SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 11-22667
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
(Exact name of Registrant as specified in its Charter)
Delaware 75-2287683 --------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 2435 North Central Expressway Richardson, Texas 75080 ----------------------------------------- -------------------- (Address of principal executive offices) (zip code) |
Registrant's telephone number, including area code: (972) 699-4062
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. N/A
PART I
Item 1. Business
Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership (the "Partnership"), owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling business. Kaneb Pipe Line Partners, L.P. ("KPP") (NYSE: KPP), a master limited partnership, holds 99% interest as a limited partner in the Partnership. Kaneb Pipe Line Company LLC, a Delaware limited liability company ("KPL"), a wholly-owned subsidiary of Kaneb Services LLC, a Delaware limited liability company ("KSL") (NYSE: KSL), holds the 1% general partner interest in both the Partnership and KPP. At December 31, 2001, KPL, together with its affiliates, owned an approximate 25% interest as a limited partner and a combined 2% interest as a general partner in KPP. The terminaling business of the Partnership is conducted through Support Terminals Operating Partnership, L.P. ("STOP"), and its affiliated partnerships and corporate entities, which operate under the trade names "ST Services" and "StanTrans," among others.
Introduction
The Partnership's pipeline business consists primarily of the transportation of refined petroleum products as a common carrier in Kansas, Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The Partnership owns and operates two common carrier pipelines (the "Pipelines") described below.
East Pipeline
Construction of the East Pipeline commenced in the 1950s with a line from southern Kansas to Geneva, Nebraska. During the 1960s, the East Pipeline was extended north to its present terminus at Jamestown, North Dakota. In the 1980's, the 8" line from Geneva, Nebraska to North Platte, Nebraska and the 16" line from McPherson, Kansas to Geneva, Nebraska were built and the Partnership acquired a 6" pipeline from Champlin Oil Company, a portion of which originally ran south from Geneva, Nebraska through Windom, Kansas terminating in Hutchinson, Kansas. In 1997, the Partnership completed construction of a new 6" pipeline from Conway, Kansas to Windom, Kansas (approximately 22 miles north of Hutchinson) that allows the Hutchinson terminal to be supplied directly from McPherson; a significantly shorter route than was previously used. As a result of this pipeline becoming operational, a 158 mile segment of the former Champlin line was shut down, including a terminal located at Superior, Nebraska. The other end of the line runs northeast approximately 175 miles, crossing the main pipeline near Osceola, Nebraska, continuing through a terminal at Columbus, Nebraska, and later interconnecting with the Partnership's Yankton/Milford line to terminate at Rock Rapids, Iowa. In December 1998, the Partnership acquired from Amoco Oil Company a 175 mile pipeline that runs from Council Bluffs, Iowa to Sioux Falls, South Dakota and the terminal at Sioux Falls. On December 31, 1998 the Partnership, pursuant to its option, purchased the 203 mile North Platte line for approximately $5 million at the end of a lease. In January 1999, a connection was completed to service the Sioux Falls terminal through the main East Pipeline.
The East Pipeline system also consists of 17 product terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota with total storage capacity of approximately 3.5 million barrels and an additional 22 product tanks with total storage capacity of approximately 1,006,000 barrels at its tank farm installations at McPherson and El Dorado, Kansas. The system also has six origin pump stations in Kansas and 38 booster pump stations throughout the system. Additionally, the system maintains various office and warehouse facilities, and an extensive quality control laboratory. The Partnership owns the entire 2,090 mile East Pipeline. The Partnership leases office space for its operating headquarters in Wichita, Kansas.
The East Pipeline transports refined petroleum products, including propane, received from refineries in southeast Kansas and other connecting pipelines to its terminals along the system and to receiving pipeline connections in Kansas. Shippers on the East Pipeline obtain refined petroleum products from refineries connected to the East Pipeline or through other pipelines directly connected to the pipeline system. Five connecting pipelines can deliver propane for shipment through the East Pipeline from gas processing plants in Texas, New Mexico, Oklahoma and Kansas.
West Pipeline
The Partnership acquired the West Pipeline in February 1995, increasing the Partnership's pipeline business in South Dakota and expanding it into Wyoming and Colorado. The West Pipeline system includes approximately 550 miles of pipeline in Wyoming, Colorado and South Dakota, four truck loading terminals and numerous pump stations situated along the system. The system's four product terminals have a total storage capacity of over 1.7 million barrels.
The West Pipeline originates at Casper, Wyoming and travels east to the Strouds Station, where it serves as a connecting point with Sinclair's Little America Refinery and the Seminoe Pipeline that transports product from Billings, Montana area refineries. From Strouds, the West Pipeline continues easterly through its 8" line to Douglas, Wyoming, where a 6" pipeline branches off to serve the Partnership's Rapid City, South Dakota terminal approximately 190 miles away. The Rapid City terminal has a three bay, bottom-loading truck rack and storage tank capacity of 256,000 barrels. The 6" pipeline also receives product from Wyoming Refining's pipeline at a connection located near the Wyoming/South Dakota border, approximately 30 miles south of Wyoming Refining's Newcastle, Wyoming Refinery. From Douglas, the Partnership's 8" pipeline continues southward through a delivery point at the Burlington Northern junction to the terminal at Cheyenne, Wyoming. The Cheyenne terminal has a two bay, bottom-loading truck rack, storage tank capacity of 345,000 barrels and serves as a receiving point for products from the Frontier Oil & Refining Company refinery at Cheyenne, as well as a product delivery point to Conoco's Cheyenne Pipeline. From the Cheyenne terminal, the 8" pipeline extends south into Colorado to the Dupont Terminal located in the Denver metropolitan area. The Dupont Terminal is the largest terminal on the West Pipeline system, with a six bay, bottom-loading truck rack and tankage capacity of 692,000 barrels. The 8" pipeline continues to the Commerce City Station, where the West Pipeline can receive from and transfer product to the Ultramar Diamond Shamrock and Conoco refineries and the Phillips Petroleum Terminal. From Commerce City, a 6" line continues south 90 miles where the system terminates at the Fountain, Colorado Terminal serving the Colorado Springs area. The Fountain Terminal has a five bay, bottom-loading truck rack and storage tank capacity of 366,000 barrels.
The West Pipeline system parallels the Partnership's East Pipeline to the west. The East Pipeline's North Platte line terminates in western Nebraska, approximately 200 miles east of the West Pipeline's Cheyenne, Wyoming Terminal. Conoco's Cheyenne Pipeline runs from west to east from the Cheyenne Terminal to near the East Pipeline's North Platte Terminal, although a portion of the line from Sidney, Nebraska (approximately 100 miles from Cheyenne) to North Platte has been deactivated. The West Pipeline serves Denver and other eastern Colorado markets and supplies jet fuel to Ellsworth Air Force Base at Rapid City, South Dakota, as compared to the East Pipeline's largely agricultural service area. The West Pipeline has a relatively small number of shippers, who, with few exceptions, are also shippers on the Partnership's East Pipeline system.
Other Systems
The Partnership also owns three single-use pipelines, located near Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies diesel fuel to a railroad fueling facility. The Oregon and Washington lines are fully automated, however the Wyoming line utilizes a coordinated startup procedure between the refinery and the railroad. For the year ended December 31, 2001, these three systems combined transported a total of 3.2 million barrels of diesel fuel, representing an aggregate of $1.3 million in revenues.
Pipelines Products and Activities
The Pipelines' revenues are based upon volumes and distances of product shipped. The following table reflects the total volume and barrel miles of refined petroleum products shipped and total operating revenues earned by the Pipelines for each of the periods indicated:
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- -------------- ------------- --------------
Volume (1).................. 92,116 89,192 85,356 77,965 69,984
Barrel miles (2)............ 18,567 17,843 18,440 17,007 16,144
Revenues (3)................ $74,976 $70,685 $67,607 $63,421 $61,320
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(1) Volumes are expressed in thousands of barrels of refined petroleum product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
(3) Revenues are expressed in thousands of dollars.
The following table sets forth volumes of propane and various types of other refined petroleum products transported by the Pipelines during each of the periods indicated:
Year Ended December 31,
(thousands of barrels)
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- -------------- ------------- --------------
Gasoline.................... 46,268 44,215 41,472 37,983 32,237
Diesel and fuel oil......... 42,354 41,087 40,435 36,237 33,541
Propane..................... 3,494 3,890 3,449 3,745 4,206
------------- ------------- -------------- ------------- --------------
Total....................... 92,116 89,192 85,356 77,965 69,984
============= ============= ============== ============= ==============
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Diesel and fuel oil are used in farm machinery and equipment, over-the-road transportation, railroad fueling and residential fuel oil. Gasoline is primarily used in over-the-road transportation and propane is used for crop drying, residential heating and to power irrigation equipment. The mix of refined petroleum products delivered varies seasonally, with gasoline demand peaking in early summer, diesel fuel demand peaking in late summer and propane demand higher in the fall. In addition, weather conditions in the areas served by the East Pipeline affect both the demand for and the mix of the refined petroleum products delivered through the East Pipeline, although historically any overall impact on the total volumes shipped has been short-term. Tariffs charged to shippers for transportation of products do not vary according to the type of product delivered.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained in a manner consistent with applicable Federal, state and local laws and regulations, standards prescribed by the American Petroleum Institute and accepted industry practice. Further, protective measures are taken and routine preventive maintenance is performed on the Pipelines in order to prolong the useful lives of the Pipelines. Such measures include cathodic protection to prevent external corrosion, inhibitors to prevent internal corrosion and periodic inspection of the Pipelines. Additionally, the Pipelines are patrolled at regular intervals to identify equipment or activities by third parties that, if left unchecked, could result in encroachment upon the Pipeline's rights-of-way and possible damage to the Pipelines.
The Partnership uses a state-of-the-art Supervisory Control and Data Acquisition remote supervisory control software program to continuously monitor and control the Pipelines from the Wichita, Kansas headquarters. The system monitors quantities of refined petroleum products injected in and delivered through the Pipelines and automatically signals the Wichita headquarters personnel upon deviations from normal operations that requires attention.
Pipeline Operations
Both the East Pipeline and the West Pipeline are interstate pipelines and thus subject to Federal regulation by such governmental agencies as the Federal Energy Regulatory Commission ("FERC"), the Department of Transportation, and the Environmental Protection Agency. Additionally, the West Pipeline is subject to state regulation of certain intrastate rates in Colorado and Wyoming and the East Pipeline is subject to state regulation in Kansas. See "Regulation."
Except for the three single-use pipelines and certain ethanol facilities, all of the Partnership's pipeline operations constitute common carrier operations and are subject to Federal tariff regulation. In May 1998, the Partnership was authorized by the FERC to adopt market-based rates in approximately one-half of its markets. Also, certain of its intrastate common carrier operations are subject to state tariff regulation. Common carrier activities are those under which transportation through the Pipelines is available at published tariffs filed, in the case of interstate shipments, with the FERC, or in the case of intrastate shipments in Kansas, Colorado and Wyoming, with the relevant state authority, to any shipper of refined petroleum products who requests such services and satisfies the conditions and specifications for transportation.
In general, a shipper on one of the Pipelines delivers products to the pipeline from refineries or third party pipelines that connect to the Pipelines. The Pipelines' operations also include 21 truck loading terminals through which refined petroleum products are delivered to storage tanks and then loaded into petroleum transport trucks. Five of the 20 terminals also receive propane into storage tanks and then load it into transport trucks. Tariffs for transportation are charged to shippers based upon transportation from the origination point on the pipeline to the point of delivery. Such tariffs also include charges for terminaling and storage of product at the Pipeline's terminals. Pipelines are generally the lowest cost method for intermediate and long-haul overland transportation of refined petroleum products.
Each shipper transporting product on a pipeline is required to supply the Partnership with a notice of shipment indicating sources of products and destinations. All shipments are tested or receive refinery certifications to ensure compliance with the Partnership's specifications. Shippers are generally invoiced by the Partnership immediately upon the product entering one of the Pipelines.
The following table shows the number of tanks owned by the Partnership at each terminal location at December 31, 2001, the storage capacity in barrels and truck capacity of each terminal location.
Location of Number Tankage Truck
Terminals of Tanks Capacity Capacity(a)
-------------------- -------- -------- -----------
Colorado:
Dupont 18 692,000 6
Fountain 13 366,000 5
Iowa:
LeMars 9 103,000 2
Milford(b) 11 172,000 2
Rock Rapids 12 366,000 2
Kansas:
Concordia(c) 7 79,000 2
Hutchinson 9 162,000 2
Salina 10 98,000 3
Nebraska:
Columbus(d) 12 191,000 2
Geneva 39 678,000 8
Norfolk 16 187,000 4
North Platte 22 198,000 5
Osceola 8 79,000 2
North Dakota:
Jamestown 13 188,000 2
South Dakota:
Aberdeen 12 181,000 2
Mitchell 8 72,000 2
Rapid City 13 256,000 3
Sioux Falls 9 394,000 2
Wolsey 21 149,000 4
Yankton 25 246,000 4
Wyoming:
Cheyenne 15 345,000 2
------ -----------
Totals 302 5,202,000
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(a) Number of trucks that may be simultaneously loaded.
(b) This terminal is situated on land leased through August 7, 2007 at an
annual rental of $2,400. The Partnership has the right to renew the lease
upon its expiration for an additional term of 20 years at the same annual
rental rate.
(c) This terminal is situated on land leased through the year 2060 for a total
rental of $2,000.
(d) Also loads rail tank cars.
The East Pipeline also has intermediate storage facilities consisting of 12 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson, Kansas, with aggregate capacities of approximately 472,000 and 534,000 barrels, respectively. During 2001, approximately 53.3% and 92.2% of the deliveries of the East Pipeline and the West Pipeline, respectively, were made through their terminals, and the remainder of the respective deliveries of such lines were made to other pipelines and customer owned storage tanks.
Storage of product at terminals pending delivery is considered by the Partnership to be an integral part of the product delivery service of the Pipelines. Shippers generally store refined petroleum products for less than one week. Ancillary services, including injection of shipper-furnished and generic additives, are available at each terminal.
Demand for and Sources of Refined Petroleum Products
The Partnership's business depends in large part on (i) the level of demand for refined petroleum products in the markets served by the Pipelines and (ii) the ability and willingness of refiners and marketers having access to the Pipelines to supply such demand by deliveries through the Pipelines.
Most of the refined petroleum products delivered through the East Pipeline are ultimately used as fuel for railroads or in agricultural operations, including fuel for farm equipment, irrigation systems, trucks used for transporting crops and crop drying facilities. Demand for refined petroleum products for agricultural use, and the relative mix of products required, is affected by weather conditions in the markets served by the East Pipeline. The agricultural sector is also affected by government agricultural policies and crop prices. Although periods of drought suppress agricultural demand for some refined petroleum products, particularly those used for fueling farm equipment, the demand for fuel for irrigation systems often increases during such times.
While there is some agricultural demand for the refined petroleum products delivered through the West Pipeline, as well as military jet fuel volumes, most of the demand is centered in the Denver and Colorado Springs area. Because demand on the West Pipeline is significantly weighted toward urban and suburban areas, the product mix on the West Pipeline includes a substantially higher percentage of gasoline than the product mix on the East Pipeline.
The Pipelines are also dependent upon adequate levels of production of refined petroleum products by refineries connected to the Pipelines, directly or through connecting pipelines. The refineries are, in turn, dependent upon adequate supplies of suitable grades of crude oil. The refineries connected directly to the East Pipeline obtain crude oil from producing fields located primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from other domestic or foreign sources. In addition, refineries in Kansas, Oklahoma and Texas are also connected to the East Pipeline through other pipelines. These refineries obtain their supplies of crude oil from a variety of sources. The refineries connected directly to the West Pipeline are located in Casper and Cheyenne, Wyoming and Denver, Colorado. Refineries in Billings and Laurel, Montana are connected to the West Pipeline through other pipelines. These refineries obtain their supplies of crude oil primarily from Rocky Mountain sources. If operations at any one refinery were discontinued, the Partnership believes (assuming unchanged demand for refined petroleum products in markets served by the Pipelines) that the effects thereof would be short-term in nature, and the Partnership's business would not be materially adversely affected over the long term because such discontinued production could be replaced by other refineries or by other sources.
The majority of the refined petroleum product transported through the East Pipeline in 2001 was produced at three refineries located at McPherson and El Dorado, Kansas and Ponca City, Oklahoma, and operated by National Cooperative Refining Association ("NCRA"), Frontier Refining and Conoco, Inc. respectively. The NCRA and Frontier Refining refineries are connected directly to the East Pipeline. The McPherson, Kansas refinery operated by NCRA accounted for approximately 30.6% of the total amount of product shipped over the East Pipeline in 2001. The East Pipeline also has direct access by third party pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies of products through connecting pipelines that receive products from pipelines originating on the Gulf Coast. Five connecting pipelines can deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to the East Pipeline for shipment.
The majority of the refined petroleum products transported through the West Pipeline is produced at the Frontier Refinery located at Cheyenne, Wyoming, the Ultramar Diamond Shamrock and Conoco Refineries located at Denver, Colorado, and Sinclair's Little America Refinery located at Casper, Wyoming, all of which are connected directly to the West Pipeline. The West Pipeline also has access to three Billings, Montana, area refineries through a connecting pipeline.
Principal Customers
The Partnership had a total of approximately 46 shippers in 2001. The principal shippers include four integrated oil companies, three refining companies, two large farm cooperatives and one railroad. Transportation revenues attributable to the top 10 shippers of the Pipelines were $51.5 million, $48.7 million and $42.7 million, which accounted for 69%, 69% and 63% of total revenues shipped for each of the years 2001, 2000 and 1999, respectively.
Competition and Business Considerations
The East Pipeline's major competitor is an independent, regulated common carrier pipeline system owned by The Williams Companies, Inc. ("Williams") that operates approximately 100 miles east of and parallel to the East Pipeline. The Williams system is a substantially more extensive system than the East Pipeline. Furthermore, Williams and its affiliates have capital and financial resources that are substantially greater than those of the Partnership. Competition with Williams is based primarily on transportation charges, quality of customer service and proximity to end users, although refined product pricing at either the origin or terminal point on a pipeline may outweigh transportation costs. Sixteen of the East Pipeline's 17 delivery terminals are located within 2 to 145 miles of, and in direct competition with Williams' terminals.
The West Pipeline competes with the truck loading racks of the Cheyenne and Denver refineries and the Denver terminals of the Chase Terminal Company and Phillips Petroleum Company. Ultramar Diamond Shamrock terminals in Denver and Colorado Springs, connected to a Ultramar Diamond Shamrock pipeline from their Texas Panhandle Refinery, are major competitors to the West Pipeline's Denver and Fountain Terminals, respectively.
Because pipelines are generally the lowest cost method for intermediate and long-haul movement of refined petroleum products, the Pipelines' more significant competitors are common carrier and proprietary pipelines owned and operated by major integrated and large independent oil companies and other companies in the areas where the Pipelines deliver products. Competition between common carrier pipelines is based primarily on transportation charges, quality of customer service and proximity to end users. The Partnership believes high capital costs, tariff regulation, environmental considerations and problems in acquiring rights-of-way make it unlikely that other competing pipeline systems comparable in size and scope to the Pipelines will be built in the near future, provided the Pipelines have available capacity to satisfy demand and its tariffs remain at reasonable levels.
The costs associated with transporting products from a loading terminal to end users limit the geographic size of the market that can be served economically by any terminal. Transportation to end users from the loading terminals of the Partnership is conducted principally by trucking operations of unrelated third parties. Trucks may competitively deliver products in some of the areas served by the Pipelines. However, trucking costs render that mode of transportation not competitive for longer hauls or larger volumes. The Partnership does not believe that trucks are, or will be, effective competition to its long-haul volumes over the long term.
Introduction
The Partnership's Support Terminal Services operation ("ST Services" or "ST") is one of the largest independent petroleum products and specialty liquids terminaling companies in the United States. For the year ended December 31, 2001, the Partnership's terminaling business accounted for approximately 64% of the Partnership's revenues. As of December 31, 2001, ST operated 41 facilities in 20 states and the District of Columbia, with a total storage capacity of approximately 33.5 million barrels. ST owns and operates six terminals located in the United Kingdom, having a total capacity of approximately 5.5 million barrels. ST Services and its predecessors have a long history in the terminaling business and handle a wide variety of liquids from petroleum products to specialty chemicals to edible liquids.
On January 3, 2001, the Partnership completed the acquisition of Shore Terminals LLC. Shore Terminals owns seven terminals, four in California (three in the San Francisco Bay area and one in Los Angeles) and one each in Tacoma, Washington, Portland, Oregon and Reno, Nevada, with a total storage capacity of 7.8 million barrels. All of the terminals handle petroleum products and, with the exception of the Nevada terminal, have deep water access. The purchase price was approximately $107,000,000 in cash and 1,975,090 units of limited partnership in the Partnership (valued at $56.5 million on the date of agreement and its announcement). The acquisition, which became a part of the ST Services terminaling operations, significantly increased ST Services' presence on the West Coast.
ST's terminal facilities provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids. ST's six largest domestic terminal facilities are located in Piney Point, Maryland; Linden, New Jersey (50% owned joint venture); Crockett, California; Martinez, California; Jacksonville, Florida and Texas City, Texas. These facilities accounted for approximately 44.5% of ST's revenues and 49.2% of its tankage capacity in 2001.
Description of Largest Domestic Terminal Facilities
Piney Point, Maryland
The largest terminal currently owned by ST is located on approximately 400 acres on the Potomac River. The facility was acquired as part of the purchase of the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively "Steuart") in December 1995. The Piney Point terminal has approximately 5.4 million barrels of storage capacity in 28 tanks and is the closest deep water facility to Washington, D.C. This terminal competes with other large petroleum terminals in the East Coast water-borne market extending from New York Harbor to Norfolk, Virginia. The terminal currently stores petroleum products consisting primarily of fuel oils and asphalt. The terminal has a dock with a 36-foot draft for tankers and four berths for barges. It also has truck loading facilities, product blending capabilities and is connected to a pipeline which supplies residual fuel oil to two power generating stations.
Linden, New Jersey
In October 1998, ST entered into a joint venture relationship with Northville Industries Corp. ("Northville") to acquire a 50% ownership interest in and the management of the terminal facility at Linden, New Jersey that was previously owned by Northville. The 44 acre facility provides ST with deep-water terminaling capabilities at New York Harbor and primarily stores petroleum products, including gasoline, jet fuel and fuel oils. The facility has a total capacity of approximately 3.9 million barrels in 22 tanks, can receive products via ship, barge and pipeline and delivers product by ship, barge, pipeline and truck. The terminal owns two docks and leases a third with draft limits of 35, 24 and 24 feet, respectively.
Crockett, California
The Crockett Terminal was acquired in January 2001 as a part of the Shore acquisition. The terminal has approximately 3 million barrels of tankage and is located in the San Francisco Bay area. The facility provides deep-water access for handling petroleum products and gasoline additives such as ethanol. The terminal offers pipeline connections to various refineries and pipelines. It receives and delivers product by vessel, barge, pipeline and truck-loading facilities. The terminal also has railroad tank car unloading capability.
Martinez, California
The Martinez Terminal, also acquired in January 2001 as a part of the Shore acquisition, is located in the refinery area of San Francisco Bay. It has approximately 2.8 million barrels of tankage and handles refined petroleum products as well as crude oil. The terminal is connected to a pipeline and to area refineries by pipelines and can also receive and deliver products by vessel or barge. It also has a truck rack for product delivery.
Jacksonville, Florida
The Jacksonville terminal, also acquired as part of the Steuart transaction in 1995, is located on approximately 86 acres on the St. John's River and consists of a main terminal and two annexes with combined storage capacity of approximately 2.1 million barrels in 30 tanks. The terminal is currently used to store petroleum products including gasoline, No. 2 oil, No. 6 oil, diesel, kerosene and asphalt. This terminal has a tanker berth with a 38-foot draft, four barge berths and also offers truck and rail car loading facilities and facilities to blend residual fuels for ship bunkering.
Texas City, Texas
The Texas City facility is situated on 39 acres of land leased from the Texas City Terminal Railway Company ("TCTRC") with long-term renewal options. Located on Galveston Bay near the mouth of the Houston Ship Channel, approximately sixteen miles from open water, the Texas City terminal consists of 124 tanks with a total capacity of approximately 2 million barrels. The eastern end of the Texas City site is adjacent to three deep-water docking facilities, which are also owned by TCTRC. The three deep-water docks include two 36-foot draft docks and a 40-foot draft dock. The docking facilities can accommodate any ship or barge capable of navigating the 40-foot draft of the Houston Ship Channel. ST is charged dockage and wharfage fees on a per vessel and per unit basis, respectively, by TCTRC, which it passes on to its customers.
The Texas City facility is designed to accommodate a diverse product mix, including specialty chemicals, such as petrochemicals and has tanks equipped for the specific storage needs of the various products handled; piping and pumping equipment for moving the product between the tanks and the transportation modes; and, an extensive infrastructure of support equipment. ST receives and delivers the majority of the specialty chemicals that it handles via ship or barge at Texas City. ST also receives and delivers liquids via rail tank cars and transport trucks and has direct pipeline connections to refineries in Texas City.
ST's facilities have been designed with engineered structural measures to minimize the possibility of the occurrence and the level of damage in the event of a spill or fire. All loading areas, tanks, pipes and pumping areas are "contained" to collect any spillage and insure that only properly treated water is discharged from the site.
Other Terminal Sites
In addition to the six major facilities described above, ST now has 35 other terminal facilities located throughout the United States and six facilities in the United Kingdom. These other facilities represented approximately 50.8% of ST's total tankage capacity and approximately 55.5% of its total revenue for 2001. With the exception of the facilities in Columbus, Georgia, which handles aviation gasoline and specialty chemicals; Winona, Minnesota, which handles nitrogen fertilizer solutions; Savannah, Georgia, which handles chemicals and caustic solutions, as well as petroleum products; Vancouver, Washington, which handles chemicals and bulk fertilizer; Eastham, United Kingdom which handles chemicals and animal fats; and Runcorn, United Kingdom, which handles molten sulphur, these facilities primarily store petroleum products for a variety of customers. Overall, these facilities provide ST locations which are diverse geographically, in products handled and in customers served.
The following table outlines ST's terminal locations, capacities, tanks and primary products handled:
Tankage No. of Primary Products
Facility Capacity Tanks Handled
------------------------------- ------------- ----------- ------------------------------------
Major U. S. Terminals:
Piney Point, MD 5,403,000 28 Petroleum
Linden, NJ(a) 3,884,000 22 Petroleum
Crockett, CA 3,048,000 24 Petroleum
Martinez, CA 2,800,000 16 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Other U. S. Terminals:
Montgomery, AL(b) 162,000 7 Petroleum, Jet Fuel
Moundville, AL(b) 310,000 6 Jet Fuel
Tuscon, AZ(a) 181,000 7 Petroleum
Los Angeles, CA 597,000 20 Petroleum
Richmond, CA 617,000 25 Petroleum
Stockton, CA 706,000 32 Petroleum
M Street, DC 133,000 3 Petroleum
Homestead, FL(b) 72,000 2 Jet Fuel
Augusta, GA 110,000 8 Petroleum
Bremen, GA 180,000 8 Petroleum, Jet Fuel
Brunswick, GA 302,000 3 Petroleum, Pulp Liquor
Columbus, GA 180,000 25 Petroleum, Chemicals
Macon, GA(b) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 861,000 19 Petroleum, Chemicals
Blue Island, IL 752,000 19 Petroleum
Chillicothe, IL(a) 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Westwego, LA 849,000 53 Molasses, Fertilizer, Caustic
Andrews AFB Pipeline, MD(b) 72,000 3 Jet Fuel
Baltimore, MD 832,000 50 Chemicals, Asphalt, Jet Fuel
Salisbury, MD 177,000 14 Petroleum
Winona, MN 229,000 7 Fertilizer
Reno, NV 107,000 7 Petroleum
Paulsboro, NJ 1,580,000 18 Petroleum
Alamogordo, NM(b) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Petroleum, Jet Fuel
Portland, OR 1,119,000 31 Petroleum
Philadelphia, PA 894,000 11 Petroleum
San Antonio, TX 207,000 4 Jet Fuel
Dumfries, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(b) 40,000 2 Jet Fuel
Tacoma, WA 377,000 15 Petroleum
Vancouver, WA 166,000 42 Chemicals, Fertilizer
Milwaukee, WI 308,000 7 Petroleum
Foreign Terminals:
Grays, England 1,945,000 53 Petroleum
Eastham, England 2,185,000 162 Chemicals, Petroleum, Animal Fats
Runcorn, England 146,000 4 Molten sulphur
Glasgow, Scotland 344,000 16 Petroleum
Leith, Scotland 459,000 34 Petroleum, Chemicals
Belfast, Northern Ireland 407,000 41 Petroleum
--------------- --------------
39,006,000 1,069
=============== ==============
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(a) The terminal is 50% owned by ST.
(b) Facility also includes pipelines to U.S. government military base
locations.
Customers
The storage and transport of jet fuel for the U.S. Department of Defense is an important part of ST's business. Eleven of ST's terminal sites are involved in the terminaling or transport (via pipeline) of jet fuel for the Department of Defense and six of the eleven locations have been utilized solely by the U.S. Government. One of these locations is presently without government business. Of the eleven locations, five include pipelines which deliver jet fuel directly to nearby military bases, while another location supplies Andrews Air Force Base, Maryland and consists of a barge receiving dock, and an 11.3 mile pipeline, with three 24,000 barrel double-bottomed tanks and an administration building located on the base.
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators, such as ST, many major energy and chemical companies own extensive terminal storage facilities. Although such terminals often have the same capabilities as terminals owned by independent operators, they generally do not provide terminaling services to third parties. In many instances, major energy and chemical companies that own storage and terminaling facilities are also significant customers of independent terminal operators, such as ST. Such companies typically have strong demand for terminals owned by independent operators when independent terminals have more cost effective locations near key transportation links, such as deep-water ports. Major energy and chemical companies also need independent terminal storage when their owned storage facilities are inadequate, either because of size constraints, the nature of the stored material or specialized handling requirements.
Independent terminal owners generally compete on the basis of the location and versatility of terminals, service and price. A favorably located terminal will have access to various cost effective transportation modes both to and from the terminal. Possible transportation modes include waterways, railroads, roadways and pipelines. Terminals located near deep-water port facilities are referred to as "deep-water terminals" and terminals without such facilities are referred to as "inland terminals"; though some inland facilities are served by barges on navigable rivers.
Terminal versatility is a function of the operator's ability to offer handling for diverse products with complex handling requirements. The service function typically provided by the terminal includes, among other things, the safe storage of the product at specified temperature, moisture and other conditions, as well as receipt at and delivery from the terminal, all of which must be in compliance with applicable environmental regulations. A terminal operator's ability to obtain attractive pricing is often dependent on the quality, versatility and reputation of the facilities owned by the operator. Although many products require modest terminal modification, operators with a greater diversity of terminals with versatile storage capabilities typically require less modification prior to usage, ultimately making the storage cost to the customer more attractive.
Several companies offering liquid terminaling facilities have significantly more capacity than ST. However, much of ST's tankage can be described as "niche" facilities that are equipped to properly handle "specialty" liquids or provide facilities or services where management believes they enjoy an advantage over competitors. Most of the larger operators have facilities used primarily for petroleum related products. As a result, many of ST's terminals compete against other large petroleum products terminals, rather than specialty liquids facilities. Such specialty or "niche" tankage is less abundant in the U.S. and "specialty" liquids typically command higher terminal fees than lower-price bulk terminaling for petroleum products.
On February 28, 2002, the Partnership acquired all of the liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia") for approximately $194 million in cash. The acquired Statia subsidiaries have approximately $107 million in outstanding debt, including $101 million of 11.75% notes due in November 2003. The cash portion of the purchase price was funded by the Partnership's $275 million revolving credit agreement and proceeds from the Partnership's February 2002 public debt offering. On March 1, 2002, the Partnership announced that it had commenced the procedure to redeem all of Statia's 11.75% notes at 102.938% of the principal amount, plus accrued interest. The redemption is expected to be funded by the Partnership's $275 million revolving credit facility.
Statia's terminaling operations encompass two world-class, strategically located facilities. The storage and transshipment facility on the island of St. Eustatius, which is located east of Puerto Rico, has tankage capacity of 11.3 million barrels. The facility located at Point Tupper, Nova Scotia, Canada has tankage capacity of 7.4 million barrels. Both facilities produce a broad range of products and services, including storage and throughput, marine services and product sales of bunker fuels and bulk oil products.
Capital expenditures by the Pipelines, excluding acquisitions, were $4.3 million, $3.4 million and $3.6 million for 2001, 2000 and 1999, respectively. During these periods, adequate capacity existed on the Pipelines to accommodate volume growth, and the expenditures required for environmental and safety improvements were not material in amount. Capital expenditures, excluding acquisitions, by ST were $12.9 million, $6.1 million and $11.0 million for 2001, 2000 and 1999, respectively.
Capital expenditures of the Pipelines during 2002 are expected to be approximately $15 million to $20 million, excluding capital expenditures relating to Statia. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Additional expansion-related capital expenditures will depend on future opportunities to expand the Partnership's operations. KPL intends to finance future expansion capital expenditures primarily through Partnership borrowings. Such future expenditures, however, will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and Federal governmental regulations, fuel conservation efforts and the availability of financing on acceptable terms. No assurance can be given that required capital expenditures will not exceed anticipated amounts during the year or thereafter or that the Partnership will have the ability to finance such expenditures through borrowings or choose to do so.
Interstate Regulation
The interstate common carrier pipeline operations of the Partnership are subject to rate regulation by FERC under the Interstate Commerce Act. The Interstate Commerce Act provides, among other things, that to be lawful the rates of common carrier petroleum pipelines must be "just and reasonable" and not unduly discriminatory. New and changed rates must be filed with the FERC, which may investigate their lawfulness on protest or its own motion. The FERC may suspend the effectiveness of such rates for up to seven months. If the suspension expires before completion of the investigation, the rates go into effect, but the pipeline can be required to refund to shippers, with interest, any difference between the level the FERC determines to be lawful and the filed rates under investigation. Rates that have become final and effective may be challenged by a complaint to FERC filed by a shipper or on the FERC's own initiative. Reparations may be recovered by the party filing the complaint for the two-year period prior to the complaint, if FERC finds the rate to be unlawful.
The FERC allows for a rate of return for petroleum products pipelines determined by adding (i) the product of a rate of return equal to the nominal cost of debt multiplied by the portion of the rate base that is deemed to be financed with debt and (ii) the product of a rate of return equal to the real (i.e., inflation-free) cost of equity multiplied by the portion of the rate base that is deemed to be financed with equity. The appropriate rate of return for a petroleum pipeline is determined on a case-by-case basis, taking into account cost of capital, competitive factors and business and financial risks associated with pipeline operations.
Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"), rates that were in effect on October 24, 1991 that were not subject to a protest, investigation or complaint are deemed to be just and reasonable. Such rates, commonly referred to as grandfathered rates, are subject to challenge only for limited reasons. Any relief granted pursuant to such challenges may be prospective only. Because the Partnership's rates that were in effect on October 24, 1991, were not subject to investigation and protest at that time, those rates could be deemed to be just and reasonable pursuant to the EP Act. The Partnership's current rates became final and effective in July 2000, and the Partnership believes that its currently effective tariffs are just and reasonable and would withstand challenge under the FERC's cost-based rate standards. Because of the complexity of rate making, however, the lawfulness of any rate is never assured.
On October 22, 1993, the FERC issued Order No. 561 which adopted a simplified rate making methodology for future oil pipeline rate changes in the form of indexation. Indexation, which is also known as price cap regulation, establishes ceiling prices on oil pipeline rates based on application of a broad-based measure of inflation in the general economy to existing rates. Rate increases up to the ceiling level are to be discretionary for the pipeline, and, for such rate increases, there will be no need to file cost-of-service or supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline may make a limitless number of rate change filings. This indexing mechanism calculates a ceiling rate. Rate decreases are required if the indexing mechanism operates to reduce the ceiling rate below a pipeline's existing rates. The pipeline may increase its rates to this calculated ceiling rate without filing a formal cost based justification and with limited risk of shipper protests.
The indexation method is to serve as the principal basis for the establishment of oil pipeline rate changes in the future. However, the FERC determined that a pipeline may utilize any one of the following alternative methodologies to indexing: (i) a cost-of-service methodology may be utilized by a pipeline to justify a change in a rate if a pipeline can demonstrate that its increased costs are prudently incurred and that there is a substantial divergence between such increased costs and the rate that would be produced by application of the index; and (ii) a pipeline may base its rates upon a "light-handed" market-based form of regulation if it is able to demonstrate a lack of significant market power in the relevant markets.
On September 15, 1997, the Partnership filed an Application for Market Power Determination with the FERC seeking market based rates for approximately half of its markets. In May 1998, the FERC granted the Partnership's application and approximately half of the Pipelines markets subsequently became subject to market force regulation.
In the FERC's Lakehead decision issued June 15, 1995, the FERC partially disallowed Lakehead's inclusion of income taxes in its cost of service. Specifically, the FERC held that Lakehead was entitled to receive an income tax allowance with respect to income attributable to its corporate partners, but was not entitled to receive such an allowance for income attributable to the partnership interests held by individuals. Lakehead's motion for rehearing was denied by the FERC and Lakehead appealed the decision to the U.S. Court of Appeals. Subsequently, the case was settled by Lakehead and the appeal was withdrawn. In another FERC proceeding involving a different oil pipeline limited partnership, various shippers challenged such pipeline's inclusion of an income tax allowance in its cost of service. The FERC decided this case on the same basis as its holding in the Lakehead case. If the FERC were to partially or completely disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, KPL believes that the Partnership's ability to pay distributions to the holders of the Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard.
Intrastate Regulation
The intrastate operations of the East Pipeline in Kansas are subject to regulation by the Kansas Corporation Commission, and the intrastate operations of the West Pipeline in Colorado and Wyoming are subject to regulation by the Colorado Public Utility Commission and the Wyoming Public Service Commission, respectively. Like the FERC, the state regulatory authorities require that shippers be notified of proposed intrastate tariff increases and have an opportunity to protest such increases. The Partnership also files with such state authorities copies of interstate tariff changes filed with the FERC. In addition to challenges to new or proposed rates, challenges to intrastate rates that have already become effective are permitted by complaint of an interested person or by independent action of the appropriate regulatory authority.
General
The operations of the Partnership are subject to Federal, state and local laws and regulations relating to the protection of the environment in the United States and, since February 1999, the environmental laws and regulations of the United Kingdom in regard to the terminals acquired from GATX Terminals, Limited, in the United Kingdom. Although the Partnership believes that its operations are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, past and present, could result in substantial costs and liabilities to the Partnership.
See "Item 3 - Legal Proceedings" for information concerning two lawsuits against certain subsidiaries of the Partnership involving claims for environmental damages.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 and other statutes as they pertain to prevention and response to oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, along shorelines or in the exclusive economic zone. In the event of an oil spill into such waters, substantial liabilities could be imposed upon the Partnership. Regulations concerning the environment are continually being developed and revised in ways that may impose additional regulatory burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum products is not unusual within the petroleum pipeline and liquids terminaling industries. The East Pipeline and ST Services have experienced limited groundwater contamination at various terminal and pipeline sites resulting from various causes including activities of previous owners. Remediation projects are underway or under construction using various remediation techniques. The costs to remediate contamination at several ST terminal locations are being borne by the former owners under indemnification agreements. Although no assurances can be made, the Partnership believes that the aggregate cost of these remediation efforts will not be material.
Groundwater remediation efforts are ongoing at all four of the West Pipeline's terminals and at a Wyoming pump station. Regulatory officials have been consulted in the development of remediation plans. In connection with the purchase of the West Pipeline, the Partnership agreed to implement remediation plans at these specific sites over the succeeding five years following the acquisition in return for the payment by the seller, Wyco Pipe Line Company, of $1,312,000 to the Partnership to cover the discounted estimated future costs of these remediations. The Partnership has accrued $2.1 million for these future remediation expenses.
In May 1998, the West Pipeline, at a point between Dupont, Colorado and Fountain, Colorado ruptured, and approximately 1,000 barrels of product was released. Containment and remedial action was immediately commenced. Upon investigation, it appeared that the failure of the pipeline was due to damage caused by third party excavations. The Partnership has made claim to the third party as well as to its insurance carriers. The Partnership has entered into a Compliance Order on Consent with the State of Colorado with respect to the remediation. As of December 31, 2001, the Partnership has incurred $1.2 million of costs in connection with this incident. Future costs are not anticipated to be significant. The Partnership has recovered substantially all of its costs from its insurance carrier.
The EPA has promulgated regulations that may require the Partnership to apply for permits to discharge storm water runoff. Storm water discharge permits also may be required in certain states in which the Partnership operates. Where such requirements are applicable, the Partnership has applied for such permits and, after the permits are received, will be required to sample storm water effluent before releasing it. The Partnership believes that effluent limitations could be met, if necessary, with minor modifications to existing facilities and operations. Although no assurance in this regard can be given, the Partnership believes that the changes will not have a material effect on the Partnership's financial condition or results of operations.
Aboveground Storage Tank Acts
A number of the states in which the Partnership operates in the United States have passed statutes regulating aboveground tanks containing liquid substances. Generally, these statutes require that such tanks include secondary containment systems or that the operators take certain alternative precautions to ensure that no contamination results from any leaks or spills from the tanks. Although there is not currently a Federal statute regulating these above ground tanks, there is a possibility that such a law will be passed in the United States within the next few years. The Partnership is in substantial compliance with all above ground storage tank laws in the states with such laws. Although no assurance can be given, the Partnership believes that the future implementation of above ground storage tank laws by either additional states or by the Federal government will not have a material adverse effect on the Partnership's financial condition or results of operations.
Air Emissions
The operations of the Partnership are subject to the Federal Clean Air Act and comparable state and local statutes. The Partnership believes that the operations of the Pipelines and Terminals are in substantial compliance with such statutes in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 require or will require most industrial operations in the United States to incur future capital expenditures in order to meet the air emission control standards that have been and are to be developed and implemented by the EPA and state environmental agencies. Pursuant to these Clean Air Act Amendments, those Partnership facilities that emit volatile organic compounds ("VOC") or nitrogen oxides are subject to increasingly stringent regulations, including requirements that certain sources install maximum or reasonably available control technology. In addition, the 1999 Federal Clean Air Act Amendments include a new operating permit for major sources ("Title V Permits"), which applies to some of the Partnership's facilities. Additionally, new dockside loading facilities owned or operated by the Partnership in the United States will be subject to the New Source Performance Standards that were proposed in May 1994. These regulations require control of VOC emissions from the loading and unloading of tank vessels.
Although the Partnership is in substantial compliance with applicable air pollution laws, in anticipation of the implementation of stricter air control regulations, the Partnership is taking actions to substantially reduce its air emissions. The Partnership plans to install bottom loading and vapor recovery equipment on the loading racks at selected terminal sites along the East Pipeline that do not already have such emissions control equipment. These modifications will substantially reduce the total air emissions from each of these facilities. Having begun in 1993, this project is being phased in over a period of years.
Solid Waste
The Partnership generates non-hazardous solid waste that is subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes in the United States. The EPA is considering the adoption of stricter disposal standards for non-hazardous wastes. RCRA also governs the disposal of hazardous wastes. At present, the Partnership is not required to comply with a substantial portion of the RCRA requirements because the Partnership's operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during pipeline operations, will in the future be designated as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Partnership.
At the terminal sites at which groundwater contamination is present, there is also limited soil contamination as a result of the aforementioned spills. The Partnership is under no present requirements to remove these contaminated soils, but the Partnership may be required to do so in the future. Soil contamination also may be present at other Partnership facilities at which spills or releases have occurred. Under certain circumstances, the Partnership may be required to clean up such contaminated soils. Although these costs should not have a material adverse effect on the Partnership, no assurance can be given in this regard.
Superfund
The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. 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. In the course of its ordinary operations, the Partnership may generate waste that may fall within CERCLA's definition of a "hazardous substance". The Partnership may be responsible under CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed.
Environmental Impact Statement
The United States National Environmental Policy Act of 1969 (the "NEPA") applies to certain extensions or additions to a pipeline system. Under NEPA, if any project that would significantly affect the quality of the environment requires a permit or approval from any United States Federal agency, a detailed environmental impact statement must be prepared. The effect of the NEPA may be to delay or prevent construction of new facilities or to alter their location, design or method of construction.
Indemnification
KPL has agreed to indemnify the Partnership against liabilities for damage to the environment resulting from operations of the East Pipeline prior to October 3, 1989. Such indemnification does not extend to any liabilities that arise after such date to the extent such liabilities result from change in environmental laws or regulations. Under such indemnity, KPL is presently liable for the remediation of contamination at certain East Pipeline sites. In addition, the Partnership was wholly or partially indemnified under certain acquisition contracts for some environmental costs. Most of such contracts contain time and amount limitations on the indemnities. To the extent that environmental liabilities exceed the amount of such indemnity, the Partnership has affirmatively assumed the excess environmental liabilities.
The Pipelines are subject to regulation by the United States Department of Transportation (the "DOT") under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA") relating to the design, installation, testing, construction, operation, replacement and management of their pipeline facilities. The HLPSA covers petroleum and petroleum products pipelines and requires any entity that owns or operates pipeline facilities to comply with such safety regulations and to permit access to and copying of records and to make certain reports and provide information as required by the Secretary to Transportation. The Federal Pipeline Safety Act of 1992 amended the HLPSA to include requirements of the future use of internal inspection devices. The Partnership does not believe that it will be required to make any substantial capital expenditures to comply with the requirements of HLPSA as so amended.
On November 3, 2000, the DOT issued new regulations intended by the DOT to assess the integrity of hazardous liquid pipeline segments that, in the event of a leak or failure, could adversely affect highly populated areas, areas unusually sensitive to environmental impact and commercially navigable waterways. Under the regulations, an operator is required, among other things, to conduct baseline integrity assessment tests (such as internal inspections) within seven years, conduct future integrity tests at typically five year intervals and develop and follow a written risk-based integrity management program covering the designated high consequence areas. KPL does not believe that any increased costs of compliance with these regulations will materially affect the Partnership's results of operations.
The Partnership is subject to the requirements of the United States Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that certain information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local authorities and citizens. The Partnership believes that it is in general compliance with OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the Federal Superfund Amendment and Reauthorization Act, and comparable state statutes require the Partnership to organize information about the hazardous materials used in its operations. Certain parts of this information must be reported to employees, state and local governmental authorities, and local citizens upon request. In general, the Partnership expects to increase its expenditures during the next decade to comply with higher industry and regulatory safety standards such as those described above. Such expenditures cannot be accurately estimated at this time, although they are not expected to have a material adverse impact on the Partnership.
The Partnership has no employees. The business of the Partnership is conducted by the General Partner, KPL, which at December 31, 2001, employed approximately 605 persons. Approximately 115 of the persons employed by KPL were subject to representation by unions for collective bargaining purposes; however, only 91 persons employed at 5 of the Partnership's terminal unit locations were subject to collective bargaining or similar contracts at that date. Union contracts regarding conditions of employment for 21, 29, 16, 19 and 6 employees are in effect through March 31, 2002, June 28, 2002, November 1, 2003, June 30, 2004 and September 30, 2005, respectively. All such contracts are subject to automatic renewal for successive one year periods unless either party provides written notice in a timely manner to terminate or modify such agreement.
Item 2. Properties
The properties owned or utilized by the Partnership and its subsidiaries are generally described in Item 1 of this Report. Additional information concerning the obligations of the Partnership and its subsidiaries for lease and rental commitments is presented under the caption "Commitments and Contingencies" in Note 6 to the Partnership's consolidated financial statements. Such descriptions and information are hereby incorporated by reference into this Item 2.
The properties used in the operations of the Pipelines are owned by the Partnership, through its subsidiary entities, except for KPL's operational headquarters, located in Wichita, Kansas, which is held under a lease that expires in 2004. The majority of ST's facilities are owned, while the remainder, including most of its terminal facilities located in port areas and its operational headquarters, located in Dallas, Texas, are held pursuant to lease agreements having various expiration dates, rental rates and other terms.
Item 3. Legal Proceedings
Grace Litigation. Certain subsidiaries of the Partnership were sued in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from which the Partnership acquired ST Services in 1993. The lawsuit involves environmental response and remediation costs allegedly resulting from jet fuel leaks in the early 1970's from a pipeline. The pipeline, which connected a former Grace terminal with Otis Air Force Base in Massachusetts (the "Otis pipeline" or the "pipeline"), ceased operations in 1973 and was abandoned not later than 1976, when the connecting terminal was sold to an unrelated entity. Grace alleged that subsidiaries of the Partnership acquired the abandoned pipeline, as part of the acquisition of ST Services in 1993 and assumed responsibility for environmental damages allegedly caused by the jet fuel leaks. Grace sought a ruling from the Texas court that these subsidiaries are responsible for all liabilities, including all present and future remediation expenses, associated with these leaks and that Grace has no obligation to indemnify these subsidiaries for these expenses. In the lawsuit, Grace also sought indemnification for expenses of approximately $3.5 million that it incurred since 1996 for response and remediation required by the State of Massachusetts and for additional expenses that it expects to incur in the future. The consistent position of the Partnership's subsidiaries has been that they did not acquire the abandoned pipeline as part of the 1993 ST Services transaction, and therefore did not assume any responsibility for the environmental damage nor any liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings that (1) Grace had breached a provision of the 1993 acquisition agreement by failing to disclose matters related to the pipeline, and (2) the pipeline was abandoned before 1978 -- 15 years before the Partnership's subsidiaries acquired ST Services. On August 30, 2000, the Judge entered final judgment in the case that Grace take nothing from the subsidiaries on its claims seeking recovery of remediation costs. Although the Partnership's subsidiaries have not incurred any expenses in connection with the remediation, the court also ruled, in effect, that the subsidiaries would not be entitled to indemnification from Grace if any such expenses were incurred in the future. Moreover, the Judge let stand a prior summary judgment ruling that the pipeline was an asset acquired by the Partnership's subsidiaries as part of the 1993 ST Services transaction and that any liabilities associated with the pipeline would have become liabilities of the subsidiaries. Based on that ruling, the Massachusetts Department of Environmental Protection and Samson Hydrocarbons Company (successor to Grace Petroleum Company) wrote letters to ST Services alleging its responsibility for the remediation, and ST Services responded denying any liability in connection with this matter. The Judge also awarded attorney fees to Grace of more than $1.5 million. Both the Partnership's subsidiaries and Grace have appealed the trial court's final judgment to the Texas Court of Appeals in Dallas. In particular, the subsidiaries have filed an appeal of the judgement finding that the Otis pipeline and any liabilities associated with the pipeline were transferred to them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an automatic stay against actions against Grace. This automatic stay covers the appeal of the Dallas litigation, and the Texas Court of Appeals has issued an order staying all proceedings of the appeal because of the bankruptcy. Once that stay is lifted, the Partnership's subsidiaries that are party to the lawsuit intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation ("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA. The MMR Site contains nine groundwater contamination plumes, two of which are allegedly associated with the Otis pipeline, and various other waste management areas of concern, such as landfills. The United States Department of Defense and the United States Coast Guard, pursuant to a Federal Facilities Agreement, have been responding to the Government remediation demand for most of the contamination problems at the MMR Site. Grace and others have also received and responded to formal inquiries from the United States Government in connection with the environmental damages allegedly resulting from the jet fuel leaks. The Partnership's subsidiaries voluntarily responded to an invitation from the Government to provide information indicating that they do not own the pipeline. In connection with a court-ordered mediation between Grace and the Partnership's subsidiaries, the Government advised the parties in April 1999 that it has identified two spill areas that it believes to be related to the pipeline that is the subject of the Grace suit. The Government at that time advised the parties that it believed it had incurred costs of approximately $34 million, and expected in the future to incur costs of approximately $55 million, for remediation of one of the spill areas. This amount was not intended to be a final accounting of costs or to include all categories of costs. The Government also advised the parties that it could not at that time allocate its costs attributable to the second spill area.
By letter dated July 26, 2001, the United States Department of Justice ("DOJ") advised ST Services that the Government intends to seek reimbursement from ST Services under the Massachusetts Oil and Hazardous Material Release Prevention and Response Act and the Declaratory Judgment Act for the Government's response costs at the two spill areas discussed above. The DOJ relied in part on the judgment by the Texas state court that, in the view of the DOJ, held that ST Services was the current owner of the pipeline and the successor-in-interest of the prior owner and operator. The Government advised ST Services that it believes it has incurred costs exceeding $40 million, and expects to incur future costs exceeding an additional $22 million, for remediation of the two spill areas. The Partnership believes that its subsidiaries have substantial defenses. ST Services responded to the DOJ on September 6, 2001, contesting the Government's positions and declining to reimburse any response costs. ST Services and the Government have continued to exchange correspondence and documents on the matter. The DOJ has not filed a lawsuit against ST Services seeking cost recovery for its environmental investigation and response costs.
PEPCO Litigation. On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a partnership of which ST Services is general partner. PEPCO has reported that it expects to incur total cleanup costs of $70 million to $75 million. Since May 2000, ST Services has provisionally contributed a minority share of the cleanup expense, which has been funded by ST Services' insurance carriers. The Partnership and PEPCO have not, however, reached a final agreement regarding the proportionate responsibility for this cleanup effort and have reserved all rights to assert claims for contribution against each other. The Partnership cannot predict the amount, if any, that ultimately may be determined to be ST Services' share of the remediation expense, but it believes that such amount will be covered by insurance and will not materially adversely affect the Partnership's financial condition.
As a result of the rupture, purported class actions have been filed against PEPCO and ST Services in federal and state court in Maryland by property and/or business owners alleging damages in unspecified amounts under various theories, including under the Oil Pollution Act ("OPA"). The court consolidated all of these cases in a case styled as In re Swanson Creek Oil Spill Litigation. The trial judge recently granted preliminary approval of a $2,250,000 class settlement, with ST Services and PEPCO each contributing half of the settlement fund. Notice of the proposed settlement will be sent to putative class members and putative class members have until March 26, 2002 to opt out. ST Services or PEPCO can void the settlement if too many putative class members opt out and elect to pursue separate litigation. A hearing on final settlement will be held on April 15, 2002. If the settlement is finally approved, this litigation should be concluded in 2002. It is expected that most class members will elect to participate in the class settlement, but it is possible that even if the In re Swanson Creek Oil Spill Litigation settlement becomes final, ST Services may still face litigation from opt-out plaintiffs. ST Services' insurance carriers have assumed the defense of these actions. While the Partnership cannot predict the amount, if any, of any liability it may have in these suits, it believes that such amounts will be covered by insurance and that these actions will not have a material adverse effect on our financial condition.
PEPCO and ST Services have agreed with the State of Maryland to pay costs of assessing natural resource damages arising from the Swanson Creek oil spill under OPA, but they cannot predict at this time the amount of any damages that may be claimed by Maryland. The Partnership believes that both the assessment costs and such damages are covered by insurance and will not materially adversely affect the Partnership's financial condition.
The U.S. Department of Transportation ("DOT") has issued a Notice of Proposed Violation to PEPCO and ST Services alleging violations over several years of pipeline safety regulations and proposing a civil penalty of $674,000. ST Services and PEPCO have contested the DOT allegations and the proposed penalty. A hearing was held before the DOT in late 2001, and ST Services anticipates that the DOT will rule during the first quarter of 2002. In addition, by letter dated January 4, 2002, the Attorney General's Office for the State of Maryland advised ST Services that it plans to exercise its right to seek penalties from ST Services in connection with the April 7, 2000 spill. The ultimate amount of any penalty attributable to ST Services cannot be determined at this time, but the Partnership believes that this matter will not have a material adverse effect on its financial condition.
The Partnership has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, based on the advice of counsel, that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of the Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Partnership Interest Matters
KPP owns a 99% interest as sole limited partner interest and KPL owns a 1% general partner interest in the Partnership. There is no established public trading market for the Partnership ownership interests.
The Partnership makes regular cash distributions, in accordance with its partnership agreement, within 45 days after the end of each quarter to limited partner and general partner interests.
The Partnership is a limited partnership that is not subject to federal income tax. Instead, the partners are required to report their allocable share of the Partnership's income, gain, loss, deduction and credit, regardless of whether the Partnership makes distributions.
Item 6. Summary Historical Financial and Operating Data
The following table sets forth, for the periods and at the dates indicated, selected historical financial and operating data for Kaneb Pipe Line Operating Partnership, L.P. and subsidiaries (the "Partnership"). The data in the table (in thousands) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31,
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2001(a) 2000 1999 1998 1997
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Income Statement Data:
Revenues.............................. $ 207,796 $ 156,232 $ 158,028 $ 125,812 $ 121,156
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Operating costs....................... 90,632 69,653 69,148 52,200 50,183
Depreciation and amortization......... 23,184 16,253 15,043 12,148 11,711
General and administrative............ 11,889 11,881 9,424 6,261 5,793
Gain on sale of assets................ - (1,126) - - -
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Total costs and expenses.......... 125,705 96,661 93,615 70,609 67,687
---------- ---------- --------- ---------- ----------
Operating income...................... 82,091 59,571 64,413 55,203 53,469
Interest and other income............. 4,277 316 408 626 562
Interest expense...................... (14,783) (12,283) (13,390) (11,304) (11,332)
--------- ---------- --------- ---------- ----------
Income before income taxes............ 71,585 47,604 51,431 44,525 42,699
Income tax provision.................. (981) (943) (1,496) (418) (718)
--------- ---------- --------- ---------- -----------
Income before extraordinary item...... 70,604 46,661 49,935 44,107 41,981
Extraordinary item - loss on debt
extinguishment, net of minority
interest and income taxes......... (5,815) - - - -
---------- ---------- --------- ---------- ----------
Net income............................ $ 64,789 $ 46,661 $ 49,935 $ 44,107 $ 41,981
========== ========== ========= ========== ==========
Cash distributions declared........... $ 62,156 $ 53,485 $ 51,850 $ 42,900 $ 40,225
========== ========== ========= ========== ==========
Balance Sheet Data (at year end):
Property and equipment, net........... $ 481,274 $ 321,355 $ 316,883 $ 268,626 $ 247,132
Total assets.......................... 548,371 375,063 365,953 308,432 269,032
Long-term debt........................ 262,624 166,900 155,987 153,000 132,118
Partners' capital..................... 220,527 161,735 169,321 106,437 105,230
|
(a) Includes the operations of Shore Terminals LLC from January 3, 2001 (See Note 3 to Consolidated Financial Statements).
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with the consolidated financial statements of Kaneb Pipe Line Operating Partnership, L.P. (the "Partnership") and notes thereto and the summary historical financial and operating data included elsewhere in this report.
Kaneb Pipe Line Operating Partnership, L.P. (the "Partnership"), a limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling business. Kaneb Pipe Line Partners, L.P. ("KPP"), a master limited partnership, holds a 99% interest as limited partner in the Partnership. Kaneb Pipe Line Company LLC ("KPL"), a wholly-owned subsidiary of Kaneb Services LLC ("KSL"), as general partner, holds a 1% general partner interest in both the Partnership and KPP. At December 31, 2001, KPL, together with its affiliates, owned an approximate 25% interest as a limited partner and a combined 2% interest as a general partner in KPP. The Partnership is engaged through operating subsidiaries in the refined petroleum products pipeline business and, since 1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the transportation through the East Pipeline and the West Pipeline (collectively referred to as the "Pipelines"), as common carriers, of refined petroleum products. Common carrier activities are those under which transportation through the pipelines is available at published tariffs filed, in the case of interstate shipments, with the Federal Energy Regulatory Commission (the "FERC"), or in the case of intrastate shipments in Kansas, Colorado and Wyoming, with the relevant state authority, to any shipper of refined petroleum products who requests such services and satisfies the conditions and specifications for transportation. The Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The products are transported from refineries connected to the Pipeline, directly or through other pipelines, to agricultural users, railroads and wholesale customers in the states in which the Pipelines are located and in portions of other states. Substantially all of the Pipelines' operations constitute common carrier operations that are subject to Federal or state tariff regulations. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products. The Partnership's business of terminaling petroleum products and specialty liquids is conducted under the name ST Services ("ST").
On January 3, 2001, the Partnership acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090 units issued by KPP (valued at $56.5 million on the date of agreement and its announcement). Financing for the cash portion of the purchase price was supplied under a $275 million unsecured revolving credit agreement with a group of banks. See "Liquidity and Capital Resources". Shore owns seven terminals, located in four states, with a total tankage capacity of 7.8 million barrels. All of the terminals handle petroleum products and, with the exception of one, have deep water access.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million) plus transaction costs and the assumption of certain liabilities. The acquisition of the six locations, which have an aggregate tankage capacity of 5.4 million barrels, was initially financed by term loans from a bank. $13.3 million of the term loans were repaid in July 1999 with the proceeds from a public unit offering. See "Liquidity and Capital Resources". Three of the terminals, handling petroleum products, chemicals and molten sulfur, respectively, operate in England. The remaining three facilities, two in Scotland and one in Northern Ireland, are primarily petroleum terminals. All six terminals are served by deepwater marine docks.
The Partnership is the third largest independent liquids terminaling company in the United States. At December 31, 2001, ST operated 41 facilities in 20 states, the District of Columbia and six facilities in the United Kingdom with an aggregate tankage capacity of approximately 39.0 million barrels.
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 74,976 $ 70,685 $ 67,607
Operating costs...................................... 28,844 25,223 23,579
Depreciation and amortization........................ 5,478 5,180 5,090
General and administrative........................... 3,881 4,069 3,102
----------- ----------- -----------
Operating income..................................... $ 36,773 $ 36,213 $ 35,836
=========== =========== ===========
|
Pipelines revenues are based on volumes shipped and the distances over which such volumes are transported. For the year ended December 31, 2001, revenues increased by $4.3 million, compared to 2000, due to increases in barrel miles shipped and increases in terminaling charges. For the year ended December 31, 2000, revenues increased by $3.1 million, compared to 1999, due to an increase in terminaling charges. Because tariff rates are regulated by the FERC, the Pipelines compete primarily on the basis of quality of service, including delivering products at convenient locations on a timely basis to meet the needs of its customers. Barrel miles totaled 18.6 billion, 17.8 billion and 18.4 billion for the years ended December 31, 2001, 2000 and 1999, respectively.
Operating costs, which include fuel and power costs, materials and supplies, maintenance and repair costs, salaries, wages and employee benefits, and property and other taxes, increased by $3.6 million in 2001 and $1.6 million in 2000. The increase in 2001 was due to increases in fuel and power costs and expenses from pipeline relocation projects. The increase in 2000 was due to increases in materials and supplies costs, including additives, that are volume related. General and administrative costs, which include managerial, accounting and administrative personnel costs, office rental expense, legal and professional costs and other non-operating costs, decreased by $0.2 million in 2001 and increased by $1.0 million in 2000, compared to the respective prior year. The increase in 2000 was the result of a one-time benefit resulting from the favorable elimination of a contingency in 1999.
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 132,820 $ 85,547 $ 90,421
Operating costs...................................... 61,788 44,430 45,569
Depreciation and amortization........................ 17,706 11,073 9,953
General and administrative........................... 8,008 7,812 6,322
Gain on sale of assets............................... - (1,126) -
----------- ----------- -----------
Operating income..................................... $ 45,318 $ 23,358 $ 28,577
=========== =========== ===========
|
For the year ended December 31, 2001, revenues increased by $47.3 million, compared to 2000, due to the Shore acquisition and overall increases in utilization at existing locations, the result of relatively favorable market conditions. Approximately $36.0 million of the 2001 revenue increase was a result of the Shore acquisition. 2000 revenues decreased by $4.9 million, compared to 1999, as revenue increases resulting from the United Kingdom and other 1999 terminal acquisitions were more than offset by decreases in tank utilization due to unfavorable domestic market conditions resulting from declines in forward product pricing. Average annual tankage utilized for the years ended December 31, 2001, 2000 and 1999 aggregated 30.1 million barrels, 21.0 million barrels and 22.6 million barrels, respectively. The 2001 increase in average annual tankage utilized resulted from the Shore acquisition and the favorable market conditions. The 2000 decrease resulted from the unfavorable domestic market conditions. Average revenues per barrel of tankage utilized for the years ended December 31, 2001, 2000 and 1999 was $4.41, $4.12 and $4.00, respectively. The increase in 2001 average revenues per barrel of tankage utilized was due to favorable market conditions, when compared to 2000. The 2000 increase, when compared to 1999, was due to the storage of a larger proportionate volume of specialty chemicals, which are historically at higher per barrel rates than petroleum products.
In 2001 operating costs increased by $17.4 million, when compared to 2000, due to the Shore acquisition and increases in volumes stored. 2000 operating costs decreased by $1.1 million, when compared to 1999, due to lower costs resulting from the overall decline in volumes stored. General and administrative expense increased by $0.2 million in 2001 and by $1.5 million in 2000. The increase in general and administrative costs in 2001, compared to 2000, is due to the Shore acquisition partially offset by the extraordinary high litigation costs in 2000. The increase in 2000, compared to 1999, was due entirely to the extraordinarily high litigation costs. In 2000 the Partnership sold land and other terminaling business assets for approximately $2.0 million in net proceeds, recognizing a gain on disposition of assets of $1.1 million.
Total tankage capacity (39.0 million barrels at December 31, 2001) has been, and is expected to remain, adequate to meet existing customer storage requirements. Customers consider factors such as location, access to cost effective transportation and quality of service, in addition to pricing, when selecting terminal storage.
In March of 2001, the Partnership entered into two contracts for the purpose of locking in interest rates on $100 million of anticipated ten-year public debt offerings. As the interest rate locks were not designated as hedging instruments pursuant to the requirements of Statement of Financial Accounting Standards ("SFAS") No. 133, increases or decreases in the fair value of the contracts are included as a component of interest and other income, net. On May 22, 2001, the contracts were settled resulting in a gain of $3.8 million.
For the year ended December 31, 2001, interest expense increased by $2.5 million, compared to 2000, due to increases in debt resulting from the Shore acquisition (see "Liquidity and Capital Resources"), partially offset by declines in interest rates on variable rate debt. For the year ended December 31, 2000, interest expense decreased by $1.1 million, compared to 1999, due to repayments of debt from a portion of the 1999 unit offering proceeds (see "Liquidity and Capital Resources").
Cash provided by operating activities was $102.2 million, $62.0 million and $63.6 million for the years 2001, 2000 and 1999, respectively. The increase in 2001, compared to 2000, is due to increases in terminaling revenues and operating income, a result of the Shore acquisition, and increases in utilization at existing terminaling locations. The decrease in 2000, compared to 1999, is a result of the decrease in terminaling revenues and operating income due to unfavorable domestic market conditions.
Capital expenditures, excluding expansion capital expenditures, were $17.2 million, $9.5 million and $14.6 million for 2001, 2000 and 1999, respectively. During all periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not, and are not expected in the future to be, significant. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages (subject to deductibles and limits). The Partnership anticipates that routine maintenance capital expenditures (excluding acquisitions) will total approximately $15 million to $20 million in 2002. Such future expenditures, however, will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and Federal governmental regulations, fuel conservation efforts and the availability of financing on acceptable terms. No assurance can be given that required capital expenditures will not exceed anticipated amounts during the year or thereafter or that the Partnership will have the ability to finance such expenditures through borrowings, or choose to do so.
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures are expected to be funded through additional Partnership bank borrowings and/or future debt offerings or KPP public unit offerings.
The Partnership makes regular cash distributions, in accordance with its partnership agreement, within 45 days after the end of each quarter to limited partner and general partner interests. Aggregate distributions of approximately $62.2 million, $53.5 million and $51.9 million, were declared to limited partner interests and general partner interests in 2001, 2000 and 1999, respectively.
In December 2000, the Partnership entered into a credit agreement with a group of banks that provides for a $275 million unsecured revolving credit facility through December 2003. The credit facility bears interest at variable rates and has a variable commitment fee on unutilized amounts. The credit facility contains certain financial and operational covenants, including limitations on investments, sales of assets and transactions with affiliates, and, absent an event of default, the covenants do not restrict distributions to partners. In January 2001, proceeds from the facility were used to repay in full the Partnership's $128 million of mortgage notes and $15 million outstanding under its $25 million revolving credit facility. An additional $107 million was used to finance the cash portion of the Shore acquisition. Under the provisions of the mortgage notes, the Partnership incurred a $6.5 million prepayment penalty before income taxes, which was recognized as an extraordinary expense in the first quarter of 2001. At December 31, 2001, $238.9 million was drawn on the facility, at an interest rate of 2.69%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned subsidiaries, entered into a credit agreement with a bank that provided for the issuance of $39.2 million of term loans in connection with the United Kingdom terminal acquisition and $5.0 million for general Partnership purposes. $18.3 million of the term loans were repaid in July 1999 with the proceeds from KPP's public unit offering. The remaining portion ($23.7 million at December 31, 2001), with a fixed rate of 7.25%, is due in December 2003. The term loans under the credit agreement, as amended, are unsecured and are pari passu with the $275 million revolving credit facility. The term loans also contain certain financial and operational covenants.
In July 1999, KPP issued 2.25 million limited partnership units in a public offering at $30.75 per unit, generating approximately $65.6 million in net proceeds. A portion of the proceeds was used to repay in full the Partnership's $15.0 million promissory note, the $25.0 million revolving credit facility and $18.3 million in term loans (including $13.3 million in term loans resulting from the United Kingdom terminal acquisition).
In January of 2002, KPP issued 1.25 million limited partnership units in a public offering at $41.65 per unit, generating approximately $49.7 million in net proceeds. The proceeds were used to reduce the amount of indebtedness outstanding under the Partnership's $275 million revolving credit facility.
In February 2002, the Partnership issued $250 million of 7.75% senior unsecured notes due February 15, 2012. The net proceeds from the public offering, $248.2 million, were used to repay the $188.9 million outstanding under the $275 million revolving credit agreement and to partially fund the acquisition of all of the liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, the Partnership acquired Statia for approximately $194 million in cash. The acquired Statia subsidiaries have approximately $107 million in outstanding debt, including $101 million of 11.75% notes due in November 2003. The cash portion of the purchase price was funded by the Partnership's $275 million revolving credit agreement and proceeds from the Partnership's February 2002 public debt offering. On March 1, 2002, the Partnership announced that it had commenced the procedure to redeem all of Statia's 11.75% notes at 102.938% of the principal amount, plus accrued interest. The redemption is expected to be funded by the Partnership's $275 million revolving credit facility.
See also "Item 1 - Regulation", regarding the FERC's Lakehead decision.
The carrying value of property and equipment is periodically evaluated using management's estimates of undiscounted future cash flows, or, in some cases, third-party appraisals, as the basis of determining if impairment exists under the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed Of". To the extent that impairment is indicated to exist, an impairment loss is recognized under SFAS No. 121 based on fair value. The application of SFAS No. 121 did not have a material impact on the results of operations of the Partnership for the years ended December 31, 2001, 2000 or 1999. However, future evaluations of carrying value are dependent of many factors, some of which are out of the Partnership's control, including demand for refined petroleum products and terminaling services in the Partnership's market areas, and local, state and Federal governmental regulations. To the extent that such factors or conditions change, it is possible that future impairments might occur, which could have a material effect on the results of operations of the Partnership.
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Partnership's commitment to a formal plan of action. The application of the Partnership's environmental accounting policies did not have a material impact on the results of operations of the Partnership for the years ended December 31, 2001, 2000 or 1999. Although the Partnership believes that its operations are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in pipeline and terminaling operations. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and legal claims for damages to property or persons resulting from operations of the Partnership could result in substantial costs and liabilities, any of which could have a material effect on the results of operations of the Partnership.
In July of 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141 "Business Combinations", which requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 141 also specifies the criteria for recording intangible assets other than goodwill in a business combination. The Partnership is currently assessing the impact of SFAS No. 141 on its financial statements.
Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Partnership is currently assessing the impact of SFAS No. 142, which must be adopted in the first quarter of 2002.
Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations", which establishes requirements for the removal-type costs associated with asset retirements. The Partnership is currently assessing the impact of SFAS No. 143, which must be adopted in the first quarter of 2003.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, which supercedes SFAS No. 121, is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years with earlier application encouraged. The Partnership is currently assessing the impact on its financial statements.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse changes in market rates and prices) to which the Partnership is exposed are interest rates on the Partnership's debt and investment portfolios. The Partnership centrally manages its debt and investment portfolios considering investment opportunities and risks and overall financing strategies. The Partnership's investment portfolio consists of cash equivalents; accordingly, the carrying amounts approximate fair value. The Partnership's investments are not material to its financial position or performance. Assuming variable rate debt of $238.9 million at December 31, 2001, a one percent increase in interest rates would increase net interest expense by approximately $2.4 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Partnership begin on page F-1 of this report. Such information is hereby incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership does not have directors or officers. All directors of the general partner are elected annually by KPL. All officers serve at the discretion of the directors. The information contained in Item 10 of KPP's Form 10-K, for the year ended December 31, 2001, is incorporated by reference in this report.
Item 11. Executive Compensation
The officers of the general partner manage and operate the Partnership's business. The Partnership does not directly employ any of the persons responsible for managing or operating the Partnership's operations, but instead reimburses the General Partner for the services of such persons. The information contained in Item 11 of KPP's Form 10-K, for the year ended December 31, 2001, is incorporated by reference in this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
KPP owns a 99% interest as the sole limited partner interest and KPL owns a 1% general partner interest in the Partnership. Information identifying security ownership by the Directors and Officers of KPL is contained in Item 12 of KPP's Form 10-K, for the year ended December 31, 2001, and is incorporated by reference in this report.
Item 13. Certain Relationships and Related Transactions
KPL is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Note 7 to the Partnership's consolidated financial statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements Beginning
Page
Set forth below is a list of financial statements appearing in this report.
Kaneb Pipe Line Operating Partnership, L.P. and Subsidiaries Financial Statements:
Independent Auditors' Report.............................................................. F - 1
Consolidated Statements of Income - Three Years Ended December 31, 2001................... F - 2
Consolidated Balance Sheets - December 31, 2001 and 2000.................................. F - 3
Consolidated Statements of Cash Flows - Three Years Ended December 31, 2001............... F - 4
Consolidated Statements of Partners' Capital - Three Years ended December 31, 2001........ F - 5
Notes to Consolidated Financial Statements................................................ F - 6
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
|
(a)(3) List of Exhibits
3.1 Amended and Restated Agreement of Limited Partnership, dated September 27, 1989, filed herewith.
10.1 ST Agreement and Plan of Merger dated December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993, filed as Exhibit 10.1 of the exhibits to KPP's Current Report on Form 8-K ("Form 8-K"), dated March 16, 1993, which exhibit is hereby incorporated by reference.
10.2 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and the Partnership, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to KPP's March 1995 Form 8-K, which exhibit is hereby incorporated by reference.
10.3 Asset Purchase Agreements between and among Steuart Petroleum Company, SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and the Partnership, as amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to KPP's Current Report on Form 8-K dated January 3, 1996, which exhibits are hereby incorporated by reference.
10.4 Formation and Purchase Agreement, between and among Support Terminal Operating Partnership, L.P., Northville Industries Corp. and AFFCO, Corp., dated October 30, 1998, filed as exhibit 10.9 to KPP's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.5 Agreement, between and among, GATX Terminals Limited, ST Services, Ltd., ST Eastham, Ltd., GATX Terminals Corporation, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated January 26, 1999, filed as Exhibit 10.10 to KPP's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.6 Credit Agreement, between and among, Kaneb Pipe Line Operating Partnership, L.P., ST Services, Ltd. and SunTrust Bank, Atlanta, dated January 27, 1999, filed as Exhibit 10.11 to KPP's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.7 Revolving Credit Agreement, dated as of December 28, 2000 among Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners, L.P., The Lenders From Time To Time Party Hereto, and SunTrust Bank, as Administrative Agent, filed as Exhibit 10.7 to KPP's Form 10-K for the year ended December 31, 2000, which exhibit is hereby incorporated by reference.
10.8 Securities Purchase Agreement Among Shore Terminals LLC, Kaneb Pipe Line Partners, L.P. and the Sellers Named Therein, dated as of September 22, 2000, Amendment No. 1 To Securities Purchase Agreement, dated as of November 28, 2000 and Registration Rights Agreement, dated as of January 3, 2001, filed as Exhibits 10.1, 10.2 and 10.3 of the exhibits to KPP's Current Report on Form 8-K dated January 3, 2001, which exhibits are hereby incorporated by reference.
10.9 Stock Purchase Agreement, dated as of November 12, 2001, by and between Kaneb Pipe Line Operating Partnership, L.P., and Statia Terminals Group NV, a public company with limited liability organized under the laws of the Netherlands Antilles, filed as Exhibit 10.1 to the exhibits to Registrant's Current Report on Form 8-K, dated January 24, 2002, and incorporated herein by reference.
10.10 Voting and Option Agreement dated as of November 12, 2001, by and between Kaneb Pipe Line Operating Partnership, L.P., and Statia Terminals Holdings N.V., a Netherlands Antilles company and a shareholder of Statia Terminals Group NV, a Netherlands Antilles company filed as Exhibit 10.1 to the exhibits to Registrant's Current Report on Form 8-K, dated January 24, 2002, and incorporated herein by reference.
21 List of Subsidiaries, filed herewith.
23 Consent of KPMG LLP, filed herewith.
24 Powers of Attorney (included in this report and incorporated herein by reference.)
(b) Reports on Form 8-K
None.
INDEPENDENT AUDITORS' REPORT
To the Partners of
Kaneb Pipe Line Operating Partnership, L.P.
We have audited the consolidated financial statements of Kaneb Pipe Line Operating Partnership, L.P. and its subsidiaries (the "Partnership") as listed in the index appearing under Item 14(a)(1). These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
February 11, 2002
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Revenues.............................................. $ 207,796,000 $ 156,232,000 $ 158,028,000
----------------- ----------------- -----------------
Costs and expenses:
Operating costs.................................... 90,632,000 69,653,000 69,148,000
Depreciation and amortization...................... 23,184,000 16,253,000 15,043,000
General and administrative......................... 11,889,000 11,881,000 9,424,000
Gain on sale of assets............................. - (1,126,000) -
----------------- ----------------- -----------------
Total costs and expenses........................ 125,705,000 96,661,000 93,615,000
----------------- ----------------- -----------------
Operating income...................................... 82,091,000 59,571,000 64,413,000
Interest and other income............................. 4,277,000 316,000 408,000
Interest expense...................................... (14,783,000) (12,283,000) (13,390,000)
----------------- ----------------- -----------------
Income before income taxes and extraordinary item..... 71,585,000 47,604,000 51,431,000
Income tax provision.................................. (981,000) (943,000) (1,496,000)
----------------- ----------------- -----------------
Income before extraordinary item...................... 70,604,000 46,661,000 49,935,000
Extraordinary item - loss on debt
extinguishment, net of income taxes................ (5,815,000) - -
----------------- ----------------- -----------------
Net income............................................ $ 64,789,000 $ 46,661,000 $ 49,935,000
================= ================= =================
|
See notes to consolidated financial statements.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2001 2000
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 7,903,000 $ 4,758,000
Accounts receivable..................................................... 24,005,000 21,091,000
Prepaid expenses........................................................ 2,721,000 5,291,000
------------- --------------
Total current assets................................................. 34,629,000 31,140,000
------------- --------------
Property and equipment..................................................... 639,084,000 458,926,000
Less accumulated depreciation.............................................. 157,810,000 137,571,000
------------- --------------
Net property and equipment........................................... 481,274,000 321,355,000
------------- --------------
Investments in affiliates.................................................. 22,252,000 22,568,000
Excess of cost over fair value of net assets of acquired business and
other assets............................................................ 10,216,000 -
------------- --------------
$ 548,371,000 $ 375,063,000
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable........................................................ $ 6,541,000 $ 3,706,000
Accrued expenses........................................................ 9,963,000 7,705,000
Accrued distributions payable........................................... 16,263,000 13,372,000
Accrued taxes, other than income taxes.................................. 2,635,000 2,363,000
Deferred terminaling fees............................................... 6,503,000 3,717,000
Payable to general partner.............................................. 4,701,000 1,889,000
------------- --------------
Total current liabilities............................................ 46,606,000 32,752,000
------------- --------------
Long-term debt............................................................. 262,624,000 166,900,000
Other liabilities and deferred taxes....................................... 18,614,000 13,676,000
Commitments and contingencies
Partners' capital:
Limited partner......................................................... 221,363,000 162,288,000
General partner......................................................... 1,030,000 984,000
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment............................ (1,866,000) (1,537,000)
------------- --------------
Total partners' capital.............................................. 220,527,000 161,735,000
------------- --------------
$ 548,371,000 $ 375,063,000
============= ==============
|
See notes to consolidated financial statements.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999
------------- ------------- --------------
Operating activities:
Net income ........................................ $ 64,789,000 $ 46,661,000 $ 49,935,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 23,184,000 16,253,000 15,043,000
Equity in earnings of affiliates, net of
distributions................................. (5,000) (154,000) (1,072,000)
Gain on sale of assets.......................... - (1,126,000) -
Deferred income taxes........................... 981,000 943,000 1,487,000
Extraordinary item.............................. 5,815,000 - -
Other liabilities............................... (5,422,000) 841,000 -
Changes in working capital components:
Accounts receivable........................... (824,000) (4,162,000) (3,012,000)
Prepaid expenses.............................. 1,601,000 (255,000) (995,000)
Accounts payable and accrued expenses......... 6,512,000 1,869,000 3,028,000
Deferred terminaling fees..................... 2,786,000 642,000 (451,000)
Payable to general partner.................... 2,812,000 478,000 (374,000)
-------------- ------------- --------------
Net cash provided by operating activities.. 102,229,000 61,990,000 63,589,000
-------------- ------------- --------------
Investing activities:
Acquisitions of terminals, net of cash acquired.... (111,562,000) (12,053,000) (44,390,000)
Capital expenditures............................... (17,246,000) (9,483,000) (14,568,000)
Proceeds from sale of assets....................... 2,807,000 1,961,000 -
Other, net......................................... (111,000) (212,000) (2,064,000)
-------------- ------------- --------------
Net cash used in investing activities...... (126,112,000) (19,787,000) (61,022,000)
-------------- ------------- --------------
Financing activities:
Issuance of debt................................... 260,500,000 14,613,000 51,319,000
Payments of debt................................... (171,316,000) (3,700,000) (58,332,000)
Distributions...................................... (62,156,000) (53,485,000) (51,850,000)
Changes in payable to general partner.............. - - (5,000,000)
Net proceeds from issuance of units by KPP......... - - 65,574,000
-------------- ------------- --------------
Net cash provided by (used in) financing
activities............................. 27,028,000 (42,572,000) 1,711,000
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents...... 3,145,000 (369,000) 4,278,000
Cash and cash equivalents at beginning of period...... 4,758,000 5,127,000 849,000
-------------- ------------- --------------
Cash and cash equivalents at end of period............ $ 7,903,000 $ 4,758,000 $ 5,127,000
============== ============= ==============
Supplemental cash flow information:
Cash paid for interest............................. $ 14,028,000 $ 12,438,000 $ 12,881,000
============== ============= ==============
Non-cash investing and financing activities -
Issuance of units by KPP in connection with
acquisition of terminals........................ $ 56,488,000 $ - $ -
============== ============= ==============
|
See notes to consolidated financial statements.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Accumulated
Other
Limited General Comprehensive Comprehensive
Partner Partner Income (Loss) Total Income
-------------- ----------- ------------- -------------- ---------------
Partners' capital at January 1, 1999..... $ 105,388,000 $ 1,049,000 $ - $ 106,437,000
1999 income allocation................. 49,436,000 499,000 - 49,935,000 $ 49,935,000
Distributions declared................. (51,342,000) (508,000) - (51,850,000) -
Issuance of units by KPP............... 65,574,000 - - 65,574,000 -
Foreign currency translation
adjustment........................... - - (775,000) (775,000) (775,000)
-------------- ----------- ----------- -------------- ---------------
Comprehensive income for the year...... $ 49,160,000
===============
Partners' capital at December 31, 1999... 169,056,000 1,040,000 (775,000) 169,321,000
2000 income allocation................. 46,194,000 467,000 - 46,661,000 $ 46,661,000
Distributions declared................. (52,962,000) (523,000) - (53,485,000) -
Foreign currency translation
adjustment........................... - - (762,000) (762,000) (762,000)
-------------- ----------- ----------- -------------- ---------------
Comprehensive income for the year...... $ 45,899,000
===============
Partners' capital at December 31, 2000... 162,288,000 984,000 (1,537,000) 161,735,000
2001 income allocation................. 64,141,000 648,000 - 64,789,000 $ 64,789,000
Distributions declared................. (61,554,000) (602,000) - (62,156,000) -
Issuance of units by KPP............... 56,488,000 - - 56,488,000 -
Foreign currency translation
adjustment........................... - - (329,000) (329,000) (329,000)
-------------- ----------- ----------- -------------- ---------------
Comprehensive income for the year...... $ 64,460,000
===============
Partners' capital at December 31, 2001... $ 221,363,000 $ 1,030,000 $(1,866,000) $ 220,527,000
============== ============ =========== ==============
|
See notes to consolidated financial statements.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Operating Partnership, L.P. (the "Partnership"), a limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling business. Kaneb Pipe Line Partners, L.P. ("KPP"), a master limited partnership, holds a 99% interest as limited partner in the Partnership. Kaneb Pipe Line Company LLC ("KPL"), a wholly-owned subsidiary of Kaneb Services LLC ("KSL"), as general partner, holds a 1% general partner interest in both the Partnership and KPP. At December 31, 2001, KPL, together with its affiliates, owned an approximate 25% interest as a limited partner and a combined 2% interest as a general partner in KPP.
In July 1999, KPP issued 2.25 million limited partnership units in a public offering at $30.75 per unit, generating approximately $65.6 million in net proceeds. A portion of the proceeds was used to repay in full the Partnership's $15.0 million promissory note, the $25.0 million revolving credit facility and $18.3 million in term loans (including $13.3 million in term loans resulting from the United Kingdom terminal acquisition referred to in Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements.
Cash and Cash Equivalents
The Partnership's policy is to invest cash in highly liquid investments with original maturities of three months or less. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents. The Partnership does not have any derivative financial instruments.
Property and Equipment
Property and equipment are carried at historical cost. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets, as disclosed in Note 4. The rates used for pipeline and storage facilities of the Partnership are the same as those which have been promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically evaluated using undiscounted future cash flows as the basis for determining if impairment exists under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". To the extent impairment is indicated to exist, an impairment loss will be recognized under SFAS No. 121 based on fair value.
Revenue and Income Recognition
The Partnership provides pipeline transportation of refined petroleum products and liquified petroleum gases. Pipeline revenues are recognized as services are provided. The Partnership's Support Terminal Services operation ("ST Services") provides terminaling and other ancillary services. Storage fees are billed one month in advance and are reported as deferred income. Terminaling revenues are recognized in the month services are provided.
Foreign Currency Translation
The Partnership translates the balance sheet of its foreign subsidiary using year-end exchange rates and translates income statement amounts using the average exchange rates in effect during the year. The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive income (loss) in Partners' Capital. Gains and losses resulting from foreign currency transactions are included in the statements of income.
Excess of Cost Over Fair Value of Net Assets of Acquired Business
The excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over a period of 20 years. The Partnership periodically evaluates the proprietary of the carrying amount of the excess of cost over fair value of net assets of the acquired business, as well as the amortization period, to determine whether current events or circumstances warrant adjustments to the carrying value and/or revised estimates of the amortization period. The Partnership believes that no such impairment has occurred and that no reduction in the amortization period is warranted.
Environmental Matters
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Partnership's commitment to a formal plan of action.
Comprehensive Income
The Partnership follows the provisions of SFAS No. 130, "Reporting Comprehensive Income", for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 only requires additional disclosure and does not affect the Partnership's financial position or results of operations.
Income Tax Considerations
Income before income tax expense and extraordinary item is made up of the following components:
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999
------------- ------------- --------------
Partnership operations...................... $ 67,119,000 $ 43,538,000 $ 46,741,000
Corporate operations:
Domestic................................. 477,000 510,000 501,000
Foreign.................................. 3,989,000 3,556,000 4,189,000
------------- ------------- --------------
$ 71,585,000 $ 47,604,000 $ 51,431,000
============= ============= ==============
|
Partnership operations are not subject to Federal or state income taxes. However, certain operations of ST Services are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 2001, 2000 and 1999 primarily consists of deferred U.S. and foreign income taxes of $1.0 million, $0.9 million and $1.5 million, respectively. The net deferred tax liability of $6.1 million and $5.9 million at December 31, 2001 and 2000, respectively, consists of deferred tax liabilities of $12.5 million and $12.0 million, respectively, and deferred tax assets of $6.4 million and $6.1 million, respectively. The deferred tax liabilities consist primarily of tax depreciation in excess of book depreciation and the deferred tax assets consist primarily of net operating losses. The U.S. corporate operations have net operating loss carryforwards for tax purposes totaling approximately $20.7 million which expire in years 2008 through 2021. Additionally, the Partnership's foreign operations have net operating loss carryforwards for tax purposes totaling approximately $2.7 million which do not have an expiration date.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If any such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of Partnership interests. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. SFAS No. 109, "Accounting for Income Taxes," requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. Management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
Cash Distributions
The Partnership makes regular cash distributions, in accordance with its partnership agreement, within 45 days after the end of each quarter to limited partner and general partner interests. Aggregate distributions of approximately $62.2 million, $53.5 million and $51.9 million, were declared to limited partner interests and general partner interests in 2001, 2000 and 1999, respectively.
Derivative Instruments
Effective January 1, 2001, the Partnership adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes the accounting and reporting standards for such activities. Under SFAS No. 133, companies must recognize all derivative instruments on their balance sheet at fair value. Changes in the value of derivative instruments, which are considered hedges, are offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. SFAS No. 133 requires that unrealized gains and losses on derivatives not qualifying for hedge accounting be recognized currently in earnings. On January 1, 2001, the Partnership was not a party to any derivative contracts; accordingly, initial adoption of SFAS No. 133 at that date did not have any effect on the Partnership's result of operations or financial position.
In March of 2001, the Partnership entered into two contracts for the purpose of locking in interest rates on $100 million of anticipated ten-year public debt offerings. As the interest rate locks were not designated as hedging instruments pursuant to the requirements of SFAS No. 133, increases or decreases in the fair value of the contracts were included as a component of interest and other income, net. On May 22, 2001, the contracts were settled resulting in a gain of $3.8 million.
Change in Presentation
Certain prior year financial statement items have been reclassified to conform with the 2001 presentation.
Estimates
The preparation of the Partnership's 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 disclosures 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 those estimates.
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141 "Business Combinations", which requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. SFAS No. 141 also specifies the criteria for recording intangible assets other than goodwill in a business combination. The Partnership is currently assessing the impact of SFAS No. 141 on its financial statements.
Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Partnership is currently assessing the impact of SFAS No. 142, which must be adopted in the first quarter of 2002.
Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations", which establishes requirements for the removal-type costs associated with asset retirements. The Partnership is currently assessing the impact of SFAS No. 143, which must be adopted in the first quarter of 2003.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144, which supercedes SFAS No. 121, is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years with earlier application encouraged. The Partnership is currently assessing the impact on its financial statements.
3. ACQUISITIONS
On January 3, 2001, the Partnership acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090 units issued by KPP (valued at $56.5 million on the date of agreement and its announcement). Financing for the cash portion of the purchase price was supplied under a $275 million unsecured revolving credit agreement with a group of banks (see Note 5). The acquisition has been accounted for using the purchase method of accounting. Assuming the acquisition occurred at January 1, 2000, unaudited pro forma 2000 revenues and net income would be $189.6 million and $49.7 million, respectively.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million) plus transaction costs and the assumption of certain liabilities. The acquisition, which was initially financed with term loans from a bank, has been accounted for using the purchase method of accounting. $13.3 million of the term loans were repaid in July 1999 with the proceeds from KPP's 1999 public unit offering (see Notes 1 and 5).
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
Estimated
Useful December 31,
Life -------------------------------------
(Years) 2001 2000
-------------- --------------- --------------
Land.................................... - $ 43,005,000 $ 23,360,000
Buildings............................... 35 10,834,000 9,144,000
Furniture and fixtures.................. 16 3,900,000 3,445,000
Transportation equipment................ 6 5,092,000 4,469,000
Machinery and equipment................. 20 - 40 32,750,000 32,996,000
Pipeline and terminaling equipment...... 20 - 40 534,292,000 378,123,000
Construction work-in-progress........... - 9,211,000 7,389,000
--------------- --------------
Total property and equipment............ 639,084,000 458,926,000
Less accumulated depreciation......... 157,810,000 137,571,000
--------------- --------------
Net property and equipment.............. $ 481,274,000 $ 321,355,000
=============== ==============
|
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
-------------------------------------
2001 2000
--------------- --------------
$275 million revolving credit facility, due in December 2003... $ 238,900,000 $ -
Term loan, due in December 2003................................ 23,724,000 23,900,000
First mortgage notes, repaid in January 2001................... - 128,000,000
$25 million revolving credit facility, repaid in January 2001.. - 15,000,000
--------------- --------------
Total long-term debt........................................... $ 262,624,000 $ 166,900,000
=============== ==============
|
In December 2000, the Partnership entered into a credit agreement with a group of banks that provides for a $275 million unsecured revolving credit facility through December 2003. The facility bears interest at variable interest rates and has a variable commitment fee on the unutilized amounts. The credit facility contains certain financial and operational covenants, including certain limitations on investments, sales of assets and transactions with affiliates and, absent an event of default, such covenants do not restrict distributions to partners. In January 2001, proceeds from the facility were used to repay in full the Partnership's $128 million of mortgage notes and $15 million outstanding under its $25 million revolving credit facility. An additional $107 million was used to finance the cash portion of the Shore acquisition. Under the provisions of the mortgage notes, the Partnership incurred $6.5 million in prepayment penalties which, before income taxes, was recognized as an extraordinary expense in the first quarter of 2001. At December 31, 2001, $238.9 million was drawn on the facility at an interest rate of 2.69%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned subsidiaries, entered into a credit agreement with a bank that provided for the issuance of $39.2 million in term loans in connection with the United Kingdom terminal acquisition and $5.0 million for general Partnership purposes. $18.3 million of the term loans were repaid in July 1999 with the proceeds from KPP's public unit offering. The remaining portion ($23.7 million at December 31, 2001), with a fixed rate of 7.25%, is due in December 2003. The term loans under the credit agreement, as amended, are unsecured and are pari passu with the $275 million revolving credit facility. The term loans also contain certain financial and operational covenants.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under operating leases as of December 31, 2001:
Year ending December 31:
2002............................................... $ 2,664,000
2003............................................... 2,433,000
2004............................................... 1,979,000
2005............................................... 1,411,000
2006............................................... 1,383,000
-------------
Total minimum lease payments....................... $ 9,870,000
=============
|
Total rent expense under operating leases amounted to $4.2 million, $3.1 million and $2.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The operations of the Partnership are subject to Federal, state and local laws and regulations in the United States and the United Kingdom relating to protection of the environment. Although the Partnership believes its operations are in general compliance with applicable environmental regulations, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership. The Partnership has recorded an undiscounted reserve for environmental claims in the amount of $13.5 million at December 31, 2001, including $12.8 million related to acquisitions of pipelines and terminals. During 2001 and 2000, respectively, the Partnership incurred $5.2 million and $2.3 million of costs related to such acquisition reserves and reduced the liability accordingly.
KPL has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (the date of formation of the Partnership). The indemnification does not extend to any liabilities that arise after such date to the extent that the liabilities result from changes in environmental laws and regulations.
In December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates. The asset purchase agreement includes a provision for an earn-out payment based upon revenues of one of the terminals exceeding a specified amount for a seven-year period ending in December 2002. No amount was payable under the earn-out provision in 1999, 2000 or 2001.
Certain subsidiaries of the Partnership were sued in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from which the Partnership acquired ST Services in 1993. The lawsuit involves environmental response and remediation costs allegedly resulting from jet fuel leaks in the early 1970's from a pipeline. The pipeline, which connected a former Grace terminal with Otis Air Force Base in Massachusetts (the "Otis pipeline" or the "pipeline"), ceased operations in 1973 and was abandoned not later than 1976, when the connecting terminal was sold to an unrelated entity. Grace alleged that subsidiaries of the Partnership acquired the abandoned pipeline, as part of the acquisition of ST Services in 1993 and assumed responsibility for environmental damages allegedly caused by the jet fuel leaks. Grace sought a ruling from the Texas court that these subsidiaries are responsible for all liabilities, including all present and future remediation expenses, associated with these leaks and that Grace has no obligation to indemnify these subsidiaries for these expenses. In the lawsuit, Grace also sought indemnification for expenses of approximately $3.5 million that it incurred since 1996 for response and remediation required by the State of Massachusetts and for additional expenses that it expects to incur in the future. The consistent position of the Partnership's subsidiaries has been that they did not acquire the abandoned pipeline as part of the 1993 ST Services transaction, and therefore did not assume any responsibility for the environmental damage nor any liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition
agreement by failing to disclose matters related to the pipeline, and
(2) the pipeline was abandoned before 1978 -- 15 years before the
Partnership's subsidiaries acquired ST Services. On August 30, 2000,
the Judge entered final judgment in the case that Grace take nothing
from the subsidiaries on its claims seeking recovery of remediation
costs. Although the Partnership's subsidiaries have not incurred any
expenses in connection with the remediation, the court also ruled, in
effect, that the subsidiaries would not be entitled to indemnification
from Grace if any such expenses were incurred in the future. Moreover,
the Judge let stand a prior summary judgment ruling that the pipeline
was an asset acquired by the Partnership's subsidiaries as part of the
1993 ST Services transaction and that any liabilities associated with
the pipeline would have become liabilities of the subsidiaries. Based
on that ruling, the Massachusetts Department of Environmental
Protection and Samson Hydrocarbons Company (successor to Grace
Petroleum Company) wrote letters to ST Services alleging its
responsibility for the remediation, and ST Services responded denying
any liability in connection with this matter. The Judge also awarded
attorney fees to Grace of more than $1.5 million. Both the
Partnership's subsidiaries and Grace have appealed the trial court's
final judgment to the Texas Court of Appeals in Dallas. In particular,
the subsidiaries have filed an appeal of the judgement finding that the
Otis pipeline and any liabilities associated with the pipeline were
transferred to them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an automatic stay against actions against Grace. This automatic stay covers the appeal of the Dallas litigation, and the Texas Court of Appeals has issued an order staying all proceedings of the appeal because of the bankruptcy. Once that stay is lifted, the Partnership's subsidiaries that are party to the lawsuit intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation ("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA. The MMR Site contains nine groundwater contamination plumes, two of which are allegedly associated with the Otis pipeline, and various other waste management areas of concern, such as landfills. The United States Department of Defense and the United States Coast Guard, pursuant to a Federal Facilities Agreement, have been responding to the Government remediation demand for most of the contamination problems at the MMR Site. Grace and others have also received and responded to formal inquiries from the United States Government in connection with the environmental damages allegedly resulting from the jet fuel leaks. The Partnership's subsidiaries voluntarily responded to an invitation from the Government to provide information indicating that they do not own the pipeline. In connection with a court-ordered mediation between Grace and the Partnership's subsidiaries, the Government advised the parties in April 1999 that it has identified two spill areas that it believes to be related to the pipeline that is the subject of the Grace suit. The Government at that time advised the parties that it believed it had incurred costs of approximately $34 million, and expected in the future to incur costs of approximately $55 million, for remediation of one of the spill areas. This amount was not intended to be a final accounting of costs or to include all categories of costs. The Government also advised the parties that it could not at that time allocate its costs attributable to the second spill area.
By letter dated July 26, 2001, the United States Department of Justice ("DOJ") advised ST Services that the Government intends to seek reimbursement from ST Services under the Massachusetts Oil and Hazardous Material Release Prevention and Response Act and the Declaratory Judgment Act for the Government's response costs at the two spill areas discussed above. The DOJ relied in part on the judgment by the Texas state court that, in the view of the DOJ, held that ST Services was the current owner of the pipeline and the successor-in-interest of the prior owner and operator. The Government advised ST Services that it believes it has incurred costs exceeding $40 million, and expects to incur future costs exceeding an additional $22 million, for remediation of the two spill areas. The Partnership believes that its subsidiaries have substantial defenses. ST Services responded to the DOJ on September 6, 2001, contesting the Government's positions and declining to reimburse any response costs. The DOJ has not filed a lawsuit against ST Services seeking cost recovery for its environmental investigation and response costs.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a partnership of which ST Services is general partner. PEPCO has reported that it expects to incur total cleanup costs of $70 million to $75 million. Since May 2000, ST Services has provisionally contributed a minority share of the cleanup expense, which has been funded by ST Services' insurance carriers. The Partnership and PEPCO have not, however, reached a final agreement regarding the proportionate responsibility for this cleanup effort and have reserved all rights to assert claims for contribution against each other. The Partnership cannot predict the amount, if any, that ultimately may be determined to be ST Services' share of the remediation expense, but it believes that such amount will be covered by insurance and will not materially adversely affect the Partnership's financial condition.
As a result of the rupture, purported class actions have been filed against PEPCO and ST Services in federal and state court in Maryland by property and/or business owners alleging damages in unspecified amounts under various theories, including under the Oil Pollution Act ("OPA"). The court consolidated all of these cases in a case styled as In re Swanson Creek Oil Spill Litigation. The trial judge recently granted preliminary approval of a $2,250,000 class settlement, with ST Services and PEPCO each contributing half of the settlement fund. Notice of the proposed settlement will be sent to putative class members and putative class members have until March 26, 2002 to opt out. ST Services or PEPCO can void the settlement if too many putative class members opt out and elect to pursue separate litigation. A hearing on final settlement will be held on April 15, 2002. If the settlement is finally approved, this litigation should be concluded in 2002. It is expected that most class members will elect to participate in the class settlement, but it is possible that even if the In re Swanson Creek Oil Spill Litigation settlement becomes final, ST Services may still face litigation from opt-out plaintiffs. ST Services' insurance carriers have assumed the defense of these actions. While the Partnership cannot predict the amount, if any, of any liability it may have in these suits, it believes that such amounts will be covered by insurance and that these actions will not have a material adverse effect on our financial condition.
PEPCO and ST Services have agreed with the State of Maryland to pay costs of assessing natural resource damages arising from the Swanson Creek oil spill under OPA, but they cannot predict at this time the amount of any damages that may be claimed by Maryland. The Partnership believes that both the assessment costs and such damages are covered by insurance and will not materially adversely affect the Partnership's financial condition.
The U.S. Department of Transportation ("DOT") has issued a Notice of Proposed Violation to PEPCO and ST Services alleging violations over several years of pipeline safety regulations and proposing a civil penalty of $674,000. ST Services and PEPCO have contested the DOT allegations and the proposed penalty. A hearing was held before the DOT in late 2001, and ST Services anticipates that the DOT will rule during the first quarter of 2002. In addition, by letter dated January 4, 2002, the Attorney General's Office for the State of Maryland advised ST Services that it plans to exercise its right to seek penalties from ST Services in connection with the April 7, 2000 spill. The ultimate amount of any penalty attributable to ST Services cannot be determined at this time, but the Partnership believes that this matter will not have a material adverse effect on its financial condition.
The Partnership has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, based on the advice of counsel, that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of the Partnership.
7. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by KPL. KPL and KSL are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $18.1 million, $17.8 million and $14.2 million for the years ended December 31, 2001, 2000 and 1999, respectively, include compensation and benefits paid to officers and employees of KPL and KSL, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $14.3 million, $12.3 million and $11.6 million of compensation and benefits, paid to officers and employees of KPL and KSL for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the Partnership paid $0.5 million in 2001 and $0.2 million in 2000 and 1999 for an allocable portion of KPL's overhead expenses. At December 31, 2001 and 2000, the Partnership owed KPL and KSL $4.7 million and $1.9 million, respectively, for these expenses which are due under normal invoice terms.
8. BUSINESS SEGMENT DATA
The Partnership conducts business through two principal operations; the "Pipeline Operations," which consists primarily of the transportation of refined petroleum products in the Midwestern states as a common carrier, and the "Terminaling Operations," which provide storage for petroleum products, specialty chemicals and other liquids.
The Partnership measures segment profit as operating income. Total assets are those assets controlled by each reportable segment.
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Business segment revenues:
Pipeline operations................................ $ 74,976,000 $ 70,685,000 $ 67,607,000
Terminaling operations............................. 132,820,000 85,547,000 90,421,000
---------------- --------------- --------------
$ 207,796,000 $ 156,232,000 $ 158,028,000
================ =============== ==============
Business segment profit:
Pipeline operations................................ $ 36,773,000 $ 36,213,000 $ 35,836,000
Terminaling operations............................. 45,318,000 23,358,000 28,577,000
---------------- --------------- --------------
Operating income................................ 82,091,000 59,571,000 64,413,000
Interest expense................................... (14,783,000) (12,283,000) (13,390,000)
Interest and other income ......................... 4,277,000 316,000 408,000
---------------- --------------- --------------
Income before income taxes and
extraordinary item............................ $ 71,585,000 $ 47,604,000 $ 51,431,000
================ =============== ==============
Business segment assets:
Depreciation and amortization:
Pipeline operations............................. $ 5,478,000 $ 5,180,000 $ 5,090,000
Terminaling operations.......................... 17,706,000 11,073,000 9,953,000
---------------- --------------- --------------
$ 23,184,000 $ 16,253,000 $ 15,043,000
================ =============== ==============
|
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Capital expenditures (excluding acquisitions):
Pipeline operations................................ $ 4,309,000 $ 3,439,000 $ 3,547,000
Terminaling operations............................. 12,937,000 6,044,000 11,021,000
---------------- --------------- --------------
$ 17,246,000 $ 9,483,000 $ 14,568,000
================ =============== ==============
December 31,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Total assets:
Pipeline operations................................ $ 105,156,000 $ 102,656,000 $ 104,774,000
Terminaling operations............................. 443,215,000 272,407,000 261,179,000
---------------- --------------- --------------
$ 548,371,000 $ 375,063,000 $ 365,953,000
================ =============== ==============
|
The following geographical area data includes revenues based on location of the operating segment and net property and equipment based on physical location.
Year Ended December 31,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Geographical area revenues:
United States...................................... $ 186,734,000 $ 136,729,000 $ 136,197,000
United Kingdom..................................... 21,062,000 19,503,000 21,831,000
---------------- --------------- --------------
$ 207,796,000 $ 156,232,000 $ 158,028,000
================ =============== ==============
Geographical area operating income:
United States...................................... $ 76,575,000 $ 55,122,000 $ 58,539,000
United Kingdom..................................... 5,516,000 4,449,000 5,874,000
---------------- --------------- --------------
$ 82,091,000 $ 59,571,000 $ 64,413,000
================ =============== ==============
December 31,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Geographical area net property and equipment:
United States...................................... $ 440,104,000 $ 282,685,000 $ 275,178,000
United Kingdom..................................... 41,170,000 38,670,000 41,705,000
---------------- --------------- --------------
$ 481,274,000 $ 321,355,000 $ 316,883,000
================ =============== ==============
|
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of debt as of December 31, 2001 and 2000 was approximately $263 million and $174 million, as compared to the carrying value of $263 million and $167 million, respectively. These fair values were estimated using discounted cash flow analysis, based on the Partnership's current incremental borrowing rates for similar types of borrowing arrangements. These estimates are not necessarily indicative of the amounts that would be realized in a current market exchange. The Partnership has no derivative financial instruments.
The Partnership markets and sells its services to a broad base of customers and performs ongoing credit evaluations of its customers. The Partnership does not believe it has a significant concentration of credit risk at December 31, 2001. No customer constituted 10 percent or more of consolidated revenues in 2001, 2000 and 1999.
10. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 2001 and 2000 are summarized as
follows:
Quarter Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- --------------- --------------
2001:
Revenues....................... $ 48,069,000 $ 52,952,000 $ 53,403,000 $ 53,372,000
================ ================ =============== ==============
Operating income............... $ 18,335,000 $ 21,871,000 $ 22,076,000 $ 19,809,000
================ ================ =============== ==============
Net income..................... $ 8,272,000(a) $ 21,144,000(b) $ 18,523,000 $ 16,850,000
================ ================ =============== ==============
2000:
Revenues....................... $ 36,680,000 $ 38,438,000 $ 41,051,000 $ 40,063,000
================ ================ =============== ==============
Operating income............... $ 12,922,000 $ 14,959,000 $ 17,466,000 $ 14,224,000
================ ================ =============== ==============
Net income..................... $ 9,664,000 $ 12,002,000 $ 14,261,000 $ 10,734,000 (c)
================ ================ =============== ==============
|
(a) Includes extraordinary item - loss on debt extinguishment, net
of income taxes, of approximately $5.8 million and gain on
interest rate lock transaction of approximately $0.6 million.
(b) Includes gain on interest rate lock transaction of
approximately $3.2 million.
(c) Includes approximately $1.9 million of accrued litigation
costs.
11. SUBSEQUENT EVENTS (unaudited)
In January of 2002, KPP issued 1.25 million limited partnership units in a public offering at $41.65 per unit, generating approximately $49.7 million in net proceeds. The proceeds were used to reduce the amount of indebtedness outstanding under the Partnership's $275 million revolving credit facility.
In February 2002, the Partnership issued $250 million of 7.75% senior unsecured notes due February 15, 2012. The net proceeds from the public offering, $248.2 million, were used to repay the $188.9 million outstanding under the $275 million revolving credit agreement and to partially fund the acquisition of all of the liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, the Partnership acquired Statia for approximately $194 million in cash. The acquired Statia subsidiaries have approximately $107 million in outstanding debt, including $101 million of 11.75% notes due in November 2003. The cash portion of the purchase price was funded by the Partnership's $275 million revolving credit agreement and proceeds from the Partnership's February 2002 public debt offering. On March 1, 2002, the Partnership announced that it had commenced the procedure to redeem all of Statia's 11.75% notes at 102.938% of the principal amount, plus accrued interest. The redemption is expected to be funded by the Partnership's $275 million revolving credit facility.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Kaneb Pipe Line Operating Partnership, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE OPERATING
PARTNERSHIP, L.P.
By: Kaneb Pipe Line Company LLC
General Partner
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints each of Edward D. Doherty and Howard C. Wadsworth his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same and all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Kaneb Pipe Line Operating Partnership, L.P. and in the capacities with Kaneb Pipe Line Company LLC and on the date indicated.
Signature Title Date
---------------------------------------- --------------------------- --------------
Principal Executive Officer
EDWARD D. DOHERTY Chairman of the Board March 27, 2002
---------------------------------------- and Chief Executive Officer
Principal Accounting Officer
HOWARD C. WADSWORTH Vice President March 27, 2002
---------------------------------------- Treasurer & Secretary
Directors
SANGWOO AHN Director March 27, 2002
----------------------------------------
JOHN R. BARNES Director March 27, 2002
----------------------------------------
MURRAY R. BILES Director March 27, 2002
----------------------------------------
FRANK M. BURKE, JR. Director March 27, 2002
----------------------------------------
CHARLES R. COX Director March 27, 2002
----------------------------------------
HANS KESSLER Director March 27, 2002
----------------------------------------
JAMES R. WHATLEY Director March 27, 2002
----------------------------------------
|
EXHIBIT 21
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
SUBSIDIARY LIST
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
Support Terminal Operating Partnership, L.P.
ST Services Ltd
ST Eastham Ltd.
ST Linden Terminal, LLC
ST/Center Chillicothe Terminal LLC
Support Terminal Services, Inc.
StanTrans, Inc.
StanTrans Holding, Inc.
StanTrans Partners, L.P.
Shore Terminals LLC
Kaneb Pipe Line Holding Company LLC
Statia Marine, Inc.
Statia Technology, Inc.
Statia Terminals Delaware, Inc.
Statia Terminals, Inc.
Statia Terminals New Jersey, Inc.
Seven Seas Steamship Company, Inc.
Seven Seas Steamship Company NV
Statia Terminals International NV
Statia Terminals Corporation NV
Statia Terminals Canada, Inc.
Point Tupper Marine Services LTD
Statia Terminals Canada Holdings, Inc.
Statia Terminals Canada Partnership
Statia Terminals Antilles NV
Saba Trustcompany NV
Bicen Development Corporation NV
Statia Terminals NV
Statia Laboratory Services NV
Statia Tugs NV
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in registration statement number 333-71638 on Form S-3 of Kaneb Pipe Line Operating Partnership, L.P. of our report dated February 11, 2002, relating to the consolidated balance sheets of Kaneb Pipe Line Operating Partnership, L.P. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, partners' capital and cash flows for each of the years in the three year period ended December 31, 2001, which report is included on page F-1 of this Form 10-K.
KPMG LLP
Dallas, Texas
March 26, 2002
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
September 27, 1989
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS................................................................................ Page
Adjusted Capital Account......................................................................... 1
------------------------
Adjusted Property................................................................................ 1
-----------------
Affiliate........................................................................................ 1
---------
Agreed Allocation................................................................................ 1
-----------------
Agreed Value..................................................................................... 1
------------
Agreement........................................................................................ 2
---------
Assignment of Leases............................................................................. 2
--------------------
Available Cash................................................................................... 2
--------------
Book-Tax Disparity............................................................................... 2
------------------
Business Day..................................................................................... 2
------------
Capital Account.................................................................................. 2
---------------
Capital Asset.................................................................................... 2
-------------
Capital Contribution............................................................................. 2
--------------------
Carrying Value................................................................................... 2
--------------
Certificate of Limited Partnership............................................................... 2
----------------------------------
Closing Date..................................................................................... 2
------------
Code............................................................................................. 2
----
Combined Interest................................................................................ 3
-----------------
Contributed Property............................................................................. 3
--------------------
Contributing Partner............................................................................. 3
--------------------
Contribution Agreement........................................................................... 3
----------------------
Curative Allocation.............................................................................. 3
-------------------
Delaware Act..................................................................................... 3
------------
Departing Partner................................................................................ 3
-----------------
Economic Risk of Loss............................................................................ 3
---------------------
General Partner.................................................................................. 3
---------------
Indemnitee....................................................................................... 3
----------
Independent Committee............................................................................ 3
---------------------
Initial Offering................................................................................. 3
----------------
Initial Offering Price........................................................................... 3
----------------------
Interim Capital Transactions..................................................................... 3
----------------------------
Investor Partnership............................................................................. 3
--------------------
Investor Partnership Agreement................................................................... 3
------------------------------
Kaneb............................................................................................ 3
-----
KPL.............................................................................................. 3
---
Limited Partner.................................................................................. 4
---------------
Liquidating Trustee.............................................................................. 4
-------------------
LP Unit.......................................................................................... 4
-------
Minimum Gain Attributable to Partner Nonrecourse Debt............................................ 4
-----------------------------------------------------
Net Agreed Value................................................................................. 4
----------------
Net Loss......................................................................................... 4
--------
Net Termination Sales Gain....................................................................... 4
--------------------------
Net Termination Sales Loss....................................................................... 4
--------------------------
Nonrecourse Built-in Gain........................................................................ 4
-------------------------
Nonrecourse Deductions........................................................................... 5
----------------------
Nonrecourse Liability............................................................................ 5
---------------------
Opinion of Counsel............................................................................... 5
------------------
Organizational Limited Partner................................................................... 5
------------------------------
Partner.......................................................................................... 5
-------
Partner Nonrecourse Debt......................................................................... 5
------------------------
Partner Nonrecourse Deductions................................................................... 5
------------------------------
Partnership...................................................................................... 5
-----------
Partnership Assets............................................................................... 5
------------------
Partnership Interest............................................................................. 5
--------------------
Partnership Minimum Gain......................................................................... 5
------------------------
Partnership Year................................................................................. 5
----------------
Partnership's Accountants........................................................................ 5
-------------------------
Percentage Interest.............................................................................. 5
-------------------
Person........................................................................................... 5
------
Pipeline System.................................................................................. 5
---------------
Recapture Income................................................................................. 5
----------------
Recaptured Credits............................................................................... 6
------------------
Reconstituted Partnership........................................................................ 6
-------------------------
Registration Statement........................................................................... 6
----------------------
Required Allocation.............................................................................. 6
-------------------
Residual Gain.................................................................................... 6
-------------
Residual Loss.................................................................................... 6
-------------
Section 754 Election............................................................................. 6
--------------------
Securities Act................................................................................... 6
--------------
Special Approval................................................................................. 6
----------------
Substituted Limited Partner...................................................................... 6
---------------------------
Terminating Capital Transactions................................................................. 6
--------------------------------
Unrealized Gain.................................................................................. 6
---------------
Unrealized Loss.................................................................................. 6
---------------
ARTICLE 2 FORMATION OF PARTNERSHIP................................................................... 6
2.1 Formation and Continuation.............................................................. 6
--------------------------
2.2 Name.................................................................................... 6
----
2.3 Names and Addresses of Partners......................................................... 7
-------------------------------
2.4 Principal Office of the Partnership: Registered Office and Agent........................ 7
----------------------------------------------------------------
2.5 Term.................................................................................... 7
----
ARTICLE 3 PURPOSE.................................................................................... 7
ARTICLE 4 CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS.................................................... 7
4.1 Initial Contributions................................................................... 7
---------------------
4.2 Contributions on the Closing Date....................................................... 8
---------------------------------
4.3 Capital Accounts........................................................................ 8
----------------
4.4 Interest................................................................................ 10
--------
4.5 No Withdrawal........................................................................... 10
-------------
4.6 Loans from Partners..................................................................... 10
-------------------
4.7 Record of Contributions................................................................. 10
-----------------------
ARTICLE 5 ALLOCATIONS AND DISTRIBUTIONS.............................................................. 10
5.1 Allocations for Capital Account Purposes................................................ 10
----------------------------------------
5.2 Allocations for Tax Purposes............................................................ 13
----------------------------
5.3 Requirement and Characterization of Distributions....................................... 15
-------------------------------------------------
5.4 Reimbursement sand Payments............................................................. 15
---------------------------
ARTICLE 6 MANAGEMENT AND OPERATION OF BUSINESS....................................................... 15
6.1 Management.............................................................................. 15
----------
6.2 Reliance By Third Parties............................................................... 16
-------------------------
6.3 Compensation and Reimbursement of the General Partner................................... 17
-----------------------------------------------------
6.4 Partnership Funds....................................................................... 17
-----------------
6.5 Loans from the General Partner: Contracts with Affiliates............................... 17
---------------------------------------------------------
6.6 Liability of Indemnitees................................................................ 18
------------------------
6.7 Indemnification......................................................................... 18
---------------
6.8 Other Matters Concerning the General Partner............................................ 19
--------------------------------------------
6.9 Title to Partnership Assets............................................................. 20
---------------------------
6.10 Resolution of Conflicts of Interest..................................................... 20
-----------------------------------
6.11 Restrictions on General Partner's Authority............................................. 21
-------------------------------------------
6.12 Outside Activities...................................................................... 21
------------------
ARTICLE 7 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS................................................. 22
7.1 Limitation of Liability................................................................. 22
-----------------------
7.2 Management of Business.................................................................. 22
----------------------
7.3 Return of Capital....................................................................... 22
-----------------
7.4 Access to Information................................................................... 22
---------------------
ARTICLE 8 BOOKS, RECORDS, ACCOUNTING AND REPORTS..................................................... 22
8.1 Records and Accounting.................................................................. 22
----------------------
8.2 Fiscal Year............................................................................. 23
-----------
ARTICLE 9 TAX MATTERS................................................................................ 23
9.1 Section 754 Allocations................................................................. 23
-----------------------
9.2 Preparation of Tax Returns.............................................................. 23
--------------------------
9.3 Tax Elections........................................................................... 23
-------------
9.4 Tax Controversies....................................................................... 23
-----------------
9.5 Tax Basis and Value Determinations...................................................... 23
----------------------------------
9.6 General Partner Net Worth............................................................... 23
-------------------------
ARTICLE 10 TRANSFER OF PARTNERSHIP INTERESTS.......................................................... 24
10.1 Transfer................................................................................ 24
--------
10.2 Transfer of Interests of the General Partner............................................ 24
--------------------------------------------
10.3 Transfer of Partnership Interests of Limited Partners................................... 24
-----------------------------------------------------
ARTICLE 11 ADMISSION OF PARTNERS...................................................................... 24
11.1 Admission of Substituted Limited Partners............................................... 24
-----------------------------------------
11.2 Admission of Successor or Additional General Partner.................................... 24
----------------------------------------------------
ARTICLE 12 WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER............................................... 25
12.1 Withdrawal or Removal of the General Partner............................................ 25
--------------------------------------------
12.2 Withdrawal.............................................................................. 25
----------
12.3 Removal................................................................................. 26
-------
12.4 Opinion of Counsel...................................................................... 26
------------------
12.5 Amendment of Certificate of Limited Partnership......................................... 26
-----------------------------------------------
12.6 Interest of Departing Partner and Successor............................................. 26
-------------------------------------------
ARTICLE 13 DISSOLUTION AND LIQUIDATION................................................................ 27
13.1 Dissolution............................................................................. 27
-----------
13.2 Continuation of the Business of the Partnership......................................... 27
-----------------------------------------------
13.3 Liquidation............................................................................. 28
-----------
13.4 Distribution in Kind.................................................................... 28
--------------------
13.5 Cancellation of Certificate of Limited Partnership...................................... 29
--------------------------------------------------
13.6 Reasonable Time for Winding Up.......................................................... 29
------------------------------
13.7 Return of Contributions................................................................. 29
-----------------------
13.8 No capital Account Restoration.......................................................... 29
------------------------------
13.9 Waiver of Partition..................................................................... 29
-------------------
ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT......................................................... 29
14.1 Amendments to be Adopted Solely by the General Partner.................................. 29
------------------------------------------------------
14.2 Amendment Procedures.................................................................... 30
--------------------
ARTICLE 15 MERGER..................................................................................... 30
15.1 Authority............................................................................... 30
---------
15.2 Procedure for Merger or Consolidation................................................... 30
-------------------------------------
15.3 Approval by Limited Partners of Merger or Consolidation................................. 31
-------------------------------------------------------
15.4 Certificate of Merger................................................................... 31
---------------------
15.5 Effect of Merger........................................................................ 31
----------------
ARTICLE 16 GENERAL PROVISIONS......................................................................... 31
16.1 Addresses and Notices................................................................... 31
---------------------
16.2 Titles and Captions..................................................................... 31
-------------------
16.3 Pronouns and Plurals.................................................................... 31
--------------------
16.4 Further Action.......................................................................... 31
--------------
16.5 Binding Effect.......................................................................... 32
--------------
16.6 Integration............................................................................. 32
-----------
16.7 Creditors............................................................................... 32
---------
16.8 Waiver.................................................................................. 32
------
16.9 Counterparts............................................................................ 32
------------
16.10 Applicable Law.......................................................................... 32
--------------
16.11 Invalidity of Provisions................................................................ 32
------------------------
|
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
This Amended and Restated Agreement of Limited Partnership of Kaneb Pipe Line Operating Partnership, L.P. (herein called this "Agreement") is entered into by and among Kaneb Pipe Line Company, a Delaware corporation, as general partner of the Partnership, Kaneb Services, Inc., a Delaware corporation, as the organizational limited partner, and those other persons who become the Partners in the Partnership as hereinafter provided.
In consideration of the mutual covenants, conditions and agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
Unless clearly indicated to the contrary, the terms defined in this Article 1 shall, for the purposes of this Agreement, have the meanings herein specified.
Adjusted Capital Account: The Capital Account maintained for each Partner as of the end of each fiscal year of the Partnership (a) increased by any amounts which such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(II)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-1T(b)(4)(iv)(f) and 1.704-1T(b)(4)(iv)(h)(5) and (b) decreased by (i) the amount of all losses and deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner's Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases pursuant to a minimum gain charge back pursuant to Section 5.1.4.(a) and 5.1.4.(b). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
Adjusted Property: Any property the Carrying Value of which has been adjusted pursuant to Section 4.3.4.(a) or 4.3.4.(b). Once an Adjusted Property is deemed distributed by, and recontributed to, the Partnership for federal income tax purposes pursuant to Section 708 of the Code, such property shall thereafter constitute a Contributed Property until the Carrying Value of such property is further adjusted pursuant to Section 4.3.4.(a) or 4.3.4.(b).
Affiliate: Any Person directly or indirectly controlling, controlled by or under common control with Person in question. As used in this definition of "Affiliate", the term "control" means the possession directly, for indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
Agreed Allocation: Any allocation, other than a Required Allocation, of a item of income, gain, deduction or loss pursuant to the provisions of Section 5.1, including a Curative Allocation (if appropriate to the context in which the term "Agreed Allocation" is used).
Agreed Value: Of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt; provided, however, that the Agreed Value of any property deemed contributed to the Partnership for federal income tax purposes upon termination and reconstitution thereof pursuant to Section 708 of the Code shall be determined in accordance with Section 4.3.3. Subject to Section 4.3.3, the General Partner shall, in its sole discretion, use such method as it deems reasonable and 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 their fair market values.
Agreement: This Amended and Restated Agreement of Limited Partnership, as it may be amended supplemented or restated from time to time.
Assignment of Leases: Collectively, those two certain Assignment of Lease Agreements dated __________________, 1989, among KPL, Kaneb and the Partnership.
Available Cash: With respect to any calendar quarter, means (i) the sum of
(a) all cash receipts of the Partnership during such quarter from all sources
and (b) any reduction in reserves established in prior quarters, less (ii) the
sum of (aa) all cash disbursements of the Partnership during such quarter,
including, without limitation, disbursements for operating expenses, debt
service (including the payment of principal, premium and interest), capital
expenditures and contributions, if any, to a subsidiary corporation or
partnership (but excluding all cash distributions to Partners), (bb) any
reserves established in such quarter in such amounts as the General Partner
determines in its reasonable discretion to be necessary or appropriate to
provide for the proper conduct of the business of the Partnership (including
reserves for future capital expenditures) and (cc) any other reserves
established in such quarter in such amounts as the General Partner determines in
its reasonable discretion to be necessary because the distribution of such
amounts would be prohibited by applicable law or by any loan agreement, security
agreement, mortgage, debt instrument or other agreement or obligation to which
the Partnership is a party or by which it is bound or its assets are subject.
Notwithstanding the foregoing, "Available Cash" shall not include any cash
receipts or reductions in reserves or take into account any disbursements made
or reserves established after commencement of the dissolution and liquidation of
the Partnership.
Book-Tax Disparity: 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 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 4.3 and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.
Business Day: Monday through Friday of each week, except that a legal holiday recognized as such by the Government of the United States or the State of New York shall not be regarded as a Business Day.
Capital Account: The Capital account maintained for a Partner pursuant to
Section 4.3.
Capital Asset: Any asset on the Partnership's balance sheet, other than inventory, accounts receivable or any other current asset and assets disposed of in connection with normal retirements or replacements.
Capital Contribution: Any cash, cash equivalents or the Net Agreed Value of
Contributed Property which a Partner contributes to the Partnership pursuant to
Section 4.1, 4.2, 4.3 or 12.6.2(b).
Carrying Value: (a) With respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, amortization and cost recovery deductions charged to the Partner's Capital Accounts, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Section 4.3.4.(a) and 4.3.4.(b), and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership Assets, as deemed appropriate by the General Partner.
Certificate of Limited Partnership: The Certificate of Limited Partnership, and any and all amendments thereto and restatements thereof, filed on behalf of the Partnership as required under the Delaware Act.
Closing Date: Has the meaning set forth in the Investor Partnership Agreement.
Code: The Internal Revenue Code of 1986, as amended and hereafter amended, and applicable regulations thereunder. Any reference herein to a specific section or sections of the Code or applicable regulations shall be deemed to include a reference to any corresponding provision of future law or regulation.
Combined Interest: Has the meaning set forth in the Investor Partnership Agreement.
Contributed Property: Each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash and cash equivalents, contributed to the Partnership (or deemed contributed to the Partnership on termination and reconstitution thereof pursuant to Section 708 of the Code or otherwise). Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 4.3.4.(a), such property shall no longer constitute a Contributed Property but shall be deemed an Adjusted Property for such purposes.
Contributing Partner: Any Partner contributing (or deemed to have
contributed on the termination and reconstitution of the Partnership pursuant to
Section 708 of the Code or otherwise) Contributed Property to the Partnership.
Contribution Agreement: That certain Contribution Agreement dated
____________, 1989 among KPL, the Partnership, the Investor Partnership and
Kaneb wherein KPL agrees (i) to contribute to the Partnership certain designated
assets and the Partnership agrees to assume certain designated liabilities and
(ii) to contribute its limited partner interest in the Partnership to the
Investor Partnership in exchange for LP Units.
Curative Allocation: Any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 5.1.4.(i).
Delaware Act: The Delaware Revised Uniform Limited Partnership Act (6 Del. C.ss.17-101, et seq.), as it may be amended from time to time, and any successor to such statute.
Departing Partner: A former General Partner, as of the effective date of any withdrawal or removal of such General Partner pursuant to Section 12.1.
Economic Risk of Loss: Has the meaning set forth in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(k)(1).
General Partner: KPL or any successor or additional General Partner admitted pursuant to Section 11.2
Indemnitee: The General Partner, any Departing Partner, any Person who is or was an Affiliate of the General Partner or any Departing Partner, any person who is or was an officer, director, employee, partner, agent or trustee of the General Partner or any Departing Partner or any Affiliate of the General Partner or Departing Partner, or any Person who is or was serving at the request of the General Partner or any Departing Partner or any Affiliate of the General Partner or the Departing Partner as a director, officer, employee, partner, agent or trustee of another Person.
Independent Committee: A committee of the Board of Directors of the General Partner composed entirely of directors who are neither officers nor employees of Kaneb, the General Partner or any of their Affiliates.
Initial Offering: Has the meaning set forth in the Investor Partnership Agreement.
Initial Offering Price: Has the meaning set forth in the Investor Partnership Agreement.
Interim Capital Transactions: Has the meaning set forth in the Investor Partnership Agreement.
Investor Partnership: Kaneb Pipe Line Partners, L.P., a Delaware limited partnership established pursuant to the Investor Partnership Agreement.
Investor Partnership Agreement: The Amended and Restated Agreement of Limited Partnership of the Investor Partnership as it may be amended, supplemented or restated from time to time.
Kaneb: Kaneb Services, Inc., a Delaware corporation.
KPL: Kaneb Pipe Line Company, a Delaware corporation.
Limited Partner: The Organizational Limited Partner and each Substituted Limited Partner.
Liquidating Trustee: The General Partner, unless dissolution was caused by an event described in Section 13.1.2, then the liquidator or liquidating committee chosen pursuant to Section 13.3.
LP Unit: Has the meaning set forth in the Investor Partnership Agreement.
Minimum Gain Attributable to Partner Nonrecourse Debt: That amount determined in accordance with the principles of Treasury Regulation Section 1.704-1T(b)(4)(iv)(h)(6).
Net Agreed Value: Means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed and (b) in the case of any property distributed to a Partner or Assignee by the Partnership, the Partnership's Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner or Assignee upon such distribution or to which such property is subject at the time of distribution, in either case, as determined under Section 752 of the Code.
Net Income: For any taxable period, the excess, if any, of the Partnership's items of income and gain (other than those items attributable to dispositions constituting Terminating Capital Transactions) for such taxable period over the Partnership's items of loss and deduction (other than those items attributable to dispositions constituting Terminating Capital Transactions) for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Section 4.3.2 and shall not include any items specially allocated under Section 5.1.4. Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to a Required Allocation or a Curative Allocation, Net Income or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item.
Net Loss: For any taxable period, the excess, if any, of the Partnership's items of loss and deduction (other than those items attributable to dispositions constituting Terminating Capital Transactions) for such taxable period over the Partnership's items of income and gain (other than those items attributable to dispositions constituting Terminating Capital Transactions) for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Section 4.3.2 and shall not include any items specially allocated under Section 5.1.4. Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to a Required Allocation or a Curative Allocation, Net Loss or the resulting Net Income, whichever the case may be, shall be recomputed without regard to such item.
Net Termination Sales Gain: Means, for each Partnership Year or shorter
period, the sum, if positive, of all items of gain or loss recognized by the
Partnership from Terminating Capital Transactions occurring in such Partnership
Year or shorter period. The items included in the determination of Net
Termination Sales Gain shall be determined in accordance with Section 4.3.2 and
shall not include any items of income, gain or loss specially allocated under
Section 5.1.4. Once an item of income, gain or loss that has been included in
the initial computation of Net Termination Sales Gain is subjected to a Required
Allocation or a Curative Allocation, Net Termination Sales Gain or the resulting
Net Termination Sales Loss, whichever the case may be, shall be recomputed
without regard to such item.
Net Termination Sales Loss: Means, for each Partnership Year or shorter
period, the sum, if negative, of all items of gain or loss recognized by the
Partnership from Terminating Capital Transactions occurring in such Partnership
Year or shorter period. The items included in the determination of Net
Termination Sales Loss shall be determined in accordance with Section 4.3.2 and
shall not include any items of income, gain or loss specially allocated under
Section 5.1.4. Once an item of gain or loss that has been included in the
initial computation of Net Termination Sales Loss is subjected to a Required
Allocation or a Curative Allocation, Net Termination Sales Loss or the resulting
Net Termination Sales Gain, whichever the case may be, shall be recomputed
without regard to such item.
Nonrecourse Built-in Gain: With respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Sections 5.2.2.(a)(A), 5.2.2.(b)(A) or 5.2.2.(d) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and or no other consideration.
Nonrecourse Deductions: Any and all items of loss, deduction or expenditure (described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-1T(b)(4)(iv)(b), are attributable to a Nonrecourse Liability.
Nonrecourse Liability: Has the meaning set forth in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(k)(3).
Opinion of Counsel: A written opinion of counsel (who may be regular counsel to the Partnership or the General Partner) acceptable to the General Partner.
Organizational Limited Partner: The investor Partnership.
Partner: A General Partner or a Limited Partner.
Partner Nonrecourse Debt: Has the meaning set forth in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(k)(4).
Partner Nonrecourse Deductions: Any and all items of loss, deduction or expenditure (described in Section 705(a)(2)(B) of the Code) that in accordance with the principles of Treasury Regulation Section 1.704-1T(b)(4)(iv)(h)(3), are attributable to a Partner Nonrecourse Debt.
Partnership: The Limited partnership heretofore formed and continued pursuant to this Agreement, and any successor thereto.
Partnership Assets: All assets, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Partnership.
Partnership Interest: As to any Partner, all of the interests of that Partner in the Partnership including, without limitation, his (i) right to distributive share of the profits and losses of the Partnership (ii) right to distributive share of Partnership Assets and (iii) rights, of the General Partner, to participate in the management of the affairs of the Partnership.
Partnership Minimum Gain: That amount determined in accordance with the principles of Treasury Regulation Sections 1.704-1T(b)(4)(iv)(a) and 1.704-1T(b)(4)(iv)(c).
Partnership Year: Means the fiscal year of the Partnership, which shall be the calendar year.
Partnership's Accountants: Such nationally recognized firm of independent public accountants as is selected, from time to time, by the General Partner.
Percentage Interest: Means, as of the date of determination, (a) as to the General Partner in its capacity as such, 1% and (b) as to the Limited Partners, an aggregate of 99%.
Person: Any individual, corporation, association, partnership, joint venture, trust, estate or other entity or organization.
Pipeline System: Shall mean the refined petroleum products pipeline assets and related terminal facilities that will be transferred to the Partnership by KPL on the Closing Date, as such facilities may be maintained or improved from time to time.
Recapture Income: Any gain recognized by the Partnership (computed without regard to any adjustment required by Sections 734 or 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.
Recaptured Credits: Credits previously taken against federal income tax liability which are required to be recaptured upon the disposition of any property by the Partnership prior to the end of such property's useful life in determining the amount of the credit relating thereto.
Reconstituted Partnership: The new limited partnership formed in the manner described in Section 13.2.
Registration Statement: Has the meaning set forth in the Investor Partnership Agreement.
Required Allocation: Any allocation (or limitation imposed on any allocation) of an item of income, gain, deduction or loss pursuant to (a) the proviso-clause of Section 5.1.2.(b) and Sections 5.1.4.(a), 5.1.4.(b), 5.1.4.(c), 5.1.4.(d), 5.1.4.(e), 5.1.4.(f), and 5.1.4.(h), such allocations (or limitations thereon) being directly or indirectly required by the Treasury Regulations promulgated under Section 704(b) of the Code.
Residual Gain or Residual Loss: Any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Sections 5.2.2.(a)(A) or 5.2.2.(b)(A) to eliminate Book-Tax Disparities.
Section 754 Election: An election under Section 754 of the Code relating to the adjustment of the adjusted basis of Partnership Assets as provided in Sections 734 and 743 of the Code.
Securities Act: The Securities Act of 1933, as amended, and any successor to such statute.
Special Approval: Approval by a majority of the members of the Board of Directors of the General Partner that includes approval by a majority of the members of the Independent Committee.
Substituted Limited Partner: A Person who is admitted as a Limited Partner in the Partnership pursuant to Section 11.1 and will all the rights of a Limited Partner and who is shown as a Limited Partner on the books and records of the Partnership.
Terminating Capital Transactions: Has the meaning set forth in the Investor Partnership Agreement.
Unrealized Gain: Attributable to a Partnership property means, as of any date of determination, the excess, if any, of the fair market value of such property as of such date of determination over the Carrying Value of such property as of such date of determination (prior to any adjustment to be made pursuant to Section 4.3.4 as of such date).
Unrealized Loss: Attributable to a Partnership property means, as of any date of determination, the excess, if any, of the Carrying Value of such property as of such date of determination (prior to any adjustment to be made pursuant to Section 4.3.4 as of such date) over the fair market value of such property as of such date of determination.
ARTICLE 2
FORMATION OF PARTNERSHIP
2.1 Formation and Continuation. The General Partner and the Organizational Limited Partner have previously formed the Partnership as a limited partnership pursuant to the provisions of the Delaware Act and hereby amend and restate the original Agreement of Limited Partnership in its entirety. Subject to the provisions of this Agreement, the General Partner and the Organizational Limited Partner hereby continue the Partnership as a limited partnership pursuant to the provisions of the Delaware Act. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. The Partnership interest of each Partner shall be personal property for all purposes.
2.2 Name. The name of the Partnership shall be "Kaneb Pipe Line Operating Partnership, L.P." The business of the Partnership shall be conducted under the name of "Kaneb Pipe Line Operating Partnership, L.P." or such other name, including the name of the General Partner or any Affiliate, as the General Partner may from time to time determine. The words "L.P." or "Limited Partnership" 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 in its sole discretion 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 Limited Partners. Notwithstanding the foregoing, unless otherwise permitted by Kaneb, in the event that neither KPL nor any Affiliate of Kaneb is the general partner of the Partnership, the Partnership shall change its name to a name not including "Kaneb" and shall cease using the name "Kaneb" or other names or symbols associated therewith.
2.3. Names and Addresses of Partners. The General Partner of the Partnership is KPL. The business address of the General Partner is 2400 Lakeside Boulevard, Richardson, Texas 75082. The General Partner may change its address at any time and from time to time. The date upon which the General Partner became a Partner in the Partnership is as set forth in the books and records of the Partnership. The names and business, residence or mailing addresses of the Limited Partners and the date on which each such Person became a Limited Partner are as set forth from time to time in the books and records of the Partnership.
2.4. Principal Office of the Partnership; Registered Office and Agent. The principal office of the Partnership shall be located at 2400 Lakeside Boulevard, Richardson, Texas 75082. The General Partner may, at any time and from time to time, change the location of the Partnership's principal office and may establish such additional offices of the Partnership as the General Partner may from time to time determine. The General Partner shall provide the Limited Partners with written notice of any change in the Partnership's principal office within 90 days after such change. The name of the registered agent for service of process on the Partnership in Delaware is The Corporation Trust Company. The address of the registered agent and the address of the registered office of the Partnership in Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
2.5. Term. The Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act on September _____, 1989, and shall continue in existence until December 31, 2039, unless earlier terminated in accordance with any provisions of this Agreement.
ARTICLE 3
PURPOSE
The purpose and nature of the business to be conducted by the Partnership shall be (i) to engage in the common carrier transportation of refined petroleum products and related activities through ownership of the Pipeline System and, in connection therewith, to operate, maintain and improve the Pipeline System, (ii) to conduct any other business that may be lawfully conducted by a limited partnership organized pursuant to the Delaware Act and (iii) to do anything necessary or incidental to the foregoing. The General Partner has no obligation or duty to the Partnership or the Limited Partners to propose or approve, and in its sole discretion may decline to propose or approve, the conduct by the Partnership pursuant to clause (ii) above of any business other than as contemplated by clause (i) above. 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 herein and for the protection and benefit of the Partnership.
ARTICLE 4
CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS
4.1. Initial Contributions. The initial Capital Contributions to the Partnership consisted of $1,000, which the Partners contributed to the Partnership upon the formation of the Partnership. The General Partner contributed $10 in cash and received in exchange therefor a 1.0% Partnership interest as General Partner and the Organizational Limited Partner contributed $990 in cash and received in exchange therefor a 99% Partnership interest as Limited Partner in the Partnership.
4.2. Contributions on the Closing Date.
4.2.1. On the Closing Date, KPL shall contribute to the Partnership, as provided in the Contribution Agreement, the property and other considerations described in the Contribution Agreement as being so contributed and shall receive an exchange therefor (i) a Partnership Interest as a Limited Partner equal to the percentage obtained by multiplying .99 by the quotient of (A) the Net Agreed Value of KPL's Capital Contribution as a Limited Partner (as provided below) divided by (B) such amount plus $990, and (ii) a Partnership interest and a credit to its capital account as General Partner in the amount required to increase such capital account to an amount equal to 1% of the aggregate capital accounts of all the Partners after giving effect to the issuance of Partnership Interests contemplated by clause (i) of this Section 4.2.1.
4.2.2. The Net Agreed Value of KPL's Capital Contribution pursuant to
Section 4.2.1 shall be an amount equal to the Initial Offering Price of one
Senior Preference Unit times 13,950,918. Of such Net Agreed Value, (i) the
amount deemed contributed as General Partner shall be the amount required
to increase the General Partner's Capital Account as General Partner to an
amount equal to 1% of the aggregate Capital Accounts of all the Partners
after giving effect to the issuance of Partnership interests contemplated
by clause (i) of Section 4.2.1 and (ii) the balance of such Net Agreed
Value shall be deemed to be contributed as a Limited Partner.
4.3. Capital Accounts.
4.3.1. The Partnership shall maintain for each Partner a separate
Capital Account in accordance with the rules of Treasury Regulation Section
1.704-1(b)(2)(iv). Such Capital Account shall be increased by the (i) the
amount of all Capital Contributions made by such Partner to the Partnership
pursuant to this Agreement and (ii) all items of Partnership income and
gain (including income and gain exempt from tax) computed in accordance
with Section 4.3.2 and allocated to such Partner pursuant to Article 5, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and
deemed distributions of cash or property made to such Partner pursuant to
this Agreement and (y) all items of Partnership deduction and loss computed
in accordance with Section 4.3.2 and allocated to such Partner pursuant to
Section 5.1. In addition, any payment by the General Partner of rent with
respect to the leases subject to the Assignment of Leases shall be treated
as a Capital Contribution by the General Partner.
4.3.2. For purposes of computing the amount of any item of income, gain, deduction or loss 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 federal income tax purposes (including any method of depreciation, cost recovery or amortization used for that purpose, provided that:
(a) 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 5.1.
(b) Except as otherwise provided in Treasury Regulation Section
1.704-1 (b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Section 754 of the Code which may be made by the Partnership and, as
to those items described in Section 705(a)(1)(B) or 705 (a)(2)(B) of
the Code, without regard to the fact that such items are not
includable in gross income or are neither currently deductible nor
capitalized for federal income tax purposes. 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 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 the basis of the asset).
(c) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date.
(d) 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 4.3.4 to the Carrying Value of any Partnership property subject to depreciation, cost recovery or amortization, any further deductions for such depreciation, cost recovery or amortization attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery or amortization derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however, that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery or amortization deductions shall be determined using any reasonable method that the General Partner may adopt.
(e) If the Partnership's adjusted basis in depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code shall, to the extent possible, be allocated in the same manner to the Partners to whom such deemed deduction was allocated.
4.3.3. Generally, a transferee of a Partnership Interest shall succeed to that portion of the Capital Account of the Transferor relating to the Partnership Interest so transferred; provided, however, that, if the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be deemed to have been distributed in liquidation of the Partnership to the Partners and recontributed by such Partners in reconstitution of the Partnership. In such event, the Carrying Values of the Partnership properties shall be adjusted immediately prior to such deemed distribution pursuant to Section 4.3.4.(b) and such Carrying Values shall then constitute the Agreed Values of such properties. The Capital Accounts of such reconstituted Partnership shall be maintained in accordance with the principles of this Section 4.3.
4.3.4. (a) Consistent with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership
Interests for cash or Contributed Property, the Capital Accounts of
all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain
or Unrealized Loss had been recognized on an actual sale of each such
Partnership property immediately prior to such issuance and had been
allocated to the Partners at such time pursuant to Section 5.1. In
determining Unrealized Gain or Unrealized Loss for purposes of this
Section 4.3.4(a) the aggregate cash amount and fair market value of
all Partnership assets (including cash or cash equivalents)
immediately prior to the issuance of Partnership Interests shall be
determined by the General Partner using such reasonable method of
valuation as it may adopt. The General Partner shall allocate such
aggregate value among the assets of the Partnership (in such manner as
it determines in its sole discretion to be reasonable) to arrive at a
fair market value for individual properties.
(b) 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 cash
or cash equivalents), the Capital Accounts of all Partners and the
Carrying Value of each Partnership property shall, immediately prior
to any such distribution, be adjusted upward or downward to reflect
any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as if such Unrealized Gain or Unrealized Loss
had been recognized in a sale of such property immediately prior to
such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section
5.1. Any Unrealized Gain or Unrealized Loss attributable to such
property shall be allocated in the same manner as Net Termination
Sales Gain or Net Termination Sales Loss pursuant to Section 5.1.3;
provided, however, that in making any such allocation, Net Termination
Sales Gain or Net Termination Sales Loss actually realized shall be
allocated first. In determining Unrealized Gain or Unrealized Loss for
purposes of this Section 4.3.4.(b), the aggregate cash amount and fair
market values of all Partnership assets (including cash or cash
equivalents) immediately prior to a distribution shall be determined
and allocated by the Liquidator using such reasonable methods of
valuation as it may adopt.
4.4. Interest. No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts.
4.5. No Withdrawal. No Partner shall be entitled to withdraw any part of his Capital Contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 5, 12 and 13.
4.6. Loans from Partners. Loans by a Partner to the Partnership shall not constitute Capital Contributions. If any Partner shall advance funds to the Partnership in excess of the amounts required hereunder to be contributed by it to the capital of the Partnership, the making of such excess advances shall not result in any increase in the amount of the Capital Account of such Partner. The amount of any such excess advances shall be a debt obligation of the Partnership to such Partner and shall be payable or collectible only out of the Partnership Assets in accordance with the terms and conditions upon which such advances are made.
4.7. Record of Contributions. The books and records of the Partnership shall include true and full information regarding the amount of cash and cash equivalents and a designation and statement of the Net Value of any other property contributed by each Partner to the Partnership.
ARTICLE 5
ALLOCATIONS AND DISTRIBUTIONS
5.1. 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 4.3.2) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below.
5.1.1. Net Income. After giving effect to the special allocations set forth in Section 5.1.4, all items of income, gain, loss and deduction taken into account in computing Net Income for such taxable period shall be allocated in the same manner as such Net Income is allocated hereunder.
(a) First, 100% to the General Partner until aggregate Net Income allocated to the General Partner pursuant to this Section 5.1.1.(a) for the current taxable year and all previous taxable years is equal to the aggregate Net Loses allocated to the General Partner pursuant to Section 5.1.2.(c) for all previous taxable years;
(b) Second, 100% to the Limited Partners and the General Partner, in accordance with their respective Percentage Interests, until the aggregate Net Income allocated to the Limited Partners and the General Partner pursuant to this Section 5.1.1.(b) for the current taxable year and all previous taxable years is equal to the aggregate Net Losses allocated to the Limited Partners and the General Partner pursuant to Section 5.1.2.(b) for all previous taxable years; and
(c) Third, the balance, if any shall be allocated among the Partners in accordance with their respective Percentage Interests.
5.1.2. Net Loss. After giving effect to the special allocations set forth in Section 5.1.4, all items of income, gain, loss and deduction taken into account in computing Net Loss for such taxable period shall be allocated in the same manner as such Net Loss is allocated hereunder:
(a) First, 100% to the General Partner and the Limited Partners, until the aggregate Net Losses allocated pursuant to this Section 5.1.2(a) for the current taxable year and all previous taxable years is equal to the aggregate Net Income allocated to such Partners pursuant to Section 5.1.1.(c) for all previous taxable years.
(b) Second, 100% to the Limited Partners and the General Partner, in accordance with their respective Percentage Interests; provided, that Net Loss shall not be allocated pursuant to this Section 5.1.2(b) to the extent that such allocation would cause any Limited Partner to have a deficit balance in its adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account);
(c) Third, the balance, if any, 100% to the General Partner.
5.1.3. Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 5.1.4, all items of gain and loss taken into account in computing Net Termination Sales Gain or Net Termination Sales Loss for such taxable period shall be allocated in the same manner as such Net Termination Sales Gain or Net Termination Sales Loss is allocated hereunder. All allocations under this Section 5.1.3 shall be made after Capital Account balances have been adjusted by all other allocations provided under this Section 5.1 and after all distributions of Available Cash have been made with respect to the taxable period ending on the liquidation date.
(a) If a Net Termination Sales Gain is recognized (or deemed recognized pursuant to Section 4.3.4) such Net Termination Sales Gain shall be allocated between the General Partner and the Limited Partners in the following manner:
First, to each Partner having a deficit balance in such Partner's Capital Account to the extend of and in proportion to such deficit balance; and
Second, 100% to the General Partner and the Limited Partners in accordance with their respective Percentage Interests.
(b) If a Net Termination Sales Loss is recognized (or deemed recognized pursuant to Section 4.3.4), such Net Termination Sales Loss shall be allocated to the Partners in the following manner:
(i) First, 100% to the General Partner and the Limited Partners in proportion to, and to the extent of, the positive balances in their respective Capital Accounts; and
(ii) Second, the balance, if any, 100% to the General Partner.
5.1.4. Special Allocations. Notwithstanding any other provision of this Section 5.1, the following special allocations shall be made for such taxable period:
(a) Partnership Minimum Gain Chargeback. Notwithstanding any
other provision of this Section 5.1, 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 proportion to,
and to the extend of, an amount equal to the greater of (A) the
portion of such Partner's share of the net decrease in Partnership
Minimum Gain during such taxable period that is allocable (in
accordance with the principles set forth in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(e)(2)) to the disposition of Partnership
property subject to one or more Nonrecourse Liabilities of the
Partnership, or (B) the deficit balance in such Partner's Adjusted
Capital Account at the end of such taxable period (modified as
appropriate, by Treasury Regulation Section 1.704T(b)(4)(iv)(e)(2)).
The items to be so allocated shall be determined in accordance with
Treasury Regulation Section 1.704-1T(b)(4)(iv)(e) and, for purposes of
this Section 5.1.4, 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 5.1.4 with respect to such
taxable period. This Section 5.1.4.(a) is intended to comply with the
Partnership Minimum Gain chargeback requirement in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(e) and shall be interpreted consistently
therewith;
(b) Chargeback of Minimum Gain Attributable to Partner
Nonrecourse Debt. Notwithstanding the other provisions of this Section
5.1 (other than Section 5.1.4(a)), if there is a net decrease in
Minimum Gain Attributable to Partner Nonrecourse Debt during any
Partnership taxable period, any Partner with a share of Minimum Gain
Attributable to Partner Nonrecourse Debt 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 proportion
to, and to the extent of an amount equal to the greater of (A) the
portion of such Partner's share of the net decrease in the Minimum
Gain Attributable to Partner Nonrecourse Debt that is allocable (in
accordance with the principles set forth in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(h)(4)) to the disposition of Partnership
property subject to such Partner Nonrecourse Debt, or (B) the deficit
balance in such Partner's Adjusted Capital Account at the end of such
taxable period (Modified, as appropriate, by Treasury Regulations
Section 1.704-1T(b)(4)(iv)(h)(4)). The items to be so allocated shall
be determined in a manner consistent with the principles of Treasury
Regulation Section 1.704-1T(b)(4)(iv)(e) and, for purposes of this
Section 5.1.4, 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 5.1.4, other than Section 5.1.4.(a), with
respect to such taxable period. This Section 5.1.4.(b) is intended to
comply with the chargeback of items of income and gain requirement in
Treasury Regulation Section 1.704-1T(b)(4)(iv)(h)(4) and shall be
interpreted consistently therewith;
(c) Qualified Income Offset. Except as provided in Section
5.1.4.(a) and 5.1.4.(b), 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), (modified, as
appropriate, by Treasury Regulation Sections 1.704-1T(b)(4)(iv)(e)(3)
and 1.704-1T(b)(4)(iv)(h)(4)), items of Partnership 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, 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 5.1.4.(c) 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 in this Section 5.1 have been
tentatively made as if this Section 5.1.4.(c) was not in this
Agreement;
(d) Gross Income Allocations. In the event any Partner has a deficit balance in its Capital Account at the end of any Partnership taxable period that is in excess of the sum of (A) the amount such Partner is obligated to restore pursuant to any provisions of this Agreement and (B) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulation Sections 1.704-1T(b)(4)(iv)(f) and 1.704-1T(b)(4)(iv)(h)(5), such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excesses as quickly as possible; provided, that an allocation pursuant to this Section 5.1.4 (d) shall be made only if and to the extent that such Partner would have a deficit balance in its Capital Account in excess of such sum after all other allocations provided for in this Section 5.1 have been tentatively made as if Section 5.1.4.(c) and this Section 5.1.4.(d) were not in this Agreement;
(e) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners in the same ratios that Net Income or Net Losses, as the case may be, is allocated for the taxable year. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must 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, upon notice to the Limited Partners, to revise the prescribed ratio to the numerically closest ratio which does satisfy such requirements;
(f) 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 Regulations Section 1.704-1T(b)(4)(iv)(h). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable thereto shall be allocated between or amoung such Partners in accordance with the ratios in which they share such Economic Risk of Loss;
(g) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-1T(e)(ii)(C), 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 among the Partners in accordance with
their respective Percentage Interests;
(h) 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 is to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts treated as an 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 Treasury Regulation Section 1.704-1(b)(2)(iv)(m).
(i) Curative Allocation.
(A) Notwithstanding any other provision of this Section 5.1, 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 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 Partner under the Agreed Allocations had the required Allocations and this Curative Allocation not otherwise been provided in this Section 5.1. 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 Minimum Gain Attributable to Partner Nonrecourse Debts. Allocations pursuant to this Section 5.1.4.(i)(A) shall only be made with respect to Required Allocations to the extent the General Partner reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 5.1.4.(i)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the General Partner reasonably determines that such allocations are likely to be offset by subsequent Required Allocations;
(B) The General Partner shall have reasonable discretion, with respect to each taxable period, to (1) apply the provisions of Section 5.1.4.(i)(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 5.1.4(i)(A) amoung the Partners in a manner that is likely to minimize such economic distortions.
(j) Rental Deductions. In the event that the General Partner's Capital Account is credited as a result of a payment described in the last sentence of Section 4.3.1, the General Partner shall be allocated the rental deduction attributable to such payment.
5.2 Allocations for Tax Purposes.
5.2.1. Except as otherwise provided herein, for 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 income, gain, loss or deduction (computed in accordance with Section 4.3.2) is allocated pursuant to Section 5.1.
5.2.2. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, depreciation and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows:
(a) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) except as otherwise provided in Section 5.2.2.(d), any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of gain or loss is allocated pursuant to Section 5.1.
(b) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 4.3.4.(a) or 4.3.4.(b), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 5.2.2.(a)(A); and (B) except as otherwise provided in Section 5.2.2.(d), any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of gain or loss is allocated pursuant to Section 5.1.
(c) Except as otherwise provided in Section 5.2.2.(d), all other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of gain or loss is allocated pursuant to Section 5.1.
(d) Any items of income, gain, loss or deduction otherwise allocable under Section 5.2.2.(a)(B), 5.2.2.(b)(B) or 5.2.2.(c) shall be subject to allocation by the General Partner in a manner designated to eliminate, to the maximum extent possible, Book-Tax Disparities in a Contributed Property or Adjusted Property otherwise resulting from the applications of the "ceiling" limitation (under Section 704(c) of the Code or Section 704(c) principles) to the allocations provided under Section 5.2.2.(a)(A) or 5.2.2.(b)(A).
5.2.3. For proper administration of the Partnership and for the
preservation of uniformity of the LP Units of the Investor Partnership (or
any class or classes thereof), the General Partner shall have sole
discretion to (i) adopt such conventions as it deems appropriate in
determining the amount of depreciation, amortization and cost recovery
deductions; (ii) make special allocations for federal income tax purposes
of income (including gross income) or deductions; 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 LP
Units of the Investor Partnership (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 5.2.3, 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 LP
Units of the Investor Partnership issued and outstanding or the
Partnership, and if such allocations are consistent with the Principles of
Section 704 of the Code.
5.2.4. The General Partner in its sole discretion may determine to depreciate 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 method and useful life applied to the Partnership's common basis of such property, despite the inconsistency of such approach with proposed Treasury Regulation Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6). If the General Partner later determines that such reporting position cannot reasonably be taken, the General Partner may adopt a depreciation convention under which all purchasers acquiring LP Units of the Investor Partnership in the same month would receive depreciation, 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 reasonable depreciation convention to preserve the uniformity of the intrinsic tax characteristics of any LP Units of the Investor Partnership that would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of LP Units of the Investor Partnership.
5.2.5. 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 5.2 be characterized as Recapture Income in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.
5.2.6. All items of income, gain, loss, deduction and credit recognized by the Partnership for 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 which may be made by the Partnership; provided, however, that such allocations once made, shall be adjusted as necessary or appropriate to take into account those adjustments permitted or required by Sections 734 or 743 of the Code.
5.2.7. Each item of Partnership income, gain, loss and deduction attributable to a transferred Partnership Interest of the General Partner or the Limited Partners shall, for federal income tax purposes, be determined on an annual basis and prorated on a monthly basis and shall be allocated to the Partners as of the opening of the New York Stock Exchange on the first Business Day of each month; provided, however, that (i) except as otherwise provided in clause (ii), such items for the period beginning on the Closing Date and ending on the last day of the month in which the Closing Date occurs shall be allocated to Partners as of the opening of the New York Stock Exchange on the first Business Day of the next succeeding month or (ii) if the Over-allotment Option is exercised, such items for the period beginning on the Closing Date and ending on the last day of the month in which the Second Time of Delivery (as defined in the Underwriting Agreement (as defined in the Investor Partnership Agreement)) occurs shall be allocated to the Partners as of the opening of the New York Stock Exchange on the first Business Day of the next succeeding month; and provided, further, that gain or loss on a sale or other disposition of any Partnership Assets other than in the ordinary course of business shall be allocated to the Partners as of the opening of the New York Stock Exchange 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 as it determines necessary, to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder.
5.2.8. The General Partner shall amend or supplement this Article 5 to provide for the allocation of any item of income, gain, loss, deduction or credit for federal, state or local income tax purposes for which provision is not otherwise made herein in the manner that the General Partner determines to be reasonable, taking into account the requirements of the Code.
5.2.9. Notwithstanding any other provision of this Section 5.2, if the Internal Revenue Service is successful in asserting an adjustment to the taxable income of the General Partner and, as a result of any such adjustment, the Partnership is entitled to a deduction for federal income tax purposes with respect to any portion of such adjustment, such deduction shall be allocated to the General Partner.
5.3. Requirement and Characterization of Distributions. Within 45 days following the end of each calendar quarter (or following the period from the Closing Date to December 31, 1989) and amount equal to 100% of Available Cash with respect to such quarter (or period) shall be distributed by the Partnership to the Partners in accordance with their Percentage Interests. The foregoing shall not be deemed to require any distribution of cash if and to the extent such distribution would be prohibited by applicable law or by any loan agreement, security agreement, mortgage, debt instruments or any other agreement or obligation to which the Partnership is a party or by which it is bound or to which its assets are subject.
5.4. Reimbursements and Payments. Amounts payable as reimbursement of the General Partner pursuant to Section 6.3 or amounts payable to any Person other than in his capacity as a Partner, such as for services rendered, goods purchased or money borrowed, shall not be treated as distributions for purposes of this Article 5.
ARTICLE 6
MANAGEMENT AND OPERATION OF BUSINESS
6.1. Management.
6.1.1. Except as otherwise expressly provided in this Agreement, all decisions respecting any matter set forth herein or otherwise affecting or arising out of the conduct of the business of the Partnership shall be made by the General Partner, and the General Partner shall have the exclusive right and full authority to manage, conduct, control and operate the Partnership's business and effect the purposes and provisions of this Agreement. Except as otherwise expressly provided in this Agreement, the General Partner shall have full authority to do all things on behalf of the Partnership deemed necessary or desirable by it in the conduct of the business of the Partnership, including without limitation, (i) the making of any expenditures, the borrowing of money, the guaranteeing of indebtedness and other liabilities, the issuance of evidences of indebtedness and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (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 assets of the Partnership or the merger or other combination of the Partnership with or into another entity (all of the foregoing subject to any prior approval which may be required by Section 6.1.l; (iv) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including without limitation, the financing of the conduct of the operations of the Partnership, the lending of funds to other persons and the repayment of obligations of the Partnership; (v) the negotiation and execution on any terms deemed desirable in its sole discretion and the performance of any contracts, conveyances or other instruments that it considers useful or necessary to the conduct of the Partnership operations or the implementation of its powers under this Agreement; (vi) the distribution of Partnership cash; (vii) the selection and dismissal of employees (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer") and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring; (viii) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (ix) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable; (x) the control of any matters affecting the rights and obligations of the Partnership, including the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation; and (xi) 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 and the securing of same by mortgage, deed of trust or other lien or encumbrance, the bringing and defending of actions at law or in equity and the indemnification of any Person against liabilities and contingencies to the extent permitted by law.
6.1.2. Each of the Partners and each other Person who may acquire a Partnership Interest hereby approves, ratifies and confirms the execution, delivery and performance by the parties thereof to the Underwriting Agreement, the Contribution Agreement, the Conveyance and Assignment, the Assignment of Leases and the other agreements described in the Registration Statement and agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions and such other agreements described in the Registration Statement on behalf of the Partnership without any further act, approval or vote of the Partners or any other Person who may acquire a Partnership Interest notwithstanding any other provision of this Agreement, the Delaware Act or any applicable law, rule or regulations. None of the execution, delivery or performance by the General Partner, the Partnership or any Affiliate of any of them of any agreement authorized or permitted under this Agreement shall constitute a breach by the General Partner of any duty that the General Partner may own the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.
6.1.3. The General Partner shall cause to be filed the Certificate of Limited Partnership as required by the Delaware Act and shall cause to be filed such other certificates or documents as may be required 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 elects to do business or own property. The General Partner shall file any necessary amendments to the Certificate of Limited Partnership, including, without limitation, amendments to reflect a successor or additional General Partner admitted pursuant to Section 11.2, and shall otherwise use its best efforts to do all things (including the appointment of registered agents of the Partnership and maintenance of registered offices of the Partnership) requisite to the maintenance of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware or any other state in which the Partnership may elect to do business or own property. Where applicable law so permits, the General Partner may omit from certificates filed in the State of Delaware and in states in which the Partnership elects to do business or own property all information not required by law, including the names and addresses of Partners, or state such information in the aggregate rather than on an individual Partner basis. Except as provided in Section 7.4.1, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership or any amendment thereto to any Limited Partner or Record Holder.
6.2. Reliance By Third Parties. Notwithstanding any other provision of this Agreement to the contrary, no lender, purchaser or other Person dealing with the Partnership shall be required to look to the application of proceeds hereunder or to verify any representation by the General Partner as to the extent of the interest in Partnership Assets that the General Partner is entitled to encumber, sell or otherwise use, and any such lender, purchaser or other Person shall be entitled to rely exclusively on the representations of the General Partner as to its authority to enter into such arrangements and shall be entitled to deal with the General Partner, without the joinder of any other Person, as if the General Partner were the sole party in interest therein, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such lender, purchaser or other Person to contest, negate or disaffirm any action of the General Partner in connection with any such arrangement. In no event shall any Person dealing with the General Partner or the General Partner's representative with respect to any business or property of the Partnership be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expediency of any act or action of the General Partner or the General Partner's representative; and every contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the General partner or the General partner's representative with respect to any business or property of the Partnership shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery thereof, this Agreement was in full force and effect, (ii) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership and (iii) the General Partner or the General Partner's representative was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership.
6.3. Compensation and Reimbursement of the General Partner.
6.3.1. Except as otherwise provided in this Section 6.3, the General Partner shall not be compensated for its services as general partner of the Partnership.
6.3.2. The General Partner shall be reimbursed for all expenses, disbursements, and advances incurred or made in connection with the organization of the Partnership and the qualification of the Partnership and the General Partner to do business.
6.3.3. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole discretion, for (i) all direct and indirect expenses it incurs or makes on behalf of the Partnership (including amounts paid to any Person to perform services for the Partnership) and (ii) the portion of the General Partner's or its Affiliate's legal, accounting, utilities, investor communication, telephone, secretarial, travel, entertainment, bookkeeping, reporting, data processing, office rent and other office expenses (including overhead charges), salaries, fees and other compensation and benefit expenses of employees, officers and directors, other administrative or overhead expenses and all other direct and indirect administrative and incidental expenses, in each case necessary or appropriate to the conduct of the Partnership's business (including, without limitation, expenses allocated to the General Partner by its Affiliates). The General Partner shall determine such fees and expenses that are allocated to the Partnership in any reasonable manner in its sole discretion. Such reimbursements shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 6.7.
6.4. Partnership Funds. The funds of the Partnership shall be deposited in such account or accounts as are designated by the General Partner. The General Partner may, in its sole discretion, deposit funds of the Partnership in a central account maintained by or in the name of the General Partner or the Partnership in which funds of the Investor Partnership are also deposited, provided that at all times books of account are maintained which show the amount of funds of the Partnership on deposit in such account. All withdrawals from or charges against such accounts shall be made by the General Partner or by its officers or agents. Funds of the Partnership may be invested as determined by the General Partner, except in connection with acts otherwise prohibited by this Agreement.
6.5. Loans from the General Partner: Contracts with Affiliates.
6.5.1. The General Partner or any Affiliate thereof may lend to the Partnership funds needed by the Partnership for such periods of time as the General Partner may determine; provided, however, that the General Partner or such Affiliate may not charge the Partnership interest at a rate greater than the lesser of (i) the actual interest cost (including points or other financing charges or fees) that the General Partner or such Affiliate is required to pay on funds borrowed by it from commercial banks and (ii) the rate (including points or other financing charges or fees) that would be charged the Partnership (without reference to the General Partner's financial abilities or guaranties) by unrelated lenders on comparable loans. The Partnership shall reimburse the General Partner or any Affiliate, as the case may be, for any costs incurred by it in connection with the borrowing of funds obtained by the General Partner or such Affiliate and loaned to the Partnership. The Investor Partnership may lend or contribute to the Partnership, and the Partnership may borrow funds from the Investor Partnership, on terms and conditions established at the sole discretion of the General Partner. The foregoing authority shall be exercised by the General Partner in its reasonable discretion and shall not create any right or benefit in favor of the Partnership or any other Person. The Partnership may not lend funds to the General Partner or any of its Affiliates. For purposes of this Section 6.5.1, the Investor Partnership shall not bee deemed to be an Affiliate of the General Partner.
6.5.2. The General Partner may itself, or may enter into an agreement with an Affiliate of the General Partner to, render services to the Partnership. Any service rendered to the Partnership by the General partner or any such Affiliate shall be on terms that are fair and reasonable to the Partnership.
6.5.3. The General Partner or any of its Affiliates may use or lease property (including, but not limited to, office equipment, computers, vehicles, aircraft and office space) of the Partnership, and the General Partner or such Affiliate will reimburse the Partnership based on the incremental cost to the Partnership of such usage.
6.5.4. Neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Partnership; provided, however, that the requirements of this Section 6.5.4 shall be deemed to be satisfied as to the transactions effected pursuant to Section 4.2, the Contribution Agreement, the Conveyance and Assignment and the Assignment of Leases.
6.6. Liability of Indemnitees.
6.6.1. No Indemnitee shall be liable to the Partnership, Limited Partners or any Persons who have acquired any interests in LP Units of the Investor Partnership, whether as Limited Partners or otherwise, for losses sustained or liabilities incurred as a result of any act or omission if such Indemnitee acted in good faith and in a manner it reasonably believed to be in, or not opposed to, the best interests of the Partnership and if such act or omission did not constitute gross negligence or willful misconduct on the part of such Indemnitee.
6.6.2. 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 through its agents, and the General Partner shall not be responsible for any act or omission on the part of any such agent appointed by the General Partner in good faith if the agent acted in a manner it reasonably believed to be in, or not opposed to, the best interests of the Partnership and if such act or omission did not constitute gross negligence or willful misconduct on the part of such Person.
6.6.3. Any amendment, modification or repeal of this Section 6.6 or any provision hereof shall be prospective only and shall not in any way affect the limitations or the liability to the Partnership and the Limited Partners of the General Partner, their directors, officers and employees under this Section 6.6 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.
6.7. Indemnification.
6.7.1. To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, each Indemnitee shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities, whether joint or several, expenses (including legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise, by reason of its status as (x) a General Partner, a Departing Partner or any of their Affiliates, (y) an officer, director, employee or agent of a General Partner, any Departing Partner or any of their Affiliates or (z) a Person serving at the request of the Partnership in another entity in a similar capacity, regardless of whether the Indemnitee continues to be a General Partner or an Affiliate of a General Partner or an officer, director, employee, partner or agent of a General Partner or an Affiliate of a General Partner at the time any such liability or expense is paid or incurred, provided that in each case the Indemnitee acted in good faith and in a manner it reasonably believed to be in, or not opposed to, the best interests of the Partnership and such action did not constitute gross negligence or willful misconduct on the part of the Indemnitee, and, with respect to any criminal proceeding, the Indemnitee had no reasonable cause to believe its conduct was unlawful. The termination of any action, suit or proceeding by a judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified above.
6.7.2. To the fullest extent permitted by law, expenses (including legal fees and expenses) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding subject to this Section 6.7, or in establishing any right to indemnification hereunder, shall, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Partnership of any undertaking (which need not be secured) by or on behalf of the Indemnitee to repay such amount if it shall be determined that such Person is not entitled to be indemnified as authorized in this Section 6.7.
6.7.3. This advancement of expenses and indemnification provided by this Section 6.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, 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.
6.7.4. To the extent deemed commercially reasonable by the General Partner, the Partnership shall purchase and maintain at the expense of the Partnership insurance on behalf of the General Partner, its Affiliates, and their respective officers, directors, employees, partners, agents and trustees 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 Person in connection with the activities of the Partnership, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.
6.7.5. For purposes of this Section 6.7, 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 be deemed "fines" within the meaning of Section 6.7.1; and action taken or omitted by it with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is in, or not opposed to, the best interests of the Partnership.
6.7.6. Any indemnification hereunder shall be satisfied solely out of the assets of the Partnership. In no event may an Indemnitee subject the General Partner or the Limited Partners to personal liability by reason of these indemnification provisions.
6.7.7. An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applied if the transaction was otherwise permitted by the terms of this Agreement.
6.7.8. The indemnification provided in this Section 6.7 is for the benefit of the Indemnitees and shall not be deemed to create any right to indemnification for any other Persons.
6.7.9. No amendment, modification or repeal of this Section 6.7 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 6.7 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.
6.8. Other Matters Concerning the General Partner.
6.8.1. The General partner may rely 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.
6.8.2. the General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it and any opinion of any such Person as to matters that the General Partner reasonably believes to be within such Person's professional or expert competencies shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by the General Partner hereunder in good faith and in accordance with such opinion.
6.8.3. 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 and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder.
6.9. Title to Partnership Assets. All Partnership Assets, whether real or 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 or one or m ore nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership Assets for which legal title is held in the name of the General Partner shall be held in trust by the General Partner for the use and benefit of the Partnership in accordance with the terms and provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership Assets shall be recorded as the property of the Partnership on its books and records, irrespective of the name in which legal title to such Partnership Assets is held.
6.10. Resolution of Conflicts of Interests.
6.10.1. Unless otherwise expressly provided in this Agreement or the
Investor Partnership 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, the Investor Partnership or any Partner,
on the other hand, any resolution or course of action 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 the
Investor Partnership 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 is or, by operation of this Agreement, is
deemed to be fair and reasonable to the Partnership. The General Partner
shall be authorized but not required in connection with its resolution of
such conflict of interest to seek Special Approval of a resolution of such
conflict or course of action. Any conflict of interest and any resolution
of such conflict of interest shall be deemed fair and reasonable to the
Partnership upon Special Approval of such conflict of interest or
resolution. The General Partner may also adopt a resolution or course of
action that has not received Special Approval. Any such resolution or
course of action in respect of any conflict of interest shall not
constitute a breach of this Agreement, of the Investor Partnership
Agreement, of any other agreement contemplated herein or therein or of any
duties stated or implied by law or equity, if such resolution or course of
action is fair and reasonable to the Partnership. The General Partner
(including the Independent Committee in connection with Special Approval)
shall be authorized in connection with its resolution of any conflict of
interest to consider (i) the relative interests of any party to such
conflict, agreement, transaction or situation and the benefits and burdens
relating to such interest; (ii) any customary or accepted industry
practices; (iii) any applicable generally accepted accounting or
engineering practices or principles; and (iv) such additional factors as
the General Partner (including such Independent Committee) determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is intended to
nor shall it be construed to require the General Partner (including such
Independent Committee) to consider the interest of any Person other than
the Partnership. In the absence of bad faith by the General Partner, the
resolutions, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any
standard of care or duty imposed herein or therein or under the Delaware
Act or any other law, rule or regulation.
6.10.2. Whenever this Agreement or any other agreement contemplated hereby provides that the General Partner or any of its Affiliates is permitted or required to make a decision (i) in its "discretion" or under a grant of similar authority or latitude, the General Partner or such Affiliate shall be entitled to consider only such interests and factors as it desires and shall have no duty or obligation to give any consideration to any interest of, or factors affecting, the Partnership or any Limited Partner, or (ii) in "good faith" or under another express standard, the General partner or such Affiliate shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement or any other agreement contemplated hereby. In addition, any actions taken by the General Partner consistent with the standards of "reasonable discretion" set forth in the definitions of Available Cash shall not constitute a breach of any duty of the General Partner to the Partnership or the Limited Partners. During the Preference Period (as defined in the Investor Partnership Agreement), the General Partner shall have no duty, express or implied, to sell or otherwise dispose of any asset of the Partnership, other than in the ordinary course of business. No borrowing by the Partnership or the approval thereof by the General Partner shall be deemed to constitute a breach of any duty of the General Partner to the Partnership or the Limited Partners solely by reason of the fact that the purpose or effect of such borrowing is directly or indirectly to avoid subordination of the Preference Units or Common Units (as such terms are defined in the Investor Partnership Agreement) by reason of the provisions of Section 5.4 or 5.5 of the Investor Partnership Agreement.
6.10.3. Whenever a particular transaction, arrangement or resolution of a conflict of interest is required under this Agreement to be "fair and reasonable" to any Person, the fair and reasonable nature of such transaction, arrangement or resolution shall be considered in the context of all similar or related transactions.
6.11. Restrictions on General Partner's Authority.
6.11.1. The General Partner may not, without the written approval of the specific act by all of the Limited Partners or by other written instrument executed and delivered by all of the Limited Partners subsequent to the date of this Agreement, do any of the following: (i) take any action in contravention of this Agreement, (ii) take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement, (iii) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose, (iv) admit a Person as a Partner, except as otherwise provided in this Agreement, (v) amend this Agreement in any manner, except as otherwise provided in this Agreement or (vi) transfer its interest as general partner of the Partnership, except as otherwise provided in Section 10.2 hereof.
6.11.2. Except as provided in Article 13, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the Partnership's assets in a single transaction or a series of related transactions (including by way of merger, consolidation or other combination with any other Person), without the approval of all the Limited Partners; provided, however, that this provision shall not preclude or limit the mortgage, pledge, hypothecation or grant of a security interest in all or substantially all of the Partnership's assets and shall not apply to any forced sale of any or all of the Partnership's assets pursuant to the foreclosure of, or other realization upon, any such encumbrance.
6.11.3. Unless approved by all the Limited Partners, the General Partner shall not take any action or refuse to take any reasonable action the effect of which, if taken or not taken, as the case may be, would be to cause the Partnership to become taxable as a corporation or to be treated for federal income tax purposes as an association taxable as a corporation.
6.11.4. At all times while serving as the general partner of the Partnership, the General Partner will not pay any dividend on, repurchase any shares of its capital stock or take any other action if the effect of such dividend, repurchase or other action would be to reduce its net worth below an amount necessary to receive an Opinion of counsel that the Partnership will be treated as a partnership for federal income tax purposes.
6.12. Outside Activities.
6.12.1. Except as described in the Registration Statement or as provided in Section 6.12.2, no Indemnitee shall be expressly or implicitly restricted or proscribed pursuant to this Agreement or the partnership relationship established hereby from engaging in other activities for profit, whether in the business engaged in by the Partnership or anticipated to be engaged in by the Partnership or otherwise, including, without limitation, those businesses described in or contemplated by the Registration Statement. Without limitation of and subject to the foregoing and Section 6.12.2, each Indemnitee shall have the right to engage in the transportation of refined petroleum products and any other business of every type and description and to engage in and possess an interest in other business ventures of any and every type and description, independently or with others, including business interests and activities in direct competition with the Partnership. Neither the Partnership, any Limited Partner nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any Indemnitee, and, except as set forth in the Registration Statement, such Indemnitees shall have no obligation to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person.
6.12.2. Without limitation of this Section 6.12, the competitive activities of certain Indemnitees and the restrictions on the Partnership's activities described in the Registration Statement under the caption "Conflicts of Interest and Fiduciary Responsibilities" are hereby approved by all Partners; provided, however that this Section 6.12 shall not operate as a waiver by the Partnership or any Limited Partner of any breach of fiduciary duty resulting from competition by an Indemnitee with the Partnership.
ARTICLE 7
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
7.1 Limitation of Liability. The Limited Partners shall have no liability under this Agreement except as provided in this Agreement or by the Delaware Act.
7.2 Management of Business. No Limited Partner (other than the General Partner, any of its Affiliates or any director, officer, general partner, employee or agent of the General Partner or any of its Affiliates, in his capacity as such, if such Person shall also be a Limited Partner) shall take part 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. The transaction of any such business by a director, officer, general partner, employee or agent of the General Partner or any of its Affiliates shall not affect, impair or eliminate the limitation son the liability of any Limited Partner under this Agreement.
7.3 Return of Capital. No Limited 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 provided by Article 5 or as otherwise expressly provided in this Agreement, no Limited Partner shall have priority over any other Limited Partner either as to the return of Capital Contribution or as to profits, losses or distributions.
7.4. Access to Information.
7.4.1. In addition to other rights provided by this Agreement or by applicable law, each Limited Partner, and each Limited Partner's duly authorized representatives shall have the right at reasonable times, upon reasonable notice which shall not be less than three Business Days, and at such Person's own expense, but only upon its written request and for a purpose reasonably related to such Person's interest as a Limited Partner, to (i) have true and full information regarding the status of the business and financial condition of the Partnership, (ii) inspect and copy, promptly after they become available, the Partnership's federal, state and local income tax returns for each year, (iii) have on demand a current list of the full name and last known business, residence or mailing address of each Partner, (iv) have true and full information regarding the Net Agreed Value of any Capital Contributions made by the General Partner and the Limited Partners and the date on which each such Person became a General Partner or Limited Partner, (v) have a copy of this Agreement and the Certificate of Limited Partnership and all amendments thereto, together with copies of executed powers of attorney pursuant to which this Agreement or any such Certificate has been executed and (vi) have any other information regarding the affairs of the Partnership as is just and reasonable.
7.4.2. Anything in Section 7.4.1 to the contrary notwithstanding, the General Partner may keep confidential from the Limited Partners, and each Limited Partner's duly authorized representatives, for such period of time as the General Partner deems reasonable, any information that the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the business of the Partnership or which the Partnership is required by law or by agreements with third parties to keep confidential.
ARTICLE 8
BOOKS, RECORDS, ACOCUNTING AND REPORTS
8.1 Records and Accounting. The General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership's business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including books of account and records of Partnership proceedings, may be kept on or be in the form of punch cards, magnetic media, photographs, micrographics or any other information storage device, provided that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained on the accrual basis in accordance with generally accepted accounting principles, except to the extent otherwise required herein.
8.2. Fiscal Year. The fiscal year of the Partnership shall be the calendar year.
ARTICLE 9
TAX MATTERS
9.1 Section 754 Allocations. The adjustments to basis to Partnership Assets that are attributable to the Section 754 Election shall be allocated to the Partners in the manner that the General Partner determines is reasonable, however, no such adjustment shall be credited or charged to the Capital Accounts.
9.2. Preparation of Tax Returns. The General Partner shall arrange for the preparation and timely filing of all returns of the Partnership necessary for federal income tax purposes and state and local income tax purposes in the jurisdictions in which the Partnership conducts business and shall use its reasonable best efforts to furnish to the Record Holders within 75 days of the close of the taxable year the tax information reasonably required for federal, state and local income tax reporting purposes. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes. The taxable year of the Partnership shall be the calendar year.
9.3. Tax Elections.
9.3.1. The Partnership shall make the Section 754 Election 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 interest of the Limited Partners.
9.3.2. The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
9.3.3. Except as otherwise provided herein, the General Partner shall determine whether to make any other available elections (including the elections provided for in Sections 167 and 168 of the Code) on behalf of the Partnership under the Code.
9.4. Tax Controversies. Subject to the provisions hereof, the General Partner is designated as the Tax Matters Partner (as defined in Section 6231 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 General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.
9.5. Tax Basis and Value Determinations. To the extent that the General Partner is required to establish fair market values or allocate amounts realized, tax basis, Carrying Values or Net Agreed Values, the General Partner shall establish such values and make such allocations in a manner that is reasonable and fair to the Limited Partners, taking into account all applicable laws, governmental regulations, rulings and decisions. The General Partner may, in its sole discretion, modify or revise such allocations in order to comply with such laws, governmental regulations, rulings or decisions or to the extent it otherwise deems such modification or revision appropriate or necessary. The General Partner is authorized, to the extent deemed by it to be appropriate or necessary, to utilize the service of an independent appraiser in establishing such values or allocations and the General Partner shall in such cases be entitled to rely on the values or allocations established by such independent appraiser.
9.6. General Partner Net Worth. The General Partner shall not declare or make payment of any dividends (except dividends payable solely in capital stock), purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, return any capital or make any distribution of assets on account of any shares of its capital stock, if any such action would reduce its net worth (computed by excluding any net worth attributable to its interest in, and accounts and notes receivable from, or payable to, the Partnership or any other limited partnership in which it is a general partner) below $5,000,000 (or such other lesser amount as may be required to obtain an Opinion of Counsel that the Partnership is not taxable as a corporation and will not be treated as an association taxable as a corporation).
ARTICLE 10
TRANSFER OF PARTNERSHIP INTERESTS
10.1. Transfer.
10.1.1. The term "transfer", when used in this Article 10 with respect to a Partnership Interest, shall be deemed to refer to a transaction by which a Partner assigns all or any part of its Partnership Interest to another Person and includes a sale, assignment, gift, pledge, hypothecation, mortgage, exchange or any other disposition.
10.1.2. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 10. Any transfer or purported transfer of any Partnership Interest not made in accordance with this Article 10 shall be null and void.
10.2. Transfer of Interests of the General Partner. The General Partner may not transfer any portion of its Partnership Interest as the general partner of the Partnership; provided, however, that if the general partner of the Investor Partnership transfers any portion of its partnership interest as a general partner therein to any Person in accordance with the provisions of the Investor Partnership Agreement, the General Partner shall also transfer the same portion of its Partnership Interest as the general partner of the Partnership to such Person. The Limited Partners hereby approve of any such transfer.
10.3. Transfer of Partnership Interests of Limited Partners.
10.3.1. No Limited Partner may withdraw from the Partnership or transfer all or any part of its Partnership Interest except that a successor of a Limited Partner may become a Substituted Limited Partner as provided in Article 11.
10.3.2. Notwithstanding the foregoing, the Partnership Interest as a limited partner to be acquired by KPL pursuant to Section 4.2 may be transferred to the Investor Partnership pursuant to the Contribution Agreement, and the Investor Partnership shall become a Substituted Limited Partner with respect to such Partnership interest.
ARTICLE 11
ADMISSION OF PARTNERS
11.1. Admission of Substituted Limited Partners. Any successor to the Partnership Interest of a Limited Partner shall be admitted to the Partnership as a Limited Partner upon the (a) furnishing to the General Partner (i) an acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement and (ii) such other documents and instruments as may be required to effect the admission of such successor as a Limited Partner; and (b) obtaining of the consent of the General Partner, which consent may be withheld or granted in the sole discretion of the General Partner. The transferee shall be admitted to the Partnership as a Limited Partner effective immediately prior to the transfer.
11.2. Admission of Successor or Additional General Partner. A successor or
additional General Partner selected pursuant to Section 12.2 or 12.3 or the
transferee or successor to of all or any portion of the Partnership Interest of
the General Partner pursuant to Section 10.2 shall be admitted to the
Partnership as a General Partner (in the place of or in addition to, as the case
may be, the transferor General Partner), effective as of the date that an
amendment to the Certificate of Limited Partnership, adding its name and other
required information, is filed pursuant to Section 6.1.3 (which, in the event
the successor or transferee General Partner is in the place of the withdrawing,
removed or transferor General Partner, shall be contemporaneous with the
withdrawal of such withdrawing, removed or transferor General Partner), and upon
receipt by the withdrawing, removed or transferor General Partner of all of the
following: (i) acceptance of all of the terms and provisions of this Agreement;
(ii) written agreement of the successor or transferee General Partner to
continue the business of the Partnership; and (iii) such other documents or
instruments as may be required in order to effect its admission as a General
Partner under this Agreement and applicable law. Each Limited Partner hereby
approves of the admission of a successor or additional General Partner selected
pursuant to the terms of this Agreement, and no further approval of Partners
shall be required to effect such admission.
ARTICLE 12
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
12.1. Withdrawal or Removal of the General Partner. 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"):
12.1.1. The General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners.
12.1.2. The General Partner transfers all of its rights as General Partner pursuant to Section 10.2 hereof.
12.1.3. The General Partner is removed pursuant to Section 12.3 hereof.
12.1.4. The General Partner
(a) makes a general assignment for the benefit of creditors;
(b) files a voluntary bankruptcy petition;
(c) files a petition or answer seeking for itself a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief 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 paragraphs
(a) through (c) of this subsection; or
(e) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the General Partner or of all or any substantial part of its properties.
12.1.5. A final and non-appealable judgment is entered by a court with appropriate jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect.
12.1.6. 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.
12.1.7. The general partner of the Investor Partnership withdraws from, or is removed as the general partner of, the Investor Partnership.
If an Event of Withdrawal specified in Sections 12.1.4, 12.1.5 or 12.1.6 occurs, the withdrawing General Partner shall give written 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 12.1 shall result in withdrawal of the General Partner from the Partnership.
12.2. Withdrawal. The General Partner covenants and agrees that it will not
voluntarily withdraw as the general partner of the Partnership prior to January
1, 2000, other than a withdrawal effective upon the transfer of all of the
General Partner's Partnership Interest as the General Partner pursuant to
Section 10.2, unless such withdrawal is approved by all Limited Partners;
provided that the General Partner may withdraw without such approval by the
Limited Partners upon 90 days' advance written notice to the Limited Partners if
more than 50% of the Outstanding LP Units (as defined in the Investor
Partnership Agreement) are held or controlled by one Person and its Affiliates
other than the withdrawing General Partner and its Affiliates. The General
Partner may, at anytime subsequent to January 1, 2000, voluntarily withdraw from
the Partnership effective on at least 90 day's advance written notice to the
Limited Partners, such withdrawal to take effect on the date specified in such
notice. The General Partner shall have no liability on account of a withdrawal
permitted hereunder. If the General Partner gives notice of withdrawal as
general partner of the Investor Partnership, and the limited partners thereof
select a successor pursuant to the terms of the Investor Partnership Agreement,
the Person so elected shall automatically become the successor General Partner
of the Partnership. If the General Partner gives notice of withdrawal pursuant
to Section 12.1.1, the Limited Partners may, prior to the effective date of such
withdrawal, elect, by unanimous vote of the Limited Partners, the successor
General Partner. If, prior to the effective date of the General Partner's
withdrawal, no successor General Partner is elected, the provisions of Section
13.1 shall apply.
12.3. Removal. The affirmative vote of all the Limited Partners shall be required to remove the General Partner. Any such vote of the Limited Partners must also provide for the election of a successor General Partner.
12.4. Opinion of Counsel. Notwithstanding the provisions of Section 12.2 or 12.3, the rights of the Limited Partners under Section 12.2 or 12.3 shall not be exercised until such time as the Partnership has received an Opinion of Counsel that the action in question (i) may be taken without the approval of all Partners to such specific act, (ii) would not cause the loss of limited liability of the Limited Partners under this Agreement, (iii) would not cause the Partnership to be taxable as a corporation or to be treated as an association taxable as a corporation for federal income tax purposes and (iv) any required consents of any regulatory authorities to such action have been obtained.
12.5. Amendment of Certificate of Limited Partnership. The Certificate of Limited Partnership shall be amended to reflect the withdrawal, removal or succession of the General Partner.
12.6. Interest of Departing Partner and Successor.
12.6.1 (a) If a successor General Partner acquires the partnership interest as general partner in the Investor Partnership of the Departing Partner, such successor General Partner must also acquire at such time the Partnership Interest of such Departing Partner or its Affiliate as general partner of the Partnership for an amount equal to the fair market value of such interest, determined as of the effective date of departure.
(b) For purposes of this Section 12.6, the fair market value of the Departing Partner's Partnership Interest as the General Partner herein shall be determined as provided in Section 14.6 of the Investor Partnership Agreement.
12.6.2. (a) If the Combined Interest (as defined in the Investor
Partnership Agreement) is not acquired in the manner set forth in
Section 14.6 of the Investor Partnership Agreement, the Departing
Partner shall become a limited partner of the Investor Partnership as
provided therein and its Combined Interest shall be converted into
Common Units as provided therein. Any successor General Partner shall
indemnify the Departing Partner as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing
Partner becomes a Limited Partner.
(b) If the option described in Section 12.6.1 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 capital of the Partnership cash equal to the greater of (i) 1/99th of the aggregate Capital Account balances of the Limited Partners as of such date or (ii) the fair market value of a 1% general partner's interest in the Partnership, determined by a valuation made by an investment banking firm or other independent expert selected pursuant to Section 14.6.1 of the Investor Partnership Agreement. In such event, the successor General Partner shall, subject to the following sentence, be entitled to such Percentage Interest of all Partnership allocations and distributions and any other allocations and distributions to which the Departing Partner was entitled as general partner. In addition, such successor General Partner shall cause this Partnership 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 1% and that of the Limited Partners shall be 99%.
12.6.3. The Partnership shall reimburse the Departing Partner for employee related liabilities including but not limited to, severance liabilities incurred in connection with the termination of employees employed by the Departing Partner for the benefit of the Partnership; and if the Partnership is otherwise indebted to the Departing Partner at the effective time of its departure for funds advanced, properties sold or services rendered to the Partnership by the Departing Partner or otherwise, the Partnership shall, at the option of the successor General Partner, either (i) within 60 days after the effective time of such departure, pay to the Departing Partner the full amount of such indebtedness or (ii) pay such indebtedness or any portion thereof in accordance with its then existing terms. The successor to the Departing Partner shall assume all obligations theretofore incurred by the Departing Partner as the General Partner of the Partnership, and the Partnership and such successor General Partner shall take all such action as shall be necessary to terminate any guarantees of the Departing Partner and any of its Affiliates of any obligations of the Partnership. If for whatever reason the creditors of the Partnership will not consent to such termination of guarantees, the successor to the Departing Partner shall be required to indemnify the Departing Partner for any liabilities and expenses incurred by the Departing Partner on account of such guarantees.
ARTICLE 13
DISSOLUTION AND LIQUIDATION
13.1. Dissolution. Except as provided in Section 13.2, the Partnership shall be dissolved upon:
13.1.1. the expiration of its term as provided in Section 2.5;
13.1.2. an Event of Withdrawal of the General Partner as provided in
Section 12.1 (other than by reason of a transfer pursuant to Section 10.2
or withdrawal occurring upon or after, or removal effective upon or after,
approval by the Limited Partners of a successor pursuant to Section 12.2 or
12.3, as the case may be);
13.1.3. a written determination by the General Partner that projected future revenues of the Partnership will be insufficient to enable payment of projected Partnership costs and expenses or, if sufficient, will be such that continued operation of the Partnership is not in the best interests of the Partners;
13.1.4. an election to dissolve the Partnership by the General Partner which is approved by all the Limited Partners; provided, that no such election shall be effective at any time when the Partnership has outstanding any indebtedness for borrowed money unless provision shall have been made in connection with such dissolution for the payment in full of such indebtedness;
13.1.5. except as otherwise provided herein, any other event that, under the Delaware Act, would cause its dissolution;
13.1.6. the sale of all or substantially all of the assets and properties of the Partnership; or
13.1.7. the dissolution of the Investor Partnership.
The Partnership shall not be dissolved by the admission of a successor Limited Partner or by the admission of additional or successor General Partners in accordance with the terms of this Agreement.
13.2. Continuation of the Business of the Partnership.
13.2.1. Within 180 days following an event described in Section 13.1.2, in the event action pursuant to Section 13.3 is not taken, the Limited Partners by unanimous vote may elect in writing to reconstitute and continue the business of the Partnership by forming a new limited partnership (a "Reconstituted Partnership") on the same terms and provisions as are set forth in this Agreement. Any such election must also provide for the election of a general partner of the Reconstituted Partnership. If such an election is made, all of the Limited Partners of the Partnership shall continue as limited partners of the Reconstituted Partnership. The Partnership Interest as General Partner of the former General Partner shall be treated as though it were an equivalent general partner's interest in the Reconstituted Partnership, and shall be subject to disposition at the option of the general partner of the Reconstituted Partnership in the manner provided in Section 12.6.1 (which option must be exercised contemporaneously with the selection of the new general partner).
13.2.2. Upon an event described in this Section 13.2, all necessary steps shall be taken to cancel this Agreement and the Certificate of Limited Partnership of the Partnership and to enter into a new partnership agreement and certificate of limited partnership of the Reconstituted Partnership.
13.3. Liquidation.
13.3.1. Upon dissolution of the Partnership, unless an election to continue the business of the Partnership is made pursuant to Section 13.2, the General Partner or in the event the dissolution was caused by an event described in Section 13.1.2 or 13.1.3, a liquidator or liquidating committee elected by a majority in interest of the Limited Partners, shall be the Liquidating Trustee. The Liquidating Trustee shall liquidate the Partnership Assets and apply and distribute the proceeds of such liquidation in the following order of priority, unless otherwise required by applicable law.
(a) the payment to creditors of the Partnership, other than Partners, in order of priority provided by law, including the establishment of reserves for the payment thereof;
(b) pro rata payment to Partners for loans or other amounts owed to them by the Partnership;
(c) to all Partners in accordance with the positive balances in their respective Capital Accounts after taking into account adjustments to such Capital Accounts pursuant to Section 5.1.3;
(d) to the Partners in proportion to their respective Percentage Interests.
13.3.2. The Liquidating Trustee (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by a majority in interest of the Limited Partners. The Liquidating Trustee shall agree not to resign at any time without 60 days' prior written notice and (if other than the General Partner) may be removed at any time, with or without cause, by written notice of removal approved by a majority in interest of the Limited Partners. Upon dissolution, removal or resignation of the Liquidating Trustee, a successor and substitute Liquidating Trustee (who shall have and succeed to all rights, powers and duties of the original Liquidating Trustee) shall, within 90 days thereafter, be selected by a majority in interest of the Limited Partners. The right to appoint a successor or substitute Liquidating Trustee in the manner provided herein shall be recurring and continuing for so long as the functions and services of the Liquidating Trustee are authorized to continue under the provisions hereof, and every reference herein to the Liquidating Trustee will be deemed to refer also to any such successor or substitute Liquidating Trustee appointed in the manner herein provided. Except as expressly provided in this Article 13, the Liquidating Trustee appointed 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) to the extent necessary or desirable in the good faith judgment of the Liquidating Trustee to carry out the duties and functions of the Liquidating Trustee hereunder (including the establishment of reserves for liabilities that are contingent or uncertain in amount) for and during such period of time as shall be reasonably required in the good faith judgment of the Liquidating Trustee to complete the winding-up and liquidation of the Partnership as provided for herein. In the event a majority in interest of the Limited Partners fail to approve of a Person to be the Liquidating Trustee as herein provided within 120 days following the event of dissolution or fail to approve a of successor and substitute Liquidating Trustee within the time period set forth above, any Partner may make application to a Court of Chancery of the State of Delaware to wind up the affairs of the Partnership and, if deemed appropriate, to appoint a Liquidating Trustee.
13.4 Distribution in Kind. Notwithstanding the provisions of Section 13.3 which require the liquidation of the Partnership Assets, but subject to the order of priorities set forth therein, if on dissolution of the Partnership the Liquidating Trustee determines that an immediate sale of part or all of the Partnership Assets would be impractical or would cause undue loss to the Partners, the Liquidating Trustee may, in its absolute discretion, defer for a reasonable time the liquidation of any Partnership Assets except those necessary to satisfy liabilities of the Partnership and may, in its absolute discretion, distribute to the Partners, in lieu of cash, as tenants in common and in accordance with Section 13.3, undivided interests in such Partnership Assets as the Liquidating Trustee deems not suitable for liquidation. Any distributions in kind shall be subject to such conditions relating to the disposition and management thereof as the Liquidating Trustee deems reasonable and equitable and to any agreements governing the operation of such Partnership Assets at such time. The Liquidating Trustee shall determine the fair market value of any Partnership Assets distributed in kind using such reasonable method of valuation as it may adopt.
13.5. Cancellation of Certificate of Limited Partnership. Upon the completion of the distribution of Partnership Assets as provided in Sections 13.3 and 13.4, the Partnership shall be terminated, and the Liquidating Trustee (or the General Partner or Limited Partners, if necessary) shall cause the cancellation of the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware and shall take such other actions as may be necessary to terminate the Partnership.
13.6. Reasonable Time for Winding Up. A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.3 in order to minimize any losses otherwise attendant upon such winding up.
13.7. Return of Contributions. The General Partner shall not be liable for the return of the Capital Contributions of the Limited Partners, or any portion thereof, it being expressly understood that any such return shall be made solely from the Partnership Assets.
13.8. No Capital Account Restoration. No Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership.
13.9. Waiver of Partition. Each Partner hereby expressly waives any and all rights that it may have to maintain an action for partition of the Partnership's Assets.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT
14.1. Amendments to be Adopted Solely by the General Partner. The General Partner, without the consent at the time of any Limited Partner (each Limited Partner being deemed to approve of any such amendment), 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:
14.1.1. a change in the name of the Partnership or the location of the principal place of business of the Partnership;
14.1.2. the admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;
14.1.3. a change that is necessary or advisable in the opinion of the General Partner 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 Partnership will not be taxable as a corporation or treated as an association taxable as a corporation for federal income tax purposes;
14.1.4. a change that (i) in the sole discretion of the General Partner does not adversely affect the Limited Partners in any material respect, (ii) is necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or contained in any federal or state statute or (iii) is required or contemplated by this Agreement or the Registration Statement;
14.1.5. an amendment that is necessary, as reflected in an Opinion of Counsel, to prevent the Partnership or the General Partner or its directors or officers from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisors Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or "plan asset" regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, whether or not substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor;
14.1.6. a change in any provision of this Agreement which requires any action to be taken by or on behalf of the General Partner or the Partnership pursuant to the requirements of the Delaware Act if the provisions of the Delaware Act are amended, modified or revoked so that the taking of such action is no longer required; provided that this Section 14.1.6 shall be applicable only if such changes are not materially adverse to the Limited Partners;
14.1.7. any amendment to this Agreement that is necessary to confirm this Agreement to any amendments made to the Investor Partnership Agreement; or
14.1.8. any other amendments similar to the foregoing.
14.2. Amendment Procedures. Except as provided in Section 14.1, all amendments to this Agreement shall require the approval of the General Partner and all the Limited Partners.
ARTICLE 15
MERGER
15.1. Authority. The Partnership may merge or consolidate with one or more corporations, business trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses including, without limitation, a general partnership or limited partnership, formed under the laws of the State of Delaware or any other state of the United States of America pursuant to a written agreement of merger or consolidation ("Merger Agreement") in accordance with this Article.
15.2. Procedure for Merger or Consolidation. Merger or consolidation of the Partnership pursuant to this Article requires the prior approval of the General Partner. If the General Partner shall determine, in the exercise of its sole discretion, to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth:
15.2.1. The names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate;
15.2.2. The name and jurisdictions of formation or organization of the business entity that is to survive the proposed merger or consolidation (hereafter designated as the "Surviving Business Entity");
15.2.3. The terms and conditions of the proposed merger or consolidation;
15.2.4. The manner and basis of exchanging or converting the equity securities of each constituent business entity for or into cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity; and (a) if any general or limited partnership interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity, the cash, property or general or limited partnership interests, rights, securities or obligations of any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity) which the holders of such general or limited partnership interests are to receive in exchange for, or upon conversion of, their securities or rights, and (b) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or general or limited partnership interests, rights, securities or obligations of the Surviving Business Entity or any limited partnership, corporation, trust or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered;
15.2.5. A statement of any changes in the constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership or other similar charter or governing document) of the Surviving business Entity to be effected by such merger or consolidation;
15.2.6. The effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 15.4 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 the certificate of merger, it shall be fixed no later than the time of the filing of the certificate of merger and stated therein); and
15.2.7. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.
15.3. Approval by Limited Partners of Merger or Consolidation. The General Partner of the Partnership, upon its approval of the Merger Agreement, shall direct that the Merger Agreement be submitted for approval by the Limited Partners. The Merger Agreement shall be approved upon execution thereof by all the Limited Partners.
15.4. Certificate of Merger. Upon the required approval by the General Partner and Limited Partners of a Merger Agreement, a certificate of merger shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act.
15.5. Effect of Merger.
15.5.1. Upon the effective date of the certificate of merger:
(a) all of the rights, privileges and powers of each of the business entities that have 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;
(b) 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;
(c) 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
(d) 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.
15.5.2. A merger or consolidation effected pursuant to this Article shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another having occurred.
ARTICLE 16
GENERAL PROVISIONS
16.1. Addresses and Notices. The address of the General Partner for all purposes shall be the address set forth on the books and records of the Partnership and for each Limited Partner the address set forth in the books and records of the Partnership or such other address of which the General Partner has received written notice. Any notice, demand, request or report 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 to the Partner at such address by first class mail or by other means of written communication.
16.2. Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof.
16.3. Pronouns and Plurals. Whenever the context may require, any pronoun used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.
16.4. 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 purpose of this Agreement.
16.5. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
16.6. Integration. This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.
16.7. Creditors. Except for the provisions of Section 6.2, none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership.
16.8. 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 or any other covenant, duty, agreement or condition.
16.9. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties notwithstanding that all the 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, independently of the signature of any other party.
16.10. Applicable Law. Notwithstanding the place where this Agreement may be executed by any of the parties hereto, the parties expressly agree that all of the terms and provisions hereof shall be construed under the substantive laws of the State of Delaware as now adopted or as may hereafter be amended, and such laws shall govern this Agreement, without regard to the principles of conflicts of law.
16.11. Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the 27th day of September, 1989.
GENERAL PARTNER:
KANEB PIPE LINE COMPANY
ORGANIZATIONAL LIMITED PARTNER:
KANEB PIPE LINE PARTNERS, L.P.
By Kaneb Pipe Line Company,
its General Partner