the Unitholders, Pro Rata; provided that Net Termination Loss shall not be allocated pursuant to this Section 6.1(c)(ii)(C) to the extent such allocation would cause any Unitholder to have a deficit balance in its Adjusted Capital Account (or increase any existing deficit in its Adjusted Capital Account); and

(D) Fourth, the balance, if any, 100% to the General Partner.

(iii) Net Termination Loss deemed recognized pursuant to clause (b) of the definition of Net Termination Loss as a result of a Revaluation Event prior to the conversion of the last Outstanding Subordinated Unit and prior to the Liquidation Date shall be allocated:

(A) First, to the General Partner and the Unitholders holding Common Units, Pro Rata, until the Capital Account in respect of each Common Unit then Outstanding equals the Event Issue Value; provided that Net Termination Loss shall not be allocated pursuant to this Section 6.1(c)(iii)(A) to the extent such allocation would cause any Unitholder to have a deficit balance in its Adjusted Capital Account at the end of such taxable period (or increase any existing deficit in its Adjusted Capital Account);

(B) Second, to all Unitholders holding Subordinated Units, Pro Rata; provided that Net Termination Loss shall not be allocated pursuant to this Section 6.1(c)(iii)(B) to the extent such allocation would cause any Unitholder to have a deficit balance in its Adjusted Capital Account at the end of such taxable period (or increase any existing deficit in its Adjusted Capital Account); and

(C) The balance, if any, to the General Partner.

(iv) If (A) a Net Termination Loss has been allocated pursuant to Section 6.1(c)(iii), (B) a Net Termination Gain or Net Termination Loss subsequently occurs (other than as a result of a Revaluation Event) prior to the conversion of the last Outstanding Subordinated Unit, and (C) after tentatively making all allocations of such Net Termination Gain or Net Termination Loss provided for in Section 6.1(c)(i) or

 

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Section 6.1(c)(ii), as applicable, the Capital Account in respect of each Common Unit does not equal the amount such Capital Account would have been if Section 6.1(c)(iii) had not been part of this Agreement and all prior allocations of Net Termination Gain and Net Termination Loss had been made pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable, then items of income, gain, loss and deduction included in such Net Termination Gain or Net Termination Loss, as applicable, shall be specially allocated to all Unitholders in a manner that will, to the maximum extent possible, cause the Capital Account in respect of each Common Unit to equal the amount such Capital Account would have been if all allocations of Net Termination Gain and Net Termination Loss had been made pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable.

(d) Special Allocations. Notwithstanding any other provision of this Section 6.1, the following special allocations shall be made for such taxable period in the following order:

(i) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of this Section 6.1, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d) with respect to such taxable period (other than an allocation pursuant to Section 6.1(d)(vi) and Section 6.1(d)(vii)). This Section 6.1(d)(i) is intended to comply with the Partnership Minimum Gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.

(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 6.1 (other than Section 6.1(d)(i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d), other than Section 6.1(d)(i) and other than an allocation pursuant to Section 6.1(d)(vi) and Section 6.1(d)(vii), with respect to such taxable period. This Section 6.1(d)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(iii) Priority Allocations.

(A) If the amount of cash or the Net Agreed Value of any property distributed (except cash or property distributed pursuant to Section 12.4) with respect to a Unit for a taxable period exceeds the amount of cash or the Net Agreed Value of property distributed with respect to another Unit within the same taxable period (the amount of the excess, an “Excess Distribution” and the Unit with respect to which the greater distribution is paid, an “Excess Distribution Unit”), then (1) there shall be allocated gross income and gain to each Unitholder receiving an Excess Distribution with respect to the Excess Distribution Unit until the aggregate amount of such items allocated with respect to such Excess Distribution Unit pursuant to this Section 6.1(d)(iii)(A) for the current taxable period and all previous taxable periods is equal to the amount of the Excess Distribution; and (2) the General Partner shall be allocated gross income and gain with respect to each such Excess Distribution in an amount equal to the product obtained by multiplying (aa) the quotient determined by dividing (x) the General Partner’s Percentage Interest at the time when the Excess Distribution occurs by (y) a percentage equal to 100% less the General Partner’s Percentage Interest at the time when the Excess Distribution occurs, times (bb) the total amount allocated in clause (1) above with respect to such Excess Distribution.

 

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(B) After the application of Section 6.1(d)(iii)(A), all or any portion of the remaining items of Partnership gross income or gain for the taxable period, if any, shall be allocated (1) to the holders of Incentive Distribution Rights, Pro Rata, until the aggregate amount of such items allocated to the holders of Incentive Distribution Rights pursuant to this Section 6.1(d)(iii)(B) for the current taxable period and all previous taxable periods is equal to the cumulative amount of all Incentive Distributions made to the holders of Incentive Distribution Rights from the Closing Date to a date 45 days after the end of the current taxable period; and (2) to the General Partner an amount equal to the product of (aa) an amount equal to the quotient determined by dividing (x) the General Partner’s Percentage Interest by (y) the sum of 100 less the General Partner’s Percentage Interest times (bb) the sum of the amounts allocated in clause (1) above.

(C) With respect to any taxable period of the Partnership ending upon, or after, a Class A Conversion Date, and after the application of Sections 6.1(d)(iii)(A) and (B), at the election of a holder of a Common Unit converted from a Class A Unit, all or a portion of the remaining items of Partnership gross income, gain, loss or deduction for such taxable period shall be allocated among the Partners, at the discretion of the General Partner, in such a manner as to cause the Per Unit Capital Amount of each Partner with respect to a Common Unit converted from a Class A Unit that is outstanding as of the time of such event to equal, as closely as possible, the Per Unit Capital Amount for a then outstanding Common Unit.

(iv) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership gross income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible; provided, that an allocation pursuant to this Section 6.1(d)(iv) shall be made only if and to the extent that such Partner would have a deficit balance in its Adjusted Capital Account after all other allocations provided for in this Section 6.1 have been tentatively made as if this Section 6.1(d)(iv) were not in this Agreement.

(v) Gross Income Allocation. In the event any Partner has a deficit balance in its Capital Account at the end of any taxable period in excess of the sum of (A) the amount such Partner is required to restore pursuant to the provisions of this Agreement and (B) the amount such Partner is deemed obligated to restore pursuant to Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 6.1(d)(v) shall be made only if and to the extent that such Partner would have a deficit balance in its Adjusted Capital Account after all other allocations provided for in this Section 6.1 have been tentatively made as if Section 6.1(d)(iv) and this Section 6.1(d)(v) were not in this Agreement.

(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners Pro Rata. If the General Partner determines that the Partnership’s Nonrecourse Deductions should be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements.

(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, the Partner Nonrecourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss.

 

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(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated as determined by the General Partner in accordance with any permissible method under Treasury Regulation Section 1.752-3(a)(3).

(ix) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code (including pursuant to Treasury Regulation Section 1.734-2(b)(1)) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.

(x) Economic Uniformity; Changes in Law.

(A) At the election of the General Partner with respect to any taxable period ending upon, or after, the termination of the Subordination Period, all or a portion of the remaining items of Partnership gross income or gain for such taxable period, after taking into account allocations pursuant to Section 6.1(d)(iii), shall be allocated 100% to each Partner holding Subordinated Units that are Outstanding as of the termination of the Subordination Period (“Final Subordinated Units”) in the proportion of the number of Final Subordinated Units held by such Partner to the total number of Final Subordinated Units then Outstanding, until each such Partner has been allocated an amount of gross income or gain that increases the Capital Account maintained with respect to such Final Subordinated Units to an amount that after taking into account the other allocations of income, gain, loss and deduction to be made with respect to such taxable period will equal the product of (A) the number of Final Subordinated Units held by such Partner and (B) the Per Unit Capital Amount for a Common Unit. The purpose of this allocation is to establish uniformity between the Capital Accounts underlying Final Subordinated Units and the Capital Accounts underlying Common Units held by Persons other than the General Partner and its Affiliates immediately prior to the conversion of such Final Subordinated Units into Common Units. This allocation method for establishing such economic uniformity will be available to the General Partner only if the method for allocating the Capital Account maintained with respect to the Subordinated Units between the transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii) does not otherwise provide such economic uniformity to the Final Subordinated Units.

(B) With respect to an event triggering an adjustment to the Carrying Value of Partnership property pursuant to Section 5.5(d) during any taxable period of the Partnership ending upon, or after, the issuance of IDR Reset Common Units pursuant to Section 5.11, after the application of Section 6.1(d)(x)(A), any Unrealized Gains and Unrealized Losses shall be allocated among the Partners in a manner that to the nearest extent possible results in the Capital Accounts maintained with respect to such IDR Reset Common Units issued pursuant to Section 5.11 equaling the product of (A) the Aggregate Quantity of IDR Reset Common Units and (B) the Per Unit Capital Amount for an Initial Common Unit.

(C) With respect to an event triggering an adjustment to the Carrying Value of Partnership property pursuant to Section 5.5(d) after the Subordination Period has ended, after the application of Sections 6.1(d)(x)(A)-(B), any remaining Unrealized Gains and Unrealized Losses shall be allocated to the holders of (A) Affiliate Retained Units, Pro Rata, or (B) Outstanding Common Units (other than Affiliate Retained Units), Pro Rata, as applicable, in a manner that to the nearest extent possible results in the Capital Accounts maintained with respect to each Affiliate Retained Unit equaling the Per Unit Capital Amount for an Initial Common Unit.

(D) With respect to an event triggering an adjustment to the Carrying Value of Partnership property pursuant to Section 5.5(d) during any taxable period of the Partnership ending upon, or after,

 

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the issuance of the Class A Units, after the application of Sections 6.1(d)(x)(A)-(C), any remaining Unrealized Gains and Unrealized Losses shall be allocated to the holders of (A) Class A Units, Pro Rata, or (B) Outstanding Common Units, Pro Rata, as applicable, in a manner that to the nearest extent possible results in the Capital Accounts maintained with respect to each Class A Unit equaling the Per Unit Capital Amount for an Initial Common Unit.

(E) With respect to any taxable period during which an IDR Reset Common Unit is transferred to any Person who is not an Affiliate of the transferor, all or a portion of the remaining items of Partnership gross income or gain for such taxable period shall be allocated 100% to the transferor Partner of such transferred IDR Reset Common Unit until such transferor Partner has been allocated an amount of gross income or gain that increases the Capital Account maintained with respect to such transferred IDR Reset Common Unit to an amount equal to the Per Unit Capital Amount for an Initial Common Unit.

(F) For the proper administration of the Partnership and for the preservation of uniformity of the Limited Partner Interests (or any class or classes thereof), the General Partner shall (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations of income, gain, loss, deduction, Unrealized Gain or Unrealized Loss; and (iii) amend the provisions of this Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the Limited Partner Interests (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 6.1(d)(x)(F) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of Limited Partner Interests issued and Outstanding or the Partnership, and if such allocations are consistent with the principles of Section 704 of the Code.

(xi) Curative Allocation.

(A) Notwithstanding any other provision of this Section 6.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of gross income, gain, loss and deduction allocated to each Partner pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Partner under the Agreed Allocations had the Required Allocations and the related Curative Allocation not otherwise been provided in this Section 6.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partner Nonrecourse Debt Minimum Gain. In exercising its discretion under this Section 6.1(d)(xi)(A), the General Partner may take into account future Required Allocations that, although not yet made, are likely to offset other Required Allocations previously made. Allocations pursuant to this Section 6.1(d)(xi)(A) shall only be made with respect to Required Allocations to the extent the General Partner determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) of the second sentence of this Section 6.1(d)(xi)(A) to the extent the General Partner determines that such allocations are likely to be offset by subsequent Required Allocations.

(B) The General Partner shall, with respect to each taxable period, (1) apply the provisions of Section 6.1(d)(xi)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among the Partners in a manner that is likely to minimize such economic distortions.

 

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(xii) Corrective and Other Allocations. In the event of any allocation of Additional Book Basis Derivative Items or any Book-Down Event or any recognition of a Net Termination Loss, the following rules shall apply:

(A) The General Partner shall allocate Additional Book Basis Derivative Items consisting of depreciation, amortization, depletion or any other form of cost recovery (other than Additional Book Basis Derivative Items included in Net Termination Gain or Net Termination Loss) with respect to any Adjusted Property to the Unitholders, Pro Rata, and the holders of Incentive Distribution Rights, all in the same proportion as the Net Termination Gain or Net Termination Loss resulting from the Revaluation Event that gave rise to such Additional Book Basis Derivative Items was allocated to them pursuant to Section 6.1(c).

(B) If a sale or other taxable disposition of an Adjusted Property, including, for this purpose, inventory (“Disposed of Adjusted Property”) occurs other than in connection with an event giving rise to Net Termination Gain or Net Termination Loss, the General Partner shall allocate (1) items of gross income and gain (aa) away from the holders of Incentive Distribution Rights and (bb) to the Unitholders, or (2) items of deduction and loss (aa) away from the Unitholders and (bb) to the holders of Incentive Distribution Rights, to the extent that the Additional Book Basis Derivative Items with respect to the Disposed of Adjusted Property (determined in accordance with the last sentence of the definition of Additional Book Basis Derivative Items) treated as having been allocated to the Unitholders pursuant to this Section 6.1(d)(xii)(B) exceed their Share of Additional Book Basis Derivative Items with respect to such Disposed of Adjusted Property. For purposes of this Section 6.1(d)(xii)(B), the Unitholders shall be treated as having been allocated Additional Book Basis Derivative Items to the extent that such Additional Book Basis Derivative Items have reduced the amount of income that would otherwise have been allocated to the Unitholders under the Partnership Agreement (e.g., Additional Book Basis Derivative Items taken into account in computing cost of goods sold would reduce the amount of book income otherwise available for allocation among the Partners). Any allocation made pursuant to this Section 6.1(d)(xii)(B) shall be made after all of the other Agreed Allocations have been made as if this Section 6.1(d)(xii) were not in this Agreement and, to the extent necessary, shall require the reallocation of items that have been allocated pursuant to such other Agreed Allocations.

(C) Net Termination Loss in an amount equal to the lesser of (1) such Net Termination Loss and (2) the Aggregate Remaining Net Positive Adjustments shall be allocated in such a manner, as determined by the General Partner, that to the extent possible, the Capital Account balances of the Partners will equal the amount they would have been had no prior Book-Up Events occurred, and any remaining Net Termination Loss shall be allocated pursuant to Section 6.1(c) hereof. In allocating Net Termination Loss pursuant to this Section 6.1(d)(xii)(C), the General Partner shall attempt, to the extent possible, to cause the Capital Accounts of the Unitholders, on the one hand, and holders of the Incentive Distribution Rights, on the other hand, to equal the amount they would equal if (i) the Carrying Values of the Partnership’s property had not been previously adjusted in connection with any prior Book-Up Events, (ii) Unrealized Gain and Unrealized Loss (or, in the case of a liquidation, actual gain or loss) with respect to such Partnership Property were determined with respect to such unadjusted Carrying Values, and (iii) any resulting Net Termination Gain had been allocated pursuant to Section 6.1(c)(i) (including, for the avoidance of doubt, taking into account the provisions set forth in the last sentence of Section 6.1(c)(i)).

(D) In making the allocations required under this Section 6.1(d)(xii), the General Partner may apply whatever conventions or other methodology it determines will satisfy the purpose of this Section 6.1(d)(xii). Without limiting the foregoing, if an Adjusted Property is contributed by the Partnership to another entity classified as a partnership for federal income tax purposes (the “lower tier partnership”), the General Partner may make allocations similar to those described in Sections 6.1(d)(xii)(A) through (C) to the extent the General Partner determines such allocations are necessary to account for the Partnership’s allocable share of income, gain, loss and deduction of the

 

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lower tier partnership that relate to the contributed Adjusted Property in a manner that is consistent with the purpose of this Section 6.1(d)(xii).

(xiii) Special Curative Allocation in Event of Liquidation Prior to Conversion of the Last Outstanding Subordinated Unit. Notwithstanding any other provision of this Section 6.1 (other than the Required Allocations), if (A) the Liquidation Date occurs prior to the conversion of the last Outstanding Subordinated Unit and (B) after having made all other allocations provided for in this Section 6.1 for the taxable period in which the Liquidation Date occurs, the Capital Account in respect of each Common Unit does not equal the amount such Capital Account would have been if Section 6.1(c)(iii) and Section 6.1(c)(iv) had not been part of this Agreement and all prior allocations of Net Termination Gain and Net Termination Loss had been made pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable, then items of income, gain, loss and deduction for such taxable period shall be reallocated among all Unitholders in a manner determined appropriate by the General Partner so as to cause, to the maximum extent possible, the Capital Account in respect of each Common Unit to equal the amount such Capital Account would have been if all prior allocations of Net Termination Gain and Net Termination Loss had been made pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable. For the avoidance of doubt, the reallocation of items set forth in the immediately preceding sentence provides that, to the extent necessary to achieve the Capital Account balances described above, (x) items of income and gain that would otherwise be included in Net Income or Net Loss, as the case may be, for the taxable period in which the Liquidation Date occurs, shall be reallocated from Unitholders holding Subordinated Units to Unitholders holding Common Units and (y) items of deduction and loss that would otherwise be included in Net Income or Net Loss, as the case may be, for the taxable period in which the Liquidation Date occurs shall be reallocated from Unitholders holding Common Units to Unitholders holding Subordinated Units. In the event that (i) the Liquidation Date occurs on or before the date (not including any extension of time prescribed by law) for the filing of the Partnership’s federal income tax return for the taxable period immediately prior to the taxable period in which the Liquidation Date occurs and (ii) the reallocation of items for the taxable period in which the Liquidation Date occurs as set forth above in this Section 6.1(d)(xiii) fails to achieve the Capital Account balances described above, items of income, gain, loss and deduction that would otherwise be included in the Net Income or Net Loss, as the case may be, for such prior taxable period shall be reallocated among all Unitholders in a manner that will, to the maximum extent possible and after taking into account all other allocations made pursuant to this Section 6.1(d)(xiii), cause the Capital Account in respect of each Common Unit to equal the amount such Capital Account would have been if all prior allocations of Net Termination Gain and Net Termination Loss had been made pursuant to Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable.

Section 6.2 Allocations for Tax Purposes.

(a) Except as otherwise provided herein, for U.S. federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1.

(b) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for U.S. federal income tax purposes among the Partners in the manner provided under Section 704(c) of the Code, and the Treasury Regulations promulgated under Section 704(b) and 704(c) of the Code, as determined appropriate by the General Partner (taking into account the General Partner’s discretion under Section 6.1(d)(x)(F)); provided, that the General Partner shall apply the principles of Treasury Regulation Section 1.704-3(d) in all events.

(c) The General Partner may determine to depreciate or amortize the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation or amortization

 

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method and useful life applied to the unamortized Book-Tax Disparity of such property, despite any inconsistency of such approach with Treasury Regulation Section 1.167(c)-l(a)(6) or any successor regulations thereto. If the General Partner determines that such reporting position cannot reasonably be taken, the General Partner may adopt depreciation and amortization conventions under which all purchasers acquiring Limited Partner Interests in the same month would receive depreciation and amortization deductions, based upon the same applicable rate as if they had purchased a direct interest in the Partnership’s property. If the General Partner chooses not to utilize such aggregate method, the General Partner may use any other depreciation and amortization conventions to preserve the uniformity of the intrinsic tax characteristics of any Limited Partner Interests, so long as such conventions would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of Limited Partner Interests.

(d) In accordance with Treasury Regulation Sections 1.1245-1(e) and 1.1250-1(f), any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 6.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.

(e) All items of income, gain, loss, deduction and credit recognized by the Partnership for U.S. federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code that may be made by the Partnership; provided, however, that such allocations, once made, shall be adjusted (in the manner determined by the General Partner) to take into account those adjustments permitted or required by Sections 734 and 743 of the Code.

(f) Each item of Partnership income, gain, loss and deduction, for federal income tax purposes, shall be determined for each taxable period and prorated on a monthly basis and shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Partnership Interests are listed or admitted to trading on the first Business Day of each month; provided, however, that such items for the period beginning on the Closing Date and ending on the last day of the month in which the last Option Closing Date or the expiration of the Over-Allotment Option occurs shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Partnership Interests are listed or admitted to trading on the first Business Day of the next succeeding month; provided, further, that gain or loss on a sale or other disposition of any assets of the Partnership or any other extraordinary item of income or loss realized and recognized other than in the ordinary course of business, as determined by the General Partner, shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Partnership Interests are listed or admitted to trading on the first Business Day of the month in which such gain or loss is recognized for federal income tax purposes. The General Partner may revise, alter or otherwise modify such methods of allocation to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder or for the proper administration of the Partnership.

(g) Allocations that would otherwise be made to a Limited Partner under the provisions of this Article VI shall instead be made to the beneficial owner of Limited Partner Interests held by a nominee, agent or representative in any case in which such nominee, agent or representative has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method determined by the General Partner.

(h) If, as a result of an exercise of a Noncompensatory Option, a Capital Account reallocation is required under Treasury Regulation Section 1.704-1(b)(2)(iv)(s)(3), the General Partner shall make corrective allocations pursuant to Treasury Regulation Section 1.704-1(b)(4)(x).

 

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Section 6.3 Distributions; Characterization of Distributions; Distributions to Record Holders.

(a) The Board of Directors may adopt a cash distribution policy, which it may change from time to time without amendment to this Agreement. Distributions will be made as and when declared by the General Partner.

(b) All amounts of Available Cash distributed by the Partnership on any date from any source shall be deemed to be Operating Surplus until the sum of all amounts of cash and cash equivalents theretofore distributed by the Partnership to the Partners pursuant to Section 6.4 equals the Operating Surplus from the Closing Date through the close of the immediately preceding Quarter. Any remaining amounts of cash and cash equivalents distributed by the Partnership on such date shall, except as otherwise provided in Section 6.5, be deemed to be “Capital Surplus.” All distributions and redemption payments required to be made under this Agreement or otherwise made by the Partnership shall be made subject to Sections 17-607 and 17-804 of the Delaware Act, notwithstanding any other provision of this Agreement.

(c) Notwithstanding Section 6.3(b) (but subject to the last sentence thereof), in the event of the dissolution and liquidation of the Partnership, all Partnership assets shall be applied and distributed solely in accordance with, and subject to the terms and conditions of, Section 12.4.

(d) The General Partner may treat taxes paid by the Partnership on behalf of, or amounts withheld with respect to, all or less than all of the Partners, as a distribution of Available Cash to such Partners, as determined appropriate under the circumstances by the General Partner.

(e) Each distribution in respect of a Partnership Interest shall be paid by the Partnership, directly or through any Transfer Agent or through any other Person or agent, only to the Record Holder of such Partnership Interest as of the Record Date set for such distribution. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise.

Section 6.4 Distributions from Operating Surplus.

(a) During Subordination Period. Cash and cash equivalents distributed in respect of any Quarter wholly within the Subordination Period that is deemed to be Operating Surplus pursuant to the provisions of Section 6.3 or Section 6.5 shall be distributed as follows, except as otherwise contemplated by Section 5.6(b) in respect of additional Partnership Interests issued pursuant thereto:

(i) First, (x) to the General Partner in accordance with its Percentage Interest and (y) to the Unitholders holding Common Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until there has been distributed in respect of each Common Unit then Outstanding an amount equal to the Minimum Quarterly Distribution for such Quarter;

(ii) Second, (x) to the General Partner in accordance with its Percentage Interest and (y) to the Unitholders holding Common Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until there has been distributed in respect of each Common Unit then Outstanding an amount equal to the Cumulative Common Unit Arrearage existing with respect to such Quarter;

(iii) Third, (x) to the General Partner in accordance with its Percentage Interest and (y) to the Unitholders holding Subordinated Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until there has been distributed in respect of each Subordinated Unit then Outstanding an amount equal to the Minimum Quarterly Distribution for such Quarter;

(iv) Fourth, to the General Partner and all Unitholders, Pro Rata, until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the First Target Distribution over the Minimum Quarterly Distribution for such Quarter;

 

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(v) Fifth, (A) to the General Partner in accordance with its Percentage Interest, (B) 13% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (v), until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the Second Target Distribution over the First Target Distribution for such Quarter;

(vi) Sixth, (A) to the General Partner in accordance with its Percentage Interest, (B) 23% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (vi), until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the Third Target Distribution over the Second Target Distribution for such Quarter; and

(vii) Thereafter, (A) to the General Partner in accordance with its Percentage Interest, (B) 48% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (vii);

provided, however, that if the Minimum Quarterly Distribution, the First Target Distribution, the Second Target Distribution and the Third Target Distribution have been reduced to zero pursuant to the second sentence of Section 6.6(a), the distribution of cash and cash equivalents that are deemed to be Operating Surplus with respect to any Quarter will be made solely in accordance with Section 6.4(a)(vii).

(b) After Subordination Period. Cash and cash equivalents distributed in respect of any Quarter ending after the Subordination Period has ended that is deemed to be Operating Surplus pursuant to the provisions of Section 6.3 or Section 6.5 shall be distributed as follows, except as otherwise contemplated by Section 5.6(b) in respect of additional Partnership Interests issued pursuant thereto:

(i) First, to the General Partner and all Unitholders, Pro Rata, until there has been distributed in respect of each Unit then Outstanding an amount equal to the Minimum Quarterly Distribution for such Quarter;

(ii) Second, to the General Partner and all Unitholders, Pro Rata, until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the First Target Distribution over the Minimum Quarterly Distribution for such Quarter;

(iii) Third, (A) to the General Partner in accordance with its Percentage Interest, (B) 13% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (iii), until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the Second Target Distribution over the First Target Distribution for such Quarter;

(iv) Fourth, (A) to the General Partner in accordance with its Percentage Interest, (B) 23% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (iv), until there has been distributed in respect of each Unit then Outstanding an amount equal to the excess of the Third Target Distribution over the Second Target Distribution for such Quarter; and

(v) Thereafter, (A) to the General Partner in accordance with its Percentage Interest, (B) 48% to the holders of the Incentive Distribution Rights, Pro Rata, and (C) to all Unitholders, Pro Rata, a percentage equal to 100% less the sum of the percentages applicable to subclauses (A) and (B) of this clause (v);

provided, however that if the Minimum Quarterly Distribution, the First Target Distribution, the Second Target Distribution and the Third Target Distribution have been reduced to zero pursuant to the second sentence of Section 6.6(a), the distribution of cash or cash equivalents that are deemed to be Operating Surplus with respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).

 

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Section 6.5 Distributions from Capital Surplus. Cash and cash equivalents that are distributed and deemed to be Capital Surplus pursuant to the provisions of Section 6.3(a) shall be distributed, unless the provisions of Section 6.3 require otherwise, to the General Partner and the Unitholders, Pro Rata, until the Minimum Quarterly Distribution is reduced to zero pursuant to the second sentence of Section 6.6(a). Cash and cash equivalents that are deemed to be Capital Surplus shall then be distributed (A) to the General Partner in accordance with its Percentage Interest and (B) to all Unitholders holding Common Units, Pro Rata, a percentage equal to 100% less the General Partner’s Percentage Interest, until there has been distributed in respect of each Common Unit then Outstanding an amount equal to the Cumulative Common Unit Arrearage. Thereafter, all cash and cash equivalents that are distributed shall be distributed as if it were Operating Surplus and shall be distributed in accordance with Section 6.4.

Section 6.6 Adjustment of Target Distribution Levels.

(a) The Target Distributions, Common Unit Arrearages and Cumulative Common Unit Arrearages shall be proportionately adjusted in the event of any distribution, combination or subdivision (whether effected by a distribution payable in Units or otherwise) of Units or other Partnership Interests. In the event of a distribution of cash or cash equivalents that is deemed to be from Capital Surplus, the then applicable Target Distributions shall be reduced in the same proportion that the distribution had to the fair market value of the Common Units immediately prior to the announcement of the distribution. If the Common Units are publicly traded on a National Securities Exchange, the fair market value will be the Current Market Price before the ex-dividend date. If the Common Units are not publicly traded, the fair market value will be determined by the Board of Directors.

(b) The Target Distributions shall also be subject to adjustment pursuant to Section 5.11 and Section 6.9.

Section 6.7 Special Provisions Relating to the Holders of Subordinated Units and Affiliate Retained Units.

(a) Except with respect to the right to vote on or approve matters requiring the vote or approval of a percentage of the holders of Outstanding Common Units and the right to participate in allocations of income, gain, loss and deduction and distributions made with respect to Common Units, the holder of a Subordinated Unit shall have all of the rights and obligations of a Unitholder holding Common Units hereunder; provided, however, that immediately upon the conversion of Subordinated Units into Common Units pursuant to Section 5.7, the Unitholder holding Subordinated Units shall possess all of the rights and obligations of a Unitholder holding Common Units hereunder with respect to such converted Subordinated Units, including the right to vote as a Common Unitholder and the right to participate in allocations of income, gain, loss and deduction and distributions made with respect to Common Units; provided, however, that such converted Subordinated Units shall remain subject to the provisions of Section 5.5(c)(ii), Section 6.1(d)(x), Section 6.7(b) and Section 6.7(c).

(b) A Unitholder shall not be permitted to transfer a Subordinated Unit, a Subordinated Unit that has converted into a Common Unit pursuant to Section 5.7 or that is an Affiliate Retained Unit (other than a transfer to an Affiliate) if the remaining balance in the transferring Unitholder’s Capital Account with respect to the retained Subordinated Units, Retained Converted Subordinated Units or Affiliate Retained Units would be negative after giving effect to the allocation under Section 5.5(c)(ii)(B).

(c) The Unitholder holding a Common Unit that has resulted from the conversion of a Subordinated Unit pursuant to Section 5.7 or that is an Affiliate Retained Unit shall not be issued a Common Unit Certificate pursuant to Section 4.1, if the Common Units are evidenced by Certificates, and shall not be permitted to transfer such Common Unit to a Person that is not an Affiliate of the holder until such time as the General Partner determines, based on advice of counsel, that each such Common Unit should have, as a substantive matter, like intrinsic economic and federal income tax characteristics, in all material respects, to the intrinsic economic and federal income tax characteristics of an Initial Common Unit. In connection with the condition imposed by this Section 6.7(c), the General Partner may take whatever steps are required to provide economic uniformity to such

 

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Common Units in preparation for a transfer of such Common Units, including the application of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b); provided, however, that no such steps may be taken that would have a material adverse effect on the Unitholders holding a Common Unit.

Section  6.8 Special Provisions Relating to the Holders of IDR Reset Common Units.

(a) A Unitholder shall not be permitted to transfer an IDR Reset Common Unit (other than a transfer to an Affiliate) if the remaining balance in the transferring Unitholder’s Capital Account with respect to the retained IDR Reset Common Units would be negative after giving effect to the allocation under Section 5.5(c)(iii).

(b) A Unitholder holding an IDR Reset Common Unit shall not be permitted to transfer such Common Unit to a Person that is not an Affiliate of the holder until such time as the General Partner determines, based on advice of counsel, that upon transfer each such Common Unit should have, as a substantive matter, like intrinsic economic and U.S. federal income tax characteristics to the transferee, in all material respects, to the intrinsic economic and U.S. federal income tax characteristics of an Initial Common Unit to such transferee. In connection with the condition imposed by this Section 6.8(b), the General Partner may apply Sections 5.5(c)(iii), 6.1(d)(x) and 6.8(a) or, to the extent not resulting in a material adverse effect on the Unitholders holding Common Units, take whatever steps are required to provide economic uniformity to such Common Units in preparation for a transfer of such IDR Reset Common Units.

Section 6.9 Entity-Level Taxation. If legislation is enacted or the official interpretation of existing legislation is modified by a governmental authority, which after giving effect to such enactment or modification, results in a Group Member becoming subject to federal, state or local or non-U.S. income or withholding taxes in excess of the amount of such taxes due from the Group Member prior to such enactment or modification (including, for the avoidance of doubt, any increase in the rate of such taxation applicable to the Group Member), then the General Partner may, in its sole discretion, reduce the Target Distributions by the amount of income or withholding taxes that are payable by reason of any such new legislation or interpretation (the “Incremental Income Taxes”), or any portion thereof selected by the General Partner, in the manner provided in this Section 6.9. If the General Partner elects to reduce the Target Distributions for any Quarter with respect to all or a portion of any Incremental Income Taxes, the General Partner shall estimate for such Quarter the Partnership Group’s aggregate liability (the “Estimated Incremental Quarterly Tax Amount”) for all (or the relevant portion of) such Incremental Income Taxes; provided that any difference between such estimate and the actual liability for Incremental Income Taxes (or the relevant portion thereof) for such Quarter may, to the extent determined by the General Partner, be taken into account in determining the Estimated Incremental Quarterly Tax Amount with respect to each Quarter in which any such difference can be determined. For each such Quarter, the Target Distributions, shall be the product obtained by multiplying (a) the amounts therefor that are set out herein prior to the application of this Section 6.9 times (b) the quotient obtained by dividing (i) cash and cash equivalents with respect to such Quarter by (ii) the sum of cash and cash equivalents with respect to such Quarter and the Estimated Incremental Quarterly Tax Amount for such Quarter, as determined by the General Partner. For purposes of the foregoing, cash and cash equivalents with respect to a Quarter will be deemed reduced by the Estimated Incremental Quarterly Tax Amount for that Quarter.

Section 6.10 Special Provisions Relating to the Holders of Class A Units.

(a) Except as otherwise provided in this Agreement, the holder of a Class A Unit shall have all of the rights and obligations of a Unitholder holding Common Units hereunder; provided, however, that immediately upon the conversion of any Class A Unit into Common Units pursuant to Section 5.12(b)(vi), the Unitholder holding a Class A Unit that is to be converted shall possess all of the rights and obligations of a Unitholder holding Common Units hereunder, including the right to vote as a Common Unitholder and the right to participate in allocations of income, gain, loss and deduction and distributions made with respect to Common Units; provided, however, that such converted Class A Unit shall remain subject to the provisions of Section 5.5(c)(iv), Section 6.1(d)(iii)(C), Section 6.10(b) and Section 6.10(c).

 

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(b) A Unitholder shall not be permitted to transfer a Class A Unit or a Class A Unit that has converted into a Common Unit pursuant to Section 5.12(b)(vi) if the remaining balance in the transferring Unitholder’s Capital Account with respect to the retained Class A Units or retained converted Class A Units would be negative after giving effect to the allocation under Section 5.5(c)(iv)(B).

(c) The Unitholder holding a Common Unit that has resulted from the conversion of a Class A Unit pursuant to Section 5.12(b)(vi) shall not be issued a Common Unit Certificate pursuant to Section 4.1, if the Common Units are evidenced by Certificates, and shall not be permitted to transfer such Common Units to a Person that is not a Permitted Transferree of the holder until such time as the General Partner determines, based on advice of counsel, that each such Common Unit should have, as a substantive matter, like intrinsic economic and United States federal income tax characteristics, in all material respects, to the intrinsic economic and United States federal income tax characteristics of an Initial Common Unit. In connection with the condition imposed by this Section 6.10(c), the General Partner shall take whatever steps are required to provide economic uniformity to such Common Units in preparation for a transfer of such Common Units, including the application of Sections 5.5(c)(iv), 6.1(d)(iii)(C) and 6.10(b); provided, however, that no such steps may be taken that would have a material adverse effect on the Unitholders holding a Common Unit.

ARTICLE VII.

MANAGEMENT AND OPERATION OF BUSINESS

Section 7.1 Management.

(a) The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, but without limitation on the ability of the General Partner to delegate its rights and powers to other Persons, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and no other Partner shall have any management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted to a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3, shall have full power and authority to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Partnership, to exercise all powers set forth in Section 2.5 and to effectuate the purposes set forth in Section 2.4, including the following:

(i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible or exchangeable into Partnership Interests, and the incurring of any other obligations;

(ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (iii) being subject, however, to any prior approval that may be required by Section 7.3 or Article XIV);

(iv) the use of the assets of the Partnership (including cash on hand) for any purpose consistent with the terms of this Agreement, including the financing of the conduct of the operations of the Partnership Group; the lending of funds to other Persons (including other Group Members); the repayment or guarantee of obligations of any Group Member; and the making of capital contributions to any Group Member;

(v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including instruments that limit the liability of the Partnership under contractual arrangements to all or particular assets of the Partnership, with the other party to the contract to have no recourse against the

 

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General Partner or its assets other than its interest in the Partnership, even if the same results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case);

(vi) the distribution of cash or cash equivalents by the Partnership;

(vii) the selection, employment, retention and dismissal of employees (including employees having titles such as “president,” “vice president,” “secretary” and “treasurer”) and agents, outside attorneys, accountants, consultants and contractors of the General Partner or the Partnership Group and the determination of their compensation and other terms of employment or hiring;

(viii) the maintenance of insurance for the benefit of the Partnership Group, the Partners and Indemnitees;

(ix) the formation of, or acquisition of an interest in, and the contribution of property and the making of loans to, any further limited or general partnerships, joint ventures, corporations, limited liability companies or other Persons (including the acquisition of interests in, and the contributions of property to, any Group Member from time to time);

(x) the control of any matters affecting the rights and obligations of the Partnership, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expense and the settlement of claims and litigation;

(xi) the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(xii) the entering into of listing agreements with any National Securities Exchange and the delisting of some or all of the Limited Partner Interests from, or requesting that trading be suspended on, any such exchange;

(xiii) the purchase, sale or other acquisition or disposition of Partnership Interests, or the issuance of options, rights, warrants, appreciation rights, phantom or tracking interests relating to Partnership Interests;

(xiv) the undertaking of any action in connection with the Partnership’s participation in the management of any Group Member; and

(xv) the entering into of agreements with any of its Affiliates to render services to a Group Member or to itself in the discharge of its duties as General Partner of the Partnership.

(b) Notwithstanding any other provision of this Agreement or any Group Member Agreement, each of the Partners and each other Person who acquires an interest in a Partnership Interest and each other Person who is otherwise bound by this Agreement hereby (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of this Agreement, each Group Member Agreement, the Underwriting Agreement, the Contribution Agreement, the Omnibus Agreement and the other agreements described in or filed as exhibits to the Registration Statement that are related to the transactions contemplated by the Registration Statement (in the case of each agreement other than this Agreement, without giving effect to any amendments, supplements or restatements after the date hereof); (ii) agrees that the General Partner (on its own behalf or on behalf of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence and the other agreements, acts, transactions and matters described in or contemplated by the Registration Statement on behalf of the Partnership without any further act, approval or vote of the Partners, the other Persons who acquire an interest in a Partnership Interest and the Persons who are otherwise bound by this Agreement; and (iii) agrees that the execution, delivery or performance by the General Partner, any Group Member or any Affiliate of any of them of this Agreement or any agreement authorized or permitted under this Agreement (including the exercise by the General Partner or any Affiliate of the General Partner of the rights accorded pursuant to Article XV or any determination or action (or not making any determination or action) by the General Partner, the Board of Directors or any committee of the Board of Directors (including the Conflicts Committee) associated with the repayment, refinancing or amendment of the terms of any borrowing in connection the leveraged distribution described in the Registration Statement) shall not constitute a breach by the General Partner or any other Person of any fiduciary or other duty existing at law, in equity or otherwise that the

 

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General Partner or such Person may owe the Partnership, the Limited Partners, the other Persons who acquire an interest in a Partnership Interest or the Persons who are otherwise bound by this Agreement.

Section 7.2 Certificate of Limited Partnership. The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents that the General Partner determines to be necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent the General Partner determines such action to be necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership or other entity in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 3.4(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to any Partner.

Section 7.3 Restrictions on the General Partner’s Authority. Except as provided in Article XII and Article XIV, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions without the approval of a Unit Majority; provided, however, that this provision shall not preclude or limit the General Partner’s ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Partnership Group and shall not apply to any forced sale of any or all of the assets of the Partnership Group pursuant to the foreclosure of, or other realization upon, any such encumbrance.

Section 7.4 Reimbursement of the General Partner.

(a) The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership Group (including salary, bonus, incentive compensation and other amounts paid to any Person (including Affiliates of the General Partner), to perform services for the Partnership Group or for the General Partner in the discharge of its duties to the Partnership Group), and (ii) all other expenses allocable to the Partnership Group or otherwise incurred by the General Partner in connection with operating the Partnership Group’s business (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine in good faith the expenses that are allocable to the General Partner or any member of the Partnership Group. Reimbursements pursuant to this Section 7.4 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.6. The General Partner and its Affiliates may charge any member of the Partnership Group a management fee to the extent necessary to allow the Partnership Group to reduce the amount of any state franchise or income tax or any tax based upon revenues or gross margin of any member of the Partnership Group if the tax benefit produced by the payment for such management fee exceeds the amount of such fee.

(b) The General Partner, without the approval of the Limited Partners (who shall have no right to vote in respect thereof), may propose and adopt on behalf of the Partnership benefit plans, programs and practices (including the USD Partners LP Long-Term Incentive Plan and other plans, programs and practices involving the issuance of Partnership Interests), or cause the Partnership to issue Partnership Interests (or other awards under the USD Partners LP Long-Term Incentive Plan) in connection with, or pursuant to, any benefit plan, program or practice maintained or sponsored by the General Partner or any of its Affiliates, in each case for the benefit of employees, officers, consultants and directors of the General Partner or its Affiliates, in respect of services performed, directly or indirectly, for the benefit of the Partnership Group. The Partnership agrees to issue or sell to the General Partner or any of its Affiliates any Partnership Interests that the General Partner or such Affiliates are obligated to provide to any employees, officers, consultants and directors pursuant to any such benefit plans,

 

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programs or practices. Expenses incurred by the General Partner in connection with any such plans, programs and practices (including the net cost to the General Partner or such Affiliates of Partnership Interests purchased by the General Partner or such Affiliates, from the Partnership or otherwise, to fulfill awards under such plans, programs and practices) shall be reimbursed in accordance with Section 7.4(a). Any and all obligations of the General Partner under any benefit plans, programs or practices adopted by the General Partner as permitted by this Section 7.4(b) shall constitute obligations of the General Partner hereunder and shall be assumed by any successor General Partner approved pursuant to Section 11.1 or Section 11.2 or the transferee of or successor to all of the General Partner’s General Partner Interest pursuant to Section 4.6.

Section 7.5 Outside Activities.

(a) The General Partner, for so long as it is the General Partner of the Partnership (i) agrees that its sole business will be to act as a general partner or managing member, as the case may be, of the Partnership and any other partnership or limited liability company of which the Partnership is, directly or indirectly, a partner or member and to undertake activities that are ancillary or related thereto (including being a Limited Partner) and (ii) shall not engage in any business or activity or incur any debts or liabilities except in connection with or incidental to (A) its performance as general partner or managing member, if any, of one or more Group Members or as described in or contemplated by the Registration Statement, (B) the acquiring, owning or disposing of debt securities or equity interests in any Group Member, (C) the guarantee of, and mortgage, pledge, or encumbrance of any or all of its assets in connection with, any indebtedness of any Group Member or (D) the performance of its obligations under the Omnibus Agreement.

(b) Subject to the terms of the Omnibus Agreement, each Unrestricted Person (other than the General Partner) shall have the right to engage in businesses of every type and description and other activities for profit and to engage in and possess an interest in other business ventures of any and every type or description, whether in businesses engaged in or anticipated to be engaged in by any Group Member, independently or with others, including business interests and activities in direct competition with the business and activities of any Group Member. No such business interest or activity shall constitute a breach of this Agreement, any fiduciary or other duty existing at law, in equity or otherwise, or obligation of any type whatsoever to the Partnership or other Group Member, any Partner, any Person who acquires an interest in a Partnership Interest or any Person who is otherwise bound by this Agreement.

(c) Notwithstanding anything to the contrary in this Agreement or any duty otherwise existing at law or in equity (i) the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to any Unrestricted Person (including the General Partner) and (ii) except as set forth in the Omnibus Agreement, no Unrestricted Person (including the General Partner) who acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Partnership, shall have any duty to communicate or offer such opportunity to any Group Member, and such Unrestricted Person (including the General Partner) shall not be liable to the Partnership or any other Group Member, any Partner, any Person who acquires an interest in a Partnership Interest or any other Person who is otherwise bound by this Agreement for breach of any fiduciary or other duty existing at law, in equity or otherwise by reason of the fact that such Unrestricted Person (including the General Partner) pursues or acquires such opportunity for itself, directs such opportunity to another Person or does not communicate such opportunity information to any Group Member.

(d) The General Partner and each of its Affiliates may acquire Units or other Partnership Interests in addition to those acquired on the Closing Date and, except as otherwise expressly provided in this Agreement, shall be entitled to exercise, at their option, all rights relating to all Units or other Partnership Interests acquired by them. The term “Affiliates” when used in this Section 7.5(d) with respect to the General Partner shall not include any Group Member.

 

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Section 7.6 Indemnification.

(a) To the fullest extent permitted by law, all Indemnitees shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all threatened pending or completed claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, and whether formal or informal and including appeals, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as an Indemnitee and acting (or refraining to act) in such capacity; provided, that the Indemnitee shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter for which the Indemnitee is seeking indemnification pursuant to this Agreement, the Indemnitee acted in bad faith or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was unlawful. Any indemnification pursuant to this Section 7.6 shall be made only out of the assets of the Partnership, it being agreed that the General Partner shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate such indemnification.

(b) To the fullest extent permitted by law, expenses (including legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Section 7.6(a) in appearing at, participating in or defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter for which the Indemnitee is seeking indemnification pursuant to this Section 7.6, the Indemnitee is not entitled to be indemnified upon receipt by the Partnership of any undertaking by or on behalf of the Indemnitee to repay such amount if it shall be ultimately determined that the Indemnitee is not entitled to be indemnified as authorized by this Section 7.6.

(c) The indemnification provided by this Section 7.6 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the holders of Outstanding Limited Partner Interests, as a matter of law, in equity or otherwise, both as to actions in the Indemnitee’s capacity as an Indemnitee and as to actions in any other capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee.

(d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of an Indemnitee and such other Persons as the General Partner shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Indemnitee in connection with the Partnership’s activities or such Indemnitee’s activities on behalf of the Partnership, regardless of whether the Partnership would have the power to indemnify such Indemnitee against such liability under the provisions of this Agreement.

(e) For purposes of this Section 7.6, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Section 7.6(a); and action taken or omitted by an Indemnitee with respect to any employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the best interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in the best interests of the Partnership.

(f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

 

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(g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.6 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

(h) The provisions of this Section 7.6 are for the benefit of the Indemnitees and their heirs, successors, assigns, executors and administrators and shall not be deemed to create any rights for the benefit of any other Persons.

(i) No amendment, modification or repeal of this Section 7.6 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligations of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 7.6 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.7 Liability of Indemnitees.

(a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Partners or any other Person who is otherwise bound by this Agreement, for losses sustained or liabilities incurred as a result of any act or omission of an Indemnitee unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter in question, the Indemnitee acted in bad faith or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was criminal. In the case where an Indemnitee is liable for damages, those damages shall only be direct damages and shall not, to the fullest extent permitted by law, include punitive damages, consequential damages or lost profits.

(b) The General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith.

(c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Partnership, the Partners, any Person who acquires an interest in a Partnership Interest or is otherwise bound by this Agreement, the General Partner and any other Indemnitee acting in connection with the Partnership’s business or affairs shall not be liable, to the fullest extent permitted by law, to the Partnership, the Partners, any Person who acquires an interest in a Partnership Interest or is otherwise bound by this Agreement, for its reliance on the provisions of this Agreement.

(d) Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnitees under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.8 Standards of Conduct and Modification of Duties.

(a) Whenever the General Partner, the Board of Directors or any committee of the Board of Directors (including the Conflicts Committee), makes a determination or takes or declines to take any action, or any Affiliates of the General Partner cause the General Partner to do so, in its capacity as the general partner of the Partnership as opposed to in its individual capacity, whether under this Agreement, any Group Member Agreement or any other agreement contemplated hereby or otherwise, then, unless a lesser standard is provided for in this Agreement, or the determination, action or omission has been approved as provided in

 

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Section 7.8(c)(ii), the General Partner, the Board of Directors, such committee or such Affiliates causing the General Partner to do so, shall make such determination or take or decline to take such action in good faith and shall not be subject to any fiduciary duty or other duty or obligation or any other different or higher standard (all of which duties, obligations and standards are hereby eliminated, waived and disclaimed) contemplated under this Agreement, any Group Member Agreement or any other agreements contemplated hereby or otherwise, or under the Delaware Act or any other law, rule or regulation or at equity. A determination, other action or failure to act by the General Partner, the Board of Directors of the General Partner or any committee thereof (including the Conflicts Committee) or any Affiliate of the General Partner will be deemed to be in good faith unless the General Partner, the Board of Directors of the General Partner or any committee thereof (including the Conflicts Committee) or any Affiliate of the General Partner believed such determination, other action or failure to act was adverse to the interests of the Partnership. In any proceeding brought by or on behalf of the Partnership, any Limited Partner, or any Person who acquires an interest in a Partnership Interest or any other Person who is bound by this Agreement challenging such action, determination or failure to act, the Person bringing or prosecuting such proceeding shall have the burden of proving that such determination, action or failure to act was not in good faith.

(b) Whenever the General Partner makes a determination or takes or declines to take any action, or any of its Affiliates causes it to do so, in its individual capacity as opposed to in its capacity as the general partner of the Partnership, whether under this Agreement, any Group Member Agreements or any other agreement contemplated hereby or otherwise, then the General Partner, or such Affiliates causing it to do so, are entitled, to the fullest extent permitted by law, to make such determination or to take or decline to take such other action free of any duty (including any fiduciary duty) or obligation existing at law, in equity or otherwise or any obligation whatsoever to the Partnership, any Limited Partner, any other Person who acquires an interest in a Partnership Interest or any other Person who otherwise is bound by this Agreement, and the General Partner, or such Affiliates causing it to do so, shall not, to the fullest extent permitted by law, be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement or any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. By way of illustration and not of limitation, whenever the phrases, “at the option of the General Partner,” “in its sole discretion” or some variation of those phrases, are used in this Agreement, it indicates that the General Partner is acting in its individual capacity. For the avoidance of doubt, whenever the General Partner votes or transfers its Partnership Interests, or refrains from voting or transferring its Partnership Interests, it shall be acting in its individual capacity.

(c) Unless a lesser standard is otherwise expressly provided in this Agreement or any Group Member Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, any other Person who acquires an interest in a Partnership Interest or any other Person who is bound by this Agreement on the other hand, any resolution or course of action by the General Partner or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement, of any Group Member Agreement, of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval or (ii) approved by the vote of a majority of the Outstanding Common Units (excluding Common Units owned by the General Partner and its Affiliates. If the General Partner does not submit the determination, action or omission as provided in either clauses (i) or (ii) in the preceding sentence, then any such determination, action or omission shall be governed by Section 7.08(a) above. The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval or Unitholder approval of such resolution, and the General Partner may also adopt a resolution or course of action that has not received Special Approval or Unitholder approval. Whenever the General Partner makes a determination to refer any potential conflict of interest to the Conflicts Committee for Special Approval, seek Unitholder approval or adopt a resolution or course of action that has not received Special Approval or Unitholder approval, then the General Partner shall be entitled, to the fullest extent permitted by law, to make such determination free of any duty or obligation whatsoever to the Partnership or any Limited Partner, and the

 

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General Partner shall not, to the fullest extent permitted by law, be required to act in good faith or pursuant to any other standard or duty imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or otherwise or under the Delaware Act or any other law, rule or regulation or at equity, and the General Partner in making such determination shall be permitted to do so in its sole and absolute discretion. If Special Approval is sought, then it shall be presumed that, in making its decision, the Conflicts Committee acted in good faith, and if the Board of Directors determines that a director satisfies the eligibility requirements to be a member of the Conflicts Committee, then it shall be presumed that, in making its decision, the Board of Directors acted in good faith. In any proceeding brought by any Limited Partner or by or on behalf of such Limited Partner or any other Limited Partner or the Partnership or by or on behalf of any Person who acquires an interest in a Partnership Interest challenging any action by the Conflicts Committee with respect to any matter referred to the Conflicts Committee for Special Approval by the General Partner or whether a director satisfies the eligibility requirements to be a member of the Conflicts Committee, the Person bringing or prosecuting such proceeding shall have the burden of overcoming the presumption that the Conflicts Committee or the Board of Directors, as applicable, acted in good faith. Notwithstanding anything to the contrary in this Agreement or any duty otherwise existing at law or equity, the conflicts of interest described in the Registration Statement are hereby approved by all Partners and shall not constitute a breach of this Agreement.

(d) Notwithstanding anything to the contrary in this Agreement, the General Partner and its Affiliates or any other Indemnitee shall have no duty or obligation, express or implied, to (i) sell or otherwise dispose or, approve the sale or disposition of, of any asset of the Partnership Group other than in the ordinary course of business or (ii) permit any Group Member to use any facilities or assets of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use. Any determination by the General Partner or any of its Affiliates to enter into such contracts shall be in its sole discretion.

(e) The Partners, each Person who acquires an interest in a Partnership Interest or is otherwise bound by this Agreement hereby authorize the General Partner, on behalf of the Partnership as a partner or member of a Group Member, to approve actions by the general partner or managing member of such Group Member similar to those actions permitted to be taken by the General Partner pursuant to this Section 7.8.

(f) For the avoidance of doubt, whenever the Board of Directors, any member of the Board of Directors, any committee of the Board of Directors (including the Conflicts Committee) and any member of any such committee, the officers of the General Partner or any Affiliates of the General Partner make a determination on behalf of or recommendation to the General Partner, or cause the General Partner to take or omit to take any action, whether in the General Partner’s capacity as the General Partner or in its individual capacity, the standards of care applicable to the General Partner shall apply to such Persons, and such Persons shall be entitled to all benefits and rights (but not the obligations) of the General Partner hereunder, including eliminations, waivers and modifications of duties (including any fiduciary duties) to the Partnership, any of its Partners or any other Person who acquires an interest in a Partnership Interest or any other Person bound by this Agreement and the protections and presumptions set forth in this Agreement.

Section 7.9 Other Matters Concerning the General Partner and Indemnitees.

(a) The General Partner and any other Indemnitee may rely upon, and shall be protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

(b) The General Partner and any other Indemnitee may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted in reliance upon the advice or opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner or such Indemnitee, as the case may be, reasonably believes to be within such Person’s

 

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professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such advice or opinion.

(c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers, a duly appointed attorney or attorneys-in-fact or the duly authorized officers of any Group Member.

Section 7.10 Purchase or Sale of Partnership Interests. The General Partner may cause the Partnership to purchase or otherwise acquire Partnership Interests. As long as Partnership Interests are held by any Group Member, such Partnership Interests shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any Affiliate of the General Partner may also purchase or otherwise acquire and sell or otherwise dispose of Partnership Interests for its own account, subject to the provisions of Articles IV and X.

Section 7.11 Registration Rights of the General Partner and its Affiliates.

(a) If (i) the General Partner or any Affiliate of the General Partner (including for purposes of this Section 7.11, any Person that is an Affiliate of the General Partner at the date hereof notwithstanding that it may later cease to be an Affiliate of the General Partner) holds Partnership Interests that it desires to sell and (ii) Rule 144 of the Securities Act (or any successor rule or regulation to Rule 144) or another exemption from registration is not available to enable such holder of Partnership Interests (the “Holder”) to dispose of the number of Partnership Interests it desires to sell at the time it desires to do so without registration under the Securities Act, then at the option and upon the request of the Holder, the Partnership shall file with the Commission as promptly as practicable after receiving such request, and use all commercially reasonable efforts to cause to become effective and remain effective for a period of not less than six months following its effective date or such shorter period as shall terminate when all Partnership Interests covered by such registration statement have been sold, a registration statement under the Securities Act registering the offering and sale of the number of Partnership Interests specified by the Holder; provided, however, that the Partnership shall not be required to effect more than three registrations pursuant to this Section 7.11(a); and provided further, however, that if the General Partner determines that a postponement of the requested registration would be in the best interests of the Partnership and its Partners due to a pending transaction, investigation or other event, the filing of such registration statement or the effectiveness thereof may be deferred for up to six months, but not thereafter. In connection with any registration pursuant to the immediately preceding sentence, the Partnership shall (i) promptly prepare and file (A) such documents as may be necessary to register or qualify the securities subject to such registration under the securities laws of such states as the Holder shall reasonably request; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Partnership would become subject to general service of process or to taxation or qualification to do business as a foreign corporation or partnership doing business in such jurisdiction solely as a result of such registration, and (B) such documents as may be necessary to apply for listing or to list the Partnership Interests subject to such registration on such National Securities Exchange as the Holder shall reasonably request, and (ii) do any and all other acts and things that may be necessary or appropriate to enable the Holder to consummate a public sale of such Partnership Interests in such states. Except as set forth in Section 7.11(c), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder.

(b) If the Partnership shall at any time propose to file a registration statement under the Securities Act for an offering of Partnership Interests for cash (other than an offering relating solely to a benefit plan), the Partnership shall use all commercially reasonable efforts to include such number or amount of Partnership Interests held by any Holder in such registration statement as the Holder shall request; provided, that the Partnership is not required to make any effort or take any action to so include the Partnership Interests of the Holder once the registration statement becomes or is declared effective by the Commission, including any registration statement providing for the offering from time to time of Partnership Interests pursuant to Rule 415 of the Securities Act. If

 

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the proposed offering pursuant to this Section 7.11(b) shall be an underwritten offering, then, in the event that the managing underwriter or managing underwriters of such offering advise the Partnership and the Holder that in their opinion the inclusion of all or some of the Holder’s Partnership Interests would adversely and materially affect the timing or success of the offering, the Partnership shall include in such offering only that number or amount, if any, of Partnership Interests held by the Holder that, in the opinion of the managing underwriter or managing underwriters, will not so adversely and materially affect the offering. Except as set forth in Section 7.11(c), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder.

(c) If underwriters are engaged in connection with any registration referred to in this Section 7.11, the Partnership shall provide indemnification, representations, covenants, opinions and other assurance to the underwriters in form and substance reasonably satisfactory to such underwriters. Further, in addition to and not in limitation of the Partnership’s obligation under Section 7.6, the Partnership shall, to the fullest extent permitted by law, indemnify and hold harmless the Holder, its officers, directors and each Person who controls the Holder (within the meaning of the Securities Act) and any agent thereof (collectively, “Indemnified Persons”) from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnified Person may be involved, or is threatened to be involved, as a party or otherwise, under the Securities Act or otherwise (hereinafter referred to in this Section 7.11(c) as a “claim” and in the plural as “claims”) based upon, arising out of or resulting from any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any Partnership Interests were registered under the Securities Act or any state securities or Blue Sky laws, in any preliminary prospectus (if used prior to the effective date of such registration statement), or in any summary or final prospectus or issuer free writing prospectus or in any amendment or supplement thereto (if used during the period the Partnership is required to keep the registration statement current), or arising out of, based upon or resulting from the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading; provided, however, that the Partnership shall not be liable to any Indemnified Person to the extent that any such claim arises out of, is based upon or results from an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, such preliminary, summary or final prospectus or free writing prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Partnership by or on behalf of such Indemnified Person specifically for use in the preparation thereof.

(d) The provisions of Section 7.11(a) and Section 7.11(b) shall continue to be applicable with respect to the General Partner (and any of the General Partner’s Affiliates) after it ceases to be a general partner of the Partnership, during a period of two years subsequent to the effective date of such cessation and for so long thereafter as is required for the Holder to sell all of the Partnership Interests with respect to which it has requested during such two-year period inclusion in a registration statement otherwise filed or that a registration statement be filed; provided, however, that the Partnership shall not be required to file successive registration statements covering the same Partnership Interests for which registration was demanded during such two-year period. The provisions of Section 7.11(c) shall continue in effect thereafter.

(e) The rights to cause the Partnership to register Partnership Interests pursuant to this Section 7.11 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such Partnership Interests, provided (i) the Partnership is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the Partnership Interests with respect to which such registration rights are being assigned; and (ii) such transferee or assignee agrees in writing to be bound by and subject to the terms set forth in this Section 7.11.

(f) Any request to register Partnership Interests pursuant to this Section 7.11 shall (i) specify the Partnership Interests intended to be offered and sold by the Person making the request, (ii) express such Person’s present

 

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intent to offer such Partnership Interests for distribution, (iii) describe the nature or method of the proposed offer and sale of Partnership Interests, and (iv) contain the undertaking of such Person to provide all such information and materials and take all action as may be required in order to permit the Partnership to comply with all applicable requirements in connection with the registration of such Partnership Interests.

Section 7.12 Reliance by Third Parties. Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner and any officer of the General Partner authorized by the General Partner to act on behalf of and in the name of the Partnership has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any authorized contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner or any such officer as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives, to the fullest extent permitted by law, any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner or any such officer in connection with any such dealing. In no event shall any Person dealing with the General Partner or any such officer or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or any such officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

Section 7.13 Replacement of Fiduciary Duties. Notwithstanding any other provision of this Agreement, to the extent that, at law or in equity, the General Partner or any other Indemnitee would have duties (including fiduciary duties) to the Partnership, to another Partner, to any Person who acquires an interest in a Partnership Interest or to any other Person bound by this Agreement, all such duties (including fiduciary duties) are hereby eliminated, to the fullest extent permitted by law, and replaced with the duties or standards expressly set forth herein. The elimination of duties (including fiduciary duties) to the Partnership, each of the Partners, each other Person who acquires an interest in a Partnership Interest and each other Person bound by this Agreement and replacement thereof with the duties or standards expressly set forth herein are approved by the Partnership, each of the Partners, each other Person who acquires an interest in a Partnership Interest and each other Person bound by this Agreement.

ARTICLE VIII.

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 8.1 Records and Accounting. The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including all books and records necessary to provide to the Limited Partners any information required to be provided pursuant to Section 3.4(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including the record of the Record Holders of Units or other Partnership Interests, books of account and records of Partnership proceedings, may be kept on, or be in the form of, computer disks, hard drives, magnetic tape, photographs, micrographics or any other information storage device; provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with U.S. GAAP. The Partnership shall not be required to keep books maintained on a cash basis and the General Partner shall be permitted to calculate cash-based measures, including Operating Surplus and Adjusted Operating

 

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Surplus, by making such adjustments to its accrual basis books to account for non-cash items and other adjustments as the General Partner determines to be necessary or appropriate.

Section 8.2 Fiscal Year. The fiscal year of the Partnership shall be a fiscal year ending December 31.

Section 8.3 Reports.

(a) As soon as practicable, but in no event later than 105 days after the close of each fiscal year of the Partnership, the General Partner shall cause to be mailed or made available, by any reasonable means, to each Record Holder of a Unit or other Partnership Interest as of a date selected by the General Partner, an annual report containing financial statements of the Partnership for such fiscal year of the Partnership, presented in accordance with U.S. GAAP, including a balance sheet and statements of operations, Partnership equity and cash flows, such statements to be audited by a firm of independent public accountants selected by the General Partner, and such other information as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed or admitted to trading, or as the General Partner determines to be necessary or appropriate.

(b) As soon as practicable, but in no event later than 50 days after the close of each Quarter except the last Quarter of each fiscal year, the General Partner shall cause to be mailed or made available, by any reasonable means to each Record Holder of a Unit or other Partnership Interest, as of a date selected by the General Partner, a report containing unaudited financial statements of the Partnership and such other information as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed or admitted to trading, or as the General Partner determines to be necessary or appropriate.

(c) The General Partner shall be deemed to have made a report available to each Record Holder as required by this Section 8.3 if it has either (i) filed such report with the Commission via its Electronic Data Gathering, Analysis and Retrieval system and such report is publicly available on such system or (ii) made such report available on any publicly available website maintained by the Partnership.

ARTICLE IX.

TAX MATTERS

Section 9.1 Tax Returns and Information. The Partnership shall timely file all returns of the Partnership that are required for federal, state and local income tax purposes on the basis of the accrual method and the taxable period or year that it is required by law to adopt, from time to time, as determined by the General Partner. In the event the Partnership is required to use a taxable period other than a year ending on December 31, the General Partner shall use reasonable efforts to change the taxable period of the Partnership to a year ending on December 31. The tax information reasonably required by Record Holders for federal, state and local income tax reporting purposes with respect to a taxable period shall be furnished to them within 90 days of the close of the calendar year in which the Partnership’s taxable period ends. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for U.S. federal income tax purposes.

Section 9.2 Tax Elections.

(a) The Partnership shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder, subject to the reservation of the right to seek to revoke any such election upon the General Partner’s determination that such revocation is in the best interests of the Limited Partners. Notwithstanding any other provision herein contained, for the purposes of computing the adjustments under Section 743(b) of the Code, the General Partner shall be authorized (but not required) to adopt a convention whereby the price paid by a transferee of a Limited Partner Interest will be deemed to be the lowest quoted closing price of the Limited Partner Interests on any National Securities Exchange on which such Limited Partner

 

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Interests are listed or admitted to trading during the calendar month in which such transfer is deemed to occur pursuant to Section 6.2(f) without regard to the actual price paid by such transferee.

(b) Except as otherwise provided herein, the General Partner shall determine whether the Partnership should make any other elections permitted by the Code.

Section 9.3 Tax Controversies. Subject to the provisions hereof, the General Partner is designated as the “tax matters partner” (as defined in Section 6231(a)(7) of the Code) and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the tax matters partner and to do or refrain from doing any or all things reasonably required by the tax matters partner to conduct such proceedings.

Section 9.4 Withholding. Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that may be required to cause the Partnership and other Group Members to comply with any withholding requirements established under the Code or any other federal, state or local law including pursuant to Sections 1441, 1442, 1445 and 1446 of the Code, or established under foreign law. To the extent that the Partnership is required or elects to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner (including by reason of Section 1446 of the Code), the General Partner may treat the amount withheld as a distribution of cash pursuant to Section 6.3 or Section 12.4(c) in the amount of such withholding from such Partner.

ARTICLE X.

ADMISSION OF PARTNERS

Section 10.1 Admission of Limited Partners.

(a) A Person shall be admitted as a Limited Partner and shall become bound by the terms of this Agreement if such Person purchases or otherwise lawfully acquires any Limited Partner Interest and becomes the Record Holder of such Limited Partner Interests in accordance with the provisions of Article IV, Article V or Article XIV hereof. A Person may become a Record Holder of a Unit without the consent or approval of any of the Partners. A Person may not become a Limited Partner without acquiring a Limited Partner Interest and until reflected on the books and records of the Partnership as the Record Holder of such Limited Partner Interest. The rights and obligations of a Person who is an Ineligible Holder shall be determined in accordance with Section 4.9. Upon the issuance by the Partnership of Common Units, Subordinated Units and Incentive Distribution Rights to the General Partner and the Underwriters in connection with the Initial Offering, such parties will be automatically admitted to the Partnership as Initial Limited Partners in respect of the Common Units, Subordinated Units or Incentive Distribution Rights issued to them.

(b) The name and mailing address of each Record Holder shall be listed on the books and records of the Partnership maintained for such purpose by the Partnership or the Transfer Agent. The General Partner shall update the books and records of the Partnership from time to time as necessary to reflect accurately the information therein (or shall cause the Transfer Agent to do so, as applicable). A Limited Partner Interest may be represented by a Certificate, as provided in Section 4.1.

(c) Any transfer of a Limited Partner Interest shall not entitle the transferee to share in the profits and losses, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a Limited Partner pursuant to Section 10.1(b).

 

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Section 10.2 Admission of Successor General Partner. A successor General Partner approved pursuant to Section 11.1 or Section 11.2 or the transferee of or successor to all of the General Partner Interest pursuant to Section 4.6 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective immediately prior to the withdrawal or removal of the predecessor or transferring General Partner, pursuant to Section 11.1 or Section 11.2 or the transfer of the General Partner Interest pursuant to Section 4.6, provided, however, that no such successor shall be admitted to the Partnership until compliance with the terms of Section 4.6 has occurred and such successor has executed and delivered such other documents or instruments as may be required to effect such admission. Any such successor shall, subject to the terms hereof, carry on the business of the members of the Partnership Group without dissolution.

Section 10.3 Amendment of Agreement and Certificate of Limited Partnership. To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary or appropriate under the Delaware Act to amend the records of the Partnership to reflect such admission and, if necessary, to prepare as soon as practicable an amendment to this Agreement and, if required by law, the General Partner shall prepare and file an amendment to the Certificate of Limited Partnership.

ARTICLE XI.

WITHDRAWAL OR REMOVAL OF PARTNERS

Section 11.1 Withdrawal of the General Partner.

(a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal”);

(i) The General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners;

(ii) The General Partner transfers all of its General Partner Interest pursuant to Section 4.6;

(iii) The General Partner is removed pursuant to Section 11.2;

(iv) The General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition for relief under Chapter 7 of the United States Bankruptcy Code; (C) files a petition or answer seeking for itself a liquidation, dissolution or similar relief (but not a reorganization) under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment of a trustee (but not a debtor-in-possession), receiver or liquidator of the General Partner or of all or any substantial part of its properties;

(v) A final and non-appealable order of relief under Chapter 7 of the United States Bankruptcy Code is entered by a court with appropriate jurisdiction pursuant to a voluntary or involuntary petition by or against the General Partner; or

(vi) (A) if the General Partner is a corporation, a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation; (B) if the General Partner is a partnership or a limited liability company, the dissolution and commencement of winding up of the General Partner; (C) if the General Partner is acting in such capacity by virtue of being a trustee of a trust, the termination of the trust; (D) if the General Partner is a natural person, his death or adjudication of incompetency; and (E) otherwise upon the termination of the General Partner.

If an Event of Withdrawal specified in Section 11.1(a)(iv), Section 11(a)(v) or Section 11(a)(vi)(A), (B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 11.1 shall result in the withdrawal of the General Partner from the Partnership.

 

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(b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) at any time during the period beginning on the Closing Date and ending at 11:59 pm, prevailing Eastern Standard Time, on March 31, 2024, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners; provided, that prior to the effective date of such withdrawal, the withdrawal is approved by Unitholders holding at least a majority of the Outstanding Common Units (excluding Common Units held by the General Partner and its Affiliates) and the General Partner delivers to the Partnership an Opinion of Counsel (“Withdrawal Opinion of Counsel”) that such withdrawal (following the selection of the successor General Partner) would not result in the loss of the limited liability under the Delaware Act of any Limited Partner or cause any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already so treated or taxed); (ii) at any time after 11:59 pm, prevailing Eastern Standard Time, on March 31, 2024, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Unitholders, such withdrawal to take effect on the date specified in such notice; (iii) at any time that the General Partner ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time that the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners, such withdrawal to take effect on the date specified in the notice, if at the time such notice is given one Person and its Affiliates (other than the General Partner and its Affiliates) own beneficially or of record or control at least 50% of the Outstanding Units. The withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall also constitute the withdrawal of the General Partner as general partner or managing member, if any, to the extent applicable, of the other Group Members. If the General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i), a Unit Majority, may, prior to the effective date of such withdrawal, elect a successor General Partner. The Person so elected as successor General Partner shall automatically become the successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If, prior to the effective date of the General Partner’s withdrawal pursuant to Section 11.1(a)(i), a successor is not selected by the Unitholders as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance with Section 12.1 unless the business of the Partnership is continued pursuant to Section 12.2. Any successor General Partner elected in accordance with the terms of this Section 11.1 shall be subject to the provisions of Section 10.2.

Section 11.2 Removal of the General Partner. The General Partner may be removed if such removal is approved by the Unitholders holding at least 66 2/3% of the Outstanding Units (including Units held by the General Partner and its Affiliates) voting as a single class. Any such action by such holders for removal of the General Partner must also provide for the election of a successor General Partner by the Unitholders holding a majority of the Outstanding Common Units, voting as a class, and a majority of the Outstanding Subordinated Units, voting as a class (including, in each case, Units held by the General Partner and its Affiliates). Such removal shall be effective immediately following the admission of a successor General Partner pursuant to Section 10.2. The removal of the General Partner shall also automatically constitute the removal of the General Partner as general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If a Person is elected as a successor General Partner in accordance with the terms of this Section 11.2, such Person shall, upon admission pursuant to Section 10.2, automatically become a successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. The right of the holders of Outstanding Units to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion opining as to the matters covered by a Withdrawal Opinion of Counsel. Any successor General Partner elected in accordance with the terms of this Section 11.2 shall be subject to the provisions of Section 10.2.

 

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Section 11.3 Interest of Departing General Partner and Successor General Partner.

(a) In the event of (i) withdrawal of the General Partner under circumstances where such withdrawal does not violate this Agreement or (ii) removal of the General Partner by the holders of Outstanding Units under circumstances where Cause does not exist, if the successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2, the Departing General Partner shall have the option, exercisable prior to the effective date of the withdrawal or removal of such Departing General Partner, to require its successor to purchase its General Partner Interest and its or its Affiliates’ general partner interest (or equivalent interest), if any, in the other Group Members and all of its or its Affiliates’ Incentive Distribution Rights (collectively, the “Combined Interest”) in exchange for an amount in cash equal to the fair market value of such Combined Interest, such amount to be determined and payable as of the effective date of its withdrawal or removal. If the General Partner is removed by the Unitholders under circumstances where Cause exists or if the General Partner withdraws under circumstances where such withdrawal violates this Agreement, and if a successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner), such successor shall have the option, exercisable prior to the effective date of the withdrawal or removal of such Departing General Partner (or, in the event the business of the Partnership is continued, prior to the date the business of the Partnership is continued), to purchase the Combined Interest for such fair market value of such Combined Interest. In either event, the Departing General Partner shall be entitled to receive all reimbursements due such Departing General Partner pursuant to Section 7.4, including any employee-related liabilities (including severance liabilities), incurred in connection with the termination of any employees employed by the Departing General Partner or its Affiliates (other than any Group Member) for the benefit of the Partnership or the other Group Members.

For purposes of this Section 11.3(a), the fair market value of the Combined Interest shall be determined by agreement between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing General Partner’s withdrawal or removal, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts, and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such withdrawal or removal, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which third independent investment banking firm or other independent expert shall determine the fair market value of the Combined Interest. In making its determination, such third independent investment banking firm or other independent expert may consider the value of the Units, including the then current trading price of Units on any National Securities Exchange on which Units are then listed or admitted to trading, the value of the Partnership’s assets, the rights and obligations of the Departing General Partner, the value of the Incentive Distribution Rights and the General Partner Interest and other factors it may deem relevant.

(b) If the Combined Interest is not purchased in the manner set forth in Section 11.3(a), the Departing General Partner (and its Affiliates, if applicable) shall become a Limited Partner and the Combined Interest shall be converted into Common Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 11.3(a), without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of its successor). Any successor General Partner shall indemnify the Departing General Partner as to all debts and liabilities of the Partnership arising on or after the date on which the Departing General Partner becomes a Limited Partner. For purposes of this Agreement, conversion of the Combined Interest to Common Units will be characterized as if the Departing General Partner (and its Affiliates, if applicable) contributed the Combined Interest to the Partnership in exchange for the newly issued Common Units.

 

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(c) If a successor General Partner is elected in accordance with the terms of Section 11.1 or Section 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner) and the option described in Section 11.3(a) is not exercised by the party entitled to do so, the successor General Partner shall, at the effective date of its admission to the Partnership, contribute to the Partnership cash in the amount equal to the product of (x) the quotient obtained by dividing (A) the Percentage Interest of the General Partner Interest of the Departing General Partner by (B) a percentage equal to 100% less the Percentage Interest of the General Partner Interest of the Departing General Partner and (y) the Net Agreed Value of the Partnership’s assets on such date. In such event, such successor General Partner shall, subject to the following sentence, be entitled to its Percentage Interest of all Partnership allocations and distributions to which the Departing General Partner was entitled. In addition, the successor General Partner shall cause this Agreement to be amended to reflect that, from and after the date of such successor General Partner’s admission, the successor General Partner’s interest in all Partnership distributions and allocations shall be its Percentage Interest.

Section 11.4 Termination of Subordination Period, Conversion of Subordinated Units and Extinguishment of Cumulative Common Unit Arrearages. Notwithstanding any provision of this Agreement, if the General Partner is removed as general partner of the Partnership under circumstances where Cause does not exist and Units held by the General Partner and its Affiliates are not voted in favor of such removal:

(a) the Subordinated Units held by any Person will immediately and automatically convert into Common Units on a one-for-one basis, provided (i) neither such Person nor any of its Affiliates voted any of its Units in favor of the removal and (ii) such Person is not an Affiliate of the successor General Partner; and

(b) if all of the Subordinated Units convert into Common Units pursuant to Section 11.4(a), (i) all Cumulative Common Unit Arrearages on the Common Units will be extinguished and the Subordination Period will end and (ii) the 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 therefor in accordance with Section 11.3;

provided, however, that any such converted Subordinated Units shall remain subject to the provisions of Section 5.5(c)(ii), Section 6.1(d)(x), Section 6.7(b) and Section 6.7(c).

Section 11.5 Withdrawal of Limited Partners. No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Limited Partner Interest becomes a Record Holder of the Limited Partner Interest so transferred, such transferring Limited Partner shall cease to be a Limited Partner with respect to the Limited Partner Interest so transferred.

ARTICLE XII.

DISSOLUTION AND LIQUIDATION

Section 12.1 Dissolution. The Partnership shall not be dissolved by the admission of additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner, if a successor General Partner is elected pursuant to Sections 11.1, 11.2 or 12.2, the Partnership shall not be dissolved and such successor General Partner is hereby authorized to, and shall, continue the business of the Partnership. Subject to Section 12.2, the Partnership shall dissolve, and its affairs shall be wound up, upon:

(a) an Event of Withdrawal of the General Partner as provided in Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and such successor is admitted to the Partnership pursuant to this Agreement;

(b) an election to dissolve the Partnership by the General Partner that is approved by a Unit Majority;

 

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(c) the entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Delaware Act; or

(d) at any time there are no Limited Partners, unless the Partnership is continued without dissolution in accordance with the Delaware Act.

Section 12.2 Continuation of the Business of the Partnership After Dissolution. Upon (a) an Event of Withdrawal caused by the withdrawal or removal of the General Partner as provided in Section 11.1(a)(i) or (iii) and the failure of the Unitholders to select a successor to such Departing General Partner pursuant to Section 11.1 or Section 11.2, then within 90 days thereafter, or (b) an event constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or (vi), then, to the maximum extent permitted by law, within 180 days thereafter, a Unit Majority may elect to continue the business of the Partnership on the same terms and conditions set forth in this Agreement by appointing as a successor General Partner a Person approved by a Unit Majority. Unless such an election is made within the applicable time period as set forth above, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is so made, then:

(i) the Partnership shall continue without dissolution unless earlier dissolved in accordance with this Article XII;

(ii) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be treated in the manner provided in Section 11.3; and

(iii) the successor General Partner shall be admitted to the Partnership as General Partner, effective as of the Event of Withdrawal, by agreeing in writing to be bound by this Agreement; provided, that the right of a Unit Majority to approve a successor General Partner and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability under the Delaware Act of any Limited Partner and (y) neither the Partnership nor any Group Member would be treated as an association taxable as a corporation or otherwise be taxable as an entity for U.S. federal income tax purposes upon the exercise of such right to continue (to the extent not already so treated or taxed).

Section 12.3 Liquidator. Upon dissolution of the Partnership, unless the business of the Partnership is continued pursuant to Section 12.2, the General Partner (or in the event of a dissolution pursuant to Section 12.1(a), a Unit Majority) shall select one or more Persons to act as Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by holders of at least a majority of the Outstanding Common Units and Subordinated Units, voting as a single class. The Liquidator (if other than the General Partner) shall agree not to resign at any time without 15 days’ prior notice and may be removed at any time, with or without cause, by notice of removal approved by holders of at least a majority of the Outstanding Common Units and Subordinated Units, voting as a single class. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by holders of at least a majority of the Outstanding Common Units and Subordinated Units, voting as a single class. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XII, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 7.3) necessary or appropriate to carry out the duties and functions of the Liquidator hereunder for and during the period of time required to complete the winding up and liquidation of the Partnership as provided for herein.

Section 12.4 Liquidation. The Liquidator shall proceed to dispose of the assets of the Partnership, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as determined by the Liquidator, subject to Section 17-804 of the Delaware Act and the following:

 

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(a) The assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidator and such Partner or Partners may agree. If any property is distributed in kind, the Partner receiving the property shall be deemed for purposes of Section 12.4(c) to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners. The Liquidator may defer liquidation or distribution of the Partnership’s assets for a reasonable time if it determines that an immediate sale or distribution of all or some of the Partnership’s assets would be impractical or would cause undue loss to the Partners. The Liquidator may distribute the Partnership’s assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners.

(b) Liabilities of the Partnership include amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 12.3) and amounts to Partners otherwise than in respect of their distribution rights under Article VI. With respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment. When paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds.

(c) All property and all cash in excess of that required to satisfy liabilities as provided in Section 12.4(b) shall be distributed to the Partners in accordance with, and to the extent of, the positive balances in their respective Capital Accounts, as determined after taking into account all Capital Account adjustments (other than those made by reason of distributions pursuant to this Section 12.4(c)) for the taxable period of the Partnership during which the liquidation of the Partnership occurs (with such date of occurrence being determined pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such taxable period (or, if later, within 90 days after said date of such occurrence).

Section 12.5 Cancellation of Certificate of Limited Partnership. Upon the completion of the distribution of Partnership cash and property as provided in Section 12.4 in connection with the liquidation of the Partnership, the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

Section 12.6 Return of Contributions. The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners or Unitholders, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets.

Section 12.7 Waiver of Partition. To the maximum extent permitted by law, each Partner hereby waives any right to partition of the Partnership property.

Section 12.8 Capital Account Restoration. No Limited Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership. The General Partner shall be obligated to restore any negative balance in its Capital Account upon liquidation of its interest in the Partnership by the end of the taxable period of the Partnership during which such liquidation occurs, or, if later, within 90 days after the date of such liquidation.

 

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ARTICLE XIII.

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

Section 13.1 Amendments to be Adopted Solely by the General Partner. Each Partner agrees that the General Partner, without the approval of any Partner, may amend any provision of this Agreement and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:

(a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership;

(b) admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;

(c) a change that the General Partner determines to be necessary or appropriate to qualify or continue the qualification of the Partnership 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 the Group Members will not be treated as associations taxable as corporations or otherwise taxed as entities for U.S. federal income tax purposes;

(d) a change that the General Partner determines (i) does not adversely affect the Limited Partners considered as a whole (or any particular class of Partnership Interests as compared to other classes of Partnership Interests) in any material respect (except as permitted by subsection (g) of this Section 13.1), (ii) to be necessary or appropriate to (A) 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 (including the Delaware Act) or (B) facilitate the trading of the Units (including the division of any class or classes of Outstanding Units into different classes to facilitate uniformity of tax consequences within such classes of Units) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are or will be listed or admitted to trading, (iii) to be necessary or appropriate in connection with action taken by the General Partner pursuant to Section 5.9 or (iv) is required to effect the intent expressed in the Registration Statement or the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement;

(e) a change in the fiscal year or taxable period of the Partnership and any other changes that the General Partner determines to be necessary or appropriate as a result of a change in the fiscal year or taxable period of the Partnership including, if the General Partner shall so determine, a change in the definition of “Quarter” and the dates on which distributions are to be made by the Partnership;

(f) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership, or the General Partner or its directors, officers, trustees or agents from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, regardless of whether such are substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor;

(g) an amendment that sets forth the designations, preferences, rights, powers and duties of, or that the General Partner determines to be otherwise necessary or appropriate in connection with the creation, authorization or issuance of, any class or series of Partnership Interests and options, rights, warrants and appreciation rights relating to the Partnership Interests pursuant to Section 5.6;

(h) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;

(i) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 14.3;

 

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(j) an amendment that the General Partner determines to be necessary or appropriate to reflect and account for the formation by the Partnership of, or investment by the Partnership in, any corporation, partnership, joint venture, limited liability company or other entity, in connection with the conduct by the Partnership of activities permitted by the terms of Section 2.4 or Section 7.1(a);

(k) any amendment, modification or other change to this Agreement that the General Partner believes, in its sole discretion, is necessary or advisable to effect the Initial Offering on terms and subject to conditions most favorable to the Partnership;

(l) a merger, conveyance or conversion pursuant to Section 14.3(d); or

(m) any other amendments substantially similar to the foregoing.

Section 13.2 Amendment Procedures. Amendments to this Agreement may be proposed only by the General Partner. To the fullest extent permitted by law, the General Partner shall have no duty or obligation to propose or approve any amendment to this Agreement and may decline to do so in its sole discretion free of any duty or obligation whatsoever to the Partnership, any Limited Partner or any other Person with an interest in a Partnership Interest or otherwise bound by this Agreement, and, in declining to propose or approve an amendment, to the fullest extent permitted by law shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any Group Member Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. An amendment shall be effective upon its approval by the General Partner and, except as otherwise provided by Section 13.1 or Section 13.3, a Unit Majority, unless a greater or different percentage is required under this Agreement or by Delaware law. Each proposed amendment that requires the approval of the holders of a specified percentage of Outstanding Units shall be set forth in a writing that contains the text of the proposed amendment. If such an amendment is proposed, the General Partner shall seek the written approval of the requisite percentage of Outstanding Units or call a meeting of the Unitholders to consider and vote on such proposed amendment. The General Partner shall notify all Record Holders upon final adoption of any amendments. The General Partner shall be deemed to have notified all Record Holders as required by this Section 13.2 if it has either (i) filed such amendment with the Commission via its Electronic Data Gathering, Analysis and Retrieval system and such amendment is publicly available on such system or (ii) made such amendment available on any publicly available website maintained by the Partnership

Section 13.3 Amendment Requirements.

(a) Notwithstanding the provisions of Section 13.1 and Section 13.2, no provision of this Agreement (other than Section 11.2 or Section 13.4) that establishes a percentage of Outstanding Units (including Units deemed owned by the General Partner) or requires a vote or approval of Partners (or a subset of Partners) holding a specified Percentage Interest required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such percentage, unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding Units whose aggregate Outstanding Units constitute not less than the voting requirement sought to be reduced or the affirmative vote of Partners whose aggregate Percentage Interests constitute not less than the voting requirement sought to be reduced, as applicable.

(b) Notwithstanding the provisions of Section 13.1 and Section 13.2, no amendment to this Agreement may (i) enlarge the obligations of (including requiring any holder of a class of Partnership Interests to make additional Capital Contributions to the Partnership) any Limited Partner without its consent, unless such shall be deemed to have occurred as a result of an amendment approved pursuant to Section 13.3(c), or (ii) enlarge the obligations of, restrict, change or modify in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable to, the General Partner or any of its Affiliates without the General Partner’s consent, which consent may be given or withheld at its option.

 

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(c) Except as provided in Section 14.3 or Section 13.1, any amendment that would have a material adverse effect on the rights or preferences of any class of Partnership Interests in relation to other classes of Partnership Interests must be approved by the holders of not less than a majority of the Outstanding Partnership Interests of the class affected. If the General Partner determines an amendment does not satisfy the requirements of Section 13.1(d)(i) because it adversely affects one or more classes of Partnership Interests, as compared to other classes of Partnership Interests, in any material respect, such amendment shall only be required to be approved by the adversely affected class or classes.

(d) Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 13.1 and except as otherwise provided by Section 14.3(b) and Section 14.3(f), no amendments shall become effective without the approval of the holders of at least 90% of the Percentage Interests of all Limited Partners voting as a single class unless the Partnership obtains an Opinion of Counsel to the effect that such amendment will not affect the limited liability of any Limited Partner under applicable partnership law of the state under whose laws the Partnership is organized.

(e) Except as provided in Section 13.1, this Section 13.3 shall only be amended with the approval of Partners (including the General Partner and its Affiliates) holding at least 90% of the Percentage Interests of all Limited Partners.

Section 13.4 Special Meetings. All acts of Limited Partners to be taken pursuant to this Agreement shall be taken in the manner provided in this Article XIII. Special meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning 20% or more of the Outstanding Units of the class or classes for which a meeting is proposed. Limited Partners shall call a special meeting by delivering to the General Partner one or more requests in writing stating that the signing Limited Partners wish to call a special meeting and indicating the general or specific purposes for which the special meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Transfer Agent. A meeting shall be held at a time and place determined by the General Partner on a date not less than 10 days nor more than 60 days after the time notice of the meeting is given as provided in Section 16.1. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business.

Section 13.5 Notice of a Meeting. Notice of a meeting called pursuant to Section 13.4 shall be given to the Record Holders of the class or classes of Units for which a meeting is proposed in writing by mail or other means of written communication in accordance with Section 16.1. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication.

Section 13.6 Record Date. For purposes of determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners or to give approvals without a meeting as provided in Section 13.11 the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading or U.S. federal securities laws, in which case the rule, regulation, guideline or requirement of such National Securities Exchange or U.S. federal securities laws shall govern) or (b) in the event that approvals are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to give such approvals. If the General Partner does not set a Record Date, then (a) the Record Date for determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners shall be the close of business on the day next preceding the day on which notice is given, and (b) the Record Date for determining the Limited Partners entitled to give approvals

 

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without a meeting shall be the date the first written approval is deposited with the Partnership in care of the General Partner in accordance with Section 13.11.

Section 13.7 Adjournment. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article XIII.

Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes. The transaction of business at any meeting of Limited Partners, however called and noticed, and whenever held, shall be as valid as if it had occurred at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to disapprove the consideration of matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting.

Section 13.9 Quorum and Voting. The holders of a majority, by Percentage Interest, of Partnership Interests of the class or classes for which a meeting has been called (including Partnership Interests deemed owned by the General Partner) represented in person or by proxy shall constitute a quorum at a meeting of Partners of such class or classes unless any such action by the Partners requires approval by holders of a greater Percentage Interest, in which case the quorum shall be such greater Percentage Interest. At any meeting of the Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Partners holding Partnership Interests that, in the aggregate, represent a majority of the Percentage Interest of those present in person or by proxy at such meeting shall be deemed to constitute the act of all Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Partners holding Partnership Interests that in the aggregate represent at least such greater or different percentage shall be required; provided, however, that if, as a matter of law or amendment to this Agreement, approval by plurality vote of Partners (or any class thereof) is required to approve any action, no minimum quorum shall be required. The Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by Partners holding the required Percentage Interest specified in this Agreement. In the absence of a quorum any meeting of Partners may be adjourned from time to time by the affirmative vote of Partners with at least a majority, by Percentage Interest, of the Partnership Interests entitled to vote at such meeting (including Partnership Interests deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 13.7.

Section 13.10 Conduct of a Meeting. The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 13.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of approvals in writing.

 

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Section 13.11 Action Without a Meeting. If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting, without a vote and without prior notice, if an approval in writing setting forth the action so taken is signed by Limited Partners owning not less than the minimum percentage, by Percentage Interest, of the Partnership Interests of the class or classes for which a meeting has been called (including Partnership Interests deemed owned by the General Partner), as the case may be, that would be necessary to authorize or take such action at a meeting at which all the Limited Partners entitled to vote at such meeting were present and voted (unless such provision conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Units are listed or admitted to trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern). Prompt notice of the taking of action without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot, if any, submitted to Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units held by the Limited Partners, the Partnership shall be deemed to have failed to receive a ballot for the Units that were not voted. If approval of the taking of any action by the Limited Partners is solicited by any Person other than by or on behalf of the General Partner, the written approvals shall have no force and effect unless and until (a) they are deposited with the Partnership in care of the General Partner and (b) an Opinion of Counsel is delivered to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (i) will not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability, and (ii) is otherwise permissible under the state statutes then governing the rights, duties and liabilities of the Partnership and the Partners. Nothing contained in this Section 13.11 shall be deemed to require the General Partner to solicit all Limited Partners in connection with a matter approved by the holders of the requisite percentage of Units acting by written consent without a meeting.

Section 13.12 Right to Vote and Related Matters.

(a) Only those Record Holders of the Outstanding Units on the Record Date set pursuant to Section 13.6 shall be entitled to notice of, and to vote at, a meeting of Limited Partners or to act with respect to matters as to which the holders of the Outstanding Units have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Outstanding Units shall be deemed to be references to the votes or acts of the Record Holders of such Outstanding Units.

(b) With respect to Units that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Units are registered, such other Person shall, in exercising the voting rights in respect of such Units on any matter, and unless the arrangement between such Persons provides otherwise, vote such Units in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 13.12(b) (as well as all other provisions of this Agreement) are subject to the provisions of Section 4.3.

Section 13.13 Voting of Incentive Distribution Rights.

(a) For so long as a majority of the Incentive Distribution Rights are held by the General Partner and its Affiliates, the holders of the Incentive Distribution Rights shall not be entitled to vote such Incentive Distribution Rights on any Partnership matter except as may otherwise be required by law and the holders of the Incentive Distribution Rights, in their capacity as such, shall be deemed to have approved any matter approved by the General Partner.

(b) If less than a majority of the Incentive Distribution Rights are held by the General Partner and its Affiliates, the Incentive Distribution Rights will be entitled to vote on all matters submitted to a vote of Unitholders, other than amendments and other matters that the General Partner determines do not adversely

 

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affect the holders of the Incentive Distribution Rights as a whole in any material respect. On any matter in which the holders of Incentive Distribution Rights are entitled to vote, such holders will vote together with the Subordinated Units, prior to the end of the Subordination Period, or together with the Common Units, thereafter, in either case as a single class except as otherwise required by Section 13.3(c), and such Incentive Distribution Rights shall be treated in all respects as Subordinated Units or Common Units, as applicable, when sending notices of a meeting of Limited Partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under this Agreement. The relative voting power of the Incentive Distribution Rights and the Subordinated Units or Common Units, as applicable, will be set in the same proportion as cumulative cash distributions, if any, in respect of the Incentive Distribution Rights for the four consecutive Quarters prior to the record date for the vote bears to the cumulative cash distributions in respect of such class of Units for such four Quarters.

(c) In connection with any equity financing, or anticipated equity financing, by the Partnership of an Expansion Capital Expenditure, the General Partner may, without the approval of the holders of the Incentive Distribution Rights, temporarily or permanently reduce the amount of Incentive Distributions that would otherwise be distributed to such holders, provided that in the judgment of the General Partner, such reduction will be in the long-term best interest of such holders.

ARTICLE XIV.

MERGER OR CONSOLIDATION

Section 14.1 Authority. The Partnership may merge or consolidate with or into one or more corporations, limited liability companies, statutory trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including a partnership (whether general or limited (including a limited liability partnership)) or convert into any such entity, whether such entity is formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written plan of merger or consolidation (“Merger Agreement”) or a written plan of conversion (“Plan of Conversion”) in accordance with this Article XIV.

Section 14.2 Procedure for Merger, Consolidation or Conversion.

(a) Merger, consolidation or conversion of the Partnership pursuant to this Article XIV requires the prior consent of the General Partner, provided, however, that, to the fullest extent permitted by law, the General Partner shall have no duty or obligation to consent to any merger, consolidation or conversion of the Partnership and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to consent to a merger, consolidation or conversion, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

(b) If the General Partner shall determine to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth:

(i) the name and jurisdiction of formation or organization of each of the business entities proposing to merge or consolidate;

(ii) the name and jurisdiction of formation or organization of the business entity that is to survive the proposed merger or consolidation (the “Surviving Business Entity”);

(iii) the terms and conditions of the proposed merger or consolidation;

(iv) the manner and basis of exchanging or converting the equity interests of each constituent business entity for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity; and (i) if any interests, securities or rights of any constituent business entity are not to be exchanged

 

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or converted solely for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity, then the cash, property or interests, rights, securities or obligations of any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity) which the holders of such interests, securities or rights are to receive in exchange for, or upon conversion of their interests, securities or rights, and (ii) in the case of equity interests represented by certificates, upon the surrender of such certificates, which cash, property or interests, rights, securities or obligations of the Surviving Business Entity or any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered;

(v) a statement of any changes in the constituent documents or the adoption of new constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership, certificate of formation or limited liability company agreement or other similar charter or governing document) of the Surviving Business Entity to be effected by such merger or consolidation;

(vi) the effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 14.4 or a later date specified in or determinable in accordance with the Merger Agreement (provided, that if the effective time of the merger is to be later than the date of the filing of such certificate of merger, the effective time shall be fixed at a date or time certain and stated in the certificate of merger); and

(vii) such other provisions with respect to the proposed merger or consolidation that the General Partner determines to be necessary or appropriate.

(c) If the General Partner shall determine to consent to the conversion, the General Partner shall approve the Plan of Conversion, which shall set forth:

(i) the name of the converting entity and the converted entity;

(ii) a statement that the Partnership is continuing its existence in the organizational form of the converted entity;

(iii) a statement as to the type of entity that the converted entity is to be and the state or country under the laws of which the converted entity is to be incorporated, formed or organized;

(iv) the manner and basis of exchanging or converting the equity interests of each constituent business entity for, or into, cash, property or interests, rights, securities or obligations of the converted entity;

(v) in an attachment or exhibit, the certificate of limited partnership of the Partnership;

(vi) in an attachment or exhibit, the certificate of limited partnership, articles of incorporation or other organizational documents of the converted entity;

(vii) the effective time of the conversion, which may be the date of the filing of the certificate of conversion or a later date specified in or determinable in accordance with the Plan of Conversion (provided, that if the effective time of the conversion is to be later than the date of the filing of such certificate of conversion, the effective time shall be fixed at a date or time certain at or prior to the time of the filing of such certificate of conversion and stated therein); and

(viii) such other provisions with respect to the proposed conversion that the General Partner determines to be necessary or appropriate.

Section 14.3 Approval by Limited Partners.

(a) Except as provided in Section 14.3(d), the General Partner, upon its approval of the Merger Agreement shall direct that the Merger Agreement and the merger, consolidation or conversion contemplated thereby, as applicable, be submitted to a vote of Limited Partners, whether at a special meeting or by written consent, in

 

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either case in accordance with the requirements of Article XIII. A copy or a summary of the Merger Agreement, as the case may be, shall be included in or enclosed with the notice of a special meeting or the written consent.

(b) Except as provided in Sections 14.3(d) and 14.3(e), the Merger Agreement shall be approved upon receiving the affirmative vote or consent of the holders of a Unit Majority unless the Merger Agreement contains any provision that, if contained in an amendment to this Agreement, the provisions of this Agreement or the Delaware Act would require for its approval the vote or consent of a greater percentage of the Outstanding Units or of any class of Limited Partners, in which case such greater percentage vote or consent shall be required for approval of the Merger Agreement.

(c) Except as provided in Sections 14.3(d) and 14.3(e), after such approval by vote or consent of the Limited Partners, and at any time prior to the filing of the certificate of merger, consolidation or conversion pursuant to Section 14.4, the merger, consolidation or conversion may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement.

(d) Notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to convert the Partnership or any Group Member into a new limited liability entity, to merge the Partnership or any Group Member into, or convey all of the Partnership’s assets to, another limited liability entity that shall be newly formed and shall have no assets, liabilities or operations at the time of such merger or conveyance other than those it receives from the Partnership or other Group Member if (i) the General Partner has received an Opinion of Counsel that the conversion, merger or conveyance, as the case may be, would not result in the loss of limited liability under the laws of the jurisdiction governing the other entity (if that jurisdiction is not Delaware) of any Limited Partner as compared to the limited liability under the Delaware Act of any Limited Partner or cause the Partnership or any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already treated as such), (ii) the sole purpose of such conversion, merger, or conveyance is to effect a mere change in the legal form of the Partnership into another limited liability entity and (iii) the governing instruments of the new entity provide the Limited Partners and the General Partner with substantially the same rights and obligations as are herein contained.

(e) Additionally, notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to merge or consolidate the Partnership with or into another entity if (A) the General Partner has received an Opinion of Counsel that the merger or consolidation, as the case may be, would not result in the loss of limited liability under the laws of the jurisdiction governing the other entity (if that jurisdiction is not Delaware) of any Limited Partner as compared to the limited liability under the Delaware Act of any Limited Partner or cause the Partnership or any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already treated as such), (B) the merger or consolidation would not result in an amendment to this Agreement, other than any amendments that could be adopted pursuant to Section 13.1, (C) the Partnership is the Surviving Business Entity in such merger or consolidation, (D) each Partnership Interest outstanding immediately prior to the effective date of the merger or consolidation is to be an identical Partnership Interest of the Partnership after the effective date of the merger or consolidation, and (E) the number of Partnership Interests to be issued by the Partnership in such merger or consolidation does not exceed 20% of the Partnership Interests (other than Incentive Distribution Rights) Outstanding immediately prior to the effective date of such merger or consolidation.

(f) Pursuant to Section 17-211(g) of the Delaware Act, an agreement of merger or consolidation approved in accordance with this Article XIV may (a) effect any amendment to this Agreement or (b) effect the adoption of a new partnership agreement for the Partnership if it is the Surviving Business Entity. Any such amendment or adoption made pursuant to this Section 14.3 shall be effective at the effective time or date of the merger or consolidation.

 

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Section 14.4 Certificate of Merger. Upon the required approval by the General Partner and the Unitholders of a Merger Agreement, a certificate of merger, consolidation or conversion shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act.

Section 14.5 Effect of Merger or Consolidation or Conversion.

(a) At the effective time of the certificate of merger or consolidation:

(i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities, shall be vested in the Surviving Business Entity and after the merger or consolidation shall be the property of the Surviving Business Entity to the extent they were of each constituent business entity;

(ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and is not in any way impaired because of the merger or consolidation;

(iii) all rights of creditors and all liens on or security interests in property of any of those constituent business entities shall be preserved unimpaired; and

(iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it.

(b) At the effective time of the conversion:

(i) the Partnership shall continue to exist, without interruption, but in the organizational form of the converted entity rather than in its prior organizational form;

(ii) all rights, title, and interests to all real estate and other property owned by the Partnership shall continue to be owned by the converted entity in its new organizational form without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing liens or other encumbrances thereon;

(iii) all liabilities and obligations of the Partnership shall continue to be liabilities and obligations of the converted entity in its new organizational form without impairment or diminution by reason of the conversion;

(iv) all rights of creditors or other parties with respect to or against the prior interest holders or other owners of the Partnership in their capacities as such in existence as of the effective time of the conversion will continue in existence as to those liabilities and obligations and may be pursued by such creditors and obligees as if the conversion did not occur;

(v) a proceeding pending by or against the Partnership or by or against any of the Partners in their capacities as such may be continued by or against the converted entity in its new organizational form and by or against the prior Partners without any need for substitution of parties; and

(vi) the Partnership Interests that are to be converted into partnership interests, shares, evidences of ownership or other securities in the converted entity as provided in the Plan of Conversion shall be so converted, and Partners shall be entitled only to the rights provided in the Plan of Conversion.

 

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ARTICLE XV.

RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS

Section 15.1 Right to Acquire Limited Partner Interests.

(a) Notwithstanding any other provision of this Agreement, if at any time Ultimate Parent and its controlled Affiliates hold more than 80% of the total Limited Partner Interests of any class then Outstanding, Ultimate Parent shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any controlled Affiliate of Ultimate Parent, exercisable in its sole discretion, to purchase all, but not less than all, of such Limited Partner Interests of such class then Outstanding held by Persons other than Ultimate Parent and its controlled Affiliates, at the greater of (x) the Current Market Price as of the date three days prior to the date that the notice described in Section 15.1(b) is mailed and (y) the highest price paid by Ultimate Parent or any of its controlled Affiliates for any such Limited Partner Interest of such class purchased during the 90-day period preceding the date that the notice described in Section 15.1(b) is mailed.

(b) If Ultimate Parent or any controlled Affiliate of Ultimate Parent elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the “Notice of Election to Purchase”) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published for a period of at least three consecutive days in at least two daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York. The Notice of Election to Purchase shall specify the Purchase Date and the price (determined in accordance with Section 15.1(a)) at which Limited Partner Interests will be purchased and state that Ultimate Parent or its controlled Affiliate, as the case may be, elects to purchase such Limited Partner Interests, upon surrender of Certificates representing such Limited Partner Interests in the case of Limited Partner Interests evidenced by Certificates, in exchange for payment, at such office or offices of the Transfer Agent as the Transfer Agent may specify, or as may be required by any National Securities Exchange on which such Limited Partner Interests are listed or admitted to trading. Any such Notice of Election to Purchase mailed to a Record Holder of Limited Partner Interests at his address as reflected in the records of the Transfer Agent shall be conclusively presumed to have been given regardless of whether the owner receives such notice. On or prior to the Purchase Date, Ultimate Parent or its controlled Affiliate, as the case may be, shall deposit with the Transfer Agent cash in an amount sufficient to pay the aggregate purchase price of all of such Limited Partner Interests to be purchased in accordance with this Section 15.1. If the Notice of Election to Purchase shall have been duly given as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to the Purchase Date the deposit described in the preceding sentence has been made for the benefit of the holders of Limited Partner Interests subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Certificate shall not have been surrendered for purchase, all rights of the holders of such Limited Partner Interests shall thereupon cease, except the right to receive the purchase price (determined in accordance with Section 15.1(a)) for Limited Partner Interests therefor, without interest, upon surrender to the Transfer Agent of the Certificates representing such Limited Partner Interests in the case of Limited Partner Interests evidenced by Certificates, and such Limited Partner Interests shall thereupon be deemed to be transferred to Ultimate Parent or its controlled Affiliate, as the case may be, on the record books of the Transfer Agent and Ultimate Parent or its controlled Affiliate, as the case may be, shall be deemed to be the owner of all such Limited Partner Interests from and after the Purchase Date and shall have all rights as the owner of such Limited Partner Interests.

(c) In the case of Limited Partner Interests evidenced by Certificates, at any time from and after the Purchase Date, a holder of an Outstanding Limited Partner Interest subject to purchase as provided in this Section 15.1 may surrender his Certificate evidencing such Limited Partner Interest to the Transfer Agent in exchange for payment of the amount described in Section 15.1(a), therefor, without interest thereon.

 

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ARTICLE XVI.

GENERAL PROVISIONS

Section 16.1 Addresses and Notices; Written Communications.

(a) Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Partner under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner at the address described below or any method approved by the National Listing Exchange on which the Partnership Interests are listed. Any notice, payment or report to be given or made to a Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Partnership Interests at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Partnership Interests by reason of any assignment or otherwise. Notwithstanding the foregoing, if (i) a Partner shall consent to receiving notices, demands, requests, reports or proxy materials via electronic mail or by the Internet or (ii) the rules of the Commission shall permit any report or proxy materials to be delivered electronically or made available via the Internet, any such notice, demand, request, report or proxy materials shall be deemed given or made when delivered or made available via such mode of delivery. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 16.1 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, payment or report. If any notice, payment or report given or made in accordance with the provisions of this Section 16.1 is returned marked to indicate that such notice, payment or report was unable to be delivered, such notice, payment or report and, in the case of notices, payments or reports returned by the United States Postal Service (or other physical mail delivery mail service outside the United States of America), any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) or other delivery if they are available for the Partner at the principal office of the Partnership for a period of one year from the date of the giving or making of such notice, payment or report to the other Partners. Any notice to the Partnership shall be deemed given if received by the General Partner at the principal office of the Partnership designated pursuant to Section 2.3. The General Partner may rely and shall be protected in relying on any notice or other document from a Partner or other Person if believed by it to be genuine.

(b) The terms “in writing”, “written communications,” “written notice” and words of similar import shall be deemed satisfied under this Agreement by use of e-mail and other forms of electronic communication.

Section 16.2 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 16.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 16.4 Integration. This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

Section 16.5 Creditors. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

Section 16.6 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach of any other covenant, duty, agreement or condition.

 

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Section 16.7 Third-Party Beneficiaries. Each Partner agrees that (a) any Indemnitee shall be entitled to assert rights and remedies hereunder as a third-party beneficiary hereto with respect to those provisions of this Agreement affording a right, benefit or privilege to such Indemnitee and (b) any Unrestricted Person shall be entitled to assert rights and remedies hereunder as a third-party beneficiary hereto with respect to those provisions of this Agreement affording a right, benefit or privilege to such Unrestricted Person.

Section 16.8 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Limited Partner Interest, pursuant to Section 10.1(a) without execution hereof.

Section 16.9 Applicable Law; Forum, Venue and Jurisdiction.

(a) This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.

(b) Each of the Partners and each Person holding any beneficial interest in the Partnership (whether through a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing or otherwise):

(i) irrevocably agrees that any claims, suits, actions or proceedings (A) arising out of or relating in any way to this Agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of this Agreement or the duties, obligations or liabilities among Partners or of Partners to the Partnership, or the rights or powers of, or restrictions on, the Partners or the Partnership), (B) brought in a derivative manner on behalf of the Partnership, (C) asserting a claim of breach of a duty (including any fiduciary duty) owed by any director, officer, or other employee of the Partnership or the General Partner, or owed by the General Partner, to the Partnership or the Partners, (D) asserting a claim arising pursuant to any provision of the Delaware Act or (E) asserting a claim governed by the internal affairs doctrine shall be exclusively brought in the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction), in each case regardless of whether such claims, suits, actions or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or are derivative or direct claims;

(ii) irrevocably submits to the exclusive jurisdiction of the courts of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction) in connection with any such claim, suit, action or proceeding;

(iii) agrees not to, and waives any right to, assert in any such claim, suit, action or proceeding that (A) it is not personally subject to the jurisdiction of the courts of the State of Delaware or of any other court to which proceedings in the Court of Chancery of the State of Delaware may be appealed, (B) such claim, suit, action or proceeding is brought in an inconvenient forum, or (C) the venue of such claim, suit, action or proceeding is improper;

(iv) expressly waives any requirement for the posting of a bond by a party bringing such claim, suit, action or proceeding;

(v) consents to process being served in any such claim, suit, action or proceeding by mailing, certified mail, return receipt requested, a copy thereof to such party at the address in effect for notices hereunder, and agrees that such services shall constitute good and sufficient service of process and notice thereof; provided, nothing in clause (v) hereof shall affect or limit any right to serve process in any other manner permitted by law; and

(vi) IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY SUCH CLAIM, SUIT, ACTION OR PROCEEDING.

 

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Section 16.10 Invalidity of Provisions. If any provision or part of a provision of this Agreement is or becomes for any reason, invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions and part thereof contained herein shall not be affected thereby and this Agreement shall, to the fullest extent permitted by law, be reformed and construed as if such invalid, illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provision or part reformed so that it would be valid, legal and enforceable to the maximum extent possible.

Section 16.11 Consent of Partners. Each Partner hereby expressly consents and agrees that, whenever in this Agreement it is specified that an action may be taken upon the affirmative vote or consent of less than all of the Partners, such action may be so taken upon the concurrence of less than all of the Partners and each Partner shall be bound by the results of such action.

Section 16.12 Facsimile Signatures. The use of facsimile signatures and signatures delivered by email in portable document format (.pdf) or other similar electronic format affixed in the name and on behalf of the Transfer Agent and registrar of the Partnership on Certificates representing Units is expressly permitted by this Agreement.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

 

GENERAL PARTNER:
USD PARTNERS GP LLC
By:  

 

Name:  
Title:  
ORGANIZATIONAL LIMITED PARTNER:
USD GROUP LLC
By:  

 

Name:  
Title:  


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EXHIBIT A

to the Third Amended and Restated

Agreement of Limited Partnership of

USD Partners LP

Certificate Evidencing Common Units

Representing Limited Partner Interests in

USD Partners LP

No.

Common Units

In accordance with Section 4.1 of the Third Amended and Restated Agreement of Limited Partnership of USD Partners LP, as amended, supplemented or restated from time to time (the “Partnership Agreement”), USD Partners LP, a Delaware limited partnership (the “Partnership”), hereby certifies that (the “Holder”) is the registered owner of Common Units representing limited partner interests in the Partnership (the “Common Units”) transferable on the books of the Partnership, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. The rights, preferences and limitations of the Common Units are set forth in, and this Certificate and the Common Units represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Partnership Agreement. Copies of the Partnership Agreement are on file, and will be furnished without charge on delivery of written request to the Partnership, at the principal office of the Partnership located at 811 Main Street, Suite 2800, Houston, Texas 77002. Capitalized terms used herein but not defined shall have the meanings given them in the Partnership Agreement.

THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF USD PARTNERS LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF USD PARTNERS LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR (C) CAUSE USD PARTNERS LP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). USD PARTNERS GP LLC, THE GENERAL PARTNER OF USD PARTNERS LP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT DETERMINES, WITH THE ADVICE OF COUNSEL, THAT SUCH RESTRICTIONS ARE NECESSARY OR ADVISABLE (i) TO AVOID A SIGNIFICANT RISK OF USD PARTNERS LP BECOMING TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR U.S. FEDERAL INCOME TAX PURPOSES OR (ii) TO PRESERVE THE ECONOMIC UNIFORMITY OF THE LIMITED PARTNER INTERESTS (OR ANY CLASS OR CLASSES THEREOF). THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.


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The Holder, by accepting this Certificate, (i) shall be admitted to the Partnership as a Limited Partner with respect to the Limited Partner Interests so transferred to such Person when any such transfer or admission is reflected on the books and records of the Partnership and such Limited Partner becomes the Record Holder of the Limited Partner Interests so transferred, (ii) shall become bound by the terms of the Partnership Agreement, (iii) represents that the transferee has the capacity, power and authority to enter into the Partnership Agreement and (iv) makes the consents, acknowledgements and waivers contained in the Partnership Agreement, with or without the execution of the Partnership Agreement by the Holder.

This Certificate shall not be valid for any purpose unless it has been countersigned and registered by the Transfer Agent. This Certificate shall be governed by and construed in accordance with the laws of the State of Delaware.

 

Dated:
USD Partners LP
By:  

 

Name:  
Title:  
[Name]
By:  

 

  As Transfer Agent and Registrar
Name:  
Title:  

 

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[Reverse of Certificate]

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as follows according to applicable laws or regulations:

TEN COM - as tenants in common

TEN ENT - as tenants by the entireties

    UNIF GIFT/TRANSFERS MIN ACT

                    Custodian

JT TEN - as joint tenants with right of survivorship and not as tenants in common

    (Cust) (Minor)

    Under Uniform Gifts/Transfers to CD Minors Act

      (State)

Additional abbreviations, though not in the above list, may also be used.

 

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ASSIGNMENT OF COMMON UNITS OF

USD PARTNERS LP

FOR VALUE RECEIVED,                      hereby assigns, conveys, sells and transfers unto

(Please print or typewrite name and address of assignee) (Please insert Social Security or other identifying number of assignee)

Common Units representing limited partner interests evidenced by this Certificate, subject to the Partnership Agreement, and does hereby irrevocably constitute and appoint                     as its attorney-in-fact with full power of substitution to transfer the same on the books of USD Partners LP

Date:

NOTE: The signature to any endorsement hereon must correspond with the name as written upon the face of this Certificate in every particular, without alteration, enlargement or change.

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15

(Signature)

(Signature)

 

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APPENDIX B

 

GLOSSARY OF TERMS

 

Unless otherwise noted or indicated by context, the following terms used in this prospectus have the following meanings:

 

API gravity” refers to American Petroleum Institute gravity.

 

bbls” refers to a common unit of measure in the oil industry, which equates to 42 gallons.

 

bitumen” refers to dense, highly viscous, petroleum-based hydrocarbon that is found in deposits such as oil sands.

 

bpd” refers to an abbreviation for barrels per day.

 

diluent” refers to lighter hydrocarbon products such as natural gasoline or condensate which is blended with heavy crude to allow for pipeline transportation of heavy crude.

 

ethanol” refers to a clear, colorless, flammable oxygenated liquid. Ethanol is typically produced chemically from ethylene, or biologically from fermentation of various sugars from carbohydrates found in agricultural crops and cellulosic residues from crops or wood. It is used in the United States as a gasoline octane enhancer and oxygenate.

 

GHG” refers to greenhouse gas.

 

heavy crude” refers to a relatively inexpensive crude oil with a low API gravity characterized by high relative density and viscosity. Heavy crude oils require greater levels of processing to produce high value products such as gasoline and diesel.

 

hydrocarbon-by-rail” means the transportation of hydrocarbons, such as crude oil and ethanol, by rail, and in particular, through the use of unit trains.

 

legacy railcar” refers to a DOT Specification 111 railcar that does not comply with the Association of American Railroads (AAR) Casualty Prevention Circular (CPC) letter known as CPC-1232 which specifies requirements for railcars built for the transportation of certain hazardous materials.

 

manifest train” refers to trains that are composed of mixed cargos and often stop at several destinations.

 

Mbpd” refers to a thousand barrels per day.

 

MMbbls” refers to a million barrels.

 

MMbpd” refers to million barrels per day.

 

oil sand” refers to deposits of loose sand or partially consolidated sandstone that is saturated with highly viscous bitumen.

 

throughput” refers to the volume processed through a terminal or refinery.

 

unit train” refers to trains comprised of up to 120 railcars and are composed of one cargo shipped from one point of origin to one destination.

 

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LOGO

 

Full View of Our Hardisty Rail Terminal


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Common Units

Representing Limited Partner Interests

 

USD Partners LP

 

LOGO

 

 

 

PRELIMINARY  PROSPECTUS

 

                    , 2014

 

 

 

Citigroup

 

Barclays

 

Credit Suisse

 

BofA Merrill Lynch

 

 

 

Evercore

 

BMO Capital Markets

 

Deutsche Bank Securities

 

RBC Capital Markets

 

Janney Montgomery Scott

 

Until                     , 2014 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 


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Part II

 

Information Not Required in the Prospectus

 

Item 13. Other expenses of issuance and distribution

 

Set forth below are the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the SEC registration fee, the FINRA filing fee and the NYSE listing fee, the amounts set forth below are estimates.

 

SEC registration fee

   $ 19,320   

FINRA filing fee

     23,000   

NYSE listing fee

     125,000   

Printing and engraving expenses

     625,000   

Fees and expenses of legal counsel

     2,000,000   

Accounting fees and expenses

     4,420,540   

Miscellaneous

     278,465   
  

 

 

 

Total

   $ 7,500,000   
  

 

 

 

 

*   To be filed by amendment.

 

Item 14. Indemnification of directors and officers

 

The section of the prospectus entitled “Our Partnership Agreement—Indemnification” discloses that we will generally indemnify officers, directors and affiliates of the general partner to the fullest extent permitted by the law against all losses, claims, damages or similar events and is incorporated herein by this reference. Reference is also made to the Underwriting Agreement to be filed as an exhibit to this registration statement in which USD Partners LP and certain of its affiliates will agree to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments that may be required to be made in respect of these liabilities. Subject to any terms, conditions or restrictions set forth in the partnership agreement, Section 17-108 of the Delaware Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other persons from and against all claims and demands whatsoever.

 

Item 15. Recent sales of unregistered securities

 

On June 5, 2014, in connection with the formation of the partnership, USD Partners LP issued to (i) USD Partners GP LLC, the 2.0% general partner interest in the partnership for $20 and (ii) to US Development Group LLC, the 98.0% limited partner interest in the partnership for $980. These transactions were exempt from registration under Section 4(2) of the Securities Act as they did not involve a public offering. There have been no other sales of unregistered securities within the past three years.

 

In August 2014, the Partnership issued 250,000 Class A Units to certain executive officers and other key employees of its general partner and its affiliates who provide services to us in an offering exempt from registration under Section 4(a)(2) of the Securities Act and Rule 701 under the Securities Act.

 

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Item 16. Exhibits

 

The following documents are filed as exhibits to this registration statement:

 

Exhibit
number

    

Description

  1.1       Form of Underwriting Agreement (including form of Lock-up Agreement)
  3.1**       Certificate of Limited Partnership of USD Partners LP
  3.2       Form of Third Amended and Restated Agreement of Limited Partnership of USD Partners LP (included as Appendix A to the Prospectus)
  5.1       Form of opinion of Latham & Watkins LLP as to the legality of the securities being registered
  8.1       Form of opinion of Latham & Watkins LLP relating to tax matters
  8.2       Form of opinion of Fasken Martineau DuMoulin LLP relating to tax matters
  10.1*       Form of Credit Agreement
  10.2       Form of Contribution, Conveyance and Assumption Agreement
  10.3       Form of USD Partners LP 2014 Incentive Compensation Plan
  10.4       Form of Omnibus Agreement
  10.5†       Facilities Connection Agreement Between USD Terminals Canada Inc. and Gibson Energy Partnership, dated June 4, 2013
  10.6**†       Services Agreement Between USD Terminals Canada ULC and USD Marketing LLC, effective July 7, 2014
  10.7*       Form of Purchase and Sale Agreement
  10.8       Form of Development Rights and Cooperation Agreement
  21.1*       List of Subsidiaries of USD Partners LP
  23.1       Consent of UHY LLP
  23.2       Consent of Latham & Watkins LLP (contained in Exhibit 5.1)
  23.3       Consent of Latham & Watkins LLP (contained in Exhibit 8.1)
  23.4       Consent of Fasken Martineau DuMoulin LLP (contained in Exhibit 8.2)
  23.5**       Consent of Director Nominee (Brad Sanders)
  23.6       Consent of Director Nominee (Sara Graziano)
  23.7       Consent of Director Nominee (Douglas Kimmelman)
  23.8       Consent of Director Nominee (Thomas Lane)
  24.1**       Powers of Attorney (contained on the signature page to this Registration Statement)

 

*   To be filed by amendment.
**   Previously filed.
  Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been separately filed with the Securities and Exchange Commission.

 

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Item 17. Undertakings

 

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

The undersigned registrant hereby undertakes that, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(1) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

(2) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(3) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(4) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

The undersigned registrant hereby undertakes that:

 

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

The undersigned registrant undertakes that, for the purposes of determining liability under the Securities Act to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated

 

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or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

The undersigned registrant undertakes to send to each common unitholder, at least on an annual basis, a detailed statement of any transactions with its general partner or its general partner’s affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to registrant or its subsidiaries for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.

 

The registrant undertakes to provide to the common unitholders the financial statements required by Form 10-K for the first full fiscal year of operations of the registrant.

 

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Signatures

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on September 22, 2014.

 

USD Partners LP

By:

 

USD Partners GP LLC, its General Partner

By:

 

/s/ Daniel K. Borgen

 

Daniel K. Borgen

Chief Executive Officer and President

 

Pursuant to the requirements of the Securities Act of 1933, as amended this Registration Statement has been signed by the following persons in the capacities and the dates indicated.

 

Signature

  

Title

 

Date

/s/ Daniel K. Borgen

Daniel K. Borgen

  

Chief Executive Officer and President

(Principal Executive Officer)

  September 22, 2014

*

Adam Altsuler

  

Chief Financial Officer

(Principal Financial Officer)

  September 22, 2014

*

Chris Robbins

  

Chief Accounting Officer

(Principal Accounting Officer)

  September 22, 2014

*

Mike Curry

  

Director

  September 22, 2014

 

*By:  

/s/ Daniel K. Borgen

 

Daniel K. Borgen

 

Attorney-in-fact

 

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INDEX TO EXHIBITS

 

Exhibit
number

    

Description

  1.1       Form of Underwriting Agreement (including form of Lock-up Agreement)
  3.1**       Certificate of Limited Partnership of USD Partners LP
  3.2       Form of Third Amended and Restated Agreement of Limited Partnership of USD Partners LP (included as Appendix A to the Prospectus)
  5.1       Form of opinion of Latham & Watkins LLP as to the legality of the securities being registered
  8.1       Form of opinion of Latham & Watkins LLP relating to tax matters
  8.2       Form of opinion of Fasken Martineau DuMoulin LLP relating to tax matters
  10.1*       Form of Credit Agreement
  10.2       Form of Contribution, Conveyance and Assumption Agreement
  10.3       Form of USD Partners LP 2014 Incentive Compensation Plan
  10.4       Form of Omnibus Agreement
  10.5†       Facilities Connection Agreement Between USD Terminals Canada Inc. and Gibson Energy Partnership, dated June 4, 2013
  10.6**†       Services Agreement Between USD Terminals Canada ULC and USD Marketing LLC, effective July 7, 2014
  10.7*       Form of Purchase and Sale Agreement
  10.8       Form of Development Rights and Cooperation Agreement
  21.1*       List of Subsidiaries of USD Partners LP
  23.1       Consent of UHY LLP
  23.2       Consent of Latham & Watkins LLP (contained in Exhibit 5.1)
  23.3       Consent of Latham & Watkins LLP (contained in Exhibit 8.1)
  23.4       Consent of Fasken Martineau DuMoulin LLP (contained in Exhibit 8.2)
  23.5**       Consent of Director Nominee (Brad Sanders)
  23.6       Consent of Director Nominee (Sara Graziano)
  23.7       Consent of Director Nominee (Douglas Kimmelman)
  23.8       Consent of Director Nominee (Thomas Lane)
  24.1**       Powers of Attorney (contained on the signature page to this Registration Statement)

 

*   To be filed by amendment.
**   Previously filed.
  Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been separately filed with the Securities and Exchange Commission.

 

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