0000950109-01-504395.txt : 20011026
0000950109-01-504395.hdr.sgml : 20011026
ACCESSION NUMBER: 0000950109-01-504395
CONFORMED SUBMISSION TYPE: S-1
PUBLIC DOCUMENT COUNT: 5
FILED AS OF DATE: 20011022
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SUNOCO LOGISTICS PARTNERS LP
CENTRAL INDEX KEY: 0001161154
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1203
FILING VALUES:
FORM TYPE: S-1
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-71968
FILM NUMBER: 1763129
BUSINESS ADDRESS:
STREET 1: SUN COMPANY INC, TEN PENN CENTER
STREET 2: 1801 MARKET ST C/O JOHN DIROCCO
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
BUSINESS PHONE: (215)977-3000
MAIL ADDRESS:
STREET 1: 1800 MARKET STREET
CITY: PHILADEPHIA
STATE: PA
ZIP: 19103
S-1
1
ds1.txt
FORM S-1 REGISTRATION STATEMENT
As filed with the Securities and Exchange Commission on October 19, 2001
Registration Statement No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Form S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------
Sunoco Logistics Partners L.P.
(Exact name of registrant as specified in its charter)
Delaware 4610 Applied for
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1801 Market Street
Philadelphia, Pennsylvania 19103
(215) 977-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
JEFFREY W. WAGNER
Sunoco Partners LLC
1801 Market Street
Philadelphia, Pennsylvania 19103
(215) 977-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Copies to:
DAN A. FLECKMAN JOSHUA DAVIDSON
Vinson & Elkins L.L.P. Baker Botts L.L.P.
1001 Fannin, Suite 2300 One Shell Plaza
Houston, Texas 77002-6760 910 Louisiana
(713) 758-2222 Houston, Texas 77002-4995
(713) 229-1234
-----------------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-------------------
CALCULATION OF REGISTRATION FEE
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Proposed
Title of each class of maximum aggregate Amount of
securities to be registered offering price(1)(2) registration fee
---------------------------------------------------------------------------------------------------
Common units representing limited partnership interests .... $120,750,000 $30,188
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(1)Includes 750,000 common units issuable upon exercise of the underwriters'
over-allotment option.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
-----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated October 19, 2001
PROSPECTUS
[LOGO] SUNOCO
Sunoco Logistics Partners L.P.
5,000,000 Common Units
Representing Limited Partner Interests
--------------------------------------------------------------------------------
We are a partnership recently formed by Sunoco, Inc. This is the initial public
offering of our common units. We expect the initial public offering price to be
between $ and $ per unit. Common units are entitled to receive
distributions of available cash of $0.45 per quarter, or $1.80 on an annualized
basis, before any distributions are paid on our subordinated units. We intend
to list the common units on the New York Stock Exchange under the symbol " ."
Investing in our common units involves risk. "Risk Factors" begin on page 13.
These risks include the following:
. We may not have sufficient cash to enable us to pay the minimum quarterly
distribution.
. Sunoco R&M's obligations under the pipelines and terminals storage and
throughput agreement may be reduced or suspended in some circumstances,
which would reduce our ability to make distributions to our unitholders.
. A significant decrease in demand for refined products in the markets
served by our pipelines could reduce our ability to make distributions to
our unitholders.
. If Sunoco R&M were to shut down or reconfigure one or more of its
refineries, its contractual obligation to use our pipelines and terminals
could be reduced.
. Rate regulation may not allow us to recover the full amount of increases
in our costs, and a successful challenge to our rates may reduce the
amount of cash available for distribution to our unitholders.
. Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety that could
require us to make substantial expenditures.
. Sunoco, Inc. and its affiliates have conflicts of interest and limited
fiduciary responsibilities, which may permit them to favor their own
interests to your detriment.
. You will have less ability to elect or remove management than holders of
common stock in a corporation.
. You will experience immediate and substantial dilution of $8.55 per common
unit.
. You may be required to pay taxes on income from us even if you do not
receive any cash distributions from us.
Per Common Unit Total
--------------- -----
Initial public offering price.......................... $ $
Underwriting discount.................................. $ $
Proceeds, before expenses, to Sunoco Logistics Partners $ $
We have granted the underwriters a 30-day option to purchase up to 750,000
common units on the same terms and conditions as set forth above to cover
over-allotments of common units, if any. To the extent that the underwriters do
not exercise this option, affiliates of Sunoco, Inc. will purchase these common
units at the initial public offering price.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the common
units on or about , 2001.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
SALOMON SMITH BARNEY
UBS WARBURG
BANC OF AMERICA SECURITIES LLC
WACHOVIA SECURITIES
CREDIT SUISSE FIRST BOSTON
, 2001
[Graphic A - Map of operating territory depicting the location of our Eastern
Pipeline System, Terminal
Facilities, Western Pipeline System and Sunoco R&M's refineries.]
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................................. 1
Sunoco Logistics Partners L.P.............................................................. 1
Partnership Structure and Management....................................................... 6
The Offering............................................................................... 8
Summary Historical and Pro Forma Financial and Operating Data.............................. 10
Summary of Conflicts of Interest and Fiduciary Responsibilities............................ 12
RISK FACTORS.................................................................................... 13
Risks Inherent in Our Business............................................................ 13
Risks Inherent in an Investment in Us..................................................... 20
Tax Risks................................................................................. 24
USE OF PROCEEDS................................................................................. 26
CAPITALIZATION.................................................................................. 27
DILUTION........................................................................................ 28
CASH DISTRIBUTION POLICY........................................................................ 29
Distributions of Available Cash........................................................... 29
Operating Surplus and Capital Surplus..................................................... 29
Subordination Period...................................................................... 30
Distributions of Available Cash from Operating Surplus during the Subordination Period.... 31
Distributions of Available Cash from Operating Surplus after the Subordination Period..... 32
Incentive Distribution Rights............................................................. 32
Hypothetical Annualized Yield............................................................. 32
Distributions from Capital Surplus........................................................ 33
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels........... 33
Distributions of Cash Upon Liquidation.................................................... 34
CASH AVAILABLE FOR DISTRIBUTION................................................................. 36
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF SUNOCO LOGISTICS
(PREDECESSOR) AND PRO FORMA FINANCIAL DATA OF SUNOCO LOGISTICS PARTNERS....................... 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................................... 40
Introduction.............................................................................. 40
Overview.................................................................................. 40
Results of Operations..................................................................... 44
Liquidity and Capital Resources........................................................... 52
Environmental Matters..................................................................... 54
Impact of Inflation....................................................................... 55
New Accounting Pronouncements............................................................. 55
Quantitative and Qualitative Disclosures about Market Risk................................ 55
BUSINESS........................................................................................ 56
Overview.................................................................................. 56
Our Relationship with Sunoco, Inc......................................................... 57
Business Strategies....................................................................... 59
Competitive Strengths..................................................................... 60
Eastern Pipeline System................................................................... 61
Terminal Facilities....................................................................... 66
Western Pipeline System................................................................... 71
i
Other Business Opportunities................................................................. 79
Pipeline and Terminal Control Operations..................................................... 79
Safety and Maintenance....................................................................... 79
Competition.................................................................................. 80
Sunoco R&M's Refining and Marketing Operations............................................... 82
Pipeline, Terminalling and Storage Assets Retained by Sunoco, Inc............................ 84
Rate Regulation.............................................................................. 85
Environmental Regulation..................................................................... 90
Environmental Remediation.................................................................... 94
Title to Properties.......................................................................... 94
Employees.................................................................................... 95
Legal Proceedings............................................................................ 95
MANAGEMENT......................................................................................... 96
Management of Sunoco Logistics Partners...................................................... 96
Directors and Executive Officers of Sunoco Partners LLC...................................... 96
Reimbursement of Expenses of the General Partner............................................. 97
Executive Compensation....................................................................... 97
Compensation of Directors.................................................................... 97
Long-Term Incentive Plan..................................................................... 97
Management Incentive Plan.................................................................... 98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 99
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 100
Distributions and Payments to the General Partner and its Affiliates......................... 100
Agreements Governing the Transactions........................................................ 101
Omnibus Agreement............................................................................ 101
Pipelines and Terminals Storage and Throughput Agreement..................................... 103
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES............................................... 104
Conflicts of Interest........................................................................ 104
Fiduciary Duties Owed to Unitholders by Our General Partner are Prescribed by Law and the
Partnership Agreement...................................................................... 106
DESCRIPTION OF THE COMMON UNITS.................................................................... 109
The Units.................................................................................... 109
Transfer Agent and Registrar................................................................. 109
Transfer of Common Units..................................................................... 109
DESCRIPTION OF THE SUBORDINATED UNITS.............................................................. 111
Conversion of Subordinated Units............................................................. 111
Limited Voting Rights........................................................................ 112
Distributions upon Liquidation............................................................... 112
THE PARTNERSHIP AGREEMENT.......................................................................... 113
Organization and Duration.................................................................... 113
Purpose...................................................................................... 113
Power of Attorney............................................................................ 113
Capital Contributions........................................................................ 113
Limited Liability............................................................................ 114
Issuance of Additional Securities............................................................ 114
Amendment of the Partnership Agreement....................................................... 115
Merger, Sale or Other Disposition of Assets.................................................. 117
Termination and Dissolution.................................................................. 118
Liquidation and Distribution of Proceeds..................................................... 118
ii
Withdrawal or Removal of the General Partner............................... 118
Transfer of General Partner Interests and Incentive Distribution Rights.... 120
Transfer of Ownership Interests in General Partner......................... 120
Transfer of Incentive Distribution Rights.................................. 120
Change of Management Provisions............................................ 120
Limited Call Right......................................................... 121
Meetings; Voting........................................................... 121
Status as Limited Partner or Assignee...................................... 122
Non-citizen Assignees; Redemption.......................................... 122
Indemnification............................................................ 122
Books and Reports.......................................................... 123
Right to Inspect Our Books and Records..................................... 123
Registration Rights........................................................ 124
UNITS ELIGIBLE FOR FUTURE SALE................................................... 125
TAX CONSIDERATIONS............................................................... 126
Partnership Status......................................................... 126
Limited Partner Status..................................................... 128
Tax Consequences of Unit Ownership......................................... 128
Tax Treatment of Operations................................................ 133
Disposition of Common Units................................................ 134
Uniformity of Units........................................................ 135
Tax-Exempt Organizations and Other Investors............................... 136
Administrative Matters..................................................... 137
State, Local, Foreign and Other Tax Considerations......................... 139
INVESTMENT IN SUNOCO LOGISTICS PARTNERS BY EMPLOYEE BENEFIT PLANS................ 140
UNDERWRITING..................................................................... 141
VALIDITY OF THE COMMON UNITS..................................................... 144
EXPERTS.......................................................................... 144
WHERE YOU CAN FIND MORE INFORMATION.............................................. 144
FORWARD-LOOKING STATEMENTS....................................................... 145
INDEX TO FINANCIAL STATEMENTS.................................................... F-1
APPENDIX A - Form of Amended and Restated Agreement of Limited Partnership....... A-1
APPENDIX B - Form of Application for Transfer of Common Units................... B-1
APPENDIX C - Glossary of Terms.................................................. C-1
APPENDIX D - Pro Forma Available Cash from Operating Surplus..................... D-1
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations, and prospects may have changed since that date.
Until , 2002 (the 25th day after the date of this prospectus), all
dealers effecting transactions in our common units, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
iii
PROSPECTUS SUMMARY
The summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in the common units. You should read the entire prospectus carefully,
including the historical and pro forma financial statements and notes to those
financial statements. The information presented in this prospectus assumes (1)
an initial public offering price of $20.00 per unit and (2) that all of the
750,000 common units subject to the over-allotment option are purchased by our
general partner. You should read "Risk Factors" on page 13 for more information
about important factors that you should consider before buying the common
units.
We include a glossary of some of the terms used in this prospectus as
Appendix C. References in this prospectus to Sunoco Logistics Partners, "we,"
"ours," "us," or like terms refer to Sunoco Logistics Partners L.P. References
in this prospectus to Sunoco R&M refer to Sunoco, Inc. (R&M), a subsidiary of
Sunoco, Inc., through which Sunoco, Inc. conducts its refining and marketing
operations.
Sunoco Logistics Partners L.P.
We are a Delaware limited partnership recently formed by Sunoco, Inc. to
acquire, own, and operate a geographically diverse and complementary group of
refined product and crude oil pipelines and terminal facilities. We have an
experienced management team dedicated to a growth strategy, and we intend to
acquire additional assets in the future. Our business comprises three segments:
. Eastern Pipeline System. Our Eastern Pipeline System primarily serves
Sunoco R&M's refining and marketing operations in the Northeast and
Midwest United States and includes 1,895 miles of refined product
pipelines, including a one-third interest in an 80-mile refined product
pipeline and 58 miles of interrefinery pipelines between two of Sunoco
R&M's refineries; a 123-mile wholly owned crude oil pipeline; and a 9.4%
interest in Explorer Pipeline Company, which owns a 1,413-mile refined
product pipeline.
. Terminal Facilities. Our Terminal Facilities consist of 32 inland refined
product terminals with an aggregate capacity of 4.8 million barrels, which
primarily serve our Eastern Pipeline System; a 2.0 million barrel refined
product terminal serving Sunoco R&M's Marcus Hook refinery near
Philadelphia, Pennsylvania; an 11.2 million barrel marine crude oil
terminal on the Texas Gulf Coast; one inland and two marine crude oil
terminals, with a combined capacity of 3.0 million barrels, and related
pipelines, all of which serve Sunoco R&M's Philadelphia refinery; and a
1.0 million barrel liquefied petroleum gas, or LPG, terminal near Detroit,
Michigan.
. Western Pipeline System. Our Western Pipeline System gathers, purchases,
sells, and transports crude oil principally in Oklahoma and Texas and
consists of 1,801 miles of crude oil trunk pipelines and 1,880 miles of
crude oil gathering lines that supply the trunk pipelines; 163 crude oil
transport trucks; and 122 crude oil truck unloading facilities.
We transport, terminal, and store refined products and crude oil in 11
states. We generate revenues by charging tariffs for transporting refined
products and crude oil through our pipelines and by charging fees for
terminalling and storing refined products, crude oil, and other hydrocarbons in
our terminals. We also generate revenues by purchasing domestic crude oil and
selling it to Sunoco R&M and other customers. Generally, as we purchase crude
oil, we simultaneously enter into corresponding sale transactions involving
physical deliveries of crude oil, which enables us to secure a profit on the
transaction at the time of purchase and to establish a substantially balanced
position.
For the year ended December 31, 2000, on a pro forma basis, we had revenues
of $2,168.3 million, EBITDA of $87.7 million, and net income of $49.5 million.
For the six months ended June 30, 2001, on a pro forma basis, we had revenues
of $1,016.4 million, EBITDA of $50.2 million, and net income of $30.0 million.
1
Our Relationship with Sunoco, Inc.
We have a strong and mutually beneficial relationship with Sunoco, Inc., one
of the leading independent United States refining and marketing companies and
the largest refiner in the Northeast United States. The majority of our
operations are strategically located within Sunoco R&M's refining and marketing
supply chain. Sunoco R&M relies on us to provide transportation and
terminalling services that support its refining and marketing operations.
The following table sets forth the crude oil refining capacity of each of
Sunoco R&M's refineries and, for the twelve months ended June 30, 2001, the
percentages of crude oil and feedstocks, and refined products that we
transported or terminalled for Sunoco R&M:
Crude Oil / Feedstocks Refined Products
- ------------------------- ---------------------
Percent of Percent of
Crude Oil Transported Sunoco Transported Sunoco
Refining or Terminalled R&M or Terminalled R&M
Sunoco R&M Refinery Capacity by Our Assets Volumes by Our Assets Volumes
------------------- --------- -------------- ---------- -------------- ----------
(bpd)
Philadelphia, PA.. 330,000 Yes 100% Yes 66%
Marcus Hook, PA... 175,000 No 0% Yes 91%
Toledo, OH........ 140,000 Yes 55% Yes 99%
Tulsa, OK......... 85,000 Yes 100% Yes/(1)/ 22%/(1)/
--------- ---------- -----------
Total......... 730,000 67%/(2)/ 74%/(1)/
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(1)The only refined product that we transport from the Tulsa refinery is lube
extracted feedstock. Excluding that refinery, we transported or terminalled
80% of the total refined products from Sunoco R&M's refineries.
(2)Excluding the Marcus Hook refinery, we transported 88% of the total crude
oil and feedstocks to Sunoco R&M's refineries.
For the twelve months ended June 30, 2001, Sunoco R&M accounted for
approximately 77% of the pro forma revenues of our Eastern Pipeline System, 63%
of the pro forma revenues of our Terminal Facilities, and 59% of the pro forma
revenues of our Western Pipeline System. We expect to continue to derive a
substantial portion of our revenues from Sunoco R&M for the foreseeable future.
At the closing of this offering, we will enter into an agreement with Sunoco
R&M under which Sunoco R&M will agree to use our pipelines and terminals for
periods generally ranging from five to seven years. A more detailed description
of this agreement begins on page 4.
Business Strategies
Our primary business strategies are to:
. generate stable cash flows;
. increase our pipeline and terminal throughput;
. pursue strategic and accretive acquisitions that complement our existing
asset base; and
. continue to improve our operating efficiency and to reduce our costs.
Competitive Strengths
We believe we are well-positioned to execute our business strategies
successfully using the following competitive strengths:
. We have a unique strategic relationship with Sunoco R&M's refining and
marketing operations. Our refined product and crude oil pipelines and
terminals are directly linked to Sunoco R&M's refineries and afford Sunoco
R&M with the most cost-effective means to access crude oil and distribute
refined
2
products. Sunoco R&M has agreed to continue using our assets to transport,
terminal, and store refined products and crude oil. See "Business--Our
Relationship with Sunoco, Inc."
. Our refined product pipelines and our terminals are strategically located
in areas with high demand. We have a strong presence in the Northeast and
Midwest United States, and our transportation and distribution assets in
these regions operate at high utilization rates providing us a base of
stable cash flows.
. We have a complementary portfolio of assets that are both geographically
and operationally diverse. Our assets include refined product pipelines
and terminals, in the Northeast and Midwest United States and a crude oil
terminal and pipelines in Texas, Oklahoma, and the Gulf Coast area. This
diversity contributes to our stable cash flows.
. We believe our pipelines and terminals are efficient and well-maintained.
We have recently made significant investments to upgrade our asset base.
Our refined product pipelines and many of our crude oil pipelines and our
terminals are automated to ensure product quality and provide continuous,
real-time operational data. We use a state-of-the-art internal inspection
program and other procedures to monitor the integrity of our pipelines.
. Our executive officers and directors have extensive experience and include
some of the most senior officers of Sunoco, Inc. Our management team has
operated our assets for the past ten years. As a result, we believe we
have the expertise to execute our business strategies. Our general partner
intends to adopt compensation and incentive plans to closely align the
interests of our executive officers with the interests of our common
unitholders.
. We have the financial flexibility to pursue expansion and acquisition
opportunities. We expect to have $150 million available under our credit
facility at closing. In addition, immediately following this offering we
anticipate having $250 million of senior notes outstanding. We believe
that our ability to access the public and private capital markets and to
issue additional units provides us with significant resources to finance
strategic expansion and acquisition opportunities.
Summary of Risk Factors
An investment in our common units involves risks associated with our
business, our partnership structure, and the tax characteristics of our common
units. Those risks include:
Risks Inherent in Our Business
. We may not have sufficient cash to enable us to pay the minimum quarterly
distribution.
. Sunoco R&M's obligations under the pipelines and terminals storage and
throughput agreement may be reduced or suspended in some circumstances,
which would reduce our ability to make distributions to our unitholders.
. A significant decrease in demand for refined products in the markets
served by our pipelines could reduce our ability to make distributions to
our unitholders.
. If Sunoco R&M were to shut down or reconfigure one or more of its
refineries, its contractual obligation to use our pipelines and terminals
could be reduced.
. Rate regulation may not allow us to recover the full amount of increases
in our costs, and a successful challenge to our rates may reduce the
amount of cash available for distribution to our unitholders.
. Our operations are subject to federal, state, and local laws and
regulations relating to environmental protection and operational safety
that could require us to make substantial expenditures.
3
. If existing or future state or federal government regulations banning or
restricting the use of MTBE in gasoline take effect, this action could
reduce our ability to make distributions to our unitholders.
Risks Inherent in an Investment in Us
. Cost reimbursements and fees due our general partner and its affiliates
will be substantial and will reduce our cash available for distribution to
you.
. Sunoco, Inc. and its affiliates have conflicts of interest and limited
fiduciary responsibilities, which may permit them to favor their own
interests to your detriment.
. Unitholders have less ability to elect or remove management than holders
of common stock in a corporation.
. The control of our general partner may be transferred to a third party
without unitholder consent.
. You will experience immediate and substantial dilution of $8.55 per common
unit.
. We may issue additional common units without your approval, which may
dilute your ownership interests.
Tax Risks
. The IRS could treat us as a corporation, which would substantially reduce
the cash available for distribution to unitholders.
. A successful IRS contest of the federal income tax positions we take may
adversely impact the market for our common units, and the costs of any
contest will be borne by our unitholders and our general partner.
. You may be required to pay taxes on income from us even if you do not
receive any cash distributions from us.
Our Pipelines and Terminals Storage and Throughput Agreement with Sunoco R&M
Under our pipelines and terminals storage and throughput agreement with
Sunoco R&M, Sunoco R&M will:
. transport on our refined product pipelines or throughput in our refined
product terminals an amount of refined products that will produce at least
$75.0 million of revenue in the first year, escalated at 1.67% per year
for the next four years. In addition, Sunoco R&M will transport on our
refined product pipelines an amount of refined products that will produce
at least $54.3 million of revenue in the sixth year and at least $55.2
million of revenue in the seventh year. Sunoco R&M will pay the published
tariffs on the pipelines and contractually agreed upon fees at the
terminals. On a pro forma basis, we would have received $82.8 million in
revenue from Sunoco R&M for the use of these pipelines and terminals
during 2000;
. deliver at least 130,000 bpd of refined products through our Marcus Hook
Tank Farm for five years. In the first year, we will receive a fee of
$0.1627 per barrel for the first 130,000 bpd and $0.0813 per barrel for
volumes in excess of 130,000 bpd. These fees will escalate at the rate of
1.67% per year. During 2000, Sunoco R&M's throughput at the Marcus Hook
Tank Farm averaged 133,524 bpd;
. pay us $5.1 million in the first year to lease the 58 miles of
interrefinery pipelines between Sunoco R&M's Philadelphia and Marcus Hook
refineries, escalating at the rate of 1.67% per year, for a term of 20
years. On a pro forma basis for 2000, Sunoco R&M would have paid us $4.9
million for the use of these pipelines;
. pay for LPG storage capacity of 975,734 barrels at our Inkster terminal
for seven years, which represents all of our LPG storage capacity at this
facility. In the first year, we will receive a fee of $2.04 per barrel,
escalating at the rate of 1.875% per year. For the last five years, Sunoco
R&M has used the full capacity of our Inkster terminal;
4
. deliver at least 290,000 bpd of crude oil or refined products through our
Fort Mifflin Terminal Complex for seven years. In the first year, we will
receive a fee of $0.1627 per barrel for the first 180,000 bpd and $0.0813
per barrel for volumes in excess of 180,000 bpd. These fees will escalate
at the rate of 1.67% per year. Sunoco R&M's throughput at the Fort Mifflin
Terminal Complex averaged 306,121 bpd during 2000; and
. transport or have us transport on Sunoco R&M's behalf an aggregate of at
least 140,000 bpd of crude oil on our Marysville to Toledo, Nederland to
Longview, Cushing to Tulsa, Barnsdall to Tulsa, and Bad Creek to Tulsa
crude oil pipelines at the published tariffs for a term of seven years.
During 2000, we and Sunoco R&M transported 165,657 bpd on these pipelines.
If Sunoco R&M fails to use our pipelines and terminals as set forth above,
it will be required to pay us in cash the amount of any shortfall. Sunoco R&M's
minimum revenue or throughput obligations would be permanently reduced in whole
or in part if Sunoco R&M (1) shuts down or reconfigures one of its refineries,
or is prohibited from using MTBE in the gasoline it produces, and (2)
reasonably believes in good faith that such event will jeopardize its ability
to satisfy these obligations. Sunoco, Inc. has advised us that it currently
does not intend to shut down or dispose of one or more of its Philadelphia,
Marcus Hook, Toledo, or Tulsa refineries, or cause any reconfigurations or
other changes that would have a material adverse effect on these refineries'
operations or Sunoco R&M's commitments under our pipelines and terminals
storage and throughput agreement.
Sunoco R&M also will agree to purchase from us all of the crude oil that our
crude oil acquisition and marketing operation purchases in certain areas for
one year following the offering. During 2000, Sunoco R&M purchased 79,346 bpd
of crude oil from us in these areas.
5
PARTNERSHIP STRUCTURE AND MANAGEMENT
Our operations will be conducted through, and our operating assets will be
owned by, our operating partnership, Sunoco Partners Operations L.P., and its
subsidiaries. Our general partner has sole responsibility for conducting our
business and for managing our operations. The senior executives who currently
manage our business will continue to manage and operate the business as the
senior executives of our general partner. Our general partner will not receive
any management fee or other compensation in connection with its management of
our business but will be entitled to reimbursement for all direct and indirect
expenses incurred on our behalf.
Our principal executive offices are located at 1801 Market Street,
Philadelphia, Pennsylvania 19103, and our phone number is (215) 977-3000.
The chart on the following page depicts the organization and ownership of
Sunoco Logistics Partners and our operating partnership after giving effect to
the offering of the common units and the related formation transactions.
6
[FLOW CHART]
-----------------------------------------------
Ownership of
Sunoco Logistics Partners L.P.
Common Unitholders:
Public Unitholders.................. 19.6%
Sunoco Partners LLC................. 29.4%
Subordinated Unitholder:
Sunoco Partners LLC................. 49.0%
General Partners Interest............... 2.0%
-----
100%
=====
-----------------------------------------------
------------------------- --------------------------
Public Unitholders Sunoco, Inc.
5,000,000 Common Units
------------------------- --------------------------
\ |
\ 100%
Indirect
Ownership
|
-----------------------------
19.6% Sunoco Partners LLC
Limited Partner (the General Partner)
Interest 7,472,528 Common Units
\ 12,472,528 Subordinated Units
\ Incentive Distribution Rights
-----------------------------
| |
78.4% Limited 2.0% General
Partner Interest Partner Interest
| /
-------------------------------
Sunoco Logistics Partners L.P.
(the Partnership)
-------------------------------
/
100%
Ownership Interest
/
-------------------------- |
Sunoco Operations GP LLC 99.99% Limited
-------------------------- Partner Interest
\ |
0.01% General
Partner Interest
----------------------------------
Sunoco Partners Operations L.P.
(the Operating Partnership)
----------------------------------
|
100%
Ownership Interest
|
----------------------------------
Operating Subsidiaries
----------------------------------
7
THE OFFERING
Common units offered to the
public.................... 5,000,000 common units.
5,750,000 common units if the underwriters
exercise their over-allotment option in full. To
the extent that the underwriters do not exercise
this option, our general partner will purchase
these common units at the initial public offering
price.
Units outstanding after this
offering.................. 12,472,528 common units and 12,472,528
subordinated units, each representing a 49%
limited partner interest in us.
Cash distributions.......... We intend to make minimum quarterly distributions
of $0.45 per common unit to the extent we have
sufficient cash from our operations after payment
of fees and expenses, including reimbursements to
our general partner. In general, we will pay any
cash distributions we make each quarter in the
following manner:
. first, 98% to the common units and 2% to the
general partner, until each common unit has
received a minimum quarterly distribution of
$0.45 plus any arrearages from prior quarters;
. second, 98% to the subordinated units and 2% to
the general partner, until each subordinated
unit has received a minimum quarterly
distribution of $0.45; and
. third, 98% to all units, pro rata, and 2% to
the general partner, until each unit has
received a distribution of $0.50.
If cash distributions exceed $0.50 per unit in a
quarter, our general partner will receive
increasing percentages, up to 50%, of the cash we
distribute in excess of that amount. We refer to
these distributions as "incentive distributions."
We must distribute all of our cash on hand at the
end of each quarter, less reserves established by
our general partner in its discretion. We refer
to this cash as "available cash," and we define
its meaning in our partnership agreement and in
the glossary herein. The amount of available cash
may be greater than or less than the minimum
quarterly distribution.
We believe that, based on the assumptions listed
on page 37 of this prospectus, we will have
sufficient cash from operations for each quarter
to make the minimum quarterly distribution of
$0.45 for each quarter through December 31, 2002.
The amount of pro forma cash available for
distribution generated during 2000 and the first
six months of 2001 would have been sufficient to
allow us to pay the full minimum quarterly
distribution on the common units, but would not
have been sufficient to allow us to pay the full
minimum quarterly distribution on the
subordinated units during these periods. Please
read "Cash Available for Distribution."
Subordination period........ The subordination period will end once we meet
the financial tests in the partnership agreement,
but it generally cannot end before December 31,
2006.
8
When the subordination period ends, all
subordinated units will convert into common units
on a one-for-one basis, and the common units will
no longer be entitled to arrearages.
Early conversion of
subordinated units........ If we meet the financial tests in the partnership
agreement for any quarter ending on or after
December 31, 2004, 25% of the subordinated units
will convert into common units. If we meet these
tests for any quarter ending on or after December
31, 2005, an additional 25% of the subordinated
units will convert into common units. The early
conversion of the second 25% of the subordinated
units may not occur until at least one year after
the early conversion of the first 25% of
subordinated units.
Issuance of additional
units..................... In general, during the subordination period we
can issue up to 6,236,264 additional common
units, or 50% of the common units outstanding
immediately after this offering, without
obtaining unitholder approval. We can also issue
an unlimited number of common units for
acquisitions that increase cash flow from
operations per unit on a pro forma basis.
Voting rights............... Our general partner will manage and operate us.
Unlike the holders of common stock in a
corporation, you will have only limited voting
rights on matters affecting our business. You
will have no right to elect our general partner
or the directors of our general partner on an
annual or other continuing basis. Our general
partner may not be removed except by a vote of
the holders of at least 66 2/3% of the
outstanding units, including any units owned by
our general partner and its affiliates.
Limited call right.......... If at any time persons other than our general
partner and its affiliates own not more than 20%
of the outstanding common units, our general
partner has the right, but not the obligation, to
purchase all of the remaining common units at a
price not less than the then-current market price
of the common units.
Estimated ratio of taxable
income to distributions... We estimate that if you hold the common units you
purchase in this offering through December 31,
2004, you will be allocated, on a cumulative
basis, an amount of federal taxable income for
that period that will be less than % of the cash
distributed to you with respect to that period.
Please read "Tax Considerations--Tax Consequences
of Unit Ownership--Ratio of Taxable Income to
Distributions" for the basis of this estimate.
Exchange listing............ We intend to list the common units on the New
York Stock Exchange under the symbol " ."
Concurrent debt offering.... Concurrently with this offering, we intend to
issue $250 million of our senior notes in a
private offering.
9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows summary historical financial and operating data of
Sunoco Logistics (Predecessor) and pro forma financial data of Sunoco Logistics
Partners L.P., in each case for the periods and as of the dates indicated. The
summary historical financial data for Sunoco Logistics (Predecessor) for 1998,
1999 and 2000 are derived from the audited combined financial statements of
Sunoco Logistics (Predecessor). The summary historical financial data for
Sunoco Logistics (Predecessor) for June 30, 2000 and 2001 are derived from the
unaudited combined financial statements of Sunoco Logistics (Predecessor).
The pro forma financial statements of Sunoco Logistics Partners L.P. give
pro forma effect to:
. the contribution of certain assets and liabilities of Sunoco Logistics
(Predecessor) to Sunoco Logistics Partners L.P.;
. the completion of this offering;
. the issuance of the senior notes;
. the establishment of the revolving credit facility; and
. the charging of fees to Sunoco R&M for terminalling and storage services
comparable to those charged in arms-length, third-party transactions.
The summary pro forma financial data presented below for the year ended
December 31, 2000 and as of and for the six months ended June 30, 2001 are
derived from our unaudited pro forma financial statements. The pro forma
balance sheet assumes the offering and related transactions occurred as of June
30, 2001, and the pro forma statements of income assume the offering and
related transactions occurred on January 1, 2000.
We define EBITDA as operating income plus depreciation and amortization.
EBITDA provides additional information for evaluating our ability to make the
minimum quarterly distribution and is presented solely as a supplemental
measure. You should not consider EBITDA as an alternative to net income, income
before income taxes, cash flows from operations, or any other measure of
financial performance presented in accordance with accounting principles
generally accepted in the United States. Our EBITDA may not be comparable to
EBITDA or similarly titled measures of other entities as other entities may not
calculate EBITDA in the same manner as we do.
For the periods presented, Sunoco R&M was the primary or exclusive user of
our refined product terminals, our Fort Mifflin Terminal Complex, and our
Marcus Hook Tank Farm. The fees we charged Sunoco R&M for these services
allowed us to recover our costs but did not generate any operating income.
Accordingly, EBITDA for those assets was equal to their depreciation and
amortization.
Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing
operating capacity of our assets and to extend their useful lives. Expansion
capital expenditures are capital expenditures made to expand the existing
operating capacity of our assets, whether through construction or acquisition.
We treat repair and maintenance expenditures that do not extend the useful life
of existing assets as operating expenses as we incur them. The maintenance
capital expenditures for the periods presented include several one-time
projects to upgrade our technology, increase reliability, and lower our cost
structure.
Throughput is the total number of barrels per day transported on a pipeline
system or through a terminal and includes barrels ultimately transported to a
delivery point on another pipeline system.
The following table should be read together with, and is qualified in its
entirety by reference to, the historical and pro forma financial statements and
the accompanying notes included elsewhere in this prospectus. The table should
be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
10
Sunoco Logistics (Predecessor) Sunoco Logistics Partners L.P.
Historical Pro Forma
-------------------------------------------------------------- ------------------------------
Six Months Ended
Year Ended December 31, June 30, Year Ended Six Months
-------------------------------------- ---------------------- December 31, Ended
1998 1999/(1)/ 2000 2000 2001 2000 June 30, 2001
---------- ---------- ---------- ---------- ---------- ------------ -------------
(in thousands, except per unit and operating data)
Income Statement
Data:
Revenues:
Sales and other
operating
revenue........... $ 941,944 $1,191,121 $2,155,017 $1,022,728 $1,007,286 $2,162,730 $1,014,253
Other income/(2)/... 5,022 6,133 5,574 3,290 2,115 5,574 2,115
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues....... 946,966 1,197,254 2,160,591 1,026,018 1,009,401 2,168,304 1,016,368
---------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of products
sold and
operating
expenses.......... 830,330 1,083,529 2,045,947 970,206 948,595 2,045,947 948,595
Depreciation and
amortization...... 18,622 19,911 20,654 10,191 11,601 20,654 11,601
Selling, general
and
administrative
expenses.......... 29,890 27,461 34,683 17,332 17,540 34,683 17,540
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses............ 878,842 1,130,901 2,101,284 997,729 977,736 2,101,284 977,736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income..... 68,124 66,353 59,307 28,289 31,665 67,020 38,632
Net interest and
debt expense........ 7,117 6,487 10,304 3,580 5,872 17,567 8,650
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
income tax expense.. 61,007 59,866 49,003 24,709 25,793 49,453 29,982
Income tax expense... 23,116 22,488 18,483 9,361 9,736 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........... $ 37,891 $ 37,378 $ 30,520 $ 15,348 $ 16,057 $ 49,453 $ 29,982
========== ========== ========== ========== ========== ========== ==========
Pro forma net
income per unit..... $ 1.94 $ 1.18
========== ==========
Other Financial
Data:
EBITDA............... $ 86,746 $ 86,264 $ 79,961 $ 38,480 $ 43,266 $ 87,674 $ 50,233
Explorer Pipeline
Company (9.4%
ownership
interest):
Equity income....... $ 3,885 $ 4,591 $ 3,766 $ 1,628 $ 1,816
Cash dividends...... $ 4,612 $ 4,730 $ 3,749 $ 1,594 $ 1,862
Net cash provided
by operating
activities.......... $ 44,950 $ 125,165 $ 79,116 $ 43,557 $ 4,372
Net cash used in
investing
activities.......... $ (36,933) $ (75,120) $ (77,292) $ (22,357) $ (23,586)
Net cash provided
by (used in)
financing
activities.......... $ (8,017) $ (50,045) $ (1,824) $ (21,200) $ 19,214
Capital
expenditures:
Maintenance......... $ 27,461 $ 32,312 $ 39,067 $ 14,837 $ 18,279
Expansion........... 9,486 49,556/(1)/ 18,854 6,552 6,658
---------- ---------- ---------- ---------- ----------
Total capital
expenditures........ $ 36,947 $ 81,868/(1)/ $ 57,921 $ 21,389 $ 24,937
========== ========== ========== ========== ==========
Operating Data
(bpd):
Eastern Pipeline
System
throughput/(3)/..... 520,627 542,843 535,510 541,754 562,739
Terminal Facilities
throughput.......... 1,154,166 1,235,547 1,272,798 1,201,113 1,165,572
Western Pipeline
System throughput... 253,124 252,098 296,801 288,364 287,116
Crude oil purchases
at wellhead......... 155,606 145,425 176,964 179,550 174,231
December 31, June 30,
-------------------------------------- ---------------------- -
1998 1999/(1)/ 2000 2000 2001 June 30, 2001
---------- ---------- ---------- ---------- ---------- -------------
(in thousands)
Balance Sheet Data:
Net properties,
plants and
equipment........... $ 430,848 $ 481,967 $ 518,605 $ 494,133 $ 530,590 $ 530,590
Total assets......... $ 528,279 $ 712,149 $ 845,956 $ 780,465 $ 799,925 $ 872,593
Total debt,
including current
portion and debt
due affiliate....... $ 90,225 $ 95,287 $ 190,043 $ 140,159 $ 214,923 $ 254,923
Net parent
investment/partners'
equity.............. $ 235,478 $ 223,083 $ 157,023 $ 172,359 $ 167,414 $ 325,476
--------
(1)On October 1, 1999, Sunoco Logistics (Predecessor) acquired the crude oil
transportation and marketing operations of Pride Companies, L.P. for $29.6
million in cash and the assumption of $5.3 million of debt. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their fair value. The acquired assets included Pride's 800-mile crude oil
pipeline system, 800,000 barrels of tankage and related assets, and the
right to purchase 35,000 barrels per day of third party lease crude oil. The
results of operations and related operating data relating to the acquired
business have been included in the above table from the date of acquisition.
We include the purchase price of this acquisition in expansion capital
expenditures.
(2)Includes equity income from investment in Explorer.
(3)Excludes amounts attributable to our 9.4% ownership interest in Explorer and
our interrefinery pipelines, as well as our Toledo, Twin Oaks, and Linden
transfer pipelines, which transport large volumes over short distances and
generate minimal revenues.
11
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Sunoco Partners LLC, our general partner, has a legal duty to manage us in a
manner beneficial to our unitholders. This legal duty originates in statutes
and judicial decisions and is commonly referred to as a "fiduciary" duty.
However, because our general partner is indirectly owned by Sunoco, Inc., its
officers and directors have fiduciary duties to manage the business of our
general partner in a manner beneficial to Sunoco, Inc. and its affiliates. As a
result of this relationship, conflicts of interest may arise in the future
between us and our unitholders, on the one hand, and our general partner and
its affiliates, on the other hand. For a more detailed description of the
conflicts of interest and fiduciary responsibilities of our general partner,
please read "Conflicts of Interest and Fiduciary Responsibilities."
Our partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. Our partnership agreement
also restricts the remedies available to unitholders for actions that might
otherwise constitute breaches of our general partner's fiduciary duty. By
purchasing a common unit, you are treated as having consented to various
actions contemplated in the partnership agreement and conflicts of interest
that might otherwise be considered a breach of fiduciary or other duties under
applicable state law.
We will enter into an agreement with Sunoco, Inc. and its affiliates under
which they will generally agree not to engage in the business of purchasing
crude oil at the wellhead, or operating crude oil pipelines or terminals,
refined product pipelines or terminals, or LPG terminals in the continental
United States. In addition, this agreement addresses our payment of a fee to
Sunoco, Inc. or its affiliates for the provision of general and administrative
services, Sunoco R&M's reimbursement of us for certain maintenance
expenditures, Sunoco, Inc.'s indemnification of us for certain environmental
and other liabilities, and other matters. For a more detailed discussion of
this agreement, please read "Business--Environmental Regulation" and "Certain
Relationships and Related Transactions--Omnibus Agreement."
12
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although many of the business risks to which we are subject are
similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together
with all of the other information included in this prospectus in evaluating an
investment in our common units.
If any of the following risks were actually to occur, our business,
financial condition, or results of operations could be materially adversely
affected. In that case, we might not be able to pay distributions on our common
units, the trading price of our common units could decline, and you could lose
all or part of your investment.
Risks Inherent in Our Business
We may not have sufficient cash to enable us to pay the minimum quarterly
distribution.
The amount of cash we can distribute on our common units principally depends
upon the amount of cash we generate from our operations, which will fluctuate
from quarter to quarter based on, among other things:
. the volume of refined products and crude oil transported in our pipelines;
. the volume of refined products and crude oil handled at our terminals;
. the tariff rates and terminalling fees we charge;
. our crude oil acquisition and marketing margins;
. the level of our operating costs;
. the level of competition from other pipelines and terminals; and
. prevailing economic conditions.
In addition, the actual amount of cash we will have available for
distribution will depend on other factors such as:
. the level of capital expenditures we make;
. our debt service requirements;
. fluctuations in our working capital needs;
. our ability to make working capital borrowings under our revolving credit
facility to make distributions; and
. the amount, if any, of cash reserves established by our general partner in
its discretion for the proper conduct of our business.
Because of these factors, we may not have sufficient available cash each
quarter to pay the minimum quarterly distribution. You should also be aware
that the amount of cash we have available for distribution depends primarily
upon our cash flow, including cash flow from financial reserves and working
capital borrowings, and not solely on profitability, which will be affected by
non-cash items. As a result, we may make cash distributions during periods when
we record losses and may not make cash distributions during periods when we
record net income.
The amount of available cash we need to pay the minimum quarterly
distribution for four quarters on the common units, the subordinated units, and
the general partner interests to be outstanding immediately after the
13
offering is approximately $45.8 million. If we had completed the transactions
contemplated in this prospectus on January 1, 2000, pro forma available cash
from operating surplus generated during 2000 would have been approximately
$29.4 million. If we had completed the transactions contemplated in this
prospectus on January 1, 2001, pro forma available cash from operating surplus
generated during the six months ended June 30, 2001 would have been
approximately $22.4 million. These amounts would have been sufficient to allow
us to pay the full minimum quarterly distribution on the common units but
insufficient to pay the full minimum quarterly distribution on the subordinated
units during these periods. For a calculation of our ability to make
distributions to unitholders based on our pro forma results in 2000 and for the
first six months of 2001, please read "Cash Available for Distribution" and
Appendix D. The terms "available cash" and "operating surplus" are technical
terms which we define in our partnership agreement. We have included these
definitions in our glossary. "Available cash" generally means cash on hand at
the end of the quarter, including any working capital borrowings, less
appropriate reserves. "Operating surplus" generally means cash received from
our operations, as opposed to long-term borrowings or major asset sales, less
our operating expenses and reserves.
Sunoco R&M's obligations under the pipelines and terminals storage and
throughput agreement may be reduced or suspended in some circumstances, which
would reduce our ability to make distributions to our unitholders.
For the twelve months ended June 30, 2001, Sunoco R&M accounted for
approximately 77% of the pro forma revenues of our Eastern Pipeline System, 63%
of the pro forma revenues of our Terminal Facilities, and 59% of the pro forma
revenues of our Western Pipeline System. We receive the balance of our revenues
from third parties. As a result, we will continue to remain dependent on third
parties for additional revenues. Our pipelines and terminals storage and
throughput agreement does not cover our crude oil acquisition and marketing
business or our Nederland Terminal. In addition, although the contract makes
provision for escalation of the fees charged to Sunoco R&M, the increased fees
may be inadequate to cover increased costs in the future. Furthermore, Sunoco
R&M's commitments are of a limited term, and the contract might not be renewed.
If we are unable to generate revenues from third parties, if the escalation of
fees is inadequate to cover increased costs, or if Sunoco R&M does not renew or
extend the contract, it may reduce our ability to make distributions to our
unitholders.
Sunoco R&M's obligations under the pipelines and terminals storage and
throughput agreement may be permanently reduced upon the occurrence of certain
events, some of which are within the exclusive control of Sunoco R&M,
including:
. a decision by Sunoco R&M to shut down or reconfigure one or more of its
refineries if Sunoco R&M reasonably believes in good faith that such event
will jeopardize its ability to satisfy its minimum revenue or throughput
obligations. For a discussion of factors that might lead Sunoco R&M to
shut down or reconfigure a refinery, see "--A significant decrease in
demand for refined products in the markets served by our pipelines could
reduce our ability to make distributions to our unitholders" and "--If
Sunoco R&M were to shut down or reconfigure one or more of its refineries,
its contractual obligation to use our pipelines and terminals could be
reduced";
. governmental action that prohibits Sunoco R&M from using MTBE in the
gasoline it produces if Sunoco R&M reasonably believes in good faith that
this action will jeopardize its ability to satisfy its minimum revenue or
throughput obligations. Please see "--If existing or future state or
federal government regulations banning or restricting the use of MTBE in
gasoline take effect, this action could reduce our ability to make
distributions to our unitholders"; and
. the inability of Sunoco R&M and us to agree on the amount of any surcharge
required to be paid by Sunoco R&M to cover substantial and unanticipated
costs that we may incur in complying with new laws or governmental
regulations applicable to our Terminal Facilities.
Furthermore, Sunoco R&M's obligations would be temporarily suspended during
the occurrence of an event that is outside the control of the parties, which
renders performance impossible with respect to an asset for at least 30 days.
The occurrence of any of these events that leads to a reduction or suspension
of Sunoco R&M's obligations under the agreement could reduce our revenues and
cash flow and may reduce our ability to make distributions to our unitholders.
14
A significant decrease in demand for refined products in the markets served by
our pipelines could reduce our ability to make distributions to our
unitholders.
A sustained decrease in demand for refined products in the markets served by
our pipelines could significantly reduce our revenues and, therefore, reduce
our ability to make distributions to our unitholders. Factors that could lead
to a decrease in market demand include:
. a recession or other adverse economic condition that results in lower
spending by consumers on gasoline, diesel fuel, and travel;
. an increase in the market price of crude oil that leads to higher refined
product prices. Market prices for refined products and crude oil are
subject to wide fluctuation in response to changes in global and regional
supply over which we do not have any control;
. higher fuel taxes or other governmental or regulatory actions that
increase, directly or indirectly, the cost of gasoline or other refined
products;
. a shift by consumers to more fuel-efficient vehicles or an increase in
fuel economy, whether as a result of technological advances by
manufacturers, pending legislation proposing to mandate higher fuel
economy, or otherwise; and
. the increased use of alternative fuels, such as electricity, propane,
natural gas, biodiesel, ethanol, and hydrogen. Several state and federal
initiatives mandate alternative fuels use. In addition, several states in
our market area have adopted income tax credits for the purchase of
alternative fuel vehicles and alternate fuels.
If market demand decreases:
. third parties may reduce the volumes they transport on our pipelines or
deliver at our terminals;
. Sunoco R&M may reduce the volumes it transports on our pipelines or
delivers at our terminals to the minimum amounts it is obligated to
transport or deliver under the pipelines and terminals storage and
throughput agreement; and
. Sunoco R&M may shut down or reconfigure a refinery, which may permanently
reduce its obligation to use our pipelines and terminals.
See "--Sunoco R&M's obligations under the pipelines and terminals storage
and throughput agreement may be reduced or suspended in some circumstances,
which would reduce our ability to make distributions to our unitholders."
If Sunoco R&M were to shut down or reconfigure one or more of its refineries,
its contractual obligation to use our pipelines and terminals could be reduced.
If Sunoco R&M were to shut down or reconfigure one or more of its refineries
and it reasonably believes in good faith that such event would jeopardize its
ability to satisfy its minimum revenue or throughput obligations, these minimum
obligations would be proportionately reduced, which could reduce our revenues
and our ability to make distributions to our unitholders. Sunoco R&M retains
sole discretion whether to shut down or reconfigure a refinery. Factors that
might lead Sunoco R&M to shut down or reconfigure a refinery include:
. reduced demand for refined products produced at the refinery. See "--A
significant decrease in demand for refined products in the markets served
by our pipelines could reduce our ability to make distributions to our
unitholders;"
. increasingly stringent environmental regulations. For example, Sunoco R&M
has estimated that it will be required to make capital expenditures of
approximately $200 million to $250 million over the next four years at its
refineries to bring them into compliance with the Environmental Protection
Agency's new rules limiting the sulfur in motor gasoline. Sunoco R&M may
also be required to make significant capital expenditures to comply with
the EPA's new rules limiting sulfur in on-road diesel fuel. Compliance
with these regulations might result in lower production at Sunoco R&M's
refineries;
15
. a catastrophic event at a refinery, such as a major fire, flood, or
explosion; and
. environmental proceedings or other litigation that could limit all or a
portion of the operations at a refinery. As part of a Clean Air Act
enforcement initiative, the EPA has requested information relating to
potential violations of the Clean Air Act from Sunoco R&M and other
refiners. The EPA has entered into consent agreements with several
refiners that require them to make significant capital expenditures to
install control equipment to reduce emissions of sulfur dioxide, nitrogen
oxides, and particulate matter. As part of this initiative, Sunoco R&M
could be required to make significant capital expenditures. See
"Business--Environmental Regulation."
Depending on the ultimate cost of complying with existing and future
environmental regulations or proceedings, Sunoco R&M may determine that it is
more economical to reduce production at a refinery or shut down all or a
portion of a refinery rather than make these capital expenditures.
Please see "--Sunoco R&M's obligations under the pipelines and terminals
storage and throughput agreement may be reduced or suspended in some
circumstances, which would reduce our ability to make distributions to our
unitholders. "
Rate regulation may not allow us to recover the full amount of increases in our
costs, and a successful challenge to our rates may reduce the amount of cash
available for distribution to our unitholders.
Pursuant to the Interstate Commerce Act, the Federal Energy Regulatory
Commission, or FERC, regulates the tariff rates for our interstate common
carrier pipeline operations. To be lawful under that Act, our tariff rates must
be just and reasonable and not unduly discriminatory. Shippers may protest, and
the FERC may investigate, the lawfulness of new or changed tariff rates. The
FERC can suspend increases in those tariff rates for up to seven months. It can
also require refunds of amounts collected under rates ultimately found
unlawful. The FERC may also investigate tariff rates that have become final and
effective. Because of the complexity of rate-making, the lawfulness of any rate
is never assured.
The FERC's primary rate-making methodology is price indexing. We use this
methodology in all of our interstate markets. The indexing method allows a
pipeline to increase its rates by a percentage equal to the producer price
index for finished goods minus 1%. If the index rises by less than 1% or falls,
we will be required to reduce our rates that are based on the FERC's price
indexing methodology if they exceed the new maximum allowable rate. In
addition, changes in the index might not be large enough to fully reflect
actual increases in our costs. The FERC's rate-making methodologies may limit
our ability to set rates based on our true costs or may delay the use of rates
that reflect increased costs. Any of the foregoing could adversely affect our
revenues and cash flow.
Under the Energy Policy Act adopted in 1992, our interstate pipeline rates
were deemed just and reasonable or "grandfathered." As that Act applies to our
rates, a person challenging a grandfathered rate must, as a threshold matter,
establish a substantial change since the date of enactment of the Act, in
either the economic circumstances or the nature of the service that formed the
basis for the rate. A complainant might assert that the creation of the
partnership itself constitutes such a change, an argument that has not
previously been specifically addressed by the FERC. If the FERC were to find a
substantial change in circumstances, then the existing rates could be subject
to detailed review. There is a risk that some of our rates could be found to be
in excess of levels justified by our cost of service. In such event, the FERC
would order us to reduce our rates. Any such reduction would result in lower
revenues and cash flows and may reduce our ability to make cash distributions
to our unitholders. Please read "Business--Rate Regulation--Our Pipelines."
In a 1995 decision involving an unrelated oil pipeline limited partnership,
the FERC partially disallowed the inclusion of income taxes in that
partnership's cost of service. In another FERC proceeding involving a different
oil pipeline limited partnership, the FERC held that the oil pipeline limited
partnership may not claim an income tax allowance for income attributable to
non-corporate limited partners. If our rates were challenged and the FERC were
to disallow the inclusion of an income tax allowance in our cost of service, it
may be more difficult for us to justify our rates.
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In addition, a state commission could also investigate our intrastate rates
or our terms and conditions of service on its own initiative or at the urging
of a shipper or other interested party. If a state commission found that our
rates exceeded levels justified by our cost of service, the state commission
could order us to reduce our rates.
Sunoco R&M has agreed not to challenge, or to cause others to challenge or
assist others in challenging, our tariff rates for seven years. This agreement
does not prevent other current or future shippers from challenging our tariff
rates. At the end of the seven years, Sunoco R&M will be free to challenge, or
to cause other parties to challenge or assist others in challenging, our tariff
rates. If any party successfully challenges our tariff rates, the effect may be
to reduce our revenues and cash flow and adversely affect our ability to make
cash distributions to our unitholders.
Potential changes to current ratemaking methods and procedures may impact
the federal and state regulations under which we will operate in the future. In
addition, if the FERC's petroleum pipeline ratemaking methodology changes, the
new methodology could result in tariffs that generate lower revenues and cash
flow and adversely affect our ability to make cash distributions to our
unitholders. Please read "Business--Rate Regulation" for more information on
our tariff rates.
Our operations are subject to federal, state, and local laws and regulations
relating to environmental protection and operational safety that could require
us to make substantial expenditures.
Our pipelines, gathering systems, and terminal operations are subject to
increasingly strict environmental and safety laws and regulations. The
transportation and storage of refined products and crude oil results in a risk
that refined products, crude oil and other hydrocarbons may be suddenly or
gradually released into the environment, potentially causing substantial
expenditures for a response action, significant government penalties, liability
to government agencies for natural resources damages, personal injury, or
property damages to private parties and significant business interruption. We
own or lease a number of properties that have been used to store or distribute
refined products and crude oil for many years. Many of these properties have
also been operated by third parties whose handling, disposal, or release of
hydrocarbons and other wastes were not under our control. We expect it will
cost approximately $8.5 million to assess, monitor and remediate 19 sites where
releases of crude oil or petroleum products have occurred. Please read
"Business--Environmental Regulation" for more information.
We estimate that we will spend $8.2 million on storage tank inspection and
repair over the next five years at our Nederland Terminal. We expect to spend
approximately $8.0 million in each of the next five years to comply with the
U.S. Department of Transportation's recently adopted pipeline integrity
management rule. Although Sunoco, Inc. has agreed to indemnify us for costs in
excess of $8.0 million per year, up to a maximum of $15.0 million over the next
five years, the cost to perform such activities may exceed these estimated
amounts and the amount of any indemnification. If we were not able to recover
the excess costs through increased tariffs and revenues, cash distributions to
our unitholders could be adversely affected.
If existing or future state or federal government regulations banning or
restricting the use of MTBE in gasoline take effect, this action could reduce
our ability to make distributions to our unitholders.
Our Eastern refined product pipeline system transports gasoline from Sunoco
R&M's refineries containing MTBE, an oxygenate used extensively to reduce motor
vehicle tailpipe emissions. Under the Clean Air Act, ozone non-attainment areas
must add an oxygenate, which in practice typically consists of either MTBE or
ethanol, to gasoline to make it burn cleaner. Many states, including New York
and Connecticut, have banned or restricted the use of MTBE in gasoline
commencing as early as 2003 in response to concerns about MTBE's adverse impact
on ground or surface water. Other states are considering bans or restrictions
on MTBE or opting out of the EPA's reformulated gasoline program, each of which
events would reduce the use of MTBE. Any ban or restriction on the use of MTBE
may lead to the greater use of ethanol. Unlike MTBE, which can be blended in
gasoline at the refinery, ethanol is blended at the terminal and is not
transported by our pipelines. While many of
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our refined product terminals currently blend ethanol, any revenues we would
receive for blending ethanol might not offset the loss of revenues we would
suffer from the reduced volumes we transport on our Eastern refined product
pipelines. Please see "--Sunoco R&M's obligations under the pipelines and
terminals storage and throughput agreement may be reduced or suspended in some
circumstances, which would reduce our ability to make distributions to our
unitholders." Congress is currently considering removing the oxygenate
requirement from the Clean Air Act or modifying the oxygenate mandate. Such
action could reduce the amount of gasoline transported on our Eastern refined
product pipelines.
When the price of foreign crude oil delivered to the United States is greater
than that of domestic crude oil, or the price for the future delivery of crude
oil falls below current prices, our customers are less likely to store crude
oil, thereby reducing our storage revenues at our Nederland Terminal.
Most of the crude oil stored at our Nederland Terminal is foreign crude oil.
When the price of foreign crude oil delivered to the United States is greater
than that of domestic crude oil, the demand for this storage capacity may
decrease. If this market condition occurs, our storage revenues may be lower,
which could reduce our ability to make distributions to our unitholders.
When the price of crude oil in a given month exceeds the price of crude oil
for delivery in a subsequent month, the market is backwardated. When the crude
oil market is backwardated, the demand for storage capacity at our Nederland
Terminal may decrease because crude oil producers can capture a premium for
prompt deliveries rather than storing it for sale later. The market has been in
backwardation for much of the last several years. In a backwardated market, our
storage revenues may be lower, which could reduce our ability to make
distributions to our unitholders.
A material decrease in the supply, or increase in the price, of crude oil
available for transport through our Western Pipeline System could reduce our
ability to make distributions to our unitholders.
The volume of crude oil we transport in our crude oil pipelines depends on
the availability of attractively priced crude oil produced in the areas
accessible to our crude oil pipelines and received from other common carrier
pipelines. If we do not replace volumes lost due to a material temporary or
permanent decrease in supply, the volumes of crude oil transported through our
pipelines would decline, reducing our revenues and cash flow and our ability to
make distributions to our unitholders. For example, some of the gathering
systems that supply crude oil that we transport on our Western Pipeline System
are experiencing a decline in production. To maintain our purchase volumes, we
must continue to contract for new supplies of crude oil to offset volumes lost
because of natural declines in crude oil production from depleting wells or
volumes lost to competitors. Generally, because of inconveniences in switching
crude oil purchasers, producers typically do not change purchasers on the basis
of minor variations in price. As a result, we may experience difficulty
acquiring crude oil at the wellhead in areas where there are existing
relationships between producers and other purchasers of crude oil. In addition,
sustained low crude oil prices could lead to a decline in drilling activity and
production levels or the shutting-in or abandonment of marginal wells.
Similarly, a temporary or permanent material increase in the price of crude oil
supplied from any of these sources, as compared to alternative sources of crude
oil available to our customers, could cause the volumes of crude oil
transported in our pipelines to decline, thereby reducing our revenues and cash
flow and adversely affecting our ability to make cash distributions to our
unitholders.
Any reduction in the capability of or the allocations to our shippers in
interconnecting, third-party pipelines could cause a reduction of volumes
transported in our pipelines and through our terminals, which could reduce our
ability to make distributions to our unitholders.
Sunoco R&M and the other users of our pipelines and terminals are dependent
upon connections to third-party pipelines to receive and deliver crude oil and
refined products. Any reduction of capabilities of these interconnecting
pipelines due to testing, line repair, reduced operating pressures, or other
causes could result in
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reduced volumes transported in our pipelines or through our terminals.
Similarly, if additional shippers begin transporting volumes over
interconnecting pipelines, the allocations to our existing shippers could be
reduced, which could also reduce volumes transported in our pipelines or
through our terminals. Any reduction in volumes transported in our pipelines or
through our terminals could adversely affect our revenues and cash flow.
Our operations are subject to operational hazards and unforeseen interruptions
for which we may not be adequately insured.
Our operations are subject to operational hazards and unforeseen
interruptions such as natural disasters, adverse weather, accidents, fires,
explosions, hazardous materials releases, and other events beyond our control.
These events might result in a loss of equipment or life, injury, or extensive
property damage, as well as an interruption in our operations. Our insurance
may not be adequate to cover losses that we may incur.
We are exposed to the credit risk of our customers in the ordinary course of
our crude oil acquisition and marketing activities.
When we purchase crude oil at the wellhead, we sometimes pay all of or a
portion of the production proceeds to an operator who distributes these
proceeds to the various interest owners, an arrangement that exposes us to
operator credit risk. Therefore, we must determine whether operators have
sufficient financial resources to make these payments and distributions and to
indemnify and defend us in case of a protest, action, or complaint. Even if our
credit review and analysis mechanisms work properly, we may experience losses
in dealings with operators and other parties.
Competing pipelines could cause us to reduce our rates.
If a competing crude oil or refined product pipeline charged lower rates
than we do, we could be forced to reduce our rates to remain competitive, which
could reduce our revenues and cash flow. A 26-inch natural gas pipeline from
Beaumont, Texas to Southern Illinois is scheduled to be converted to a refined
product pipeline by 2002 and will likely compete with Explorer. Similarly,
Ultramar Diamond Shamrock is expanding a crude oil pipeline from Wichita Falls,
Texas to its McKee, Texas refinery. This pipeline will compete with portions of
our West Texas pipeline system when the expansion is completed in the first
quarter of 2002.
If we do not make acquisitions on economically acceptable terms, any future
growth will be limited.
Our future growth will depend principally on our ability to make
acquisitions at attractive prices. We cannot assure you that we will be able to
identify attractive acquisition candidates or that we will be able to acquire
businesses on economically acceptable terms. We may not be able to acquire
additional businesses for various reasons, including the following:
. we may be unable to use cash or access capital to pay for additional
acquisitions without adversely affecting our ability to make cash
distributions to our unitholders; and
. we may not be able to use common units as an acquisition currency, and
their issuance in some circumstances may be dilutive to our existing
unitholders.
This offering will not provide us with any cash for acquisitions, and we
expect we will use our cash from operations primarily for reinvestment in our
business and distributions to our unitholders.
Any acquisition involves potential risks, including:
. the inability to integrate the operations of recently acquired businesses;
. the diversion of management's attention from other business concerns;
19
. customer or key employee loss from the acquired businesses; and
. a significant increase in our indebtedness.
Restrictions in our and Sunoco, Inc.'s debt agreements may prevent us from
engaging in some beneficial transactions or paying distributions.
Upon completion of this offering, we expect our total outstanding long-term
indebtedness to be approximately $255 million, including $250 million of our
senior notes and approximately $5.0 million of other indebtedness. Our payment
of principal and interest on the debt will reduce the cash available for
distribution on our units. In addition, we will be prohibited by our credit
agreement and our senior notes from making cash distributions during an event
of default under any of our debt. Our leverage and various limitations in our
credit agreement and our senior notes may reduce our ability to incur
additional debt, engage in some transactions, and capitalize on acquisition or
other business opportunities. Sunoco, Inc.'s revolving credit agreement also
limits the amount of debt Sunoco, Inc. and its affiliates, including us, may
borrow. Since Sunoco, Inc. will own and control our general partner, we may not
be permitted to incur additional debt if the effect would be to cause an event
of default under Sunoco, Inc.'s revolving credit agreement. Any subsequent
refinancing of Sunoco, Inc.'s or our current debt or any new debt could have
similar or greater restrictions.
Risks Inherent in an Investment in Us
Cost reimbursements and fees due our general partner and its affiliates will be
substantial and will reduce our cash available for distribution to you.
For three years following this offering, we will pay Sunoco, Inc. an
administrative fee of $8.0 million per year for the provision by Sunoco, Inc.
or its affiliates of various general and administrative services for our
benefit. The administrative fee will increase each year by the lesser of 2.5%
or the consumer price index for the applicable year and may also increase if we
make an acquisition that requires an increase in the level of general and
administrative services that we receive from Sunoco, Inc. or its affiliates. In
addition, the general partner will be entitled to reimbursement for all
expenses, other than the general and administrative expenses covered by the
administrative fee, it incurs on our behalf. These reimbursable expenses
include the salaries and the cost of employee benefits of employees of the
general partner who provide services to us. Our general partner has sole
discretion in determining the amount of these expenses. Our obligation to pay
our general partner its administrative services fees and to reimburse it for
expenses will be substantial and will reduce the amount of available cash for
distribution to unitholders. Our general partner and its affiliates also may
provide us other services for which we will be charged fees as determined by
our general partner. Please read "Conflicts of Interest and Fiduciary
Responsibilities--Conflicts of Interest."
Sunoco, Inc. and its affiliates have conflicts of interest and limited
fiduciary responsibilities, which may permit them to favor their own interests
to your detriment.
Following the offering, Sunoco, Inc. will indirectly own the 2% general
partner interest and a 78.4% limited partner interest in us and will own and
control our general partner. Conflicts of interest may arise between Sunoco,
Inc. and its affiliates, including our general partner, on the one hand, and
us, on the other hand. As a result of these conflicts, the general partner may
favor its own interests and the interests of its affiliates over the interests
of our unitholders. These conflicts include, among others, the following
situations:
. Sunoco R&M, as a shipper on our pipelines, has an economic incentive not
to cause us to seek higher tariff rates or terminalling fees, even if such
higher rates or terminalling fees would reflect rates that could be
obtained in arms-length, third-party transactions;
20
. some officers of Sunoco, Inc. who will provide services to us will also
devote significant time to the businesses of Sunoco, Inc. and will be
compensated by Sunoco, Inc. for these services;
. neither our partnership agreement nor any other agreement requires Sunoco,
Inc. to pursue a business strategy that favors us or utilizes our assets,
including whether to increase or decrease refinery production, whether to
shut down or reconfigure a refinery, or what markets to pursue or grow.
Sunoco, Inc. directors and officers have a fiduciary duty to make these
decisions in the best interests of the stockholders of Sunoco, Inc.;
. Sunoco, Inc. and its affiliates may engage in limited competition with us;
. our general partner is allowed to take into account the interests of
parties other than us, such as Sunoco, Inc., in resolving conflicts of
interest, which has the effect of limiting its fiduciary duty to our
unitholders;
. our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to our unitholders
for actions that, without the limitations, might constitute breaches of
fiduciary duty. As a result of purchasing units, our unitholders consent
to some actions and conflicts of interest that might otherwise constitute
a breach of fiduciary or other duties under applicable state law;
. our general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings, issuance of additional
partnership securities, and reserves, each of which can affect the amount
of cash that is distributed to our unitholders;
. our general partner determines which costs incurred by Sunoco, Inc. and
its affiliates are reimbursable by us;
. our partnership agreement does not restrict our general partner from
causing us to pay it or its affiliates for any services rendered on terms
that are fair and reasonable to us or entering into additional contractual
arrangements with any of these entities on our behalf;
. our general partner controls the enforcement of obligations owed to us by
our general partner and its affiliates, including the pipelines and
terminals storage and throughput agreement with Sunoco R&M;
. our general partner decides whether to retain separate counsel,
accountants, or others to perform services for us;
. in some instances, our general partner may cause us to borrow funds from
affiliates of Sunoco, Inc. or from third parties in order to permit the
payment of cash distributions, even if the purpose or effect of the
borrowing is to make a distribution on the subordinated units, to make
incentive distributions, or to hasten the expiration of the subordination
period;
. our partnership agreement gives our general partner broad discretion in
establishing financial reserves for the proper conduct of our business.
These reserves also will affect the amount of cash available for
distribution; and
. Sunoco, Inc. may at any time propose that we undertake a project to
develop and construct an asset, and if our general partner determines in
its good faith judgment, with the concurrence of its conflicts committee,
that the project, including the terms on which Sunoco, Inc. would agree to
use such asset, will be beneficial on the whole to us and that proceeding
with the project will not effectively preclude us from undertaking another
project that will be more beneficial to us, we will be required to use our
commercially reasonable efforts to finance, develop, and construct the
asset.
Please read "Certain Relationships and Related Transactions--Omnibus
Agreement" and "Conflicts of Interest and Fiduciary Responsibilities."
Unitholders have less ability to elect or remove management than holders of
common stock in a corporation.
Unlike the holders of common stock in a corporation, unitholders have only
limited voting rights on matters affecting our business and, therefore, limited
ability to influence management's decisions regarding our business.
21
Unitholders did not elect our general partner or its board of directors and
will have no right to elect our general partner or its board of directors on an
annual or other continuing basis. The board of directors of our general partner
is chosen by the members of our general partner. Although our general partner
has a fiduciary duty to manage our partnership in a manner beneficial to us and
the unitholders, the directors of the general partner have a fiduciary duty to
manage the general partner in a manner beneficial to its members.
Furthermore, if unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner.
First, the general partner generally may not be removed except upon the vote of
the holders of at least 66 2/3% of the outstanding units voting together as a
single class. Because the general partner will control approximately 80.0% of
all the units, the general partner currently cannot be removed without the
consent of the general partner. Also, if the general partner is removed without
cause during the subordination period and units held by the general partner are
not voted in favor of that removal, all remaining subordinated units will
automatically be converted into common units and any existing arrearages on the
common units will be extinguished. A removal of the general partner under these
circumstances would adversely affect the common units by prematurely
eliminating their distribution and liquidation preference over the subordinated
units, which would otherwise have continued until we had met certain
distribution and performance tests.
Cause is narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner liable for
actual fraud, gross negligence, or willful or wanton misconduct in its capacity
as our general partner. Cause does not include most cases of charges of poor
management of the business, so the removal of the general partner because of
the unitholders' dissatisfaction with the general partner's performance in
managing our partnership will most likely result in the termination of the
subordination period.
Furthermore, unitholders' voting rights are further restricted by the
partnership agreement provision providing that any units held by a person that
owns 20% or more of any class of units then outstanding, other than the general
partner, its affiliates, their transferees, and persons who acquired such units
with the prior approval of the board of directors of our general partner,
cannot vote on any matter.
The control of our general partner may be transferred to a third party without
unitholder consent.
The general partner may transfer its general partner interest to a third
party in a merger or in a sale of all or substantially all of its assets
without the consent of the unitholders. Furthermore, there is no restriction in
the partnership agreement on the ability of the owner of the general partner
from transferring its ownership interest in the general partner to a third
party. The new owner of the general partner would then be in a position to
replace the board of directors and officers of the general partner with its own
choices and to control the decisions taken by the board of directors and
officers.
You will experience immediate and substantial dilution of $8.55 per common
unit.
The assumed initial public offering price of $20.00 per unit exceeds pro
forma net tangible book value of $11.45 per unit. Based on an assumed initial
public offering price of $20.00, you will incur immediate and substantial
dilution of $8.55 per common unit. This dilution results primarily because the
assets contributed by our general partner are recorded at their historical
cost, and not their fair value, in accordance with generally accepted
accounting principles. Please read "Dilution."
We may issue additional common units without your approval, which may dilute
your ownership interests.
During the subordination period, our general partner, without the approval
of our unitholders, may cause us to issue up to 6,236,264 additional common
units. Our general partner may also cause us to issue an unlimited
22
number of additional common units or other equity securities of equal rank with
the common units, without unitholder approval, in a number of circumstances
such as:
. the issuance of common units in connection with acquisitions that increase
cash flow from operations per unit on a pro forma basis;
. the conversion of subordinated units into common units;
. the conversion of units of equal rank with the common units into common
units under some circumstances;
. the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of our
general partner;
. issuances of common units under our long-term incentive plan; or
. issuances of common units to repay up to $40 million of certain
indebtedness.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of our
unitholders. Our partnership agreement does not give our unitholders the right
to approve our issuance of equity securities ranking junior to the common units
at any time.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
. our unitholders' proportionate ownership interest in us will decrease;
. the amount of cash available for distribution on each unit may decrease;
. since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by our common unitholders will increase;
. the relative voting strength of each previously outstanding unit may be
diminished; and
. the market price of the common units may decline.
Our general partner has a limited call right that may require you to sell your
common units at an undesirable time or price.
If at any time persons other than our general partner and its affiliates own
not more than 20% of the common units, our general partner will have the right,
but not the obligation, which it may assign to any of its affiliates or to us,
to acquire all, but not less than all, of the common units held by unaffiliated
persons at a price not less than their then-current market price. As a result,
you may be required to sell your common units at an undesirable time or price
and may not receive any return on your investment. You may also incur a tax
liability upon a sale of your units. For additional information about the call
right, please read "The Partnership Agreement--Limited Call Right."
You may not have limited liability if a court finds that we have not complied
with the applicable statutes or that unitholder action constitutes control of
our business.
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. You could be held liable in some circumstances for our obligations
to the same extent as a general partner if a court determined that:
. we had been conducting business in any state without compliance with the
applicable limited partnership statute; or
. the right or the exercise of the right by our unitholders as a group to
remove or replace our general partner, to approve some amendments to the
partnership agreement, or to take other action under our partnership
agreement constituted participation in the "control" of our business.
23
Our general partner generally has unlimited liability for the obligations of
the partnership, such as its debts and environmental liabilities, except for
those contractual obligations of the partnership that are expressly made
without recourse to the general partner.
In addition, under some circumstances, a unitholder may be liable to us for
the amount of a distribution for a period of three years from the date of the
distribution. Please read "The Partnership Agreement--Limited Liability" for a
discussion of the implications of the limitations on liability to a unitholder.
Tax Risks
You should read "Tax Considerations" for a more complete discussion of the
following expected material federal income tax consequences of owning and
disposing of common units.
The IRS could treat us as a corporation, which would substantially reduce the
cash available for distribution to unitholders.
The federal income tax benefit of an investment in us depends largely on our
classification as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting us.
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, currently 35%, distributions
would generally be taxed again to you as corporate distributions, and no
income, gains, losses, or deductions would flow through to you. Because a tax
would be imposed upon us as an entity, the cash available for distribution to
you would be substantially reduced. Treatment of us as a corporation would
result in a material reduction in the anticipated cash flow and after-tax
return to you and thus would likely result in a substantial reduction in the
value of the common units.
Current law may change so as to cause us to be taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects us to
taxation as a corporation or otherwise subjects us to entity-level taxation for
federal, state or local income tax purposes, then distributions will be
decreased to reflect the impact of that law on us.
A successful IRS contest of the federal income tax positions we take may
adversely impact the market for our common units, and the costs of any contest
will be borne by our unitholders and our general partner.
We have not requested any ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes or any other
matter affecting us. The IRS may adopt positions that differ from our counsel's
conclusions expressed in this prospectus. It may be necessary to resort to
administrative or court proceedings to sustain some or all of our counsel's
conclusions or the positions we take. A court may not concur with all our
counsel's conclusions or the positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by our unitholders and our general
partner.
You may be required to pay taxes on income from us even if you do not receive
any cash distributions from us.
You will be required to pay federal income taxes and, in some cases, state,
local, and foreign income taxes on your share of our taxable income, whether or
not you receive cash distributions from us. You may not receive cash
distributions equal to your allocable share of our taxable income or even the
tax liability that results from that income.
Tax gain or loss on the disposition of our common units could be different than
expected.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common
units. Prior distributions in excess of the total net taxable income
24
you were allocated for a common unit, which decreased your tax basis in that
common unit, will, in effect, become taxable income to you if the common unit
is sold at a price greater than your tax basis in that common unit, even if the
price you receive is less than your original cost. A substantial portion of the
amount realized, whether or not representing gain, may be ordinary income to
you. Should the IRS successfully contest some positions we take, you could
recognize more gain on the sale of units than would be the case under those
positions, without the benefit of decreased income in prior years. In addition,
if you sell your units, you may incur a tax liability in excess of the amount
of cash you receive from the sale.
Tax-exempt entities, regulated investment companies and foreign persons face
unique tax issues from owning common units that may result in adverse tax
consequences to them.
Investment in common units by tax-exempt entities, regulated investment
companies (known as mutual funds), and non-U.S. persons raises issues unique to
them. For example, virtually all of our income allocated to organizations
exempt from federal income tax, including individual retirement accounts and
other retirement plans, will be unrelated business income and will be taxable
to them. Very little of our income will be qualifying income to a regulated
investment company. Distributions to non-U.S. persons will be reduced by
withholding taxes at the highest effective rate applicable to individuals, and
non-U.S. persons will be required to file federal income tax returns and pay
tax on their share of our taxable income.
We will register as a tax shelter. This may increase the risk of an IRS audit
of us or a unitholder.
We intend to register with the IRS as a "tax shelter." We will advise you of
our tax shelter registration number once that number has been assigned. The IRS
requires that some types of entities, including some partnerships, register as
"tax shelters" in response to the perception that they claim tax benefits that
the IRS may believe to be unwarranted. As a result, we may be audited by the
IRS and tax adjustments could be made. Any unitholder owning less than a 1%
profits interest in us has very limited rights to participate in the income tax
audit process. Further, any adjustments in our tax returns will lead to
adjustments in our unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. You will
bear the cost of any expense incurred in connection with an examination of your
personal tax return.
We will treat each purchaser of units as having the same tax benefits without
regard to the units purchased. The IRS may challenge this treatment, which
could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units and
because of other reasons, we will adopt depreciation conventions that may not
conform to all aspects of the Treasury regulations. A successful IRS challenge
to those conventions could adversely affect the amount of tax benefits
available to you. It also could affect the timing of these tax benefits or the
amount of gain from the sale of common units and could have a negative impact
on the value of our common units or result in audit adjustments to your tax
returns. Please read "Tax Considerations--Uniformity of Units" for a further
discussion of the effect of the depreciation and amortization positions we will
adopt.
You will likely be subject to state, local, and foreign taxes and return filing
requirements as a result of investing in our common units.
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state, local, and foreign income taxes, unincorporated
business taxes and estate, inheritance, or intangible taxes that are imposed by
the various jurisdictions in which we do business or own property. You will
likely be required to file state, local, and foreign income tax returns and pay
state, local, and foreign income taxes in some or all of the various
jurisdictions in which we do business or own property and may be subject to
penalties for failure to comply with those requirements. We will initially own
property and conduct business in Indiana, Kansas, Louisiana, Michigan, New
Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Texas, and Ontario,
Canada. We may do business or own property in other states or foreign countries
in the future. It is your responsibility to file all federal, state, local, and
foreign tax returns. Our counsel has not rendered an opinion on the state,
local, or foreign tax consequences of an investment in our common units.
25
USE OF PROCEEDS
We expect to receive net proceeds of approximately $93.0 million from the
sale of 5,000,000 common units offered by this prospectus, after deducting
underwriting discounts but before paying estimated offering expenses.
Additionally, we expect to receive proceeds of approximately $15.0 million from
the sale of 750,000 common units that will either be purchased by the
underwriters upon the exercise of the over-allotment option or by our general
partner to the extent that the underwriters do not exercise the over-allotment
option. Any net proceeds from a sale of common units to the underwriters will
be reduced by the underwriting discount. We base these amounts on an assumed
public offering price of $20.00 per unit.
We intend to use the net proceeds of this offering of $108.0 million to:
. establish working capital of $102.0 million; and
. pay $6.0 million of expenses associated with the offering and the related
transactions.
We intend to use the net proceeds from the sale of senior notes to make a
$247.0 million distribution to Sunoco, Inc. and its affiliates.
Please see Notes 2 and 3 to our Unaudited Pro Forma Financial Statements.
26
CAPITALIZATION
The following table shows:
. our historical capitalization as of June 30, 2001; and
. our pro forma capitalization as of June 30, 2001, adjusted to reflect the
offering of the common units, the issuance of our senior notes, the
removal of assets and liabilities that will not be contributed by Sunoco,
Inc. to us, and the application of the net proceeds we receive in the
offering and these financings in the manner described under "Use of
Proceeds."
This table is derived from, should be read together with and is qualified in
its entirety by reference to our historical and pro forma financial statements
and the accompanying notes included elsewhere in this prospectus.
As of June 30, 2001
-------------------
Actual Pro Forma
-------- ---------
(in thousands)
Cash /(1)/................................................................ $ -- $102,000
======== ========
Debt due to affiliate, including current portion and short-term borrowings $210,000 $ --
Senior notes.............................................................. -- 250,000
Other debt, including current portion..................................... 4,923 4,923
-------- --------
Total debt............................................................. 214,923 254,923
-------- --------
Equity:
Net parent investment.................................................. 167,414 --
Held by public:
Common units......................................................... -- 88,696
Held indirectly by Sunoco, Inc.:
Common units......................................................... -- 90,005
Subordinated units................................................... -- 142,305
General partner interest............................................. -- 4,470
-------- --------
Total equity....................................................... 167,414 325,476
-------- --------
Total capitalization............................................... $382,337 $580,399
======== ========
--------
(1)This cash will be used to fund increases in the following working capital
accounts to reflect their anticipated ongoing level based on current market
conditions and payment terms included in contracts with Sunoco, Inc. and
Sunoco R&M:
As of
June 30, 2001
--------------
Pro Forma
--------------
(in thousands)
Accounts receivable, affiliated companies. $ 92,000
Inventories............................... 26,485
--------
118,485
Less: Accounts payable.................... 16,485
--------
Use of cash........................... $102,000
========
27
DILUTION
Dilution is the amount by which the offering price will exceed the net
tangible book value per unit after the offering. On a pro forma basis as of
June 30, 2001, after giving effect to the offering of common units and the
related transactions, our net tangible book value was $291.4 million, or $11.45
per common unit. Purchasers of common units in this offering will experience
substantial and immediate dilution in net tangible book value per common unit
for financial accounting purposes, as illustrated in the following table.
Assumed initial public offering price per common unit............................................... $20.00
Pro forma net tangible book value per common unit before the offering/(1)/.................... $9.61
Increase in net tangible book value per common unit attributable to purchasers in the offering 1.84
-----
Less: Pro forma net tangible book value per common unit after the offering/(2)/..................... 11.45
------
Immediate dilution in net tangible book value per common unit to purchasers in the offering......... $ 8.55
======
--------
(1)Determined by dividing the number of units (6,722,528 common units,
12,472,528 subordinated units, and the 2% general partner interest, which
has a dilutive effect equivalent to 509,082 units) to be issued to the
general partner for its contribution of assets and liabilities to Sunoco
Logistics Partners into the net tangible book value of the contributed
assets and liabilities.
(2)Determined by dividing the total number of units (12,472,528 common units,
12,472,528 subordinated units, and the 2% general partner interest, which
has a dilutive effect equivalent to 509,082 units) to be outstanding after
the offering into the pro forma net tangible book value of Sunoco Logistics
Partners, after giving effect to the application of the net proceeds of the
offering.
The following table sets forth the number of units that we will issue and
the total consideration contributed to Sunoco Logistics Partners by the general
partner in respect of its units and by the purchasers of common units in this
offering upon consummation of the transactions contemplated by this prospectus.
Units Acquired
----------------- Total
Number Percent Consideration
---------- ------- -------------
(in
thousands)
General partner/(1)(2)/ 20,454,138 80.4% $238,476
New investors.......... 5,000,000 19.6% 100,000
---------- ----- --------
Total............... 25,454,138 100.0% $338,476
========== ===== ========
--------
(1)Upon the consummation of the transactions contemplated by this prospectus,
our general partner will own 7,472,528 common units, 12,472,528 subordinated
units, and a 2% general partner interest in Sunoco Logistics Partners having
a dilutive effect equivalent to 509,082 units.
(2)The assets contributed by the general partner and its affiliates were
recorded at historical cost in accordance with accounting principles
generally accepted in the United States. Book value of the consideration
provided by the general partner and its affiliates, as of June 30, 2001, was
$223.5 million.
28
CASH DISTRIBUTION POLICY
Distributions of Available Cash
General. Within 45 days after the end of each quarter, beginning with the
quarter ending December 31, 2001, we will distribute all of our available cash
to unitholders of record on the applicable record date. We will adjust the
minimum quarterly distribution for the period from the closing of the offering
through December 31, 2001 based on the actual length of the period.
Definition of Available Cash. We define available cash in the glossary, and
it generally means, for each fiscal quarter, all cash on hand at the end of the
quarter:
. less the amount of cash that the general partner determines in its
reasonable discretion is necessary or appropriate to:
-- providefor the proper conduct of our business;
-- complywith applicable law, any of our debt instruments, or other
agreements; or
-- providefunds for distributions to our unitholders and to our general
partner for any one or more of the next four quarters;
. plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our credit facility and in all cases are used solely for
working capital purposes or to pay distributions to partners.
Minimum Quarterly Distribution. Common units are entitled to receive
distributions from operating surplus of $0.45 per quarter, or $1.80 on an
annualized basis, before any distributions are paid on our subordinated units.
There is no guarantee that we will pay the minimum quarterly distribution on
the common units in any quarter, and we will be prohibited from making any
distributions to unitholders if it would cause an event of default under our
credit facility or the senior notes.
Operating Surplus and Capital Surplus
General. All cash distributed to unitholders will be characterized as either
"operating surplus" or "capital surplus." We distribute available cash from
operating surplus differently than available cash from capital surplus.
Definition of Operating Surplus. We define operating surplus in the
glossary, and for any period it generally means:
. our cash balance on the closing date of this offering; plus
. $15.0 million (as described below); plus
. all of our cash receipts since the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales or other dispositions of assets
outside the ordinary course of business; plus
. working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less
. all of our operating expenditures since the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures; less
. the amount of cash reserves that the general partner deems necessary or
advisable to provide funds for future operating expenditures.
29
Definition of Capital Surplus. We also define capital surplus in the
glossary, and it will generally be generated only by:
. borrowings other than working capital borrowings;
. sales of debt and equity securities; and
. sales or other disposition of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available
cash distributed since we began operations equals the operating surplus as of
the most recent date of determination of available cash. We will treat any
amount distributed in excess of operating surplus, regardless of its source, as
capital surplus. As reflected above, operating surplus includes $15.0 million
in addition to our cash balance on the closing date of this offering, cash
receipts from our operations and cash from working capital borrowings. This
amount does not reflect actual cash on hand at closing that is available for
distribution to our unitholders. Rather, it is a provision that will enable us,
if we choose, to distribute as operating surplus up to $15.0 million of cash we
receive in the future from non-operating sources, such as asset sales,
issuances of securities, and long-term borrowings, that would otherwise be
distributed as capital surplus. We do not anticipate that we will make any
distributions from capital surplus.
Subordination Period
General. During the subordination period, which we define below and in the
glossary, the common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.45 per quarter, plus any arrearages in the payment
of the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating surplus may be made
on the subordinated units. The purpose of the subordinated units is to increase
the likelihood that during the subordination period there will be available
cash to be distributed on the common units.
Definition of Subordination Period. We define the subordination period in
the glossary. The subordination period will extend until the first day of any
quarter beginning after December 31, 2006 that each of the following tests are
met:
. distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
. the "adjusted operating surplus" (as defined below) generated during each
of the three consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
. there are no arrearages in payment of the minimum quarterly distribution
on the common units.
Early Conversion of Subordinated Units. Before the end of the subordination
period, 50% of the subordinated units, or up to 6,236,264 subordinated units,
may convert into common units on a one-for-one basis immediately after the
distribution of available cash to the partners in respect of any quarter ending
on or after:
. December 31, 2004 with respect to 25% of the subordinated units; and
. December 31, 2005 with respect to 25% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter
each of the following occurs:
. distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
30
. the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
. there are no arrearages in payment of the minimum quarterly distribution
on the common units.
However, the second early conversion of the subordinated units may not occur
until at least one year following the first early conversion of the
subordinated units.
Definition of Adjusted Operating Surplus. We define adjusted operating
surplus in the glossary and for any period it generally means:
. operating surplus generated with respect to that period; less
. any net increase in working capital borrowings with respect to that
period; less
. any net reduction in cash reserves for operating expenditures with respect
to that period not relating to an operating expenditure made with respect
to that period; plus
. any net decrease in working capital borrowings with respect to that
period; plus
. any net increase in cash reserves for operating expenditures with respect
to that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net increases in
working capital borrowings and net drawdowns of reserves of cash generated in
prior periods.
Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by the general partner and
its affiliates are not voted in favor of such removal:
. the subordination period will end and each subordinated unit will
immediately convert into one common unit;
. any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
. the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
Distributions of Available Cash from Operating Surplus during the Subordination
Period
We will make distributions of available cash from operating surplus for any
quarter during the subordination period in the following manner:
. First, 98% to the common unitholders, pro rata, and 2% to the general
partner until we distribute for each outstanding common unit an amount
equal to the minimum quarterly distribution for that quarter;
. Second, 98% to the common unitholders, pro rata, and 2% to the general
partner until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination
period;
. Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter; and
. Thereafter, in the manner described in "--Incentive Distribution Rights"
below.
31
Distributions of Available Cash from Operating Surplus after the Subordination
Period
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
. First, 98% to all unitholders, pro rata, and 2% to the general partner
until we distribute for each outstanding unit an amount equal to the
minimum quarterly distribution for that quarter; and
. Thereafter, in the manner described in "--Incentive Distribution Rights"
below.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels
have been achieved. Our general partner currently holds the incentive
distribution rights, but may transfer these rights separately from its general
partner interest, subject to restrictions in the partnership agreement.
If for any quarter:
. we have distributed available cash from operating surplus to the common
and subordinated unitholders in an amount equal to the minimum quarterly
distribution; and
. we have distributed available cash from operating surplus on outstanding
common units in an amount necessary to eliminate any cumulative arrearages
in payment of the minimum quarterly distribution;
then, we will distribute any additional available cash from operating surplus
for that quarter among the unitholders and the general partner in the following
manner:
. First, 98% to all unitholders, pro rata, and 2% to the general partner
until each unitholder receives a total of $0.500 per unit for that quarter
(the "first target distribution");
. Second, 85% to all unitholders, pro rata, and 15% to the general partner,
until each unitholder receives a total of $0.575 per unit for that quarter
(the "second target distribution");
. Third, 75% to all unitholders, pro rata, and 25% to the general partner,
until each unitholder receives a total of $0.700 per unit for that quarter
(the "third target distribution"); and
. Thereafter, 50% to all unitholders, pro rata, and 50% to the general
partner.
In each case, the amount of the target distribution set forth above is
exclusive of any distributions to common unitholders to eliminate any
cumulative arrearages in payment of the minimum quarterly distribution.
Hypothetical Annualized Yield
The following table illustrates the percentage allocations of the additional
available cash from operating surplus between the unitholders and our general
partner up to the various target distribution levels and a hypothetical
annualized percentage yield to be realized by a unitholder at each target
distribution level. For purposes of the following table, we calculated the
annualized percentage yield on a pretax basis assuming that (1) the common unit
was purchased at an amount equal to the assumed initial public offering price
of $20.00 per common unit and (2) we distributed each quarter during the first
year following the investment the amount set forth under the column "Total
Quarterly Distribution Target Amount." We also based the calculations on the
assumption that the quarterly distribution amounts shown do not include any
common unit arrearages. The amounts set forth under "Marginal Percentage
Interest in Distributions" are the percentage interests of our general partner
and the unitholders in any available cash from operating surplus we distribute
up to and including the corresponding amount in the column "Total Quarterly
Distribution Target Amount," until available cash from operating surplus we
distribute reaches the next target distribution level, if any. The percentage
interests shown
32
for the unitholders and the general partner for the minimum quarterly
distribution are also applicable to quarterly distribution amounts that are
less than the minimum quarterly distribution.
Marginal Percentage
Interest in Distributions
Total Quarterly -------------------------
Distribution General
Target Amount Unitholders Partner
-------------------------------- ----------- -------
Minimum Quarterly Distribution $0.450 98% 2%
First Target Distribution..... up to $0.500 98% 2%
Second Target Distribution.... above $0.500 up to $0.575 85% 15%
Third Target Distribution..... above $0.575 up to $0.700 75% 25%
Thereafter.................... above $0.700 50% 50%
Distributions from Capital Surplus
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus, if any, in the following
manner:
. First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we distribute for each common unit that was issued in this offering,
an amount of available cash from capital surplus equal to the initial
public offering price;
. Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we distribute for each common unit, an amount of available
cash from capital surplus equal to any unpaid arrearages in payment of the
minimum quarterly distribution on the common units; and
. Thereafter, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per
unit is referred to as the "unrecovered initial unit price." Each time a
distribution of capital surplus is made, the minimum quarterly distribution and
the target distribution levels will be reduced in the same proportion as the
corresponding reduction in the unrecovered initial unit price. Because
distributions of capital surplus will reduce the minimum quarterly
distribution, after any of these distributions are made, it may be easier for
the general partner to receive incentive distributions and for the subordinated
units to convert into common units. However, any distribution of capital
surplus before the unrecovered initial unit price is reduced to zero cannot be
applied to the payment of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will then make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to the
general partner.
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:
. the minimum quarterly distribution;
. target distribution levels;
. unrecovered initial unit price;
33
. the number of common units issuable during the subordination period
without a unitholder vote; and
. the number of common units into which a subordinated unit is convertible.
For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance of additional
units for cash or property.
In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For example, if we
became subject to a maximum marginal federal, and effective state and local
income tax rate of 38%, then the minimum quarterly distribution and the target
distributions levels would each be reduced to 62% of their previous levels.
Distributions of Cash Upon Liquidation
If we dissolve in accordance with the partnership agreement, we will sell or
otherwise dispose of our assets in a process called liquidation. We will first
apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the general partner,
in accordance with their capital account balances, as adjusted to reflect any
gain or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon our
liquidation, to the extent required to permit common unitholders to receive
their unrecovered initial unit price plus the minimum quarterly distribution
for the quarter during which liquidation occurs plus any unpaid arrearages in
payment of the minimum quarterly distribution on the common units. However,
there may not be sufficient gain upon our liquidation to enable the holders of
common units to fully recover all of these amounts, even though there may be
cash available for distribution to the holders of subordinated units. Any
further net gain recognized upon liquidation will be allocated in a manner that
takes into account the incentive distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of the adjustment for gain is set
forth in the partnership agreement. If our liquidation occurs before the end of
the subordination period, we will allocate any gain to the partners in the
following manner:
. First, to the general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
. Second, 98% to the common unitholders, pro rata, and 2% to the general
partner until the capital account for each common unit is equal to the sum
of:
(1)the unrecovered initial unit price;
(2)the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs; and
(3)any unpaid arrearages in payment of the minimum quarterly distribution;
. Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner until the capital account for each subordinated unit is
equal to the sum of:
(1)the unrecovered initial unit price; and
(2)the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs;
34
. Fourth, 98% to all unitholders, pro rata, and 2% to the general partner,
pro rata, until we allocate under this paragraph an amount per unit equal
to:
(1)the sum of the excess of the first target distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2)the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution
per unit that we distributed 98% to the units, pro rata, and 2% to the
general partner, pro rata, for each quarter of our existence;
. Fifth, 85% to all unitholders, pro rata, and 15% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1)the sum of the excess of the second target distribution per unit over
the first target distribution per unit for each quarter of our
existence; less
(2)the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the first target distribution per
unit that we distributed 85% to the unitholders, pro rata, and 15% to
the general partner for each quarter of our existence;
. Sixth, 75% to all unitholders, pro rata, and 25% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1)the sum of the excess of the third target distribution per unit over
the second target distribution per unit for each quarter of our
existence; less
(2)the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the second target distribution per
unit that we distributed 75% to the unitholders, pro rata, and 25% to
the general partner for each quarter of our existence; and
. Thereafter, 50% to all unitholders, pro rata, and 50% to the general
partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.
Manner of Adjustments for Losses. Upon our liquidation, we will generally
allocate any loss to the general partner and the unitholders in the following
manner:
. First, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to the general partner until the
capital accounts of the subordinated unitholders have been reduced to
zero;
. Second, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to the general partner until the
capital accounts of the common unitholders have been reduced to zero; and
. Thereafter, 100% to the general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first bullet point above will no longer be applicable.
Adjustments to Capital Accounts. We will make adjustments to capital
accounts upon the issuance of additional units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and the general partner in the same manner
as we allocate gain or loss upon liquidation. In the event that we make
positive adjustments to the capital accounts upon the issuance of additional
units, we will allocate any later negative adjustments to the capital accounts
resulting from the issuance of additional units or upon our liquidation in a
manner which results, to the extent possible, in the general partner's capital
account balances equaling the amount which they would have been if no earlier
positive adjustments to the capital accounts had been made.
35
CASH AVAILABLE FOR DISTRIBUTION
We intend to pay each quarter, to the extent we have sufficient available
cash from operating surplus, the minimum quarterly distribution of $0.45 per
unit, or $1.80 per year, on all the common units and subordinated units.
Available cash for any quarter will consist generally of all cash on hand at
the end of that quarter, plus working capital borrowings after the end of the
quarter, as adjusted for reserves. Operating surplus generally consists of cash
on hand at closing, cash generated from operations after deducting related
expenditures and other items, plus working capital borrowings after the end of
the quarter, plus $15.0 million. The definitions of available cash and
operating surplus are in the glossary.
The amounts of available cash from operating surplus needed to pay the
minimum quarterly distribution for one quarter and for four quarters on the
common units, the subordinated units, and the general partner interest to be
outstanding immediately after this offering are approximately:
One Four
Quarter Quarters
------- --------
(in thousands)
Common units............... $ 5,613 $22,451
Subordinated units......... 5,613 22,451
2% general partner interest 228 915
------- -------
Total................... $11,454 $45,817
======= =======
Pro forma available cash from operating surplus from prior periods would not
have been sufficient to pay the minimum quarterly distribution on all units.
If we had completed the transactions contemplated in this prospectus on
January 1, 2000, pro forma available cash from operating surplus generated
during 2000 would have been approximately $29.4 million. This amount would have
been sufficient to allow us to pay the full minimum quarterly distribution on
the common units and approximately 28.3% of the minimum quarterly distribution
on the subordinated units. If we had completed the transactions contemplated in
this prospectus on January 1, 2001, pro forma available cash from operating
surplus generated during the six months ended June 30, 2001 would have been
approximately $22.4 million. This amount would have been sufficient to allow us
to pay the full minimum quarterly distribution on the common units and
approximately 95.2% of the minimum quarterly distribution on the subordinated
units.
We derived the amounts of pro forma available cash from operating surplus
shown above from our pro forma financial statements in the manner described in
Appendix D. The pro forma adjustments are based upon currently available
information and specific estimates and assumptions. The pro forma financial
statements do not purport to present our results of operations had the
transactions contemplated in this prospectus actually been completed as of the
dates indicated. In addition, available cash from operating surplus as defined
in the partnership agreement is a cash accounting concept, while our pro forma
financial statements have been prepared on an accrual basis. As a result, you
should only view the amount of pro forma available cash from operating surplus
as a general indication of the amount of available cash from operating surplus
that we might have generated had Sunoco Logistics Partners been formed in
earlier periods. A more complete explanation of the pro forma adjustments can
be found in the Notes to our Unaudited Pro Forma Financial Statements.
We believe we will have sufficient available cash from operating surplus
following the offering to pay the minimum quarterly distribution on all units
through December 31, 2002.
We believe that, following completion of the offering, we will have
sufficient available cash from operating surplus to allow us to make the full
minimum quarterly distribution on all the outstanding units for each quarter
through December 31, 2002. Our belief is based on a number of specific
assumptions, including the assumptions that:
36
. volumes transported on our Eastern Pipeline System in 2002 will increase
by 1.1% over the volumes transported during the twelve months ended June
30, 2001;
. weighted average tariffs for our Eastern Pipeline System will increase by
2.0% in 2002 over the weighted average tariffs for the twelve months ended
June 30, 2001;
. volumes at our Terminal Facilities will increase between 1.0% and 3.0%
over volumes for 2000;
. fees charged at our Terminal Facilities will increase over those charged
in 2001 as provided in our pipelines and terminals storage and throughput
agreement and existing third-party contracts;
. volumes transported on our Western Pipeline System trunk pipelines in 2002
will increase by 0.3% over the volumes transported during the twelve
months ended June 30, 2001;
. weighted average tariffs for our Western Pipeline System trunk pipelines
in 2002 will increase by 1.0% over the weighted average tariffs for the
twelve months ended June 30, 2001;
. volumes for our crude oil acquisition and marketing business will be the
same as those for the twelve months ended June 30, 2001, and margin per
barrel (after operating expenses) for 2002 will decline 20%, compared to
the twelve months ended June 30, 2001;
. our maintenance capital expenditures in 2002 will be $27 million. These
projected maintenance capital outlays are approximately $6.0 million lower
than the average annual outlays for the 1998 to 2000 period. This period
included several one-time projects to upgrade our technology, increase
reliability, and lower our cost structure. We do not believe we will incur
these type of expenditures in 2002;
. general and administrative expenses will increase $1.1 million in 2002
over the twelve months ended June 30, 2001;
. operating expenses in 2002, other than those for our crude oil acquisition
and marketing business that we discuss above, will increase by 2.9% over
the twelve months ended June 30, 2001;
. no material accidents, releases, or similar events will occur; and
. market, regulatory, and overall economic conditions will not change
substantially.
Although we believe our assumptions are reasonable, our assumptions relate
to matters which are not within our control and cannot be predicted with any
degree of certainty. If our assumptions are not realized, the actual available
cash from operating surplus that we generate could be substantially less than
that currently expected and could, therefore, be insufficient to permit us to
make cash distributions at the levels described above. Accordingly, we cannot
assure you that distributions of the minimum quarterly distribution or any
other amounts will be made. We refer you to "Risk Factors--Risks Inherent in
Our Business."
37
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF SUNOCO LOGISTICS
(PREDECESSOR) (PREDECESSOR TO SUNOCO LOGISTICS PARTNERS) AND PRO FORMA
FINANCIAL DATA OF SUNOCO LOGISTICS PARTNERS
The following table shows selected historical financial and operating data
of Sunoco Logistics (Predecessor) and pro forma financial data of Sunoco
Logistics Partners L.P., in each case for the periods and as of the dates
indicated. The selected historical financial data for Sunoco Logistics
(Predecessor) for 1998, 1999 and 2000 are derived from the audited combined
financial statements of Sunoco Logistics (Predecessor). The selected historical
financial data for Sunoco Logistics (Predecessor) for 1996 and 1997, and for
June 30, 2000 and 2001 are derived from the unaudited combined financial
statements of Sunoco Logistics (Predecessor).
The pro forma financial statements of Sunoco Logistics Partners L.P. give
pro forma effect to:
. the contribution of certain assets and liabilities of Sunoco Logistics
(Predecessor) to Sunoco Logistics Partners L.P.;
. the completion of this offering;
. the issuance of the senior notes;
. the establishment of the revolving credit facility; and
. the charging of fees to Sunoco R&M for terminalling and storage services
comparable to those charged in arms-length, third-party transactions.
The selected pro forma financial data presented below for the year ended
December 31, 2000 and as of and for the six months ended June 30, 2001 are
derived from our unaudited pro forma financial statements. The pro forma
balance sheet assumes the offering and related transactions occurred as of June
30, 2001, and the pro forma statements of income assume the offering and
related transactions occurred on January 1, 2000.
For the periods presented, Sunoco R&M was the primary or exclusive user of
our refined product terminals, our Fort Mifflin Terminal Complex, and our
Marcus Hook Tank Farm. The fees we charged Sunoco R&M for these services
allowed us to recover our costs but did not generate any operating income.
Accordingly, EBITDA for those assets was equal to their depreciation and
amortization.
We define EBITDA as operating income plus depreciation and amortization.
EBITDA provides additional information for evaluating our ability to make the
minimum quarterly distribution and is presented solely as a supplemental
measure. You should not consider EBITDA as an alternative to net income, income
before income taxes, cash flows from operations, or any other measure of
financial performance presented in accordance with accounting principles
generally accepted in the United States. Our EBITDA may not be comparable to
EBITDA or similarly titled measures of other entities as other entities may not
calculate EBITDA in the same manner as we do.
Maintenance capital expenditures are capital expenditures made to replace
partially or fully depreciated assets in order to maintain the existing
operating capacity of our assets and to extend their useful lives. Expansion
capital expenditures are capital expenditures made to expand the existing
operating capacity of our assets, whether through construction or acquisition.
We treat repair and maintenance expenditures that do not extend the useful life
of existing assets as operating expenses as incurred. The maintenance capital
expenditures for the periods presented include several one-time projects to
upgrade our technology, increase reliability, and lower our cost structure.
Throughput is the total number of barrels per day transported on a pipeline
system or through a terminal and includes barrels ultimately transported to a
delivery point on another pipeline system.
The following table should be read together with, and is qualified in its
entirety by reference to, the historical and pro forma financial statements and
the accompanying notes included elsewhere in this prospectus. The table should
be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
38
Sunoco Logistics (Predecessor)
Historical
--------------------------------------------------------------------------------------
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------------------------- ----------------------
1996 1997 1998 1999/(1)/ 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per unit and operating data)
Income Statement Data:
Revenues:
Sales and other operating revenue. $1,338,807 $1,356,948 $ 941,944 $1,191,121 $2,155,017 $1,022,728 $1,007,286
Other income/(2)/................. 4,229 3,894 5,022 6,133 5,574 3,290 2,115
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues...................... 1,343,036 1,360,842 946,966 1,197,254 2,160,591 1,026,018 1,009,401
---------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of products sold and
operating expenses............... 1,235,870 1,252,395 830,330 1,083,529 2,045,947 970,206 948,595
Depreciation and amortization..... 28,827 18,194 18,622 19,911 20,654 10,191 11,601
Selling, general and
administrative expenses.......... 28,769 29,811 29,890 27,461 34,683 17,332 17,540
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 1,293,466 1,300,400 878,842 1,130,901 2,101,284 997,729 977,736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income.................... 49,570 60,442 68,124 66,353 59,307 28,289 31,665
Net interest and debt expense....... 7,840 8,675 7,117 6,487 10,304 3,580 5,872
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income tax expense.... 41,730 51,767 61,007 59,866 49,003 24,709 25,793
Income tax expense.................. 15,693 19,494 23,116 22,488 18,483 9,361 9,736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.......................... $ 26,037 $ 32,273 $ 37,891 $ 37,378 $ 30,520 $ 15,348 $ 16,057
========== ========== ========== ========== ========== ========== ==========
Pro forma net income per unit.......
Other Financial Data:
EBITDA.............................. $ 78,397 $ 78,636 $ 86,746 $ 86,264 $ 79,961 $ 38,480 $ 43,266
Explorer Pipeline Company (9.4%
ownership interest):
Equity income..................... $ 4,044 $ 3,881 $ 3,885 $ 4,591 $ 3,766 $ 1,628 $ 1,816
Cash dividends.................... $ 4,095 $ 2,958 $ 4,612 $ 4,730 $ 3,749 $ 1,594 $ 1,862
Net cash provided by operating
activities......................... $ 126,554 $ 36,313 $ 44,950 $ 125,165 $ 79,116 $ 43,557 $ 4,372
Net cash used in investing
activities......................... $ (34,004) $ (36,594) $ (36,933) $ (75,120) $ (77,292) $ (22,357) $ (23,586)
Net cash provided by (used in)
financing activities............... $ (92,550) $ 281 $ (8,017) $ (50,045) $ (1,824) $ (21,200) $ 19,214
Capital expenditures:
Maintenance....................... $ 22,106 $ 26,680 $ 27,461 $ 32,312 $ 39,067 $ 14,837 $ 18,279
Expansion......................... 7,429 8,428 9,486 49,556/(1)/ 18,854 6,552 6,658
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total capital expenditures.......... $ 29,535 $ 35,108 $ 36,947 $ 81,868/(1)/ $ 57,921 $ 21,389 $ 24,937
========== ========== ========== ========== ========== ========== ==========
Operating Data (bpd):
Eastern Pipeline System
throughput/(3)/.................... 466,294 522,170 520,627 542,843 535,510 541,754 562,739
Terminal Facilities throughput...... 1,063,286 1,160,868 1,154,166 1,235,547 1,272,798 1,201,113 1,165,572
Western Pipeline System
throughput......................... 260,570 258,931 253,124 252,098 296,801 288,364 287,116
Crude oil purchases at wellhead..... 148,728 163,736 155,606 145,425 176,964 179,550 174,231
December 31, June 30,
-------------------------------------------------------------- ----------------------
1996 1997 1998 1999/(1)/ 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Balance Sheet Data:
Net properties, plants and
equipment.......................... $ 393,912 $ 412,312 $ 430,848 $ 481,967 $ 518,605 $ 494,133 $ 530,590
Total assets........................ $ 606,931 $ 596,478 $ 528,279 $ 712,149 $ 845,956 $ 780,465 $ 799,925
Total debt, including current
portion and debt due affiliate..... $ 90,000 $ 90,000 $ 90,225 $ 95,287 $ 190,043 $ 140,159 $ 214,923
Net parent investment/partners'
equity............................. $ 170,292 $ 205,604 $ 235,478 $ 223,083 $ 157,023 $ 172,359 $ 167,414
Sunoco Logistics Partners L.P.
Pro Forma
------------------------------
Year Ended Six
December 31, Months Ended
2000 June 30, 2001
------------ -------------
Income Statement Data:
Revenues:
Sales and other operating revenue. $2,162,730 $1,014,253
Other income/(2)/................. 5,574 2,115
---------- ----------
Total revenues...................... 2,168,304 1,016,368
---------- ----------
Costs and expenses:
Cost of products sold and
operating expenses............... 2,045,947 948,595
Depreciation and amortization..... 20,654 11,601
Selling, general and
administrative expenses.......... 34,683 17,540
---------- ----------
Total costs and expenses............ 2,101,284 977,736
---------- ----------
Operating income.................... 67,020 38,632
Net interest and debt expense....... 17,567 8,650
---------- ----------
Income before income tax expense.... 49,453 29,982
Income tax expense.................. -- --
---------- ----------
Net income.......................... $ 49,453 $ 29,982
========== ==========
Pro forma net income per unit....... $ 1.94 $ 1.18
========== ==========
Other Financial Data:
EBITDA.............................. $ 87,674 $ 50,233
Explorer Pipeline Company (9.4%
ownership interest):
Equity income.....................
Cash dividends....................
Net cash provided by operating
activities.........................
Net cash used in investing
activities.........................
Net cash provided by (used in)
financing activities...............
Capital expenditures:
Maintenance.......................
Expansion.........................
Total capital expenditures..........
Operating Data (bpd):
Eastern Pipeline System
throughput/(3)/....................
Terminal Facilities throughput......
Western Pipeline System
throughput.........................
Crude oil purchases at wellhead.....
June 30, 2001
-------------
Balance Sheet Data:
Net properties, plants and
equipment.......................... $ 530,590
Total assets........................ $ 872,593
Total debt, including current
portion and debt due affiliate..... $ 254,923
Net parent investment/partners'
equity............................. $ 325,476
--------
(1)On October 1, 1999, Sunoco Logistics (Predecessor) acquired the crude oil
transportation and marketing operations of Pride Companies, L.P. for $29.6
million in cash and the assumption of $5.3 million of debt. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their fair value. The acquired assets included Pride's 800-mile crude oil
pipeline system, 800,000 barrels of tankage and related assets, and the
right to purchase 35,000 barrels per day of third party lease crude oil. The
results of operations and related operating data relating to the acquired
business have been included in the above table from the date of acquisition.
We include the purchase price of this acquisition in expansion capital
expenditures.
(2)Includes equity income from investment in Explorer.
(3)Excludes amounts attributable to our 9.4% ownership interest in Explorer and
our interrefinery pipelines, as well as our Toledo, Twin Oaks and Linden
transfer pipelines which transport large volumes over short distances and
generate minimal revenues.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Sunoco Logistics (Predecessor) should be read in conjunction with
the historical combined financial statements of Sunoco Logistics (Predecessor)
and the pro forma financial statements of Sunoco Logistics Partners L.P.
included elsewhere in this prospectus. Among other things, those historical and
pro forma financial statements include more detailed information regarding the
basis of presentation for the following information.
Introduction
We are a Delaware limited partnership formed on October 15, 2001 to acquire,
own, and operate refined product pipelines, terminalling and storage assets,
crude oil pipelines, and crude oil acquisition and marketing assets located in
the Northeast and Midwest United States. Most of these assets support Sunoco,
Inc.'s refining and marketing operations, which are conducted by Sunoco R&M.
Overview
General
We conduct business through three segments: our Eastern Pipeline System, our
Terminal Facilities, and our Western Pipeline System. Our Eastern Pipeline
System primarily transports refined products in the Northeast and Midwest
United States largely for three of Sunoco R&M's refineries and transports crude
oil in Ohio and Michigan. This system also includes our interrefinery pipeline
between Sunoco R&M's Marcus Hook and Philadelphia refineries and our 9.4%
ownership interest in Explorer Pipeline Company, the owner of a refined product
pipeline located in the Midwest United States. Our Terminal Facilities business
includes our network of 32 refined product terminals in the Northeast and
Midwest United States that distribute products primarily to Sunoco R&M's retail
outlets, our Nederland marine crude oil terminal on the Texas Gulf Coast, and
an LPG storage facility in the Midwest. Our Terminal Facilities business also
owns and operates refinery assets, including one inland and two marine crude
oil terminals and related pipelines that supply all of the crude oil processed
by Sunoco R&M's Philadelphia refinery and a refined product storage terminal
used by Sunoco R&M's Marcus Hook refinery. Our Western Pipeline System owns and
operates crude oil trunk and gathering pipelines and purchases and markets
crude oil primarily in Oklahoma and Texas for Sunoco R&M's Tulsa, Oklahoma and
Toledo, Ohio refineries and for other customers.
Eastern Pipeline System
We generate revenue by charging shippers tariffs for transporting refined
products and crude oil through our pipelines. The amount of revenue we generate
depends on the level of these tariffs and the throughput in our pipelines. When
transporting barrels, we charge a tariff based on the point of origin and the
ultimate destination, even if the barrel moves through more than one pipeline
segment to reach its destination. For example, on the Philadelphia,
Pennsylvania to Buffalo, New York pipeline segment, we have separate tariffs
depending on whether the ultimate destination from Philadelphia is Rochester,
New York or Buffalo.
The tariffs for our interstate common carrier pipelines are regulated by the
FERC. The rate-making methodology for these pipelines is price indexing. This
methodology provides for increases in tariff rates based upon changes in the
producer price index. Competition, however, may constrain the tariffs we
charge. We also lease to Sunoco R&M, for a fixed amount escalating annually at
1.67%, three pipelines between Sunoco R&M's Marcus Hook and Philadelphia
refineries, as well as a pipeline from our Paulsboro terminal to the
Philadelphia International Airport for the delivery of jet fuel.
The crude oil and refined product throughput in our pipelines is directly
affected by the level of supply and demand for crude oil and refined products
in the markets served directly or indirectly by our pipelines. Demand
40
for gasoline in most markets peaks during the summer driving season, which
extends from April to September, and declines during the fall and winter
months. Demand for heating oil and other distillate fuels tends to peak during
the winter heating season, and declines during the spring and summer months.
The supply of crude oil to our Eastern Pipeline System depends upon the level
of crude oil production in Canada, which has increased in recent years. Demand
for crude oil transported to refineries for processing is driven by refining
margins (the price of refined products compared to the price of crude oil and
refining costs), unscheduled downtime at refineries, and the amount of
turnaround activity, when refiners shut down selected portions of the refinery
for scheduled maintenance.
The operating income generated by our Eastern Pipeline System depends not
only on the volumes transported on the pipelines and the level of the tariff
charged, but also on the fixed costs and, to a much lesser extent, the variable
costs of operating the pipelines. Fixed costs are typically related to
maintenance, insurance, control rooms, telecommunications, pipeline field and
support personnel, and depreciation. Variable costs, such as fuel and power
costs to run pump stations along the pipelines, fluctuate with throughput.
Terminal Facilities
We have historically provided terminalling and storage services for Sunoco
R&M at fees that enabled us to recover our costs but not generate a profit.
Upon the closing of this offering, we will enter into a pipelines and terminals
storage and throughput agreement with Sunoco R&M under which we will charge
Sunoco R&M fees comparable to those charged in arms-length, third-party
transactions. Under this new agreement, Sunoco R&M will pay us a minimum level
of revenues for terminalling refined products and crude oil and agree to
certain minimum throughputs at our Inkster Terminal, Fort Mifflin Terminal
Complex, and Marcus Hook Tank Farm. Please read "--Agreements with Sunoco R&M
and Sunoco, Inc." Future operating income from terminalling and storage
activities will depend on throughput and storage volume and the level of fees
charged for terminalling and storage services, as well as the fixed and
variable costs of operating these facilities.
We generate revenue at our Nederland Terminal by charging storage and
throughput fees for crude oil and other petroleum products. The operating
income generated at this facility depends on storage and throughput volumes and
the level of fees charged for these services, as well as the fixed and variable
costs of operating the terminal.
Terminalling and storage fees are not directly affected by the absolute
price level of crude oil and refined products, although they are affected by
the absolute levels of supply and demand for these products.
Western Pipeline System
The Western Pipeline System consists of our crude oil pipelines and
gathering systems as well as our crude oil acquisition and marketing
operations.
The factors affecting the operating results of our crude oil pipelines and
gathering systems are substantially similar to the factors affecting the
operating results of our pipelines in the Eastern Pipeline System described
above. The operating results of our crude oil acquisition and marketing
operations are dependent on our ability to sell crude oil at a price in excess
of our aggregate cost. We believe gross margin, which is equal to sales and
other operating revenue less cost of products sold and operating expenses, is a
key measure of financial performance for the Western Pipeline System.
Our crude oil acquisition and marketing operations generate substantial
revenues and cost of sales because they reflect the sales price and cost of the
significant volumes of crude oil we buy and sell. However, the absolute price
levels for crude oil normally do not bear a relationship to gross margin,
although these price levels significantly impact revenues and cost of products
sold. As a result, period-to-period variations in revenues and cost of sales
are not generally meaningful in analyzing the variation in gross margin for our
crude oil acquisition and marketing operations.
41
In general, we purchase crude oil at the wellhead from local producers and
in bulk at major pipeline connection and marketing points. We also enter into
transactions with third parties in which we exchange one grade of crude oil for
another grade that more nearly matches our delivery requirement or the
preferences of our customers. Bulk purchases and sales and exchange
transactions are characterized by large volumes and much smaller gross margins
than are sales of crude oil purchased at the wellhead. As we purchase crude
oil, we establish a margin by selling or exchanging the crude oil for physical
delivery of other crude oil to Sunoco R&M and third-party customers, such as
independent refiners or major oil companies, thereby reducing exposure to price
fluctuations. This margin is determined by the difference between the price of
crude oil at the point of purchase and the price of crude oil at the point of
sale, minus the associated costs related to acquisition and transportation.
Changes in the absolute price level for crude oil do not materially impact our
margin, as we attempt to maintain positions that are substantially balanced
between crude oil purchases and sales.
Since we attempt to maintain balanced positions, we are able to minimize
basis risk, which occurs when crude oil is purchased based on a crude oil
specification that is different from the countervailing sales arrangement.
Specification differences include grades or types of crude oil, variability in
lease crude oil barrels produced, individual refinery demand for specific
grades of crude oil, relative market prices for the different grades of crude
oil, customer location, availability of transportation facilities, timing, and
costs (including storage) involved in delivering crude oil to the customer. Our
policy is only to purchase crude oil for which we have a market and to
structure our sales contracts so that crude oil price fluctuations do not
materially affect the gross margin that we receive. We do not acquire and hold
any futures contracts or other derivative products for any purpose.
We operate our crude oil acquisition and marketing activities differently as
market conditions change. During periods when there is a higher demand than
supply of crude oil in the near term, the market is in backwardation, meaning
that the price of crude oil in a given month exceeds the price of crude oil for
delivery in subsequent months. A backwardated market has a positive impact on
marketing margins because crude oil marketers can continue to purchase crude
oil from producers at a fixed premium to posted prices while selling crude oil
at a higher premium to such prices. In backwardated markets, we purchase crude
oil and contract for its sale as soon as possible. When the demand for crude
oil is weak, the market for crude oil is often in contango, meaning that the
price of crude oil in a given month is less than the price of crude oil for
delivery in subsequent months. In a contango market, marketing margins are
adversely impacted as crude oil marketers are unable to capture the premium to
posted prices described above. However, this unfavorable market condition can
be mitigated by storing crude oil because storage owners at major trading
locations can simultaneously purchase production at current prices for storage
and sell at higher prices for future delivery. As a result, in a contango
market we will purchase crude oil and contract for its delivery in future
months to capture the price difference.
Agreements with Sunoco R&M and Sunoco, Inc.
Pipelines and Terminals Storage and Throughput Agreement with Sunoco R&M.
Concurrent with the closing of this offering, we will enter into a pipelines
and terminals storage and throughput agreement with Sunoco R&M. Under this
agreement, Sunoco R&M will pay us a minimum level of revenues for transporting
and terminalling refined products. Sunoco R&M will also agree to minimum
throughputs of refined products and crude oil in our Inkster Terminal, Fort
Mifflin Terminal Complex, and Marcus Hook Tank Farm. Please read "Business--Our
Relationship with Sunoco, Inc.--Pipelines and Terminals Storage and Throughput
Agreement with Sunoco R&M."
Crude Oil Purchase Agreement. Sunoco R&M will purchase from us all of the
crude oil that our crude oil acquisition and marketing operation purchases in
certain areas for one year following this offering.
Omnibus Agreement. Historically, Sunoco, Inc. has allocated a portion of its
general and administrative expenses to its pipeline, terminalling, and storage
operations to cover costs of centralized corporate functions such as legal,
accounting, treasury, engineering, information technology, and insurance. The
allocation was $9.1 million, $9.0 million, and $10.1 million for the years
ended December 31, 1998, 1999, and 2000, respectively, and $5.1 million and
$5.4 million for the first six months of 2000 and 2001, respectively.
42
Under an omnibus agreement with Sunoco, Inc., for three years following this
offering, we will pay Sunoco, Inc. an administrative fee of $8.0 million per
year for the provision by Sunoco, Inc. or its affiliates of various general and
administrative services for our benefit. The $8.0 million fee includes the cost
of administering employee benefit plans, but does not include salaries of
pipeline and terminal personnel or the cost of employee benefits relating to
our employees, such as 401(k), pension, and health insurance benefits. We will
reimburse Sunoco, Inc. and its affiliates for direct expenses they incur on our
behalf (for example, salaries). In addition, we anticipate incurring additional
general and administrative costs for tax return preparation, annual and
quarterly reports to unitholders, investor relations, registrar and transfer
agent fees, and other costs related to maintaining a separate publicly held
entity. We estimate that these incremental costs will be approximately $2.1
million per year, excluding incremental insurance costs, if any. Please see
"Certain Relationships and Related Transactions--Omnibus Agreement."
The omnibus agreement also will require Sunoco R&M to:
. reimburse us for any operating expenses and capital expenditures in excess
of $8.0 million per year in each year from 2002 to 2006 that are made to
comply with the DOT's pipeline integrity management rule, subject to a
maximum aggregate reimbursement of $15.0 million over the five-year
period;
. complete, at its expense, certain tank maintenance and inspection projects
currently in progress or expected to be completed at the Marcus Hook Tank
Farm and the Darby Creek Tank Farm within one year; and
. reimburse us for up to $10.0 million of expenditures required at the
Marcus Hook Tank Farm and the Darby Creek Tank Farm to maintain compliance
with existing industry standards and regulatory requirements, including:
--cathodic protection upgrades at these facilities;
--raising tank farm pipelines above ground level at these facilities; and
--repairing or demolishing two riveted tanks at the Marcus Hook Tank Farm.
The omnibus agreement also provides that Sunoco, Inc. will indemnify us for
certain environmental and toxic tort liabilities. Sunoco, Inc. also will
indemnify us for liabilities, other than environmental and toxic tort
liabilities, that arise out of its and its affiliates' ownership and operation
of the assets contributed to us in connection with this offering. Please read
"--Environmental Matters," "Business--Environmental Regulation" and "Certain
Relationships and Related Transactions--Omnibus Agreement" for a more complete
description of these provisions.
43
Results of Operations
Six Months Ended
Year Ended December 31, June 30,
------------------------------ ---------------------
1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ----------
(in thousands)
Combined Statements of Income
Sales and other operating revenue........... $941,944 $1,191,121 $2,155,017 $1,022,728 $1,007,286
Other income................................ 5,022 6,133 5,574 3,290 2,115
-------- ---------- ---------- ---------- ----------
Total revenues.............................. 946,966 1,197,254 2,160,591 1,026,018 1,009,401
-------- ---------- ---------- ---------- ----------
Cost of products sold and operating expenses 830,330 1,083,529 2,045,947 970,206 948,595
Depreciation and amortization............... 18,622 19,911 20,654 10,191 11,601
Selling, general and administrative expenses 29,890 27,461 34,683 17,332 17,540
-------- ---------- ---------- ---------- ----------
Total costs and expenses.................... 878,842 1,130,901 2,101,284 997,729 977,736
-------- ---------- ---------- ---------- ----------
Operating income............................ 68,124 66,353 59,307 28,289 31,665
Net interest expense........................ 7,117 6,487 10,304 3,580 5,872
-------- ---------- ---------- ---------- ----------
Income before income tax expense............ 61,007 59,866 49,003 24,709 25,793
Income tax expense.......................... 23,116 22,488 18,483 9,361 9,736
-------- ---------- ---------- ---------- ----------
Net income.................................. $ 37,891 $ 37,378 $ 30,520 $ 15,348 $ 16,057
======== ========== ========== ========== ==========
Segment Operating Income:
Eastern Pipeline System
Sales and other operating revenue........... $ 90,652 $ 89,649 $ 88,350 $ 43,649 $ 45,703
Other income................................ 4,449 5,500 4,592 2,407 2,104
-------- ---------- ---------- ---------- ----------
Total revenues.............................. 95,101 95,149 92,942 46,056 47,807
-------- ---------- ---------- ---------- ----------
Cost of products sold and operating expenses 34,150 38,633 41,174 20,553 20,220
Depreciation and amortization............... 7,395 7,929 8,272 4,094 4,789
Selling, general and administrative expenses 11,371 10,086 12,432 6,217 6,404
-------- ---------- ---------- ---------- ----------
Total costs and expenses.................... 52,916 56,648 61,878 30,864 31,413
-------- ---------- ---------- ---------- ----------
Operating income............................ $ 42,185 $ 38,501 $ 31,064 $ 15,192 $ 16,394
======== ========== ========== ========== ==========
Terminal Facilities
Sales and other operating revenue........... $ 63,570 $ 67,495 $ 75,398 $ 35,069 $ 34,131
Other income (loss)......................... 343 356 430 357 (67)
-------- ---------- ---------- ---------- ----------
Total revenues.............................. 63,913 67,851 75,828 35,426 34,064
-------- ---------- ---------- ---------- ----------
Cost of products sold and operating expenses 27,350 33,588 39,390 19,932 17,473
Depreciation and amortization............... 8,118 8,457 8,616 4,242 4,819
Selling, general and administrative expenses 9,649 9,039 10,666 4,974 4,741
-------- ---------- ---------- ---------- ----------
Total costs and expenses.................... 45,117 51,084 58,672 29,148 27,033
-------- ---------- ---------- ---------- ----------
Operating income............................ $ 18,796 $ 16,767 $ 17,156 $ 6,278 $ 7,031
======== ========== ========== ========== ==========
Western Pipeline System
Sales and other operating revenue........... $787,722 $1,033,977 $1,991,269 $ 944,010 $ 927,452
Other income................................ 230 277 552 526 78
-------- ---------- ---------- ---------- ----------
Total revenues.............................. 787,952 1,034,254 1,991,821 944,536 927,530
-------- ---------- ---------- ---------- ----------
Cost of products sold and operating expenses 768,830 1,011,308 1,965,383 929,721 910,902
Depreciation and amortization............... 3,109 3,525 3,766 1,855 1,993
Selling, general and administrative expenses 8,870 8,336 11,585 6,141 6,395
-------- ---------- ---------- ---------- ----------
Total costs and expenses.................... 780,809 1,023,169 1,980,734 937,717 919,290
-------- ---------- ---------- ---------- ----------
Operating income............................ $ 7,143 $ 11,085 $ 11,087 $ 6,819 $ 8,240
======== ========== ========== ========== ==========
44
Operating Highlights
Six Months
Year Ended December 31, Ended June 30,
-------------------------------- ---------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
Eastern Pipeline System/(1)/:
Pipeline throughput (bpd):
Refined products/(2)/....................... 431,989 461,379 444,046 453,913 460,241
Crude oil................................... 88,638 81,464 91,464 87,841 102,498
Total shipments (barrel miles per day)/(3) / 55,081,108 56,136,811 55,061,080 54,606,714 56,827,067
Tariffs per barrel mile(c).................... 0.451 0.438 0.438 0.439 0.444
Terminal Facilities:
Terminal throughput (bpd):
Refined product terminals................... 234,058 251,627 266,212 260,251 279,314
Nederland Terminal.......................... 475,796 544,624 566,941 475,990 428,132
Fort Mifflin Terminal Complex............... 306,181 297,271 306,121 322,765 317,168
Marcus Hook Tank Farm....................... 138,131 142,025 133,524 142,107 140,958
Western Pipeline System:
Crude oil pipeline throughput (bpd)........... 253,124 252,098 296,801 288,364 287,116
Crude oil purchases at wellhead (bpd)......... 155,606 145,425 176,964 179,550 174,231
Gross margin per barrel(c)/(4)/............... 20.4 24.6 23.8 27.2 31.8
--------
(1)Excludes amounts attributable to our 9.4% ownership interest in Explorer.
(2)Excludes Toledo, Twin Oaks, and Linden transfer pipelines that transport
large volumes over short distances and generate minimal revenues.
(3)Represents total average daily pipeline throughput multiplied by the number
of miles of pipeline through which each barrel has been shipped.
(4)Represents total segment sales and other operating revenue minus cost of
products sold and operating expenses divided by crude oil pipeline
throughput.
Six Months Ended June 30, 2001 versus Six Months Ended June 30, 2000
Analysis of Combined Statements of Income
Sales and other operating revenue for the six months ended June 30, 2001
were $1,007.3 million as compared to $1,022.7 million for the same period
during 2000, a decrease of $15.4 million. This decrease was primarily due to
lower crude oil sales resulting from a decline in crude oil prices and volumes
purchased at the wellhead, which was only partially offset by higher bulk
purchases. During the first six months of 2001, the average price of West Texas
Intermediate crude oil, or WTI, at Cushing, Oklahoma, the benchmark crude oil
in the United States, dropped to $28.34 per barrel from $28.68 per barrel.
Other income was $2.1 million in the first six months of 2001 versus $3.3
million in the first six months of 2000. This $1.2 million decrease was
primarily due to lower dividend income from an insurance consortium in which
Sunoco, Inc. participates and the absence of our allocated portion of a gain
recognized in 2000 attributable to the receipt of stock by Sunoco, Inc. in
connection with an insurance company demutualization. We allocated these
insurance-related gains to each of our business segments. Partially offsetting
these lower gains was a $0.2 million increase in Explorer equity income to $1.8
million in the first half of 2001 from $1.6 million in the same period in 2000.
Cash dividends paid to us by Explorer approximate the equity income earned by
us from that investment. The increase in Explorer equity income was due to the
absence of the adverse impact of a refined products spill that occurred in
March 2000.
Total cost of products sold and operating expenses decreased $21.6 million
to $948.6 million in the first half of 2001 from $970.2 million in the same
period in 2000. This decrease was primarily due to the decline in crude oil
sales described above.
45
Approximately 90% of our sales and other operating revenue and our cost of
products sold and operating expenses are attributable to our crude oil
acquisition and marketing activities in our Western Pipeline System. However,
the critical profitability factor for these activities is the gross margin, not
the absolute level of revenues and expenses.
Depreciation and amortization was $11.6 million during the first half of
2001 compared to $10.2 million in the first half of 2000. This $1.4 million
increase was primarily due to recent capital expenditures.
Selling, general and administrative expenses were $17.5 million during the
first half of 2001 compared to $17.3 million in the first six months of 2000.
Selling, general and administrative expenses include amounts allocated to us by
Sunoco, Inc. to cover the costs of centralized corporate functions incurred on
our behalf. These costs totaled $5.4 million and $5.1 million for the first six
months of 2001 and 2000, respectively.
Net interest expense was $5.9 million for the first half of 2001 versus $3.6
million for the first half of 2000. This $2.3 million increase was primarily
due to higher average outstanding borrowings from an affiliate, partially
offset by higher capitalized interest. Income tax expense increased as a result
of the increase in pretax earnings. The effective tax rate for both six-month
periods was 38%.
Analysis of Segment Operating Income
Eastern Pipeline System. Operating income in our Eastern Pipeline System was
$16.4 million in the first six months of 2001 compared to $15.2 million for the
first six months of 2000. This $1.2 million increase was due to a $2.0 million
increase in sales and other operating revenue, partially offset by a $0.5
million increase in total costs and expenses and a $0.3 million decrease in
other income. Total pipeline throughput in the first half of 2001 increased
20,985 bpd, or 4%, compared to the same period in 2000, while shipments in
barrel miles also increased 4%. The average tariff per barrel mile increased to
0.444c per barrel in the first six months of 2001 from 0.439c per barrel in the
same period in 2000.
The $2.0 million increase in sales and other operating revenue was primarily
due to increased tariff revenue on our 123-mile Marysville to Toledo crude oil
pipeline and the 39-mile Twin Oaks to Montello refined product pipeline.
Volumes transported on the Marysville to Toledo pipeline increased 14,700 bpd
due to an increase in Canadian crude oil purchases by Sunoco R&M and third
parties as a result of favorable pricing for these crude oils versus
alternatives. Volumes transported on the Twin Oaks to Montello pipeline
increased 2,800 bpd due to increased shipments of reformulated gasoline
blendstocks from Sunoco R&M's Marcus Hook refinery. Also contributing to the
increase in sales and other operating revenue were higher throughput of refined
products by Sunoco R&M at our terminals due to higher demand for gasoline and
heating oil and other distillate products and higher throughput of chemical
products from Sun Petrochemicals Company (a joint venture of Sunoco R&M and
Suncor Energy) at our Vanport, Pennsylvania terminal.
The $0.5 million increase in total costs and expenses was due to increases
in depreciation and amortization of $0.7 million due to recent capital
expenditures and selling, general and administrative expenses of $0.2 million,
partially offset by a decrease in operating expenses of $0.4 million. The
reduction in operating expenses was largely attributable to remediation of a
pipeline leak which occurred in January 2000, partially offset by higher
contract services for line testing and other maintenance projects.
The $0.3 million decrease in other income was primarily due to lower
allocated insurance-related gains, partially offset by the $0.2 million
increase in equity income from Explorer discussed above.
Terminal Facilities. Operating income in our Terminal Facilities was $7.0
million in the first six months of 2001 compared to $6.3 million in the first
half of 2000. This $0.7 million increase was primarily due to storage revenue
attributable to a new 660,000 barrel tank placed into service at our Nederland
Terminal in
46
September 2000. Partially offsetting this positive factor was a decrease in
low-tariff throughput volumes at the Nederland Terminal.
We have historically provided terminalling and storage services for Sunoco
R&M at fees that enabled us to recover our costs, but not to generate a profit.
Accordingly, a $2.7 million decrease in these costs and expenses during the
first six months of 2001 resulted in a corresponding decrease in revenues. The
primary cause for these declines was the absence of $4.3 million in charges
recognized in the first half of 2000 in connection with remediation activities
related to a February 2000 crude oil spill at one of our crude oil transfer
lines to the Darby Creek Tank Farm. Partially offsetting this factor were
higher depreciation and amortization due to recent capital expenditures, higher
environmental remediation expenses, and other general cost increases.
Throughput volumes at our refined product terminals increased 7% in the
first six months of 2001 as compared to the same period in 2000 primarily due
to stronger heating oil and other distillate fuel demand resulting from colder
weather. The average throughput of our refinery assets decreased 1% in the
first half of 2001.
Western Pipeline System. Operating income in our Western Pipeline System was
$8.2 million in the first six months of 2001 compared to $6.8 million in the
first six months of 2000. This $1.4 million increase was primarily due to a
$2.3 million increase in gross margins, partially offset by a $0.4 million
decrease in other income and a $0.3 million increase in selling, general and
administrative expenses. Gross margin per barrel of pipeline throughput
increased by 4.6c in the first half of 2001 versus the same period in 2000.
The $2.3 million increase in gross margins was due to an increase in crude
oil acquisition and marketing margins, partially offset by a decrease in
margins from crude oil pipeline operations. The higher crude oil acquisition
and marketing margins reflect a decline in competition for crude oil as a
result of higher domestic crude oil production. Under the terms of a supply
agreement with Sunoco R&M, we were able to capture the benefits of this
favorable market environment. Gross margin also benefited from lower volumetric
losses in our crude oil trucking operations. Partially offsetting these
positive factors were higher wages paid to our truck drivers. The decline in
crude oil pipeline margins was due in part to lower revenues resulting from
reduced shipments of foreign crude oil to Sunoco R&M's Toledo refinery through
our East Texas pipeline, which delivers crude oil to the Mid-Valley pipeline at
Longview, Texas. Operating problems in several Midwest refineries during the
first half of 2001 resulted in lower demand for crude oil generally, which
enabled the Midwest refiners to satisfy their reduced crude oil requirements
with less expensive domestic crude oil. Revenues also declined due to lower
gathering volumes. Partially offsetting these negative factors was a decline in
pipeline operating expenses due to the favorable impact of changes in
volumetric gains and losses on our pipelines, partially offset by higher
electricity prices.
The $0.4 million decrease in other income was due to the lower allocated
insurance-related gains.
Year Ended December 31, 2000 versus Year Ended December 31, 1999
Analysis of Combined Statements of Income
Sales and other operating revenues for 2000 were $2,155.0 million compared
to $1,191.1 million for 1999, an increase of $963.9 million. This increase was
primarily due to higher crude oil prices and volumes. The average price of WTI
at Cushing increased to $30.20 per barrel in 2000 from $19.24 per barrel in
1999. Sales volumes increased 11.7 million barrels, or 22%, during 2000 in
large part due to the full-year impact of the acquisition of the crude oil
transportation and marketing assets of Pride Companies, L.P., or the West Texas
assets, in October 1999.
Other income was $5.6 million in 2000 versus $6.1 million in 1999. This $0.5
million decrease was due to an $0.8 million decline in Explorer equity income
to $3.8 million in 2000 from $4.6 million in 1999, due to costs
47
associated with a refined products spill that occurred in March 2000, partially
offset by a $0.4 million allocated gain on the receipt of stock by Sunoco, Inc.
in connection with an insurance company demutualization.
Total cost of products sold and operating expenses increased $962.4 million
to $2,045.9 million in 2000 from $1,083.5 million in 1999. This increase was
primarily due to higher crude oil acquisition prices and purchase volumes.
Depreciation and amortization was $20.7 million in 2000 versus $19.9 million
in 1999. This $0.8 million increase was primarily due to recent capital
expenditures and the acquisition of the West Texas assets in October 1999.
Selling, general and administrative expenses were $34.7 million in 2000
versus $27.5 million in 1999. This $7.2 million increase was largely due to
higher allocated costs attributable to Sunoco, Inc.'s employee incentive
compensation and benefit plans. Historically, allocated incentive compensation
costs were determined based upon Sunoco, Inc.'s overall financial performance.
Future incentive compensation will depend upon our performance. Higher salaries
and wages also contributed to the increase. Selling, general and administrative
expenses include amounts allocated to us by Sunoco, Inc., which were $10.1
million and $9.0 million in 2000 and 1999, respectively.
Net interest expense was $10.3 million in 2000 versus $6.5 million in 1999.
This $3.8 million increase was primarily due to higher average outstanding
borrowings from an affiliate, partially offset by higher capitalized interest.
Income tax expense decreased as a result of the decline in pretax earnings. The
effective tax rate in both 2000 and 1999 was 38%.
Analysis of Segment Operating Income
Eastern Pipeline System. Operating income in our Eastern Pipeline System was
$31.1 million in 2000 compared to $38.5 million in 1999. This $7.4 million
decrease was due to a $1.3 million decrease in sales and other operating
revenue, a $5.2 million increase in total costs and expenses, and a $0.9
million decrease in other income. Refined product pipeline throughput in 2000
decreased 17,333 bpd, or 4%, compared to 1999, and shipments in barrel miles
decreased 2% in the current period. The average tariff per barrel mile was
unchanged at 0.438c per barrel.
The $1.3 million decrease in sales and other operating revenue was due in
part to lower tariff revenue from most of our refined product pipelines
resulting from decreased production at Sunoco R&M's refineries related to
scheduled refinery turnarounds. Also contributing to the lower sales and other
operating revenue were decreased sales of heating oil and other distillate
fuels by Sunoco R&M at our terminals due to unseasonably warm weather and
reduced shipments on our Twin Oaks to Newark pipeline due to higher prices of
refined products, particularly gasoline, in the Philadelphia area than in the
New York Harbor market. Partially offsetting these negative factors were
increased tariff revenues resulting from increased throughput on our
Philadelphia to Linden pipeline due to the expansion of the Linden junction and
a new connection to a third-party terminal in Syracuse, New York, which allowed
Sunoco R&M to shift volumes from competitors' pipelines to our Montello to
Syracuse pipeline. Revenues also increased on our Marysville to Toledo crude
oil pipeline due to increased processing of Canadian crude oil at Sunoco R&M's
Toledo refinery.
The $5.2 million increase in total costs and expenses was due to a $2.5
million increase in operating expenses, a $2.3 million increase in selling,
general and administrative expenses, and a $0.4 million increase in
depreciation and amortization. The increase in operating expenses was primarily
due to the adverse impact of changes in volumetric gains and losses on our
pipelines and higher environmental remediation costs largely due to a pipeline
leak that occurred in January 2000. The increase in selling, general and
administrative expenses was primarily due to higher employee incentive
compensation payments and benefit costs and administrative costs allocated to
us from Sunoco, Inc.
48
The $0.9 million decrease in other income was primarily due to the $0.8
million decline in equity income from Explorer discussed above.
Terminal Facilities. Operating income in our Terminal Facilities was $17.2
million in 2000 compared to $16.8 million in 1999. This $0.4 million increase
was primarily due to higher revenues at our Nederland Terminal primarily as a
result of a 5% increase in terminal throughput. The higher throughput was
largely due to U.S. Government sales of crude oil from the Strategic Petroleum
Reserve, which was partially offset by decreased throughput of lubricant
products by Sunoco R&M. Also partially offsetting the higher revenues was an
increase in operating and administrative expenses largely as a result of higher
employee incentive compensation payments and benefit costs and higher utility
costs attributable to increases in electricity and fuel prices.
Total costs and corresponding revenues attributable to our refined product
terminals and refinery assets increased $7.0 million as a result of the $6.0
million of charges recognized in 2000 in connection with the remediation
activities related to the spill in February 2000 at one of our crude oil
transfer lines to the Darby Creek Tank Farm. Higher employee incentive
compensation and benefit costs also contributed to the increase.
Throughput volumes at our refined product terminals increased 5% in 2000
primarily due to higher Sunoco R&M retail gasoline sales volumes, particularly
in the Midwest. The average throughput of our refinery assets was essentially
unchanged in 2000 as increased crude oil throughput at Sunoco R&M's
Philadelphia refinery offset declines related to scheduled turnaround activity
at Sunoco R&M's Marcus Hook refinery.
Western Pipeline System. Operating income in our Western Pipeline System was
$11.1 million for both 2000 and 1999. A $3.2 million increase in gross margin
was offset by higher selling, general and administrative expenses. Revenues and
expenses in the Western Pipeline System increased significantly during 2000 in
large part due to the acquisition of the West Texas assets in October 1999,
which contributed $4.1 million and $1.3 million to operating income (including
gross margin of $4.9 million and $1.5 million) in 2000 and 1999, respectively.
Excluding the West Texas assets, gross margin decreased $0.2 million in 2000
primarily due to a decrease in margins from crude oil acquisition and marketing
activities, essentially offset by an increase in margins from crude oil
pipeline operations.
Crude oil acquisition and marketing margins declined primarily due to
increased competitive pressure in 2000 for purchasing crude oil as demand from
Midwest refineries increased and domestic production declined. We were unable
to pass all of the increase in crude oil acquisition costs on to Sunoco R&M
under the terms of a supply agreement. Also contributing to the margin decline
was the adverse impact of volumetric gains and losses in our crude oil trucking
operations. Partially offsetting these negative factors was the absence of
unfavorable litigation settlements recognized in 1999.
The higher crude oil pipeline margin reflects higher gross margin from the
10-inch East Texas pipeline reactivated in July 1999 to transport foreign crude
oil for Sunoco R&M's Toledo refinery and additional deliveries on the pipeline
to Sunoco R&M's and Sinclair Oil's Tulsa refineries. Partially offsetting these
positive factors were increases in salaries and wages, utility costs, and
rental expense.
The $3.2 million increase in selling, general and administrative expenses
was primarily due to the higher employee incentive compensation and benefit
costs and higher administrative costs allocated to us by Sunoco, Inc.
49
Year Ended December 31, 1999 versus Year Ended December 31, 1998
Analysis of Combined Statements of Income
Sales and other operating revenue for 1999 were $1,191.1 million as compared
to $941.9 million for 1998, an increase of $249.2 million. This increase was
primarily due to higher crude oil prices, partially offset by a decrease in
volumes. The average price of WTI at Cushing increased to $19.24 per barrel in
1999 from $14.43 per barrel in 1998. Sales volumes decreased 3.7 million
barrels, or 7%, due to lower domestic crude oil production and lower demand
from Midwest refineries due to the poor refining margin environment, partially
offset by increased volumes attributable to the West Texas assets acquired in
October 1999.
Other income was $6.1 million in 1999 versus $5.0 million in 1998. This $1.1
million increase was largely due to a $0.7 million increase in Explorer equity
income to $4.6 million in 1999 from $3.9 million in 1998, due to a 47,000 bpd,
or 10%, increase in throughput. Our allocated portion of higher dividend income
from an insurance consortium in which Sunoco, Inc. participates also
contributed to the increase in other income.
Total cost of products sold and operating expenses increased $253.2 million
to $1,083.5 million in 1999 from $830.3 million in 1998. The increase was
primarily due to higher crude oil acquisition prices, partially offset by a
decrease in purchase volumes in the Western Pipeline System.
Depreciation and amortization was $19.9 million in 1999 versus $18.6 million
in 1998. This $1.3 million increase was due to recent capital expenditures and
the acquisition of the West Texas assets in October 1999.
Selling, general and administrative expenses were $27.5 million in 1999
versus $29.9 million in 1998. This $2.4 million decrease was primarily due to
reductions in allocated employee incentive compensation and benefit costs,
partially offset by higher salaries and wages and general cost increases.
Selling, general and administrative expenses include amounts allocated to us by
Sunoco, Inc., which totaled $9.0 million and $9.1 million in 1999 and 1998,
respectively.
Net interest expense was $6.5 million in 1999 versus $7.1 million in 1998.
This $0.6 million decrease was primarily due to lower average interest rates
and higher capitalized interest. Income tax expense decreased as a result of
the decline in pretax earnings. The effective tax rate in both 1999 and 1998
was 38%.
Analysis of Segment Operating Income
Eastern Pipeline System. Operating income in our Eastern Pipeline System was
$38.5 million in 1999 compared to $42.2 million in 1998. This $3.7 million
decrease was due to a $1.0 million decline in sales and other operating revenue
and a $3.7 million increase in total costs and expenses, partially offset by a
$1.0 million increase in other income. Refined product pipeline throughput in
1999 increased 29,390 bpd, or 7%, compared to 1998, while shipments in barrel
miles increased 2%. The average tariff per barrel mile decreased to 0.438c per
barrel in 1999 from 0.451c per barrel in 1998.
The $1.0 million decrease in sales and other operating revenue was due in
part to lower revenues on our Marysville to Toledo crude oil pipeline caused by
a reduction in third-party throughput due to increased competition from a new
Lakehead pipeline that began operating in April 1999. This decrease in revenues
was partially offset by higher tariff revenues from increased shipments to
Sunoco R&M's Toledo refinery as the price of Canadian crude oil dropped
relative to alternative grades. Also contributing to the decrease in sales and
other operating revenue were lower tariff revenues due to the closing of Sunoco
R&M's Syracuse terminal, which resulted in Sunoco R&M shipping on a
competitor's pipeline to a third-party terminal to supply its retail outlets
and wholesale customers in the Syracuse area. Partially offsetting these
negative factors were increased shipments over our pipelines from Sunoco R&M's
Philadelphia refinery as Sunoco R&M increased production in response to
weather-related increases in heating oil and other distillate fuel demand in
its Eastern marketing area.
50
The $3.7 million increase in total costs and expenses was due to $4.5
million higher operating expenses and $0.5 million higher depreciation and
amortization, partially offset by $1.3 million lower selling, general and
administrative expenses. The higher operating expenses largely resulted from
the adverse impact of changes in volumetric gains and losses on our pipelines,
higher environmental remediation costs and litigation settlements, and
increased costs for maintenance and line testing. The decrease in selling,
general and administrative expenses was primarily due to the reductions in
allocated employee incentive compensation and benefit costs, partially offset
by higher salaries and wages and other general cost increases.
The $1.0 million increase in other income was primarily due to the $0.7
million increase in equity income from Explorer discussed above.
Terminal Facilities. Operating income in our Terminal Facilities was $16.8
million in 1999 versus $18.8 million in 1998. This $2.0 million decrease was
primarily due to increased operating costs at the Nederland Terminal due to
higher utility costs, which were partially offset by higher revenues at our
Fort Mifflin Terminal resulting from increased storage services provided to
Sunoco R&M's Philadelphia refinery. Revenues at Nederland were flat because
increased crude oil throughput was essentially offset by lower storage volumes.
Total costs and corresponding revenues attributable to our refined product
terminals and refinery assets increased $2.8 million in 1999 in part due to
higher environmental remediation expense largely as a result of the absence of
a $1.2 million favorable adjustment to refined product terminal environmental
remediation liabilities that was recognized in 1998.
Throughput at our refined product terminals increased 7% in 1999 primarily
due to increased Sunoco R&M volumes resulting from retail marketing growth and
a shift by Sunoco R&M to our terminals from those of our competitors. The
average throughput of our refinery assets decreased 1% in 1999.
Western Pipeline System. Operating income in our Western Pipeline System was
$11.1 million in 1999 compared to $7.1 million in 1998. This $4.0 million
increase was due to a $3.8 million increase in gross margin and a $0.6 million
decrease in selling, general and administrative expenses, partially offset by a
$0.4 million increase in depreciation and amortization. Revenues and expenses
in the Western Pipeline System increased significantly during 1999 primarily
due to higher crude oil prices at the wellhead, partially offset by a decrease
in volumes despite additional volumes from the acquisition of the West Texas
assets in October 1999. Excluding the West Texas assets, gross margin increased
$2.3 million.
This $2.3 million increase in gross margin (excluding the West Texas assets)
was primarily due to an increase in margin from crude oil acquisition and
marketing activities, partially offset by a decrease in margin from crude oil
pipelines. Crude oil acquisition and marketing margins improved in 1999 as the
crude oil market structure switched from contango in 1998 to backwardation in
1999. This resulted in increased margins since our customers pay higher prices
for crude oil during backwardated periods, while increased crude oil
acquisition costs paid to our suppliers generally lag market prices. The lower
crude oil pipeline margins were primarily due to lower throughput on our
gathering and trunk lines resulting from production declines attributable to
low crude oil prices, partially offset by the reactivation in July 1999 of the
East Texas 10-inch pipeline to transport foreign crude oil for Sunoco R&M's
Toledo refinery. The $0.6 million decrease in selling, general and
administrative expenses was primarily due to reductions in employee incentive
compensation and benefit costs.
51
Liquidity and Capital Resources
Cash Flows and Capital Expenditures
Net cash provided by operating activities for the six months ended June 30,
2001 was $4.4 million compared to $43.6 million for the six months ended June
30, 2000. This $39.2 million decrease in net cash provided by operating
activities was primarily due to a $48.6 million increase in working capital
uses pertaining to operating activities, partially offset by an increase in net
income, depreciation and amortization, and deferred income taxes. For the full
year 2000, our net cash provided by operating activities was $79.1 million
compared to $125.2 million in 1999 and $45.0 million in 1998. The $46.1 million
decrease in net cash provided by operating activities in 2000 was largely due
to a $35.5 million decrease in working capital sources pertaining to operating
activities and lower net income. The $80.2 million increase in net cash
provided by operating activities in 1999 was largely due to an $82.5 million
increase in working capital sources pertaining to operating activities,
partially offset by lower deferred income taxes. The fluctuations in working
capital during the 1998-2001 period were primarily due to the impact of crude
oil price changes on receivables and payables from the purchase and sale of
crude oil in the Western Pipeline System.
Net cash used in investing activities for the years ended December 31, 2000,
1999, and 1998 was $77.3 million, $75.1 million and $36.9 million,
respectively. Capital expenditures were $57.9 million in 2000, $47.0 million in
1999 and $36.9 million in 1998. The other significant investing transactions in
the three-year period were a loan to an affiliate of $20.0 million in 2000 and
the acquisition of the West Texas assets in 1999 for $29.6 million.
Net cash used in financing activities for the years ended December 31, 2000,
1999 and 1998 was $1.8 million, $50.0 million and $8.0 million, respectively.
Distributions to Sunoco, Inc. and its affiliates were $96.6 million, $49.8
million and $8.0 million in 2000, 1999, and 1998, respectively. Net proceeds of
borrowings from an affiliate were $95.0 million in 2000.
Capital Requirements
The pipeline, terminalling, and crude oil storage operations are capital
intensive, requiring significant investment to upgrade or enhance existing
operations and to meet environmental and operational regulations. Our capital
requirements have consisted, and are expected to continue to consist, primarily
of:
. maintenance capital expenditures, such as those required to maintain
equipment reliability, tankage, and pipeline integrity and safety, and to
address environmental regulations; and
. expansion capital expenditures to acquire complementary assets to grow our
business and to expand existing facilities, such as projects that increase
storage or throughput volumes.
The following table summarizes maintenance and expansion capital
expenditures:
Year Ended Six Months Ended
December 31, June 30,
---------------------------- ----------------
1998 1999 2000 2000 2001
------- ------- ------- ------- -------
(in thousands)
Maintenance $27,461 $32,312 $39,067 $14,837 $18,279
Expansion.. 9,486 49,556/(1)/ 18,854 6,552 6,658
------- ------- ------- ------- -------
Total... $36,947 $81,868/(1)/ $57,921 $21,389 $24,937
======= ======= ======= ======= =======
--------
(1)Includes purchase of the West Texas assets for $29.6 million in cash and the
assumption of $5.3 million of long-term debt.
We estimate that our annual maintenance capital expenditures will be $27.0
million in 2002. These projected maintenance capital outlays are approximately
$6.0 million lower than the average annual outlays for
52
the 1998 to 2000 period. This period included several one-time projects to
upgrade our technology, increase reliability, and lower our cost structure. We
do not believe we will incur these types of expenditures in 2002.
In the area of technology, we completed numerous automation projects,
upgraded our metering systems, enhanced various software packages, and replaced
pipeline control systems. In addition, we completed numerous asset upgrade
projects, including relocating pipelines at the Philadelphia International
Airport due to runway and terminal reconfigurations, rebuilds on two pump
stations, and repair and upgrades on the crude oil transfer lines between Hog
Island Wharf and the Darby Creek Tank Farm. The crude oil transfer lines, which
were historically a part of Sunoco R&M's refining business, did not meet
pipeline standards and could not be internally inspected or maintained by
conventional leak detection devices prior to completion of this project.
Under the terms of the omnibus agreement, Sunoco R&M will reimburse us for
operating expenses and capital expenditures in excess of $8.0 million per year
(up to an aggregate maximum of $15.0 million over a five-year period) incurred
to comply with the DOT's pipeline integrity management rule. In addition,
Sunoco R&M will, at its expense, complete for the Darby Creek and Marcus Hook
Tank Farms certain tank maintenance and inspection projects now in progress or
expected to be completed within one year from the closing of the offering.
Sunoco R&M will also reimburse us up to $10.0 million in connection with
expenditures required at the Darby Creek and Marcus Hook Tank Farms to maintain
compliance with existing industry standards and regulatory requirements.
Our typical growth projects consist of new tankage, increased throughput on
our existing pipelines, and new connections for deliveries to customers. We
anticipate pursuing similar growth projects and acquisitions.
We expect to fund our capital expenditures, including any acquisitions, from
cash provided by operations and, to the extent necessary, from the proceeds of:
. borrowing under the revolving credit facility discussed below and other
borrowings; and
. issuance of additional common units.
Credit Facility
In connection with the closing of this offering, our operating partnership
will enter into a three-year $150.0 million revolving credit facility. The
credit facility will be used for ongoing working capital needs, letters of
credit, and general partnership purposes, including future acquisitions. We do
not anticipate that we will borrow any of the amounts available under our
credit facility at the closing of the offering.
Our obligations under the credit facility will be unsecured. Indebtedness
under the credit facility will rank equally with all the outstanding unsecured
and unsubordinated debt of our operating partnership. We may prepay all loans
at any time without penalty.
Indebtedness under the credit facility will bear interest at the prime rate
or LIBOR plus an applicable margin. We will incur an annual fee based on the
amount of the revolving credit facility whether we borrow under the facility or
not.
In addition, the credit facility will contain various covenants limiting our
operating partnership's ability to:
. incur indebtedness;
. grant liens;
. make distributions; or
. engage in transactions with affiliates.
53
The credit facility also contains covenants requiring us to maintain
specified ratios of:
. EBITDA (as defined in the credit facility), pro forma for any asset
acquisitions, to interest expense; and
. total debt to EBITDA, pro forma for any asset acquisitions.
Senior Notes
In connection with this offering, our operating partnership will issue
approximately $250 million of senior notes, the net proceeds of which will be
distributed to Sunoco, Inc.
Our obligation under the senior notes will be unsecured. Indebtedness under
the senior notes will rank equally with the credit facility and all the
outstanding unsecured and unsubordinated debt of our operating partnership. The
senior notes will have a maturity date of ten years from the date of this
offering and will bear interest at a fixed interest rate payable semi-annually.
There will be no amortization of the senior notes prior to maturity and the
senior notes cannot be prepaid without penalty.
In addition, the senior notes will contain various covenants limiting our
operating partnership's ability to incur indebtedness or grant liens.
Environmental Matters
Operation of our pipelines, terminals, and associated facilities are subject
to stringent and complex federal, state, and local laws and regulations
governing the discharge of materials into the environment or otherwise relating
to protection of the environment. As a result of our compliance with these laws
and regulations, we have accrued liabilities for estimated site restoration
costs to be incurred in the future at our facilities and properties, including
liabilities for environmental remediation obligations. Under our accounting
policies, we record liabilities when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. For a discussion of the accrued liabilities and
charges against income related to these activities, see Note 7 to the
historical combined financial statements.
Under the terms of our omnibus agreement with Sunoco, Inc., and in
connection with the contribution of our assets by affiliates of Sunoco, Inc.,
Sunoco, Inc. has agreed to indemnify us for 30 years from environmental and
toxic tort liabilities related to the assets contributed to us that arise from
the operation of such assets prior to closing. Sunoco, Inc. will be obligated
to indemnify us for 100% of all losses asserted within the first 21 years of
closing. Sunoco, Inc.'s share of liability for claims asserted thereafter will
decrease by 10% a year. For example, for a claim asserted during the
twenty-third year after closing, Sunoco, Inc. would be required to indemnify us
for 80% of our loss. There is no monetary cap on the amount of indemnity
coverage provided by Sunoco, Inc. Any remediation liabilities not covered by
this indemnity will be our responsibility. Total future costs for environmental
remediation activities will depend upon, among other things, the identification
of any additional sites, the determination of the extent of the contamination
at each site, the timing and nature of required remedial actions, the
technology available and needed to meet the various existing legal
requirements, the nature and extent of future environmental laws, inflation
rates, and the determination of our liability at multi-party sites, if any, in
light of the number, participation levels, and financial viability of other
parties.
The use of MTBE continues to be the focus of federal and state government
attention due to public health and environmental issues that have been raised
by the use of MTBE in gasoline, and specifically the discovery of MTBE in water
supplies. MTBE is the primary oxygenate used by Sunoco R&M and other petroleum
refiners to meet reformulated gasoline requirements under the Clean Air Act.
Many states, including New York and Connecticut, have banned or restricted the
use of MTBE in gasoline commencing as early as 2003 in response to concerns
about MTBE's adverse impact on ground or surface water. Other states are
considering bans or restrictions on MTBE or opting out of the EPA's
reformulated gasoline program, each of which events would reduce the use of
MTBE. Any ban or restriction on the use of MTBE may lead to the greater use of
ethanol. Unlike MTBE, which can be blended in gasoline at the refinery, ethanol
is blended at the terminal and is not transported by our pipelines. While many
of our refined product terminals currently blend ethanol, any revenues we would
receive for blending ethanol might not offset the loss of revenues we would
suffer from the reduced volumes we transport on our Eastern refined product
pipelines.
54
Impact of Inflation
Although the impact of inflation has slowed in recent years, it is still a
factor in the United States economy and may increase the cost to acquire or
replace property, plant, and equipment and may increase the costs of labor and
supplies. To the extent permitted by competition, regulation, and existing
agreements, Sunoco Logistics (Predecessor) has and we will continue to pass
along increased costs to customers in the form of higher fees.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued, and
in June 2000, it was amended by Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (collectively, "new derivative accounting"). The new derivative
accounting requires recognition of all derivative contracts in the balance
sheet at their fair value. If the derivative contracts qualify for hedge
accounting, depending on their nature, changes in their fair values are either
offset in net income against the changes in the fair values of the items being
hedged or reflected initially as a separate component of the net parent
investment and subsequently recognized in the net income when the hedged items
are recognized in net income. The ineffective portions of changes in the fair
values of derivative contracts that qualify for hedge accounting as well as
changes in fair value of all other derivatives are immediately recognized in
net income. The new derivative accounting was adopted effective January 1,
2001. There was no impact on net income or net parent investment for the six
months ended June 30, 2001.
In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142") was issued. Sunoco Logistics
(Predecessor) will adopt SFAS No. 142 effective January 1, 2002 when adoption
is mandatory. SFAS No. 142 will require the testing of goodwill and indefinite-
lived intangible assets for impairment rather than amortizing them. We are
currently assessing the impact of adopting SFAS No. 142 on our combined
financial statements. The current level of annual amortization of goodwill and
indefinite-lived intangible assets, which will be eliminated upon the adoption
of SFAS No. 142, is approximately $0.5 million.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued. This
statement significantly changes the method of accruing for costs associated
with the retirement of fixed assets which an entity is legally obligated to
incur. We will evaluate the impact and timing of implementing SFAS No. 143.
Implementation of this standard is required no later than January 1, 2003.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") was issued. Sunoco Logistics (Predecessor) will adopt SFAS No. 144
effective January 1, 2002 when adoption is mandatory. Among other things, SFAS
No. 144 significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. This statement supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
provisions of Accounting Principles Board Opinion 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" that
relate to reporting the effects of a disposal of a segment of a business. We
are currently assessing the impact of adopting SFAS No. 144 on our combined
financial statements.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including volatility in crude oil
commodity prices and interest rates. To manage such exposure, we monitor our
inventory levels and our expectations of future commodity prices and interest
rates when making decisions with respect to risk management. We do not enter
into derivative transactions that would expose us to price risk.
55
BUSINESS
Overview
We are a Delaware limited partnership recently formed by Sunoco, Inc. to
acquire, own, and operate a geographically diverse and complementary group of
refined product and crude oil pipelines and terminal facilities. We have an
experienced management team dedicated to a growth strategy, and we intend to
acquire additional assets in the future. Our business comprises three segments:
. Eastern Pipeline System:
--1,895 miles of refined product pipelines, including a one-third interest
in an 80-mile refined product pipeline, which primarily serve Sunoco
R&M's refining and marketing operations in the Northeast and Midwest
United States, and 58 miles of interrefinery pipelines between Sunoco
R&M's Philadelphia and Marcus Hook, Pennsylvania refineries;
--a 123-mile wholly owned crude oil pipeline; and
--a 9.4% interest in the Explorer Pipeline Company, which owns a
1,413-mile refined product pipeline.
. Terminal Facilities:
--32 inland refined product terminals with an aggregate capacity of 4.8
million barrels, which primarily serve our Eastern Pipeline System;
--a 2.0 million barrel refined product terminal serving Sunoco R&M's
Marcus Hook refinery;
--an 11.2 million barrel marine crude oil terminal on the Texas Gulf
Coast;
--one inland and two marine crude oil terminals, with a combined capacity
of 3.0 million barrels, and related pipelines, all of which serve Sunoco
R&M's Philadelphia refinery; and
--a 1.0 million barrel LPG terminal near Detroit, Michigan.
. Western Pipeline System:
--1,801 miles of crude oil trunk pipelines and 1,880 miles of crude oil
gathering lines principally in Oklahoma and Texas that supply the trunk
pipelines;
--163 crude oil transport trucks; and
--122 crude oil truck unloading facilities.
We transport, terminal, and store refined products and crude oil in 11
states. We generate revenues by charging tariffs for transporting refined
products and crude oil through our pipelines and by charging fees for storing
refined products, crude oil, and other hydrocarbons in, and for providing other
services at, our terminals. We also generate revenues by purchasing domestic
crude oil and selling it to Sunoco R&M and other customers. Generally, as we
purchase crude oil, we simultaneously enter into corresponding sale
transactions involving physical deliveries of crude oil, which enables us to
secure a profit on the transaction at the time of purchase and establish a
substantially balanced position, thereby minimizing exposure to price
volatility after the initial purchase. Our practice is not to enter into
futures contracts.
For the year ended December 31, 2000, on a pro forma basis, we had revenues
of $2,168.3 million, EBITDA of $87.7 million, and net income of $49.5 million .
For the six months ended June 30, 2001, on a pro forma basis, we had revenues
of $1,016.4 million, EBITDA of $50.2 million, and net income of $30.0 million.
56
Our Relationship with Sunoco, Inc.
We have a strong and mutually beneficial relationship with Sunoco, Inc.
Through its subsidiaries, Sunoco, Inc. is a leading independent United States
refiner and marketer of petroleum products; a growing manufacturer of
petrochemicals; and a technologically advantaged manufacturer of
metallurgical-grade coke for use in the steel industry.
Sunoco R&M is the largest refiner in the Northeast United States and owns
and operates the following four refineries, which have a combined crude oil
processing capacity of 730,000 bpd:
. the Philadelphia, Pennsylvania refinery, which can process 330,000 bpd of
crude oil, making it the largest refinery in the Northeast United States;
. the Marcus Hook, Pennsylvania refinery near Philadelphia, which can
process 175,000 bpd of crude oil;
. the Toledo, Ohio refinery, which can process 140,000 bpd of crude oil; and
. the Tulsa, Oklahoma refinery, which can process 85,000 bpd of crude oil.
Sunoco R&M markets refined products in 21 states on the East Coast and in
the Midwest through approximately 4,100 branded retail gasoline outlets,
selling nearly four billion gallons of gasoline per year. In addition, Sunoco
R&M sells refined products through wholesale and spot market sales and
exchanges refined product with other refiner-marketers to enhance distribution
efficiency.
The majority of our operations are strategically located within Sunoco R&M's
refining and marketing supply chain, but we do not own or operate any refining
or marketing assets. Sunoco R&M relies on us to provide transportation and
terminalling services that support its refining and marketing operations. For
the twelve months ended June 30, 2001, Sunoco R&M accounted for approximately
77% of the pro forma revenues of our Eastern Pipeline System, 63% of the pro
forma revenues of our Terminal Facilities, and 59% of the pro forma revenues of
our Western Pipeline System. We expect to continue to derive a substantial
portion of our revenues from Sunoco R&M for the foreseeable future.
The following table sets forth the crude oil refining capacity of each of
Sunoco R&M's refineries, and, for the twelve months ended June 30, 2001, the
percentages of crude oil and feedstocks, and refined products that we
transported or terminalled for Sunoco R&M:
Crude Oil / Feedstocks Refined Products
---------------------- ---------------------
Transported Percent of Transported Percent of
Crude Oil or Terminalled Sunoco or Terminalled Sunoco
Refining by Our R&M by Our R&M
Sunoco R&M Refinery Capacity Assets Volumes Assets Volumes
------------------- --------- -------------- ---------- -------------- ----------
(bpd)
Philadelphia, PA.. 330,000 Yes 100% Yes 66%
Marcus Hook, PA... 175,000 No 0% Yes 91%
Toledo, OH........ 140,000 Yes 55% Yes 99%
Tulsa, OK......... 85,000 Yes 100% Yes/(1)/ 22%/(1)/
------- ---- ---
Total.......... 730,000 67%/(2)/ 74%/(1)/
--------
(1)The only refined product that we transport from the Tulsa refinery is lube
extracted feedstock. Excluding this refinery, we transported or terminalled
80% of the total refined products from Sunoco R&M's refineries.
(2)Excluding the Marcus Hook refinery, we transported 88% of the total crude
oil and feedstocks to Sunoco R&M's refineries.
57
Pipelines and Terminals Storage and Throughput Agreement with Sunoco R&M
Under a pipelines and terminals storage and throughput agreement, Sunoco R&M
will:
. transport on our refined product pipelines or throughput in our refined
product terminals an amount of refined products that will produce at least
$75.0 million of revenue in the first year, escalated at 1.67% per year
for the next four years. In addition, Sunoco R&M will transport on our
refined product pipelines an amount of refined products that will produce
at least $54.3 million of revenue in the sixth year and at least $55.2
million of revenue in the seventh year. Sunoco R&M will pay the published
tariffs on the pipelines and contractually agreed fees at the terminals.
On a pro forma basis, we would have received $82.8 million in revenue from
Sunoco R&M for the use of these pipelines and terminals during 2000;
. deliver at least 130,000 bpd of refined product through our Marcus Hook
Tank Farm for five years. In the first year, we will receive a fee of
$0.1627 per barrel for the first 130,000 bpd and $0.0813 per barrel for
volumes in excess of 130,000 bpd. These fees will escalate at the rate of
1.67% per year. During the year ended December 31, 2000, throughput at the
Marcus Hook Tank Farm averaged 133,524 bpd;
. pay us $5.1 million in the first year to lease the 58 miles of
interrefinery pipelines between Sunoco R&M's Philadelphia and Marcus Hook
refineries, escalating at the rate of 1.67% per year, for a term of 20
years. On a pro forma basis for 2000, Sunoco R&M would have paid us $4.9
million for the use of these assets;
. pay for LPG storage capacity of 975,734 barrels at our Inkster Terminal
for seven years, which represents all of our LPG storage capacity at this
facility. In the first year, we will receive a fee of $2.04 per barrel,
escalating at the rate of 1.875% per year. For the last five years, Sunoco
R&M has used the full capacity of our Inkster Terminal;
. deliver at least 290,000 bpd of refined product or crude oil through our
Fort Mifflin Terminal Complex for seven years. In the first year, we will
receive a fee of $0.1627 per barrel for the first 180,000 bpd and $0.0813
per barrel for volumes in excess of 180,000 bpd. These fees will escalate
at the rate of 1.67% per year. Throughput at the Fort Mifflin Terminal
Complex averaged 306,121 bpd during 2000; and
. transport or have us transport on Sunoco R&M's behalf an aggregate of at
least 140,000 bpd of crude oil on our Marysville to Toledo, Nederland to
Longview, Cushing to Tulsa, Barnsdall to Tulsa, and Bad Creek to Tulsa
crude oil pipelines at the published tariffs for a term of seven years.
During 2000, we and Sunoco R&M transported 165,657 bpd on these pipelines.
If Sunoco R&M fails to use our pipelines and terminals as set forth above, it
will be required to pay us in cash the amount of any shortfall. This agreement
does not cover our crude oil acquisition and marketing business and the
Nederland Terminal.
Sunoco R&M's obligations under this agreement may be permanently reduced or
suspended if:
. Sunoco R&M (1) shuts down or reconfigures one of its refineries and (2)
reasonably believes in good faith that such event will jeopardize its
ability to satisfy its minimum revenue or throughput obligations. Sunoco
R&M will be required to give at least six months' advance notice of any
shut down or reconfiguration. Sunoco R&M will propose new minimum
obligations that proportionally reduce the affected obligations. If we do
not agree with this reduction, any change in Sunoco R&M's obligations will
be determined by binding arbitration;
. Sunoco R&M (1) is prohibited from using MTBE in the gasoline it produces
and (2) reasonably believes in good faith that such event will jeopardize
its ability to satisfy its minimum revenue or throughput obligations.
Sunoco R&M will propose new minimum obligations that proportionally reduce
its affected obligations. If we do not agree with this reduction, any
change in Sunoco R&M's obligations will be determined by binding
arbitration.
Furthermore, if new laws or regulations are enacted that require us to make
substantial and unanticipated capital expenditures at the Terminal Facilities,
we will have the right to impose a monthly surcharge on Sunoco R&M for the use
of the Terminal Facilities to cover the cost of complying with these laws or
regulations, after
58
we have made efforts to mitigate their effect. We and Sunoco R&M will negotiate
in good faith to agree on the level of the monthly surcharge. If we are unable
to agree, then we may terminate the agreement with respect to the affected
asset.
Sunoco R&M's obligations under this agreement may be temporarily suspended
during the occurrence of an event that is outside the control of the parties
that renders performance impossible with respect to an asset for at least 30
days. The length of the contract for such an asset would be extended by the
duration of the temporary suspension.
Sunoco R&M has agreed not to challenge, or to cause others to challenge or
assist others in challenging, our tariff rates for seven years. This agreement
does not prevent other current or future shippers from challenging our tariff
rates. At the end of seven years, Sunoco R&M will be free to challenge, or to
cause others to challenge or assist others in challenging, our tariff rates.
Sunoco, Inc. has advised us that it currently does not intend to shut down
or dispose one or more of its Philadelphia, Marcus Hook, Toledo, or Tulsa
refineries, or cause any reconfigurations or other changes that would have a
material adverse effect on these refineries' operations or Sunoco R&M's
commitments under our pipelines and terminals storage and throughput agreement.
Sunoco R&M also will purchase from us all of the crude oil that our crude
oil acquisition and marketing operation purchases in certain areas for one year
following the offering. During 2000, Sunoco R&M purchased 79,346 bpd of crude
oil from us in these areas.
Sunoco, Inc. Owns and Controls Our General Partner
We are a key element of Sunoco, Inc.'s business strategy, and Sunoco, Inc.
intends to use our partnership as the primary means of growing its
transportation and terminalling business. Sunoco, Inc. will retain a
significant interest in us through its indirect ownership of a 78.4% limited
partner interest and the 2% general partner interest. While our relationship
with Sunoco, Inc. and its subsidiaries offers us many benefits, it is also a
potential source of conflicts of interest. Please read "Conflicts of Interest
and Fiduciary Responsibilities."
Business Strategies
Our primary business strategies are to:
Generate stable cash flows. In our Eastern Pipeline System, Terminal
Facilities, and Western Pipeline System, our customers pay us fees based on the
volume of refined product or crude oil shipped in our pipelines under published
tariffs or stored in, or distributed from, our terminals. Our Western Pipeline
System also generates revenues by purchasing domestic crude oil and selling it
to Sunoco R&M and other third parties. We have little direct exposure to
commodity price fluctuations in our Eastern Pipeline System and Terminal
Facilities because we do not own any of the refined products or crude oil that
we transport or store in these operations. In the Western Pipeline System, we
mitigate our commodity price exposure when we purchase lease crude oil by
simultaneously entering into sale transactions that are backed by physical
delivery. The geographic and business diversity of our assets also contributes
to the stability of our cash flows. Our current intention is to focus on
businesses and assets that generate stable cash flows.
Increase our pipeline and terminal throughput. When necessary to meet
increases in demand for refined products, we have increased and will increase
capacity in our existing pipelines and terminals. We increase capacity in our
pipelines by adding or expanding pump stations or increasing the diameter of
the pipelines. In addition to these measures, over the last two years we have
added 1.2 million barrels of new storage capacity at our Nederland Terminal,
bringing our total storage capacity at Nederland to 11.2 million barrels. We
anticipate adding an additional 1.3 million barrels of storage capacity at our
Nederland Terminal over the next three years to meet growing demand.
59
Pursue strategic and accretive acquisitions that complement our existing
asset base. Sunoco, Inc. has a long history of successfully pursuing and
consummating energy acquisitions and intends to use us in the future as a
growth vehicle for its transportation and terminalling business. We expect to
pursue strategic acquisitions both independently and jointly with Sunoco, Inc.
that will enable us to grow our distributable cash flow and enhance our service
capabilities to Sunoco, Inc. and third parties. For example, we may acquire
pipeline or terminal assets associated with any refineries acquired by Sunoco,
Inc. or its affiliates.
Continue to improve our operating efficiency and to reduce our costs. We are
focused on monitoring and controlling our cost structure. We have been able to
implement cost saving initiatives such as energy conservation, bulk purchasing
and automation of delivery facilities and pump stations. We intend to continue
to make investments to improve our operations and pursue cost saving
initiatives.
Competitive Strengths
We believe we are well-positioned to execute our business strategies
successfully using the following competitive strengths:
We have a unique strategic relationship with Sunoco R&M's refining and
marketing operations. Our refined product and crude oil pipelines and terminals
are directly linked to Sunoco R&M's refineries and afford Sunoco R&M with the
most cost-effective means to access crude oil and distribute refined products.
For the twelve months ended June 30, 2001, the three Sunoco R&M refineries that
we supply with crude oil and feedstocks received 88% of their crude oil from
us, and Sunoco R&M transported through our refined product pipelines or across
our Terminal Facilities approximately 74% of the refined products from its four
refineries. Sunoco R&M has agreed to continue using our assets to transport,
terminal and store refined products and crude oil. See "--Our Relationship with
Sunoco, Inc." Furthermore, Sunoco, Inc. has a significant economic incentive to
see that our pipeline and terminal assets are managed in the best interests of
our unitholders because, as the ultimate owner of our general partner, it will
indirectly own a 2% general partner interest and a 78.4% limited partner
interest in us. We may construct, own and operate assets that will be used in
connection with Sunoco, Inc.'s business and pursue acquisitions jointly with
Sunoco, Inc. and its subsidiaries.
Our refined product pipelines and our terminals are strategically located in
areas with high demand. We have a strong presence in the Northeast and Midwest
United States, areas where demand for refined products exceeds the supply from
local refineries. According to the Energy Information Administration, or EIA,
refined products transported into these regions from other regions, including
foreign countries, have increased 1.7% annually from 1995 to 2000. As a result,
our transportation and distribution assets in these regions operate at high
utilization rates providing us a base of stable cash flows. In the Gulf Coast
region, our Nederland Terminal and related pipeline network are strategically
located to supply crude oil to local refiners, as well as to major connecting
pipelines that supply crude oil to the Midwest United States. The Nederland
Terminal is well-positioned to capitalize on the trend of increasing foreign
crude oil imports as inland domestic crude oil production continues to decline.
According to the EIA, imports of crude oil through the Gulf Coast increased
4.8% annually from 1995 to 2000. In addition, our Marysville, Michigan to
Toledo, Ohio crude oil pipeline is one of only three pipelines able to deliver
Canadian crude oil to refineries in Michigan and Northern Ohio. We believe this
pipeline positions us to participate in the growing market for Canadian crude
oil, including synthetic crude oil, imported to these refineries. The Canadian
National Energy Board forecasts that synthetic crude oil production will nearly
triple in the next 15 years, from 372,400 bpd to 922,700 bpd.
We have a complementary portfolio of assets that are both geographically and
operationally diverse. Our assets include our refined product pipelines and
terminals in the Northeast and Midwest United States and a crude oil terminal
and pipelines in Texas, Oklahoma, and the Gulf Coast area. This diversity
contributes to our stable cash flows. Our Eastern Pipeline System, Terminal
Facilities, and Western Pipeline System represented 42%, 41%, and 17% of pro
forma EBITDA for the twelve months ended June 30, 2001, respectively.
60
We believe our pipelines and terminals are efficient and well-maintained. We
have recently made significant investments to upgrade our asset base. Our
refined product pipelines and many of our terminals are automated to ensure
product quality for our customers. In addition, substantially all of our
pipelines subject to regulation by the U.S. Department of Transportation are
monitored by computerized control centers that continuously track real-time
operational data, including refined products and crude oil quantities, flow
rates and pressures. We utilize a state-of-the-art internal inspection program
and other procedures to monitor the integrity of our pipelines.
Our executive officers and directors have extensive experience and include
some of the most senior officers of Sunoco, Inc. Our management team has
operated our assets for the past ten years. As a result, we believe we have the
expertise to execute our business strategies. Our general partner intends to
adopt compensation and incentive plans to closely align the interests of our
executive officers with the interests of our common unitholders.
We have the financial flexibility to pursue expansion and acquisition
opportunities. We expect to have $150 million available under our credit
facility at closing. In addition, immediately following this offering, we
anticipate having $250 million of senior notes outstanding. We believe that our
ability to access the public and private capital markets and to issue
additional units provides us with significant resources to finance strategic
expansion and acquisition opportunities.
Eastern Pipeline System
Refined Product Pipelines
Our refined product pipelines transport refined products from Sunoco R&M's
Philadelphia, Marcus Hook, and Toledo refineries, as well as from third
parties, to markets in New York, New Jersey, Pennsylvania, Ohio, and Michigan.
The refined products transported in these pipelines include conventional
gasoline, federal specification reformulated gasoline, other oxygenated
gasolines, low-octane gasoline for ethanol blending, distillates that include
high- and low-sulfur diesel and jet fuel, LPGs (such as propane, butane,
isobutane, and a butane/butylene mixture), refining feedstocks, and other
hydrocarbons (such as toluene and xylene). For the twelve months ended June 30,
2001, gasoline and distillates represented approximately 62% and 34%,
respectively, of the total throughput in our refined product pipelines. Our
refined product pipelines were originally constructed between 1931 and 1967.
Our pipelines are regularly maintained, and we believe they are in good repair.
The FERC regulates the rates for interstate shipments in our Eastern Pipeline
System, and the Pennsylvania Public Utility Commission regulates the rates for
intrastate shipments in Pennsylvania.
[Graphic B -- Map depicting our Eastern Pipeline System, including the
location of Sunoco R&M refineries.]
The following table details the average aggregate daily number of barrels of
refined products transported on our refined product pipelines in each of the
periods presented. The information in the following table does not include
interrefinery pipelines and transfer pipelines that transport large volumes
over short distances and generate minimal revenues.
Year Ended December 31, Twelve Months
--------------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- -------------
Refined products transported (bpd) 386,186 433,222 431,989 461,379 444,046 447,156
The following table sets forth, for each of our refined product pipeline
systems, the origin and destination, length, diameter, capacity, throughput,
capacity utilization, revenues, and Sunoco R&M throughput for the period
presented. Except as shown below, we own 100% of our refined product pipeline
systems. Throughput is the
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total number of barrels per day transported on a pipeline system or through a
terminal and includes barrels ultimately transported to a delivery point on
another pipeline system. Revenues reflect tariff revenues generated by barrels
shipped to a delivery point on a pipeline system and do not include revenues
from tariffs generated by barrels shipped on but delivered to a delivery point
on another of our pipeline systems. For example, we would include in our
throughput calculation, 10,000 bpd of refined products transported on our
Philadelphia, Pennsylvania to Montello, Pennsylvania pipeline system even
though that refined product is ultimately delivered to a point on our Montello
to Buffalo, New York pipeline system, where it would also be counted in the
calculation of throughput. All of the revenues from transporting the 10,000 bpd
of refined products would be recognized only by the Montello to Buffalo
pipeline system.
Twelve Months Ended June 30, 2001
------------------------------------------------------
Miles of Capacity Sunoco R&M
Origin and Destination Pipeline Diameter Capacity Throughput Utilization Revenues Throughput/(1)/
---------------------- -------- -------- -------- ---------- ----------- -------------- --------------
(inches) (bpd) (bpd) (in thousands)
Philadelphia, PA to Montello, PA....... 210 12,8 164,400 135,653 83% $ 7,982 74%
Montello, PA to Buffalo, NY............ 300 14,8 62,400 59,316 95% 18,137 45%
Montello, PA to Kingston, PA........... 84 6 8,800 7,665 87% 1,570 85%
Montello, PA to Syracuse, NY........... 230 8,6 14,100 12,667 90% 4,734 100%
Montello, PA to Pittsburgh, PA......... 221 8 35,000 33,706 96% 6,766 100%
Toledo, OH to Blawnox, PA.............. 260 10,8 32,900 18,835 57% 3,753 95%
Toledo, OH to Sarnia, Canada........... 241 8,6 66,600 43,062 65% 7,975 56%
Twin Oaks, PA to Newark, NJ............ 118 14 140,000 100,131 72% 16,856 86%
Philadelphia, PA to Linden, NJ/(2)/.... 88 16,12 60,000 36,121 60% 4,269 100%
----- ------- ------- ---- ------- ----
Subtotal.............................. 1,752 N.M. 584,200 447,156 77% 72,042 77%
Interrefinery Pipelines................ 58 8,6,4 62,400 40,815 65% 5,584/(3)/ 100%
Transfer Pipelines/(4)/................ 85 N.M. N.M. 131,800 N.M. 2,392 22%
----- ----- ------- ------- ---- ------- ----
Total................................. 1,895 N.M. N.M. 619,771 N.M. $80,018 67%
===== ===== ======= ======= ==== ======= ====
--------
N.M.Not meaningful.
(1)Percentage of throughput attributable to Sunoco R&M.
(2)We own a one-third interest in 80 miles of this pipeline. Numerical
information, other than mileage, reflects only our ownership.
(3)We lease these pipelines to Sunoco R&M. The revenues represent lease income
from Sunoco R&M.
(4)Consists of our Toledo, Twin Oaks, and Linden transfer pipelines.
For the twelve months ended June 30, 2001, Sunoco R&M accounted for an
aggregate of 67% of the refined product volumes transported on our Eastern
Pipeline System. For the same period, these pipelines transported 76% of the
refined products transported by pipeline from the three Sunoco R&M refineries
served by our Eastern Pipeline System. The following text provides additional
information about each refined product pipeline system.
Philadelphia, Pennsylvania to Montello, Pennsylvania. The Philadelphia to
Montello refined product pipeline system is the principal means by which Sunoco
R&M transports refined products from its Philadelphia and Marcus Hook
refineries into our Montello terminal for further distribution on our Eastern
Pipeline System. The Philadelphia to Montello pipeline system consists of four
segments:
. a 12-inch, 60-mile segment from the Point Breeze pump station at Sunoco
R&M's Philadelphia refinery to Montello;
. an 8-inch, 60-mile segment from the Point Breeze pump station to Montello;
. an 8-inch, 39-mile segment from our Twin Oaks pump station, which is
adjacent to the Marcus Hook Tank Farm near Sunoco R&M's Marcus Hook
refinery, to the 8-inch Point Breeze to Montello pipeline segment; and
. an 8-inch, 51-mile segment from Boot, Pennsylvania to Fullerton,
Pennsylvania.
62
[Graphic C--Diagram depicting location of our Montello terminal relative to
Sunoco R&M's refineries, and the Philadelphia to Montello pipeline system.]
The 12-inch Point Breeze pump station to Montello segment also serves our
Exton, Pennsylvania terminal. The 8-inch Point Breeze pump station to Montello
segment connects with the 8-inch Boot to Fullerton segment at the Boot pump
station and continues to Montello, with connections to a Phillips pipeline in
Swarthmore, Pennsylvania and our terminal in Exton along its route. The 8-inch
segment from the Twin Oaks pump station to the Point Breeze to Montello
pipeline segment serves our terminal at Malvern, Pennsylvania and our storage
facility at Icedale, Pennsylvania. The 8-inch Boot to Fullerton segment
originates at the Boot pump station and terminates at our Fullerton terminal
and Gulf Oil's Fullerton terminal. This segment also serves terminals operated
by Pipeline Petroleum Corp. and Farm & Home and delivers to Buckeye's Buckeye
pipeline in Macungie, Pennsylvania.
Sunoco R&M accounted for 74% of volumes transported on this pipeline system
for the twelve months ended June 30, 2001. Other shippers on this system
include ExxonMobil, Gulf Oil, Major Oil, Delphi Petroleum, CITGO, El Paso,
Griffith Oil, NOCO Energy, Pickelner, and TransMontaigne. Phillips' Trainer,
Pennsylvania refinery and Motiva's Delaware City, Delaware refinery can access
the system at the Twin Oaks pump station. Products can also enter the system
from ST Services' terminal in Philadelphia and from Valero's Paulsboro, New
Jersey refinery via ExxonMobil's Malvern terminal. Refined products from
Buckeye's Laurel pipeline can enter this system at Montello.
Montello, Pennsylvania to Buffalo, New York. The Montello to Buffalo refined
product pipeline system consists of the following segments:
. a 14-inch, 80-mile segment and an 8-inch, 3-mile segment from Montello to
Williamsport, Pennsylvania; and
. an 8-inch, 217-mile segment from Williamsport to Buffalo, including an
8-inch, 19-mile spur from Caledonia Junction, New York to the Rochester,
New York terminals.
The Montello to Williamsport segment makes deliveries to Petroleum Products
Corp., our Northumberland, Pennsylvania terminal, and to Sunoco R&M, Farm &
Home, Pickelner, and Gulf Oil terminals in the Williamsport area. The
Williamsport to Buffalo segment makes deliveries to the Rochester Gas &
Electric terminal in Big Flats, New York. At Caledonia Junction, the spur runs
to our Rochester terminal, as well as to terminals operated by ExxonMobil,
Buckeye, Alaskan Oil, and Rochester Gas & Electric. In the Buffalo area, the
pipeline serves our terminal and those of United Refining and NOCO Energy.
Sunoco R&M accounted for approximately 45% of the volumes transported on
this pipeline system for the twelve months ended June 30, 2001. In addition to
Sunoco R&M and the other companies who are served by this pipeline system, we
also transport refined products for CITGO, BP, Phillips, El Paso, and Motiva.
We also receive refined products for shipment into the Buffalo market through
our interconnection with Buckeye's Buckeye pipeline at Caledonia Junction.
Montello, Pennsylvania to Kingston, Pennsylvania. The Montello to Kingston
refined product pipeline system consists of an 84-mile, 6-inch pipeline serving
our terminal in Kingston, the Lehigh Oil & Gas terminal in Barnesville,
Pennsylvania and the Travel Center of America terminal in Beach Haven,
Pennsylvania. In addition to Sunoco R&M, which accounted for 85% of the volumes
transported on this system for the twelve months ended June 30, 2001, we also
transport product for Griffith Oil and TransMontaigne.
Montello, Pennsylvania to Syracuse, New York. The Montello to Syracuse
refined product pipeline system consists of 15 miles of 8-inch pipeline and 215
miles of 6-inch pipeline. This pipeline system serves our
63
terminals in Tamaqua, Pennsylvania and Binghamton, New York, and terminates at
a Hess/ExxonMobil terminal in Syracuse, New York. Sunoco R&M is the only
shipper on this pipeline system.
Montello, Pennsylvania to Pittsburgh, Pennsylvania. The Montello to
Pittsburgh refined product pipeline system consists of a 221-mile, 8-inch
pipeline supplied by our Philadelphia to Montello pipeline system and Buckeye's
Laurel pipeline at Delmont, Pennsylvania. The pipeline system serves our
terminals located in Mechanicsburg, Altoona, Delmont, Blawnox, and Pittsburgh,
Pennsylvania. This pipeline system is connected to our Toledo, Ohio to Blawnox
pipeline system, through which we can supply our Pittsburgh, Blawnox, Delmont,
and Altoona terminals with refined product from Sunoco R&M's Toledo refinery.
Sunoco R&M is the only shipper on this pipeline system.
Toledo, Ohio to Blawnox, Pennsylvania. The Toledo to Blawnox refined product
pipeline system consists of 115 miles of 10-inch pipeline and 145 miles of
8-inch pipeline. This pipeline system transports refined products and
petrochemicals from Sunoco R&M's Toledo refinery, as well as petrochemicals
from Sarnia, Canada, to our terminals in Akron and Youngstown, Ohio and Vanport
and Blawnox, Pennsylvania. The pipeline system also makes deliveries to the
Kinder Morgan Indianola, Pennsylvania facility and accesses the Inland Pipeline
system owned by Sunoco R&M, BP, Unocal, and Equilon. Sunoco R&M accounted for
95% of the volumes transported on this pipeline system for the twelve months
ended June 30, 2001.
Toledo, Ohio to Sarnia, Canada. The Toledo to Sarnia refined product
pipeline system consists of three segments totaling 241 miles of 6-inch and
8-inch pipelines originating at Sunoco R&M's Toledo refinery and terminating at
three separate points. The system includes one 6-inch and two 8-inch pipelines
running approximately 50 miles between Toledo and our Inkster Terminal near
Detroit, Michigan. At Inkster, the 6-inch pipeline continues 11 miles to River
Rouge, Michigan, and one of the 8-inch pipelines continues 80 miles to Sarnia.
Deliveries into and out of Toledo originate from Sunoco R&M's Toledo
refinery, BP's Toledo refinery, Buckeye's Buckeye pipeline, and Marathon
Ashland Petroleum's Toledo terminal. The Toledo to River Rouge segment serves
the Atlas, Buckeye, and Marathon Ashland Petroleum terminals in Taylor,
Michigan and our Inkster Terminal and River Rouge terminal. Product terminals
in the Detroit area served by the Toledo to Sarnia segment include those of BP,
Marathon Ashland Petroleum, and RKA. The Toledo to Sarnia segment serves our
Inkster Terminal and the Consumers Power Marysville, Michigan underground
storage facilities and has delivery and origin capabilities at Sarnia that
include the Suncor, BP, Royal Dutch/Shell, and Novacor refineries. Each section
of this system is bi-directional and can ship refined products or LPG.
Sunoco R&M accounted for 56% of the volume on this system for the twelve
months ended June 30, 2001. Other shippers on this system include Suncor,
CITGO, Marathon Ashland Petroleum, Northwest Airlines, TransMontaigne, Foster,
BP, and Royal Dutch/Shell.
Twin Oaks, Pennsylvania to Newark, New Jersey. The Twin Oaks to Newark
refined product pipeline system consists of a 111-mile, 14-inch pipeline
originating at the Twin Oaks pump station, adjacent to our Marcus Hook Tank
Farm, and terminating in Newark and Linden, New Jersey. Motiva's Delaware City
refinery, Phillips' Trainer refinery, and Sunoco R&M's Marcus Hook refinery can
access this pipeline system at its origin. Deliveries are made to our Willow
Grove, Pennsylvania and Piscataway and Newark, New Jersey terminals, as well as
into the Linden area via a 7-mile, 12-inch spur that serves terminals owned by
Kaneb, Kinder Morgan, ExxonMobil, Phillips, and Buckeye. Our Linden transfer
facility allows transfers between these third-party terminals while we make
main-line deliveries. In Newark, the pipeline system serves terminals owned by
Lukoil and Motiva. We interconnect with Buckeye's Laurel pipeline at the Twin
Oaks pump station using a 2-mile, 16-inch spur. Shippers on this pipeline
include Sunoco R&M, which accounted for 86% of volumes transported for the
twelve months ended June 30, 2001, Motiva, Phillips, ExxonMobil, Kaneb, and
Kinder Morgan.
Philadelphia, Pennsylvania to Linden, New Jersey. The Philadelphia to Linden
refined product pipeline system consists of an 80-mile, 16-inch segment called
the Harbor pipeline, and an 8-mile, 12-inch segment. We
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own 100% of the 12-inch segment, and we operate the 16-inch segment, which is
owned jointly, in equal percentages, by El Paso, Phillips, and us. Each owner
of the 16-inch segment has a right to 60,000 bpd of capacity. The pipeline
system is connected at its origin to the El Paso refinery in Eagle Point, New
Jersey, the Phillips tank farm in Woodbury, New Jersey, the Gulf Oil terminal
in Woodbury, and Sunoco R&M's Philadelphia refinery. Sunoco R&M can also
deliver product to the Gulf Oil terminal while other parties are shipping
product to New York. Deliveries at Linden are made to a Phillips terminal, a
Gulf Oil terminal, CITGO terminals, and Buckeye's and El Paso's pipelines. This
pipeline system is also connected and makes deliveries into our Twin Oaks,
Pennsylvania to Newark pipeline, allowing us to transport refined product to
our Piscataway and Newark, New Jersey terminals. Sunoco R&M accounted for all
of our allocated share of the volumes transported on the 16-inch segment for
the twelve months ended June 30, 2001 and for all of the volumes transported on
the 12-inch segment for the same period.
Interrefinery Pipelines. We also own and lease to Sunoco R&M for a fixed
amount three bi-directional 18-mile pipelines. One pipeline transfers jet fuel
from Sunoco R&M's Philadelphia and Marcus Hook refineries to the Philadelphia
International Airport. A second pipeline transfers LPGs to and from Sunoco
R&M's Philadelphia refinery and Marcus Hook storage facility. The third
pipeline transfers gasoline blending components and intermediate feedstocks
between Sunoco R&M's Marcus Hook and Philadelphia refineries. The third
pipeline is used to optimize refinery operations, such as gasoline blending and
unit turnaround scheduling.
[Graphic D - Diagram depicting our interrefinery pipelines.]
Crude Oil Pipeline
We own and operate a 123-mile, 16-inch crude oil pipeline that runs from
Marysville, Michigan to Toledo, Ohio. It has a capacity of 140,000 bpd. This
pipeline receives crude oil from the Lakehead Pipeline system for delivery to
Sunoco R&M and BP refineries located in Toledo, Ohio and to Marathon Ashland
Petroleum's Samaria, Michigan tank farm, which supplies its refinery in
Detroit, Michigan. Marysville is also a truck injection point for local
production. Sunoco R&M is the major shipper on the pipeline, accounting for 79%
of the volumes transported for the twelve months ended June 30, 2001. Other
shippers include BP and Marathon Ashland Petroleum. The pipeline was built in
1967, and its tariffs are regulated by the FERC. This pipeline is regularly
maintained, and we believe that it is in good repair.
The table below sets forth the average daily number of barrels of crude oil
transported through this crude oil pipeline in each of the periods presented.
Year Ended December 31, Twelve Months
---------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------ ------ ------ ------ ------ -------------
Crude oil transported (bpd) 80,108 88,948 88,638 81,464 91,464 98,742
Explorer Pipeline
We own a 9.4% interest in Explorer Pipeline Company, which owns and operates
a 1,413-mile common carrier refined product pipeline. Other owners of Explorer
include Equilon, Marathon Ashland Petroleum, ChevronTexaco, Conoco, CITGO, and
Phillips. The system originates from the refining centers of Lake Charles,
Louisiana and Beaumont, Port Arthur and Houston, Texas, and extends to Chicago,
Illinois, with delivery points in the Houston, Dallas/Fort Worth, Tulsa, St.
Louis, and Chicago areas. The pipeline system consists of a 12-inch segment
from Lake Charles to Port Arthur, a 28-inch segment from Port Arthur to Tulsa,
and a 24-inch segment from Tulsa to Hammond, Illinois. The 28-inch segment has
capacity of 560,000 bpd, and the 24-inch segment has capacity of 350,000 bpd.
We receive a quarterly cash dividend from Explorer that is commensurate with
our ownership interest. For the twelve months ended June 30, 2001, we received
approximately $4.0 million in cash dividends.
65
The pipeline was built in 1972. Refined products transported on this system
primarily include gasoline, jet fuel, diesel fuel, and heating oil. Shippers on
the pipeline include most of the owners other than Sunoco, Inc. and several
non-affiliated customers. For the year ended December 31, 2000, interest owners
transporting refined products on the pipeline system accounted for
approximately 42% of operating revenues, and the top ten non-affiliated
customers accounted for approximately 40%. In 2000, the FERC approved
Explorer's application for market-based rates for all its tariffs.
Volumes transported on this system have increased as the refining centers in
the Gulf Coast region have increased shipments to meet higher demand. Explorer
recently announced two expansions of the system's capacity by 130,000 bpd from
Port Arthur to Tulsa and by 100,000 bpd from Tulsa to Chicago. The expansions,
planned to be completed by early 2003, are currently projected to cost more
than $100 million. Based on current plans, we will not be required to make an
equity contribution to finance these capital expenditures. A member of our
management team serves on Explorer's eight-member board of directors.
Explorer's primary competition is the TEPPCO pipeline, which transports
petroleum products from the Beaumont, Port Arthur and Houston, Texas refining
centers to Little Rock, Indianapolis, Chicago, and other markets along its
route. Another competitor is the Seaway pipeline, a large diameter pipeline
from Houston to Cushing, Oklahoma owned by BP and Phillips, which connects to
the Phillips pipeline system to Chicago. Centennial Pipeline, a 26-inch natural
gas pipeline owned by Marathon Ashland Petroleum, TEPPCO, and CMS Energy that
is scheduled to be converted into a refined product pipeline by early 2002,
will also provide competition. Centennial originates near Beaumont, Texas and
terminates in southern Illinois.
Terminal Facilities
Refined Product Terminals
Our refined product terminals receive refined products from pipelines and
distribute them to Sunoco R&M and to third parties, who in turn deliver them to
end-users such as retail outlets. Terminals play a key role in moving product
to the end-user market by providing the following services:
. storage and inventory management;
. distribution;
. blending to achieve specified grades of gasoline; and
. other ancillary services that include the injection of additives and
filtering of jet fuel.
Typically, our terminal facilities consist of multiple storage tanks and are
equipped with automated truck loading equipment that is available 24 hours a
day. This automated system provides for control of allocations, and credit and
carrier certification by remote input of data by our customers. In addition,
all of our terminals are equipped with truck loading racks capable of providing
automated blending to individual customer specifications.
Our refined product terminals derive most of their revenues from
terminalling fees paid by customers. A fee is charged for transferring refined
products from the terminal to trucks, barges, or pipelines. In addition to
terminalling fees, we generate revenues by charging our customers fees for
blending, injecting additives, and filtering jet fuel. We generate the balance
of our revenues from petrochemicals handled for Sunoco R&M in Vanport,
Pennsylvania and Toledo, Ohio and for lubricants handled for Sunoco R&M in
Cleveland, Ohio. Sunoco R&M accounts for substantially all of our refined
product terminal revenues.
The majority of our refined product terminals are supplied by our pipelines.
The remainder of our refined product terminals are supplied by third-party
pipelines. For the twelve months ended June 30, 2001, gasoline represented
approximately 67% of the total volume of refined products distributed through
our product terminals, while distillates represented approximately 31%.
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The table below sets forth the total average throughput for our refined
product terminals in each of the periods presented:
Twelve
Months
Year Ended December 31, Ended
--------------------------------------- June 30,
1996 1997 1998 1999 2000 2001
------- ------- ------- ------- ------- --------
Refined products terminalled (bpd) 246,599 242,570 234,058 251,627 266,212 275,682
The following table outlines the location of our refined product terminals
and their storage capacities, number of tanks, supply source, mode of delivery,
and average throughput for the twelve months ended June 30, 2001:
Storage Number of Average
Capacity Tanks Supply Source Mode of Delivery Throughput
--------- --------- --------------- ---------------- ----------
(bbls) (bpd)
Akron, OH......... 98,200 8 Pipeline Truck 5,934
Altoona, PA....... 103,400 9 Pipeline Truck 3,899
Belmont, PA/(1)/.. 0/(1)/ 0/(1)/ Refinery Truck 25,408
Binghamton, NY.... 60,000 4 Pipeline Truck 2,590
Blawnox, PA....... 72,100 4 Pipeline Truck 2,401
Buffalo, NY....... 358,500 8 Pipeline Truck 8,206
Cleveland, OH..... 255,000 10 Pipeline/Rail Truck 14,280
Columbus, OH...... 78,900 6 Pipeline Truck 7,836
Dayton, OH........ 248,700 15 Pipeline Truck 9,351
Delmont, PA....... 233,900 8 Pipeline Truck 10,339
Exton, PA......... 132,200 7 Pipeline Truck 2,871
Fullerton, PA..... 161,700 7 Pipeline Truck 6,557
Huntington, IN.... 207,000 8 Pipeline Truck 3,225
Inwood, NY/(2)/... 54,200 18 Pipeline Truck 9,699
Kingston, PA...... 148,800 7 Pipeline Truck 6,194
Malvern, PA....... 62,900 5 Pipeline Truck 5,449
Mechanicsburg, PA. 166,200 9 Pipeline Truck 9,975
Montello, PA...... 67,900 7 Pipeline Truck 7,819
Newark, NJ........ 581,100 16 Pipeline/Marine Truck/Marine 22,612
Northumberland, PA 170,300 6 Pipeline Truck 5,060
Owosso, MI........ 233,300 8 Pipeline Truck 7,740
Paulsboro, NJ..... 81,000 6 Pipeline Truck/Pipeline 14,131
Piscataway, NJ.... 95,000 4 Pipeline Truck 8,299
Pittsburgh, PA.... 205,500 5 Pipeline/Rail Truck 11,907
River Rouge, MI... 178,400 10 Pipeline Truck 15,175
Rochester, NY..... 173,000 7 Pipeline Truck 4,585
Tamaqua, PA....... 113,600 8 Pipeline Truck 2,626
Toledo, OH........ 102,400 10 Refinery/Rail Truck 16,160
Twin Oaks, PA..... 90,000 4 Refinery Truck 13,073
Vanport, PA....... 179,300 8 Pipeline/Marine Truck/Marine 1,669
Willow Grove, PA.. 85,000 7 Pipeline Truck 7,020
Youngstown, OH.... 22,700 5 Pipeline Truck 3,592
--------- --- -------
Total.......... 4,820,200 244 275,682
========= === =======
--------
(1)This terminal receives product from Sunoco R&M's Philadelphia refinery and
does not have any tankage.
(2)We have a 45% ownership interest in this terminal. The capacity represents
the proportionate share of capacity attributable to our ownership interest.
67
The Nederland Terminal
The Texas Gulf Coast region is the major hub for petroleum refining in the
United States, representing approximately 40% of total United States daily
refining capacity and 66% of total United States refining capacity expansion
from 1990 to 1999. The growth in Gulf Coast refining capacity has resulted in
part from consolidation in the petroleum industry in order to achieve economies
of scale from operating larger refineries. According to the Energy Information
Agency at the Department of Energy, or the EIA, imports of crude oil through
the Gulf Coast increased 4.8% annually from 1995 to 2000. The growth in
refining capacity, including new heavy oil conversion projects, and increased
product flow from the Gulf Coast region to other regions has created a need for
additional transportation, storage, and distribution facilities on the Gulf
Coast. We believe that demand for imported crude oil and for petroleum products
refined in the Gulf Coast region will continue to increase.
We own and operate the Nederland Terminal, which is located on the
Sabine-Neches waterway between Beaumont and Port Arthur, Texas. The Nederland
Terminal is a large marine terminal that provides inventory management,
storage, and distribution services for refiners and other large end-users of
crude oil. The Nederland Terminal receives, stores, and distributes crude oil,
feedstocks, lubricants, petrochemicals, and bunker oils (used for fueling ships
and other marine vessels). In addition, the Nederland Terminal also blends and
packages lubricants, provides fuel to ships, and is equipped with petroleum
laboratory facilities.
The Nederland Terminal has a total storage capacity of approximately 11.2
million barrels in 126 above-ground storage tanks with individual capacities of
up to 660,000 barrels. The terminal currently uses its aggregate storage
capacity as follows:
. 10.3 million barrels for crude oil;
. 400,000 barrels for feedstocks;
. 272,000 barrels for lubricants;
. 150,000 barrels for bunker oils; and
. 80,000 barrels for petrochemicals.
[Graphic E--Diagram depicting our Nederland Terminal and its pipeline
connections.]
The terminal can receive crude oil at each of its five ship docks and three
barge berths, which can accommodate any vessel capable of navigating the
40-foot freshwater draft of the Sabine-Neches Ship Channel. The five ship docks
are capable of receiving a total of 1.0 million bpd of crude oil. The terminal
can also receive crude oil through a number of pipelines, including the Equilon
pipeline from Louisiana, the U.S. Department of Energy Big Hill pipeline, the
U.S. Department of Energy West Hackberry pipeline, the EOTT Louisiana pipeline
system, and our Western Pipeline System. The U.S. Department of Energy
pipelines connect the Nederland Terminal to the United States Strategic
Petroleum Reserve's West Hackberry caverns at Hackberry, Louisiana and Big Hill
caverns near Winnie, Texas, which have an aggregate storage capacity of 370
million barrels. The Nederland Terminal's pipeline connections to major markets
in the Lake Charles, Beaumont, Port Arthur, Houston, and Midwest areas provide
customers with maximum flexibility and liquidity.
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The Nederland Terminal can deliver crude oil and other petroleum products
via pipeline, barge, ship, rail, or truck. In the aggregate, the Nederland
Terminal is capable of delivering over 1.0 million bpd of crude oil to
connecting pipelines. The following table describes the Nederland Terminal's
pipeline delivery connections, including the destination of the pipelines to
which we can deliver, the diameter of each pipeline, the rate at which we can
make deliveries, and key delivery points along each pipeline's route:
Delivery
Pipeline Destination Diameter Rate Key Delivery Points
-------- -------------------- -------- -------- ------------------------------------------
(inches) (bpd)
ExxonMobil............... Beaumont, Texas 24 300,000 ExxonMobil's Beaumont refinery
ExxonMobil............... Patoka, Illinois and 20 225,000 Basin's pipeline to Cushing, Oklahoma
Wichita Falls, Texas UltramarDiamond Shamrock's pipeline to
its McKee, Texas refinery
Shamrock Logistics' pipeline to UDS's
Ardmore, Oklahoma refinery
Conoco's pipeline to its Ponca City,
Oklahoma refinery
Pipelines supplying Midwest refineries
Equilon.................. Houston, Texas 20 200,000 Houston area refineries
Premcor.................. Port Arthur, Texas 32 250,000 Premcor's Port Arthur refinery
West Texas Gulf.......... Longview, Texas 26 250,000 Mid-Valley pipeline to Midwest refineries
CITGO's pipeline to its Lake Charles,
Louisiana refinery
BP's pipeline to Cushing
McMurrey's pipeline to Crown Central's
Tyler, Texas refinery
Alon..................... Big Springs, Texas 10 25,000 Alon's Big Springs refinery
Total Fina Elf........... Port Arthur, Texas 10 50,000 Total Fina Elf's Port Arthur refinery
8 35,000
U.S. Department of Energy Big Hill caverns 36 250,000 Strategic Petroleum Reserve
U.S. Department of Energy West Hackberry 42 250,000 Strategic Petroleum Reserve
caverns
Sunoco Logistics......... Longview, Texas 10 50,000 Mid-Valley pipeline to Midwest refineries
CITGO's pipeline to its Lake Charles
refinery
BP's pipeline to Cushing
McMurrey's pipeline to Crown Central's
Tyler refinery
Sunoco Logistics......... Seabreeze, Texas 10 35,000 TEPPCO's pipeline to BASF/Fina's Port
Arthur steam cracker
We generate revenues at the Nederland Terminal primarily by providing
long-term and short-term, or spot, storage services and throughput capability
to a broad spectrum of customers such as ExxonMobil, Premcor, Total Fina Elf,
BASF/Fina, the U.S. Department of Energy, Ultramar Diamond Shamrock, Marathon
Ashland Petroleum, Sunoco R&M, and BP. For the twelve months ended June 30,
2001, approximately 87% of the terminal's total revenues came from unaffiliated
third parties. We derive a significant portion of our Nederland Terminal's
revenues from long-term contracts, which enhance the stability and
predictability of its revenue stream. For the twelve months ended June 30,
2001, 45% of the terminal's total revenues were generated under contracts that
expire in more than three years. The terminal's long standing relationships
with its spot-contract customers generally lead to repeat business and the
renewal of short-term contracts.
69
Our terminal is currently operating at near capacity. We believe that the
strong demand for our marine terminal facilities results from our
cost-effective transportation services, efficiency, connectivity, and customer
service. Because the Nederland Terminal's docks are operating at approximately
50% capacity, we believe that we can take advantage of increasing demand for
terminalling and storage services by building additional tankage.
Fort Mifflin Terminal Complex
We own and operate the Fort Mifflin Terminal Complex located on the Delaware
River in Philadelphia. Our Fort Mifflin Terminal Complex supplies Sunoco R&M's
Philadelphia refinery with all of its crude oil. These assets include the Fort
Mifflin Terminal, the Hog Island Wharf, the Darby Creek Tank Farm, and
connecting pipelines. We generate revenues from our Fort Mifflin Terminal
Complex by charging Sunoco R&M and others a storage fee based on tank capacity
and throughput. Substantially all of our revenues are derived from Sunoco R&M.
[Graphic F - Diagram depicting out Fort Mifflin Terminal Complex and its
location relative to Sunoco R&M's Philadelphia and Marcus Hook refineries.]
Fort Mifflin Terminal. Our Fort Mifflin Terminal consists of two ship docks
with 40-foot freshwater drafts and nine tanks with a total storage capacity of
570,000 barrels. Six 80,000-barrel tanks are used to store crude oil, and three
30,000-barrel tanks are used to provide fuel to ships. Two of the 80,000-barrel
tanks can be used to store refined products. This terminal also has a
connection with the Colonial Pipeline System.
Crude oil and some refined products enter our Fort Mifflin Terminal
primarily from marine vessels on the Delaware River. One Fort Mifflin dock is
designed to handle crude oil from very large crude carrier-class tankers and
smaller crude oil vessels. Our other dock can accommodate only smaller crude
oil vessels.
Hog Island Wharf. Our Hog Island Wharf is located next to the Fort Mifflin
Terminal on the Delaware River. Our Hog Island Wharf receives crude oil via two
ship docks, one of which can accommodate crude oil tankers and smaller crude
oil vessels and the other of which can accommodate some smaller crude oil
vessels. Hog Island Wharf supplies our Darby Creek Tank Farm and Fort Mifflin
Terminal with crude oil. Crude oil from our Hog Island Wharf is delivered to
Sunoco R&M's Philadelphia refinery via our Darby Creek Tank Farm.
Darby Creek Tank Farm. Our Darby Creek Tank Farm is a primary crude oil
storage terminal for Sunoco R&M's Philadelphia refinery. This facility has 21
tanks with a total storage capacity of 2.4 million barrels. Darby Creek
receives crude oil from our Fort Mifflin Terminal and Hog Island Wharf via our
24-inch pipelines. The tank farm then stores the crude oil and pumps it to the
Philadelphia refinery via our 16-inch pipeline. The multiple tanks in this
storage facility provide us with added flexibility in blending crude oil to
achieve the optimal crude oil slate for the Philadelphia refinery.
Crude Oil Delivery. Our Fort Mifflin Terminal Complex includes a number of
pipelines:
. one 30-inch pipeline and one 16-inch pipeline that deliver crude oil from
our Fort Mifflin Terminal to Sunoco R&M's Philadelphia refinery;
. two 24-inch pipelines that deliver crude oil from our Hog Island Wharf to
our Darby Creek Tank Farm;
. one 16-inch pipeline that delivers crude oil from our Darby Creek Tank
Farm to Sunoco R&M's Philadelphia refinery; and
. one 30-inch bi-directional pipeline that delivers crude oil between our
Hog Island Wharf and our Fort Mifflin Terminal.
70
We charge Sunoco R&M a fee for each barrel delivered to its Philadelphia
refinery via our Fort Mifflin Terminal or our Darby Creek Tank Farm. The table
below sets forth the average daily number of barrels of crude oil delivered to
Sunoco R&M's Philadelphia refinery in each of the periods presented.
Year Ended December 31, Twelve Months
--------------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- -------------
Total crude oil transported (bpd) 295,713 310,853 306,181 297,271 306,121 303,300
Other Pipelines. Our Fort Mifflin Terminal Complex also includes several
pipelines that deliver refined products to Sunoco R&M's Philadelphia refinery:
. one 30-inch pipeline and one 16-inch pipeline that deliver refined
products from our Fort Mifflin Terminal to Sunoco R&M's Philadelphia
refinery for transportation on our Eastern Pipeline System; and
. one dual diameter, 24- and 26-inch pipeline that delivers refined products
from our Hog Island Wharf to Sunoco R&M's Philadelphia refinery.
Marcus Hook Tank Farm
The Marcus Hook Tank Farm stores substantially all of the refined products
that Sunoco R&M ships from its Marcus Hook refinery. This facility has 17 tanks
with a total storage capacity of approximately 2.0 million barrels. After
receipt of refined products from the Marcus Hook refinery, the tank farm either
stores them or delivers them to our Twin Oaks terminal or to the Twin Oaks pump
station, which supplies our Eastern Pipeline System.
The Inkster Terminal
We own and operate the Inkster Terminal, a large terminal located in
Inkster, Michigan consisting of eight salt caverns with a total storage
capacity of 975,000 barrels. We use the Inkster Terminal's storage in
connection with our Toledo, Ohio to Sarnia, Canada pipeline system and for the
storage of LPGs from Sunoco R&M's Toledo refinery and from Canada. The terminal
can receive and ship LPGs in both directions at the same time and has a propane
truck loading rack that can load two trucks simultaneously. For the last five
years, Sunoco R&M has used the full capacity of our Inkster Terminal. Buckeye
has access to the terminal through our spur line to Joan Junction in Taylor,
Michigan.
The Inkster Terminal enjoys a competitive advantage with respect to volumes
from Sunoco R&M's Toledo refinery due to the relatively short distance between
Toledo and the Inkster Terminal. The short distance helps keep the
transportation cost of LPG lower than to the Consumers Power Marysville
Underground Storage Terminal or to BP's storage facility at St. Clair,
Michigan. We own three pipelines running between Toledo and the Inkster
Terminal, which provide Sunoco R&M with additional flexibility.
Western Pipeline System
Crude Oil Pipelines
We own and operate 1,801 miles of crude oil trunk pipelines and 1,880 miles
of crude oil gathering lines in three primary geographic regions--Oklahoma,
West Texas, and the Texas Gulf Coast and East Texas region. We are the primary
shipper on our Western Pipeline System. We also deliver crude oil for Sunoco
R&M and for various third parties from points in Texas and Oklahoma. Delivery
points on our Western Pipeline System include Sunoco R&M's and Sinclair's Tulsa
refineries and the Gary-Williams refinery in Wynnewood, Oklahoma.
Our pipelines also access several trading hubs, including the largest and
most significant trading hub for crude oil in the United States located in
Cushing, Oklahoma, as well as other trading hubs located in Colorado
71
City and Longview, Texas. Our crude oil pipelines also connect with other
pipelines that deliver crude oil to a number of third-party refineries. The
majority of the pipelines in our Western Pipeline System were constructed
between 1927 and 1960. Our pipelines are subject to ongoing maintenance, and we
believe they are in good repair.
[Graphic G -- Map of Oklahoma and Texas depicting our Western Pipeline
System.]
In each geographic region, we have major crude oil trunk line systems that
ship crude oil across a number of different-sized trunk pipeline segments. The
following table details the mileage and volumes delivered for each major system
and, therefore, eliminates double counting of barrels transported across more
than one of our pipeline segments. We transported 71% of the crude oil and lube
extracted feedstock transported to or originating from Sunoco R&M's Tulsa,
Oklahoma and Toledo, Ohio refineries for the twelve months ended June 30, 2001.
Twelve Months
Ended
June 30, 2001
Major System Miles of Pipeline Throughput
------------ ----------------- -------------
(bpd)
Oklahoma:
Enid to Tulsa.......................... 316 69,283
Velma to Tulsa......................... 248 33,378
Other.................................. 129 17,752
West Texas:
Jameson and Salt Creek to Colorado City 93 30,479
Hearne to Hawley....................... 453 13,113/(1)/
Hawley to Dixon........................ 242 32,648
Other.................................. 32 -- /(2)/
Texas Gulf Coast and East Texas:
Seabreeze and Orange to Nederland...... 39 10,998
Nederland to Longview.................. 171 34,709
Mt. Belvieu to Nederland............... 70 10,542
Thomas to Longview..................... 3 7,630
Other.................................. 5 -- /(2)/
--------
(1)Volume excludes 16,718 bpd that is delivered to and included in the Hawley
to Dixon pipeline segment.
(2)Throughput included in another segment.
72
The following table sets forth the origin and destination, length, diameter,
and throughput for approximately 95% of our trunk pipeline segments in each of
the three regions we serve. We own 100% of these pipelines.
Twelve Months
Ended
June 30, 2001
Miles of Pipeline Diameter Throughput
Origin and Destination ----------------- -------- -------------
---------------------- (inches) (bpd)
Oklahoma:
Enid to Tulsa:
Bottleman to Enid.................... 44 4,6 5,747
Ringwood to Enid..................... 28 4,6 1,876
Dover to Enid........................ 32 4,6 1,868
Oklahoma City to Douglas............. 56 8 2,374
Enid to Morris....................... 36 8 3,873
Enid to Cushing...................... 75 8 11,822
Cushing to Tulsa..................... 45 10,12 65,410
Velma to Tulsa:
Velma to Eola........................ 15 6 6,174
Eola to Maysville.................... 18 10 1,444
Eola to Wynnewood.................... 17 6 6,743
Maysville to Seminole................ 61 6 6,026
Seminole to Bad Creek................ 32 6,8 13,538
Fitts to Bad Creek................... 52 4,6,8 8,304
Bad Creek to Tulsa................... 53 8,10 26,635
Other:
Tulsa to Cushing..................... 45 12 14,751
Barnsdall to Tulsa................... 34 8 1,540
West Texas:
Jameson and Salt Creek to Colorado City:
Jameson to Colorado City............. 35 8 6,970
Salt Creek to Colorado City.......... 58 6,8 23,509
Hearne to Hawley:
Hearne to Comyn...................... 143 8,12 14,547
Ballinger to Comyn................... 83 8 5,046
Comyn to Ranger...................... 30 8 5,243
Ranger to South Bend................. 52 6,8 12,138
Comyn to Hawley...................... 90 16 16,778
Hamlin to Hawley..................... 41 8 1,978
Tye to Hawley........................ 14 6 975
Hawley to Dixon:
Hawley to Dixon...................... 242 8,10 32,648
Texas Gulf Coast and East Texas:
Seabreeze and Orange to Nederland:
Seabreeze to Nederland............... 28 10 7,603
Orange to Nederland.................. 11 6 3,395
Nederland to Longview:
Nederland to Longview................ 171 10,12 34,709
Mt. Belvieu to Nederland:
Mt. Belvieu to Sour Lake............. 43 6,8 7,038
Sour Lake to Nederland............... 27 8 3,504
Thomas to Longview:
Thomas to Longview................... 3 8 7,630
73
Oklahoma
We own and operate a large crude oil pipeline and gathering system in
Oklahoma. This system contains 693 miles of crude oil trunk pipelines and 1,018
miles of crude oil gathering lines. We have the ability to deliver all of the
crude oil gathered on our Oklahoma system to Cushing. Additionally, we make
deliveries on the Oklahoma system to:
. Sunoco R&M's Tulsa refinery;
. Sinclair's Tulsa refinery;
. Gary-Williams' Wynnewood refinery; and
. Conoco's pipeline to its Ponca City refinery.
Throughput on our Oklahoma system for the twelve months ended June 30, 2001
was 120,413 bpd. We generate revenues on our Oklahoma system from tariffs paid
by shippers utilizing our transportation services. We file these tariffs with
the Oklahoma Corporation Commission and the FERC. We are the largest purchaser
of crude oil from producers in the state, and we are the primary shipper on our
Oklahoma system. Other significant shippers are Sunoco R&M and Sinclair, which
ship primarily on the Cushing to Tulsa segment.
Our Oklahoma crude oil pipelines consist of two major systems, the Enid to
Tulsa system and the Velma to Tulsa system, and several smaller pipelines.
[Graphic H - Map of Oklahoma depicting the Oklahoma portion of our Western
Pipeline System.]
Enid, Oklahoma to Tulsa, Oklahoma. The Enid to Tulsa crude oil pipeline
system originates in Northwestern Oklahoma, connects to the Cushing, Oklahoma
trading hub, and terminates in Tulsa at the Sunoco R&M and Sinclair refineries.
This system consists of seven major segments.
Three segments deliver crude oil received from trucks and gathering systems
to Enid for further delivery on our system. Enid is a hub from which we
transport crude oil on our two east-bound pipelines to third-party pipelines
and refineries, and to the Cushing trading hub. The two east-bound pipelines
from Enid include our Enid to Morris pipeline, which connects Conoco's pipeline
to its Ponca City refinery, and our Enid to Cushing pipeline, which receives
crude oil from our Oklahoma City to Douglas segment and delivers crude oil to
our storage tanks at the Cushing trading hub.
Shippers utilizing our pipeline may also access the BP, Equilon, Plains All
American, and TEPPCO storage terminals in Cushing. Our Cushing to Tulsa
pipeline provides transportation services, under tariffs filed with the FERC,
from third-party terminals and our tanks in Cushing to the Sunoco R&M and
Sinclair refineries in Tulsa.
Velma, Oklahoma to Tulsa, Oklahoma. The Velma to Tulsa crude oil pipeline
system originates in Southwestern Oklahoma, moves eastward to the Gary-Williams
refinery at Wynnewood, and terminates at the Sunoco R&M and Sinclair refineries
in Tulsa. This system consists of seven major segments.
The Velma to Eola, Eola to Maysville, and Eola to Wynnewood segments are
used to transport crude oil from trucks and gathering systems owned by us and
third parties to Gary-Williams' Wynnewood refinery and to our pipeline that
delivers to Cushing and Sunoco R&M's Tulsa refinery. The Maysville to Seminole,
Seminole to Bad Creek, Fitts to Bad Creek, and Bad Creek to Tulsa pipelines are
primarily used to transport crude oil to the Sunoco R&M and Sinclair refineries
in Tulsa. These pipelines are supplied by our gathering systems and trucks, as
well as EOTT and STG gathering lines. We ship substantially all of the volumes
on these pipelines.
Other Oklahoma Pipelines. Our other Oklahoma pipelines include the Tulsa to
Cushing segment that transports lube extracted feedstock from Sunoco R&M's
Tulsa refinery to Cushing for ultimate delivery by third-
74
party pipelines to other refineries for further processing. Our Barnsdall to
Tulsa segment receives crude oil gathered by our trucks for shipment to Sunoco
R&M's Tulsa refinery.
West Texas
We own and operate approximately 820 miles of crude oil trunk pipelines and
494 miles of crude oil gathering lines in West and North Central Texas. We make
deliveries on our West Texas system to:
. a Shamrock Logistics pipeline at Dixon, Texas that delivers crude oil to
Ultramar Diamond Shamrock's refinery in McKee, Texas;
. a Conoco pipeline at South Bend, Texas that makes deliveries to Conoco's
Ponca City refinery;
. a TEPPCO pipeline at South Bend that makes deliveries to Gary-Williams'
Wynnewood refinery;
. the West Texas Gulf pipeline at Tye and Colorado City, Texas that connects
to Mid-Valley pipeline in Longview, Texas, which makes deliveries to
Sunoco R&M's Toledo refinery and other Midwest refineries; and
. other third-party pipelines at Colorado City that deliver crude oil to
Sunoco R&M's Tulsa and Toledo refineries, among others.
Throughput on this system during the twelve months ended June 30, 2001 was
76,240 bpd. We were the shipper of substantially all of these volumes. We
generate revenues in West Texas from tariffs paid by shippers utilizing our
transportation services. We file these tariffs with the Texas Railroad
Commission.
[Graphic I - Map of Texas depicting the West Texas portion of our Western
Pipeline System.]
Our West Texas pipelines consist of the three following systems:
Jameson and Salt Creek, Texas to Colorado City, Texas. The Jameson and Salt
Creek to Colorado City crude oil pipeline system consists of two pipeline
segments. Crude oil is gathered or trucked into this system and transported
from Jameson to Colorado City, or from Salt Creek to Colorado City, where it
can be delivered into BP, Basin, ChevronTexaco, EOTT, or West Texas Gulf
pipelines. These connections allow us to deliver crude oil to Sunoco R&M's
Tulsa and Toledo refineries and other unaffiliated third-party destinations.
Hearne, Texas to Hawley, Texas. The Hearne to Hawley system is comprised of
seven pipeline segments. The two segments delivering into Comyn, Texas are
supplied with crude oil from our trucks, third-party trucks, and pipelines,
including the Genesis, Koch, and Plains All American pipelines located in
Hearne. From Comyn, crude oil can be shipped to:
. the West Texas Gulf pipeline at Tye;
. the Conoco and TEPPCO pipelines at South Bend; or
. our pipeline in Hawley.
At Tye, we have tankage and a bi-directional connection with the West Texas
Gulf pipeline that allows us to receive and deliver crude oil.
Hawley, Texas to Dixon, Texas. On the Hawley to Dixon system, we receive
crude oil from the following sources:
. our Hearne to Hawley system, including West Texas Gulf's system through
Tye, Texas;
. Plains All American and ChevronTexaco pipeline interconnections; and
. truck injection locations and pipeline-connected lease gathering sites.
75
We deliver this crude oil to Dixon, where we connect with the Shamrock
Logistics pipeline that delivers crude oil to the Ultramar Diamond Shamrock
refinery at McKee. Crude oil received from our Hearne to Hawley system accounts
for a majority of the volumes transported on this system.
Texas Gulf Coast and East Texas
Our Texas Gulf Coast and East Texas pipeline system includes 288 miles of
crude oil trunk pipelines and 368 miles of crude oil gathering lines that run
between the Texas Gulf Coast region near Beaumont and Mt. Belvieu, Texas and
the East Texas field near Longview, Texas. We transport multiple grades of
crude oil, including foreign imports, and other refinery and petrochemical
feedstocks, such as condensate and naphtha, on these pipelines. We receive
crude oil for these systems from other pipelines, our Nederland Terminal, our
trucks, third-party trucks, and our pipeline gathering systems. This system
provides access to major delivery points with interconnecting pipelines in
Texas at Longview, Sour Lake, and Nederland.
Throughput on this system for the twelve months ended June 30, 2001 was
63,879 bpd. We generate revenues from tariffs paid by shippers utilizing our
transportation services. These tariffs are filed with the Texas Railroad
Commission and the FERC. We are the primary shipper on the Texas Gulf Coast and
East Texas system. Sunoco R&M ships on the Nederland to Longview segment, which
connects with the Mid-Valley pipeline for deliveries to Sunoco R&M's Toledo
refinery.
[Graphic J -- Map of East Texas depicting the Texas Gulf Coast and East
Texas portion of our Western Pipeline System.]
Our Texas Gulf Coast and East Texas system consists of these pipelines:
Seabreeze and Orange, Texas to Nederland, Texas. The Seabreeze and Orange to
Nederland crude oil pipeline system consists of two pipelines:
. a bi-directional 28-mile pipeline from Seabreeze to Nederland; and
. an 11-mile pipeline from Orange to Nederland.
The Seabreeze pipeline transports condensate received from TransTexas' Winnie,
Texas plant and by truck to our Nederland Terminal. The Seabreeze pipeline also
transports naphtha for BASF/Fina from our Nederland Terminal to the TEPPCO
pipeline for delivery to BASF/Fina's new steam cracker in Port Arthur. Crude
oil gathered or trucked to the Orange pipeline is transported to our Nederland
Terminal for delivery to a number of destinations.
Nederland, Texas to Longview, Texas. The Nederland to Longview pipeline
transports primarily foreign crude oil from our Nederland Terminal to the
240,000 bpd Mid-Valley pipeline in Longview, Texas. Other connections in the
Longview area include BP's pipeline from Longview to Cushing, Oklahoma,
McMurrey's pipeline that supplies Crown Central's Tyler, Texas refinery, and
ExxonMobil's pipeline that delivers to Wichita Falls, Texas and Patoka,
Illinois.
Mt. Belvieu, Texas to Nederland, Texas. The Mt. Belvieu to Nederland crude
oil pipeline passes through Sour Lake, Texas where it makes deliveries to our
Nederland to Longview pipeline, the CITGO tank farm and pipeline that supplies
CITGO's Lake Charles, Louisiana refinery, and the GulfMark pipeline to Baytown,
Texas.
Thomas, Texas to Longview, Texas. The Thomas to Longview crude oil pipeline
originates in Thomas, Texas and makes deliveries to all of the connections in
Longview, Texas described above. The pipeline receives crude oil from our
pipeline gathering system in the East Texas field.
76
Crude Oil Acquisition and Marketing
In addition to receiving tariff revenues for transporting crude oil on our
Western Pipeline System, we also generate revenues through our crude oil
acquisition and marketing operations, primarily in Oklahoma and Texas. These
activities include:
. purchasing crude oil from producers at the wellhead and in bulk from
aggregators at major pipeline interconnections and trading locations;
. transporting crude oil on our pipelines and trucks or, when necessary or
cost effective, pipelines or trucks owned and operated by third parties;
and
. marketing crude oil to refiners or resellers.
The marketing of crude oil is complex and requires detailed knowledge of the
crude oil market and a familiarity with a number of factors, including types of
crude oil, individual refinery demand for specific grades of crude oil, area
market price structures for different grades of crude oil, location of
customers, availability of transportation facilities, timing, and customers'
costs (including storage). We sell our crude oil to major integrated oil
companies, independent refiners, including Sunoco R&M for its Tulsa and Toledo
refineries, and other resellers in various types of sale and exchange
transactions, at market prices for terms generally ranging from one month to
one year.
We enter into contracts with producers at market prices generally for a term
of one year or less, with a majority of the transactions on a 30-day renewable
basis. For the twelve months ended June 30, 2001, we purchased approximately
174,000 bpd from 3,300 producers from approximately 32,000 leases.
Crude Oil Lease Purchases and Exchanges
In a typical producer's operation, crude oil flows from the wellhead to a
separator where the petroleum gases are removed. After separation, the producer
treats the crude oil to remove water, sand, and other contaminants and then
moves it to an on-site storage tank. When the tank is full, the producer
contacts our field personnel to purchase and transport the crude oil to market.
The crude oil in producers' tanks is then either delivered to our pipeline or
transported via truck to our pipeline or a third party's pipeline. Our truck
fleet generally performs the trucking service.
We also enter into exchange agreements to enhance margins throughout the
acquisition and marketing process. When opportunities arise to increase our
margin or to acquire a grade of crude oil that more nearly matches our delivery
requirement or the preferences of our refinery customers, we exchange physical
crude oil with third parties. Generally, we enter into exchanges to acquire
crude oil of a desired quality in exchange for a common grade crude oil or to
acquire crude oil at locations that are closer to our end markets, thereby
reducing transportation costs.
The following table shows our average daily volume for our crude oil lease
purchases and exchanges for the periods presented.
Year Ended December 31, Twelve Months
------------------------ Ended
Crude Oil 1996 1997 1998 1999 2000 June 30, 2001
--------- ---- ---- ---- ---- ---- -------------
(in thousands of bpd)
Lease Purchases.............. 149 164 156 145 177 174
Exchanges.................... 130 147 144 141 230 232
--- --- --- --- --- ---
Total..................... 279 311 300 286 407 406
=== === === === === ===
Our business practice is generally to purchase only crude oil for which we
have a corresponding sale agreement for physical delivery of crude oil to a
third party or a Sunoco R&M refinery. Through this process, we
77
seek to maintain a position that is substantially balanced between crude oil
purchases and future delivery obligations. We do not acquire and hold crude oil
futures contracts or enter into other derivative contracts for the purpose of
speculating on crude oil prices.
The following table shows our average daily sales volume of crude oil for
the periods presented:
Year Ended December 31, Twelve Months
------------------------ Ended
1996 1997 1998 1999 2000 June 30, 2001
---- ---- ---- ---- ---- -------------
(in thousands of bpd)
Sunoco R&M refineries:
Toledo............. 41 41 30 26 29 29
Tulsa.............. 43 46 57 63 73 74
Third Parties......... 65 78 70 56 75 75
Exchanges............. 130 147 143 141 230 228
--- --- --- --- --- ---
Total.............. 279 312 300 286 407 406
=== === === === === ===
Market Conditions
During periods when demand for crude oil is weak, the market for crude oil
is often in contango, meaning that the price of crude oil in a given month is
less than the price of crude oil for delivery in a subsequent month. In a
contango market, storing crude oil is favorable because storage owners at major
trading locations can simultaneously purchase production at low current prices
for storage and sell at higher prices for future delivery. When there is a
higher demand than supply of crude oil in the near term, the market is
backwardated, meaning that the price of crude oil in a given month exceeds the
price of crude oil for delivery in a subsequent month. A backwardated market
has a positive impact on marketing margins because crude oil marketers can
continue to purchase crude oil from producers at a fixed premium to posted
prices while selling crude oil at a higher premium to such prices.
Producer Services
Crude oil purchasers who buy from producers compete on the basis of
competitive prices and highly responsive services. Through our team of crude
oil purchasing representatives, we maintain ongoing relationships with more
than 3,300 producers. We believe that our ability to offer competitive pricing
and high-quality field and administrative services to producers is a key factor
in our ability to maintain volumes of purchased crude oil and to obtain new
volumes. Field services include efficient gathering capabilities, availability
of trucks, willingness to construct gathering pipelines where economically
justified, timely pickup of crude oil from storage tanks at the lease or
production point, accurate measurement of crude oil volumes received, avoidance
of spills, and effective management of pipeline deliveries. Accounting and
other administrative services include securing division orders (statements from
interest owners affirming the division of ownership in crude oil purchased by
us), providing statements of the crude oil purchased each month, disbursing
production proceeds to interest owners, and calculating and paying production
taxes on behalf of interest owners. In order to compete effectively, we must
maintain records of title and division order interests in an accurate and
timely manner for purposes of making prompt and correct payment of crude oil
production proceeds, together with the correct payment of all production taxes
associated with these proceeds.
Credit with Customers
When we market crude oil, we must determine the amount of any line of credit
to be extended to a customer. Since our typical sales transactions can involve
tens of thousands of barrels of crude oil, the risk of nonpayment and
nonperformance by customers is a major consideration in our business. We
believe our sales are made to creditworthy entities or entities with adequate
credit support. Credit review and analysis are also integral
78
to our lease purchases. Payment for substantially all of the monthly lease
production is sometimes made to the operator of the lease. The operator, in
turn, is responsible for the correct payment and distribution of such
production proceeds to the proper parties. In these situations, we must
determine whether the operator has sufficient financial resources to make such
payments and distributions and to indemnify and defend us in the event a third
party brings a protest, action, or complaint in connection with the ultimate
distribution of production proceeds by the operator.
Crude Oil Trucking
We operate 122 crude oil truck unloading facilities in Oklahoma, Texas, and
New Mexico, of which 88 are on our pipeline system and 34 are on third-party
pipeline systems. We employ 272 crude oil truck drivers and own 163 crude oil
transport trucks. The crude oil truck drivers pick up crude oil at production
lease sites and transport it to various truck unloading facilities on our
pipelines and on third-party pipelines.
Other Business Opportunities
Although we do not currently engage in business unrelated to the
transportation or storage of crude oil and refined products and the other
businesses described above, we may in the future consider and make acquisitions
in other business areas.
Pipeline and Terminal Control Operations
All of our refined products and crude oil pipelines are operated via
satellite, microwave, and frame relay communication systems from central
control rooms located in Philadelphia and Tulsa. The Philadelphia control
center primarily monitors and controls our refined product pipelines, and the
Tulsa control center primarily monitors and controls our crude oil pipelines.
The Philadelphia control center has a backup control center at our Montello,
Pennsylvania pipeline facility located approximately 50 miles from
Philadelphia. The Nederland Terminal has its own control center.
The control centers operate with modern, state-of-the-art System Control and
Data Acquisition, or SCADA, systems. Our control centers are equipped with
computer systems designed to continuously monitor real time operational data,
including refined product and crude oil throughput, flow rates, and pressures.
In addition, the control centers monitor alarms and throughput balances. The
control centers operate remote pumps, motors, engines, and valves associated
with the delivery of refined products and crude oil. The computer systems are
designed to enhance leak-detection capabilities, sound automatic alarms if
operational conditions outside of pre-established parameters occur, and provide
for remote-controlled shutdown of pump stations on the pipelines. Pump stations
and meter-measurement points along the pipelines are linked by satellite or
telephone communication systems for remote monitoring and control, which
reduces our requirement for full-time on-site personnel at most of these
locations.
Safety and Maintenance
We perform preventive and normal maintenance on all of our pipeline systems
and make repairs and replacements when necessary or appropriate. We also
conduct routine and required inspections of our pipelines and other assets as
required by code or regulation. We inject corrosion inhibitors into our crude
oil mainlines to help control internal corrosion. Cleaning and de-waxing pigs
are also run through our crude oil pipelines to help prohibit internal
corrosion. External coatings and impressed current cathodic protection systems
are used to protect against external corrosion. We conduct all cathodic
protection work in accordance with National Association of Corrosion Engineers
standards. We continually monitor, test, and record the effectiveness of these
corrosion inhibiting systems.
We monitor the structural integrity of selected segments of our pipeline
systems through a program of periodic internal inspections using both "dent
pigs" and electronic "smart pigs." We started our smart pigging
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program in 1988. Beginning in 2002, the U.S. Department of Transportation, or
DOT, will require smart pigging or other integrity testing of all DOT-regulated
crude oil and refined product pipelines. This requirement will be phased in
over a five-year period. To date, we have inspected 80% of the total
DOT-regulated miles of our refined product pipelines and 35% of the total
DOT-regulated miles of our crude oil pipelines. We anticipate spending $8.0
million per year for each of the next five years to comply with these
regulations. Please read ''Certain Relationships and Related
Transactions--Omnibus Agreement.'' We follow these inspections with a rigorous
review of the data, and we make repairs as required to ensure the integrity of
the pipeline. We have initiated a risk-based approach to prioritizing the
pipeline segments for future smart pig runs or other approved integrity testing
methods. This will ensure that the pipelines that have the greatest risk
potential receive the highest priority in being scheduled for inspections or
pressure tests for integrity.
Maintenance facilities containing equipment for pipe repairs, spare parts,
and trained response personnel are strategically located along the pipelines.
Employees participate in simulated spill deployment exercises on a regular
basis. They also participate in actual spill response boom deployment exercises
in both planned and unannounced spill scenarios in accordance with Oil
Pollution Act of 1990 requirements. We believe that all of our pipelines have
been constructed and are maintained in all material respects in accordance with
applicable federal, state, and local laws and the regulations and standards
prescribed by the American Petroleum Institute, the DOT, and accepted industry
practice.
At our terminals, tanks designed for gasoline storage are equipped with
internal or external floating roofs that minimize emissions and prevent
potentially flammable vapor accumulation between fluid levels and the roof of
the tank. Our terminal facilities have facility response plans, spill
prevention and control plans, and other plans and programs to respond to
emergencies.
Many of our terminal loading racks are protected with water deluge systems
activated by vapor sensors, heat sensors, or an emergency switch. Several of
our terminals are also protected by foam systems that are activated in case of
fire. Our Inkster Terminal is our only terminal that stores and loads propane.
Our propane truck loading rack is protected against fire hazards with a deluge
system. This system automatically activates with heat sensors in the event of a
fire. All of our terminals are subject to participation in a comprehensive
environmental management program to assure compliance with applicable air,
solid wastes, and wastewater regulations.
Competition
As a result of our physical integration with Sunoco R&M's refineries and our
contractual relationship with Sunoco, Inc. pursuant to the omnibus agreement
and Sunoco R&M pursuant to the pipelines and terminals storage and throughput
agreement, we believe that we will not face significant competition for crude
oil transported to the Philadelphia, Toledo, and Tulsa refineries, or refined
products transported from the Philadelphia, Marcus Hook, and Toledo refineries,
particularly during the term of our pipelines and terminals storage and
throughput agreement with Sunoco R&M. See "--Our Relationship with Sunoco,
Inc.--Pipelines and Terminals Storage and Throughput Agreement with Sunoco
R&M."
Eastern Pipeline System
Nearly all of our Eastern Pipeline System is directly linked to Sunoco R&M's
refineries. Sunoco R&M constructed or acquired these assets as the most
cost-effective means to access raw materials and distribute refined products.
Generally, pipelines are the lowest cost method for long-haul, overland
movement of refined products. Therefore, our most significant competitors for
large volume shipments in the area served by our Eastern Pipeline System are
other pipelines. We believe that high capital requirements, environmental
considerations, and the difficulty in acquiring rights-of-way and related
permits make it difficult for other companies to build competing pipelines in
areas served by our pipelines. As a result, competing pipelines are likely to
be built only in those cases in which strong market demand and attractive
tariff rates support additional capacity in an area.
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Although it is unlikely that a pipeline system comparable in size and scope
to our Eastern Pipeline System will be built in the foreseeable future, new
pipelines (including pipeline segments that connect with existing pipeline
systems, such as those operated by Colonial, Buckeye, ExxonMobil, and Inland)
could be built to effectively compete with us in particular locations.
In addition, we face competition from trucks that deliver product in a
number of areas we serve. While their costs may not be competitive for longer
hauls or large volume shipments, trucks compete effectively for incremental and
marginal volumes in many areas we serve. The availability of truck
transportation places a significant competitive constraint on our ability to
increase our tariff rates.
Terminal Facilities
Historically, except for our Nederland Terminal, essentially all of the
throughput at our terminal facilities has come from Sunoco R&M. Under the terms
of our pipelines and terminals storage and throughput agreement, we will
continue to receive a significant portion of the throughput at these facilities
from Sunoco R&M.
Our 32 refined product terminals compete with other independent terminal
operators as well as integrated oil companies on the basis of terminal
location, price, versatility, and services provided. Our competition primarily
comes from integrated petroleum companies, refining and marketing companies,
independent terminal companies, and distribution companies with marketing and
trading arms.
The Inkster Terminal's primary competition comes from the Marysville
Underground Storage Terminal, or MUST, which is owned by Consumers Power. MUST
is a third-party facility located in Marysville, Michigan with approximately 12
million barrels of underground storage. This facility serves the refining
markets in Sarnia, Canada and Toledo, Ohio and has extensive rail car loading
and unloading operations, which could be used by other refineries. In addition
to MUST, Marathon Ashland Petroleum operates a similar LPG storage facility in
Trenton, Michigan, primarily serving its refinery in Detroit, Michigan. BP also
operates a similar facility in St. Clair, Michigan, as well as one in Windsor,
Canada that is served by pipeline and rail connections from the Sarnia
refineries.
The primary competitors for the Nederland Terminal are its refinery
customers' docks and terminal facilities, and the Unocal terminal and the Oil
Tanking terminal, both located in Beaumont. We believe the Nederland Terminal
has superior docking capabilities and tankage facilities, and is better
connected to supply and distribution pipelines than these competing terminals.
Western Pipeline System
Our Western Pipeline System faces competition from a number of major oil
companies and smaller entities. Pipeline competition among common carrier
pipelines is based primarily on transportation charges, access to producing
areas, and demand for the crude oil by end users. We believe that high capital
costs make it unlikely for other companies to build competing crude oil
pipeline systems in areas served by our pipelines. Crude oil purchasing and
marketing competitive factors include price and contract flexibility, quantity
and quality of services, and accessibility to end markets. The principal
competitors of the Western Pipeline System are EOTT, Plains All American,
Conoco, Seminole Trading and Gathering, TEPPCO, and GulfMark.
Retained Assets
We do not expect any significant competition from Sunoco, Inc. utilizing the
retained assets described below under "--Pipeline, Terminalling and Storage
Assets Retained by Sunoco, Inc."
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Sunoco R&M's Refining and Marketing Operations
Although we do not own or operate any refining or marketing assets, our
pipeline systems are located within Sunoco R&M's refining and marketing supply
chain. Sunoco, Inc., through its subsidiaries, is principally a petroleum
refiner and marketer and chemicals manufacturer with interests in cokemaking.
Sunoco R&M's petroleum refining and marketing operations include the
manufacturing and marketing of a full range of petroleum products, including
fuels, lubricants, and petrochemical feedstocks. Sunoco R&M's chemical
operations comprise the manufacturing, distribution, and marketing of base
commodity and intermediate petrochemicals. The petroleum refining and marketing
and chemical operations are conducted principally in the Northeast and Midwest
United States. Sunoco, Inc. currently employs approximately 14,700 people.
Sunoco R&M owns and operates four refineries located in Marcus Hook and
Philadelphia, Pennsylvania, Toledo, Ohio, and Tulsa, Oklahoma. Sunoco R&M also
markets gasoline and middle distillates, and offers a broad range of
convenience store merchandise through a network of approximately 4,100 retail
outlets in 21 states on the East Coast and in the Midwest United States.
Refineries
Our pipelines deliver crude oil to and transport refined products from
Sunoco R&M's Philadelphia, Marcus Hook, Toledo, and Tulsa refineries.
Philadelphia
The Philadelphia refinery can process 330,000 bpd of crude oil and is the
largest refinery in the Northeast United States. For the twelve months ended
June 30, 2001, its total input to crude oil processing units was 303,500 bpd,
all of which was supplied by our Fort Mifflin Terminal Complex. The refinery
processes predominantly sweet crude oils from foreign sources. The refinery
produces primarily gasoline (including reformulated and premium grades), middle
distillates, residual fuel, and petrochemical feedstocks. For the twelve months
ended June 30, 2001, 66% of the refined products produced in the Philadelphia
refinery were distributed through our refined product pipelines or our refined
product terminals.
The table below sets forth the refinery's total input to crude oil
processing units in each of the periods presented.
Year Ended December 31, Twelve Months
--------------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- -------------
Input to crude units (bpd) 294,700 313,300 303,200 300,200 304,700 303,500
Marcus Hook
The Marcus Hook refinery can process 175,000 bpd of crude oil. For the
twelve months ended June 30, 2001, its total input to crude oil processing
units was 159,300 bpd. The refinery processes predominantly light sweet crude
oils from foreign sources that it receives directly from its docks. The
refinery produces primarily gasoline (including reformulated and premium
grades), middle distillates, residual fuel, and petrochemical feedstocks. For
the twelve months ended June 30, 2001, 91% of the refined products produced in
the Marcus Hook refinery were distributed through our refined product pipelines
and/or our refined product terminals.
The table below sets forth the refinery's total input to crude oil
processing units in each of the periods presented.
Year Ended December 31, Twelve Months
--------------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- -------------
Input to crude units (bpd) 150,900 165,300 166,200 168,700 155,800 159,300
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Toledo
The Toledo refinery can process 140,000 bpd of crude oil. For the twelve
months ended June 30, 2001, its total input of crude oil and other feedstocks
to crude oil processing units was 142,200 bpd, of which 53% was supplied by our
Marysville, Michigan to Toledo, Ohio crude pipeline systems. The Toledo
refinery is a high conversion refinery that refines predominantly light,
low-sulfur crude oil. The refinery produces primarily gasoline, middle
distillates, residual fuel, and petrochemicals. For the twelve months ended
June 30, 2001, 99% of the refined products produced in the Toledo refinery were
distributed through our refined product pipelines or our refined product
terminals.
The table below sets forth the refinery's total input of crude oil and other
feedstocks to crude oil processing units in each of the periods presented.
Year Ended December 31, Twelve Months
--------------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- -------------
Input to crude units (bpd) 124,700 132,600 132,200 133,400 133,600 142,200
The Toledo refinery has access to crude oil from a number of sources,
including foreign crude oil imported through the Gulf Coast, Canadian crude oil
through our Marysville to Toledo pipeline system, and domestic crude oil from
Texas, Louisiana, Oklahoma, and Michigan.
Tulsa
The Tulsa refinery can process 85,000 bpd of crude oil. For the twelve
months ended June 30, 2001, its total input to crude oil processing units was
77,600 bpd, all of which was supplied by our Western Pipeline System. The Tulsa
refinery refines predominantly light, low-sulfur crude oil and produces
primarily gasoline, middle distillates, base oil lubricants, waxes, petroleum
coke, and lube extracted feedstocks. For the twelve months ended June 30, 2001,
all lube extracted feedstocks, which represented 22% of the petroleum products
produced in the Tulsa refinery, were transported from the refinery through our
refined product pipelines. Other refined products are transported via
third-party pipelines.
The table below sets forth the refinery's total input to crude oil
processing units in each of the periods presented.
Year Ended December 31, Twelve Months
---------------------------------- Ended
1996 1997 1998 1999 2000 June 30, 2001
------ ------ ------ ------ ------ -------------
Input to crude units (bpd) 81,900 79,700 78,800 75,900 79,200 77,600
The Tulsa refinery has access to crude oil from a number of sources,
including production from Oklahoma and Texas and foreign crude oil.
Marketing
We believe that our pipeline, terminalling, and storage assets are
well-positioned for future growth because these assets are located in
attractive market regions and many of these assets are associated with Sunoco
R&M, a significant participant in those market regions. We believe that the
population growth and the growth in demand for refined products in the
Northeast and Midwest United States will lead to increased throughput.
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The table below sets forth total branded sales by Sunoco R&M in all states
in each of the periods presented. Middle distillates include high- and
low-sulfur diesel, heating oil, and kerosene.
At December 31, Twelve Months
----------------------------------------------- Ended
1995 1996 1997 1998 1999 2000 June 30, 2001
------- ------- ------- ------- ------- ------- -------------
(bpd)
Gasoline.......... 204,600 205,700 201,800 208,600 216,600 225,300 234,500
Middle distillates 18,900 20,500 21,900 22,800 28,900 31,700 33,300
------- ------- ------- ------- ------- ------- -------
Total.......... 223,500 226,200 223,700 231,400 245,500 257,000 267,800
======= ======= ======= ======= ======= ======= =======
The following table sets forth market share information in certain key
states served by our refined product terminals and pipelines:
Total Number of Sunoco's Rank
Number of Market Branded Retail Among
Branded Sites Share/(1)/ Marketers Marketers/(1)/
------------- --------- --------------- -------------
Pennsylvania 757 37% 24 1
New York.... 832 30% 21 1
Ohio........ 485 18% 14 3
Michigan.... 300 13% 18 4
New Jersey.. 278 9% 14 2
--------
(1)Source: National Petroleum News (Mid-July 2001). Market share and ranking
based upon Sunoco R&M branded sites versus total branded sites in each
state.
Sunoco R&M's convenience stores are located principally in Pennsylvania, New
York, Massachusetts, Michigan, Ohio and Florida. These stores supplement sales
of fuel products with a broad mix of high-margin merchandise such as groceries,
fast foods, and beverages. Sunoco R&M intends to grow its convenience store
business through acquisitions, new site construction and redesign of
traditional gasoline outlets in an effort to reduce its dependence on gasoline
margins. Pursuant to this strategy, in 2001, Sunoco R&M acquired from The
Coastal Corporation 310 direct retail sites and supply contracts with 24
Coastal distributors for 163 distributor sites located in eight Eastern states
with the largest concentration in Pennsylvania, New Jersey, Virginia, and
Florida.
In the fourth quarter of 2000, Sunoco R&M entered into an agreement with
Wal-Mart Stores, Inc. that will enable Sunoco R&M to build and operate retail
gasoline outlets on sites at selected existing and future Wal-Mart locations in
nine Eastern states. Sunoco R&M expects to commence building 20 to 40 of these
facilities during the initial year of the agreement and up to 100 new sites per
year during the next four to five years at an estimated cost of $50 to $80
million per year depending on configuration and store size. In addition to
gasoline, these sites will offer customers a limited selection of convenience
store merchandise. In conjunction with Wal-Mart, Sunoco R&M is developing a new
brand that is planned for use at these facilities. This agreement will enable
Sunoco R&M to market significantly more of its own gasoline production directly
to the consumer and to take further advantage of our refined product pipelines
and terminals in the region.
Pipeline, Terminalling and Storage Assets Retained by Sunoco, Inc.
At the closing of this offering, affiliates of Sunoco, Inc. will transfer to
us most of the pipeline, terminalling, storage, and related assets that support
Sunoco R&M's refinery operations. Sunoco, Inc. or its affiliates will retain
the assets described below because they are either interests in crude oil
pipelines that may not provide consistent revenues and cash flows or are
inactive.
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Assets That May Not Provide Consistent Revenues and Cash Flows
. Mid-Valley Pipeline. A subsidiary of Sunoco, Inc. owns a 55% interest in
the Mid-Valley Pipeline Company (a 50% voting interest), which owns and
operates a 994-mile crude oil pipeline from Longview, Texas to Samaria,
Michigan. In 2000, Mid-Valley supplied 47% of the crude oil refined by
Sunoco, Inc.'s Toledo, Ohio refinery. The Mid-Valley pipeline serves a
number of refineries in the Midwest United States. Because of our concern
that the closure of one or more of these refineries could result in a
material decline in the revenues and cash flows of Mid-Valley, we have
elected not to acquire Sunoco, Inc.'s interest in Mid-Valley. We believe
that Mid-Valley could be converted to a refined product pipeline and we
will continue to evaluate its future prospects.
. West Texas Gulf Pipeline. A subsidiary of Sunoco, Inc. owns a 17% interest
in West Texas Gulf Pipeline Company, which owns and operates a 581-mile
crude oil pipeline from Colorado City, Texas and Nederland, Texas to
Longview, Texas. West Texas Gulf supplies crude oil to Mid-Valley
Pipeline. We have elected not to acquire Sunoco, Inc.'s interest in this
pipeline for the reasons discussed above.
. Mesa Pipeline. A subsidiary of Sunoco, Inc. owns an undivided 6% interest
in the Mesa pipeline, an 80-mile crude oil pipeline from Midland, Texas to
Colorado City. Mesa Pipeline connects to West Texas Gulf's pipeline, which
supplies crude oil to Mid-Valley. We have elected not to acquire Sunoco,
Inc.'s interest in this pipeline for the reasons discussed above.
. Inland Pipeline. A subsidiary of Sunoco, Inc. owns a 10% interest in
Inland Corporation, which owns and operates a 611-mile refined products
pipeline from Lima and Toledo, Ohio to Canton, Cleveland, Columbus and
Dayton, Ohio. This pipeline transports refined products for Sunoco R&M
from its Toledo, Ohio refinery and for the other owners. The Inland
pipeline is a private intrastate pipeline that is operated at cost by the
shipper-owners and does not generate profits to its owners. As a result,
it will not be included in the assets transferred to us.
Sunoco, Inc. will grant us a ten-year option to purchase its interest in any
of the preceding assets for fair market value.
Assets That are Inactive
. A subsidiary of Sunoco, Inc. owns an idled 370-mile, 6-inch refined
product pipeline from Icedale, Pennsylvania to Cleveland, Ohio.
. A subsidiary of Sunoco, Inc. owns various crude oil pipelines and
gathering systems in Louisiana, Oklahoma, and Texas that are no longer
used because of a lack of crude oil supply.
. A subsidiary of Sunoco, Inc. owns various refined product pipelines in the
Northeast and Midwest that are no longer used because they are no longer
economical to operate. Most of these lines have been idle for several
years.
. A subsidiary of Sunoco, Inc. owns two inactive refined product terminals
in Maryland and Pennsylvania. Sunoco, Inc. idled these terminals because
they were not economical to operate.
Sunoco, Inc. will grant us a ten-year option to purchase its interest in any
of the preceding assets for fair market value.
Rate Regulation
General Interstate Regulation. Our interstate common carrier pipeline
operations are subject to rate regulation by the FERC under the Interstate
Commerce Act. The Interstate Commerce Act requires that tariff rates for oil
pipelines, a category which includes crude oil, petroleum products and
petrochemical pipelines (crude oil, petroleum product, and petrochemical
pipelines are referred to collectively as "petroleum pipelines" in
85
this prospectus), be just and reasonable and non-discriminatory. The Interstate
Commerce Act permits challenges to proposed new or changed rates by protest,
and challenges to rates that are already on file and in effect by complaint.
Upon the appropriate showing, a successful complainant may obtain damages or
reparations for generally up to two years prior to the filing of a complaint.
The FERC is authorized to suspend the effectiveness of a new or changed
tariff rate for a period of up to seven months and to investigate the rate. The
FERC may also permit a new or changed tariff rate to go into effect on at least
one days' notice, subject to refund and investigation. If upon the completion
of an investigation the FERC finds that the rate is unlawful, it may require
the pipeline operator to refund to shippers, with interest, any difference
between the rates the FERC determines to be lawful and the rates under
investigation. FERC will order the pipeline to change its rates prospectively
to the lawful level. Interstate petroleum pipeline rates may be defended on the
basis of the pipeline's cost of service, although, as discussed below, rates
may also be justified based upon the FERC's indexing methodology, or deemed
"grandfathered," under the Energy Policy Act. Settlement rates, which are rates
that have been agreed to by all shippers, are permitted, and market-based rates
may be permitted in certain circumstances.
From 1906 until October 1, 1977, the Interstate Commerce Commission, rather
than the FERC, was charged with exercising regulatory authority over petroleum
pipeline rates. During the latter years of this period, the Interstate Commerce
Commission determined pipeline rates on a "valuation" methodology under which
pipeline rate base was calculated on "fair value" rather than on depreciated
original cost. The valuation rate base approach was applied by the Interstate
Commerce Commission until 1977, when its oversight authority for petroleum
pipeline rates was transferred to the FERC. The FERC was then required by a
federal court to reevaluate its petroleum pipeline ratemaking methods.
In 1985, the FERC issued an opinion in a case involving Williams Pipe Line
Co. (Opinion No. 154-B) which adopted the trended original cost methodology for
determining the justness and reasonableness of petroleum pipeline tariff rates.
The trended original cost methodology provides that in calculating a petroleum
pipeline's rate base, after a starting rate base has been determined, the
pipeline's rate base is to be:
. increased by property additions at cost plus an amount equal to the equity
portion of the rate base multiplied or "trended" by an inflation factor;
and
. decreased by property retirements and depreciation and amortization of the
rate base write-ups reflecting inflation and amortization of the starting
rate base write-up.
The starting rate base must be determined for pipelines that previously were
regulated under the Interstate Commerce Commission valuation methodology in
order to provide a transition from the valuation methodology to the trended
original cost methodology. For these pipelines, a portion of the starting rate
base will continue to reflect reproduction costs in excess of the depreciated
original cost of the pipeline's assets. The Williams opinion provides that the
starting rate base is to be the sum of the following components:
. the depreciated original cost of the carrier's property, multiplied by the
ratio of debt to total capitalization;
. the net depreciated reproduction cost based on the FERC reproduction cost
rate base (as of 1983) derived under the Interstate Commerce Commission
valuation methodology, multiplied by the ratio of equity to total
capitalization; and
. the original cost of land, the net book value of rights-of-way and allowed
working capital.
The difference between the starting rate base and the depreciated original
cost rate base is referred to as the starting rate base write-up. This write-up
is amortized over the useful life of the facilities. The Williams opinion
expressly provides that the use of a starting rate base in excess of the
original cost of the assets is subject to challenge by showing that the
investors in the carrier had not relied on the Interstate Commerce Commission
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valuation rate base methodology. Some of our rates involve rate base components
built or acquired prior to 1983, and if our rates were challenged, defending
these rates on a cost-of-service basis may require technical rate base
calculations.
Index-Based Rates and other Subsequent Developments. In October 1992,
Congress passed the Energy Policy Act of 1992. The Energy Policy Act deemed
interstate petroleum pipeline rates in effect for the 365-day period ending on
the date of enactment of the Energy Policy Act, or that were in effect on the
365th day preceding enactment and had not been subject to complaint, protest,
or investigation during the 365-day period, to be just and reasonable under the
Interstate Commerce Act. These rates are commonly referred to as "grandfathered
rates." All of our interstate pipeline rates were deemed just and reasonable
and therefore are grandfathered under the Energy Policy Act. The Energy Policy
Act provides that the FERC may change grandfathered rates upon complaints only
under the following limited circumstances:
. a substantial change has occurred since enactment in either the economic
circumstances or the nature of the services which were a basis for the
rate;
. the complainant was contractually barred from challenging the rate prior
to enactment of the Energy Policy Act and filed the complaint within 30
days of the expiration of the contractual bar; or
. a provision of the tariff is unduly discriminatory or preferential.
The Energy Policy Act further required the FERC to issue rules establishing
a simplified and generally applicable ratemaking methodology for interstate
petroleum pipelines and to streamline procedures in petroleum pipeline
proceedings. On October 22, 1993, the FERC responded to the Energy Policy Act
directive by issuing Order No. 561, which adopts a new indexing rate
methodology for interstate petroleum pipelines. Under the resulting
regulations, effective January 1, 1995, petroleum pipelines are able to change
their rates within prescribed ceiling levels that are tied to changes in the
Producer Price Index for Finished Goods, minus one percent. Rate increases made
under the index will be subject to protest, but the scope of the protest
proceeding will be limited to an inquiry into whether the portion of the rate
increase resulting from application of the index is substantially in excess of
the pipeline's increase in costs. The indexing methodology is applicable to any
existing rate, whether grandfathered or whether established after enactment of
the Energy Policy Act.
In Order No. 561, the FERC said that as a general rule pipelines must
utilize the indexing methodology to change their rates. Indexing includes the
requirement that, in any year in which the index is negative, pipelines must
file to lower their rates if they would otherwise be above the reduced ceiling.
However, the pipeline is not required to reduce its rates below the level
deemed just and reasonable under the Energy Policy Act. The FERC further
indicated in Order No. 561, however, that it is retaining cost-of-service
ratemaking, market-based rates, and settlement rates as alternatives to the
indexing approach. A pipeline can follow a cost-of-service approach when
seeking to increase its rates above index levels (or when seeking to avoid
lowering rates to index levels) provided that the pipeline can establish that
there is a substantial divergence between the actual costs experienced by the
pipeline and the rate resulting from application of the index. A pipeline can
charge market-based rates if it establishes that it lacks significant market
power in the affected markets. In addition, a pipeline can establish rates
under settlement if agreed upon by all current shippers. As specified in Order
561 and subsequent decisions, a pipeline can seek to establish initial rates
for new services through a cost-of-service showing, by establishing that it
lacks significant market power in the affected markets, or through an agreement
between the pipeline and at least one shipper not affiliated with the pipeline
who intends to use the new service.
The Court of Appeals for the District of Columbia Circuit affirmed Order No.
561, concluding that the general indexing methodology, along with the limited
exceptions to indexed rates, reasonably balances the FERC's dual
responsibilities of ensuring just and reasonable rates and streamlining
ratemaking through generally applicable procedures. The FERC indicated in Order
No. 561 that it would assess in 2000 how the rate-indexing method was
operating. The FERC issued a Notice of Inquiry on July 27, 2000 seeking
comments on whether to retain or to change the existing index. On December 14,
2000, the FERC issued an order concluding the initial
87
review of the petroleum pipeline pricing index. In this order, the FERC found
that the existing index has closely approximated the actual cost changes in the
petroleum pipeline industry and that use of the rate index continues to satisfy
the mandates of the Energy Policy Act. The Association of Oil Pipe Lines has
petitioned for judicial review of that decision, arguing that the annual
adjustment should be based on the full producer price index, without the one
percentage point deduction. That petition is currently pending before the U.S.
Court of Appeals for the District of Columbia Circuit. The next review of the
FERC index is scheduled for July 2005.
Another development affecting petroleum pipeline ratemaking arose in Opinion
No. 397, involving a partnership operating a crude oil pipeline. In Opinion No.
397, the FERC concluded that there should not be a corporate income tax
allowance built into a petroleum pipeline's rates for income attributable to
noncorporate partners because those partners, unlike corporate partners, do not
pay a corporate income tax on partnership distributions. Opinion No. 397 was
affirmed by the FERC on rehearing in May 1996. The parties subsequently settled
the case, so no judicial review of the tax ruling took place.
A current proceeding, however, is pending at the FERC that could result in
changes to the FERC's income tax method announced in Opinion No. 397 as well as
to other elements of the FERC's rate methods for petroleum pipelines. This
proceeding involves another publicly traded limited partnership engaged in
petroleum products pipeline transportation. More specifically, on January 13,
1999, the FERC issued Opinion No. 435 in this proceeding, which, among other
things, affirmed Opinion No. 397's determination that there should not be a
corporate income tax allowance built into a petroleum pipeline's rates for
income attributable to noncorporate partners. Requests for rehearing of Opinion
No. 435 were filed with the FERC on the tax issue and on other aspects of the
FERC's crude oil pipeline ratemaking methodology. Petitions for review of
Opinion No. 435 are before the Court of Appeals for the District of Columbia
Circuit. On May 17, 2000, the FERC issued Opinion No. 435-A which, with respect
to the substance of the income tax allowance issue, denied rehearing requests.
Petitions for review of Opinion No. 435-A are before the Court of Appeals for
the District of Columbia. Petitions for rehearing of Opinion No. 435-A were
decided by the FERC in Opinion 435-B, issued on September 13, 2001. That
decision further defined the scope of the income tax allowance for publicly
traded limited partnerships, and resolved a number of other cost of service
issues as well. We do not know if any party will seek rehearing of Opinion
435-B; if so, those petitions would need to be resolved by the FERC before the
Court of Appeals will consider the petitions for review of Opinions 435, 435-A
and 435-B. We cannot assume that the ultimate outcome of the income tax
allowance issue and other issues subject to judicial review will not adversely
affect our pipeline rates.
Market-Based Rates. In a proceeding involving Buckeye Pipeline Company,
L.P., the FERC found that a petroleum pipeline able to demonstrate a lack of
market power may be allowed a lighter standard of regulation than that imposed
by the trended original cost methodology. In such a case, the pipeline company
has the opportunity to establish that it faces sufficient competition to
justify relief from the strict application of the cost-based principles. In
Buckeye, the FERC determined, based on the existing level of market
concentration in the pipeline's market areas, that Buckeye exercised
significant market power in only five of its 21 market areas and therefore was
entitled to charge market-based rates in the other 16 market areas. The
opportunity to charge market-based rates means that the pipeline may charge
what the market will bear. Order No. 572, a companion order to Order No. 561,
was issued by the FERC on October 25, 1994 and established procedural rules
governing petroleum pipelines' applications for a finding that the pipeline
lacks significant market power in the relevant market.
Settlement Rates. In Order No. 561, the FERC specifically held that it would
also permit changes in rates that are the product of unanimous agreement
between the pipeline and all the shippers using the service to which the rate
applies. The rationale behind allowing this type of rate change is to further
the FERC's policy of favoring settlements among parties and to lessen the
regulatory burdens on all concerned. The FERC, however, will also entertain a
challenge to settlement rates, in response to a protest or a complaint which
alleges the same circumstances required to challenge an indexed rate. An
example of this type of challenge is that there is a discrepancy between the
rate and the pipeline's cost of service that is so substantial as to render the
settlement (or indexed) rate unjust and unreasonable.
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Intrastate Regulation. Some of our pipeline operations are subject to
regulation by the Texas Railroad Commission, the Pennsylvania Public Utility
Commission, the Ohio Public Utility Commission, and the Oklahoma Corporation
Commission. The applicable state statutes require that pipeline rates be
non-discriminatory and provide no more than a fair return on the aggregate
value of the pipeline property used to render services. State commissions have
generally not been aggressive in regulating common carrier pipelines and have
generally not investigated the rates or practices of petroleum pipelines in the
absence of shipper complaints. Complaints to state agencies have been
infrequent and are usually resolved informally. Although we cannot assure you
that our intrastate rates would ultimately be upheld if challenged, we believe
that, given this history, the tariffs now in effect are not likely to be
challenged, or if challenged, not likely to be ordered to be reduced.
Our Pipelines. The FERC generally has not investigated interstate rates on
its own initiative when those rates, like ours, have not been the subject of a
protest or a complaint by a shipper. In addition, as discussed above,
intrastate pipelines generally are subject to "light-handed" regulation by
state commissions and we do not believe the intrastate tariffs now in effect
are likely to be challenged. However, the FERC or a state regulatory commission
could investigate our rates at the urging of a third party if the third party
is either a current shipper or is able to show that it has a substantial
economic interest in our tariff rate level. If an interstate rate were
challenged, we would defend that rate as grandfathered under the Energy Policy
Act. As that Act applies to our rates, a person challenging a grandfathered
rate must, as a threshold matter, establish a substantial change since the date
of enactment of the Act, in either the economic circumstances or the nature of
the service that formed the basis for the rate. A complainant might assert that
the creation of the partnership itself constitutes such a change, an argument
that has not previously been specifically addressed by the FERC and to which we
believe there are valid defenses. If the FERC were to find a substantial change
in circumstances, then the existing rates could be subject to detailed review.
We believe that most such rates can be supported on a cost of service basis,
even recognizing the reduction in our income tax allowance that is likely to
result from our conversion from a corporation to a partnership. Although there
are some rates that might not be defensible on that basis, we believe that all
of those rates involve movements as to which (1) Sunoco R&M is the only
shipper, (2) the partnership has a reasonable basis to assert that it lacks
significant market power and therefore is entitled to market based rates, or
(3) the revenue amounts involved do not materially affect our performance.
If the FERC investigated our rate levels, it could inquire into our costs,
including:
. the overall cost of service, including operating costs and overhead;
. the allocation of overhead and other administrative and general expenses
to the rate;
. the appropriate capital structure to be utilized in calculating rates;
. the appropriate rate of return on equity;
. the rate base, including the proper starting rate base;
. the throughput underlying the rate; and
. the proper allowance for federal and state income taxes.
We do not believe that it is likely that there will be a challenge to our
rates by a current shipper that would materially affect our revenues or cash
flows. Sunoco R&M and its subsidiaries are the only current shippers in many of
our pipelines. Sunoco R&M has agreed not to challenge, or to cause others to
challenge or assist others in challenging, our tariff rates for seven years.
Because most of our pipelines are common carrier pipelines, we may be
required to accept new shippers who wish to transport in our pipelines. It is
possible that any new shippers, current shippers, or other interested parties,
may decide to challenge our tariff rates. If any rate challenge or challenges
were successful, cash available for distribution could be materially reduced.
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Environmental Regulation
General
Our operation of pipelines, terminals, and associated facilities in
connection with the storage and transportation of refined products, crude oil,
and other liquid hydrocarbons are subject to stringent and complex federal,
state, and local laws and regulations governing the discharge of materials into
the environment, or otherwise relating to the protection of the environment. As
with the industry generally, compliance with existing and anticipated laws and
regulations increases our overall cost of business including our capital costs
to construct, maintain, and upgrade equipment and facilities. While these laws
and regulations affect our maintenance capital expenditures and net income, we
believe that they do not affect our competitive position in that the operations
of our competitors are similarly affected. We believe that our operations are
in substantial compliance with applicable environmental laws and regulations.
However, these laws and regulations are subject to frequent change by
regulatory authorities, and we are unable to predict the ongoing cost to us of
complying with these laws and regulations or the future impact of these laws
and regulations on our operations. Violation of environmental laws,
regulations, and permits can result in the imposition of significant
administrative, civil and criminal penalties, injunctions, and construction
bans or delays. A discharge of hydrocarbons or hazardous substances into the
environment could, to the extent the event is not insured, subject us to
substantial expense, including both the cost to comply with applicable laws and
regulations and claims made by neighboring landowners and other third parties
for personal injury and property damage.
Under the terms of our omnibus agreement with Sunoco, Inc., and in
connection with the contribution of our assets by affiliates of Sunoco, Inc.,
Sunoco, Inc. has agreed to indemnify us for 30 years from environmental and
toxic tort liabilities related to the assets transferred to us that arise from
the operation of such assets prior to closing. Sunoco, Inc. will be obligated
to indemnify us for 100% of all losses asserted within the first 21 years of
closing. Sunoco, Inc.'s share of liability for claims asserted thereafter will
decrease by 10% a year. For example, for a claim asserted during the
twenty-third year after closing, Sunoco, Inc. would be required to indemnify us
for 80% of our loss. There is no monetary cap on the amount of indemnity
coverage provided by Sunoco, Inc. Any remediation liabilities not covered by
this indemnity will be our responsibility. Total future costs for environmental
remediation activities will depend upon, among other things, the identification
of any additional sites, the determination of the extent of the contamination
at each site, the timing and nature of required remedial actions, the
technology available and needed to meet the various existing legal
requirements, the nature and extent of future environmental laws, inflation
rates, and the determination of our liability at multi-party sites, if any, in
light of the number, participation levels, and financial viability of other
parties.
Air Emissions
Our operations are subject to the Clean Air Act and comparable state and
local statutes. Amendments to the Clean Air Act enacted in late 1990 as well as
recent or soon to be adopted changes to state implementation plans for
controlling air emissions in regional, non-attainment areas require or will
require most industrial operations in the United States to incur capital
expenditures in order to meet air emission control standards developed by the
Environmental Protection Agency and state environmental agencies. As a result
of these amendments, our facilities that emit volatile organic compounds or
nitrogen oxides are subject to increasingly stringent regulations, including
requirements that some sources install maximum or reasonably available control
technology. In addition, the 1990 Clean Air Act Amendments established a new
operating permit for major sources, which applies to some of our facilities. We
will be required to incur certain capital expenditures in the next several
years for air pollution control equipment in connection with maintaining or
obtaining permits and approvals addressing air emission related issues.
Although we can give no assurances,
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we believe implementation of the 1990 Clean Air Act Amendments will not have a
material adverse effect on our financial condition or results of operations.
Our customers are also subject to, and affected by, environmental
regulations. Since the late 1990s, the Environmental Protection Agency has
undertaken significant enforcement initiatives under authority of the Clean Air
Act's New Source Review and Prevention of Significant Deterioration, or
NSR/PSD, program in an effort to further reduce annual emissions of volatile
organic compounds, nitrogen oxides, sulfur dioxide, and particulate matter.
These enforcement initiatives have been targeted at industries that have large
manufacturing facilities and that are significant sources of emissions, such as
refining, paper and pulp, and electric power generating industries. The basic
premise of the enforcement initiative is the Environmental Protection Agency's
assertion that many of these industrial establishments have modified or
expanded their operations over time without complying with NSR/PSD regulations
adopted by the Environmental Protection Agency that require permits and new
emission controls in connection with any significant facility modifications or
expansions that can result in emissions increases above certain thresholds.
Where the Environmental Protection Agency finds that a company or facility has
modified or expanded its operations without complying with the requirements of
the NSR/PSD program, it may bring an enforcement action against the company or
facility to require installation of the emissions controls that the agency
deems necessary, and it may also seek to impose fines and penalties for failure
to comply with NSR/PSD requirements.
As part of this on-going NSR/PSD enforcement initiative, the Environmental
Protection Agency has entered into consent agreements with several refiners
that require the refiners to make significant capital expenditures to install
emissions control equipment at selected facilities. In certain instances, these
additional controls would be required to comply with other provisions of the
Clean Air Act or other federal or state regulations at a later date, but the
effect of these consent agreements is to require the installation of air
emission controls earlier than they might otherwise be required. The cost of
the required emissions control equipment can be significant, ranging from a few
million dollars to more than $100.0 million per refinery, depending on the
size, age, and configuration of the refinery. Sunoco R&M has received a request
for information from the Environmental Protection Agency relating to
maintenance activities and modifications that have taken place at Sunoco R&M's
refineries since 1980. Although, Sunoco R&M does not believe that it has
violated any NSR/PSD requirements, as part of this initiative, Sunoco R&M could
be required to make significant capital expenditures.
Under the Clean Air Act, the Environmental Protection Agency and state
agencies acting with authority delegated by the Environmental Protection Agency
have announced new rules or the intent to strengthen existing rules affecting
the composition of motor vehicle fuels and automobile emissions. The
Environmental Protection Agency's Gasoline Sulfur Control Requirements require
that the sulfur content of motor vehicle gasoline be reduced to 80 parts per
million and the corporate average sulfur content be reduced to 30 parts per
million by 2006. Likewise, the Environmental Protection Agency's Diesel Fuel
Sulfur Control Requirements require that the sulfur content of diesel fuel be
reduced to 15 parts per million by 2006. This rule is currently being
challenged in federal court, but it is unclear whether the litigation will have
any impact on the implementation of the rule (although several states,
including New York and Texas, have adopted or are planning to adopt these new
standards, even if the Environmental Protection Agency fails to implement this
rule). The United States Supreme Court recently upheld the Environmental
Protection Agency's ozone and particulate matter standards against similar
attacks.
The Environmental Protection Agency is also reportedly considering limiting
the levels of benzene and other toxic substances in gasoline as well as banning
methyl tertiary-butyl ether, also known as MTBE, in gasoline, which may require
the use of other chemical additives to serve as oxygenates instead of MTBE.
Legal mandates to use alternative fuels may also have a direct and potentially
adverse impact on our revenues. For example, under the Energy Policy Act of
1992, 75% of new vehicles purchased by certain federal and state government
fleets must use alternative fuels and New York has adopted standards requiring
that by the year 2003, 10% of fleets delivered be zero-emissions vehicles; and
under the Clean Air Act, 50% to 70% (depending on vehicle weight) of new
vehicles in clean air non-attainment areas purchased by certain federal, state,
municipal and private fleets must use some type of alternative fuels by 2001.
Also, some states and local
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governments, including, for example, Texas, have adopted "boutique" fuel
standards to comply with clean air requirements. "Boutique" fuels pose
distribution problems because refiners must produce different blends for
different communities. We have no control over Sunoco, Inc.'s responses to
these emerging requirements, and we cannot assure you that those responses will
not reduce the throughput in our pipelines, our cash flow and our ability to
make distributions to you.
Hazardous Substances and Waste
To a large extent, the environmental laws and regulations affecting our
operations relate to the release of hazardous substances or solid wastes into
soils, groundwater, and surface water, and include measures to control
pollution of the environment. These laws generally regulate the generation,
storage, treatment, transportation, and disposal of solid and hazardous waste.
They also require corrective action, including the investigation and
remediation, of certain units at a facility where such waste may have been
released or disposed. For instance, the Comprehensive Environmental Response,
Compensation and Liability Act, referred to as CERCLA and also known as
Superfund, and comparable state laws impose liability, without regard to fault
or the legality of the original conduct, 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 where the release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances found at the site. Under CERCLA, these persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources, and for the costs of certain health studies. CERCLA also
authorizes the Environmental Protection Agency and, in some instances, third
parties to act in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. It is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by
hazardous substances or other pollutants released into the environment. In the
course of our ordinary operations, we may generate waste that falls within
CERCLA's definition of a "hazardous substance" and, as a result, may be jointly
and severally liable under CERCLA for all or part of the costs required to
clean up sites at which these hazardous substances have been released into the
environment.
We also generate solid wastes, including hazardous wastes, that are subject
to the requirements of the Federal Resource Conservation and Recovery Act,
referred to as RCRA, and comparable state statutes. From time to time, the
Environmental Protection Agency considers the adoption of stricter disposal
standards for non-hazardous wastes, including crude oil and gas wastes. We are
not currently required to comply with a substantial portion of the RCRA
requirements because our operations generate minimal quantities of hazardous
wastes. However, it is possible that additional wastes, which could include
wastes currently generated during 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. Any changes in the
regulations could have a material adverse effect on our maintenance capital
expenditures and operating expenses.
We currently own or lease, and our predecessor has in the past owned or
leased, properties where hydrocarbons are being or have been handled for many
years. Although we have utilized operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other waste may have been
disposed of or released on or under the properties owned or leased by us or on
or under other locations where these wastes have been taken for disposal. In
addition, many of these properties have been operated by third parties whose
treatment and disposal or release of hydrocarbons or other wastes was not under
our control. These properties and wastes disposed thereon may be subject to
CERCLA, RCRA, and analogous state laws. Under these laws, we could be required
to remove or remediate previously disposed wastes (including wastes disposed of
or released by prior owners or operators), to clean up contaminated property
(including contaminated groundwater) or to perform remedial operations to
prevent future contamination.
We are currently involved in remediation activities at numerous sites, which
involve significant expense. These remediation activities are all covered by an
indemnity from Sunoco Inc. For more information, please see
"Business--Environmental Remediation."
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Water
Our operations can result in the discharge of pollutants, including crude
oil. The Oil Pollution Act was enacted in 1990 and amends provisions of the
Water Pollution Control Act of 1972 and other statutes as they pertain to
prevention and response to oil spills. The Oil Pollution Act subjects owners of
covered facilities to strict, joint, and potentially unlimited liability for
removal costs and other consequences of an oil spill, where the spill is into
navigable waters, along shorelines or in the exclusive economic zone of the
United States. In the event of an oil spill into navigable waters, substantial
liabilities could be imposed upon us. States in which we operate have also
enacted similar laws. Regulations are currently being developed under the Oil
Pollution Act and state laws that may also impose additional regulatory burdens
on our operations. Spill prevention control and countermeasure requirements of
federal laws and some state laws require diking and similar structures to help
prevent contamination of navigable waters in the event of an oil overflow,
rupture or leak. We are in substantial compliance with these laws.
Additionally, the Office of Pipeline Safety of the DOT has approved our oil
spill emergency response plans.
The Water Pollution Control Act of 1972 imposes restrictions and strict
controls regarding the discharge of pollutants into navigable waters. Permits
must be obtained to discharge pollutants into state and federal waters. The
Water Pollution Control Act of 1972 imposes substantial potential liability for
the costs of removal, remediation and damages. In addition, some states
maintain groundwater protection programs that require permits for discharges or
operations that may impact groundwater conditions. We believe that compliance
with existing permits and compliance with foreseeable new permit requirements
will not have a material adverse effect on our financial condition or results
of operations.
Employee Safety
We are subject to the requirements of the Occupational Safety and Health
Act, referred to as 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 information be maintained about hazardous
materials used or produced in operations and that this information be provided
to employees, state and local government authorities and citizens. We believe
that our operations are in substantial compliance with the OSHA requirements,
including general industry standards, record keeping requirements, and
monitoring of occupational exposure to regulated substances.
Endangered Species Act
The Endangered Species Act restricts activities that may affect endangered
species or their habitats. While some of our facilities are in areas that may
be designated as habitat for endangered species, we believe that we are in
substantial compliance with the Endangered Species Act. However, the discovery
of previously unidentified endangered species could cause us to incur
additional costs or become subject to operating restrictions or bans in the
affected area.
Hazardous Materials Transportation Requirements
The DOT regulations affecting pipeline safety require pipeline operators to
implement measures designed to reduce the environmental impact of crude oil
discharge from onshore crude oil pipelines. These regulations require operators
to maintain comprehensive spill response plans, including extensive spill
response training for pipeline personnel. In addition, the DOT regulations
contain detailed specifications for pipeline operation and maintenance. We
believe our operations are in substantial compliance with these regulations.
The DOT has recently adopted a pipeline integrity management rule. We have
analyzed the impact of this rule and, based on historical integrity tests
conducted since 1989, have estimated that compliance with this rule may cost us
approximately $8.0 million a year for five years, for a total of $40.0 million
for all pipelines in the Eastern and Western Pipeline Systems. Sunoco, Inc. has
agreed to indemnify us for costs in excess of $8.0 million per year, up to a
maximum of $15.0 million over the next five years.
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Environmental Remediation
Contamination resulting from spills of refined products and crude oil is not
unusual within the petroleum pipeline industry. Historic spills along our
pipelines, gathering systems, and terminals as a result of past operations have
resulted in contamination of the environment, including soils and groundwater.
Site conditions, including soils and groundwater, are being evaluated at a
number of our properties where operations may have resulted in releases of
hydrocarbons and other wastes.
Moreover, potentially significant assessment, monitoring, and remediation
programs are being performed at some 19 sites in Michigan, New Jersey, New
York, Ohio, and Pennsylvania. These 19 sites include eight terminals and two
tank farms owned by us (River Rouge and Owosso Terminals in Michigan; Newark
Terminal in New Jersey; Dayton Terminal in Ohio; and Belmont, Kingston,
Montello, and Pittsburgh Terminals and Darby Creek Tank Farm and Marcus Hook
Tank Farm in Pennsylvania) and nine third-party locations (in Camden County in
New Jersey; in Livingston and Chemung Counties in New York; and in Chester,
Delaware, Lancaster, Lebanon, and Luzerne Counties, in Pennsylvania) that were
impacted by pipe line or pump station releases of crude oil or petroleum
products. While we estimate that the total aggregate cost of performing the
currently anticipated assessment, monitoring and remediation at these 19 sites
to be $8.5 million, we cannot assure you that the actual remediation costs or
associated remediation liabilities will not exceed this amount. Sunoco, Inc.
has agreed to indemnify us from environmental and toxic tort liabilities
related to the assets transferred to us to the extent such liabilities exist or
arise from operation of these assets prior to closing and are asserted within
30 years after the closing of this offering. This indemnity will cover the
costs associated with performance of the assessment, monitoring, and
remediation programs at the 19 sites referenced above. See "--Environmental
Regulation--General."
We may experience future releases of refined products or crude oil into the
environment from our pipelines, gathering systems, and terminals, or discover
historical releases that were previously unidentified or not assessed. While we
maintain an extensive inspection and audit program designed, as applicable, to
prevent and to detect and address these releases promptly, damages and
liabilities incurred due to any future environmental releases from our assets
nevertheless have the potential to substantially affect our business.
Title to Properties
Substantially all of our pipelines are constructed on rights-of-way granted
by the apparent record owners of the property and in some instances these
rights-of-way are revocable at the election of the grantor. In many instances,
lands over which rights-of-way have been obtained are subject to prior liens
that have not been subordinated to the right-of-way grants. In some cases, not
all of the apparent record owners have joined in the right-of-way grants, but
in substantially all of these cases, signatures of the owners of majority
interests have been obtained. We have obtained permits from public authorities
to cross over or under, or to lay facilities in or along watercourses, county
roads, municipal streets, and state highways, and in some instances, these
permits are revocable at the election of the grantor. We have also obtained
permits from railroad companies to cross over or under lands or rights-of-way,
many of which are also revocable at the grantor's election. In some cases,
property for pipeline purposes was purchased in fee. In some states and under
some circumstances, we have the right of eminent domain to acquire
rights-of-way and lands necessary for our common carrier pipelines.
Some of the leases, easements, rights-of-way, permits, and licenses that
will be transferred to us will require the consent of the grantor to transfer
these rights, which in some instances is a governmental entity. Our general
partner believes that it has obtained or will obtain sufficient third-party
consents, permits, and authorizations for the transfer of the assets necessary
for us to operate our business in all material respects as described in this
prospectus. With respect to any consents, permits, or authorizations that have
not been obtained, our general partner believes that these consents, permits,
or authorizations will be obtained after the closing of this offering, or that
the failure to obtain these consents, permits, or authorizations will have no
material adverse effect on the operation of our business.
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Our general partner believes that we have satisfactory title to all of our
assets. Record title to some of our assets may continue to be held by
affiliates of Sunoco, Inc. until we have made the appropriate filings in the
jurisdictions in which such assets are located and obtained any consents and
approvals that are not obtained prior to transfer. We will make these filings
and obtain these consents upon completion of this offering. Although title to
these properties is subject to encumbrances in some cases, such as customary
interests generally retained in connection with acquisition of real property,
liens related to environmental liabilities associated with historical
operations, liens for current taxes and other burdens, and easements,
restrictions, and other encumbrances to which the underlying properties were
subject at the time of acquisition by our predecessor or us, our general
partner believes that none of these burdens should materially detract from the
value of these properties or from our interest in these properties or should
materially interfere with their use in the operation of our business.
Employees
To carry out our operations, our general partner and its affiliates will
employ approximately 1,170 people, who will provide direct support to our
operations. Approximately 620 of these employees are represented by labor
unions or associations. Our general partner considers its employee relations to
be good.
Legal Proceedings
We will be a party to various legal actions that arise in the ordinary
course of our business. Sunoco, Inc. has agreed to indemnify us for any losses
we may suffer as a result of currently pending legal actions against our
predecessors.
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MANAGEMENT
Management of Sunoco Logistics Partners
Sunoco Partners LLC, as our general partner, will manage our operations and
activities on our behalf. Our general partner is not elected by our unitholders
and will not be subject to re-election on a regular basis in the future.
Unitholders will not directly or indirectly participate in our management or
operation. Our general partner owes a fiduciary duty to our unitholders. Our
general partner will be liable, as general partner, for all of our debts (to
the extent not paid from our assets), except for indebtedness or other
obligations that are made specifically non-recourse to it. Whenever possible,
our general partner intends to incur indebtedness or other obligations that are
non-recourse.
At least three members of the board of directors of our general partner will
serve on a conflicts committee to review specific matters that the board
believes may involve conflicts of interest. The conflicts committee will
determine if the resolution of the conflict of interest is fair and reasonable
to us. The members of the conflicts committee may not be officers or employees
of our general partner or directors, officers, or employees of its affiliates,
and must meet the independence standards to serve on an audit committee of a
board of directors established by the NYSE. Any matters approved by the
conflicts committee will be conclusively deemed to be fair and reasonable to
us, approved by all of our partners, and not a breach by our general partner of
any duties it may owe us or our unitholders. In addition, the members of the
conflicts committee will also serve on an audit committee that will review our
external financial reporting, recommend engagement of our independent auditors,
and review procedures for internal auditing and the adequacy of our internal
accounting controls. The members of the conflicts committee will also serve on
the compensation committee, which will oversee compensation decisions for the
officers of our general partner as well as the compensation plans described
below.
We are managed and operated by the directors and officers of Sunoco Partners
LLC, our general partner. Most of our operational personnel will be employees
of our general partner.
Some officers of Sunoco Partners LLC may spend a substantial amount of time
managing the business and affairs of Sunoco, Inc. and its other affiliates.
These officers may face a conflict regarding the allocation of their time
between our business and the other business interests of Sunoco, Inc. Sunoco
Partners LLC intends to cause its officers to devote as much time to the
management of our business and affairs as is necessary for the proper conduct
of our business and affairs.
Directors and Executive Officers of Sunoco Partners LLC
The following table shows information for the directors and executive
officers of Sunoco Partners LLC. Executive officers and directors are elected
for one-year terms.
Name Age Position with the General Partner
---- --- -----------------------------------------------
Deborah M. Fretz. 53 President, Chief Executive Officer and Director
Joseph P. Krott.. 38 Comptroller
John G. Drosdick. 58 Director
Thomas W. Hofmann 50 Director
Ms. Fretz was elected our President, Chief Executive Officer and a director
in October 2001. Prior to assuming her positions with us, she was Senior Vice
President, MidContinent Refining, Marketing and Logistics of Sunoco, Inc. from
November 2000. Prior to that, she was Senior Vice President, Logistics of
Sunoco, Inc. from August 1994 to November 2000 and also held the position of
Senior Vice President, Lubricants of Sunoco, Inc. from January 1997 to November
2000. In addition, she has been President of Sun Pipe Line Company, a
subsidiary of Sunoco, Inc., since October 1991. Ms. Fretz is also a director of
GATX Corporation and Cooper Tire & Rubber Company.
Mr. Krott was elected our Comptroller in October 2001. He has been
Comptroller of Sunoco, Inc. since July 1998. Prior to that, from September 1997
to July 1998, he served as Director, Compensation, Benefits & HR Systems at
Sunoco, Inc. and from July 1996 to September 1997 as Manager, Compensation & HR
Systems of Sunoco, Inc.
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Mr. Drosdick was elected to our board of directors in October 2001. He has
been Chairman of the Board of Directors, President and Chief Executive Officer
of Sunoco, Inc. since May 2000. Prior to that, he was a director, President and
Chief Operating Officer of Sunoco, Inc. from December 1996 to May 2000. He was
President and Chief Operating Officer of Ultramar Corporation from June 1992 to
August 1996. Mr. Drosdick is also a director of Hercules Incorporated and
Lincoln National Corp.
Mr. Hofmann was elected to our board of directors in October 2001. He has
been Vice President and Chief Financial Officer of Sunoco, Inc. since July
1998. Prior to that, he was Comptroller of Sunoco, Inc. from July 1995.
Reimbursement of Expenses of the General Partner
The general partner will not receive any management fee or other
compensation for its management of Sunoco Logistics Partners. The general
partner and its affiliates will be reimbursed for expenses incurred on our
behalf. These expenses include the costs of employee, officer and director
compensation and benefits properly allocable to Sunoco Logistics Partners, and
all other expenses necessary or appropriate to the conduct of the business of,
and allocable to, Sunoco Logistics Partners. The partnership agreement provides
that the general partner will determine the expenses that are allocable to
Sunoco Logistics Partners in any reasonable manner determined by the general
partner in its sole discretion.
Executive Compensation
Sunoco Logistics Partners and the general partner were formed in October
2001, but the general partner paid no compensation to its directors and
officers with respect to the 2001 fiscal year. We have not accrued any
obligations with respect to management incentive or retirement benefits for the
directors and officers for the 2001 fiscal year. Officers and employees of the
general partner may participate in employee benefit plans and arrangements
sponsored by the general partner or its affiliates, including plans which may
be established by the general partner or its affiliates in the future.
Compensation of Directors
Officers or employees of the general partner who also serve as directors
will not receive additional compensation. The general partner anticipates that
each independent director will receive compensation for attending meetings of
the board of directors as well as committee meetings. The amount of
compensation to be paid to the independent directors has not yet been
determined. In addition, each independent director will be reimbursed for
out-of-pocket expenses in connection with attending meetings of the board of
directors or committees. Each director will be fully indemnified by us for
actions associated with being a director to the extent permitted under Delaware
law.
Long-Term Incentive Plan
The general partner has adopted the Sunoco Logistics Partners Long-Term
Incentive Plan for employees and directors of the general partner and employees
of its affiliates who perform services for us. The long-term incentive plan
consists of two components: restricted units and unit options. The long-term
incentive plan currently permits the grant of awards covering an aggregate of
common units. The plan is administered by the compensation committee of the
general partner's board of directors.
The general partner's board of directors in its discretion may terminate or
amend the long-term incentive plan at any time with respect to any units for
which a grant has not yet been made. The general partner's board of directors
also has the right to alter or amend the long-term incentive plan or any part
of the plan from time to time, including increasing the number of units that
may be granted subject to unitholder approval as required by
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the exchange upon which the common units are listed at that time. However, no
change in any outstanding grant may be made that would materially impair the
rights of the participant without the consent of the participant.
Restricted Units. A restricted unit is a "phantom" unit that entitles the
grantee to receive a common unit upon the vesting of the phantom unit or, in
the discretion of the compensation committee, cash equivalent to the value of a
common unit. In the future, the compensation committee may determine to make
additional grants under the plan to employees and directors containing such
terms as the compensation committee shall determine under the plan. The
compensation committee will determine the period over which restricted units
granted to employees and directors will vest. The committee may base its
determination upon the achievement of specified financial objectives. In
addition, the restricted units will vest upon a change of control of Sunoco
Logistics Partners, the general partner or Sunoco, Inc.
If a grantee's employment or membership on the board of directors terminates
for any reason, the grantee's restricted units will be automatically forfeited
unless, and to the extent, the compensation committee provides otherwise.
Common units to be delivered upon the vesting of restricted units may be common
units acquired by the general partner in the open market, common units already
owned by the general partner, common units acquired by the general partner
directly from us or any other person or any combination of the foregoing. The
general partner will be entitled to reimbursement by us for the cost incurred
in acquiring common units. If we issue new common units upon vesting of the
restricted units, the total number of common units outstanding will increase.
Following the subordination period, the compensation committee, in its
discretion, may grant tandem distribution equivalent rights with respect to
restricted units.
We intend the issuance of the common units upon vesting of the restricted
units under the plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate in the equity
appreciation of the common units. Therefore, plan participants will not pay any
consideration for the common units they receive, and we will receive no
remuneration for the units.
Unit Options. The long-term incentive plan currently permits the grant of
options covering common units. In the future, the compensation committee may
determine to make grants under the plan to employees and directors containing
such terms as the committee shall determine. Unit options will have an exercise
price that, in the discretion of the committee, may be less than, equal to or
more than the fair market value of the units on the date of grant. In general,
unit options granted will become exercisable over a period determined by the
compensation committee. In addition, the unit options will become exercisable
upon a change in control of Sunoco Logistics Partners, the general partner,
Sunoco, Inc. or upon the achievement of specified financial objectives.
Upon exercise of a unit option, the general partner will acquire common
units in the open market or directly from us or any other person or use common
units already owned by the general partner, or any combination of the
foregoing. The general partner will be entitled to reimbursement by us for the
difference between the cost incurred by the general partner in acquiring these
common units and the proceeds received by the general partner from an optionee
at the time of exercise. Thus, the cost of the unit options will be borne by
us. If we issue new common units upon exercise of the unit options, the total
number of common units outstanding will increase, and the general partner will
pay us the proceeds it received from the optionee upon exercise of the unit
option. The unit option plan has been designed to furnish additional
compensation to employees and directors and to align their economic interests
with those of common unitholders.
Management Incentive Plan
The general partner has adopted the Sunoco Logistics Partners Annual
Incentive Compensation Plan. The management incentive plan is designed to
enhance the performance of the general partner's key employees by rewarding
them with cash awards for achieving annual financial and operational
performance objectives. The compensation committee in its discretion may
determine individual participants and payments, if any, for each fiscal year.
The board of directors of the general partner may amend or change the
management incentive plan at any time. We will reimburse the general partner
for payments and costs incurred under the plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units of Sunoco
Logistics Partners that will be issued upon the consummation of this offering
and the related transactions and held by beneficial owners of 5% or more of the
units, by directors of Sunoco Partners LLC (our general partner), by each named
executive officer and by all directors and officers of Sunoco Partners LLC as a
group. Sunoco Partners LLC is an indirect wholly owned subsidiary of Sunoco,
Inc.
Percentage of Percentage of Percentage of
Common Common Subordinated Subordinated Total Units
Units to be Units to be Units to be Units to be to be
Name of Beneficially Beneficially Beneficially Beneficially Beneficially
Beneficial Owner Owned Owned Owned Owned Owned
---------------- ------------ ------------- ------------ ------------- -------------
Sunoco Partners LLC 7,472,528 59.9% 12,472,528 100% 80.0%
Deborah M. Fretz... -- -- -- -- --
Joseph P. Krott.... -- -- -- -- --
John G. Drosdick... -- -- -- -- --
Thomas W. Hofmann.. -- -- -- -- --
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After this offering, the general partner will own 7,472,528 common units and
12,472,528 subordinated units representing an aggregate 78.4% limited partner
interest in us and Sunoco Partners Operations. In addition, the general partner
will own a 2% general partner interest in us. The general partner's ability, as
general partner, to manage and operate us and its ownership of a 78.4% limited
partner interest in us effectively gives the general partner the ability to
veto some actions of Sunoco Logistics Partners and to control the management of
Sunoco Logistics Partners.
Distributions and Payments to the General Partner and its Affiliates
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the formation,
ongoing operation, and liquidation of Sunoco Logistics Partners. These
distributions and payments were determined by and among affiliated entities
and, consequently, are not the result of arm's-length negotiations.
Formation Stage
The consideration received
by our general partner and
its affiliates for the
contribution of the assets
and liabilities of Sunoco
Logistics (Predecessor)... . 6,722,528 common units;
. 12,472,528 subordinated units;
. 2% general partner interest in Sunoco Logistics
Partners;
. the incentive distribution rights; and
. approximately $247.0 million from the proceeds
of the issuance of senior notes by Sunoco
Logistics Partners.
Operational Stage
Distributions of available
cash to our general
partner................... We will generally make cash distributions 98% to
the unitholders including our general partner, as
holder of an aggregate of 7,472,528 common units
and all of the subordinated units, and 2% to the
general partner. In addition, if distributions
exceed the minimum quarterly distribution and
other higher target levels, our general partner
will be entitled to increasing percentages of the
distributions, up to 50% of the distributions
above the highest target level.
Assuming we have sufficient available cash to pay
the full minimum quarterly distribution on all of
our outstanding units for four quarters, our
general partner would receive an annual
distribution of approximately $0.9 million on its
2% general partner interest and $35.9 million on
its common units and subordinated units.
Payments to our general
partner and its
affiliates................ We will pay Sunoco, Inc. or its affiliates an
administrative fee of $8.0 million per year for
the provision of various general and
administrative services for our benefit. In
addition, the general partner
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will be entitled to reimbursement for all
expenses it incurs on our behalf, including other
general and administrative expenses. These
reimbursable expenses include the salaries and
the cost of employee benefits of employees of the
general partner who provide services to us.
Please read "--Omnibus Agreement." Our general
partner has sole discretion in determining the
amount of these expenses. The expenses we
reimbursed to Sunoco, Inc. and its affiliates
were $10.1 million in 2000, and $5.4 million for
the six months ended June 30, 2001.
Withdrawal or removal of our
general partner........... If our general partner withdraws or is removed,
its general partner interest and its incentive
distribution rights will either be sold to the
new general partner for cash or converted into
common units, in each case for an amount equal to
the fair market value of those interests. Please
read "The Partnership Agreement--Withdrawal or
Removal of the General Partner."
Liquidation Stage
Liquidation................. Upon our liquidation, the partners, including our
general partner, will be entitled to receive
liquidating distributions according to their
particular capital account balances.
Agreements Governing the Transactions
We and other parties have entered into or will enter into the various
documents and agreements that will effect transactions, including the vesting
of assets in, and the assumption of liabilities by, us and our subsidiaries,
and the application of the proceeds of this offering. These agreements will not
be the result of arm's-length negotiations, and they, or any of the
transactions that they provide for, may be effected on terms at least as
favorable to the parties to these agreements as they could have been obtained
from unaffiliated third parties. All of the transaction expenses incurred in
connection with these transactions, including the expenses associated with
vesting assets into our subsidiaries, will be paid from the proceeds of this
offering. Our general partner has agreed that if, during the term of the
pipelines and terminals storage and throughput agreement, we are required by
the FERC to reduce any of our tariffs, it will contribute an amount to us equal
to the resulting revenue shortfall for the remaining term of the agreement.
Omnibus Agreement
Upon the closing of this offering, we will enter into an omnibus agreement
with Sunoco, Inc., Sunoco R&M, and our general partner that will address the
following matters:
. Sunoco R&M's obligation to reimburse us for specified operating expenses
and capital expenditures or otherwise to complete certain tank maintenance
and inspection projects;
. our obligation to pay our general partner or Sunoco, Inc. an
administrative fee of $8.0 million per year for the provision by Sunoco,
Inc. of certain general and administrative services;
. Sunoco, Inc.'s and its affiliates' agreement not to compete with us under
certain circumstances;
. our agreement to undertake to develop and construct an asset if requested
by Sunoco, Inc.;
. an indemnity by Sunoco, Inc. for certain environmental, toxic tort and
other liabilities;
. an indemnity by Sunoco, Inc. for certain liabilities, other than
environmental and toxic tort liabilities; and
. our option to purchase certain pipeline, terminalling, and storage assets
retained by Sunoco, Inc.
Reimbursement of Expenses and Completion of Certain Projects by Sunoco, Inc.
The omnibus agreement will require Sunoco R&M to:
. reimburse us for any operating expenses and capital expenditures in excess
of $8.0 million per year in each year from 2002 to 2006 that are made to
comply with the DOT's pipeline integrity management rule, subject to a
maximum aggregate reimbursement of $15.0 million over this five-year
period;
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. complete, at its expense, certain tank maintenance and inspection projects
currently in progress or expected to be completed at the Marcus Hook Tank
Farm and the Darby Creek Tank Farm within one year; and
. reimburse us for up to $10.0 million of expenditures required at the
Marcus Hook Tank Farm and the Darby Creek Tank Farm to maintain compliance
with existing industry standards and regulatory requirements, including:
--cathodic protection upgrades at these facilities;
--raising tank farm pipelines above ground level at these facilities; and
--repairing or demolishing two riveted tanks at the Marcus Hook Tank Farm.
Payment of General and Administrative Services Fee
In addition, under the omnibus agreement we will pay our general partner or
Sunoco, Inc. an administrative fee of $8.0 million per year for the provision
by Sunoco, Inc. or its affiliates of various general and administrative
services for our benefit. The contract provides that this amount may be
increased in the second and third years following this offering by the lesser
of 2.5% or the consumer price index for the applicable year. This amount may
also increase if we undertake an acquisition that requires an increase in the
services provided by our general partner or Sunoco, Inc. Our general partner,
with the approval and consent of its conflict committee, will also have the
right to agree to further increases in connection with expansions of our
operations through the acquisition or construction of new assets or businesses.
After this three-year period, our general partner will determine the general
and administrative expenses to that will be allocated to us. Please read "Risk
Factors--Risks Inherent in an Investment in Us" and "Conflicts of Interest and
Fiduciary Responsibilities--Conflicts of Interest--We will reimburse the
general partner and its affiliates for expenses."
The $8.0 million fee includes the cost of administering employee benefit
plans, but does not include salaries of pipeline and terminal personnel or the
cost of employee benefits relating to our employees, such as 401(k), pension,
and health insurance benefits. We will reimburse Sunoco, Inc. and its
affiliates for direct expenses they incur on our behalf (for example,
salaries). In addition, we anticipate incurring additional general and
administrative costs for tax return preparation, annual and quarterly reports
to unitholders, investor relations, registrar and transfer agent fees, and
other costs related to maintaining a separate publicly held entity.
Development and Construction of an Asset By Us
The omnibus agreement will also contain a provision pursuant to which
Sunoco, Inc. may at any time propose to us that we undertake a project to
develop and construct an asset, and if our general partner determines in its
good faith judgment, with the concurrence of its conflicts committee, that the
project, including the terms on which Sunoco, Inc. would agree to use such
asset, will be beneficial on the whole to us and that proceeding with the
project will not effectively preclude us from undertaking another project that
will be more beneficial to us, we will be required to use commercially
reasonable efforts to finance, develop and construct the project.
Noncompetition
Sunoco, Inc. will agree, and will cause its affiliates to agree, for so long
as Sunoco, Inc. controls the general partner, not to engage in, whether by
acquisition or otherwise, the business of purchasing crude oil at the wellhead,
transporting via pipeline crude oil or refined products (including
petrochemicals), or operating crude oil pipelines or terminals, refined
products pipelines or terminals, or LPG terminals in the continental United
States. This restriction will not apply to:
. any business operated by Sunoco, Inc. or any subsidiary of Sunoco, Inc. at
the closing of this offering;
. any logistics asset constructed by Sunoco R&M within a manufacturing or
refining facility in connection with the operation of that facility;
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. any business with a fair market value of less than $5.0 million; and
. any business that Sunoco, Inc. or any subsidiary of Sunoco, Inc. acquires
with a fair market value of $5.0 million or more if we have been offered
the opportunity to purchase the business on the same terms as Sunoco,
Inc., but in no event less than fair market value, and we have declined to
do so with the concurrence of our conflicts committee.
Options to Purchase Assets Retained by Sunoco, Inc.
The omnibus agreement also contains the terms under which we have the
options to purchase Sunoco, Inc.'s interests in Mid-Valley Pipeline Company,
West Texas Gulf Pipeline Company, Mesa Pipeline and Inland Corporation, as well
as other inactive assets, as described under "Business--Pipeline, Terminalling
and Storage Assets Retained by Sunoco, Inc.--Assets That May Not Provide
Consistent Revenues and Cash Flows ."
Indemnification
The omnibus agreement will also provide for an environmental and toxic tort
indemnity by Sunoco, Inc. as described under "Business--Environmental
Regulation--General" and an indemnity by Sunoco, Inc. for liabilities related
to the assets contributed to the Partnership, other than environmental and
toxic tort liabilities, that arise out of its and its affiliates' ownership and
operation of the assets prior to the closing of this offering and that are
asserted within ten years after closing.
Pipelines and Terminals Storage and Throughput Agreement
Concurrently with the closing of this offering, we will enter into a
pipelines and terminals storage and throughput agreement with Sunoco R&M, as
described under "Business--Our Relationship with Sunoco, Inc."
Sunoco R&M's obligations under this agreement will not terminate if Sunoco,
Inc. and its affiliates no longer owns the general partner. This agreement may
only be assigned by Sunoco R&M with the consent of our conflicts committee.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of Interest
Conflicts of interest exist and may arise in the future as a result of the
relationships between our general partner and its affiliates (including Sunoco,
Inc.), on the one hand, and us and our limited partners, on the other hand. The
directors and officers of our general partner have fiduciary duties to manage
the general partner in a manner beneficial to its owners. At the same time, our
general partner has a fiduciary duty to manage us in a manner beneficial to us
and our unitholders.
Our partnership agreement contains provisions that allow our general partner
to take into account the interests of other parties in addition to our
interests when resolving conflicts of interest. In effect, these provisions
limit our general partner's fiduciary duties to the unitholders. Our
partnership agreement also restricts the remedies available to unitholders for
actions taken that, without those limitations, might constitute breaches of
fiduciary duty. Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the other, the
general partner will resolve that conflict. At the request of the general
partner, a conflicts committee of the board of directors of the general partner
will review conflicts of interest. Our general partner will not be in breach of
its obligations under the partnership agreement or its duties to us or the
unitholders if the resolution of the conflict is considered fair and reasonable
to us. Any resolution is considered fair and reasonable to us if that
resolution is:
. approved by the conflicts committee, although no party is obligated to
seek approval and the general partner may adopt a resolution or course of
action that has not received approval;
. on terms no less favorable to us than those generally being provided to or
available from unrelated third parties; or
. fair to us, taking into account the totality of the relationships between
the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
Unless the resolution is specifically provided for in our partnership
agreement, when resolving a conflict, our general partner may consider:
. the relative interests of the parties involved in the conflict or affected
by the action;
. any customary or accepted industry practices or historical dealings with a
particular person or entity; and
. generally accepted accounting practices or principles and other factors it
considers relevant, if applicable.
Conflicts of interest could arise in the situations described below, among
others:
Actions taken by our general partner may affect the amount of cash available
for distribution to unitholders or accelerate the right to convert subordinated
units.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding such matters as:
. amount and timing of asset purchases and sales;
. cash expenditures;
. borrowings;
. issuance of additional units; and
. the creation, reduction or increase of reserves in any quarter.
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In addition, borrowings by us and our affiliates do not constitute a breach
of any duty owed by the general partner to our unitholders, including
borrowings that have the purpose or effect of:
. enabling our general partner to receive distributions on any subordinated
units held by it or the incentive distribution rights; or
. hastening the expiration of the subordination period.
For example, in the event we have not generated sufficient cash from our
operations to pay the minimum quarterly distribution on our common units and
our subordinated units, our partnership agreement permits us to borrow funds,
which would enable us to make this distribution on all outstanding units.
Please read "Cash Distribution Policy--Subordination Period."
Our partnership agreement provides that we and our subsidiaries may borrow
funds from our general partner and its affiliates. Our general partner and its
affiliates may not borrow funds from us, the operating partnership or the
subsidiaries.
We do not have any officers or employees and rely solely on officers and
employees of our general partner and its affiliates.
Affiliates of our general partner conduct businesses and activities of their
own in which we have no economic interest. If these separate activities are
significantly greater than our activities, there could be material competition
for the time and effort of the officers and employees who provide services to
our general partner. The officers of our general partner are not required to
work full time on our affairs. These officers are required to devote time to
the affairs of Sunoco, Inc. or its affiliates and are compensated by them for
the services rendered to them.
We will reimburse the general partner and its affiliates for expenses.
We will reimburse the general partner and its affiliates for costs incurred
in managing and operating us, including costs incurred in rendering corporate
staff and support services to us. Our partnership agreement provides that the
general partner will determine the expenses that are allocable to us in any
reasonable manner determined by the general partner in its sole discretion.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only to our assets and not
against the general partner or its assets or any affiliate of the general
partner or its assets. Our partnership agreement provides that any action taken
by our general partner to limit its or our liability is not a breach of the
general partner's fiduciary duties, even if we could have obtained terms that
are more favorable without the limitation on liability.
Common unitholders will have no right to enforce obligations of our general
partner and its affiliates under agreements with us.
Any agreements between us, on the one hand, and our general partner and its
affiliates, on the other, will not grant to the unitholders, separate and apart
from us, the right to enforce the obligations of our general partner and its
affiliates in our favor.
Contracts between us, on the one hand, and our general partner and its
affiliates, on the other, will not be the result of arm's-length negotiations.
Our partnership agreement allows our general partner to pay itself or its
affiliates for any services rendered, provided these services are rendered on
terms that are fair and reasonable to us. Our general partner may also
105
enter into additional contractual arrangements with any of its affiliates on
our behalf. Neither our partnership agreement nor any of the other agreements,
contracts and arrangements between us and the general partner and its
affiliates are or will be the result of arm's-length negotiations.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms that are fair and reasonable to us.
Our general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of the general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. There is no obligation of our general partner and its affiliates to
enter into any contracts of this kind.
Common units are subject to our general partner's limited call right.
Our general partner may exercise its right to call and purchase common units
as provided in the partnership agreement or assign this right to one of its
affiliates or to us. Our general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As
a result, a common unitholder may have his common units purchased from him at
an undesirable time or price. Please read "The Partnership Agreement--Limited
Call Right."
We may not choose to retain separate counsel for ourselves or for the holders
of common units.
The attorneys, independent accountants and others who perform services for
us have been retained by our general partner. Attorneys, independent
accountants and others who perform services for us are selected by the general
partner or the conflicts committee and may perform services for our general
partner and its affiliates. We may retain separate counsel for ourselves or the
holders of common units in the event of a conflict of interest between our
general partner and its affiliates, on the one hand, and us or the holders of
common units, on the other, depending on the nature of the conflict. We do not
intend to do so in most cases.
Our general partner's affiliates may compete with us.
Our partnership agreement provides that the general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in us and certain services the employees of our
general partner are currently providing to Sunoco, Inc. and its affiliates.
Except as provided in our partnership agreement and the omnibus agreement,
affiliates of our general partner are not prohibited from engaging in other
businesses or activities, including those that might be in direct competition
with us.
Fiduciary Duties Owed to Unitholders by Our General Partner are Prescribed by
Law and the Partnership Agreement.
Our general partner is accountable to us and our unitholders as a fiduciary.
The Delaware Revised Uniform Limited Partnership Act, which we refer to in this
prospectus as the Delaware Act, provides that Delaware limited partnerships
may, in their partnership agreements, restrict or expand the fiduciary duties
owed by the general partner to limited partners and the partnership.
106
Our partnership agreement contains various provisions restricting the
fiduciary duties that might otherwise be owed by the general partner. The
following is a summary of the material restrictions of the fiduciary duties
owed by our general partner to the limited partners:
State-law fiduciary duty
standards................. Fiduciary duties are generally considered to
include an obligation to act with due care and
loyalty. The duty of care, in the absence of a
provision in a partnership agreement providing
otherwise, would generally require a general
partner to act for the partnership in the same
manner as a prudent person would act on his own
behalf. The duty of loyalty, in the absence of a
provision in a partnership agreement providing
otherwise, would generally prohibit a general
partner of a Delaware limited partnership from
taking any action or engaging in any transaction
where a conflict of interest is present.
The Delaware Act generally provides that a
limited partner may institute legal action on
behalf of the partnership to recover damages from
a third party where a general partner has refused
to institute the action or where an effort to
cause a general partner to do so is not likely to
succeed. In addition, the statutory or case law
of some jurisdictions may permit a limited
partner to institute legal action on behalf of
himself and all other similarly situated limited
partners to recover damages from a general
partner for violations of its fiduciary duties to
the limited partners.
Partnership agreement
modified standards........ Our partnership agreement contains provisions
that waive or consent to conduct by our general
partner and its affiliates that might otherwise
raise issues as to compliance with fiduciary
duties or applicable law. For example, our
partnership agreement permits our general partner
to make a number of decisions in its "sole
discretion." This entitles the general partner to
consider only the interests and factors that it
desires, and it has no duty or obligation to give
any consideration to any interest of, or factors
affecting, us, our affiliates or any limited
partner. Other provisions of the partnership
agreement provide that the general partner's
actions must be made in its reasonable
discretion. These standards reduce the
obligations to which the general partner would
otherwise be held.
Our partnership agreement generally provides that
affiliated transactions and resolutions of
conflicts of interest not involving a required
vote of unitholders must be "fair and reasonable"
to us under the factors previously set forth. In
determining whether a transaction or resolution
is "fair and reasonable," our general partner may
consider interests of all parties involved,
including its own. Unless our general partner has
acted in bad faith, the action taken by our
general partner will not constitute a breach of
its fiduciary duty. These standards reduce the
obligations to which our general partner would
otherwise be held.
In addition to the other more specific provisions
limiting the obligations of our general partner,
our partnership agreement further provides that
our general partner and its officers and
directors will not be liable for monetary damages
to us, our limited partners or assignees for
errors of judgment or for any acts or omissions
if the general partner and those other persons
acted in good faith.
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In order to become one of our limited partners, a common unitholder is
required to agree to be bound by the provisions in the partnership agreement,
including the provisions discussed above. This is in accordance with the policy
of the Delaware Act favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a limited partner or
assignee to sign a partnership agreement does not render the partnership
agreement unenforceable against that person.
We must indemnify our general partner and its officers, directors,
employees, affiliates, members, agents and trustees, to the fullest extent
permitted by law, against liabilities, costs and expenses incurred by the
general partner or these other persons. We must provide this indemnification if
our general partner or these persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than the
general partner) not opposed to, our best interests. We also must provide this
indemnification for criminal proceedings if our general partner or these other
persons had no reasonable cause to believe their conduct was unlawful. Thus,
our general partner could be indemnified for its negligent acts if it met these
requirements concerning good faith and our best interests. Please read "The
Partnership Agreement--Indemnification."
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DESCRIPTION OF THE COMMON UNITS
The Units
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in
partnership distributions and exercise the rights or privileges available to
limited partners under our partnership agreement. For a description of the
relative rights and preferences of holders of common units and subordinated
units in and to partnership distributions, please read "Description of the
Common Units," "Cash Distribution Policy," and "Description of the Subordinated
Units." For a description of the rights and privileges of limited partners
under our partnership agreement, including voting rights, please read "The
Partnership Agreement."
Transfer Agent and Registrar
Duties
will serve as registrar and transfer agent for the common units. We pay all
fees charged by the transfer agent for transfers of common units, except the
following that must be paid by unitholders:
. surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
. special charges for services requested by a holder of a common unit; and
. other similar fees or charges.
There is no charge to unitholders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents and each of
their stockholders, directors, officers and employees against all claims and
losses that may arise out of acts performed or omitted for its activities in
that capacity, except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
Resignation or Removal
The transfer agent may resign, by notice to us, or be removed by us. The
resignation or removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its acceptance of
the appointment. If no successor has been appointed and has accepted the
appointment within 30 days after notice of the resignation or removal, the
general partner may act as the transfer agent and registrar until a successor
is appointed.
Transfer of Common Units
The transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and
delivery of a transfer application by the investor. Any later transfers of a
common unit will not be recorded by the transfer agent or recognized by us
unless the transferee executes and delivers a transfer application. By
executing and delivering a transfer application, the transferee of common
units:
. becomes the record holder of the common units and is an assignee until
admitted into our partnership as a substituted limited partner;
. automatically requests admission as a substituted limited partner in our
partnership;
. agrees to be bound by the terms and conditions of, and executes, our
partnership agreement;
. represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
. grants powers of attorney to officers of our general partner and any
liquidator of us as specified in the partnership agreement; and
. makes the consents and waivers contained in the partnership agreement.
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An assignee will become a substituted limited partner of our partnership for
the transferred common units upon the consent of our general partner and the
recording of the name of the assignee on our books and records. The general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and deliver a
transfer application. We are entitled to treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial holder's rights are
limited solely to those that it has against the nominee holder as a result of
any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
. the right to assign the common unit to a purchaser or other transferee;
and
. the right to transfer the right to seek admission as a substituted limited
partner in our partnership for the transferred common units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application:
. will not receive cash distributions or federal income tax allocations,
unless the common units are held in a nominee or "street name" account and
the nominee or broker has executed and delivered a transfer application;
and
. may not receive some federal income tax information or reports furnished
to record holders of common units.
The transferor of common units has a duty to provide the transferee with all
information that may be necessary to transfer the common units. The transferor
does not have a duty to insure the execution of the transfer application by the
transferee and has no liability or responsibility if the transferee neglects or
chooses not to execute and forward the transfer application to the transfer
agent. Please read "The Partnership Agreement--Status as Limited Partner or
Assignee."
Until a common unit has been transferred on our books, we and the transfer
agent may treat the record holder of the unit as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
our partnership, and the rights of holders to participate in distributions to
partners differ from, and are subordinate to, the rights of the holders of
common units. For any given quarter, any available cash will first be
distributed to the general partner and to the holders of common units, until
the holders of common units have received the minimum quarterly distribution
plus any arrearages, and then will be distributed to the holders of
subordinated units. Please read "Cash Distribution Policy."
Conversion of Subordinated Units
The subordination period will generally extend until the first day of any
quarter beginning after December 31, 2006, in which each of the following
events occurs:
(1) distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
Before the end of the subordination period, 25% of the subordinated units
(up to 3,118,132 subordinated units) will convert early into common units on a
one-for-one basis immediately after the distribution of available cash to the
partners in respect of any quarter ending on or after December 31, 2004, and
25% of the subordinated units (up to 3,118,132 subordinated units) will convert
early into common units on a one-for-one basis on the first day after the
record date established for the distribution for any quarter ending on or after
December 31, 2005, if at the end of the applicable quarter each of the
following three events occurs:
(1) distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the sum
of the minimum quarterly distributions on all of the outstanding common
units and subordinated units for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units;
provided, however, that the second early conversion of the subordinated units
may not occur until at least one year following the first early conversion of
the subordinated units.
Upon expiration of the subordination period, all remaining subordinated
units will convert into common units on a one-for-one basis and will then
participate, pro rata, with the other common units in distributions of
available cash. In addition, if Sunoco Partners LLC is removed as our general
partner under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
. the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
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. any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
. the general partner will have the right to convert its general partner
interests and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
Limited Voting Rights
Holders of subordinated units sometimes vote as a single class together with
the common units and sometimes vote as a class separate from the holders of
common units. Holders of subordinated units like holders of common units have
very limited voting rights. During the subordination period, common units and
subordinated units each vote separately as a class on the following matters:
. a sale or exchange of all or substantially all of our assets;
. the election of a successor general partner in connection with the removal
of the general partner;
. dissolution or reconstitution of our partnership;
. a merger of our partnership;
. issuance of limited partner interests in some circumstances; and
. some amendments to the partnership agreement, including any amendment that
would cause us to be treated as an association taxable as a corporation.
The subordinated units are not entitled to vote on approval of the
withdrawal of the general partner or the transfer by the general partner of its
general partner interest or incentive distribution rights under some
circumstances. Removal of our general partner requires:
. a 662/3% vote of all outstanding units voting as a single class; and
. the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units voting as separate
classes.
Under our partnership agreement, our general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially adversely affect unitholders without the approval of any
unitholders.
Distributions upon Liquidation
If we liquidate during the subordination period, in some circumstances,
holders of outstanding common units will be entitled to receive more per unit
in liquidating distributions than holders of outstanding subordinated units.
The per-unit difference will be dependent upon the amount of gain or loss that
we recognize in liquidating our assets. Following conversion of the
subordinated units into common units, all units will be treated the same upon
liquidation.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our partnership agreement and the partnership agreement of the
operating partnership are included as exhibits to the registration statement of
which this prospectus constitutes a part. We will provide prospective investors
with a copy of these agreements upon request at no charge.
We summarize the following provisions of the partnership agreement elsewhere
in this prospectus:
. With regard to distributions of available cash, please read "Cash
Distribution Policy."
. With regard to the transfer of common units, please read "Description of
the Common Units--Transfer of Common Units."
. With regard to allocations of taxable income and taxable loss, please read
"Tax Considerations."
Organization and Duration
We were organized on October 15, 2001 and have a perpetual existence.
Purpose
Our purpose under the partnership agreement is limited to serving as the
limited partner of the operating partnership and engaging in any business
activities that may be engaged in by the operating partnership or that are
approved by our general partner. The partnership agreement of the operating
partnership provides that the operating partnership may, directly or
indirectly, engage in:
(1) its operations as conducted immediately before our initial public
offering;
(2) any other activity approved by the general partner but only to the
extent that the general partner reasonably determines that, as of the date
of the acquisition or commencement of the activity, the activity generates
"qualifying income" as this term is defined in Section 7704 of the Internal
Revenue Code; or
(3) any activity that enhances the operations of an activity that is
described in (1) or (2) above.
Although the general partner has the ability to cause us, the operating
partnership or its subsidiaries to engage in activities other than the storage,
terminalling, transportation and distribution of crude oil petroleum products
and LPG, our general partner has no current plans to do so. The general partner
is authorized in general to perform all acts deemed necessary to carry out our
purposes and to conduct our business.
Power of Attorney
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance, or
dissolution. The power of attorney also grants the general partner the
authority to amend, and to make consents and waivers under, the partnership
agreement.
Capital Contributions
Unitholders are not obligated to make additional capital contributions,
except as described below under "--Limited Liability."
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Limited Liability
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Act and that he otherwise acts in
conformity with the provisions of the partnership agreement, his liability
under the Delaware Act will be limited, subject to possible exceptions, to the
amount of capital he is obligated to contribute to us for his common units plus
his share of any undistributed profits and assets. If it were determined,
however, that the right, or exercise of the right, by the limited partners as a
group:
. to remove or replace the general partner;
. to approve some amendments to the partnership agreement; or
. to take other action under the partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner. Neither
the partnership agreement nor the Delaware Act specifically provides for legal
recourse against the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this does not mean
that a limited partner could not seek legal recourse, we know of no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner if, after the distribution, all liabilities of the limited
partnership, other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair value of the assets
of the limited partnership. For the purpose of determining the fair value of
the assets of a limited partnership, the Delaware Act provides that the fair
value of property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited partnership only to the
extent that the fair value of that property exceeds the nonrecourse liability.
The Delaware Act provides that a limited partner who receives a distribution
and knew at the time of the distribution that the distribution was in violation
of the Delaware Act shall be liable to the limited partnership for the amount
of the distribution for three years. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for
the obligations of his assignor to make contributions to the partnership,
except the assignee is not obligated for liabilities unknown to him at the time
he became a limited partner and that could not be ascertained from the
partnership agreement.
Our subsidiaries conduct business in 11 states and Canada. Maintenance of
our limited liability as a limited partner of the operating partnership may
require compliance with legal requirements in the jurisdictions in which the
operating partnership conducts business, including qualifying our subsidiaries
to do business there. Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly established in many
jurisdictions. If, by virtue of our limited partner interest in the operating
partnership or otherwise, it were determined that we were conducting business
in any state without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise of the right
by the limited partners as a group to remove or replace the general partner, to
approve some amendments to the partnership agreement, or to take other action
under the partnership agreement constituted "participation in the control" of
our business for purposes of the statutes of any relevant jurisdiction, then
the limited partners could be held personally liable for our obligations under
the law of that jurisdiction to the same extent as the general partner under
the circumstances. We will operate in a manner that the general partner
considers reasonable and necessary or appropriate to preserve the limited
liability of the limited partners.
Issuance of Additional Securities
The partnership agreement authorizes us to issue an unlimited number of
additional partnership securities and rights to buy partnership securities for
the consideration and on the terms and conditions established by the
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general partner in its sole discretion without the approval of the unitholders.
During the subordination period, however, except as we discuss in the following
paragraph, we may not issue equity securities ranking senior to the common
units or an aggregate of more than 6,236,264 additional common units or units
on a parity with the common units, in each case, without the approval of the
holders of a majority of the outstanding common units and subordinated units,
voting as separate classes.
During or after the subordination period, we may issue an unlimited number
of common units as follows:
. upon exercise of the underwriters' over-allotment option;
. upon conversion of the subordinated units;
. under employee benefit plans;
. upon conversion of the general partner interest and incentive distribution
rights as a result of a withdrawal of the general partner;
. in the event of a combination or subdivision of common units;
. in connection with an acquisition or a capital improvement that increases
cash flow from operations per unit on a pro forma basis; or
. if the proceeds of the issuance are used exclusively to repay up to $40.0
million of certain of our indebtedness.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition,
the issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities interests that,
in the sole discretion of the general partner, have special voting rights to
which the common units are not entitled.
Upon issuance of additional partnership securities, the general partner will
be required to make additional capital contributions to the extent necessary to
maintain its 2% general partner interest in us. Moreover, the general partner
will have the right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase common units, subordinated units or other
equity securities whenever, and on the same terms that, we issue those
securities to persons other than the general partner and its affiliates, to the
extent necessary to maintain its percentage interest, including its interest
represented by common units and subordinated units, that existed immediately
prior to each issuance. The holders of common units will not have preemptive
rights to acquire additional common units or other partnership securities.
Amendment of the Partnership Agreement
General
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner, which consent may be given or withheld in its
sole discretion, except as discussed below. In order to adopt a proposed
amendment, other than the amendments discussed below, the general partner must
seek written approval of the holders of the number of units required to approve
the amendment or call a meeting of the limited partners to consider and vote
upon the proposed amendment. Except as we describe below, an amendment must be
approved:
. during the subordination period, by a majority of the common units,
excluding those common units held by our general partner and its
affiliates, and a majority of the subordinated units, voting as separate
classes; and
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. after the subordination period, by a majority of the common units.
We refer to the voting provisions described above as a "unit majority."
Prohibited Amendments
No amendment may be made that would:
(1) enlarge the obligations of any limited partner without its consent,
unless approved by at least a majority of the type or class of limited
partner interests so affected;
(2) enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable by us to the general partner or any of its affiliates
without the consent of the general partner, which may be given or withheld
in its sole discretion;
(3) change the term of our partnership;
(4) provide that our partnership is not dissolved upon an election to
dissolve our partnership by the general partner that is approved by the
holders of a majority of the outstanding common units and subordinated units
voting as separate classes; or
(5) give any person the right to dissolve our partnership other than the
general partner's right to dissolve our partnership with the approval of the
holders of a majority of the outstanding common units and subordinated units
voting as separate classes.
The provision of the partnership agreement preventing the amendments having the
effects described in clauses (1) through (5) above can be amended upon the
approval of the holders of at least 90% of the outstanding units voting
together as a single class.
No Unitholder Approval
The general partner may generally make amendments to the partnership
agreement without the approval of any limited partner or assignee to reflect:
(1) a change in our name, the location of our principal place of
business, our registered agent or our registered office;
(2) the admission, substitution, withdrawal, or removal of partners in
accordance with the partnership agreement;
(3) a change that, in the sole discretion of the general partner, is
necessary or advisable for us to qualify or to continue our qualification as
a limited partnership or a partnership in which the limited partners have
limited liability under the laws of any state or to ensure that neither we,
the operating partnership, nor its subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(4) an amendment that is necessary, in the opinion of our counsel, to
prevent us or our general partner or its directors, officers, agents, or
trustees from in any manner being subjected to the provisions of the
Investment Company Act of 1940, the Investment Advisors Act of 1940, or plan
asset regulations adopted under the Employee Retirement Income Security Act
of 1974, whether or not substantially similar to plan asset regulations
currently applied or proposed;
(5) subject to the limitations on the issuance of additional partnership
securities described above, an amendment that in the discretion of the
general partner is necessary or advisable for the authorization of
additional partnership securities or rights to acquire partnership
securities;
(6) any amendment expressly permitted in the partnership agreement to be
made by the general partner acting alone;
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(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of the partnership
agreement;
(8) any amendment that, in the discretion of the general partner, is
necessary or advisable for the formation by us of, or our investment in, any
corporation, partnership, or other entity, as otherwise permitted by the
partnership agreement;
(9) a change in our fiscal year or taxable year and related changes; and
(10) any other amendments substantially similar to any of the matters
described in (1) through (9) above.
In addition, the general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of the general partner:
(1) do not adversely affect the limited partners (or any particular class
of limited partners) in any material respect;
(2) are necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute;
(3) are necessary or advisable to facilitate the trading of limited
partner interests or to comply with any rule, regulation, guideline or
requirement of any securities exchange on which the limited partner
interests are or will be listed for trading, compliance with any of which
the general partner deems to be in our best interest and the best interest
of limited partners;
(4) are necessary or advisable for any action taken by the general
partner relating to splits or combinations of units under the provisions of
the partnership agreement; or
(5) are required to effect the intent expressed in this prospectus or the
intent of the provisions of the partnership agreement or are otherwise
contemplated by the partnership agreement.
Opinion of Counsel and Unitholder Approval
Our general partner will not be required to obtain an opinion of counsel
that an amendment will not result in a loss of limited liability to the limited
partners or result in our being treated as an entity for federal income tax
purposes if one of the amendments described above under "--No Unitholder
Approval" should occur. No other amendments to the partnership agreement will
become effective without the approval of holders of at least 90% of the units
unless we obtain an opinion of counsel to the effect that the amendment will
not affect the limited liability under applicable law of any of our limited
partners or cause us, the operating partnership or our subsidiaries to be
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such).
In addition to the above restrictions, any amendment that would have a
material adverse effect on the rights or preferences of any type or class of
outstanding units in relation to other classes of units will require the
approval of at least a majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take any action must
be approved by the affirmative vote of limited partners constituting not less
than the voting requirement sought to be reduced.
Merger, Sale or Other Disposition of Assets
The partnership agreement generally prohibits the general partner, without
the prior approval of the holders of units representing a unit majority, from
causing us to, among other things, sell, exchange or otherwise dispose of all
or substantially all of our assets in a single transaction or a series of
related transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange, or other
disposition
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of all or substantially all of the assets of our subsidiaries. The general
partner may, however, mortgage, pledge, hypothecate, or grant a security
interest in all or substantially all of our assets without that approval. The
general partner may also sell all or substantially all of our assets under a
foreclosure or other realization upon those encumbrances without that approval.
If conditions specified in the partnership agreement are satisfied, the
general partner may merge us or any of our subsidiaries into, or convey some or
all of our assets to, a newly formed entity if the sole purpose of that merger
or conveyance is to change our legal form into another limited liability
entity. The unitholders are not entitled to dissenters' rights of appraisal
under the partnership agreement or applicable Delaware law in the event of a
merger or consolidation, a sale of substantially all of our assets, or any
other transaction or event.
Termination and Dissolution
We will continue as a limited partnership until terminated under the
partnership agreement. We will dissolve upon:
(1) the election of the general partner to dissolve us, if approved by
the holders of units representing a unit majority;
(2) the sale, exchange or other disposition of all or substantially all
of our assets and properties and our subsidiaries;
(3) the entry of a decree of judicial dissolution of Sunoco Logistics
Partners; or
(4) the withdrawal or removal of our general partner or any other event
that results in its ceasing to be the general partner other than by reason
of a transfer of its general partner interest in accordance with the
partnership agreement or withdrawal or removal following approval and
admission of a successor.
Upon a dissolution under clause (4), the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes,
may also elect, within specific time limitations, to reconstitute us and
continue our business on the same terms and conditions described in the
partnership agreement by forming a new limited partnership on terms identical
to those in the partnership agreement and having as general partner an entity
approved by the holders of units representing a unit majority, subject to our
receipt of an opinion of counsel to the effect that:
(1) the action would not result in the loss of limited liability of any
limited partner; and
(2) neither Sunoco Logistics Partners, the reconstituted limited
partnership nor the operating partnership would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of that right to continue.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of the general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution
Policy--Distributions of Cash Upon Liquidation." The liquidator may defer
liquidation of our assets for a reasonable period or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
Withdrawal or Removal of the General Partner
Except as described below, our general partner has agreed not to withdraw
voluntarily as our general partner or general partner of the operating
partnership prior to December 31, 2011 without obtaining the approval of the
holders of at least a majority of the outstanding common units, excluding
common units held by the general
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partner and its affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after December 31, 2011, our general
partner may withdraw as general partner without first obtaining approval of any
unitholder by giving 90 days' written notice, and that withdrawal will not
constitute a violation of the partnership agreement. Notwithstanding the
information above, our general partner may withdraw without unitholder approval
upon 90 days' notice to the limited partners if at least 50% of the outstanding
common units are held or controlled by one person and its affiliates other than
the general partner and its affiliates. In addition, the partnership agreement
permits our general partner in some instances to sell or otherwise transfer all
of its general partner interest in us without the approval of the unitholders.
Please read "--Transfer of General Partner Interests and Incentive Distribution
Rights."
Upon withdrawal of our general partner under any circumstances, other than
as a result of a transfer by the general partner of all or a part of its
general partner interest in us, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is not elected,
or is elected but an opinion of counsel regarding limited liability and tax
matters cannot be obtained, we will be dissolved, wound up and liquidated,
unless within 180 days after that withdrawal, the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes,
agree in writing to continue our business and to appoint a successor general
partner. Please read "--Termination and Dissolution."
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by the general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of our general partner is also subject to the approval of a successor general
partner by the vote of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes. The ownership of more
than 33 1/3% of the outstanding units by our general partner and its affiliates
would give it the practical ability to prevent its removal. At the closing of
this offering, affiliates of our general partner will own 80.0% of the
outstanding units.
Our partnership agreement also provides that if Sunoco Partners LLC is
removed as our general partner under circumstances where cause does not exist
and units held by the general partner and its affiliates are not voted in favor
of that removal:
. the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis;
. any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
. the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
In the event of removal of the general partner under circumstances where
cause exists or withdrawal of the general partner where that withdrawal
violates the partnership agreement, a successor general partner will have the
option to purchase the general partner interest and incentive distribution
rights of the departing general partner for a cash payment equal to the fair
market value of those interests. Under all other circumstances where the
general partner withdraws or is removed by the limited partners, the departing
general partner will have the option to require the successor general partner
to purchase the general partner interest of the departing general partner and
its incentive distribution rights for the fair market value. In each case, this
fair market value will be determined by agreement between the departing general
partner and the successor general partner. If no agreement is reached, an
independent investment banking firm or other independent expert selected by the
departing general partner and the successor general partner will determine the
fair market value. Or, if the departing general partner and the successor
general partner cannot agree upon an expert, then an expert chosen by agreement
of the experts selected by each of them will determine the fair market value.
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If the option described above is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner
for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer of General Partner Interests and Incentive Distribution Rights
Except for transfer by our general partner of all, but not less than all, of
its general partner interest in us to:
. an affiliate of the general partner (other than an individual); or
. another entity as part of the merger or consolidation of the general
partner with or into another entity or the transfer by the general partner
of all or substantially all of its assets to another entity;
our general partner may not transfer all or any part of its general partner
interest in us to another person prior to December 31, 2011 without the
approval of the holders of at least a majority of the outstanding common units,
excluding common units held by the general partner and its affiliates. As a
condition of this transfer, the transferee must, among other things, assume the
rights and duties of the general partner, agree to be bound by the provisions
of the partnership agreement, and furnish an opinion of counsel regarding
limited liability and tax matters. Our general partner and its affiliates may
at any time transfer units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer of Ownership Interests in General Partner
At any time, the members of our general partner may sell or transfer all or
part of their membership interests in our general partner to an affiliate
without the approval of our unitholders.
Transfer of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may transfer
its incentive distribution rights to an affiliate or another person as part of
its merger or consolidation with or into, or sale of all or substantially all
of its assets to, that person without the prior approval of the unitholders;
but, in each case, the transferee must agree to be bound by the provisions of
the partnership agreement. Prior to December 31, 2011, other transfers of the
incentive distribution rights will require the affirmative vote of holders of a
majority of the outstanding common units and subordinated units, voting as
separate classes. On or after December 31, 2011, the incentive distribution
rights will be freely transferable.
Change of Management Provisions
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove Sunoco Partners LLC as
our general partner or otherwise change management. If any person or group
other than the general partner and its affiliates acquires beneficial ownership
of 20% or more of any class of units, that person or group loses voting rights
on all of its units. This loss of voting rights does not apply to any person or
group that acquires the units from our general partner or its affiliates and
any transferees of that person or group approved by our general partner or to
any person or group who acquires the units with the prior approval of the board
of directors.
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The partnership agreement also provides that if the general partner is
removed under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common units or
to receive cash in exchange for those interests.
Limited Call Right
If at any time not more than 20% of the then-issued and outstanding
partnership securities of any class are held by persons other than the general
partner and its affiliates, the general partner will have the right, which it
may assign in whole or in part to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining partnership securities of the
class held by unaffiliated persons as of a record date to be selected by the
general partner, on at least ten but not more than 60 days notice. The purchase
price in the event of this purchase is the greater of:
(1) the highest cash price paid by either of the general partner or any
of its affiliates for any partnership securities of the class purchased
within the 90 days preceding the date on which the general partner first
mails notice of its election to purchase those partnership securities; and
(2) the current market price as of the date three days before the date
the notice is mailed.
As a result of the general partner's right to purchase outstanding partnership
securities, a holder of partnership securities may have his partnership
securities purchased at an undesirable time or price. The tax consequences to a
unitholder of the exercise of this call right are the same as a sale by that
unitholder of his common units in the market. Please read "Tax
Considerations--Disposition of Common Units."
Meetings; Voting
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of our limited partners and to act upon matters for which
approvals may be solicited. Common units that are owned by an assignee who is a
record holder, but who has not yet been admitted as a limited partner, will be
voted by the general partner at the written direction of the record holder.
Absent direction of this kind, the common units will not be voted, except that,
in the case of common units held by the general partner on behalf of
non-citizen assignees, the general partner will distribute the votes on those
common units in the same ratios as the votes of limited partners on other units
are cast.
The general partner does not anticipate that any meeting of unitholders will
be called in the foreseeable future. Any action that is required or permitted
to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action
so taken are signed by holders of the number of units necessary to authorize or
take that action at a meeting. Meetings of the unitholders may be called by the
general partner or by unitholders owning at least 20% of the outstanding units
of the class for which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the outstanding
units of the class or classes for which a meeting has been called, represented
in person or by proxy, will constitute a quorum unless any action by the
unitholders requires approval by holders of a greater percentage of the units,
in which case the quorum will be the greater percentage.
Each record holder of a unit has a vote according to his percentage interest
in us, although additional limited partner interests having special voting
rights could be issued. Please read "--Issuance of Additional Securities."
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However, if at any time any person or group, other than the general partner and
its affiliates, or a direct or subsequently approved transferee of the general
partner or its affiliates, acquires, in the aggregate, beneficial ownership of
20% or more of any class of units then outstanding, that person or group will
lose voting rights on all of its units and the units may not be voted on any
matter and will not be considered to be outstanding when sending notices of a
meeting of unitholders, calculating required votes, determining the presence of
a quorum or for other similar purposes. Common units held in nominee or street
name account will be voted by the broker or other nominee in accordance with
the instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise. Except as the partnership
agreement otherwise provides, subordinated units will vote together with common
units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under the partnership
agreement will be delivered to the record holder by us or by the transfer
agent.
Status as Limited Partner or Assignee
Except as described above under "--Limited Liability," the common units will
be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right
to share in allocations and distributions from us, including liquidating
distributions. The general partner will vote and exercise other powers
attributable to common units owned by an assignee that has not become a
substitute limited partner at the written direction of the assignee. See
"--Meetings; Voting." Transferees that do not execute and deliver a transfer
application will not be treated as assignees or as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to holders of common units. Please read "Description of
the Common Units--Transfer of Common Units."
Non-citizen Assignees; Redemption
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of the general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, the general partner may require each limited
partner or assignee to furnish information about his nationality, citizenship,
or related status. If a limited partner or assignee fails to furnish
information about his nationality, citizenship, or other related status within
30 days after a request for the information or the general partner determines
after receipt of the information that the limited partner or assignee is not an
eligible citizen, the limited partner or assignee may be treated as a
non-citizen assignee. In addition to other limitations on the rights of an
assignee that is not a substituted limited partner, a non-citizen assignee does
not have the right to direct the voting of his units and may not receive
distributions in kind upon our liquidation.
Indemnification
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
(1) the general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of a general partner or any
departing general partner;
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(4) any person who is or was a member, partner, officer, director,
employee, agent or trustee of the general partner or any departing general
partner or any affiliate of a general partner or any departing general
partner; or
(5) any person who is or was serving at the request of a general partner
or any departing general partner or any affiliate of a general partner or
any departing general partner as an officer, director, employee, member,
partner, agent or trustee of another person.
Any indemnification under these provisions will only be out of our assets.
Unless it otherwise agrees in its sole discretion, the general partner will not
be personally liable for, or have any obligation to contribute or loan funds or
assets to us to enable us to effectuate, indemnification. We may purchase
insurance against liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the power to indemnify
the person against liabilities under the partnership agreement.
Books and Reports
The general partner is required to keep appropriate books of our business at
our principal offices. The books will be maintained for both tax and financial
reporting purposes on an accrual basis. For tax and fiscal reporting purposes,
our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after
the close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided.
Our ability to furnish this summary information to unitholders will depend on
the cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal
and state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
Right to Inspect Our Books and Records
The partnership agreement provides that a limited partner can, for a purpose
reasonably related to his interest as a limited partner, upon reasonable demand
and at his own expense, have furnished to him:
(1) a current list of the name and last known address of each partner;
(2) a copy of our tax returns;
(3) information as to the amount of cash, and a description and statement
of the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
(4) copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of attorney
under which they have been executed;
(5) information regarding the status of our business and financial
condition; and
(6) any other information regarding our affairs as is just and
reasonable.
The general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which the general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
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Registration Rights
Under the partnership agreement, we have agreed to register for resale under
the Securities Act of 1933 and applicable state securities laws any common
units, subordinated units or other partnership securities proposed to be sold
by the general partner or any of its affiliates or their assignees if an
exemption from the registration requirements is not otherwise available. These
registration rights continue for two years following any withdrawal or removal
of Sunoco Partners LLC as our general partner. We are obligated to pay all
expenses incidental to the registration, excluding underwriting discounts and
commissions. Please read "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered by this prospectus, the general
partner will hold an aggregate of 7,472,528 common units and 12,472,528
subordinated units. All of the subordinated units will convert into common
units at the end of the subordination period, and some may convert earlier. The
sale of these common and subordinated units could have an adverse impact on the
price of the common units or on any trading market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units held by an "affiliate" of ours may not be resold publicly
except in compliance with the registration requirements of the Securities Act
or under an exemption under Rule 144 or otherwise. Rule 144 permits securities
acquired by an affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three months period, the greater of:
. 1% of the total number of the securities outstanding; or
. the average weekly reported trading volume of the common units for the
four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale provisions,
notice requirements and the availability of current public information about
us. A person who is not deemed to have been an affiliate of ours at any time
during the three months preceding a sale, and who has beneficially owned his
common units for are least two years, would be entitled to sell common units
under Rule 144 without regard to the public information requirements, volume
limitations, manner of sale provisions and notice requirements of Rule 144.
Prior to the end of the subordination period, we may not issue equity
securities of the partnership ranking prior or senior to the common units or an
aggregate of more than 6,236,264 additional common units or an equivalent
amount of securities ranking on a parity with the common units, without the
approval of the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes, subject to certain exceptions
described under "The Partnership Agreement--Issuance of Additional Securities."
The partnership agreement provides that, after the subordination period, we
may issue an unlimited number of limited partner interests of any type without
a vote of the unitholders. The partnership agreement does not restrict our
ability to issue equity securities ranking junior to the common units at any
time. Any issuance of additional common units or other equity securities would
result in a corresponding decrease in the proportionate ownership interest in
us represented by, and could adversely affect the cash distributions to and
market price of, common units then outstanding. Please read "The Partnership
Agreement--Issuance of Additional Securities."
Under the partnership agreement, the general partner and its affiliates have
the right to cause us to register under the Securities Act of 1933 and state
laws the offer and sale of any units that they hold. Subject to the terms and
conditions of the partnership agreement, these registration rights allow the
general partner and its affiliates or their assignees holding any units to
require registration of any of these units and to include any of these units in
a registration by us of other units, including units offered by us or by any
unitholder. The general partner will continue to have these registration rights
for two years following its withdrawal or removal as a general partner. In
connection with any registration of this kind, we will indemnify each
unitholder participating in the registration and its officers, directors and
controlling persons from and against any liabilities under the Securities Act
of 1933 or any state securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to any registration,
excluding any underwriting discounts and commissions. Except as described
below, the general partner and its affiliates may sell their units in private
transactions at any time, subject to compliance with applicable laws.
Sunoco, Inc., Sunoco Logistics Partners, our general partner, and the
directors and executive officers of the general partner have agreed not to sell
any common units they beneficially own for a period of 180 days from the date
of this prospectus. Please read "Underwriting" for a description of these
lock-up provisions.
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TAX CONSIDERATIONS
This section is a summary of all the material tax considerations that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion,
expresses the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal
income tax law and legal conclusions with respect to those matters. This
section is based upon current provisions of the Internal Revenue Code, existing
and proposed regulations, and current administrative rulings and court
decisions, all of which are subject to change. Later changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to "us" or "we" are references to Sunoco Logistics Partners and
the operating partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts (IRAs), real estate investment trusts, or REITs, or mutual
funds. Accordingly, we recommend that each prospective unitholder consult, and
depend on, his own tax advisor in analyzing the federal, state, local and
foreign tax consequences particular to him of the ownership or disposition of
common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations made by
us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the tax treatment of us, or of an investment in us, may
be significantly modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "--Tax
Consequences of Unit Ownership--Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"--Disposition of Common Units--Allocations Between Transferors and
Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "--Tax Consequences of Unit Ownership--Section 754
Election").
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made to him by the partnership. Distributions by
a partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
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No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status for federal income tax purposes or whether our
operations generate "qualifying income" under Section 7704 of the Code.
Instead, we will rely on the opinion of counsel that, based upon the Internal
Revenue Code, its regulations, published revenue rulings and court decisions
and the representations described below, we will be classified as a partnership
and the operating partnership will be disregarded as an entity separate from us
for federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations made
by us and the general partner. The representations made by us and our general
partner upon which counsel has relied are:
(a) Neither we, the general partner of the operating partnership nor the
operating partnership will elect to be treated as a corporation; and
(b) For each taxable year, more than 90% of our gross income will be
income from sources that, in our counsel's opinion, generate "qualifying
income" within the meaning of Section 7704(d) of the Internal Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with
respect to publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of "qualifying income." Qualifying
income includes income and gains derived from the transportation, storage and
processing of crude oil, natural gas and products thereof. Other types of
qualifying income include interest other than from a financial business,
dividends, gains from the sale of real property and gains from the sale or
other disposition of assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less than % of our current
income is not qualifying income; however, this estimate could change from time
to time. Based upon and subject to this estimate, the factual representations
made by us and the general partner and a review of the applicable legal
authorities, counsel is of the opinion that at least 90% of our current gross
income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred
all of our assets, subject to liabilities, to a newly formed corporation, on
the first day of the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then distributed that
stock to the unitholders in liquidation of their interests in us. This
contribution and liquidation should be tax-free to unitholders and us so long
as we, at that time, do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would
be taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow
and after-tax return and thus would likely result in a substantial reduction of
the value of the units.
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The discussion below is based on counsel's opinion that we will be
classified as a partnership for federal income tax purposes.
Limited Partner Status
Unitholders who have become limited partners of Sunoco Logistics Partners
will be treated as partners of Sunoco Logistics Partners for federal income tax
purposes. Also:
(a) assignees who have executed and delivered transfer applications, and
are awaiting admission as limited partners; and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units;
will be treated as partners of Sunoco Logistics Partners for federal income tax
purposes. As there is no direct authority addressing assignees of common units
who are entitled to execute and deliver transfer applications and become
entitled to direct the exercise of attendant rights, but who fail to execute
and deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please
read "--Tax Consequences of Unit Ownership--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in Sunoco Logistics Partners for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return
his share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a cash
distribution. Each unitholder will be required to include in income his
allocable share of our income, gains, losses and deductions for our taxable
year ending with or within his taxable year.
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the
distribution. Our cash distributions in excess of a unitholder's tax basis
generally will be considered to be gain from the sale or exchange of the common
units, taxable in accordance with the rules described under "--Disposition of
Common Units" below. Any reduction in a unitholder's share of our liabilities
for which no partner, including the general partner, bears the economic risk of
loss, known as "nonrecourse liabilities," will be treated as a distribution of
cash to that unitholder. To the extent our distributions cause a unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. Please read "--Limitations on
Deductibility of Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution
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of cash. A non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in his common
units, if the distribution reduces the unitholder's share of our "unrealized
receivables," including depreciation recapture, and/or substantially
appreciated "inventory items," both as defined in the Internal Revenue Code,
and collectively, "Section 751 Assets." To that extent, he will be treated as
having been distributed his proportionate share of the Section 751 Assets and
having exchanged those assets with us in return for the non-pro rata portion of
the actual distribution made to him. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income, which will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the
unitholder's tax basis for the share of Section 751 Assets deemed relinquished
in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in this offering who owns those common units from the date of
closing of this offering through December 31, 2004, will be allocated an amount
of federal taxable income for that period that will be less than % of the cash
distributed with respect to that period. We anticipate that after the taxable
year ending December 31, 2004, the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates are based upon
the assumption that gross income from operations will approximate the amount
required to make the minimum quarterly distribution on all units and other
assumptions with respect to capital expenditures, cash flow and anticipated
cash distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are based on current
tax law and tax reporting positions that we will adopt and with which the IRS
could disagree. Accordingly, we cannot assure you that these estimates will
prove to be correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower, and any differences could
be material and could materially affect the value of the common units.
Basis of Common Units. A unitholder's initial tax basis for his common units
will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse liabilities. That
basis will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized.
A limited partner will have no share of our debt that is recourse to the
general partner, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities. Please read "--Disposition of Common
Units--Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of his
share of our losses will be limited to the tax basis in his units and, in the
case of an individual unitholder or a corporate unitholder, if more than 50% of
the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount
for which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be
offset by losses that were previously suspended by the at risk limitation but
may not be offset by losses suspended by the basis limitation. Any excess loss
above that gain previously suspended by the at risk or basis limitations is no
longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire
or hold his units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our
nonrecourse liabilities.
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The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly traded partnerships, or salary or active
business income. Passive losses that are not deductible because they exceed a
unitholder's share of income we generate may be deducted in full when he
disposes of his entire investment in us in a fully taxable transaction with an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has indicated that net passive
income from a publicly traded partnership constitutes investment income for
purposes of the limitations on the deductibility of investment interest. In
addition, the unitholder's share of our portfolio income will be treated as
investment income. Investment interest expense includes:
. interest on indebtedness properly allocable to property held for
investment;
. our interest expense attributed to portfolio income; and
. the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state, local or foreign income tax on behalf of any
unitholder or the general partner or any former unitholder, we are authorized
to pay those taxes from our funds. That payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
we are authorized to treat the payment as a distribution to all current
unitholders. We are authorized to amend the partnership agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of units and
to adjust later distributions, so that after giving effect to these
distributions, the priority and characterization of distributions otherwise
applicable under the partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event the
partner would be required to file a claim in order to obtain a credit or
refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a net
profit, our items of income, gain, loss and deduction will be allocated among
the general partner and the unitholders in accordance with their percentage
interests in us. At any time that distributions are made to the common units in
excess of distributions to the subordinated units, or incentive distributions
are made to the general partner, gross income will be allocated to the
recipients to the extent of these distributions. If we have a net loss for the
entire year, that loss will be allocated first to the general partner and the
unitholders in accordance with their percentage interests in us to the extent
of their positive capital accounts and, second, to the general partner.
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Specified items of our income, gain, loss and deduction will be allocated to
account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and its affiliates, referred
to in this discussion as "Contributed Property." The effect of these
allocations to a unitholder purchasing common units in this offering will be
essentially the same as if the tax basis of our assets were equal to their fair
market value at the time of this offering. In addition, items of recapture
income will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be allocated in an
amount and manner to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than an
allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity," will generally be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction
only if the allocation has substantial economic effect. In any other case, a
partner's share of an item will be determined on the basis of his interest in
us, which will be determined by taking into account all the facts and
circumstances, including:
. his relative contributions to us;
. the interests of all the partners in profits and losses;
. the interest of all the partners in cash flow; and
. the rights of all the partners to distributions of capital upon
liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "--Tax Consequences of Unit Ownership--Section 754 Election" and
"--Disposition of Common Units--Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
. any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
. any cash distributions received by the unitholder as to those units would
be fully taxable; and
. all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of partnership interests.
Please also read "--Disposition of Common Units--Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. Prospective
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unitholders should consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative minimum tax.
Tax Rates. Effective July 1, 2001, the highest effective United States
federal income tax rate for individuals for 2001 is 38.6% and the maximum
United States federal income tax rate for net capital gains of an individual
for 2001 is 20% if the asset disposed of was held for more than 12 months at
the time of disposition.
Section 754 Election. We will make the election permitted by Section 754 of
the Internal Revenue Code. That election is irrevocable without the consent of
the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of
the Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other partners. For
purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code require,
if the remedial allocation method is adopted (which we will adopt), a portion
of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.l67(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under
Section 167 of the Internal Revenue Code rather than cost recovery deductions
under Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our
partnership agreement, the general partner is authorized to take a position to
preserve the uniformity of units even if that position is not consistent with
these Treasury Regulations. Please read "--Uniformity of Units."
Although counsel is unable to opine as to the validity of this approach
because there is no clear authority on this issue, we intend to depreciate the
portion of a Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the common basis
of the property, or treat that portion as non-amortizable to the extent
attributable to property the common basis of which is not amortizable. This
method is consistent with the regulations under Section 743 of the Internal
Revenue Code but is arguably inconsistent with Treasury Regulation Section
1.167(c)-l(a)(6), which is not expected to directly apply to a material portion
of our assets. To the extent this Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, we will
apply the rules described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken, we may take a
depreciation or amortization position under which all purchasers acquiring
units in the same month would receive depreciation or amortization, whether
attributable to common basis or a Section 743(b) adjustment, based upon the
same applicable rate as if they had purchased a direct interest in our assets.
This kind of aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to some unitholders.
Please read "--Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and his share of any gain or loss on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to
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reallocate some or all of any Section 743(b) adjustment allocated by us to our
tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations
we make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should, in our
opinion, the expense of compliance exceed the benefit of the election, we may
seek permission from the IRS to revoke our Section 754 election. If permission
is granted, a subsequent purchaser of units may be allocated more income than
he would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending within or with
his taxable year. In addition, a unitholder who has a taxable year ending on a
date other than December 31 and who disposes of all of his units following the
close of our taxable year but before the close of his taxable year must include
his share of our income, gain, loss and deduction in income for his taxable
year, with the result that he will be required to include in income for his
taxable year his share of more than one year of our income, gain, loss and
deduction. Please read "--Disposition of Common Units--Allocations Between
Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets.
The federal income tax burden associated with the difference between the fair
market value of our assets and their tax basis immediately prior to this
offering will be borne by the general partner and its affiliates. Please read
"--Tax Consequences of Unit Ownership--Allocation of Income, Gain, Loss and
Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to recapture some or
all of those deductions as ordinary income upon a sale of his interest in us.
Please read "--Tax Consequences of Unit Ownership--Allocation of Income, Gain,
Loss and Deduction" and "--Disposition of Common Units--Recognition of Gain or
Loss."
The costs incurred in selling our units (called "syndication expenses") must
be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication cost.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to
those adjustments.
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Disposition of Common Units
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured
by the sum of the cash or the fair market value of other property received by
him plus his share of our nonrecourse liabilities. Because the amount realized
includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of
any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for a
common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price received
is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally
be taxed at a maximum rate of 20%. However, a portion of this gain or loss,
which will likely be substantial, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Capital losses may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Treasury
Regulations under Section 1223 of the Internal Revenue Code allow a selling
unitholder who can identify common units transferred with an ascertainable
holding period to elect to use the actual holding period of the common units
transferred. Thus, according to the ruling, a common unitholder will be unable
to select high or low basis common units to sell as would be the case with
corporate stock, but, according to the regulations, may designate specific
common units sold for purposes of determining the holding period of units
transferred. A unitholder electing to use the actual holding period of common
units transferred must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder considering the
purchase of additional units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
this ruling and application of the regulations.
Specific provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests, by treating
a taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into:
. a short sale;
. an offsetting notional principal contract; or
. a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having
sold that
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position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the
applicable exchange on the first business day of the month, which we refer to
in this prospectus as the Allocation Date. However, gain or loss realized on a
sale or other disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and deduction realized
after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between unitholders. If this method
is not allowed under the Treasury Regulations, or only applies to transfers of
less than all of the unitholder's interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to revise our method of
allocation between unitholders to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes of
them prior to the record date set for a cash distribution for that quarter will
be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A purchaser of units who purchases units for
another unitholder is required to notify us in writing of that purchase within
30 days after the purchase. We are required to notify the IRS of that
transaction and to furnish specified information to the transferor and
transferee. However, these reporting requirements do not apply to a sale by an
individual who is a citizen of the United States and who effects the sale or
exchange through a broker. Additionally, a transferor and a transferee of a
unit will be required to furnish statements to the IRS, filed with their income
tax returns for the taxable year in which the sale or exchange occurred, that
describe the amount of the consideration received for the unit that is
allocated to our goodwill or going concern value. Failure to satisfy these
reporting obligations may lead to the imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated for
tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
Uniformity of Units
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-
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uniformity could have a negative impact on the value of the units. Please read
"--Tax Consequences of Unit Ownership--Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property,
to the extent of any unamortized Book-Tax Disparity, using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of that property, or treat
that portion as nonamortizable, to the extent attributable to property the
common basis of which is not amortizable, consistent with the regulations under
Section 743 of the Internal Revenue Code, even though that position may be
inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6) which is not
expected to directly apply to a material portion of our assets. Please read
"--Tax Consequences of Unit Ownership--Section 754 Election." To the extent
that the Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, we will apply the rules described
in the Treasury Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation and
amortization position under which all purchasers acquiring units in the same
month would receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b) adjustment, based upon the
same applicable rate as if they had purchased a direct interest in our
property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of
additional deductions. Please read "--Disposition of Common Units--Recognition
of Gain or Loss."
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement
plans, are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder that is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is
not anticipated that any significant amount of our gross income will include
that type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence, they will be required to file
federal tax returns to report their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on their share of our net
income or gain. Moreover, under rules applicable to publicly traded
partnerships, we will withhold at the highest marginal tax rate applicable to
individuals from cash distributions made quarterly to foreign unitholders. Each
foreign unitholder must obtain a taxpayer identification number from the IRS
and submit that number to our transfer agent on a Form W-8BEN or applicable
substitute form in order to obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be
subject to the United States branch profits tax at a rate of 30%, in addition
to regular federal income tax, on its share of our income and gain, as adjusted
for changes in the foreign
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corporation's "U.S. net equity," which are effectively connected with the
conduct of a United States trade or business. That tax may be reduced or
eliminated by an income tax treaty between the United States and the country in
which the foreign corporate unitholder is a "qualified resident." In addition,
this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the sale or disposition of that unit to the extent that this gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed or
subject to withholding upon the sale or disposition of a unit if he has owned
less than 5% in value of the units during the five-year period ending on the
date of the disposition and if the units are regularly traded on an established
securities market at the time of the sale or disposition.
Administrative Matters
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure
you that those positions will yield a result that conforms to the requirements
of the Internal Revenue Code, regulations or administrative interpretations of
the IRS. Neither we nor counsel can assure prospective unitholders that the IRS
will not successfully contend in court that those positions are impermissible.
Any challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of his return. Any
audit of a unitholder's return could result in adjustments not related to our
returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Internal Revenue
Code requires that one partner be designated as the "Tax Matters Partner" for
these purposes. The partnership agreement names Sunoco Partners LLC as our Tax
Matters Partner.
The Tax Matters Partner will make some elections on our behalf and on behalf
of unitholders. In addition, the Tax Matters Partner can extend the statute of
limitations for assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with less than a 1%
profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give that authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which
all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, judicial review
may be sought by any unitholder having at least a 1% interest in profits or by
any group of unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
137
(b) whether the beneficial owner is:
(1) a person that is not a United States person;
(2) a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing; or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred for
the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with
the information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of
the Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not
constitute a tax shelter. However, we will register as a tax shelter with the
Secretary of Treasury in the absence of assurance that we will not be subject
to tax shelter registration and in light of the substantial penalties that
might be imposed if registration is required and not undertaken.
Issuance of a tax shelter registration number does not indicate that
investment in us or the claimed tax benefits have been reviewed, examined or
approved by the IRS.
We will supply our tax shelter registration number to you when one has been
assigned to us. A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit we generate is claimed or on which
any of our income is included. A unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority"; or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
138
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
State, Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you will be subject to other taxes,
including state, local and foreign income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. We will initially own property or do business in Indiana,
Kansas, Louisiana, Michigan, New Jersey, New Mexico, New York, Ohio, Oklahoma,
Pennsylvania, Texas and Ontario, Canada. We may also own property or do
business in other jurisdictions in the future. Although you may not be required
to file a return and pay taxes in some jurisdictions because your income from
that jurisdiction falls below the filing and payment requirement, you will be
required to file income tax returns and to pay income taxes in many of these
jurisdictions in which we do business or own property and may be subject to
penalties for failure to comply with those requirements. In some jurisdictions,
tax losses may not produce a tax benefit in the year incurred and may not be
available to offset income in subsequent taxable years. Some of the
jurisdictions may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to a unitholder who is not a resident of
the jurisdiction. Withholding, the amount of which may be greater or less than
a particular unitholder's income tax liability to the jurisdiction, generally
does not relieve a nonresident unitholder from the obligation to file an income
tax return. Amounts withheld will be treated as if distributed to unitholders
for purposes of determining the amounts distributed by us. Please read "--Tax
Consequences of Unit Ownership--Entity-Level Collections." Based on current law
and our estimate of our future operations, the general partner anticipates that
any amounts required to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent jurisdictions, of his investment in
us. Accordingly, each prospective unitholder should consult, and must depend
upon, his tax counsel or other advisor with regard to those matters. Further,
it is the responsibility of each unitholder to file all state, local and
foreign, as well as United States federal tax returns, that may be required of
him. Counsel has not rendered an opinion on the state, local or foreign tax
consequences of an investment in us.
139
INVESTMENT IN SUNOCO LOGISTICS PARTNERS BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA, and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or IRAs
established or maintained by an employer or employee organization. Among other
things, consideration should be given to:
(a) whether the investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential after-tax
investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibits
employee benefit plans, and IRAs that are not considered part of an employee
benefit plan, from engaging in specified transactions involving "plan assets"
with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that the general partner also would be
fiduciaries of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things:
(a) the equity interests acquired by employee benefit plans are publicly
offered securities; i.e., the equity interests are widely held by 100 or
more investors independent of the issuer and each other, freely transferable
and registered under some provisions of the federal securities laws;
(b) the entity is an "operating company," -- i.e., it is primarily
engaged in the production or sale of a product or service other than the
investment of capital either directly or through a majority owned subsidiary
or subsidiaries; or
(c) there is no significant investment by benefit plan investors, which
is defined to mean that less than 25% of the value of each class of equity
interest, disregarding some interests held by the general partner, its
affiliates, and some other persons, is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to
ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (a)
above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
140
UNDERWRITING
Under the terms of an underwriting agreement, which will be filed as an
exhibit to the registration statement relating to this prospectus, each of the
underwriters named below for whom Lehman Brothers Inc., Salomon Smith Barney
Inc., UBS Warburg LLC, Banc of America Securities LLC, First Union Securities,
Inc., and Credit Suisse First Boston Corporation are acting as representatives,
have severally agreed to purchase from us the respective number of common units
opposite their names below.
Number of
Underwriters Common Units
------------ ------------
Lehman Brothers Inc...................
Salomon Smith Barney Inc..............
UBS Warburg LLC.......................
Banc of America Securities LLC........
First Union Securities, Inc...........
Credit Suisse First Boston Corporation
---------
Total.............................. 5,000,000
=========
The underwriting agreement provides that the underwriters' obligations to
purchase the common units depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the common units
are purchased by the underwriters, all of the common units must be purchased.
The conditions contained in the underwriting agreement include the condition
that all the representations and warranties made by us to the underwriters are
true, that there has been no material adverse change in the condition of us or
in the financial markets and that Sunoco Logistics Partners deliver to the
underwriters customary closing documents.
The following table shows the underwriting fees to be paid to the
underwriters by Sunoco Logistics Partners in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common units. This underwriting fee
is the difference between the initial price to the public and the amount the
underwriters pay to Sunoco Logistics Partners to purchase the common units. On
a per unit basis, the underwriting fee is % of the initial price to public.
No Exercise Full Exercise
----------- -------------
Per unit. $ $
Total. $ $
We have been advised by the underwriters that the underwriters propose to
offer the common units directly to the public at the initial price to the
public set forth on the cover page of this prospectus and to dealers (who may
include the underwriters) at this price to the public less a concession not in
excess of $ per unit. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per unit to certain brokers and
dealers. After the offering, the underwriters may change the offering price and
other selling terms.
Sunoco, Inc., Sunoco Logistics Partners, our general partner, the operating
partnership, and certain other parties have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 and liabilities arising from breaches of representations
and warranties contained in the underwriting agreement, or to contribute to
payments that may be required to be made in respect of these liabilities.
We have granted to the underwriters an option to purchase up to an aggregate
of 750,000 additional common units at the initial price to the public less the
underwriting discount set forth on the cover page of this prospectus
exercisable solely to cover over-allotments, if any. Such option may be
exercised at any time until 30 days after the date of this prospectus. If this
option is exercised, each underwriter will be committed, subject to
satisfaction of the conditions specified in the underwriting agreement, to
purchase a number of additional
141
common units proportionate to the underwriter's initial commitment as indicated
in the preceding table, and we will be obligated, pursuant to the option, to
sell these common units to the underwriters. To the extent that the
underwriters do not exercise this option, affiliates of Sunoco, Inc. will
purchase these common units at the initial public offering price.
Sunoco, Inc., Sunoco Logistics Partners and our general partner and the
directors and executive officers of the general partner have agreed that they
will not, directly or indirectly, sell, offer or otherwise dispose of any
common units or enter into any derivative transaction with similar effect as a
sale of common units for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. The restrictions
described in this paragraph do not apply to:
. The sale of common units to the underwriters; or
. Restricted units issued by Sunoco Logistics Partners under the long-term
incentive plan or upon the exercise of options issued under the long-term
incentive plan.
Lehman Brothers Inc., in its sole discretion, may release the units subject
to lock-up agreements in whole or in part at any time with or without notice.
When determining whether or not to release units from lock-up agreements,
Lehman Brothers Inc. will consider, among other factors, the unitholders'
reasons for requesting the release, the number of units for which the release
is being requested and market conditions at the time.
In connection with this offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment transactions involve sales by the underwriters of the
common units in excess of the number of units the underwriters are
obligated to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short position.
In a covered short position, the number of units over-allotted by the
underwriters is not greater than the number of units they may purchase in
the over-allotment option. In a naked short position, the number of units
involved is greater than the number of units in the over-allotment option.
The underwriters may close out any short position by either exercising
their over-allotment option and/or purchasing common units in the open
market.
. Syndicate covering transactions involve purchases of the common units in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of the common
units to close out the short position, the underwriters will consider,
among other things, the price of common units available for purchase in
the open market as compared to the price at which they may purchase common
units through the over-allotment option. If the underwriters sell more
common units than could be covered by the over-allotment option, which we
refer to in this prospectus as a naked short position, the position can
only be closed out by buying common units in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the common
units in the open market after pricing that could adversely affect
investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common units originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the common units or preventing or retarding a decline in the
market price of the common units. As a result, the price of the common units
may be higher than the price that might otherwise exist in the open market.
142
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common units or preventing or retarding a decline in the market price of the
common units. As a result, the price of the common units may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common units. In addition, neither we nor
any of the underwriters make representation that the representatives will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
We intend to apply to list the common units on the New York Stock Exchange
under the symbol " ."
Prior to this offering, there has been no public market for the common
units. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included the following:
. the information set forth in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
units of generally comparable entities.
We estimate that total expenses of the offering, other than underwriting
discounts and commissions, will be approximately $6.0 million.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us and our affiliates, including acting as
lenders under our credit facility.
Because the National Association for Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Investor suitability with respect to the common units should be judged
similarly to the suitability with respect to other securities that are listed
for trading on a national securities exchange.
No sales to accounts over which any underwriter exercises discretionary
authority may be made without the prior written approval of the customer.
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to
143
place orders online. The underwriters may agree with us to allocate a specific
number of shares for sale to online brokerage account holders. Any such
allocation for online distributions will be made by the representatives on the
same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group member's web site and any information contained
in any other web site maintained by an underwriter or selling group member is
not part of this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter or selling group member in its capacity as underwriter or selling
group member and should not be relied upon by investors.
Wachovia Corporation conducts its investment banking, institutional and
capital markets business through its various bank, broker-dealer and non-bank
subsidiaries (including one of the underwriters, First Union Securities, Inc.)
under the trade name of Wachovia Securities. Any references to Wachovia
Securities in this prospectus, however, do not include Wachovia Securities,
Inc., member NASD/SIPC and a separate broker-dealer subsidiary of Wachovia
Corporation and sister affiliate of the underwriter which may or may not be
participating as a selling dealer in the distribution of the securities.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for us by Vinson &
Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the
common units offered hereby will be passed upon for the underwriters by Baker
Botts L.L.P., Houston, Texas.
EXPERTS
The balance sheets of Sunoco Logistics Partners L.P. and Sunoco Partners LLC
as of October 18, 2001 appearing in this prospectus and the registration
statement of which this prospectus forms a part have been audited by Ernst &
Young LLP, independent auditors, to the extent indicated in their reports
thereon appearing elsewhere herein, and have been included herein in reliance
upon such reports given on the authority of such firm as experts in accounting
and auditing.
The financial statements of Sunoco Logistics (Predecessor) as of December
31, 1999 and 2000 and for each of the three years in the period ending December
31, 2000 appearing in this prospectus and the registration statement of which
this prospectus forms a part have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their report thereon appearing
elsewhere herein, and have been included herein in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-l regarding the common units. This prospectus does not
contain all of the information found in the registration statement. For further
information regarding us and the common units offered by this prospectus, you
may desire to review the full registration statement, including its exhibits
and schedules, filed under the Securities Act of 1933. The registration
statement of which this prospectus forms a part, including its exhibits and
schedules, may be inspected and copied at the public reference room maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of the materials may also be obtained from the SEC at prescribed rates by
writing to the public reference room maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
l-800-SEC-0330.
144
The SEC maintains a World Wide Web site on the Internet at
http://www.sec.gov. Our registration statement, of which this prospectus
constitutes a part, can be downloaded from the SEC's web site and can also be
inspected and copied at the offices of The New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We intend to furnish our unitholders annual reports containing our audited
financial statements and furnish or make available quarterly reports containing
our unaudited interim financial information for the first three fiscal quarters
of each of our fiscal years.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. These statements can be identified by the use of forward-looking
terminology including "may," "believe," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. These forward-looking
statements involve risks and uncertainties. When considering these
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors and other factors
noted throughout this prospectus could cause our actual results to differ
materially from those contained in any forward-looking statement.
145
INDEX TO FINANCIAL STATEMENTS
Page
----
SUNOCO LOGISTICS PARTNERS L.P.
PRO FORMA FINANCIAL STATEMENTS (Unaudited)
Introduction................................................................................. F-2
Pro Forma Balance Sheet as of June 30, 2001.................................................. F-3
Pro Forma Statements of Income for the Year Ended December 31, 2000 and the Six Months Ended
June 30, 2001.............................................................................. F-4
Notes to Pro Forma Financial Statements...................................................... F-5
SUNOCO LOGISTICS (PREDECESSOR)
HISTORICAL COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors............................................................... F-10
Combined Balance Sheets as of December 31, 1999 and 2000 and June 30, 2001 (unaudited)....... F-11
Combined Statements of Income and Net Parent Investment for the Years Ended December 31,
1998, 1999 and 2000 and the Six Months Ended June 30, 2000 and 2001 (unaudited)............ F-12
Combined Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000 and
for the Six Months Ended June 30, 2000 and 2001 (unaudited)................................ F-13
Notes to Combined Financial Statements....................................................... F-14
SUNOCO LOGISTICS PARTNERS L.P.
HISTORICAL BALANCE SHEET
Report of Independent Auditors............................................................... F-27
Balance Sheet as of October 18, 2001......................................................... F-28
Note to Balance Sheet........................................................................ F-29
SUNOCO PARTNERS LLC
HISTORICAL BALANCE SHEET
Report of Independent Auditors............................................................... F-30
Balance Sheet as of October 18, 2001......................................................... F-31
Note to Balance Sheet........................................................................ F-32
F-1
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction
Effective with the closing of this offering, the assets and liabilities of
Sunoco Logistics (Predecessor) will be transferred to Sunoco Logistics Partners
L.P. (the "Partnership"), a newly formed Delaware limited partnership. The
accompanying unaudited pro forma financial statements give effect to this
transfer and related transactions. The pro forma information assumes that the
transfer occurred on June 30, 2001 for the pro forma balance sheet and January
1, 2000 for the pro forma statements of income. The transfer will be recorded
at historical cost as it is considered to be a reorganization of entities under
common control. Please read Note 1: Basis of Presentation, the Offering and
Other Transactions in the accompanying notes to pro forma financial statements
for further explanation of the offering, the transfer and the related
transactions.
Sunoco Logistics Partners L.P.'s unaudited pro forma financial statements
and accompanying notes should be read together with the historical financial
statements and related notes of Sunoco Logistics (Predecessor) included
elsewhere in this prospectus. The pro forma balance sheet and the pro forma
statements of income were derived by adjusting the historical financial
statements of Sunoco Logistics (Predecessor). The adjustments are based on
currently available information and certain estimates and assumptions;
therefore, the actual adjustments may differ from the pro forma adjustments.
However, management believes that the assumptions provide a reasonable basis
for presenting the significant effects of the offering and the other
transactions as contemplated and that the pro forma adjustments give
appropriate effect to the assumptions made and are properly applied in the pro
forma financial statements.
The unaudited pro forma financial statements do not purport to present the
financial position or results of operations of Sunoco Logistics Partners L.P.
had the offering and the related transactions to be effected at the closing
actually been completed as of the dates indicated. Moreover, they do not
project Sunoco Logistics Partners L.P.'s financial position or results of
operations for any future date or period.
F-2
SUNOCO LOGISTICS PARTNERS L.P.
PRO FORMA BALANCE SHEET (Unaudited)
JUNE 30, 2001
(in thousands, except unit data)
Sunoco Logistics Offering and
(Predecessor) Transaction Pro
Historical Adjustments Forma
---------------- ------------ --------
Assets
Current Assets:
Cash........................................... $ -- $ 115,000 (A) $102,000
250,000 (B)
(13,000) (C)
(3,000) (C)
(247,000) (D)
Accounts receivable, affiliated companies...... 7,553 -- 7,553
Accounts receivable, net....................... 197,208 -- 197,208
Note receivable from affiliate................. 20,000 (20,000) (E) --
Inventories.................................... 21,897 (10,324) (E) 11,573
Deferred income taxes.......................... 2,008 (2,008) (F) --
-------- --------- --------
Total Current Assets....................... 248,666 69,668 318,334
Properties, plants and equipment, net.......... 530,590 -- 530,590
Deferred charges and other assets.............. 20,669 3,000 (C) 23,669
-------- --------- --------
Total Assets............................... $799,925 $ 72,668 $872,593
======== ========= ========
Liabilities and Equity
Current Liabilities:
Accounts payable............................... $292,713 $ (16,485) (E) $276,228
Accrued liabilities............................ 19,313 (9,067) (E) 10,246
Short-term borrowings due affiliate............ 70,000 (70,000) (E) --
Current portion of long-term debt due affiliate 50,000 (50,000) (E) --
Current portion of long-term debt.............. 216 -- 216
Taxes payable.................................. 16,776 (12,113) (F) 4,663
-------- --------- --------
Total Current Liabilities.................. 449,018 (157,665) 291,353
Long-term debt due affiliate................... 90,000 (90,000) (E) --
Long-term debt................................. 4,707 250,000 (B) 254,707
Deferred income taxes.......................... 77,285 (77,285) (F) --
Other deferred credits and liabilities......... 11,501 (10,444) (E) 1,057
Equity:
Net parent investment.......................... 167,414 (247,000) (D) --
215,672 (E)
87,390 (F)
(223,476) (G)
Held by Public:
Common units................................... -- 100,000 (A) 88,696
(11,304) (C)
Held Indirectly by Sunoco, Inc.:
Common units................................... -- 15,000 (A) 90,005
(1,696) (C)
76,701 (G)
Subordinated units............................. -- 142,305 (G) 142,305
General partner interest....................... -- 4,470 (G) 4,470
-------- --------- --------
Total Equity............................... 167,414 158,062 325,476
-------- --------- --------
Total Liabilities and Equity............... $799,925 $ 72,668 $872,593
======== ========= ========
(See Accompanying Notes)
F-3
SUNOCO LOGISTICS PARTNERS L.P.
PRO FORMA STATEMENTS OF INCOME (Unaudited)
(in thousands, except unit data)
Year Ended Six Months
December 31, 2000 Ended June 30, 2001
---------------------------------------- ----------------------------------------
Sunoco Offering Sunoco Offering
Logistics and Logistics and
(Predecessor) Transaction (Predecessor) Transaction
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
------------- ----------- ----------- ------------- ----------- -----------
Revenues
Sales and other operating
revenue:
Affiliates............... $1,301,079 $ 7,713 (H) $ 1,308,792 $ 600,758 $ 6,967 (H) $ 607,725
Unaffiliated customers... 853,938 -- 853,938 406,528 -- 406,528
Other income................ 5,574 -- 5,574 2,115 -- 2,115
---------- -------- ----------- ---------- ------- -----------
Total Revenues......... 2,160,591 7,713 2,168,304 1,009,401 6,967 1,016,368
Costs and Expenses
Cost of products sold and
operating expenses........ 2,045,947 -- 2,045,947 948,595 -- 948,595
Depreciation and
amortization.............. 20,654 -- 20,654 11,601 -- 11,601
Selling, general and
administrative expenses... 34,683 -- 34,683 17,540 -- 17,540
---------- -------- ----------- ---------- ------- -----------
Total Costs and
Expenses............. 2,101,284 -- 2,101,284 977,736 -- 977,736
---------- -------- ----------- ---------- ------- -----------
Operating Income............ 59,307 7,713 67,020 31,665 6,967 38,632
Net interest cost paid to
affiliates................ 11,537 (11,537) (I) -- 6,622 (6,622) (I) --
Other interest cost and debt
expense................... 426 18,125 (J) 19,226 198 9,063 (J) 9,598
375 (K) 187 (K)
300 (L) 150 (L)
Capitalized interest........ (1,659) -- (1,659) (948) -- (948)
---------- -------- ----------- ---------- ------- -----------
Income before income tax
expense................... 49,003 450 49,453 25,793 4,189 29,982
Income tax expense.......... 18,483 (18,483) (M) -- 9,736 (9,736) (M) --
---------- -------- ----------- ---------- ------- -----------
Net Income............. $ 30,520 $ 18,933 49,453 $ 16,057 $13,925 29,982
========== ======== ========== =======
General partner's
interest in net income.... (989) (600)
----------- -----------
Limited partners' interest
in net income............. $ 48,464 $ 29,382
=========== ===========
Net income per unit......... $ 1.94 $ 1.18
=========== ===========
Weighted average limited
partners' units
oustanding................ 24,945,056 (N) 24,945,056 (N)
=========== ===========
(See Accompanying Notes)
F-4
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation, the Offering and Other Transactions
The historical financial information is derived from the historical
financial statements of Sunoco Logistics (Predecessor). Sunoco Logistics
(Predecessor)'s financial statements are a combination of the accounts of a
substantial portion of the wholly owned logistics operations of Sunoco, Inc.
and subsidiaries (collectively, "Sunoco"). The combined financial statements
also include Sunoco Logistics (Predecessor)'s 9.4% investment in Explorer
Pipeline Company, which is accounted for by the equity method since Sunoco
Logistics (Predecessor) exercises significant influence over the operating and
financial policies of the joint venture. The equity income from this investment
is included in other income in the pro forma statements of income. Most of the
assets of Sunoco Logistics (Predecessor) support Sunoco, Inc.'s refining and
marketing operations which are conducted primarily by Sunoco, Inc. (R&M)
("Sunoco R&M"). Sunoco Logistics (Predecessor) operates in three principal
business segments: Eastern Pipeline System, Terminal Facilities and Western
Pipeline System.
The pro forma financial statements reflect the following transactions:
. The contribution of certain assets and liabilities of Sunoco Logistics
(Predecessor) to Sunoco Logistics Partners L.P. in exchange for the
issuance by Sunoco Logistics Partners L.P. to Sunoco Partners LLC of
6,722,528 common units, 12,472,528 subordinated units, the 2% general
partner interest in Sunoco Logistics Partners L.P. and the incentive
distribution rights;
. The issuance by Sunoco Logistics Partners L.P. of 5,000,000 common units
to the public and 750,000 common units to Sunoco Partners LLC if the
underwriters do not exercise their over-allotment option at an assumed
initial public offering price of $20.00 per common unit resulting in
aggregate gross proceeds to Sunoco Logistics Partners L.P. of $115
million;
. The issuance by Sunoco Logistics Partners L.P. of $250 million of ten-year
senior notes (the "Senior Notes") and the establishment of a three-year
$150 million revolving credit facility;
. The payment of estimated underwriting commissions and offering expenses of
$13 million and debt financing fees of $3 million;
. The distribution to Sunoco, Inc. of the net proceeds from the Senior
Notes; and
. The execution of a pipelines and terminals storage and throughput
agreement and an omnibus agreement with Sunoco R&M and Sunoco, Inc. as
described in Note 6 below.
Upon completion of the offering, Sunoco Logistics Partners L.P. anticipates
incurring incremental general and administrative costs (e.g., cost of tax
return preparation, annual and quarterly reports to unitholders, investor
relations and registrar and transfer agent fees) at an annual rate of
approximately $2.1 million, excluding incremental insurance costs, if any. The
pro forma financial statements do not reflect any adjustment for these
estimated incremental costs or adjustments in the general and administrative
costs allocated to Sunoco Logistics Partners L.P. by Sunoco, Inc. as described
in Note 6 below.
Note 2: Pro Forma Adjustments and Assumptions
(A) Reflects the estimated proceeds to Sunoco Logistics Partners L.P. of
$115 million from the issuance and sale of 5,000,000 common units to the public
and 750,000 common units to Sunoco Partners LLC if the underwriters do not
exercise their over-allotment option at an assumed initial public offering
price of $20.00 per unit.
(B) Represents the issuance by Sunoco Logistics Partners L.P. of the Senior
Notes.
(C) Reflects the payment of underwriting commissions and offering expenses
of $13 million and debt financing fees of $3 million. The underwriting
commissions and offering expenses will be allocated to the
F-5
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)--(Continued)
common units issued in the public offering and the debt financing fees will be
capitalized and amortized over the life of the Senior Notes.
(D) Represents the distribution of $247 million to Sunoco, Inc. of the
estimated net proceeds from the issuance of the Senior Notes.
(E) Reflects removal of assets and liabilities that will not be contributed
by Sunoco, Inc. to Sunoco Logistics Partners L.P.
(F) Represents elimination of current and deferred income tax assets and
liabilities which will be retained by Sunoco, Inc. Income taxes will be the
responsibility of the unitholders and not Sunoco Logistics Partners L.P.
(G) Represents the allocation of net partnership equity of Sunoco Logistics
Partners L.P. owned by the general partner of the Partnership of $223.5 million
of which $76.7 million is allocated to the 6,722,528 common units, $142.3
million is allocated to its 12,472,528 subordinated units and $4.5 million to
the general partner interest.
(H) Reflects an adjustment to terminalling and storage service revenues and
the interrefinery pipeline lease revenues pursuant to a pipelines and terminals
storage and throughput agreement with Sunoco R&M under which Sunoco Logistics
Partners L.P. will charge Sunoco R&M fees for these services comparable to
those charged in arms-length, third-party transactions. Historically, except at
the Nederland Terminal, Sunoco Logistics (Predecessor) provided terminalling
and throughput services for Sunoco R&M's refining and marketing operations at
fees that enabled it to recover its costs but not to generate a profit. The
following table summarizes the historical and pro forma sales and other
operating revenue attributable to these assets (in thousands of dollars):
Year Ended Six Months Ended
December 31, 2000/(1)/ June 30, 2001
--------------------- ----------------
Sales and other operating revenue:
Historical..................... $48,017 $21,950
Adjustment..................... 7,713 6,967
------- -------
Pro Forma...................... $55,730 $28,917
======= =======
--
(1)Historical sales and other operating revenue includes $5,994 thousand
reimbursement of remediation costs attributable to an oil spill in
February 2000 at one of Sunoco Logistics (Predecessor)'s crude oil
transfer lines to the Darby Creek Tank Farm. Pro forma sales and other
operating revenue is not impacted by the reimbursement.
(I) Reflects removal of net interest cost paid to affiliates as the debt due
affiliate will not be contributed by Sunoco, Inc. to Sunoco Logistics Partners
L.P. (see Note E above).
(J) Reflects interest expense as if the Senior Notes were issued by Sunoco
Logistics Partners L.P. on January 1, 2000 (see Note B above). The interest
adjustments were computed using the assumed interest rate for the Senior Notes
of 7.25%.
(K) Reflects expense attributable to an annual facility fee on the $150
million revolving credit facility.
(L) Reflects amortization of debt financing fees over the life of the Senior
Notes (see Note B above).
(M) Reflects elimination of current and deferred income taxes. Income taxes
will be the responsibility of the unitholders and not Sunoco Logistics Partners
L.P.
(N) The weighted average limited partners' units outstanding used in the net
income per unit calculation consists of the limited partners' common and
subordinated units.
F-6
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)--(Continued)
Note 3: Pro Forma Cash
The pro forma cash balance of $102 million represents the net proceeds from
the sale of 5,750,000 common units. This cash will be used to fund increases in
the following working capital accounts to reflect their anticipated ongoing
level based on current market conditions and payment terms included in
contracts with Sunoco, Inc. and Sunoco R&M:
As of
June 30, 2001
--------------
Pro Forma
--------------
(in thousands)
Accounts receivable, affiliated companies $ 92,000
Inventories.............................. 26,485
--------
118,485
Less: Accounts payable................... 16,485
--------
Use of cash......................... $102,000
========
Note 4: Pro Forma Net Income Per Unit
Pro forma net income per unit is determined by dividing the pro forma net
income that would have been allocated to the common and subordinated
unitholders, which is 98% of pro forma net income, by the number of common and
subordinated units expected to be outstanding at the closing of the offering.
For purposes of this calculation, the number of common and subordinated units
outstanding of 24,945,056 was assumed to have been outstanding since January 1,
2000. Pursuant to the partnership agreement, to the extent that the quarterly
distribution exceeds certain thresholds, the general partner is entitled to
certain incentive distributions which will result in less net income
proportionately being allocated to the holders of the common units and
subordinated units. The pro forma net income per unit assumes that no incentive
distributions were made to the general partner for the periods presented. Basic
and diluted pro forma net income per unit are equal as there are no dilutive
units.
Note 5: Description of Equity Interest in Sunoco Logistics Partners L.P.
The common units and the subordinated units represent limited partner
interests in Sunoco Logistics Partners L.P. The holders of units are entitled
to participate in partnership distributions and exercise the rights and
privileges available to limited partners under the Sunoco Logistics Partners
L.P. partnership agreement.
The common units will have the right to receive a minimum quarterly
distribution of available cash from operating surplus of $0.45 per unit or
$1.80 on an annualized basis, plus any arrearages on the common units, before
any distribution is made to the holders of subordinated units. In addition, if
at any time persons other than the general partner of the Partnership and its
affiliates own not more than 20% of the outstanding common units, the general
partner has the right to purchase all of the remaining common units at a price
not less than the then-current market price of the common units.
The subordinated units generally receive quarterly cash distributions only
when the common units have received a minimum quarterly distribution of $0.45
per unit for each quarter since the commencement of operations. When the
subordination period ends, all subordinated units will convert into common
units on a one-for-one basis and the common units will no longer be entitled to
arrearages. The subordination period will end when Sunoco Logistics Partners
L.P. meets financial tests specified in the partnership agreement but generally
cannot end before December 31, 2006. However, if Sunoco Logistics Partners L.P.
meets the financial tests for any quarter ending on or after December 31, 2004,
25% of the subordinated units will convert into common units. If these tests
are met for any quarter ending on or after December 31, 2005, an additional 25%
of the subordinated units will convert into common units. The early conversion
of the second 25% of the subordinated units may not occur until at least one
year after the early conversion of the first 25% of the subordinated units.
F-7
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)--(Continued)
The general partner interest is entitled to at least 2% of all distributions
made by Sunoco Logistics Partners L.P. In addition, the general partner holds
incentive distribution rights, which allow the general partner to receive a
higher percentage of quarterly distributions of available cash after the
minimum quarterly distributions have been achieved, and as additional target
levels are met. The higher percentages range from 15% up to 50%. The pro forma
financial statements assume that no incentive distributions were made to the
general partner. In subsequent periods, Sunoco Logistics Partners L.P. will
apply the hypothetical liquidation at book value method in allocating income to
the various partnership interests.
Note 6: Agreements with Sunoco R&M and Sunoco, Inc.
Concurrent with the closing of this offering, Sunoco, Inc. and its
affiliates and Sunoco Logistics Partners L.P. intend to enter into the
following agreements.
Pipelines and Terminals Storage and Throughput Agreement with Sunoco R&M.
Under this agreement, Sunoco R&M will agree to pay Sunoco Logistics Partners
L.P. a minimum level of revenues for transporting and terminalling refined
products. Sunoco R&M will also agree to minimum throughputs of refined products
and crude oil in the Partnership's Inkster Terminal, Fort Mifflin Terminal
Complex and Marcus Hook Tank Farm.
Crude Oil Purchase Agreement. Sunoco R&M will purchase from the Partnership
all of the crude oil that the Partnership's crude oil acquisition and marketing
operation purchases in certain areas for one year following this offering.
Omnibus Agreement. Historically, Sunoco, Inc. has allocated a portion of its
general and administrative expenses to its pipeline, terminalling and storage
operations to cover costs of centralized corporate functions such as legal,
accounting, treasury, engineering, information technology and insurance. The
allocation was $9.1 million, $9.0 million and $10.1 million for the years ended
December 31, 1998, 1999 and 2000, respectively, and $5.1 million and $5.4
million (unaudited) for the first six months of 2000 and 2001, respectively.
Under the omnibus agreement, Sunoco, Inc. will continue to provide these
services for three years for an annual administrative fee of $8.0 million,
which may be increased in the second and third years following this offering by
the lesser of 2.5% or the consumer price index for the applicable year. These
costs may also increase if the Partnership makes an acquisition or constructs
additional assets that require an increase in the level of general and
administrative services received by the Partnership from the general partner or
Sunoco, Inc. In addition, the Partnership anticipates incurring additional
general and administrative costs for tax return preparation, annual and
quarterly reports to unitholders, investor relations, registrar and transfer
agent fees, and other costs related to maintaining a separate publicly held
entity. The Partnership estimates that these incremental costs will be
approximately $2.1 million per year, excluding incremental insurance costs, if
any.
Under the omnibus agreement, Sunoco R&M will reimburse Sunoco Logistics
Partners L.P. for operating expenses and capital expenditures in excess of $8.0
million per year (up to an aggregate maximum of $15.0 million over a five-year
period) incurred to comply with future requirements under existing pipeline
safety regulations. In addition, Sunoco R&M will, at its expense, complete for
Sunoco Logistics Partners L.P.'s Darby Creek and Marcus Hook Tank Farms certain
tank maintenance and inspection projects now in progress or expected to be
completed within one year from the closing of this offering. Sunoco R&M will
also reimburse Sunoco Logistics Partners L.P. up to $10.0 million in connection
with expenditures required at the Darby Creek and Marcus Hook Tank Farms to
maintain compliance with existing industry standards and regulatory
requirements.
F-8
SUNOCO LOGISTICS PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)--(Continued)
Sunoco, Inc. will agree to indemnify Sunoco Logistics Partners L.P. for 30
years from environmental and toxic tort liabilities related to the assets
contributed to the Partnership that arise from the operation of such assets
prior to the closing of this offering. Sunoco, Inc. will be obligated to
indemnify the Partnership for 100% of all losses asserted within the first 21
years of closing. Sunoco, Inc.'s share of liability for claims asserted
thereafter will decrease by 10% a year. For example, for a claim asserted
during the twenty-third year after closing, Sunoco, Inc. would be required to
indemnify the Partnership for 80% of its loss. There is no monetary cap on the
amount of indemnity coverage provided by Sunoco, Inc.
Sunoco, Inc. also will indemnify Sunoco Logistics Partners L.P. for
liabilities, other than environmental and toxic tort liabilities related to the
assets contributed to the Partnership, that arise out of Sunoco, Inc. and its
affiliates' ownership and operation of the assets prior to the closing of this
offering and that are asserted within 10 years after closing.
In addition, Sunoco, Inc. and its affiliates will agree not to engage in,
whether by acquisition or otherwise, the business of purchasing crude oil at
the wellhead, or operating crude oil pipelines or terminals, refined products
pipelines or terminals, or LPG terminals in the continental United States.
F-9
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Sunoco Partners LLC:
We have audited the accompanying combined balance sheets of Sunoco Logistics
(Predecessor) (the "Predecessor") as of December 31, 2000 and 1999 and the
related combined statements of income and net parent investment and of cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Predecessor's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Sunoco Logistics
(Predecessor) at December 31, 2000 and 1999 and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
October 15, 2001
F-10
SUNOCO LOGISTICS (PREDECESSOR)
COMBINED BALANCE SHEETS
(in thousands)
December 31, June 30,
----------------- -----------
1999 2000 2001
-------- -------- -----------
(Unaudited)
Assets
Current Assets
Accounts receivable, affiliated companies (Note 2)...... $ 9,006 $ 6,753 $ 7,553
Accounts receivable, net................................ 187,992 258,044 197,208
Note receivable from affiliate (Note 2)................. -- -- 20,000
Inventories (Note 3).................................... 12,669 18,683 21,897
Deferred income taxes (Note 4).......................... 2,130 4,426 2,008
-------- -------- --------
Total Current Assets................................. 211,797 287,906 248,666
Properties, plants and equipment, net (Note 5).......... 481,967 518,605 530,590
Note receivable from affiliate (Note 2)................. -- 20,000 --
Deferred charges and other assets....................... 18,385 19,445 20,669
-------- -------- --------
Total Assets......................................... $712,149 $845,956 $799,925
======== ======== ========
Liabilities and Net Parent Investment
Current Liabilities
Accounts payable........................................ $277,975 $372,460 $292,713
Accrued liabilities..................................... 24,249 26,299 19,313
Short-term borrowings due affiliate (Note 2)............ -- 45,000 70,000
Current portion of long-term debt due affiliate (Note 2) -- -- 50,000
Current portion of long-term debt (Note 6).............. 186 205 216
Taxes payable........................................... 17,290 18,958 16,776
-------- -------- --------
Total Current Liabilities............................ 319,700 462,922 449,018
Long-term debt due affiliate (Note 2)................... 90,000 140,000 90,000
Long-term debt (Note 6)................................. 5,101 4,838 4,707
Deferred income taxes (Note 4).......................... 63,296 70,932 77,285
Other deferred credits and liabilities.................. 10,969 10,241 11,501
Commitments and contingent liabilities (Note 7)
Net parent investment (Note 2).......................... 223,083 157,023 167,414
-------- -------- --------
Total Liabilities and Net Parent Investment.......... $712,149 $845,956 $799,925
======== ======== ========
(See Accompanying Notes)
F-11
SUNOCO LOGISTICS (PREDECESSOR)
COMBINED STATEMENTS OF INCOME AND NET PARENT INVESTMENT
(in thousands)
Year Ended Six Months Ended
December 31, June 30,
-------------------------------- ----------------------
1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ----------
(Unaudited)
Revenues
Sales and other operating revenue:
Affiliates (Note 2)....................... $570,332 $ 764,133 $1,301,079 $ 620,327 $ 600,758
Unaffiliated customers.................... 371,612 426,988 853,938 402,401 406,528
Other income................................. 5,022 6,133 5,574 3,290 2,115
-------- ---------- ---------- ---------- ----------
Total Revenues........................ 946,966 1,197,254 2,160,591 1,026,018 1,009,401
Costs and Expenses
Cost of products sold and operating expenses. 830,330 1,083,529 2,045,947 970,206 948,595
Depreciation and amortization................ 18,622 19,911 20,654 10,191 11,601
Selling, general and administrative expenses. 29,890 27,461 34,683 17,332 17,540
-------- ---------- ---------- ---------- ----------
Total Costs and Expenses.............. 878,842 1,130,901 2,101,284 997,729 977,736
-------- ---------- ---------- ---------- ----------
Operating Income............................. 68,124 66,353 59,307 28,289 31,665
Net interest cost paid to affiliates (Note 2) 7,518 7,196 11,537 4,024 6,622
Other interest cost.......................... 7 110 426 219 198
Capitalized interest......................... (408) (819) (1,659) (663) (948)
-------- ---------- ---------- ---------- ----------
Income before income tax expense............. 61,007 59,866 49,003 24,709 25,793
Income tax expense (Note 4).................. 23,116 22,488 18,483 9,361 9,736
-------- ---------- ---------- ---------- ----------
Net Income................................... $ 37,891 $ 37,378 $ 30,520 $ 15,348 $ 16,057
======== ========== ========== ========== ==========
Net Parent Investment
At beginning of period....................... $205,604 $ 235,478 $ 223,083 $ 223,083 $ 157,023
Net income................................... 37,891 37,378 30,520 15,348 16,057
Distributions to parent...................... (8,017) (49,773) (96,580) (66,072) (5,666)
-------- ---------- ---------- ---------- ----------
At end of period............................. $235,478 $ 223,083 $ 157,023 $ 172,359 $ 167,414
======== ========== ========== ========== ==========
(See Accompanying Notes)
F-12
SUNOCO LOGISTICS (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------
1998 1999 2000 2000 2001
--------- --------- -------- -------- --------
(Unaudited)
Increases (Decreases) in Cash
Cash Flows from Operating Activities:
Net Income........................................... $ 37,891 $ 37,378 $ 30,520 $ 15,348 $ 16,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 18,622 19,911 20,654 10,191 11,601
Deferred income tax expense....................... 5,820 4,046 5,340 5,736 8,771
Changes in working capital pertaining to
operating activities:
Accounts receivable, affiliated companies..... 4,817 (5,556) 2,253 2,006 (800)
Accounts receivable........................... 74,775 (125,624) (70,052) (48,431) 60,836
Inventories................................... (566) 9,943 (6,014) (9,801) (3,214)
Accounts payable and accrued liabilities...... (102,673) 177,054 96,408 73,173 (88,073)
Taxes payable................................. 878 3,930 1,668 (1,743) (2,182)
Other............................................. 5,386 4,083 (1,661) (2,922) 1,376
--------- --------- -------- -------- --------
Net cash provided by operating activities............ 44,950 125,165 79,116 43,557 4,372
--------- --------- -------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures................................. (36,947) (46,958) (57,921) (21,389) (24,937)
Acquisition of crude oil transportation and marketing
operations of Pride Companies, L.P., net of debt
assumed of $5,334 (Note 10)........................ -- (29,576) -- -- --
Loan to affiliate.................................... -- -- (20,000) -- --
Other................................................ 14 1,414 629 (968) 1,351
--------- --------- -------- -------- --------
Net cash used in investing activities ............... (36,933) (75,120) (77,292) (22,357) (23,586)
--------- --------- -------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from short-term borrowings due
affiliate.......................................... -- -- 45,000 45,000 25,000
Proceeds from issuance of long-term debt to affiliate -- -- 50,000 -- --
Repayments of long-term debt......................... -- (272) (244) (128) (120)
Distributions to parent.............................. (8,017) (49,773) (96,580) (66,072) (5,666)
--------- --------- -------- -------- --------
Net cash provided by (used in) financing activities.. (8,017) (50,045) (1,824) (21,200) 19,214
--------- --------- -------- -------- --------
Net change in cash................................... -- -- -- -- --
Cash at beginning of year............................ -- -- -- -- --
--------- --------- -------- -------- --------
Cash at end of year.................................. $ -- $ -- $ -- $ -- $ --
========= ========= ======== ======== ========
(See Accompanying Notes)
F-13
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Combination and Description of Business
The accompanying combined financial statements consist of the accounts of a
substantial portion of the wholly owned logistics operations of Sunoco, Inc.
(collectively, "Sunoco Logistics (Predecessor)" or the "Predecessor"), after
elimination of all balances and transactions within the combined group of
operations. The combined financial statements also include Sunoco Logistics
(Predecessor)'s 9.4% investment in Explorer Pipeline Company, which is
accounted for by the equity method since the Predecessor exercises significant
influence over the operating and financial policies of the joint venture. The
equity income from this investment is included in other income in the combined
statements of income and net parent investment. The Predecessor's operations
are to be transferred to Sunoco Logistics Partners L.P., a newly formed
Delaware limited partnership. Most of the assets of Sunoco Logistics
(Predecessor) support Sunoco, Inc.'s refining and marketing operations which
are conducted primarily by Sunoco, Inc. (R&M) ("Sunoco R&M"). The Predecessor
operates in three principal business segments: Eastern Pipeline System,
Terminal Facilities and Western Pipeline System.
The Eastern Pipeline System transports refined products in the Northeast and
Midwest largely for Sunoco R&M's Philadelphia, PA, Marcus Hook, PA and Toledo,
OH refineries. The Eastern Pipeline System also transports crude oil on a
pipeline in Ohio and Michigan that supplies both Sunoco R&M's Toledo refinery
and third-party refineries. This segment also includes an interrefinery
pipeline between Sunoco R&M's Marcus Hook and Philadelphia refineries and the
equity interest in Explorer Pipeline Company, which transports refined products
from the Gulf Coast to numerous terminals throughout the Midwest.
The Terminal Facilities segment includes a network of 32 refined product
terminals in the Northeast and Midwest that distribute products primarily to
Sunoco R&M's retail outlets, an 11.2 million-barrel marine crude oil terminal
on the Texas Gulf Coast and a one million barrel liquefied petroleum gas
("LPG") storage facility near Detroit, MI. This segment also owns and operates
one inland and two marine crude oil terminals and the related storage
facilities and pipelines that supply all of the crude oil processed by Sunoco
R&M's Philadelphia refinery. Finally, this segment includes a two million
barrel refined product storage terminal in Marcus Hook, PA that is used by
Sunoco R&M's Marcus Hook refinery to source barrels to the Predecessor's
pipelines.
The Western Pipeline System acquires, transports and markets crude oil
principally in Oklahoma and Texas for Sunoco R&M's Tulsa, OK and Toledo, OH
refineries and also for other customers.
Basis of Presentation
The accompanying combined financial statements reflect historical cost-basis
amounts of the Predecessor and include charges from Sunoco, Inc. and its
subsidiaries (collectively, "Sunoco") for direct costs and allocations of
indirect corporate overhead. Management of the Predecessor believes that the
allocation methods are reasonable, and that the allocations are representative
of the costs that would have been incurred on a stand-alone basis.
Interim Financial Data
The interim financial data are unaudited; however, in the opinion of
management, the interim financial data include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results for the six-month periods ended June 30, 2000 and 2001. The interim
financial data is presented in accordance with the requirements of accounting
principles generally accepted in the United States for interim financial
reporting. The information does not include all disclosures normally contained
in annual financial statements and is not necessarily indicative of the results
for the full year 2001.
F-14
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual amounts could differ from these
estimates.
Revenue Recognition
Crude oil gathering and marketing revenues are recognized when title to the
crude oil is transferred to the customer. Revenues are not recognized for crude
oil exchange transactions which are entered into primarily to acquire crude oil
of a desired quality or to reduce transportation costs by taking delivery
closer to the Predecessor's end markets. Any net differential for exchange
transactions is recorded in cost of products sold and operating expenses in the
combined statements of income and net parent investment. Terminalling and
storage revenues are recognized at the time the services are provided. Pipeline
revenues are recognized upon delivery of the barrels to the location designated
by the shipper.
Inventories
Inventories are valued at the lower of cost or market. Crude oil reflects an
allocation to the Predecessor by Sunoco R&M of the Predecessor's share of
Sunoco R&M's crude oil inventory, the cost of which has been determined using
the last-in, first-out method ("LIFO"). The cost of materials, supplies and
other inventories is determined using principally the average cost method.
Properties, Plants and Equipment
Properties, plants and equipment are stated at cost. Additions to
properties, plants and equipment, including replacements and improvements, are
recorded at cost. Repair and maintenance expenditures are charged to expense as
incurred. Depreciation is provided principally using the straight-line method
based on the estimated useful lives of the related assets. For certain
interstate pipelines, the depreciation rate is applied to the net asset value
based on FERC requirements. When FERC-regulated property, plant and equipment
is retired or otherwise disposed of, the cost less net proceeds is charged to
accumulated depreciation and amortization, except that gains and losses for
those groups are taken into income for unusual disposals. Gains and losses on
the disposal of non-FERC properties, plants and equipment are reflected in net
income.
Environmental Remediation
The Predecessor accrues environmental remediation costs for work at
identified sites where an assessment has indicated that cleanup costs are
probable and reasonably estimable. Such accruals are undiscounted and are based
on currently available information, estimated timing of remedial actions and
related inflation assumptions, existing technology and presently enacted laws
and regulations.
Income Taxes
The Predecessor is included in the consolidated federal income tax return
filed by Sunoco, Inc. However, the provision for federal income taxes included
in the combined statements of income and net parent investment and the deferred
tax amounts reflected in the combined balance sheets have been determined on a
separate-return basis. Any current federal income tax amounts due on a
separate-return basis are settled with Sunoco, Inc. through the net parent
investment account.
F-15
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
2. Related Party Transactions
Accounts Receivable, Affiliated Companies
Substantially all of the related party transactions discussed below are
settled immediately through the net parent investment account. The balance in
accounts receivable from affiliated companies represents the net amount owed to
the Predecessor by Sunoco R&M related to the remaining intercompany
transactions.
Affiliated revenues in the combined statements of income and net parent
investment consist of sales of crude oil as well as the provision of crude oil
and refined product pipeline transportation, terminalling and storage services
to Sunoco R&M. Sales of crude oil and most pipeline tariffs reflect terms
believed by management of the Predecessor to be comparable to those that could
be negotiated with an unrelated third party. Revenues from terminalling and
storage are generally equal to all of the costs incurred for these activities.
Selling, general and administrative expenses in the combined statements of
income and net parent investment include costs allocated to the Predecessor
totaling $9.1 million, $9.0 million and $10.1 million for the years ended
December 31, 1998, 1999 and 2000, respectively, and $5.1 million and $5.4
million (unaudited) for the six months ended June 30, 2000 and 2001,
respectively. These expenses incurred by Sunoco cover costs of centralized
corporate functions such as legal, accounting, treasury, engineering,
information technology, insurance and other corporate services. Such expenses
are based on amounts negotiated between the parties, which approximate Sunoco's
cost of providing such services.
Costs of employees who work in the pipeline, terminalling, storage and crude
oil gathering operations are charged directly to the Predecessor and such
charges include salary and employee benefit costs. Employee benefits include
non-contributory defined benefit retirement plans, defined contribution 401(k)
plans, employee and retiree medical, dental and life insurance plans, incentive
compensation plans (i.e., cash and stock awards) and other such benefits. The
Predecessor's share of allocated Sunoco employee benefit plan expenses was
$16.3 million, $13.3 million and $18.7 million for the years ended December 31,
1998, 1999 and 2000, respectively, and $9.3 million and $9.4 million
(unaudited) for the six months ended June 30, 2000 and 2001, respectively.
These expenses are reflected primarily in cost of products sold and operating
expenses in the combined statements of income and net parent investment.
Note Receivable from Affiliate
Effective October 1, 2000, the Predecessor loaned $20.0 million to Sunoco.
The loan, which is evidenced by a note due January 1, 2002, earns interest at a
rate based on the short-term applicable federal rate established by the
Internal Revenue Service. The interest rate on this note at December 31, 2000
was 8.26%.
Short-Term Borrowings due Affiliate
At December 31, 2000, the Predecessor had two short-term notes totaling
$45.0 million payable to Sunoco. The notes bear interest at a rate based on the
short-term applicable federal rate established by the Internal Revenue Service.
The weighted-average interest rate related to these notes was 6.86% at December
31, 2000.
F-16
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Long-term Debt due Affiliate
The Predecessor has the following notes payable to Sunoco (in thousands of
dollars):
December 31,
----------------
1999 2000
------- --------
Variable-rate note due 2002 (8.22% at December 31, 2000) $ -- $ 50,000
Variable-rate note due 2002 (9.50% at December 31, 2000) 25,000 25,000
Variable-rate note due 2004 (9.50% at December 31, 2000) 25,000 25,000
Variable-rate note due 2005 (9.50% at December 31, 2000) 40,000 40,000
------- --------
$90,000 $140,000
======= ========
The 8.22% note bears interest at a rate based on the short-term applicable
federal rate established by the Internal Revenue Service, while the 9.50% notes
bear interest based on the prime rate.
Net Parent Investment
The net parent investment represents a net balance resulting from the
settlement of intercompany transactions (including federal income taxes)
between the Predecessor and Sunoco as well as Sunoco's ownership interest in
the net assets of the Predecessor. It also reflects the Predecessor's
participation in Sunoco's central cash management program, wherein all of the
Predecessor's cash receipts are remitted to Sunoco and all cash disbursements
are funded by Sunoco. There are no terms of settlement or interest charges
attributable to this balance. The net parent investment excludes amounts loaned
to/borrowed from Sunoco evidenced by interest-bearing notes.
3. Inventories
The components of inventories were as follows (in thousands of dollars):
December 31, June 30,
--------------- -----------
1999 2000 2001
------- ------- -----------
(Unaudited)
Crude oil.................... $11,470 $17,456 $20,648
Materials, supplies and other 1,199 1,227 1,249
------- ------- -------
$12,669 $18,683 $21,897
======= ======= =======
The current replacement cost of all crude oil inventory exceeded its
carrying value by $30.6 million and $34.4 million at December 31, 1999 and
2000, respectively, and $37.2 million (unaudited) at June 30, 2001.
F-17
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
4. Income Taxes
The components of income tax expense are as follows (in thousands of
dollars):
1998 1999 2000
------- ------- -------
Income taxes currently payable:
U.S. federal................ $14,430 $15,386 $10,965
State....................... 2,866 3,056 2,178
------- ------- -------
17,296 18,442 13,143
------- ------- -------
Deferred taxes:
U.S. federal................ 4,855 3,376 4,455
State....................... 965 670 885
------- ------- -------
5,820 4,046 5,340
------- ------- -------
$23,116 $22,488 $18,483
======= ======= =======
The reconciliation of the income tax expense at the U.S. statutory rate to
the income tax expense is as follows (in thousands of dollars):
1998 1999 2000
------- ------- -------
Income tax expense at U.S. statutory rate of 35%........... $21,352 $20,953 $17,151
Increase (reduction) in income taxes resulting from:
State income taxes net of Federal income tax effects.... 2,490 2,422 1,991
Dividend exclusion for joint venture pipeline operation. (952) (1,125) (923)
Other................................................... 226 238 264
------- ------- -------
$23,116 $22,488 $18,483
======= ======= =======
The effects of temporary differences that comprise the net deferred income
tax liability are as follows (in thousands of dollars):
December 31,
------------------
1999 2000
-------- --------
Deferred tax assets:
Environmental remediation liabilities. $ 6,390 $ 6,519
Other liabilities not yet deductible.. 4,148 4,426
Other................................. 2,847 3,426
-------- --------
13,385 14,371
-------- --------
Deferred tax liabilities:
Inventories........................... (3,087) (1,836)
Properties, plants and equipment...... (71,464) (79,041)
-------- --------
(74,551) (80,877)
-------- --------
Net deferred income tax liability........ $(61,166) $(66,506)
======== ========
F-18
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Cash payments for income taxes (including amounts paid to Sunoco) amounted
to $16.0 million, $16.7 million and $11.9 million in 1998, 1999 and 2000,
respectively.
The net deferred income tax liability is classified in the combined balance
sheets as follows (in thousands of dollars):
December 31,
------------------
1999 2000
-------- --------
Current asset....... $ 2,130 $ 4,426
Noncurrent liability (63,296) (70,932)
-------- --------
$(61,166) $(66,506)
======== ========
5. Properties, Plants and Equipment
The components of net properties, plants and equipment were as follows (in
thousands of dollars):
December 31,
Estimated -----------------
Useful Lives 1999 2000
------------ -------- --------
Land and land improvements (including rights of way) 20-60 $ 49,705 $ 50,183
Pipeline and related assets......................... 38-60 393,075 425,093
Terminals and storage facilities.................... 5-44 280,374 296,898
Other............................................... 5-48 57,982 61,542
Construction-in-progress............................ -- 39,879 38,249
-------- --------
821,015 871,965
Less: Accumulated depreciation and amortization..... 339,048 353,360
-------- --------
$481,967 $518,605
======== ========
6. Long-Term Debt
In connection with the acquisition of the crude oil transportation and
marketing operations of Pride Companies, L.P. on October 1, 1999 (Note 10), the
Predecessor assumed a $5.3 million note. The note is due in 2014 with interest
payable at an annual rate of 8%. The note is secured by certain of the acquired
assets. The amount of this note and the long-term debt due affiliate (Note 2)
maturing in the years 2001 through 2005 is as follows (in thousands of
dollars):
Pride Long-Term Debt
Note Due Affiliate Total
----- -------------- -------
2001 $205 $ -- $ 205
2002 $225 $75,000 $75,225
2003 $243 $ -- $ 243
2004 $265 $25,000 $25,265
2005 $285 $40,000 $40,285
Cash payments for interest related to the Pride note and amounts due
affiliates were $7.5 million, $7.3 million and $12.4 million in 1998, 1999 and
2000, respectively.
F-19
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingent Liabilities
The Predecessor, as lessee, has noncancelable operating leases for land,
office space and equipment. Total rental expense for 1998, 1999 and 2000
amounted to $2.8 million, $3.6 million and $5.4 million, respectively. The
aggregate amount of future minimum annual rentals as of December 31, 2000
applicable to noncancelable operating leases is as follows (in thousands of
dollars):
Year Ending December 31:
2001................. $1,616
2002................. 1,235
2003................. 802
2004................. 358
2005................. 25
------
Total................ $4,036
======
The Predecessor is subject to numerous federal, state and local laws which
regulate the discharge of materials into the environment or that otherwise
relate to the protection of the environment. These laws result in liabilities
and loss contingencies for remediation at the Predecessor's facilities and at
third-party or formerly owned sites. The accrued liability for environmental
remediation is classified in the combined balance sheets as follows (in
thousands of dollars):
December 31, June 30,
--------------- -----------
1999 2000 2001
------- ------- -----------
(Unaudited)
Accrued liabilities................... $ 5,987 $ 6,333 $ 3,178
Other deferred credits and liabilities 9,224 9,082 10,027
------- ------- -------
$15,211 $15,415 $13,205
======= ======= =======
Pretax charges against (benefits to) income for environmental remediation
totaled $(0.7) million, $3.9 million and $8.5 million in the years ended
December 31, 1998, 1999 and 2000, respectively, and $5.5 million and $1.2
million (unaudited) in the six months ended June 30, 2000 and 2001,
respectively.
Total future costs for environmental remediation activities will depend
upon, among other things, the identification of any additional sites, the
determination of the extent of the contamination at each site, the timing and
nature of required remedial actions, the technology available and needed to
meet the various existing legal requirements, the nature and extent of future
environmental laws, inflation rates and the determination of the Predecessor's
liability at multi-party sites, if any, in light of the number, participation
levels and financial viability of other parties.
The Predecessor is a party to certain pending and threatened claims.
Although the ultimate outcome of these claims cannot be ascertained at this
time, it is reasonably possible that some portion of them could be resolved
unfavorably to the Predecessor. Management of the Predecessor believes that any
liabilities which may arise from such claims and the environmental matters
discussed above would not be material in relation to the financial position of
the Predecessor at December 31, 2000 and June 30, 2001.
F-20
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
8. Investment in Explorer Pipeline Company
The following table provides summarized financial information on a 100%
basis for Explorer Pipeline Company (in thousands of dollars):
1998 1999 2000
-------- -------- --------
Income Statement Data:
Total revenues...................... $131,828 $150,776 $146,719
Income before income taxes.......... $ 64,809 $ 78,886 $ 61,655
Net income.......................... $ 40,642 $ 50,170 $ 38,859
Balance Sheet Data (as of year end):
Current assets...................... $ 23,173 $ 27,601 $ 35,012
Noncurrent assets................... $135,174 $132,010 $129,935
Current liabilities................. $ 41,096 $ 17,328 $ 24,320
Noncurrent liabilities.............. $115,382 $140,573 $139,953
Net equity.......................... $ 1,869 $ 1,710 $ 674
9. Financial Instruments and Concentration of Credit Risk
The Predecessor's current assets (other than inventories and deferred income
taxes) and current liabilities are financial instruments. The estimated fair
value of these financial instruments approximates their carrying amounts. The
estimated fair values of the long-term debt (primarily amounts due affiliate)
at December 31, 1999 and 2000 were $96.0 million and $146.6 million,
respectively, compared to the carrying amounts of $95.1 million and $144.8
million, respectively. The estimated fair value of the $20.0 million note
receivable from affiliate was $19.9 million at December 31, 2000. The estimated
fair values were based upon the current interest rates at the balance sheet
dates for similar issues.
Approximately 60% of the sales and other operating revenue recognized by the
Predecessor during 2000 is derived from Sunoco R&M. The Predecessor sells crude
oil to Sunoco R&M, transports crude oil and refined products to/from Sunoco
R&M's refineries and provides terminalling and storage services for Sunoco R&M.
The Predecessor does not believe that the transactions with Sunoco R&M expose
it to significant credit risk.
The Predecessor's other trade relationships are primarily with major
integrated oil companies, independent oil companies and other pipelines and
wholesalers. These concentrations of customers may affect the Predecessor's
overall credit risk in that the customers (including Sunoco R&M) may be
similarly affected by changes in economic, regulatory or other factors. The
Predecessor's customers' credit positions are analyzed prior to extending
credit. The Predecessor manages its exposure to credit risk through credit
analysis, credit approvals, credit limits and monitoring procedures, and for
certain transactions may utilize letters of credit, prepayments and guarantees.
10. Acquisition of Pride Companies, L.P. Crude Oil Transportation and Marketing
Operations
On October 1, 1999, the Predecessor acquired the crude oil transportation
and marketing operations of Pride Companies, L.P. ("Pride") for $29.6 million
in cash and the assumption of $5.3 million of debt. The acquisition included
Pride's 800-mile crude oil pipeline system, 800,000 barrels of tankage and
related assets, and the right to purchase 35,000 barrels per day of third-party
lease crude oil.
F-21
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
The acquisition has been accounted for as a purchase. The results of
operations have been included in the combined statements of income and net
parent investment since the date of acquisition. The purchase price has been
allocated to the assets acquired and liabilities assumed based on their
relative fair market values at the acquisition date. The following is a summary
of the effects of this transaction on the Predecessor's financial position as
of the acquisition date (in thousands of dollars):
Allocation of purchase price:
Inventories................................ $10,246
Properties, plants and equipment........... 25,486
Deferred charges and other assets.......... 1,839
Accrued liabilities........................ (822)
Long-term debt (including current portion). (5,334)
Deferred income taxes...................... (1,839)
-------
Cash paid on acquisition date.............. $29,576
=======
The unaudited pro forma net income for the years ended December 31, 1998 and
1999, assuming the acquisition had occurred on January 1, 1998, was $34.4
million and $34.8 million, respectively. The pro forma information does not
purport to be indicative of the results that actually would have been obtained
if the combined operations had been conducted during the periods presented and
is not intended to be a projection of future results.
11. Business Segment Information
The Predecessor is comprised of a substantial portion of the logistics
operations of Sunoco, Inc. The Predecessor operates in three principal business
segments: Eastern Pipeline System, Terminal Facilities and Western Pipeline
System. A detailed description of each of these segments is contained in Note
1.
Segment Information (in thousands)
Year Ended December 31, 1998
-------------------------------------------
Eastern Western
Pipeline Terminal Pipeline
System Facilities System Total
-------- ---------- -------- --------
Sales and other operating revenue:
Affiliates..................... $ 68,081 $ 35,263 $466,988 $570,332
======== ======== ======== ========
Unaffiliated customers......... $ 22,571 $ 28,307 $320,734 $371,612
======== ======== ======== ========
Operating income.................. $ 42,185 /(1)/ $ 18,796 $ 7,143 $ 68,124
======== ======== ========
Net interest expense.............. (7,117)
Income tax expense................ (23,116)
--------
Net income........................ $ 37,891
========
Depreciation and amortization..... $ 7,395 $ 8,118 $ 3,109 $ 18,622
======== ======== ======== ========
Capital expenditures.............. $ 16,831 $ 12,366 $ 7,750 $ 36,947
======== ======== ======== ========
Identifiable assets............... $242,100 $145,832 $138,585 $528,279 /(2)/
======== ======== ======== ========
--------
(1)Includes equity income of $3,885 thousand attributable to the Predecessor's
ownership interest in Explorer Pipeline Company.
(2)Identifiable assets include the Predecessor's unallocated $1,762 thousand
deferred income tax asset.
F-22
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Segment Information (in thousands)
Year Ended December 31, 1999
-------------------------------------------------
Eastern Western
Pipeline Terminal Pipeline
System Facilities System Total
-------- ---------- -------- --------
Sales and other operating revenue:
Affiliates..................... $ 70,177 $ 38,329 $655,627 $764,133
======== ======== ======== ========
Unaffiliated customers......... $ 19,472 $ 29,166 $378,350 $426,988
======== ======== ======== ========
Operating income.................. $ 38,501 /(1)/ $ 16,767 $ 11,085 $ 66,353
======== ======== ========
Net interest expense.............. (6,487)
Income tax expense................ (22,488)
--------
Net income........................ $ 37,378
========
Depreciation and amortization..... $ 7,929 $ 8,457 $ 3,525 $ 19,911
======== ======== ======== ========
Capital expenditures.............. $ 20,697 $ 16,858 $ 9,403 /(2)/ $ 46,958
======== ======== ======== ========
Identifiable assets............... $256,842 $151,497 $301,680 $712,149 /(3)/
======== ======== ======== ========
--------
(1)Includes equity income of $4,591 thousand attributable to the Predecessor's
ownership interest in Explorer Pipeline Company.
(2)Excludes $34,910 thousand acquisition of the crude oil transportation and
marketing operations of Pride Companies, L.P.
(3)Identifiable assets include the Predecessor's unallocated $2,130 thousand
deferred income tax asset.
Segment Information (in thousands)
Year Ended December 31, 2000
-----------------------------------------------
Eastern Western
Pipeline Terminal Pipeline
System Facilities System Total
-------- ---------- ---------- ----------
Sales and other operating revenue:
Affiliates..................... $ 69,027 $ 44,356 $1,187,696 $1,301,079
======== ======== ========== ==========
Unaffiliated customers......... $ 19,323 $ 31,042 $ 803,573 $ 853,938
======== ======== ========== ==========
Operating income.................. $ 31,064 /(1)/ $ 17,156 $ 11,087 $ 59,307
======== ======== ==========
Net interest expense.............. (10,304)
Income tax expense................ (18,483)
----------
Net income........................ $ 30,520
==========
Depreciation and amortization..... $ 8,272 $ 8,616 $ 3,766 $ 20,654
======== ======== ========== ==========
Capital expenditures.............. $ 21,894 $ 28,488 $ 7,539 $ 57,921
======== ======== ========== ==========
Identifiable assets............... $286,319 $175,376 $ 379,835 $ 845,956 /(2)/
======== ======== ========== ==========
--------
(1)Includes equity income of $3,766 thousand attributable to the Predecessor's
ownership interest in Explorer Pipeline Company.
(2)Identifiable assets include the Predecessor's unallocated $4,426 thousand
deferred income tax asset.
F-23
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Segment Information (in thousands)
Six Months Six Months
Ended June 30, 2000 (unaudited) Ended June 30, 2001 (unaudited)
------------------------------------------ ------------------------------------------
Eastern Western Eastern Western
Pipeline Terminal Pipeline Pipeline Terminal Pipeline
System Facilities System Total System Facilities System Total
-------- ---------- -------- -------- -------- ---------- -------- --------
Sales and other
operating revenue:
Affiliates............. $34,385 $22,637 $563,305 $620,327 $ 35,156 $20,328 $545,274 $600,758
======= ======= ======== ======== ======== ======= ======== ========
Unaffiliated customers. $ 9,264 $12,432 $380,705 $402,401 $ 10,547 $13,803 $382,178 $406,528
======= ======= ======== ======== ======== ======= ======== ========
Operating income.......... $15,192 /(1)/ $ 6,278 $ 6,819 $ 28,289 $16,394 /(1)/ $ 7,031 $ 8,240 $ 31,665
======= ======= ======== ======== ======= ========
Net interest expense...... (3,580) (5,872)
Income tax expense........ (9,361) (9,736)
-------- --------
Net income................ $ 15,348 $ 16,057
======== ========
Depreciation and
amortization............ $ 4,094 $ 4,242 $ 1,855 $ 10,191 $ 4,789 $ 4,819 $ 1,993 $ 11,601
======= ======= ======== ======== ======== ======= ======== ========
Capital expenditures...... $ 6,646 $12,353 $ 2,390 $ 21,389 $ 9,717 $ 9,421 $ 5,799 $ 24,937
======= ======= ======== ======== ======== ======= ======== ========
--------
(1)Includes equity income of $1,628 and $1,816 thousand for the six months
ended June 30, 2000 and 2001, respectively, attributable to the
Predecessor's ownership interest in Explorer Pipeline Company.
Income tax amounts give effect to the tax credits earned by each segment.
Overhead expenses are identified with each segment and included as deductions
in determining the segment's operating income. Identifiable assets are those
assets that are utilized within a specific segment.
The following table sets forth the Predecessor's total sales and other
operating revenue by product or service (in thousands of dollars):
Year Ended Six Months Ended
December 31, June 30,
---------------------------- -----------------
1998 1999 2000 2000 2001
-------- -------- ---------- -------- --------
(Unaudited)
Affiliates:
Crude oil.............. $463,975 $651,805 $1,178,004 $559,535 $540,795
Pipeline............... 71,094 73,999 78,719 38,155 39,635
Terminalling and other. 35,263 38,329 44,356 22,637 20,328
-------- -------- ---------- -------- --------
$570,332 $764,133 $1,301,079 $620,327 $600,758
======== ======== ========== ======== ========
Unaffiliated Customers:
Crude oil.............. $315,615 $372,916 $ 799,056 $378,377 $380,437
Pipeline............... 27,690 24,906 23,840 11,592 12,288
Terminalling and other. 28,307 29,166 31,042 12,432 13,803
-------- -------- ---------- -------- --------
$371,612 $426,988 $ 853,938 $402,401 $406,528
======== ======== ========== ======== ========
F-24
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
12. New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued, and
in June 2000, it was amended by Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (collectively, "new derivative accounting"). The new derivative
accounting requires recognition of all derivative contracts in the balance
sheet at their fair value. If the derivative contracts qualify for hedge
accounting, depending on their nature, changes in their fair values are either
offset in net income against the changes in the fair values of the items being
hedged or reflected initially as a separate component of the net parent
investment and subsequently recognized in the net income when the hedged items
are recognized in net income. The ineffective portions of changes in the fair
values of derivative contracts that qualify for hedge accounting as well as
changes in fair value of all other derivatives are immediately recognized in
net income. The new derivative accounting was adopted effective January 1,
2001. There was no impact on net income or net parent investment for the six
months ended June 30, 2001.
In July 2001, Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142") was issued. Sunoco Logistics
(Predecessor) will adopt SFAS No. 142 effective January 1, 2002 when adoption
is mandatory. SFAS No. 142 will require the testing of goodwill and indefinite-
lived intangible assets for impairment rather than amortizing them. The
Predecessor is currently assessing the impact of adopting SFAS No. 142 on its
combined financial statements. The current level of annual amortization of
goodwill and indefinite-lived intangible assets, which will be eliminated upon
the adoption of SFAS No. 142, is approximately $0.5 million.
In August 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued. This
statement significantly changes the method of accruing for costs associated
with the retirement of fixed assets which an entity is legally obligated to
incur. The Predecessor will evaluate the impact and timing of implementing SFAS
No. 143. Implementation of this standard is required no later than January 1,
2003.
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") was issued. Sunoco Logistics (Predecessor) will adopt SFAS No. 144
effective January 1, 2002 when adoption is mandatory. Among other things, SFAS
No. 144 significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. This statement supersedes Statement of
Financial Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and the provisions of
Accounting Principles Board Opinion 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" that
relate to reporting the effects of a disposal of a segment of a business. The
Predecessor is currently assessing the impact of adopting SFAS No. 144 on its
combined financial statements.
13. Subsequent Events
On October 15, 2001, Sunoco, Inc. formed Sunoco Logistics Partners L.P.
("Partnership") to ultimately acquire the business of Sunoco Logistics
(Predecessor). The Partnership's general partner is Sunoco Partners LLC, an
indirect wholly owned subsidiary of Sunoco, Inc. Effective with the closing of
an initial public offering of common units of the Partnership expected to occur
in the fourth quarter of 2001, the ownership of the Predecessor will be
transferred to the Partnership. This transfer represents a reorganization of
entities under common control and will be recorded at historical cost.
F-25
SUNOCO LOGISTICS (PREDECESSOR)
NOTES TO HISTORICAL COMBINED FINANCIAL STATEMENTS--(Continued)
Prior to the closing of this offering, the Predecessor has provided
terminalling and storage services for Sunoco R&M's refining and marketing
operations at fees that enabled the Predecessor to recover its costs but not to
generate a profit. Concurrent with the closing of this offering, the
Partnership will enter into a pipelines and terminals storage and throughput
agreement with Sunoco R&M under which the Partnership will charge Sunoco R&M
fees for these services comparable to those charged in arms-length, third-party
transactions.
Under the pipelines and terminals storage and throughput agreement, Sunoco
R&M will agree to pay the Partnership a minimum level of revenues for
transporting and terminalling refined products. Sunoco R&M will also agree to
minimum throughputs of refined products and crude oil in the Partnership's
Inkster Terminal, Fort Mifflin Terminal Complex and Marcus Hook Tank Farm.
Under a crude oil purchase agreement, Sunoco R&M will purchase from the
Partnership all of the crude oil that the Partnership's crude oil acquisition
and marketing operation purchases in certain areas for one year following this
offering.
Historically, Sunoco has allocated a portion of its general and
administrative expenses to its pipeline, terminalling and storage operations to
cover costs of centralized corporate functions (Note 2). Under an omnibus
agreement with Sunoco, Inc. that the Partnership will enter into at the closing
of this offering, Sunoco, Inc. will continue to provide these services for
three years for an annual administrative fee of $8.0 million, which may be
increased in the second and third years following this offering by the lesser
of 2.5% or the consumer price index for the applicable year. These costs may
also increase if the Partnership makes an acquisition or constructs additional
assets that require an increase in the level of general and administrative
services received by the Partnership from the general partner or Sunoco, Inc.
In addition, the Partnership anticipates incurring additional general and
administrative costs for tax return preparation, annual and quarterly reports
to unitholders, investor relations, registrar and transfer agent fees, and
other costs related to maintaining a separate publicly held entity. The
Partnership estimates that these incremental costs will be approximately $2.1
million (unaudited) per year, excluding incremental insurance costs, if any.
Under the omnibus agreement, Sunoco R&M will reimburse Sunoco Logistics
Partners L.P. for operating expenses and capital expenditures in excess of $8.0
million per year (up to an aggregate maximum of $15.0 million over a five-year
period) incurred to comply with future requirements under existing pipeline
safety regulations. In addition, Sunoco R&M will, at its expense, complete for
Sunoco Logistics Partners L.P.'s Darby Creek and Marcus Hook Tank Farms certain
tank maintenance and inspection projects now in progress or expected to be
completed within one year from the closing of this offering. Sunoco R&M will
also reimburse Sunoco Logistics Partners L.P. up to $10.0 million in connection
with expenditures required at the Darby Creek and Marcus Hook Tank Farms to
maintain compliance with existing industry standards and regulatory
requirements.
In connection with this offering and related transactions, Sunoco, Inc. will
agree to indemnify Sunoco Logistics Partners L.P. for 30 years from
environmental and toxic tort liabilities related to the assets contributed to
the Partnership that arise from the operation of such assets prior to the
closing of this offering. Sunoco, Inc. will be obligated to indemnify the
Partnership for 100% of all losses asserted within the first 21 years of
closing. Sunoco, Inc.'s share of liability for claims asserted thereafter will
decrease by 10% a year. For example, for a claim asserted during the
twenty-third year after closing, Sunoco, Inc. would be required to indemnify
the Partnership for 80% of its loss. There is no monetary cap on the amount of
indemnity coverage provided by Sunoco, Inc.
Sunoco, Inc. also will indemnify Sunoco Logistics Partners L.P. for
liabilities, other than environmental and toxic tort liabilities related to the
assets contributed to the Partnership, that arise out of Sunoco, Inc. and its
affiliates' ownership and operation of the assets prior to the closing of this
offering and that are asserted within 10 years after closing.
In addition, Sunoco will agree not to engage in, whether by acquisition or
otherwise, the business of purchasing crude oil at the wellhead, or operating
crude oil pipelines or terminals, refined products pipelines or terminals, or
LPG terminals in the continental United States.
F-26
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Sunoco Partners LLC:
We have audited the accompanying balance sheet of Sunoco Logistics Partners
L.P. (a Delaware limited partnership) (the "Partnership") as of October 18,
2001. This balance sheet is the responsibility of the Partnership's management.
Our responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Sunoco Logistics Partners L.P. at
October 18, 2001 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
October 19, 2001
F-27
SUNOCO LOGISTICS PARTNERS L.P.
BALANCE SHEET
OCTOBER 18, 2001
Assets
Current Assets
Cash.................... $1,000
------
Total Assets......... $1,000
======
Equity
Limited partner's equity $ 980
General partner's equity 20
------
Total Equity......... $1,000
======
(See Accompanying Note)
F-28
SUNOCO LOGISTICS PARTNERS L.P.
NOTE TO BALANCE SHEET
1. Nature of Operations
Sunoco Logistics Partners L.P., a Delaware limited partnership (the
"Partnership"), was formed on October 15, 2001 to ultimately acquire a
substantial portion of the refined product pipelines, terminalling and storage
assets, and crude oil pipelines and crude oil acquisition and marketing assets
of Sunoco, Inc. (collectively, "Sunoco Logistics (Predecessor)"). Sunoco
Partners LLC, the Partnership's general partner, and the Partnership's limited
partner are both wholly owned subsidiaries of Sunoco, Inc. The Partnership has
adopted a January 1 to December 31 fiscal year. Sunoco Partners LLC contributed
$20 and the wholly owned subsidiary of Sunoco, Inc. contributed $980 to the
Partnership on October 18, 2001. There have been no other transactions
involving the Partnership as of October 18, 2001.
The Partnership intends to offer 5,000,000 common units to the public and
750,000 common units to Sunoco Partners LLC if the underwriters do not exercise
their over-allotment option, representing limited partner interests, pursuant
to a public offering. It will also concurrently issue to Sunoco Partners LLC
6,722,528 common units and 12,472,528 subordinated units, representing
additional limited partner interests, and an aggregate 2% general partner
interest and incentive distribution rights in exchange for the contribution of
the assets of Sunoco Logistics (Predecessor). The contribution of the assets
also will entitle Sunoco Partners LLC to receive $247 million in cash
representing the estimated net proceeds from $250 million of senior notes,
which will be issued by the Partnership in connection with the public offering.
F-29
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Sunoco Partners LLC:
We have audited the accompanying balance sheet of Sunoco Partners LLC as of
October 18, 2001. This balance sheet is the responsibility of Sunoco Partners
LLC's management. Our responsibility is to express an opinion on this balance
sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Sunoco Partners LLC at October 18,
2001 in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
October 19, 2001
F-30
SUNOCO PARTNERS LLC
BALANCE SHEET
OCTOBER 18, 2001
Assets
Current Assets
Cash........................................ $ 980
Investment in Sunoco Logistics Partners L.P. 20
------
Total Assets............................. $1,000
======
Equity
Net parent investment....................... $1,000
------
Total Equity............................. $1,000
======
(See Accompanying Note)
F-31
SUNOCO PARTNERS LLC
NOTE TO BALANCE SHEET
1. Nature of Operations
Sunoco Partners LLC is a Delaware limited liability company formed on
October 12, 2001 to become the general partner of Sunoco Logistics Partners
L.P. (the "Partnership"). Sunoco Partners LLC is a wholly owned subsidiary of
Sunoco, Inc. On October 18, 2001, another wholly owned subsidiary of Sunoco,
Inc. contributed $1,000 to Sunoco Partners LLC in exchange for a 100% ownership
interest. Sunoco Partners LLC has invested $20 in the Partnership for its 2%
general partner interest. There have been no other transactions involving
Sunoco Partners LLC as of October 18, 2001.
F-32
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
APPENDIX A
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
SUNOCO LOGISTICS PARTNERS L.P.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
Section 1.1 Definitions....................................................................... A-1
Section 1.2 Construction...................................................................... A-16
ARTICLE II
ORGANIZATION
Section 2.1 Formation......................................................................... A-16
Section 2.2 Name.............................................................................. A-16
Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices.............. A-16
Section 2.4 Purpose and Business.............................................................. A-17
Section 2.5 Powers............................................................................ A-17
Section 2.6 Power of Attorney................................................................. A-17
Section 2.7 Term.............................................................................. A-18
Section 2.8 Title to Partnership Assets....................................................... A-18
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability........................................................... A-19
Section 3.2 Management of Business............................................................ A-19
Section 3.3 Outside Activities of the Limited Partners........................................ A-19
Section 3.4 Rights of Limited Partners........................................................ A-19
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 Certificates...................................................................... A-20
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates................................. A-20
Section 4.3 Record Holders.................................................................... A-21
Section 4.4 Transfer Generally................................................................ A-21
Section 4.5 Registration and Transfer of Limited Partner Interests............................ A-22
Section 4.6 Transfer of the General Partner's General Partner Interest........................ A-22
Section 4.7 Transfer of Incentive Distribution Rights......................................... A-23
Section 4.8 Restrictions on Transfers......................................................... A-23
Section 4.9 Citizenship Certificates; Non-citizen Assignees................................... A-24
Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees...................... A-24
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions...................................................... A-25
Section 5.2 Contributions by the General Partner and its Affiliates........................... A-25
Section 5.3 Contributions by Initial Limited Partners and Reimbursement of the General Partner A-26
Section 5.4 Interest and Withdrawal........................................................... A-26
Section 5.5 Capital Accounts.................................................................. A-27
Section 5.6 Issuances of Additional Partnership Securities.................................... A-29
A--i
Section 5.7 Limitations on Issuance of Additional Partnership Securities.......................... A-29
Section 5.8 Conversion of Subordinated Units...................................................... A-31
Section 5.9 Limited Preemptive Right.............................................................. A-32
Section 5.10 Splits and Combinations............................................................... A-32
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests..................... A-33
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes.............................................. A-33
Section 6.2 Allocations for Tax Purposes.......................................................... A-38
Section 6.3 Requirement and Characterization of Distributions; Distributions to Record Holders.... A-40
Section 6.4 Distributions of Available Cash from Operating Surplus................................ A-40
Section 6.5 Distributions of Available Cash from Capital Surplus.................................. A-41
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels........... A-42
Section 6.7 Special Provisions Relating to the Holders of Subordinated Units...................... A-42
Section 6.8 Special Provisions Relating to the Holders of Incentive Distribution Rights........... A-43
Section 6.9 Entity-Level Taxation................................................................. A-43
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management............................................................................ A-43
Section 7.2 Certificate of Limited Partnership.................................................... A-45
Section 7.3 Restrictions on the General Partner's Authority....................................... A-45
Section 7.4 Reimbursement of the General Partner.................................................. A-46
Section 7.5 Outside Activities.................................................................... A-46
Section 7.6 Loans from the General Partner; Loans or Contributions from the Partnership; Contracts
with Affiliates; Certain Restrictions on the General Partner........................ A-47
Section 7.7 Indemnification....................................................................... A-48
Section 7.8 Liability of Indemnitees.............................................................. A-50
Section 7.9 Resolution of Conflicts of Interest................................................... A-50
Section 7.10 Other Matters Concerning the General Partner.......................................... A-51
Section 7.11 Purchase or Sale of Partnership Securities............................................ A-52
Section 7.12 Registration Rights of the General Partner and its Affiliates......................... A-52
Section 7.13 Reliance by Third Parties............................................................. A-54
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting................................................................ A-54
Section 8.2 Fiscal Year........................................................................... A-54
Section 8.3 Reports............................................................................... A-54
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information........................................................... A-55
Section 9.2 Tax Elections......................................................................... A-55
Section 9.3 Tax Controversies..................................................................... A-55
Section 9.4 Withholding........................................................................... A-56
A--ii
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners.................................... A-56
Section 10.2 Admission of Substituted Limited Partner................................. A-56
Section 10.3 Admission of Successor General Partner................................... A-56
Section 10.4 Admission of Additional Limited Partners................................. A-57
Section 10.5 Amendment of Agreement and Certificate of Limited Partnership............ A-57
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner........................................ A-57
Section 11.2 Removal of the General Partner........................................... A-59
Section 11.3 Interest of Departing Partner and Successor General Partner.............. A-59
Section 11.4 Termination of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit Arrearages.................... A-60
Section 11.5 Withdrawal of Limited Partners........................................... A-60
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution.............................................................. A-60
Section 12.2 Continuation of the Business of the Partnership After Dissolution........ A-61
Section 12.3 Liquidator............................................................... A-61
Section 12.4 Liquidation.............................................................. A-62
Section 12.5 Cancellation of Certificate of Limited Partnership....................... A-62
Section 12.6 Return of Contributions.................................................. A-62
Section 12.7 Waiver of Partition...................................................... A-63
Section 12.8 Capital Account Restoration.............................................. A-63
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner.................... A-63
Section 13.2 Amendment Procedures..................................................... A-64
Section 13.3 Amendment Requirements................................................... A-64
Section 13.4 Special Meetings......................................................... A-65
Section 13.5 Notice of a Meeting...................................................... A-65
Section 13.6 Record Date.............................................................. A-65
Section 13.7 Adjournment.............................................................. A-66
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes............... A-66
Section 13.9 Quorum................................................................... A-66
Section 13.10 Conduct of a Meeting..................................................... A-66
Section 13.11 Action Without a Meeting................................................. A-67
Section 13.12 Voting and Other Rights.................................................. A-67
A--iii
ARTICLE XIV
MERGER
Section 14.1 Authority.............................................. A-68
Section 14.2 Procedure for Merger or Consolidation.................. A-68
Section 14.3 Approval by Limited Partners of Merger or Consolidation A-68
Section 14.4 Certificate of Merger.................................. A-69
Section 14.5 Effect of Merger....................................... A-69
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right to Acquire Limited Partner Interests............. A-70
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices.................................. A-71
Section 16.2 Further Action......................................... A-72
Section 16.3 Binding Effect......................................... A-72
Section 16.4 Integration............................................ A-72
Section 16.5 Creditors.............................................. A-72
Section 16.6 Waiver................................................. A-72
Section 16.7 Counterparts........................................... A-72
Section 16.8 Applicable Law......................................... A-72
Section 16.9 Invalidity of Provisions............................... A-72
Section 16.10 Consent of Partners.................................... A-72
A--iv
FIRST AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF SUNOCO LOGISTICS PARTNERS L.P.
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SUNOCO
LOGISTICS PARTNERS L.P., dated as of , 2001, is entered into by and among
Sunoco Partners LLC, a Delaware limited liability company, as the General
Partner and Sun Pipe Line Company of Delaware, a Delaware corporation, as the
Organizational Limited Partner, together with any other Persons who become
Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property is
increased as a result of such Book-Down Event, an allocable portion of any
such increase in Carrying Value shall be treated as Additional Book Basis;
provided that the amount treated as Additional Book Basis pursuant hereto as
a result of such Book-Down Event shall not exceed the amount by which the
Aggregate Remaining Net Positive Adjustments after such Book-Down Event
exceeds the remaining Additional Book Basis attributable to all of the
Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's
Adjusted Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning of such period
(the "Excess Additional Book Basis"), the Additional Book Basis Derivative
Items for such period shall be reduced by the amount that bears the same ratio
to the amount of Additional Book Basis Derivative Items determined without
regard to this sentence as the Excess Additional Book Basis bears to the
Additional Book Basis as of the beginning of such period.
A--1
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that 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 1.704-2(g) and 1.704-2(i)(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 as a result of a minimum gain chargeback pursuant to
Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
The "Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by such Partner from
and after the date on which such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other interest was first
issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings with respect to such period and (ii) any net reduction in
cash reserves for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made with respect to such period, and (b)
plus (i) any net decrease in Working Capital Borrowings with respect to such
period, and (ii) any net increase in cash reserves for Operating Expenditures
with respect to such period required by any debt instrument for the repayment
of principal, interest or premium. Adjusted Operating Surplus does not include
that portion of Operating Surplus included in clause (a)(i) of the definition
of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, 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
A--2
valuation as it may adopt. The General Partner shall, in its 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 the fair market value of each Contributed Property.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership of Sunoco Logistics Partners L.P., as it may be amended,
supplemented or restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under
this Agreement and who has executed and delivered a Transfer Application as
required by this Agreement, but who has not been admitted as a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination of
Available Cash with respect to such Quarter resulting from Working Capital
Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that are necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter but
on or before the date of determination of Available Cash with respect to
such Quarter shall be deemed to have been made, established, increased or
reduced, for purposes of determining Available Cash, within such Quarter if
the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or
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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 5.5 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.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America or
the Commonwealth of Pennsylvania shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by such Partner from and after
the date on which such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other Partnership Interest was first
issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution Agreement.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, pipeline
systems, terminal storage facilities and related assets), in each case if such
addition, improvement, acquisition or construction is made to increase the
operating capacity or revenues of the Partnership Group from the operating
capacity or revenues of the Partnership Group existing immediately prior to
such addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (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 Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, 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 Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
"Certificate" means a certificate (i) substantially in the form of Exhibit A
to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
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"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State
of Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of
the Code shall be deemed to include a reference to any corresponding provision
of successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partner, and having the rights and obligations specified with respect
to Common Units in this Agreement. The term "Common Unit" does not refer to a
Subordinated Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Conflicts Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are not (a)
security holders, officers or employees of the General Partner, (b) officers,
directors or employees of any Affiliate of the General Partner or (c) holders
of any ownership interest in the Partnership Group other than Common Units and
who also meet the independence standards required to serve on an audit
committee of a board of directors by the National Securities Exchange on which
the Common Units are listed for trading.
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Contribution Agreement" means that certain Contribution, Conveyance and
Assumption Agreement, dated as of the Closing Date, among the General Partner,
the Partnership, the Operating Partnership and certain other parties, together
with the additional conveyance documents and instruments contemplated or
referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit
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Arrearage as to an Initial Common Unit for each of the Quarters within the
Subordination Period ending on or before the last day of such Quarter over (b)
the sum of any distributions theretofore made pursuant to Section 6.4(a)(ii)
and the second sentence of Section 6.5 with respect to an Initial Common Unit
(including any distributions to be made in respect of the last of such
Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section 17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Depositary" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes
to do business from time to time, and whose status as a Limited Partner or
Assignee does not or would not subject such Group Member to a significant risk
of cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.500 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2002, it means the product of $0.500 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
"Fully Diluted Basis" means, when calculating the number of Outstanding
Units for any period, a basis that includes, in addition to the Outstanding
Units, all Partnership Securities and options, rights, warrants and
appreciation rights relating to an equity interest in the Partnership (a) that
are convertible into or exercisable or exchangeable for Units that are senior
to or pari passu with the Subordinated Units, (b) whose conversion, exercise or
exchange price is less than the Current Market Price on the date of such
calculation, and (c) that may be converted into or exercised or exchanged for
such Units during the Quarter following the end of the last Quarter contained
in the period for which the calculation is being made without the satisfaction
of any contingency beyond the control of the holder other than the payment of
consideration and the compliance with administrative mechanics applicable to
such conversion, exercise or exchange; provided that for purposes of
determining the number of Outstanding Units on a Fully Diluted Basis when
calculating whether the Subordination Period has ended or Subordinated Units
are entitled to convert into Common Units pursuant to Section 5.8, such
Partnership Securities, options, rights, warrants and appreciation rights shall
be deemed to have been Outstanding Units only for the four Quarters that
comprise the last four Quarters of the measurement period; provided, further,
that if consideration will be paid to any Group Member in connection with such
conversion, exercise or exchange, the number of Units to be included in such
calculation shall be that number
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equal to the difference between (i) the number of Units issuable upon such
conversion, exercise or exchange and (ii) the number of Units which such
consideration would purchase at the Current Market Price.
"General Partner" means Sunoco Partners LLC and its successors and permitted
assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General
Partner to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with any
other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"Incentive Distribution Right" means a non-voting Limited Partner Interest
issued to the General Partner in connection with the transfer of substantially
all of its interests in to the Partnership pursuant to Section 5.2,
which Partnership Interest will confer upon the holder thereof only the rights
and obligations specifically provided in this Agreement with respect to
Incentive Distribution Rights (and no other rights otherwise available to or
other obligations of a holder of a Partnership Interest). Notwithstanding
anything in this Agreement to the contrary, the holder of an Incentive
Distribution Right shall not be entitled to vote such Incentive Distribution
Right on any Partnership matter except as may otherwise be required by law.
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) 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 any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner (with respect to the
Incentive Distribution Rights and Subordinated Units received by it pursuant to
Section 5.2) and the Underwriters, in each case upon being admitted to the
Partnership in accordance with Section 10.1.
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"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth
on the cover page of the prospectus included as part of the Registration
Statement and first issued at or after the time the Registration Statement
first became effective or (b) with respect to any other class or series of
Units, the price per Unit at which such class or series of Units is initially
sold by the Partnership, as determined by the General Partner, in each case
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, and (ii) sales or other dispositions of
assets as part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Departing Partner upon the change of its status from
General Partner to Limited Partner pursuant to Section 11.3 or (b) solely for
purposes of Articles V, VI, VII and IX, each Assignee; provided, however, that
when the term "Limited Partner" is used herein in the context of any vote or
other approval, including without limitation Articles XIII and XIV, such term
shall not, solely for such purpose, include any holder of an Incentive
Distribution Right except as may otherwise be required by law.
"Limited Partner Interest" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
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"Minimum Quarterly Distribution" means $0.450 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on March 31,
2002, it means the product of $0.450 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"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
(as adjusted pursuant to Section 5.5(d)(ii)) 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" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Income shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under Section 6.1(d);
provided that the determination of the items that have been specially allocated
under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under Section 6.1(d);
provided that the determination of the items that have been specially allocated
under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would
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be allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A)
and 6.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse
Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b).
"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing
Date, among Sunoco, Inc., the General Partner, the Partnership and the
Operating Partnership.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
repayment of Working Capital Borrowings, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness other than Working Capital Borrowings shall not constitute
Operating Expenditures; and
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes, the
General Partner's good faith allocation between the amounts paid for each
shall be conclusive.
"Operating Partnership" means Sunoco Partners Operations L.P., a Delaware
limited partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Partnership
Agreement of the Operating Partnership, as it may be amended, supplemented or
restated from time to time.
"Operating Surplus" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $15.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the amount
of cash reserves that is necessary or advisable in the reasonable discretion
of the General Partner to provide funds for future Operating Expenditures;
provided, however, that disbursements made (including contributions to a
Group Member or disbursements on behalf of a Group Member) or cash reserves
established, increased or reduced after the end of such period but on or
before the date of determination of Available Cash with respect to such
period shall be deemed to have been made, established, increased or reduced,
for purposes of determining Operating Surplus, within such period if the
General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
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"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" means the date or dates on which any Common Units are
sold by the Partnership to the Underwriters upon exercise of the Over-Allotment
Option.
"Organizational Limited Partner" means Sun Pipe Line Company of Delaware in
its capacity as the organizational limited partner of the Partnership pursuant
to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General
Partner or its Affiliates) beneficially owns 20% or more of any Outstanding
Partnership Securities of any class then Outstanding, all Partnership
Securities owned by such Person or Group shall not be voted on any matter and
shall not be considered to be Outstanding when sending notices of a meeting of
Limited Partners to vote on any matter (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under this Agreement, except that Common Units so owned shall
be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired
20% or more of any Outstanding Partnership Securities of any class then
Outstanding directly from the General Partner or its Affiliates, (ii) to any
Person or Group who acquired 20% or more of any Outstanding Partnership
Securities of any class then Outstanding directly or indirectly from a Person
or Group described in clause (i) provided that the General Partner shall have
notified such Person or Group in writing that such limitation shall not apply,
or (iii) to any Person or Group who acquired 20% or more of any Partnership
Securities issued by the Partnership with the prior approval of the board of
directors of the General Partner.
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units of any other class or
series that have the right (i) to receive distributions of Available Cash from
Operating Surplus pursuant to each of subclauses (a)(i) and (a)(ii) of Section
6.4 in the same order of priority with respect to the participation of Common
Units in such distributions or (ii) to participate in allocations of Net
Termination Gain pursuant to Section 6.1(c)(i)(B) in the same order of priority
with the Common Units, in each case regardless of whether the amounts or value
so distributed or allocated on each Parity Unit equals the amount or value so
distributed or allocated on each Common Unit. Units whose participation in such
(i) distributions of Available Cash from Operating Surplus and (ii) allocations
of Net Termination Gain are subordinate in order of priority to such
distributions and allocations on Common Units shall not constitute Parity Units
even if such Units are convertible under certain circumstances into Common
Units or Parity Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
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"Partnership" means Sunoco Logistics Partners L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of any such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation
rights relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of any date of determination (a) as to the
General Partner (in its capacity as General Partner without reference to any
Limited Partner Interests held by it), 2.0%, (b) as to any Unitholder or
Assignee holding Units, the product obtained by multiplying (i) 98% less the
percentage applicable to paragraph (c) by (ii) the quotient obtained by
dividing (A) the number of Units held by such Unitholder or Assignee by (B) the
total number of all Outstanding Units, and (c) as to the holders of additional
Partnership Securities issued by the Partnership in accordance with Section
5.6, the percentage established as a part of such issuance. The Percentage
Interest with respect to an Incentive Distribution Right shall at all times be
zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter,
or, with respect to the first fiscal quarter after the Closing Date, the
portion of such fiscal quarter after the Closing Date, of the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or
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give approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a
particular Business Day, or with respect to other Partnership Securities, the
Person in whose name any such other Partnership Security is registered on the
books which the General Partner has caused to be kept as of the opening of
business on such Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333- ) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or
Subordinated Units, the excess of (a) the Net Positive Adjustments of the
Unitholders holding Common Units or Subordinated Units as of the end of such
period over (b) the sum of those Partners' Share of Additional Book Basis
Derivative Items for each prior taxable period, (ii) with respect to the
General Partner (as holder of the General Partner Interest), the excess of (a)
the Net Positive Adjustments of the General Partner as of the end of such
period over (b) the sum of the General Partner's Share of Additional Book Basis
Derivative Items with respect to the General Partner Interest for each prior
taxable period, and (iii) with respect to the holders of Incentive Distribution
Rights, the excess of (a) the Net Positive Adjustments of the holders of
Incentive Distribution Rights as of the end of such period over (b) the sum of
the Share of Additional Book Basis Derivative Items of the holders of the
Incentive Distribution Rights for each prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b)
any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means 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 Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Restricted Business" has the meaning assigned to such term in the Omnibus
Agreement.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.575 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2002, it means the product of $0.575 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable
period, (i) with respect to the Unitholders holding Common Units or
Subordinated Units, the amount that bears the same ratio to such Additional
Book Basis Derivative Items as the
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Unitholders' Remaining Net Positive Adjustments as of the end of such period
bears to the Aggregate Remaining Net Positive Adjustments as of that time, (ii)
with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive
Adjustments of the Partners holding the Incentive Distribution Rights as of the
end of such period bears to the Aggregate Remaining Net Positive Adjustments as
of that time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement. The term "Subordinated Unit" as used herein does not include a
Common Unit or Parity Unit. A Subordinated Unit that is convertible into a
Common Unit or a Parity Unit shall not constitute a Common Unit or Parity Unit
until such conversion occurs.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after December 31, 2006 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units and
any other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution (or
portion thereof for the first fiscal quarter after the Closing Date) on all
Outstanding Common Units and Subordinated Units and any other Outstanding
Units that are senior or equal in right of distribution to the Subordinated
Units during such periods and (B) the Adjusted Operating Surplus generated
during each of the three consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units and Subordinated Units and
any other Units that are senior or equal in right of distribution to the
Subordinated Units that were Outstanding during such periods on a Fully
Diluted Basis, plus the related distribution on the General Partner
Interest, during such periods and (ii) there are no Cumulative Common Unit
Arrearages; and
(b) the date on which the General Partner is removed as general partner
of the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the General
Partner and its Affiliates are not voted in favor of such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the
date of determination, by such Person, by one or more Subsidiaries of such
Person or a combination thereof, (b) a partnership (whether general or limited)
in which such Person or a Subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
more than 50% of the partnership interests of such partnership (considering all
of the partnership interests of the partnership as a single class) is owned,
directly or indirectly, at the date of determination, by such Person, by one or
more Subsidiaries of such Person, or a combination thereof, or (c) any other
Person (other than a corporation or a partnership) in which such Person, one or
more Subsidiaries of such Person, or a combination thereof, directly or
indirectly, at the date of determination, has (i) at least a majority ownership
interest or (ii) the power to elect or direct the election of a majority of the
directors or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
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"Surviving Business Entity" has the meaning assigned to such term in Section
14.2(b).
"Third Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(F).
"Third Target Distribution" means $0.700 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2002, it means the product of $0.700 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
Common Units; provided that if no Transfer Agent is specifically designated for
any other Partnership Securities, the General Partner shall act in such
capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated ,
2001 among the Underwriters, the Partnership, the General Partner, the
Operating Partnership and Sunoco, Inc. providing for the purchase of Common
Units by such Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and shall
include Common Units and Subordinated Units but shall not include (i) a General
Partner Interest or (ii) Incentive Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units (excluding Common Units owned by the General
Partner and its affiliates) voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any
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distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Borrowings" means borrowings used solely for working
capital purposes or to pay distributions to Partners made pursuant to a credit
facility or other arrangement requiring all such borrowings thereunder to be
reduced to a relatively small amount each year (or for the year in which the
Initial Offering is consummated, the 12-month period beginning on the Closing
Date) for an economically meaningful period of time.
Section 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
ARTICLE II
ORGANIZATION
Section 2.1 Formation.
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 of Sunoco Logistics Partners L.P. in its entirety. This amendment
and restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
Section 2.2 Name.
The name of the Partnership shall be "Sunoco Logistics Partners L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purpose of complying with the laws
of any jurisdiction that so requires. The General Partner in its 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
the Limited Partners.
Section 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange
Street, Wilmington, Delaware 19801, and the registered agent for service of
process on the Partnership in the State of Delaware at such registered office
shall be The Corporation
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Trust Company. The principal office of the Partnership shall be located at 1801
Market Street, Philadelphia, Pennsylvania 19103 or such other place as the
General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate. The address of the General Partner shall be 1801 Market Street,
Philadelphia, Pennsylvania 19103 or such other place as the General Partner may
from time to time designate by notice to the Limited Partners.
Section 2.4 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a partner of the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a partner of the Operating Partnership pursuant to the Operating
Partnership Agreement or otherwise, (b) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that the
Operating Partnership is permitted to engage in by the Operating Partnership
Agreement or that its subsidiaries are permitted to engage in by their limited
liability company or partnership agreements and, in connection therewith, to
exercise all of the rights and powers conferred upon the Partnership pursuant
to the agreements relating to such business activity, (c) engage directly in,
or enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that is approved by the General Partner and which lawfully may be
conducted by a limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and powers conferred
upon the Partnership pursuant to the agreements relating to such business
activity; provided, however, that the General Partner reasonably determines, as
of the date of the acquisition or commencement of such activity, that such
activity (i) generates "qualifying income" (as such term is defined pursuant to
Section 7704 of the Code) or a Subsidiary or a Partnership activity that
generates qualifying income or (ii) enhances the operations of an activity of
the Operating Partnership, and (d) do anything necessary or appropriate to the
foregoing, including the making of capital contributions or loans to a Group
Member. The General Partner has no obligation or duty to the Partnership, the
Limited Partners or the Assignees to propose or approve, and in its discretion
may decline to propose or approve, the conduct by the Partnership of any
business.
Section 2.5 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the Partnership.
Section 2.6 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator (and any successor to the Liquidator by merger,
transfer, assignment, election or otherwise) and each of their authorized
officers and attorneys-in-fact, as the case may be, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full
power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance with
its terms, any amendment, change, modification or restatement
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of this Agreement; (C) all certificates, documents and other instruments
(including conveyances and a certificate of cancellation) that the General
Partner or the Liquidator deems necessary or appropriate to reflect the
dissolution and liquidation of the Partnership pursuant to the terms of this
Agreement; (D) all certificates, documents and other instruments relating to
the admission, withdrawal, removal or substitution of any Partner pursuant
to, or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or the
Liquidator, to effectuate the terms or intent of this Agreement; provided,
that when required by Section13.3 or any other provision of this Agreement
that establishes a percentage of the Limited Partners or of the Limited
Partners of any class or series required to take any action, the General
Partner and the Liquidator may exercise the power of attorney made in this
Section 2.6(a)(ii) only after the necessary vote, consent or approval of the
Limited Partners or of the Limited Partners of such class or series, as
applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XIII
or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal
representatives. Each such Limited Partner or Assignee hereby agrees to be
bound by any representation made by the General Partner or the Liquidator
acting in good faith pursuant to such power of attorney; and each such Limited
Partner or Assignee, to the maximum extent permitted by law, hereby waives any
and all defenses that may be available to contest, negate or disaffirm the
action of the General Partner or the Liquidator taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver
to the General Partner or the Liquidator, within 15 days after receipt of the
request therefor, such further designation, powers of attorney and other
instruments as the General Partner or the Liquidator deems necessary to
effectuate this Agreement and the purposes of the Partnership.
Section 2.7 Term.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the dissolution of the Partnership in accordance with the
provisions of Article XII. The existence of the Partnership as a separate legal
entity shall continue until the cancellation of the Certificate of Limited
Partnership as provided in the Delaware Act.
Section 2.8 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have
any ownership interest in such Partnership assets or any portion thereof. Title
to any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates
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or one or more nominees, as the General Partner may determine. The General
Partner hereby declares and warrants that any Partnership assets for which
record title is held in the name of the General Partner or one or more of its
Affiliates or one or more nominees shall be held by the General Partner or such
Affiliate or nominee for the use and benefit of the Partnership in accordance
with the provisions of this Agreement; provided, however, that the General
Partner shall use reasonable efforts to cause record title to such assets
(other than those assets in respect of which the General Partner determines
that the expense and difficulty of conveyancing makes transfer of record title
to the Partnership impracticable) to be vested in the Partnership as soon as
reasonably practicable; provided, further, that, prior to the withdrawal or
removal of the General Partner or as soon thereafter as practicable, the
General Partner shall use reasonable efforts to effect the transfer of record
title to the Partnership and, prior to any such transfer, will provide for the
use of such assets in a manner satisfactory to the General Partner. All
Partnership assets shall be recorded as the property of the Partnership in its
books and records, irrespective of the name in which record title to such
Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
Section 3.2 Management of Business.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware
Act) of the Partnership's business, transact any business in the Partnership's
name or have the power to sign documents for or otherwise bind the Partnership.
Any action taken by any Affiliate of the General Partner or any officer,
director, employee, manager, member, general partner, agent or trustee of the
General Partner or any of its Affiliates, or any officer, director, employee,
manager, member, general partner, agent or trustee of a Group Member, in its
capacity as such, shall not be deemed to be participation in the control of the
business of the Partnership by a limited partner of the Partnership (within the
meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair
or eliminate the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
Section 3.3 Outside Activities of the Limited Partners.
Subject to the provisions of Section 7.5 and the Omnibus Agreement, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any
Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to
the Partnership, including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership nor any of the
other Partners or Assignees shall have any rights by virtue of this Agreement
in any business ventures of any Limited Partner or Assignee.
Section 3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
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(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together with
a copy of the executed copies of all powers of attorney pursuant to which
this Agreement, the Certificate of Limited Partnership and all amendments
thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to contribute
in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 Certificates.
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one
or more Certificates in the name of the General Partner evidencing its
interests in the Partnership and (b) upon the request of any Person owning
Incentive Distribution Rights or any other Partnership Securities other than
Common Units or Subordinated Units, the Partnership shall issue to such Person
one or more certificates evidencing such Incentive Distribution Rights or other
Partnership Securities other than Common Units or Subordinated Units.
Certificates shall be executed on behalf of the Partnership by the Chairman of
the Board, President or any Executive Vice President or Vice President and the
Secretary or any Assistant Secretary of the General Partner. No Common Unit
Certificate shall be valid for any purpose until it has been countersigned by
the Transfer Agent; provided, however, that if the General Partner elects to
issue Common Units in global form, the Common Unit Certificates shall be valid
upon receipt of a certificate from the Transfer Agent certifying that the
Common Units have been duly registered in accordance with the directions of the
Partnership and the Underwriters. Subject to the requirements of Section
6.7(b), the Partners holding Certificates evidencing Subordinated Units may
exchange such Certificates for Certificates evidencing Common Units on or after
the date on which such Subordinated Units are converted into Common Units
pursuant to the terms of Section 5.8.
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall countersign
a new Certificate in place of any Certificate previously issued if the Record
Holder of the Certificate:
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(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the General Partner and the Transfer Agent against any claim that may be
made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee
shall be precluded from making any claim against the Partnership, the General
Partner or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
Section 4.3 Record Holders.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of
whether the Partnership shall have actual or other notice thereof, except as
otherwise provided by law or any applicable rule, regulation, guideline or
requirement of any National Securities Exchange on which such Partnership
Interests are listed for trading. Without limiting the foregoing, when a Person
(such as a broker, dealer, bank, trust company or clearing corporation or an
agent of any of the foregoing) is acting as nominee, agent or in some other
representative capacity for another Person in acquiring and/or holding
Partnership Interests, as between the Partnership on the one hand, and such
other Persons on the other, such representative Person (a) shall be the Partner
or Assignee (as the case may be) of record and beneficially, (b) must execute
and deliver a Transfer Application and (c) shall be bound by this Agreement and
shall have the rights and obligations of a Partner or Assignee (as the case may
be) hereunder and as, and to the extent, provided for herein.
Section 4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which a
General Partner assigns its General Partner Interest to another Person who
becomes a General Partner, by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is or becomes a
Limited Partner or an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
IV. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the
membership interests of the General Partner.
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Section 4.5 Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests.
The Transfer Agent is hereby appointed registrar and transfer agent for the
purpose of registering Common Units and transfers of such Common Units as
herein provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent shall countersign
and deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more new
Certificates evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly
authorized in writing). No charge shall be imposed by the Partnership for such
transfer; provided, that as a condition to the issuance of any new Certificate
under this Section 4.5, the Partnership may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an amendment
to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and be
bound by and to have executed this Agreement, (iii) represented and warranted
that such transferee has the right, power and authority and, if an individual,
the capacity to enter into this Agreement, (iv) granted the powers of attorney
set forth in this Agreement and (v) given the consents and approvals and made
the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
Section 4.6 Transfer of the General Partner's General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to December 31, 2011, the General
Partner shall not transfer all or any part of its General Partner Interest to a
Person unless such transfer (i) has been approved by the prior written consent
or vote of the holders of at least a majority of the Outstanding Common Units
(excluding Common Units held by the General Partner and its Affiliates) or (ii)
is of all, but not less than all, of its General Partner Interest to (A) an
Affiliate of the General Partner (other than an individual) or (B) another
Person (other than an individual) in connection with the merger or
consolidation of the General Partner with or into another Person (other than an
individual) or the transfer by the General Partner of all or substantially all
of its assets to another Person (other than an individual).
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(b) Subject to Section 4.6(c) below, on or after December 31, 2011, the
General Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and to be bound by the
provisions of this Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the loss of limited liability of
any Limited Partner or of any limited partner of the Operating Partnership or
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not already so treated or taxed) and
(iii) such transferee also agrees to purchase all (or the appropriate portion
thereof, if applicable) of the partnership or membership interest of the
General Partner as the general partner or managing member, if any, of each
other Group Member. In the case of a transfer pursuant to and in compliance
with this Section 4.6, the transferee or successor (as the case may be) shall,
subject to compliance with the terms of Section 10.3, be admitted to the
Partnership as the General Partner immediately prior to the transfer of the
Partnership Interest, and the business of the Partnership shall continue
without dissolution.
Section 4.7 Transfer of Incentive Distribution Rights.
Prior to December 31, 2011, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate of such holder
(other than an individual) or (b) to another Person (other than an individual)
in connection with (i) the merger or consolidation of such holder of Incentive
Distribution Rights with or into such other Person or (ii) the transfer by such
holder of all or substantially all of its assets to such other Person. Any
other transfer of the Incentive Distribution Rights prior to September 30,
2011, shall require the prior approval of holders of at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner
and its Affiliates). On or after September 30, 2011, the General Partner or any
other holder of Incentive Distribution Rights may transfer any or all of its
Incentive Distribution Rights without Unitholder approval. Notwithstanding
anything herein to the contrary, no transfer of Incentive Distribution Rights
to another Person shall be permitted unless the transferee agrees to be bound
by the provisions of this Agreement.
Section 4.8 Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction
over such transfer, (ii) terminate the existence or qualification of the
Partnership or the Operating Partnership under the laws of the jurisdiction of
its formation, or (iii) cause the Partnership or the Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes (to the extent not already so
treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or
the Operating Partnership becoming taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes. The restrictions may be
imposed by making such amendments to this Agreement as the General Partner may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the General Partner believes, in the exercise
of its reasonable discretion, could result in the delisting or suspension of
trading of any class of Limited Partner Interests on the principal National
Securities Exchange on which such class of Limited Partner Interests is then
traded must be approved, prior to such amendment being effected, by the holders
of at least a majority of the Outstanding Limited Partner Interests of such
class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
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(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
Section 4.9 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General Partner,
creates a substantial risk of cancellation or forfeiture of any property in
which the Group Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Limited Partner or Assignee is a nominee
holding for the account of another Person, the nationality, citizenship or
other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be
subject to redemption in accordance with the provisions of Section 4.10. In
addition, the General Partner may require that the status of any such Partner
or Assignee be changed to that of a Non-citizen Assignee and, thereupon, the
General Partner shall be substituted for such Non-citizen Assignee as the
Limited Partner in respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall
be entitled to the cash equivalent thereof, and the Partnership shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Limited
Partner Interests of such Non-citizen Assignee not redeemed pursuant to Section
4.10, and upon his admission pursuant to Section 10.2, the General Partner
shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's Limited Partner Interests.
Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Partnership
Interests to a Person who is an Eligible Citizen and who furnishes a
Citizenship Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Partnership Interest of such Limited
Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be
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deemed to have been given when so mailed. The notice shall specify the
Redeemable Interests, the date fixed for redemption, the place of payment,
that payment of the redemption price will be made upon surrender of the
Certificate evidencing the Redeemable Interests and that on and after the
date fixed for redemption no further allocations or distributions to which
the Limited Partner or Assignee would otherwise be entitled in respect of
the Redeemable Interests will accrue or be made.
(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of which
shall be the date fixed for redemption) of Limited Partner Interests of the
class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner, in
cash or by delivery of a promissory note of the Partnership in the principal
amount of the redemption price, bearing interest at the rate of 10% annually
and payable in three equal annual installments of principal together with
accrued interest, commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Limited Partner Interest certifies
to the satisfaction of the General Partner in a Citizenship Certification
delivered in connection with the Transfer Application that he is an Eligible
Citizen. If the transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $20.00, for a certain interest in the Partnership and has been
admitted as a General Partner of the Partnership, and the Organizational
Limited Partner made an initial Capital Contribution to the Partnership in the
amount of $980.00 for an interest in the Partnership and has been admitted as a
Limited Partner of the Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in the
Contribution Agreement; the initial Capital Contributions of each Partner shall
thereupon be refunded; and the Organizational Limited Partner shall cease to be
a Limited Partner of the Partnership. Ninety-eight percent of any interest or
other profit that may have resulted from the investment or other use of such
initial Capital Contributions shall be allocated and distributed to the
Organizational Limited Partner, and the balance thereof shall be allocated and
distributed to the General Partner.
Section 5.2 Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution Agreement, the
General Partner shall contribute to the Partnership, as a Capital Contribution,
all of its interest in [GP LLC, Services LP, Michigan In LLC, Explorer
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Pipeline Company, Mid-Con In LLC, Pipe Line GP LLC, Sun Pipeline LP, RM In LLC,
R&M In LP, Atlantic In LLC, Atlantic In LP and Atlantic RM In LP} in exchange
for (i)the continuation of its General Partner Interest, subject to all of the
rights, privileges and duties of the General Partner under this Agreement, (ii)
the Incentive Distribution Rights, (iii) Common Units and (iv) Subordinated
Units.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the Initial
Offering and other than the issuance of the Common Units issued pursuant to the
Over-Allotment Option), the General Partner shall be required to make
additional Capital Contributions equal to 1/98th of any amount contributed to
the Partnership by the Limited Partners in exchange for such additional Limited
Partner Interests. Except as set forth in the immediately preceding sentence
and Article XII, the General Partner shall not be obligated to make any
additional Capital Contributions to the Partnership.
Section 5.3 Contributions by Initial Limited Partners and Reimbursement of the
General Partner.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by
or on behalf of such Underwriter by (ii) the Issue Price per Initial Common
Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option
Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained
by dividing (i) the cash contributions to the Partnership by or on behalf of
such Underwriter by (ii) the Issue Price per Initial Common Unit.
(c) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to subparagraph
(a) hereof in aggregate number equal to 5,000,000, (ii) the "Additional Units"
as such term is used in the Underwriting Agreement in an aggregate number up to
750,000 issuable upon exercise of the Over-Allotment Option pursuant to
subparagraph (b) hereof or to the General Partner to the extent the
Over-Allotment Option is not exercised, (iii) the 6,722,528 Common Units
issuable to the General Partner pursuant to Section 5.2 hereof, (iv) the
12,472,528 Subordinated Units issuable to the General Partner pursuant to
Section 5.2 hereof, and (v) the Incentive Distribution Rights.
Section 5.4 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its
Capital Contribution, except to the extent, if any, that distributions made
pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent expressly provided in this Agreement, no
Partner or Assignee shall have priority over any other Partner or Assignee
either as to the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which all Partners and
Assignees agree within the meaning of 17-502(b) of the Delaware Act.
Section 5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in
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accordance with Section 6031(c) of the Code or any other method acceptable to
the General Partner in its sole discretion) owning a Partnership Interest a
separate Capital Account with respect to such Partnership Interest in
accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions made to the Partnership with respect to such Partnership Interest
pursuant to this Agreement and (ii) all items of Partnership income and gain
(including, without limitation, income and gain exempt from tax) computed in
accordance with Section 5.5(b) and allocated with respect to such Partnership
Interest pursuant to Section6.1, and decreased by (x) the amount of cash or Net
Agreed Value of all actual and deemed distributions of cash or property made
with respect to such Partnership Interest pursuant to this Agreement and (y)
all items of Partnership deduction and loss computed in accordance with Section
5.5(b) and allocated with respect to such Partnership Interest pursuant to
Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership or any other
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be deducted
nor amortized under Section 709 of the Code, if any, shall, for purposes of
Capital Account maintenance, be treated as an item of deduction at the time
such fees and other expenses are incurred and shall be allocated among the
Partners pursuant to Section 6.1.
(iii) 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 in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) 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.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for such
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.
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(vi) If the Partnership's adjusted basis in a 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
6.1. 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.
(c)(i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section 5.8
by a holder thereof (other than a transfer to an Affiliate unless the General
Partner elects to have this subparagraph 5.5(c)(ii) apply), the Capital Account
maintained for such Person with respect to its Subordinated Units or converted
Subordinated Units will (A) first, be allocated to the Subordinated Units or
converted Subordinated Units to be transferred in an amount equal to the
product of (x) the number of such Subordinated Units or converted Subordinated
Units to be transferred and (y) the Per Unit Capital Amount for a Common Unit,
and (B) second, any remaining balance in such Capital Account will be retained
by the transferor, regardless of whether it has retained any Subordinated Units
or converted Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the retained
Subordinated Units or converted Subordinated Units, if any, will have a balance
equal to the amount allocated under clause (B) herein above, and the
transferee's Capital Account established with respect to the transferred
Subordinated Units or converted Subordinated Units will have a balance equal to
the amount allocated under clause (A) herein above.
(d)(i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Interests for cash or Contributed
Property or the conversion of the General Partner's Combined Interest to Common
Units pursuant to Section 11.3(b), the Capital Account 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 property immediately prior to such issuance and had been allocated to
the Partners at such time pursuant to Section 6.1 in the same manner as any
item of gain or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
the issuance of additional Partnership Interests shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation,
must take fully into account the fair market value of the Partnership Interests
of all Partners at such time. The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such manner as it determines in
its discretion to be reasonable) to arrive at a fair market value for
individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, 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 6.1 in
the same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to a distribution shall (A) in the case of an actual
distribution which is not made pursuant to Section 12.4 or in the case of a
deemed distribution, be
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determined and allocated in the same manner as that provided in Section
5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section
12.4, be determined and allocated by the Liquidator using such reasonable
method of valuation as it may adopt.
Section 5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights relating to
the Partnership Securities for any Partnership purpose at any time and from
time to time to such Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series
of Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be issued, evidenced by
certificates and assigned or transferred; and (vii) the right, if any, of each
such Partnership Security to vote on Partnership matters, including matters
relating to the relative rights, preferences and privileges of such Partnership
Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this Section
5.6, (ii) the conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of Partnership Securities. The General Partner is further authorized and
directed to specify the relative rights, powers and duties of the holders of
the Units or other Partnership Securities being so issued. The General Partner
shall do all things necessary to comply with the Delaware Act and is authorized
and directed to do all things it deems to be necessary or advisable in
connection with any future issuance of Partnership Securities or in connection
with the conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this Agreement,
including compliance with any statute, rule, regulation or guideline of any
federal, state or other governmental agency or any National Securities Exchange
on which the Units or other Partnership Securities are listed for trading.
Section 5.7 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than 6,236,264 additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity Units
issued (A) in connection with the exercise of the Over-Allotment Option, (B)
in accordance with Sections 5.7(b) and 5.7(c), (C) upon conversion of
Subordinated Units pursuant to Section 5.8, (D) upon conversion of the
General Partner Interest or any Incentive Distribution Rights pursuant to
Section 11.3(b), (D) pursuant to the employee benefit plans of the General
Partner, the Partnership or any other Group Member, (E) upon a conversion or
exchange of Parity Units issued after the date hereof into Common Units or
other Parity Units; provided that the total amount of
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Available Cash required to pay the aggregate Minimum Quarterly Distribution
on all Common Units and all Parity Units does not increase as a result of
this conversion or exchange and (F) in the event of a combination or
subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval
of the Unitholders, if such issuance occurs (i) in connection with an
Acquisition or a Capital Improvement or (ii) within 365 days of, and the net
proceeds from such issuance are used to repay debt incurred in connection
with, an Acquisition or a Capital Improvement, in each case where such
Acquisition or Capital Improvement involves assets that, if acquired by the
Partnership as of the date that is one year prior to the first day of the
Quarter in which such Acquisition is to be consummated or such Capital
Improvement is to be completed, would have resulted, on a pro forma basis,
in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect
to each of the four most recently completed Quarters (on a pro forma
basis as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Parity Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing
Date, then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter,
if any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of
the Partnership generated with respect to such Quarter, and (ii) for each
other Quarter, on a pro forma basis consistent with the procedures, as
applicable, set forth in Appendix D to the Registration Statement.
Furthermore, the amount in clause (A) shall be determined on a pro forma
basis assuming that (1) all of the Parity Units to be issued in connection
with or within 365 days of such Acquisition or Capital Improvement had been
issued and outstanding, (2) all indebtedness for borrowed money to be
incurred or assumed in connection with such Acquisition or Capital
Improvement (other than any such indebtedness that is to be repaid with the
proceeds of such issuance of Parity Units) had been incurred or assumed, in
each case as of the commencement of such four-Quarter period, (3) the
personnel expenses that would have been incurred by the Partnership in the
operation of the acquired assets are the personnel expenses for employees to
be retained by the Partnership in the operation of the acquired assets, and
(4) the non-personnel costs and expenses are computed on the same basis as
those incurred by the Partnership in the operation of the Partnership's
business at similarly situated Partnership facilities.
(c) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership shall not issue any additional
Partnership Securities (or options, rights, warrants or appreciation rights
related thereto) (i) that are entitled in any Quarter to receive in respect
of the Subordination Period any distribution of Available Cash from
Operating Surplus before the Common Units and any Parity Units have received
(or amounts have been set aside for payment of) the Minimum Quarterly
Distribution and any Cumulative Common Unit Arrearage for such Quarter or
(ii) that are entitled to allocations in respect of the Subordination Period
of Net Termination Gain before the Common Units and any Parity Units have
been allocated Net Termination Gain pursuant to Section 6.1(c)(i)(B).
(d) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership may issue additional Partnership
Securities (or options, rights, warrants or appreciation rights related
thereto) (i) that are not entitled in any Quarter during the Subordination
Period to receive any distributions of Available Cash from Operating Surplus
until after the Common Units and any Parity Units have received (or amounts
have been set aside for payment of) the Minimum Quarterly Distribution and
any Cumulative Common Unit Arrearage for such Quarter and (ii) that are not
entitled to allocations in respect of the Subordination Period of Net
Termination Gain before the Common Units and Parity Units have been
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allocated Net Termination Gain pursuant to Section 6.1(c)(i)(B), even if (A)
the amount of Available Cash from Operating Surplus to which each such
Partnership Security is entitled to receive after the Minimum Quarterly
Distribution and any Cumulative Common Unit Arrearage have been paid or set
aside for payment on the Common Units exceeds the Minimum Quarterly
Distribution, (B) the amount of Net Termination Gain to be allocated to such
Partnership Security after Net Termination Gain has been allocated to any
Common Units and Parity Units pursuant to Section 6.1(c)(i)(B) exceeds the
amount of such Net Termination Gain to be allocated to each Common Unit or
Parity Unit or (C) the holders of such additional Partnership Securities
have the right to require the Partnership or its Affiliates to repurchase
such Partnership Securities at a discount, par or a premium.
(e) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of the
Unitholders, if the proceeds from such issuance are used exclusively to
repay up to $40.0 million of indebtedness of a Group Member where the
aggregate amount of distributions that would have been paid with respect to
such newly issued Units or Partnership Securities, plus the related
distributions on the General Partner Interest in the Partnership and the
Operating Partnership in respect of the four-Quarter period ending prior to
the first day of the Quarter in which the issuance is to be consummated
(assuming such additional Units or Partnership Securities had been
Outstanding throughout such period and that distributions equal to the
distributions that were actually paid on the Outstanding Units during the
period were paid on such additional Units or Partnership Securities) did not
exceed the interest costs actually incurred during such period on the
indebtedness that is to be repaid (or, if such indebtedness was not
outstanding throughout the entire period, would have been incurred had such
indebtedness been outstanding for the entire period). In the event that the
Partnership is required to pay a prepayment penalty in connection with the
repayment of such indebtedness, for purposes of the foregoing test the
number of Parity Units issued to repay such indebtedness shall be deemed
increased by the number of Parity Units that would need to be issued to pay
such penalty.
(f) No fractional Units shall be issued by the Partnership.
Section 5.8 Conversion of Subordinated Units.
(a) A total of 3,118,132 of the Outstanding Subordinated Units will convert
into Common Units on a one-for-one basis immediately after the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in respect of any Quarter
ending on or after December 31, 2004, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units and any other Outstanding Units that are senior
or equal in right of distribution to the Subordinated Units with respect to
each of the three consecutive, non-overlapping four-Quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that were
Outstanding during such periods on a Fully Diluted Basis, plus the related
distribution on the General Partner Interest in the Partnership, during such
periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.
(b) An additional 3,118,132 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter ending on or after December 31, 2005, in respect of
which
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units and any other Outstanding Units that are senior
or equal in right of distribution to the Subordinated Units
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with respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the Common Units, Subordinated Units and any other Units that are
senior or equal in right of distribution to the Subordinated Units that were
Outstanding during such periods on a Fully Diluted Basis, plus the related
distribution on the General Partner Interest during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion
of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless
all of the holders of Subordinated Units shall agree to a different allocation,
the Subordinated Units that are to be converted into Common Units shall be
allocated among the holders of Subordinated Units pro rata based on the number
of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units pursuant
to Section 5.8(a) and (b) shall convert into Common Units on a one-for-one
basis immediately after the distribution of Available Cash to Partners pursuant
to Section 6.3(a) in respect of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on
a one-for-one basis as set forth in, and pursuant to the terms of, Section
11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
Section 5.9 Limited Preemptive Right.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
Section 5.10 Splits and Combinations.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
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(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of a date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants
selected by it to calculate the number of Partnership Securities to be held by
each Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the accuracy of such
calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income for such taxable
year shall be allocated as follows:
(i) First, 100% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 2% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 98% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
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(iii) Third, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata, until the aggregate Net Losses allocated pursuant to this Section
6.1(b)(i) for the current taxable year and all previous taxable years is
equal to the aggregate Net Income allocated to such Partners pursuant to
Section 6.1(a)(iii) for all previous taxable years, provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(ii) Second, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata; provided, that Net Losses shall not be allocated pursuant to this
Section 6.1(b)(ii) to the extent that such allocation would cause any
Unitholder to have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this
Section 6.1 and after all distributions of Available Cash provided under
Sections 6.4 and 6.5 have been made; provided, however, that solely for
purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for
distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD") plus (3) any
then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
98% to all Unitholders holding Subordinated Units, Pro Rata, and 2% to
the General Partner, until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, determined for the taxable year (or portion thereof) to which
this allocation of gain relates, plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with respect
to such Subordinated Unit for such Quarter;
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(D) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital, plus (2)
the Unpaid MQD, plus (3) any then existing Cumulative Common Unit
Arrearage, plus (4) the excess of (aa) the First Target Distribution
less the Minimum Quarterly Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of any
distributions of Available Cash that is deemed to be Operating Surplus
made pursuant to Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus
(2) plus (3) plus (4) is hereinafter defined as the "First Liquidation
Target Amount");
(E) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of (1) plus (2) is
hereinafter defined as the "Second Liquidation Target Amount");
(F) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Available Cash that is deemed to be Operating Surplus made pursuant
to Sections 6.4(a)(vi) and 6.4(b)(iv) (the sum of (1) plus (2) is
hereinafter defined as the "Third Liquidation Target Amount"); and
(G) Finally, any remaining amount 50% to all Unitholders, Pro Rata,
48% to the holders of the Incentive Distribution Rights, Pro Rata, and
2% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 98% to the Unitholders holding Subordinated Units,
Pro Rata, and 2% to the General Partner, until the Capital Account in
respect of each Subordinated Unit then Outstanding has been reduced to
zero;
(B) Second, 98% to all Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this Section
6.1, the following special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be determined,
and the allocation of income or gain required hereunder shall be effected,
prior to the application of any other allocations pursuant to this Section
6.1(d) with respect to such taxable period (other than an allocation
pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section 6.1(d)(i) is
intended to comply with the Partnership Minimum Gain chargeback requirement
in Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
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(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding
the other provisions of this Section 6.1 (other than Section 6.1(d)(i)),
except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is
a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership taxable period, any Partner with a share of Partner Nonrecourse
Debt Minimum Gain at the beginning of such taxable period shall be allocated
items of Partnership income and gain for such period (and, if necessary,
subsequent periods) in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor
provisions. For purposes of this Section 6.1(d), each Partner's Adjusted
Capital Account balance shall be determined, and the allocation of income or
gain required hereunder shall be effected, prior to the application of any
other allocations pursuant to this Section 6.1(d), other than Section
6.1(d)(i) and other than an allocation pursuant to Sections 6.1(d)(vi) and
6.1(d)(vii), with respect to such taxable period. This Section 6.1(d)(ii) is
intended to comply with the chargeback of items of income and gain
requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/98th of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or
1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be
specially allocated to such Partner in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations promulgated
under Section 704(b) of the Code, the deficit balance, if any, in its
Adjusted Capital Account created by such adjustments, allocations or
distributions as quickly as possible unless such deficit balance is
otherwise eliminated pursuant to Section 6.1(d)(i) or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such Partner
is deemed obligated to restore pursuant to Treasury Regulation Sections
1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially allocated
items of Partnership gross income and gain in the amount of such excess as
quickly as possible; provided, that an allocation pursuant to this Section
6.1(d)(v) shall be made only if and to the extent that such Partner would
have a deficit balance in its Capital Account as adjusted after all other
allocations provided for in this Section 6.1 have been tentatively made as
if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
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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 other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy such
requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) 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 such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of Partnership
gross income or gain for such taxable period, after taking into account
allocations pursuant to Section 6.1(d)(iii), shall be allocated 100% to each
Partner holding Subordinated Units that are Outstanding as of the
termination of the Subordination Period ("Final Subordinated Units") in the
proportion of the number of Final Subordinated Units held by such Partner to
the total number of Final Subordinated Units then Outstanding, until each
such Partner has been allocated an amount of gross income or gain which
increases the Capital Account maintained with respect to such Final
Subordinated Units to an amount equal to the product of (A) the number of
Final Subordinated Units held by such Partner and (B) the Per Unit Capital
Amount for a Common Unit. The purpose of this allocation is to establish
uniformity between the Capital Accounts underlying Final Subordinated Units
and the Capital Accounts underlying Common Units held by Persons other than
the General Partner and its Affiliates immediately prior to the conversion
of such Final Subordinated Units into Common Units. This allocation method
for establishing such economic uniformity will only be available to the
General Partner if the method for allocating the Capital Account maintained
with respect to the Subordinated Units between the transferred and retained
Subordinated Units pursuant to Section 5.5(c)(ii) does not otherwise provide
such economic uniformity to the Final Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into
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account except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations to
the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) 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
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized Loss
under Section 5.5(d) hereof), the General Partner shall allocate
additional items of gross income and gain away from the holders of
Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, to the extent that the Additional Book Basis
Derivative Items allocated to the Unitholders or the General Partner
exceed their Share of Additional Book Basis Derivative Items. For this
purpose, the Unitholders and the General Partner shall be treated as
being allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the Unitholders or
the General Partner under the Partnership Agreement (e.g., Additional
Book Basis Derivative Items taken into account in computing cost of
goods sold would reduce the amount of book income otherwise available
for allocation among the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A) shall be made after all of the other Agreed
Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the
reallocation of items that have been allocated pursuant to such other
Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c)
hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
Section 6.2 Allocations for Tax Purposes.
(a) 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 "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1.
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(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (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) 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 "book" gain or loss is
allocated pursuant to Section 6.1.
(ii) (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 5.5(d)(i) or 5.5(d)(ii), and (2) second, in the event
such property was originally a Contributed Property, be allocated among the
Partners in a manner consistent with Section 6.2(b)(i)(A); and (B) 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 "book" gain or loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall 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, without
limitation, 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 Section704(c) of the Code or (y)
otherwise to preserve or achieve uniformity of the Limited Partner Interests
(or any class or classes thereof). The General Partner may adopt such
conventions, make such allocations and make such amendments to this Agreement
as provided in this Section 6.2(c) only if such conventions, allocations or
amendments would not have a material adverse effect on the Partners, the
holders of any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are consistent with the
principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Treasury Regulation Section 1.167(c)-l(a)(6) or any successor
regulations thereto. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt depreciation
and amortization conventions under which all purchasers acquiring Limited
Partner Interests in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any Limited Partner Interests that
would not have a material adverse effect on the Limited Partners or the Record
Holders of any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this Section
6.2, be characterized as Recapture Income in the same proportions and to the
same extent as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to the treatment of
such gains as Recapture Income.
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(f) 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 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction 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) such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Option Closing Date or the
expiration of the Over-allotment Option 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 assets of the Partnership or any other
extraordinary item of income or loss realized and recognized other than in the
ordinary course of business, as determined by the General Partner in its sole
discretion, 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 or appropriate in its sole discretion, to the extent permitted or
required by Section 706 of the Code and the regulations or rulings promulgated
thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
Section 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on March 31, 2002, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to
the Partners as of the Record Date selected by the General Partner in its
reasonable discretion. All amounts of Available Cash distributed by the
Partnership on any date from any source shall be deemed to be Operating Surplus
until the sum of all amounts of Available Cash theretofore distributed by the
Partnership to the Partners pursuant to Section 6.4 equals the Operating
Surplus from the Closing Date through the close of the immediately preceding
Quarter. Any remaining amounts of Available Cash distributed by the Partnership
on such date shall, except as otherwise provided in Section 6.5, be deemed to
be "Capital Surplus." All distributions required to be made under this
Agreement shall be made subject to Section 17-607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or less than
all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
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Section 6.4 Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 98% to the Unitholders holding Common Units, Pro Rata, and 2%
to the General Partner, until there has been distributed in respect of each
Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 98% to the Unitholders holding Common Units, Pro Rata, and
2% to the General Partner, until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Cumulative Common
Unit Arrearage existing with respect to such Quarter;
(iii) Third, 98% to the Unitholders holding Subordinated Units, Pro Rata,
and 2% to the General Partner, until there has been distributed in respect
of each Subordinated Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
(iv) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Second Target Distribution over the First
Target Distribution for such Quarter;
(vi) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders of the
Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Third Target Distribution over the Second
Target Distribution for such Quarter; and
(vii) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of the
Delaware Act, shall be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85% to all Unitholders, Pro Rata, and 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Second Target Distribution over the First
Target Distribution for such Quarter;
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(iv) Fourth, 75% to all Unitholders Pro Rata, and 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Third Target Distribution over the Second
Target Distribution for such Quarter; and
(v) Thereafter, 50% to all Unitholders, Pro Rata, and 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(b)(v).
Section 6.5 Distributions of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise,
98% to all Unitholders, Pro Rata, and 2% to the General Partner, until a
hypothetical holder of a Common Unit acquired on the Closing Date has received
with respect to such Common Unit, during the period since the Closing Date
through such date, distributions of Available Cash that are deemed to be
Capital Surplus in an aggregate amount equal to the Initial Unit Price.
Available Cash that is deemed to be Capital Surplus shall then be distributed
98% to all Unitholders holding Common Units, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Common Unit then
Outstanding an amount equal to the Cumulative Common Unit Arrearage.
Thereafter, all Available Cash shall be distributed as if it were Operating
Surplus and shall be distributed in accordance with Section 6.4.
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the
event of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Capital of the Common Units
immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Capital of the Common Units immediately prior to
giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution, shall also be subject to
adjustment pursuant to Section 6.9.
Section 6.7 Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common Units
and the right to participate in allocations of income, gain, loss and deduction
and distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in
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allocations of income, gain, loss and deduction and distributions made with
respect to Common Units; provided, however, that such converted Subordinated
Units shall remain subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x)
and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the
holder until such time as the General Partner determines, based on advice of
counsel, that a converted Subordinated Unit should have, as a substantive
matter, like intrinsic economic and federal income tax characteristics, in all
material respects, to the intrinsic economic and federal income tax
characteristics of an Initial Common Unit. In connection with the condition
imposed by this Section 6.7(b), the General Partner may take whatever
reasonable steps are required to provide economic uniformity to the converted
Subordinated Units in preparation for a transfer of such converted Subordinated
Units, including the application of Sections 5.5(c)(ii) and 6.1(d)(x);
provided, however, that no such steps may be taken that would have a material
adverse effect on the Unitholders holding Common Units represented by Common
Unit Certificates.
Section 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of
the holders of Outstanding Units, (ii) be entitled to any distributions other
than as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and
(v), and 12.4 or (iii) be allocated items of income, gain, loss or deduction
other than as specified in this Article VI.
Section 6.9 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes a Group Member to
be treated as an association taxable as a corporation or otherwise subjects a
Group Member to entity-level taxation for federal, state or local income tax
purposes, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution, shall
be adjusted to equal the product obtained by multiplying (a) the amount thereof
by (b) one minus the sum of (i) the highest marginal federal corporate (or
other entity, as applicable) income tax rate of the Group Member for the
taxable year of the Group Member in which such Quarter occurs (expressed as a
percentage) plus (ii) the effective overall state and local income tax rate
(expressed as a percentage) applicable to the Group Member for the calendar
year next preceding the calendar year in which such Quarter occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes), but
only to the extent of the increase in such rates resulting from such
legislation or interpretation. Such effective overall state and local income
tax rate shall be determined for the taxable year next preceding the first
taxable year during which the Group Member is taxable for federal income tax
purposes as an association taxable as a corporation or is otherwise subject to
entity-level taxation by determining such rate as if the Group Member had been
subject to such state and local taxes during such preceding taxable year.
ARTICLE VII
Management and Operation of Business
Section 7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the
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Partnership shall be exclusively vested in the General Partner, and no Limited
Partner or Assignee shall have any management power over the business and
affairs of the Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law or which are
granted to the General Partner under any other provision of this Agreement, the
General Partner, subject to Section 7.3, shall have full power and authority to
do all things and on such terms as it, in its sole discretion, may deem
necessary or appropriate to conduct the business of the Partnership, to
exercise all powers set forth in Section 2.5 and to effectuate the purposes set
forth in Section 2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group; subject
to Section 7.6(a), the lending of funds to other Persons (including the
Operating Partnership); the repayment of obligations of the Partnership
Group and the making of capital contributions to any member of the
Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than its
interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including 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 Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests in,
and the contributions of property to, the Operating Partnership from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
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(xiii) unless restricted or prohibited by Section 5.7, the purchase, sale
or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership or any other subsidiary of the
Partnership as a member or partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and the Assignees and each other Person who
may acquire an interest in Partnership Securities hereby (i) approves, ratifies
and confirms the execution, delivery and performance by the parties thereto of
the Operating Partnership Agreement, the Underwriting Agreement, the Omnibus
Agreement, the Contribution Agreement, and the other agreements described in or
filed as exhibits to the Registration Statement that are related to the
transactions contemplated by the Registration Statement; (ii) agrees that the
General Partner (on its own or through any officer of the Partnership) is
authorized to execute, deliver and perform the agreements referred to in clause
(i) of this sentence and the other agreements, acts, transactions and matters
described in or contemplated by the Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Partnership
Securities; and (iii) agrees that the execution, delivery or performance by the
General Partner, any Group Member or any Affiliate of any of them, of this
Agreement or any agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate of the General
Partner of the rights accorded pursuant to ArticleXV), shall not constitute a
breach by the General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
Section 7.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act. The General Partner shall use all reasonable efforts to cause to
be filed such other certificates or documents as may be determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate for the formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware or any other state in which the
Partnership may elect to do business or own property. To the extent that such
action is determined by the General Partner in its sole discretion to be
reasonable and necessary or appropriate, the General Partner shall file
amendments to and restatements of the Certificate of Limited Partnership and do
all things to maintain the Partnership as a limited partnership (or a
partnership or other entity in which the limited partners have limited
liability) under the laws of the State of Delaware or of any other state in
which the Partnership may elect to do business or own property. Subject to the
terms of Section 3.4(a), the General Partner shall not be required, before or
after filing, to deliver or mail a copy of the Certificate of Limited
Partnership, any qualification document or any amendment thereto to any Limited
Partner.
Section 7.3 Restrictions on the General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it
impossible to carry on the ordinary business of the Partnership; (ii)
possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as a general partner of the Partnership.
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(b) Except as provided in Articles XII and XIV, 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)
or approve on behalf of the Partnership the sale, exchange or other disposition
of all or substantially all of the assets of the Operating Partnership without
the approval of holders of a Unit Majority; provided however that this
provision shall not preclude or limit the General Partner's ability to
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or the Operating Partnership
and shall not apply to any forced sale of any or all of the assets of the
Partnership or the Operating Partnership pursuant to the foreclosure of, or
other realization upon, any such encumbrance. Without the approval of holders
of a Unit Majority, the General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Partnership
Agreement or, except as expressly permitted by Section 7.9(d), take any action
permitted to be taken by a partner of the Operating Partnership, in either
case, that would adversely affect the Limited Partners (including any
particular class of Partnership Interests as compared to any other class of
Partnership Interests) in any material respect or (ii) except as permitted
under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to elect a
successor general partner of the Partnership.
Section 7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement,
the General Partner shall not be compensated for its services as a general
partner or managing member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership Securities
or options to purchase Partnership Securities), or cause the Partnership to
issue Partnership Securities in connection with, or pursuant to, any employee
benefit plan, employee program or employee practice maintained or sponsored by
the General Partner or any of its Affiliates, in each case for the benefit of
employees of the General Partner, any Group Member or any Affiliate, or any of
them, in respect of services performed, directly or indirectly, for the benefit
of the Partnership Group. The Partnership agrees to issue and sell to the
General Partner or any of its Affiliates any Partnership Securities that the
General Partner or such Affiliates are obligated to provide to any employees
pursuant to any such employee benefit plans, employee programs or employee
practices. Expenses incurred by the General Partner in connection with any such
plans, programs and practices (including the net cost to the General Partner or
such Affiliates of Partnership Securities purchased by the General Partner or
such Affiliates from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted by the General
Partner as permitted by this Section 7.4(c) shall constitute obligations of the
General Partner hereunder and shall be assumed by any successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's General Partner Interest pursuant to Section 4.6.
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Section 7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership (i) agrees that its sole business will be to
act as a general partner or managing member, as the case may be, of the
Partnership and any other partnership or limited liability company of which the
Partnership or the Operating Partnership is, directly or indirectly, a partner
or member and to undertake activities that are ancillary or related thereto
(including being a limited partner in the Partnership), (ii) shall not engage
in any business or activity or incur any debts or liabilities except in
connection with or incidental to (A) its performance as general partner of one
or more Group Members or as described in or contemplated by the Registration
Statement or (B) the acquiring, owning or disposing of debt or equity
securities in any Group Member and (iii) except to the extent permitted in the
Omnibus Agreement, shall not, and shall cause its Affiliates not to, engage in
any Restricted Business.
(b) Sunoco, Inc. and certain of its Affiliates have entered into the Omnibus
Agreement with the Partnership and the Operating Partnership, which agreement
sets forth certain restrictions on the ability of Sunoco, Inc. and its
Affiliates to engage in Restricted Businesses.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the
right to engage in businesses of every type and description and other
activities for profit and to engage in and possess an interest in other
business ventures of any and every type or description, whether in businesses
engaged in or anticipated to be engaged in by any Group Member, independently
or with others, including business interests and activities in direct
competition with the business and activities of any Group Member, and none of
the same shall constitute a breach of this Agreement or any duty express or
implied by law to any Group Member or any Partner or Assignee. Neither any
Group
Member, any Limited Partner nor any other Person shall have any rights by
virtue of this Agreement, the Operating Partnership Agreement or the
partnership relationship established hereby or thereby in any business ventures
of any Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b), Section 7.5(c)
and the Omnibus Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 7.5 is hereby approved by the Partnership and all Partners,
(ii) it shall be deemed not to be a breach of the General Partner's fiduciary
duty or any other obligation of any type whatsoever of the General Partner for
the Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the
Partnership and (iii) except as set forth in the Omnibus Agreement, the General
Partner and the Indemnitees shall have no obligation to present business
opportunities to the Partnership.
(e) The General Partner and any of its Affiliates may acquire Units or other
Partnership Securities in addition to those acquired on the Closing Date and,
except as otherwise provided in this Agreement, shall be entitled to exercise
all rights of the General Partner or Limited Partner, as applicable, relating
to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and Section 7.5(e)
with respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of
this Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited Partners
to any such restriction, such provisions shall be inapplicable and have no
effect in determining whether the General Partner has complied with its
fiduciary duties in connection with determinations made by it under this
Section 7.5.
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Section 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the General
Partner.
(a) The General Partner or any of its Affiliates may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of
time and in such amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not charge the borrowing
party interest at a rate greater than the rate that would be charged the
borrowing party or impose terms less favorable to the borrowing party than
would be charged or imposed on the borrowing party by unrelated lenders on
comparable loans made on an arm's-length basis (without reference to the
lending party's financial abilities or guarantees). The borrowing party shall
reimburse the lending party for any costs (other than any additional interest
costs) incurred by the lending party in connection with the borrowing of such
funds. For purposes of this Section 7.6(a) and Section 7.6(b), the term "Group
Member" shall include any Affiliate of a Group Member that is controlled by the
Group Member. No Group Member may lend funds to the General Partner or any of
its Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders
on comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as General Partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third
parties or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply
to the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) 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 7.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 5.2 and 5.3, the Contribution
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval,
(iii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties, or (iv) any transaction that, taking into account the totality
of the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership), is
equitable to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Conflicts Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of the
assets, the liquidated and contingent liabilities assumed, the tax basis in the
assets, the extent to which tax-only allocations to the transferor will protect
the existing partners of the Partnership against a low tax basis, and such
other factors as the Conflicts Committee deems relevant under the
circumstances.
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(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and its
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation on
the part of the General Partner or its Affiliates to enter into such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of
the conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
Section 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided, that in each
case the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in, or (in the case of a Person other than the
General Partner) not opposed to, the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful; provided, further, no indemnification pursuant to this
Section 7.7 shall be available to the General Partner with respect to its
obligations incurred pursuant to the Underwriting Agreement or the Contribution
Agreement (other than obligations incurred by the General Partner on behalf of
the Partnership). The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 7.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies
or property to the Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding 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 by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests,
as a matter of law or otherwise, both as to actions in the Indemnitee's
capacity as an Indemnitee and as to actions in any other capacity (including
any capacity under the Underwriting Agreement), and shall continue as to an
Indemnitee who has ceased to serve in such capacity and shall inure to the
benefit of the heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates 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 Partnership's activities
or such Person's activities on behalf 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.
(e) For purposes of this Section 7.7, 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
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also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute "fines" within the meaning of Section 7.7(a); and action taken
or omitted by it with respect to any 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.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 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 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
Section 7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not be
liable to the Partnership or to any Partner for its good faith reliance on the
provisions of this Agreement. The provisions of this Agreement, to the extent
that they restrict or otherwise modify the duties and liabilities of an
Indemnitee otherwise existing at law or in equity, are agreed by the Partners
to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior to
such amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
Section 7.9 Resolution of Conflicts of Interest
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on
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the one hand, and the Partnership, the Operating Partnership, any Partner or
any Assignee, on the other, any resolution or course of action by the General
Partner or its Affiliates in respect of such conflict of interest shall be
permitted and deemed approved by all Partners, and shall not constitute a
breach of this Agreement, of the Operating 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 such
resolution. Any conflict of interest and any resolution of such conflict of
interest to seek Special Approval of such resolution. Any conflict of interest
and any resolution of such conflict of interest shall be conclusively deemed
fair and reasonable to the Partnership if such conflict of interest or
resolution is (i) approved by Special Approval (as long as the material facts
known to the General Partner or any of its Affiliates regarding any proposed
transaction were disclosed to the Conflicts Committee at the time it gave its
approval), (ii) on terms no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
fair to the Partnership, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership). The General Partner
may also adopt a resolution or course of action that has not received Special
Approval. The General Partner (including the Conflicts Committee in connection
with Special Approval) shall be authorized in connection with its determination
of what is "fair and reasonable" to the Partnership and in connection with its
resolution of any conflict of interest to consider (A) the relative interests
of any party to such conflict, agreement, transaction or situation and the
benefits and burdens relating to such interest; (B) any customary or accepted
industry practices and any customary or historical dealings with a particular
Person; (C) any applicable generally accepted accounting practices or
principles; and (D) such additional factors as the General Partner (including
the Conflicts 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 the Conflicts Committee) to consider the interests
of any Person other than the Partnership. In the absence of bad faith by the
General Partner, the resolution, 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, to the extent permitted
by law, under the Delaware Act or any other law, rule or regulation.
(b) 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 "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
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, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) 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, the Operating Partnership Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definitions of Available Cash or Operating Surplus shall not constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group other than in the
ordinary course of business. No borrowing by any Group Member 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 by
reason of the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable distributions to the General Partner or its Affiliates
(including in their capacities as Limited Partners) to exceed 2% of the total
amount distributed to all partners or (B) hasten the expiration of the
Subordination Period or the conversion of any Subordinated Units into Common
Units.
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(c) 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.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
Section 7.10 Other Matters Concerning the General Partner.
(a) 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.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
Section 7.11 Purchase or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase
or otherwise acquire and sell or otherwise dispose of Partnership Securities
for its own account, subject to the provisions of Articles IV and X.
Section 7.12 RegistrationRights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate
of the General Partner at the date hereof notwithstanding that it may later
cease to be an Affiliate of the General Partner) holds Partnership Securities
that it desires to sell and (ii) Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of the General Partner or any of its Affiliates, the
Partnership shall file with the Commission as promptly as practicable after
receiving such request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six months
following its effective date or such shorter period as shall terminate when all
Partnership Securities covered by such registration statement have been
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sold, a registration statement under the Securities Act registering the
offering and sale of the number of Partnership Securities specified by the
Holder; provided, however, that the Partnership shall not be required to effect
more than three registrations pursuant to this Section 7.12(a); and provided
further, however, that if the Conflicts Committee determines in its good faith
judgment that a postponement of the requested registration for up to six months
would be in the best interests of the Partnership and its Partners due to a
pending transaction, investigation or other event, the filing of such
registration statement or the effectiveness thereof may be deferred for up to
six months, but not thereafter. In connection with any registration pursuant to
the immediately preceding sentence, the Partnership shall promptly prepare and
file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a result thereof,
the Partnership would become subject to general service of process or to
taxation or qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction solely as a result of such
registration, and (y) such documents as may be necessary to apply for listing
or to list the Partnership Securities subject to such registration on such
National Securities Exchange as the Holder shall reasonably request, and do any
and all other acts and things that may reasonably be necessary or advisable to
enable the Holder to consummate a public sale of such Partnership Securities in
such states. Except as set forth in Section 7.12(c), all costs and expenses of
any such registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 7.12(b) shall be an underwritten offering, then, in the event that
the managing underwriter or managing underwriters of such offering advise the
Partnership and the Holder in writing that in their opinion the inclusion of
all or some of the Holder's Partnership Securities would adversely and
materially affect the success of the offering, the Partnership shall include in
such offering only that number or amount, if any, of securities held by the
Holder which, in the opinion of the managing underwriter or managing
underwriters, will not so adversely and materially affect the offering. Except
as set forth in Section 7.12(c), all costs and expenses of any such
registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.12(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such
registration statement), or in any summary or final prospectus or in any
amendment or supplement thereto (if used during the period the Partnership is
required to keep the registration statement current), or arising out of, based
upon or resulting from the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
made therein not misleading; provided, however, that the Partnership shall not
be liable to any Indemnified Person to the extent that any such claim arises
out of, is based upon or results from an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
such preliminary, summary or final prospectus or such amendment or supplement,
in
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reliance upon and in conformity with written information furnished to the
Partnership by or on behalf of such Indemnified Person specifically for use in
the preparation thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such cessation
and for so long thereafter as is required for the Holder to sell all of the
Partnership Securities with respect to which it has requested during such
two-year period inclusion in a registration statement otherwise filed or that a
registration statement be filed; provided, however, that the Partnership shall
not be required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
Section 7.13 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General
Partner to act on behalf of and in the name of the Partnership has full power
and authority to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any authorized contracts on behalf
of the Partnership, and such Person shall be entitled to deal with the General
Partner or any such officer as if it were the Partnership's sole party in
interest, both legally and beneficially. Each Limited Partner hereby waives any
and all defenses or other remedies that may be available against such Person to
contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of the Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming thereunder that (a)
at the time of the execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership and (c)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to
Section 3.4(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business, including the record of the
Record Holders and Assignees of Units or other Partnership Securities, books of
account and records of Partnership proceedings, may be kept on, or be in the
form of, computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of
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time. The books of the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance with U.S. GAAP.
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed or made available to each Record Holder of a Unit as of a date
selected by the General Partner in its discretion, an annual report containing
financial statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with U.S. GAAP, including a balance sheet
and statements of operations, Partnership equity and cash flows, such
statements to be audited by a firm of independent public accountants selected
by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or made available to each Record Holder of a
Unit, as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. 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.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the
purposes of computing the adjustments under Section 743(b) of the Code, the
General Partner shall be authorized (but not required) to adopt a convention
whereby the price paid by a transferee of a Limited Partner Interest will be
deemed to be the lowest quoted closing price of the Limited Partner Interests
on any National Securities Exchange on which such Limited Partner Interests are
traded during the calendar month in which such transfer is deemed to occur
pursuant to Section 6.2(g) without regard to the actual price paid by such
transferee.
(b) 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.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in 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.
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Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of Common Units, Subordinated Units and
Incentive Distribution Rights to the General Partner and the Underwriters as
described in Section 5.3 in connection with the Initial Offering, the General
Partner shall admit such parties to the Partnership as Initial Limited Partners
in respect of the Common Units, Subordinated Units or Incentive Distribution
Rights issued to them.
Section 10.2 Admission of Substituted Limited Partner.
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request
admission as a Substituted Limited Partner to such purchaser or other
transferee in respect of the transferred Limited Partner Interests. Each
transferee of a Limited Partner Interest (including any nominee holder or an
agent acquiring such Limited Partner Interest for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Limited Partner
Interests so transferred to such Person. Such Assignee shall become a
Substituted Limited Partner (x) at such time as the General Partner consents
thereto, which consent may be given or withheld in the General Partner's
discretion, and (y) when any such admission is shown on the books and records
of the Partnership. If such consent is withheld, such transferee shall be an
Assignee. An Assignee shall have an interest in the Partnership equivalent to
that of a Limited Partner with respect to allocations and distributions,
including liquidating distributions, of the Partnership. With respect to voting
rights attributable to Limited Partner Interests that are held by Assignees,
the General Partner shall be deemed to be the Limited Partner with respect
thereto and shall, in exercising the voting rights in respect of such Limited
Partner Interests on any matter, vote such Limited Partner Interests at the
written direction of the Assignee who is the Record Holder of such Limited
Partner Interests. If no such written direction is received, such Limited
Partner Interests will not be voted. An Assignee shall have no other rights of
a Limited Partner.
Section 10.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner Interest pursuant to
Section 4.6 who is proposed to be admitted as a successor General
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Partner shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the predecessor or
transferring General Partner, pursuant to Section 11.1 or 11.2 or the transfer
of the General Partner Interest pursuant to Section 4.6, provided, however,
that no such successor shall be admitted to the Partnership until compliance
with the terms of Section 4.6 has occurred and such successor has executed and
delivered such other documents or instruments as may be required to effect such
admission. Any such successor shall, subject to the terms hereof, carry on the
business of the members of the Partnership Group without dissolution.
Section 10.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner.
(i) evidence of acceptance in form satisfactory to the General Partner of
all of the terms and conditions of this Agreement, including the power of
attorney granted in Section 2.6, and
(ii) such other documents or instruments as may be required in the
discretion of the General Partner to effect such Person's admission as an
Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement
and, if required by law, the General Partner shall prepare and file an
amendment to the Certificate of Limited Partnership, and the General Partner
may for this purpose, among others, exercise the power of attorney granted
pursuant to Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners;
(ii) The General Partner transfers all of its rights as General Partner
pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of
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a petition filed against the General Partner in a proceeding of the type
described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a
debtor-in-possession), receiver or liquidator of the General Partner or of
all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a certificate
of dissolution or its equivalent is filed for the General Partner, or 90
days expire after the date of notice to the General Partner of revocation of
its charter without a reinstatement of its charter, under the laws of its
state of incorporation; (B) in the event the General Partner is a
partnership or a limited liability company, the dissolution and commencement
of winding up of the General Partner; (C) in the event the General Partner
is acting in such capacity by virtue of being a trustee of a trust, the
termination of the trust; (D) in the event the General Partner is a natural
person, his death or adjudication of incompetency; and (E) otherwise in the
event of the termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to
the Limited Partners within 30 days after such occurrence. The Partners hereby
agree that only the Events of Withdrawal described in this Section 11.1 shall
result in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2011, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner
and its Affiliates) and the General Partner delivers to the Partnership an
Opinion of Counsel ("Withdrawal Opinion of Counsel") that such withdrawal
(following the selection of the successor General Partner) would not result in
the loss of the limited liability of any Limited Partner or any Group Member or
cause any Group Member to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes (to the
extent not previously treated as such); (ii) at any time after 12:00 midnight,
Eastern Standard Time, on December 31, 2011, the General Partner voluntarily
withdraws by giving at least 90 days' advance notice to the Unitholders, such
withdrawal to take effect on the date specified in such notice; (iii) at any
time that the General Partner ceases to be the General Partner pursuant to
Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv)
notwithstanding clause (i) of this sentence, at any time that the General
Partner voluntarily withdraws by giving at least 90 days' advance notice of its
intention to withdraw to the Limited Partners, such withdrawal to take effect
on the date specified in the notice, if at the time such notice is given one
Person and its Affiliates (other than the General Partner and its Affiliates)
own beneficially or of record or control at least 50% of the Outstanding Units.
The withdrawal of the General Partner from the Partnership upon the occurrence
of an Event of Withdrawal shall also constitute the withdrawal of the General
Partner as general partner or managing member, to the extent applicable, of the
other Group Members. If the General Partner gives a notice of withdrawal
pursuant to Section 11.1(a)(i), the holders of a Unit Majority, may, prior to
the effective date of such withdrawal, elect a successor General Partner. The
Person so elected as successor General Partner shall automatically become the
successor general partner or managing member, to the extent applicable, of the
other Group Members of which the General Partner is a general partner or a
managing member. If, prior to the effective date of the General Partner's
withdrawal, a successor is not selected by the Unitholders as provided herein
or the Partnership does not receive a Withdrawal Opinion of Counsel, the
Partnership shall be dissolved in accordance with Section 12.1. Any successor
General Partner elected in accordance with the terms of this Section 11.1 shall
be subject to the provisions of Section 10.3.
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Section 11.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such
holders for removal of the General Partner must also provide for the election
of a successor General Partner by the Unitholders holding a majority of the
outstanding Common Units voting as a class and a majority of the outstanding
Subordinated Units voting as a class (including Units held by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to Section
10.3. The removal of the General Partner shall also automatically constitute
the removal of the General Partner as general partner or managing member, to
the extent applicable, of the other Group Members of which the General Partner
is a general partner or a managing member. If a Person is elected as a
successor General Partner in accordance with the terms of this Section 11.2,
such Person shall, upon admission pursuant to Section 10.3, automatically
become a successor general partner or managing member, to the extent
applicable, of the other Group Members of which the General Partner is a
general partner or a managing member. The right of the holders of Outstanding
Units to remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
Section 11.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if the successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option, exercisable prior to the effective date of the
departure of such Departing Partner, to require its successor to purchase its
General Partner Interest and its general partner interest (or equivalent
interest) in the other Group Members and all of its Incentive Distribution
Rights (collectively, the "Combined Interest") in exchange for an amount in
cash equal to the fair market value of such Combined Interest, such amount to
be determined and payable as of the effective date of its departure. If the
General Partner is removed by the Unitholders under circumstances where Cause
exists or if the General Partner withdraws under circumstances where such
withdrawal violates this Agreement, and if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest for such fair
market value of such Combined Interest of the Departing Partner. In either
event, the Departing Partner shall be entitled to receive all reimbursements
due such Departing Partner pursuant to Section 7.4, including any
employee-related liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the Departing
Partner for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which third independent investment banking firm or other
independent expert shall determine the fair market value of the Combined
Interest of the Departing Partner. In making its determination, such third
independent investment banking firm or other independent expert may consider
the then current trading price of Units on any National Securities Exchange on
which Units are then listed, the value
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of the Partnership's assets, the rights and obligations of the Departing
Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner (or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing Partner (or its
transferee) becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest of the Departing Partner to Common Units
will be characterized as if the Departing Partner (or its transferee)
contributed its Combined Interest to the Partnership in exchange for the newly
issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to 1/98th of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General
Partner shall, subject to the following sentence, be entitled to 2% of all
Partnership allocations and distributions to which the Departing Partner was
entitled. In addition, the successor General Partner shall cause this Agreement
to be amended to reflect that, from and after the date of such successor
General Partner's admission, the successor General Partner's interest in all
Partnership distributions and allocations shall be 2%.
Section 11.4 Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
Section 11.5 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited
Partner Interest becomes a Record Holder of the Limited Partner Interest so
transferred, such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 11.1 or 11.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 12.2)
its affairs shall be wound up, upon:
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