10-K405 1 FORM 10-K 405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to _______________ Commission file number 1-10311 KANEB PIPE LINE PARTNERS, L.P. (Exact name of Registrant as specified in its Charter) Delaware 75-2287571 ------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2435 North Central Expressway Richardson, Texas 75080 ------------------------------- ----------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (214) 699-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ----------------------- ---------------------- Senior Preference Units New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] Aggregate market value of the voting stock held by non-affiliates of the registrant: $167,048,011. This figure is estimated as of March 17, 1995, at which date the closing price of the Registrant's Senior Preference Units on the New York Stock Exchange was $23.50 per share, and assumes that only the Registrant's officers and directors were affiliates of the Registrant. Number of Senior Preference Units of the Registrant outstanding at March 17, 1995: 7,250,000. PART I ITEM I. BUSINESS GENERAL Kaneb Pipe Line Partners, L.P. (the "Partnership") is a Delaware limited partnership formed in September 1989 to acquire, own and operate the refined petroleum products pipeline business previously conducted by Kaneb Pipe Line Company, a Delaware corporation (the "Company"), a wholly owned subsidiary of Kaneb Services, Inc., a Delaware corporation ("Kaneb"). The Partnership's pipeline assets and operations and liquids terminaling business ("ST") are owned and conducted, directly or indirectly, by Kaneb Pipe Line Operating Partnership ("KPOP"), in which the Partnership holds a 99% limited partner interest. The Company serves as the general partner of both the Partnership and KPOP and the Company's current management conducts the Partnership's business (see Item 10. Directors and Executive Officers of the Registrant). The Partnership is engaged, through its operating subsidiaries, in the refined petroleum products pipeline business and the independent terminaling of petroleum products and specialty liquids. PRODUCTS PIPELINE BUSINESS Introduction The pipeline business consists primarily of the transportation, as a common carrier, of refined petroleum products in Kansas, Nebraska, Iowa, South Dakota and North Dakota, as well as related terminaling activities (the "Pipeline"). The acquisition of the assets of Wyco Pipe Line Company ("Wyco") in February 1995 increased the Partnership's pipeline business in South Dakota and expanded it into Wyoming and Colorado. None of the results for 1994 include Wyco which is described subsequently. The Pipeline is an integrated pipeline transporting refined petroleum products, including propane, received from refineries in southeast Kansas, or from other connecting pipelines, to terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota and to receiving pipeline connections in Kansas. Shippers on the Pipeline obtain refined petroleum products from refineries connected to the Pipeline directly or through other pipelines. Such refineries obtain crude oil primarily from producing areas in Kansas, Oklahoma and Texas. Five connecting pipelines deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to the Pipeline for shipment. The Pipeline's revenues are based on volumes shipped and the distances over which such volumes are transported. The following table reflects the total volume and barrel miles of refined petroleum products shipped and total operating revenues earned by the Pipeline for each of the periods indicated.
Year Ended December 31, ------------------------------------------------------------------------ 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Volume (1) 53,087 51,635 55,111 56,234 54,546 Barrel miles(2) 13,165 13,245 14,287 14,160 14,460 Revenues(thousands) $37,618 $39,415 $42,179 $44,107 $46,117
___________________________ (1) Volumes are expressed in thousands of barrels of refined petroleum product. (2) Barrel miles are shown in millions. A barrel mile is the movement of one barrel of refined petroleum product one mile. 1 The mix of refined petroleum products delivered varies seasonally, with gasoline demand peaking in early summer, diesel fuel demand peaking in late summer and propane demand higher in the fall. In addition, weather conditions in the geographic areas served by the Pipeline affect the demand for and the mix of the refined petroleum products delivered through the Pipeline, although historically any impact on the volumes shipped has been short-term. Tariffs charged shippers for transportation do not vary according to the type of products delivered. The following table sets forth, in thousands of barrels, the volumes of gasoline, diesel and fuel oil, propane and other refined petroleum products transported by the Pipeline during the periods indicated.
Year Ended December 31, ----------------------------------------------------------------------- 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Gasoline 26,841 24,152 24,816 25,407 23,958 Diesel and fuel oil 18,991 20,047 23,374 25,308 26,340 Propane 4,703 4,441 4,676 4,153 4,204 Other 2,552 2,995 2,245 1,366 44 ----- ----- ----- ----- ----- TOTAL 53,087 51,635 55,111 56,234 54,546 ====== ====== ====== ====== ======
In October, 1991, two single-use pipelines were acquired from Calnev Pipe Line Company for $2.65 million. Each system, one of which is located in Umatilla, Oregon and the other in Rawlins, Wyoming, supplies diesel fuel to Union Pacific Railroad fueling facilities under contracts expiring in October 1996. Such contracts are renewable thereafter for successive two year terms unless canceled by either party. The Oregon line is fully automated and the Wyoming line requires minimal start-up assistance, which is provided by the railroad. In May 1993, KPOP began operating a newly constructed single-use pipeline near Pasco, Washington. For the year ended December 31, 1994, the three systems combined transported a total of 2.8 million barrels of diesel fuel, representing an aggregate of $1.2 million in revenues. Pipeline Operations The Pipeline is a 2,075 mile underground pipeline network that transports refined liquid petroleum products, including gasoline, diesel fuel, heating oil and propane. Centrifugal pumps at intervals along the Pipeline overcome pressure reductions due to friction loss and assure efficient movement of products through the Pipeline. Products are transported primarily for refiners, marketers and distributors of such products. The Pipeline has been constructed and is maintained consistent with applicable federal, state and local laws and regulations, standards prescribed by the American Petroleum Institute and accepted industry practice. Except for the three single-use lines and certain ethanol facilities, all of the Partnership's pipeline operations constitute common carrier operations and are subject to federal tariff regulation. Also, certain of its intrastate common carrier operations are subject to state tariff regulation. Common carrier activities are those under which transportation through the Pipeline is available at published tariffs filed with the Federal Energy Regulatory Commission ("FERC") in the case of interstate shipments, or the Kansas Corporation Commission in the case of intrastate shipments in Kansas, to any shipper of refined petroleum products who requests such services and satisfies the conditions and specifications for transportation. For a description of the federal and state tariff regulations applicable to the common carrier transportation activities of the Partnership, see "---Regulation". The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products. 2 In general, a shipper of refined petroleum products on the Pipeline acquires refined petroleum products from refineries connected to the Pipeline, or, if such shipper already owns the refined petroleum products, delivers such refined petroleum products to the Pipeline from those refineries or through pipelines that connect with the Pipeline. Tariffs for such transportation are charged to shippers based upon transportation from the origination point on the Pipeline to the point of delivery. Such tariffs also include charges for terminaling and storage of product at Pipeline terminals. Pipelines are generally the lowest cost method for intermediate and long-haul overland transportation of refined petroleum products. Each shipper is required to supply KPOP with a notice of shipment indicating sources of products and destinations. All shipments are tested to insure compliance with Pipeline specifications. Shippers are usually invoiced by sight draft by KPOP immediately upon the product entering the Pipeline. The operations of the Pipeline also include 16 truck loading terminals through which refined petroleum products are delivered to petroleum transport trucks. The following table shows, with respect to each of such terminals, its location, number of tanks, storage capacity in barrels and truck capacity. Except as indicated in the notes to the table, each terminal is owned by KPOP.
No. of Storage Truck Location of Terminals Tanks Capacity (barrels) Capacity (1) --------------------- ------ ------------------ ------------ KANSAS: Hutchinson 9 161,690 1 Concordia(2) 7 79,339 2 NEBRASKA: Superior 11 192,027 1 Geneva 39 678,115 8 North Platte 22 197,914 5 Osceola 8 79,444 2 Columbus 12 191,417 2 Norfolk 16 186,981 4 IOWA: LeMars 9 102,914 2 Rock Rapids 12 366,081 2 Milford(3) 11 171,937 2 SOUTH DAKOTA: Yankton 25 245,473 4 Mitchell 8 71,450 2 Wolsey 21 148,475 4 Aberdeen 12 181,450 2 NORTH DAKOTA: Jamestown 13 188,178 2 -- ------- TOTALS 235 3,242,922 === =========
________________________ (1) Number of trucks that may be simultaneously loaded. (2) The Concordia terminal is situated on land leased through the year 2060 for a total rental of $2,000. (3) The Milford terminal is situated on land leased through August 7, 2007 at an annual rental of $2,400. KPOP has the right to renew such lease upon its expiration for an additional term of 20 years at the same annual rental. The Pipeline operations include intermediate storage facilities consisting of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson, Kansas with aggregate capacities of 388,041 and 534,135 barrels, respectively. During 1994, approximately 53% of the Pipeline's deliveries were made through 3 its terminals and approximately 47% were made to other pipelines and customer owned storage tanks. Storage of product at terminals pending delivery is considered by the Partnership to be an integral part of the product delivery service of the Pipeline. Shippers generally store refined petroleum products for less than one week. Ancillary services, including injection of shipper-furnished and generic additives, are available at each terminal. Description of Pipeline Construction of the Pipeline commenced in the 1950's with lines from southern Kansas to Geneva, Nebraska. During the 1960's, the Pipeline was expanded north to its present terminus at Jamestown, North Dakota. In 1981, the North Platte line was built and, in 1982, the 16" line from McPherson, Kansas to Geneva, Nebraska was laid. In 1984, the Partnership acquired a 6" pipeline from Champlin Oil Company. A portion of this 6" line is the line running south through Superior, Nebraska, to Hutchinson, Kansas. The other end of the line runs northeast approximately 175 miles crossing the main pipeline at Osceola, Nebraska, through a terminal at Columbus, Nebraska, and later crossing and interconnecting with the Yankton/Milford line to terminate at Rock Rapids, Iowa. KPOP owns the 2,075 mile Pipeline except for the 203 mile North Platte Line, which is held under a capitalized lease that expires at the end of 1998 and that provides rights to renew the lease for five years. KPOP has the option to purchase the North Platte Line at the end of the lease term for approximately $5 million. If such option is not exercised, the lessor can require KPOP to purchase such line at a lower price. KPOP also owns 235 product distribution tanks with total storage capacity of approximately 3.2 million barrels located at 16 distribution terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota and 23 product tanks with total storage capacity of approximately 922,000 barrels at its tank farm installations at McPherson and El Dorado, Kansas. The Pipeline further consists of six origin pump stations at refineries in Kansas and 38 booster pump stations along the system in Kansas, Nebraska, Iowa, South Dakota and North Dakota. The system uses distribution terminals, various office and warehouse facilities, and an extensive quality control laboratory. The Partnership leases office space for its operating headquarters in Wichita, Kansas. To prolong the useful life of the Pipeline, routine preventive maintenance is performed. Such maintenance includes cathodic protection to prevent external corrosion and inhibitors for internal corrosion, periodic internal inspection of the Pipeline and frequent patrols of the Pipeline rights-of-way. The Pipeline is patrolled at regular intervals to identify equipment or activities by third parties, that, if left unchecked, could result in encroachment of the Pipeline and other problems. Supervisory Control and Data Acquisition ("SCADA"), a remote supervisory control software program, continuously monitors the entire Pipeline system for operational control from the Wichita office. The program monitors quantities of refined petroleum products injected in and delivered through the Pipeline, except at two continuously manned locations, as well as pressure and temperature variations through the Pipeline and automatically signals any deviation from normal operations that require attention. Portions of the system can be shut down by remote control. The program is fully operational throughout the Pipeline. In addition to the maintenance described above, routine maintenance is also performed on the terminal and storage facilities associated with the Pipeline. Such terminal and storage facilities also include automatic tank alarm systems. Demand for and Sources of Refined Petroleum Products The Partnership's pipeline business depends in large part on (i) the level of demand for refined petroleum products in the markets served by the Pipeline and (ii) the ability and willingness of refiners and marketers having access to the Pipeline to supply such demand by deliveries through the Pipeline. 4 Most of the refined petroleum products delivered through the Pipeline are ultimately used in agricultural operations, including fuel for farm equipment, irrigation systems, trucks transporting crops and crop drying facilities. Demand for refined petroleum products for agricultural use, and the relative mix of products required, is affected by weather conditions in the markets served by the Pipeline. The agricultural sector is also affected by government agricultural policies and crop prices. Although periods of drought suppress agricultural demand for some refined petroleum products, particularly those used for fueling farm equipment, during such times the demand for fuel for irrigation systems often increases. The Pipeline is also dependent upon adequate levels of production of refined petroleum products by refineries connected to the Pipeline. The refineries are, in turn, dependent upon adequate supplies of suitable grades of crude oil. Such refineries obtain crude oil from producing fields located primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from other domestic or foreign sources. If operations at any one refinery were discontinued, the Partnership believes (assuming unchanged demand for refined petroleum products in markets served by the Pipeline) that the effects thereof would be short-term in nature, and the Partnership's business would not be materially adversely affected over the long term because such discontinued production could be replaced by other refineries in southeast Kansas having excess refinery capacity or by other sources. Three refineries, located at El Dorado, Wichita and Augusta, Kansas, operated by Coastal Refining and Marketing, Inc. ("Coastal") were closed down during 1993. The majority of the refined petroleum product transported through the Pipeline is produced at three refineries in southeast Kansas located at McPherson, El Dorado and Arkansas City, Kansas and operated by National Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco") and Total Petroleum, Inc. ("Total"), respectively. These refineries with direct connections to the Pipeline shipped an aggregate of 29.7 million barrels of refined petroleum products through the Pipeline in 1994. One refinery accounted for approximately 54% of such amount. The Pipeline also has direct access by third party pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies of products through a connecting pipeline which receives products from a pipeline originating on the Gulf Coast. Five connecting pipelines deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to the Pipeline for shipment. Wyco Pipeline Acquisition - Subsequent Event Effective February 24, 1995, KPOP acquired the refined petroleum product pipeline assets of Wyco Pipe Line Company ("Wyco") for $27.1 million in cash financed by a 7 year loan from three insurance companies. The assets consist of approximately 550 miles of pipeline and four truck loading terminals located in Wyoming, South Dakota and Colorado. On a pro forma basis for the year ended December 31, 1994, Wyco would account for approximately 14.8% of the Partnership's revenues. The pipeline, previously jointly owned by subsidiaries of GATX Terminals Corporation and Amoco Pipe Line Company, originates at Casper, Wyoming where it is connected to Sinclair's Little America refinery. It also receives product at Strouds Station, Wyoming, a short distance from Casper, through a connection with the Seminoe Pipe Line bringing barrels down from the Billings, Montana refineries. From Strouds, the 8" main line continues easterly to Douglas Junction where a 6" lateral line branches off to the Rapid City, South Dakota terminal approximately 190 miles away. The Rapid City terminal has two bottom loading truck racks and 268,506 barrels of tankage. The Rapid City terminal also receives product from Wyoming Refining's Newcastle, Wyoming refinery through their pipeline which enters the Wyco pipeline just before the Wyoming/South Dakota border near Mule Creek, Wyoming. From Douglas Junction the main 8" line continues southward to a truck loading terminal at Cheyenne, Wyoming. At Cheyenne, Wyco can receive product from the Frontier refinery and can deliver product to the Cheyenne Pipe Line. The Cheyenne terminal is a one spot bottom loading truck rack with 385,964 5 barrels of tankage. From Cheyenne, Wyoming the Wyco 8" line extends south into Colorado to Wyco's Dupont terminal near Denver. DuPont, Wyco's largest terminal, has 6 bottom loading truck lanes with vapor recovery and 756,948 barrels of storage. At Denver, through its Commerce City station, Wyco can receive and transfer product to the Total Petroleum and Conoco Oil refineries and the Phillips Petroleum terminal. From Commerce City, a 6" line continues south 90 miles to the final terminal at Fountain, Colorado. The Fountain terminal has 5 bottom loading truck lanes and 389,545 barrels of tankage. Unlike the KPOP service area which is largely agricultural, Wyco serves the growing Denver and northeastern Colorado markets. Wyco also supplies the jet fuel for Ellsworth Air Force Base at Rapid City. Wyco has a relatively small number of shippers, who, with only a few exceptions, are also shippers on KPOP's system. The Wyco pipeline system is the nearest pipeline parallelling the KPOP system to the west. The KPOP North Platte line which terminates in western Nebraska is approximately 200 miles east of Wyco's Cheyenne terminal. The small Cheyenne Pipe Line which moves from west to east connects Wyco at Cheyenne, Wyoming with North Platte, Nebraska, although that line has been deactivated from Sidney, Nebraska (approximately 100 miles from Cheyenne) to North Platte. Contamination resulting from spills or releases of refined petroleum products are not unusual within the petroleum industry. Remediation efforts are ongoing at Wyco's Dupont terminal and will be required at the three other Wyco terminals and one pump station. In the course of acquisition negotiations, KPOP's regulatory group and their outside environmental consultants agreed upon the extent and costs of these required remediations. KPOP has agreed to implement the agreed remediation plans at these specific sites over the next five years in return for the payment by Wyco of the estimated costs thereof. At the closing, Wyco paid $1,312,000 to KPOP to cover the discounted future costs of these remediations. Wyco has also agreed to indemnify KPOP for up to $2,950,000 of the unknown environmental liabilities which occurred prior to the closing after KPOP has paid the first $150,000 and shared, on an equal basis, the next $900,000 of such expenses with Wyco. Wyco is an interstate pipeline and thus subject to regulation by the FERC as well as by Wyoming and Colorado on its intrastate rates. It is subject to the same regulations of other governmental agencies such as the Department of Transportation and the Environmental Protection Agency as KPOP. Therefore, the following sections in regard to regulatory matters and the application of certain laws and regulations of interstate pipelines apply equally to the Wyco system. Competition and Business Considerations The Partnership provides common carrier transportation services through the Pipeline at posted tariffs. Demand for transportation services by the Pipeline arises, ultimately, from demand for refined petroleum products in the markets it serves. See "---Demand for and Sources of Refined Petroleum Products". The Partnership's business will, therefore, be subject to many factors beyond its control. The Pipeline's major competitor is an independent regulated common carrier pipeline system owned by The Williams Companies ("Williams") which operates approximately 100 miles east of and parallel with the Pipeline. This competing pipeline system is a substantially more extensive system than the Pipeline. Furthermore, Williams and its affiliates have capital and financial resources substantially greater than those of the Partnership. Competition with Williams is based primarily on transportation charges, quality of customer service and proximity to end users although refined product pricing at either the origin or terminal point on a pipeline may outweigh transportation costs. Fifteen of the Pipeline's 16 delivery terminals are in direct competition with Williams' terminals located within two to 145 miles. 6 Upon the expiration of a five year settlement agreement pursuant to which its tariffs had been frozen, Williams filed a comprehensive new tariff on January 16, 1990. The filing proposed a tariff design for the future which would allow Williams substantial flexibility to raise or lower various rates without regulatory review and specifically provided increases in rates to many destinations, decreases in rates to other destinations, volume incentive rates at some terminals and rebates for shipments into certain counties from specified terminals. Some counties in which rebates would apply lie in the traditional service area of the Pipeline. The Partnership intervened in the Williams tariff proceeding before the FERC and protested the rebates. Nine shippers also intervened or protested the Williams filing. On February 15, 1990, FERC suspended the Williams tariff for the maximum statutory period of seven months. Williams chose a bifurcated proceeding under the authority of the FERC's ruling in the Buckeye Pipeline Company case (see "-- Regulation"). Under the first phase of such a proceeding, a determination was to be made whether Williams had market power in its various markets. Discrimination issues were also scheduled to be determined during the first phase. Ultimately Williams would be required to prove that its tariff rates are just, reasonable and non-discriminatory. The tariff became effective September 16, 1990 subject to refund depending on the outcome of the FERC proceedings. A hearing was held before an administrative law judge of the FERC from June 3 to August 9, 1991 on the first phase of the proceeding. On January 24, 1992 the judge issued an initial decision which determined that Williams had market power in 10 of 32 markets in which it operated and deferred most of the other issues involved to the second phase of the case on the grounds that they involved cost issues. All active parties have filed briefs and exceptions to the judge's initial decision. On July 27, 1994, the Commission issued its Opinion and Order on the Initial Decision. The Commission determined that Williams had market power in 19 of 32 markets. The Commission also denied Williams' motion proposing rate standards to apply to Phase II of the proceeding and directed the Administrative Law Judge to proceed with Phase II for the purpose of establishing base rates in the 19 markets where Williams had market power. All discrimination issues were also to be decided in Phase II. Williams filed its direct testimony in Phase II on January 23, 1995. The discovery phase of the proceeding is just starting. During the pendency of the proceeding, Williams has instituted other tariff changes, which have been permitted to go into effect subsequent to their suspension, subject to refund depending on the final outcome of the 1990 FERC tariff proceedings. Because pipelines are generally the lowest cost method for intermediate and long-haul movement of refined petroleum products, the Pipeline's more significant competitors are common carrier and proprietary pipelines owned and operated by major integrated and large independent oil companies and other companies in the areas where the Pipeline delivers products. Competition between common carrier pipelines is based primarily on transportation charges, quality of customer service and proximity to end users. The Partnership believes that high capital costs, tariff regulation, environmental considerations and problems in acquiring rights-of-way make it unlikely that other competing pipeline systems comparable in size and scope to the Pipeline will be built in the near future, provided that the Pipeline has available capacity to satisfy demand and its tariffs remain at reasonable levels. The costs associated with transporting products from a loading terminal to end users limit the geographic size of the market that can be served economically by any terminal. Transportation to end users from the loading terminals of the Partnership is conducted principally by trucking operations of unrelated third parties. Trucks may competitively deliver products in some of the areas served by the Pipeline. Trucking costs, however, render that mode of transportation uncompetitive for longer hauls or larger volumes. The Partnership does not believe that trucks are, or will be, over the long term effective competition to its long-haul volumes. 7 LIQUIDS TERMINALING Introduction ST is one of the largest independent petroleum products and specialty liquids terminaling companies in the United States. For the year ended December 31, 1994, the Partnership's terminaling business accounted for approximately 41% of the Partnership's revenues. ST operates 23 facilities in sixteen states, with a total storage capacity of approximately 7.7 million barrels. ST and its predecessors have been in the terminaling business for over 30 years and handle a wide variety of products from petroleum products to specialty chemicals to edible liquids. ST's terminal facilities provide throughput and storage on a fee basis for specialty chemicals, petroleum products and other liquids. ST's three largest terminal facilities are located in Texas City, Texas, Westwego, Louisiana and Baltimore, Maryland. These facilities accounted for approximately 68% of ST's revenues and 48% of its tankage capacity in 1994. The Texas City terminal is a deep water facility primarily serving the petrochemical industry along the Gulf Coast. The facility is the largest independent terminal facility in Texas City and has the ability to handle a wide range of specialty chemicals. The facility is located within sixteen miles of open water and has three deep-water loading docks with 36- to 40-foot drafts. In 1994, the Texas City facility accounted for approximately 42% of ST's revenues. The Baltimore terminal is the largest independent terminal facility in the Baltimore area and also has a deep water loading dock with a 33-foot draft. The Baltimore facility provides terminaling services for asphalt, fructose, caustics, latex and other products. In 1994 the Baltimore facility accounted for approximately 22% of ST's revenues. The Westwego terminal, purchased in June, 1994, is a deep water facility on the Mississippi River at New Orleans which handles molasses, fertilizer, animal and vegetable fats and oils, latex and caustic solutions. In 1994, the Westwego facility accounted for approximately 5% of ST's revenues. In addition to the Texas City, Westwego and Baltimore terminaling facilities, ST operates 20 other terminaling facilities in 14 states. These inland terminaling facilities primarily handle petroleum products. Five of these terminaling facilities are located on or near U.S. military bases and have pipelines owned and operated by ST that deliver jet fuel directly to the bases. 8 The following table outlines ST's terminal locations, capacities, tanks and primary products handled.
Primary Tankage No. of Products Facility Capacity Tanks Handled -------- -------- ------ -------- (In MBbls) Primary Terminals: ------------------ Texas City, TX 1,987 123 Chemicals Westwego, LA(a) 858 54 Molasses, Fertilizer Baltimore, MD 826 50 Chemicals, Asphalt Inland terminals: ----------------- Stockton, CA 314 18 Petroleum Products Indianapolis, IN 410 18 Petroleum Products Macon, GA(b) 307 10 Petroleum Products, Jet Fuel Imperial, CA 124 6 Petroleum Products Columbus, GA 187 35 Petroleum Products, Chemicals Salina, KS(c) 65 9 Petroleum Products Chillicothe, IL 270 6 Petroleum Products Alamogordo, NM(b) 120 5 Jet Fuel Virginia Beach, VA(b) 40 2 Jet Fuel Drumright, OK 315 4 Jet Fuel Moundville, AL 310 6 Jet Fuel San Antonio,TX 207 4 Jet Fuel Winona, MN 229 7 Fertilizer Montgomery, AL(b) 162 7 Jet Fuel Tucson, Az 90(d) 7 Petroleum Products Bremen, GA 180 8 Petroleum Products, Jet Fuel Peru, IL 221 8 Petroleum Products, Jet Fuel Homestead, FL(b) 72 2 Jet Fuel Milwaukee, WI 308 7 Petroleum Products Augusta, GA(e) 110 8 Petroleum Products ----- --- Totals 7,712 404 ===== ===
(a) Terminal purchased on June 8, 1994. (b) Facility also includes pipelines to U.S. government military base locations. (c) Terminal purchased on January 18, 1994. (d) Represents 50% interest in 181 Mbbl terminal. (e) Terminal purchased on July 7, 1994. Description of Terminals Texas City, Texas. The Texas City facility is situated on 39 acres of land, leased from the Texas City Terminal Railway Company with long-term renewal options. It is located in Galveston County near the mouth of the Houston Ship Channel and is approximately sixteen miles from open water. The eastern end of the Texas City site is adjacent to three deep-water docking facilities, which are also owned by Texas City Terminal Railway. The three deep-water docks include two 36 foot draft docks and a 40 foot draft dock. ST is charged dockage and wharfage fees on a per vessel and per unit basis, respectively, by Texas City Terminal Railway, which it passes directly to the shipper or owner of the incoming or outgoing products. ST handles and stores a wide range of specialty chemicals, including petrochemicals, at the Texas City facility. The facilities are designed to accommodate a diverse product mix, and include (i) tanks equipped for the specific storage needs of the various products handled; (ii) piping and pumping equipment for moving the product between the tanks and the transportation modes; and (iii) an extensive infrastructure of support equipment. The tankage at Texas City is constructed of either mild carbon steel, stainless steel or aluminum. Certain of the tanks, piping and pumping equipment are equipped for special product needs, 9 including among other things, equipment that can control temperature, air pressure, air mixture or moisture. ST receives or delivers the majority of the specialty chemicals that it handles via ship or barge at Texas City. ST also receives and delivers liquids via rail tank cars and transport trucks. Additionally, the terminal has direct connections to refineries in Texas City. The Texas City tank facility consists of 123 tanks with a total capacity of approximately 1,987 Mbbls. All recently built tanks are equipped with "double bottoms," which provide a leak detection system between the primary and secondary bottom. ST's facility has been designed with several preventative structural measures to minimize the occurrence and level of damage in the event of a spill or fire. All loading areas, tanks, pipes and pumping areas are "contained" to collect any spillage and water run-off. Westwego, Louisiana. Acquired in June, 1994, the Westwego facility is situated on 27 acres of owned land adjacent to the West bank of the Mississippi River across from New Orleans. A new dock built in 1992 is capable of handling ocean going vessels and barges. The terminal has numerous handling facilities for receiving and shipping by rail and tank truck as well as vessels and barges. The Westwego terminal historically has been primarily a terminal for molasses, and animal and vegetable fats and oils. The former owner, PM Ag, Products, Inc., has contracted with ST for five years for terminaling at 5 large molasses tanks. In recent years, the terminal has broadened its product mix to include fertilizer, natural latex and caustic solutions. The facility includes a blending plant for the processing of certain molasses-based feeds and a laboratory for quality control and analysis. The facility consists of 54 large tanks with a total capacity of approximately 858,000 barrels. There are also approximately 30 smaller tanks for manufacturing and processing. Baltimore, Maryland. The Baltimore facility is situated on 18 acres of owned land, located just south of Baltimore near the Harbor Tunnel on the Chesapeake Bay. ST also owns a 700 ft. finger pier with a 33 foot draft channel and berth. The dock gives ST the ability to receive and distribute shipments of product by barge and ship. Similar to the Texas City facility, Baltimore is a specialty liquids terminal. The primary products handled at the Baltimore facility include asphalt, fructose, latex, caustic solutions and chemicals. ST receives and delivers a variety of products via ship, barge, rail, truck and a common carrier pipeline. The Baltimore tank facility consists of 50 tanks with a total capacity of approximately 826 Mbbls. The majority of the tanks are dedicated to specific products of customers under contract. Tanks are also customized to accommodate the requirements of different products. Inland Terminals. In addition to ST's three major facilities, ST has 20 inland terminal facilities throughout the United States. These facilities represented approximately 52% of ST's total tankage capacity and approximately 32% of its total revenue for 1994. Except for the facility in Columbus, Georgia, which primarily handles specialty chemicals, and the facility in Winona, Minnesota, which handles fertilizer solutions, these inland facilities receive, store and deliver petroleum products for a variety of customers. In 1994, terminaling and pipeline transportation of jet fuel for the U.S. Department of Defense represented 11% of ST's business. Ten of ST's twenty inland terminal sites are involved in the terminaling or transport (via pipeline) of jet fuel for the Department of Defense. Seven of the ten locations are utilized solely by the Department of Defense. Five of the ten locations include pipelines that deliver jet fuel directly to nearby military bases. The base closing list released by the Department of Defense on March 12, 1993 included the closure of the Naval Air Station in Glenview, Illinois which is served by ST's Terminal in Peru, Illinois. Additionally, the ST pipeline serving Homestead Air Force Base in Florida has been inactive due to lack of fuel usage at 10 the base since Hurricane Andrew in 1992. It is anticipated that the operation of that pipeline will begin again in 1995. ST does not believe that, in the aggregate, the inland terminals serving the U.S. Department of Defense will experience a significant decrease in cash flows for the foreseeable future as a result of Department of Defense changes in activity. However, the third party pipeline serving the Drumright, Oklahoma terminal reversed the direction of product flow in 1994 causing jet fuel to become unavailable at this location. Jet fuel is the only product handled at Drumright currently and ST is exploring alternative uses for this terminal. In the absence of an alternative use, this terminal may be forced to close. Competition The independent liquids terminaling industry is fragmented and includes both large, well financed companies that own many terminal locations and small companies that may own a single terminal location. ST is a member of the Independent Liquid Terminals Association ("ILTA"), which, among other functions, publishes a directory of terminal locations of its members throughout the United States. Customers with specific location and facility demands generally use the ILTA directory to identify the terminals in the region available for specific needs, and then select the preferred providers on the basis of service, specific terminal capabilities and environmental compliance. Customers then seek competitive proposals to ultimately select the terminal retained. In addition to the terminals owned by independent terminal operators, many major energy and chemical companies also own extensive terminal facilities. Although such terminals often have the same capabilities as terminals owned by independent operators, they generally do not provide terminaling services to third parties. In many instances, major energy and chemical companies that own storage and terminaling facilities are also significant customers of independent terminal operators. Such companies typically have strong demand for terminals owned by independent operators when independent terminals have more cost effective locations near key transportation links such as deep water ports. Major energy and chemical companies also need independent terminal storage when their captive storage facilities are inadequate, either because of size constraints, the nature of the stored material or specialized handling requirements. Independent terminal owners compete based on the location and versatility of terminals, service and price. A favorably located terminal will have access to varied cost effective transportation both to and from the terminal. Possible transportation modes include waterways, railroads, roadways and pipelines. Terminals located near deep water port facilities are referred to as "deep water terminals" and terminals without such facilities are referred to as "inland terminals" (some inland facilities are served by barges on navigable rivers). Terminal versatility is a function of the operator's ability to offer safe handling for a diverse group of products with complex handling requirements. The service function typically provided by the terminal includes, among other things, the safe storage of the product at specified temperature, moisture and other conditions, as well as loading and unloading at the terminal. An increasingly important aspect of versatility and the service function is an operator's ability to offer product handling and storage in compliance with environmental regulations. A terminal operator's ability to offer competitive pricing is often dependent on the quality, specifications and versatility of the facilities owned by the operator. Although many products require modest terminal modification, operators with a greater diversity of terminals with versatile storage applications typically require less modification prior to usage, ultimately reducing the storage cost. Several companies offering liquid terminaling facilities have significantly more capacity than ST. However, the majority of ST's tankage can be described as "niche" facilities that are equipped to properly handle "specialty" liquids or provide facilities or services where management believes they enjoy an advantage over competitors. Most of the larger operators, including GATX, Williams, Northville Industries, Petroleum Fuel & Terminal and Steuart Petroleum, have facilities used primarily for petroleum related products. Such specialty or "niche" tankage is less abundant in the U.S., and "specialty" liquids typically command higher premiums than lower-margin bulk terminaling for petroleum related products. 11 CAPITAL EXPENDITURES Capital expenditures by the Pipeline were $3.2 million, $5.1 million and $2.2 million, respectively, for each of the three years ended from December 31, 1992 to December 31, 1994. Approximately 66% of the aggregate of these capital expenditures related primarily to maintenance of existing operations and approximately 28% related to expansion projects. During these periods, adequate Pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not material in amount. Capital expenditures by ST were $6.0 million, $3.2 million and $17.3 million, respectively, for each of the three years ended from December 31, 1992 to December 31, 1994. In 1994, capital expenditures related primarily to acquisition of terminals at Salina, Kansas, Westwego, Louisiana, and Augusta, Georgia. Capital expenditures of the Partnership (including ST but excluding the Wyco system) for maintenance of existing operations during 1995 are expected to be approximately $7.0 million. Capital expenditures for expansionary purposes during 1995 are expected to be approximately $1.0 million. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Capital Resources and Liquidity"). Additional expansionary capital expenditures will depend on future opportunities to expand the Partnership's operation. The General Partner intends to finance future expansive and some environmental capital expenditures primarily through Partnership borrowings. Such future expenditures, however,will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and federal governmental regulations and fuel conservation efforts and the availability of financing on acceptable terms. No assurance can be given that required capital expenditures will not exceed anticipated amounts during the year or thereafter or that the Partnership will be able to finance such expenditures through borrowing. REGULATION Interstate Regulation General. The interstate common carrier pipeline operations of the Partnership are subject to rate regulation by the FERC under the Interstate Commerce Act. The Interstate Commerce Act provides, among other things, that to be lawful the rates of common carrier petroleum pipelines be "just and reasonable" and not unduly discriminatory. New and changed rates must be filed with the FERC, which may investigate their lawfulness on protest or its own motion. The FERC may suspend the effectiveness of such rates for up to seven months. If the suspension expires before completion of the investigation, the rates go into effect, but the pipeline can be required to refund to shippers, with interest, any difference between the level the FERC determines to be lawful and the filed rates under investigation. Rates that have become final and effective may be challenged by complaint to a Court or the FERC, and reparations may be recovered by the party filing the complaint for the two year period prior to the complaint if the FERC finds the rate to be unlawful. The only challenge to a rate change proposed by the Partnership was filed in 1974. The Partnership's final and effective rates have never been challenged by complaint in a court or to the FERC. The Partnership's current rates became final and effective in July 1992. On February 25, 1994, the Partnership filed an approximately 5.5% tariff increase which became effective April 1, 1994. Under Title XVIII of the Energy Policy Act of 1992, rates that were in effect on October 25, 1991 are deemed to be just and reasonable. Such rates are subject to challenge only for limited reasons, relating to substantial changed circumstances in either the economic circumstances of the subject pipeline or the nature of the services, or to a contractual bar that prevented the complainant from previously challenging the rates. Any relief granted pursuant to such challenges may be prospective only. The Partnership believes that its currently effective tariffs are just and reasonable and would withstand challenge under the FERC's cost-based rate standards. Because of the complexity of rate making, however, the lawfulness of any rate is never assured. 12 In general, petroleum product pipeline rates are cost-based. Such rates are permitted to generate operating revenues, based on projected volumes, not greater than the total of the following components: (i) operating expenses, (ii) depreciation and amortization, (iii) federal and state income taxes (determined on a separate company basis and adjusted or "normalized" to avoid year to year variations in rates due to the effect of timing differences between book and tax accounting for certain expenses, primarily depreciation) and (iv) an overall allowed rate of return on the pipeline's "rate base". Generally, rate base is a measurement of the investment in, or value of, the common carrier assets of a petroleum products pipeline. In 1985, the FERC began issuing a series of Opinions ("FERC Opinions") providing that oil pipeline rates would continue to be cost-based. The FERC Opinions required that the rate base be calculated by the net depreciated trended original cost ("TOC") methodology. Under the TOC methodology, after a starting rate base has been determined, a pipeline's rate base is to be (i) 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 (ii) decreased by property retirements, depreciation and amortization of rate base write-ups reflecting inflation. The FERC Opinions allow for a rate of return for petroleum products pipelines determined by adding (i) the product of a rate of return equal to the nominal cost of debt multiplied by the portion of the rate base that is deemed to be financed with debt and (ii) the product of a rate of return equal to the real (i.e., inflation-free) cost of equity multiplied by the portion of the rate base that is deemed to be financed with equity. The appropriate rate of return for a petroleum pipeline is determined on a case-by-case basis, taking into account cost of capital, competitive factors and business and financial risks associated with pipeline operations. The Interstate Commerce Commission, which regulated oil pipelines until 1978, had formerly determined rate base by using a current valuation methodology. The FERC Opinions abandoned the valuation methodology and required pipelines to establish a transition rate base for the pipeline's existing plant. The transition rate base, called the "starting rate base," is the sum of (i) the net depreciated original cost of the pipeline's property multiplied by the ratio of debt to total capitalization and (ii) the net depreciated reproduction portion of the valuation rate base as of 1983, multiplied by the ratio of equity to total capitalization. The original cost of land, rights of way less book depreciation, allowed working capital and plant less book depreciation that were not included in the 1983 valuation may be added to the starting rate base. The actual capital structure as of June 28, 1985 of either the pipeline or its parent is used to establish the starting rate base. In general, the pipeline's structure is used if the pipeline issues long-term debt to outside investors without any parent guarantee and the parent's structure is used if the pipeline has no long-term debt, issues long-term debt to its parent, or its long-term debt is guaranteed by its parent. In individual cases, however, the FERC may determine that the actual capital structure of the pipeline or its parent is inappropriate for rate regulation purposes. The FERC may then impute to the pipeline the capital structure it deems appropriate to the pipeline's risk. In addition to the TOC methodology, the FERC has indicated a willingness to consider departures from cost-of-service rates depending upon whether a pipeline's individual markets are sufficiently competitive. In a proceeding involving Buckeye Pipeline Company, the Commission invited jurisdictional pipelines to demonstrate that they lack market power in all or some of their markets. In Buckeye, the FERC accepted a three-year experimental program of lighthanded regulation of the pipeline's rates. Under the program, the Commission permitted the use of the weighted average of Buckeye's actual rates in those markets where it lacked significant market power to determine the price cap for rates in non-competitive markets. 13 The Partnership has not attempted to depart from cost-based rates. Instead, it has continued to rely on the TOC methodology. Title XVIII of the Energy Policy Act of 1992 ("EPAct") required the FERC to issue a ruling establishing a simplified and generally applicable rate making methodology for oil pipelines no later than October 24, 1993. FERC was also required to issue a final rule to streamline procedures relating to oil and product pipeline rates "in order to avoid unnecessary regulatory costs and delays" no later than April 24, 1994. On October 22, 1993, the FERC issued Order No. 561 implementing the EPAct. Order No. 561, among other things, adopted simplified and generally acceptable rate making methodology for oil pipelines in the form of indexation. Indexation, which is also known as price cap regulation, establishes ceiling prices on oil pipeline rates based on application of a broad-based measure of inflation in the general economy to existing rates. On October 28, 1994, after numerous hearings and public comment periods, FERC issued the final rules on Order No. 571 and 572 which were companion orders to Order No. 561. That final rule (issued October 28, 1994) amended FERC's regulations to establish filing requirements for oil pipelines for cost-of-service rate filings; filing requirement for oil pipelines seeking to establish new or to change depreciation rates; and new and revised pages of the FERC Form No. 6, "Annual Report for Oil Pipelines". Intrastate Regulation The Pipeline's intrastate operations in Kansas are subject to regulation by the Kansas Corporation Commission ("KCC"). Beginning in 1995, intrastate operations in Colorado and Wyoming will be subject to regulation by authorities in those states. The Partnership's revenues for intrastate service in Kansas accounted for 6% of its total transportation operating revenues for the year ended December 31, 1994. The Partnership expects this relationship to continue in the future. The KCC requires that shippers be notified of proposed intrastate tariff increases in Kansas and have an opportunity to protest such increases. KPOP also files with the KCC copies of interstate tariff changes filed with the FERC. KPOP has never had a protest filed with the KCC against an intrastate rate increase although it withdrew an interstate filing filed with the KCC in 1974 due to a protest. In addition to challenges to new or proposed rates, challenges to intrastate rates which have already become effective are permitted by complaint of an interested person or by independent action of the KCC. ENVIRONMENTAL MATTERS General The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes that its operations are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership. Water The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they pertain to prevention and response to oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, along shorelines, or in the exclusive economic zone. In the event of an oil spill into such waters, substantial liabilities could be imposed upon the Partnership. States in which the Partnership operates have also 14 enacted similar laws. Regulations are currently being developed under OPA and state laws which may also impose additional regulatory burdens on the Partnership. The Pipeline crosses several navigable rivers and streams. The FWPCA imposes strict controls against the discharge of oil and its derivatives into navigable waters. The FWPCA provides penalties for any discharges of petroleum products in reportable quantities and imposes substantial potential liability for the costs of removing an oil spill. State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of a release of petroleum or its derivatives in surface waters or into the groundwater. Contamination resulting from spills or releases of refined petroleum products are not unusual within the petroleum pipeline industry. The Pipeline has experienced limited groundwater contamination at three terminal sites (Milford, Iowa, Norfolk, Nebraska and Yankton, South Dakota) resulting from spills of refined petroleum products. Regulatory authorities have been notified of these findings and cleanup is underway using extraction wells and air strippers. The Partnership estimates that $420,000 has been expended to date for remediation at these three sites and that ongoing remediation expenses will be less than $5,000 per year for the next several years. Groundwater contamination is also known to exist at Pipeline sites in Augusta, Kansas and in Potwin, Kansas, but no remediation has been required. Although no assurances can be made, if remediation is required, the Partnership believes that the resulting cost would not be material. The Partnership is also evaluating possible groundwater contamination at a Pipeline pumping and storage site at El Dorado, Kansas. However, the Partnership believes that a third party is liable for the possible contamination. The Pipeline experienced a spill due to third party damage during the first quarter of 1991. Remediation of the groundwater impacted by this spill has been underway since the second quarter of 1991. The Partnership estimates that on-going remediation expenses will be in the range of $10,000 to $15,000 per year. Regulatory authorities have been notified. The Partnership has filed suit against the third party seeking compensation for damages. During 1994, the Pipeline experienced a seam rupture of its 8" northbound line in Nebraska in January and another similar rupture on the same line in April. As a result of these ruptures, KPOP reduced the maximum operating pressure on this line to 60% of the Maximum Allowable Operating Pressure ("MAOP") and, on May 24, commenced a hydrostatic test to determine the integrity of over 80 miles of that line. The test was completed on the entire 80 miles on May 29, 1994, and the line was authorized to return to approximately 80% of MAOP pending review by the Department of Transportation ("DOT") of the hydrostatic test results. On July 29, 1994, the DOT authorized most of the line to return to the historical MAOP. Approximately 30 miles of the line was authorized to return to slightly less than historical MAOP. The amount of remediation expenses that will be required as a result of the rupture in January and April has not yet been determined but these expenses are not expected to have a material effect upon the results of the Partnership. ST has experienced groundwater contamination at its terminal sites at Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have been notified of these findings and cleanup is underway using extraction wells and air strippers. Groundwater contamination also exists at the ST terminal site in Stockton, California and in the areas surrounding this site as a result of the past operations of five of the facilities operating in this area. ST has entered into an agreement with three of these other companies to allocate responsibility for the clean up of the contaminated area. Under the initial estimate of remedial costs the parties (including ST) at Stockton would pay in total approximately $752,000. However, the remediation costs have not been finalized and could ultimately increase or decrease. In addition, ST is responsible for up to two-thirds of the costs associated with existing groundwater contamination at a formerly owned terminal at Marcy, New York, which also is being remediated through extraction wells and air strippers. The Partnership estimates that approximately $350,000 has been expended by the Partnership 15 to date for remediation at these four sites and that on-going remediation expenses average $100,000 to $150,000 per year for the next several years. Groundwater contamination has been identified at ST terminal sites at Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken place. Shell Oil Company has indemnified ST for any contamination at the Milwaukee site prior to ST's acquisition of such facility. Star Enterprise has indemnified ST for contamination at a portion of the Montgomery site where contamination has been identified prior to ST's acquisition of the facility. There is also a possibility that groundwater contamination may exist at other facilities. Although no assurance in this regard can be given, the Partnership believes that such contamination, if present, could be remedied with extraction wells and air strippers similar to those that are currently in use and that resulting costs would not be material. In 1991, the Environmental Protection Agency (the "EPA") implemented regulations expanding the definition of hazardous waste. The Toxicity Characteristic Leaching Procedure ("TCLP") has broadened the definition of hazardous waste by including 25 constituents that were not previously included in determining that a waste is hazardous. Water that comes in contact with petroleum may fail the "TCLP" procedure and require additional treatment prior to its disposal. The Partnership plans to install totally enclosed wastewater treatment systems at all Pipeline terminal sites to treat such petroleum contaminated water, especially tank bottom water. Previously, this waste water was disposed of in evaporation ponds located at each site. The Pipeline has discontinued this practice and is installing onsite treatment systems. These systems, the installation of which commenced in 1993, will be completed in 1995. The EPA has promulgated regulations that may require the Partnership to apply for permits to discharge storm water runoff. Storm water discharge permits also may be required in certain states in which the Partnership operates. Where such requirements are applicable, the Partnership has applied for such permits and, after the permits are received, will be required to sample storm water effluent before releasing it. The Partnership believes that effluent limitations could be met, if necessary, with minor modifications to existing facilities and operations. Although no assurance in this regard can be given, the Partnership believes that the changes will not have a material effect on the Partnership's financial condition or results of operations. Aboveground Storage Tank Acts A number of the states in which the Partnership operates have passed statutes regulating aboveground tanks containing liquid substances. Generally, these Acts require that such tanks include secondary containment systems or that the operators take certain alternative precautions to ensure that no contamination results from any leaks in the tanks. Although there is not currently a federal statute regulating these aboveground tanks, there is a possibility that such a law will be passed within the next couple of years. The Partnership is in substantial compliance with all aboveground storage tank laws in the states with such laws. Although no assurance can be given, the Partnership believes that the future implementation of aboveground storage tank laws by either additional states or by the federal government will not have a material adverse effect on the Partnership's financial condition or results of operations. Air Emissions The operations of the Partnership are subject to the Federal Clean Air Act and comparable state and local statutes. The Partnership believes that the operations of the Pipeline are in substantial compliance with such statutes in all states in which it operates. Amendments to the Federal Clean Air Act enacted in late 1990 will require most industrial operations in the United States to incur future capital expenditures in order to meet the air emission control standards that are to be developed and implemented by the EPA and state environmental agencies during the next 16 decade. Pursuant to these Clean Air Act Amendments, those Partnership facilities that emit volatile organic compounds ("VOC") or nitrogen oxides and are located in non-attainment areas will be subject to increasingly stringent regulations, including requirements that certain sources install reasonably available control technology. The EPA is also required to promulgate new regulations governing the emissions of hazardous air pollutants. Some of the Partnership's facilities are included within the categories of hazardous air pollutant sources which will be affected by these regulations. Additionally, new dockside loading facilities owned or operated by the Partnership will be subject to the New Source Performance Standards that were scheduled for proposal in late 1992. These regulations will control VOC emissions from the loading and unloading of tank vessels. Although the Partnership is in substantial compliance with applicable air pollution laws, in anticipation of the passage of stricter air control regulations, the Partnership is taking actions to substantially reduce its air emissions. The Pipeline plans to install bottom loading and vapor recovery equipment on the loading racks at almost all of the terminal sites that do not already have such emissions control equipment. These modifications are expected to reduce substantially the total air emissions from each of these facilities. Having begun in 1993, this project is being phased in over a period of years at an approximate cost of $5.0 million. Another project that is underway is the installation of marine vapor collection equipment and a large flare at the Texas City terminal site. This Texas City project is estimated to cost approximately $2.0 million and to be completed by the end of 1995. Solid Waste The Partnership generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA is considering the adoption of stricter disposal standards for non-hazardous wastes. RCRA also governs the disposal of hazardous wastes. At present, the Partnership is not required to comply with a substantial portion of the RCRA requirements because the Partnership's operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during Pipeline operations, will in the future be designated as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Partnership. At the terminal sites at which groundwater contamination is present, there is also limited soil contamination as a result of the aforementioned spills. The Partnership is under no present requirements to remove these contaminated soils, but the Partnership may be required to do so in the future. Soil contamination also may be present at other Partnership facilities at which spills or releases have occurred. Under certain circumstances, the Partnership may be required to clean up such contaminated soils. Although these costs should not have a material adverse effect on the Partnership, no assurance can be given in this regard. Superfund The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Partnership may generate waste which may fall within the CERCLA's definition of a "hazardous substance". The Partnership may be responsible under the CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed. 17 ST has been named a potentially responsible party for a site located at Elkton, Maryland, operated by Spectron, Inc. until August of 1988. This site is presently under the oversight of the EPA and is listed as a federal "Superfund" site. A small amount of material handled by Spectron was attributed to ST. The Partnership believes that ST will be able to settle its potential obligation in connection with this matter for an aggregate cost of approximately $10,000. However, until a final settlement agreement is signed with the EPA, there is a possibility that the EPA could bring additional claims against ST. Environmental Impact Statement The National Environmental Policy Act of 1969 (the "NEPA") applies to certain extensions or additions to a pipeline system. Under NEPA, if any project that would significantly affect the quality of the environment requires a permit or approval from any federal agency, a detailed environmental impact statement must be prepared. The effect of the NEPA may be to delay or prevent construction of new facilities or to alter their location, design or method of construction. Indemnification Kaneb has agreed to indemnify the Partnership against liabilities for damage to the environment resulting from operations of the Pipeline prior to October 3, 1989. Such indemnification does not extend to any liabilities that arise after such date to the extent such liabilities result from changes in environmental laws or regulations. Nevertheless, the Company will remain liable for the remediation of groundwater contamination resulting from three spills and the possible groundwater contamination at a pumping and storage site referred to under "---Water" to the standards that are in effect at the time such remediation operations are concluded. In addition, ST's former owner has agreed to indemnify the Partnership against liabilities for damages to the environment from operations conducted by such former owner prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000 until an aggregate amount of $10 million has been paid by ST's former owner. With regard to the Wyco acquisition, Wyco's former owners have agreed to indemnify the Partnership against unknown environmental damages from operations conducted by Wyco prior to February 24, 1995. The indemnity, which expires in August 1999 is limited in amount to 50% of any claim exceeding $150,000 for the next $900,000 in claims, then 100% of the next $2,950,000 in environmental damages. SAFETY REGULATION The Pipeline is subject to regulation by the Department of Transportation under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA") relating to the design, installation, testing, construction, operation, replacement and management of its pipeline facilities. The HLPSA covers petroleum and petroleum products and requires any entity that owns or operates pipeline facilities to comply with such plan, to permit access to and copying of records and to make certain reports and provide information as required by the Secretary of Transportation. The Federal Pipeline Safety Act of 1992 amended the HLPSA to include requirements for the future use of internal inspection devices. The Partnership does not believe that it will be required to make any substantial capital expenditures to comply with the requirements of HLPSA as so amended. The Partnership is subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The Partnership believes that it is in general compliance with OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to benzene. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the Federal Superfund Amendment and Reauthorization Act, and comparable state statutes require the Partnership to organize information about the hazardous materials used in its operations. Certain parts of this information must be reported to employees, state and local governmental authorities, and local citizens upon request. In general, the Partnership expects to increase its expenditures during the next decade to 18 comply with higher industry and regulatory safety standards such as those described above. Such expenditures cannot be accurately estimated at this time, although they are not expected to have a material adverse impact on the Partnership. EMPLOYEES The Partnership has no employees. The Pipeline business of the Partnership is conducted by its general partner, Kaneb Pipe Line Company, which at December 31, 1994, employed 144 persons, approximately 50 of whom were salaried and, approximately 94 of whom were hourly rate employees. Approximately 94 persons employed by the Company were subject to representation by unions for collective bargaining purposes; however, there were no collective bargaining contracts covering the Company employees in effect at December 31, 1994. The Partnership's liquids terminaling business is conducted through ST subsidiaries which at December 31, 1994, employed 176 persons, approximately 104 of whom were salaried and, approximately 72 of whom were hourly rate employees. Approximately 33 persons employed by ST were subject to representation by the Oil, Chemical and Atomic Workers International Union AFL-CIO (OCAW). ST has an agreement with OCAW regarding conditions of employment for the above persons which is in effect through June 28, 1996. This agreement is subject to automatic renewal for successive one-year periods unless ST or OCAW serves written notice to terminate or modify such agreement in a timely manner. ITEM 2. PROPERTIES Descriptions of properties owned or utilized by the Partnership are contained in Item 1 of this report and such descriptions are hereby incorporated by reference into this Item 2. Under the captioned "Leases" in notes to the Partnership's financial statements included in Item 8 herein below, additional information is presented concerning obligations for lease and rental commitments. Said additional information is hereby incorporated by reference into this Item 2. ITEM 3. LEGAL PROCEEDINGS The Partnership is a party to several lawsuits arising in the ordinary course of business. Subject to certain deductibles and self-insurance retentions, substantially all the claims made in these lawsuits are covered by insurance policies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In July, 1994, the unitholders of the Partnership overwhelmingly approved a consent solicitation amending the Partnership Agreement to allow the Partnership to issue up to an additional 7.5 million Senior Preference Units. The Partnership has no current plans to issue these units, however, this gives the Partnership added flexibility for future acquisitions or refinancing. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND RELATED UNITHOLDER MATTERS The Partnership's senior preference limited partner interests ("Senior Preference Units") are listed and traded on the New York Stock Exchange. At March 17, 1995, there were approximately 1,164 Senior Preference Unitholders of record. Set forth below are Senior Preference Unit prices on the New York Stock Exchange and cash distributions per Senior Preference Unit paid for the periods indicated.
SENIOR PREFERENCE CASH UNIT PRICES DISTRIBUTIONS ----------------------- YEAR HIGH LOW DECLARED ---- --- -------- 1993: First Quarter 26 1/2 20 7/8 .55 Second Quarter 26 3/8 23 .55 Third Quarter 26 1/2 22 7/8 .55 Fourth Quarter 28 1/8 26 3/8 .55 1994: First Quarter 28 3/8 24 1/4 .55 Second Quarter 26 3/8 23 5/8 .55 Third Quarter 26 23 1/2 .55 Fourth Quarter 25 3/8 20 1/2 .55 1995: First Quarter 24 1/2 20 5/8 .55 (through March 17, 1995)
The Partnership has paid the Minimum Quarterly Distribution on each outstanding Senior Preference Unit for each quarter since the Partnership's inception. The Partnership has also paid the Minimum Quarterly Distribution on Preference Units with respect to all quarters since inception of the Partnership, except for the failure to pay distributions in the second, third and fourth quarters of 1991 totalling $9,323,000. All such arrearages have since been satisfied and none remain as of December 31, 1994. No distributions were paid on the outstanding Common Units, which are not entitled to arrearages in the payment of the Minimum Quarterly Distribution thereon, until 1994 when distributions totalling $1,738,000 were paid. Under the terms of its financing agreements, the Partnership is prohibited from declaring or paying any distribution if a default exists thereunder. 20 ITEM 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth, for the periods and at the dates indicated, selected historical financial and operating data for Kaneb Pipe Line Partners, L.P. and Subsidiaries ("Partnership"). The data in the table (in thousands, except per unit amounts) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, -------------------------------------------------------- 1990 1991 1992 1993(a) 1994 ------ ------ ------ ------- ------ INCOME STATEMENT DATA: Revenues......................... $37,618 $39,415 $42,179 $69,235 $78,745 ------- ------- ------- ------- ------- Operating costs.................. 12,588 14,337 14,507 29,012 33,586 Depreciation and amortization.... 3,333 3,519 4,124 6,135 7,257 General and administrative....... 2,916 2,861 2,752 4,673 4,924 Legal expenses for tariff protest........................ 400 2,172 - - - ------- ------- ------- ------- ------- Total costs and expenses....... 19,237 22,889 21,383 39,820 45,767 ------- ------- ------- ------- ------- Operating income................. 18,381 16,526 20,796 29,415 32,978 Interest and other income........ 2,093 1,751 1,721 1,331 1,299 Interest expense................. (2,321) (2,259) (2,338) (3,376) (3,706) Minority interest................ (183) (159) (200) (266) (295) ------- ------- ------- ------- ------- Income before income taxes....... 17,970 15,859 19,979 27,104 30,276 Income taxes (b)................. - - - (450) (818) ------- ------- ------- ------- ------- Net income....................... $17,970 $15,859 $19,979 $26,654 $29,458 ======= ======= ======= ======= ======= Allocation of net income per Senior Preference Unit (c)..... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 ======= ======= ======= ======= ======= Cash distributions declared per Senior Preference Unit......... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 ======= ======= ======= ======= ======= BALANCE SHEET DATA (AT PERIOD END): Property and equipment, net...... $67,045 $68,255 $66,956 $133,436 $145,646 Total assets..................... 88,610 88,530 86,409 162,407 163,105 Long-term debt................... 15,368 16,941 20,864 41,814 43,265 Partners' capital................ 60,310 61,918 55,657 100,598 99,754
(a) Includes the operations of ST since its acquisition on March 2, 1993. (b) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in a taxable entity. (c) Net income of the Partnership for each reporting period is allocated to the Senior Preference Units (SPU) in an amount equal to the cash distributions to the SPU declared for that reporting period. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the summary historical and pro forma financial and operating data included elsewhere in this report. GENERAL In September, 1989 Kaneb Pipe Line Company ("Company"), a wholly owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed a master limited partnership, Kaneb Pipe Line Partners, L.P. ("Partnership"), to own and operate its refined petroleum products pipeline business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. The Partnership's business consists primarily of the transportation, as a common carrier, of refined petroleum products, including propane, from refineries and pipeline connections in Kansas to destinations in Kansas, Nebraska, Iowa, South Dakota and North Dakota, and related terminaling activities. The Partnership owns a 2,075 mile integrated pipeline system with 16 terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota. The pipeline serves oil companies, railroads and farm cooperatives in such states and in portions of three adjoining states. Three refineries have direct access to the pipeline; these refineries obtain crude oil primarily from producing areas in Kansas, Oklahoma and Texas. Effective March 2, 1993, the Partnership acquired, through KPOP, Support Terminal Services, Inc. ("ST"), a petroleum products and specialty liquids storage and terminaling company headquartered in Dallas, Texas, for approximately $65 million (including $2 million in acquisition costs). In connection with the acquisition, the Partnership borrowed $65 million from a group of banks. In April 1993, the Partnership completed a public offering of 2.25 million Senior Preference Units at $25.25 per unit. The bank loan was partially repaid with $50.8 million of the proceeds from the offering. The Partnership continually evaluates other potential acquisitions. The Pipeline's common carrier operations are subject to federal or state tariff regulation. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products. The Partnership's business depends in large part on (i) the level of demand for refined petroleum products in the geographic locations served by the pipeline and (ii) the ability and willingness of refiners and marketers having access to the pipeline to supply such demand by deliveries through the pipeline. RESULTS OF PARTNERSHIP OPERATIONS Net income increased $2.8 million or 11% in 1994 to $29.5 million due primarily to the inclusion of ST results for the full year in 1994 versus the 10 months in 1993 from the acquisition in March 1993. The increase in interest expense is attributable to the acquisition debt incurred for ST. PIPELINE OPERATIONS
Year Ended December 31, -------------------------------- 1994 1993 1992 -------- -------- -------- Revenues $46,117 $44,107 $42,179 Operating costs 17,777 16,453 14,507 Depreciation and amortization 4,276 4,055 4,124 General and administrative 2,908 3,132 2,752 ------- ------- ------- Operating income $21,156 $20,467 $20,796 ======= ======= =======
22 Revenues increased 5% in both 1994 and 1993. KPOP implemented a tariff increase of approximately 5.5% in April, 1994 and approximately 5.6% in July, 1992. Barrel miles increased 2% in both 1994 and 1993. The increase in barrel miles is primarily due to increased long-haul shipments related to product pricing advantages for shippers to western area terminals served by the Pipeline. Operating costs increased 8% in 1994 and 13% in 1993. Property taxes increased $.3 and $.9 million in 1994 and 1993, respectively. The 1994 increase was primarily due to tax rate adjustments in Kansas and Nebraska and the 1993 increase was primarily due to non-recurring refunds received in 1992 and tax rate adjustments in Nebraska. Power costs increased by $.6 million in 1994 due to increased barrel miles, utility rates and increased usage of drag reducer. Material, supplies and outside services increased $.4 million in 1994 primarily due to unusually high repair and maintenance expenditures. TERMINALING OPERATIONS
Year Ended December 31, -------------------------------- 1994 1993 1992 -------- -------- -------- Pro Forma (Unaudited) Revenues $32,628 $29,921 $26,852 Operating costs 15,809 15,064 13,500 Depreciation and amortization 2,981 2,496 2,242 General and administrative 2,016 1,949 1,442 ------- ------- ------- Operating income $11,822 $10,412 $ 9,668 ======= ======= =======
Revenues increased $2.7 million in 1994 as average tankage utilized increased .2 million barrels to 6.1 million barrels compared to 5.9 million barrels in 1993. Revenues per barrel stored increased by $.26 in 1994 to $5.33 per barrel. LIQUIDITY AND CAPITAL RESOURCES The Partnership borrowed approximately $10 million on its term facility in the fourth quarter of 1993 in anticipation of terminal acquisitions to be made in 1994. The ratio of current assets to current liabilities decreased to .8 to 1 at December 31, 1994 from 1.29 to 1 at December 31, 1993 primarily as a result of terminal acquisitions in 1994 funded from the Partnership's cash balances. Cash provided by operating activities was $37.9 million, $37.2 million, and $26.6 million for the years 1994, 1993 and 1992, respectively. The increase in cash flow from operating activities in 1993 was due to the acquisition of ST. Capital expenditures were $19.5 million, $8.1 million and $3.2 million for the years 1994, 1993 and 1992, respectively. Included in 1994 capital expenditures are three terminal acquisitions by ST that totalled $12.3 million. During these periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not material. Capital expenditures for 1995 are expected to be approximately $8.0 million, excluding the Wyco acquisition. The Partnership makes distributions of 100% of its Available Cash to holders of LP Units and the General Partner. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and 1992. In 1995, the Partnership anticipates distributing $2.20 per Senior Preference Unit, which is the annualized Minimum Quarterly Distribution. During 1994, 1993, and 1992, the Partnership paid distributions of $12.3 million ($2.20 per unit), $19.3 million ($2.20 per unit and $1.21 per unit in arrearages) and $15.0 million ($2.20 per unit and $.45 per unit in arrearages) to the Preference Unitholders. During 1994, the Partnership paid distributions of $1.7 million ($.55 per unit) to the Common Unitholders. 23 The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities and expansionary capital expenditures are expected to be funded through Partnership borrowings. In 1994, a wholly-owned subsidiary of the Partnership sold $33 million of notes to a group of insurance companies. The notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, KPOP entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through November 30, 1997. The credit facility bears interest at variable rates and has a commitment fee of .2% per annum of the unused credit facility. No amounts were drawn under this credit facility at December 31, 1994. The notes and credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership. Effective February 24, 1995, the Partnership, through KPOP, acquired the refined petroleum product pipeline assets of Wyco Pipe Line Company for $27.1 million. The acquisition was financed by the sale of additional first mortgage notes to three insurance companies. The notes are due February 24, 2002 and bear interest at the rate of 8.37% per annum. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Partnership begin on page F-1 of this report. Said information is hereby incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership is a limited partnership and has no directors. The Partnership is managed by the Company as general partner. Set forth below is certain information concerning the directors and officers of the Company. All directors of the Company are elected annually by Kaneb, as its sole stockholder. All officers serve at the discretion of the Board of Directors of the Company.
Senior Preference Years of Units Beneficially Percentage Position with Service Owned at March 17, of Name Age the Company in Office 1995 (13) Class ---- --- ------------- --------- ------------------ ---------- Edward D. Doherty 59 Chairman of the Board 6 (1) 8,326 * Leon Hutchens 60 President 2 (2) 148 * Douglas M. Easum 56 Vice President - 6 (3) -0- Business Development Howard C. Wadsworth 50 Vice President - Treasurer & Secretary 4 (4) -0- Jimmy L. Harrison 41 Controller 3 (5) -0- John R. Barnes 50 Director 8 (6) 76,600 1% C.E. Bentley 73 Director 6 (7) -0- Sangwoo Ahn 56 Director 6 (8) 35,000 * Preston A. Peak 72 Director 6 (9) -0- James R. Whatley 68 Director 6(10) 21,000 * Ralph A. Rehm 49 Director 4(11) -0- Murray A. Biles 63 Director 10(12) 500 * ------- All Directors and Officers as a group (12 persons) 141,574 2% =======
____________________________________________________________ * Less than one percent (1) Mr. Doherty, Chairman of the Board of the Company since September 1989, is also Senior Vice President of Kaneb. In addition to the Senior Preference Units set forth above, Mr. Doherty owns 75,000 Common Units representing an aggregate limited partnership interest of less than one percent. (2) Mr. Hutchens has served as President of the Company since January 1994. Having been with the Company since January 1960, Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981 and Vice President - Transportation until assuming his present position. (3) Mr. Easum has served the Company as Vice President of Business Development since August 1988, prior to which he was Director of Purchasing with Union Pacific Railroad Company since August 1980. (4) Mr. Wadsworth also serves as an officer of Kaneb. Mr. Wadsworth joined Kaneb in October, 1990, prior to which he served as general manager of Dorchester Hugoton, Ltd. for more than five years. (5) Mr. Harrison has served as Controller of the Company since November, 1992. Mr. Harrison was previously employed in various financial positions, including Assistant Secretary and Treasurer, by ARCO Pipe Line Company since April 1974. (6) Mr. Barnes, a director of the Company, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. In addition to the Senior Preference Units set forth above, Mr. Barnes owns 79,000 common and 60,500 preference units representing an aggregate limited partner interest of approximately 1%. 25 (7) Mr. Bentley, a director of the Company since July 1989, is also a director of Kaneb. Mr. Bentley has been President of Bentley Investment Corp., a private investment firm, since November 1985. (8) Mr. Ahn, a director of the Company since July 1989, is also a director of Kaneb. Mr. Ahn has been a partner of Morgan Lewis Githens & Ahn, L.P., an investment banking firm, since 1982 and currently serves as a director of Broadcasting Partners, Inc., Haynes International, Inc., ITI Technologies, Inc., PAR Technology, Inc., Quaker Fabric Corporation, and Stuart Entertainment, Inc. (9) Mr. Peak, a director of the Company since July 1989, is also a director of Kaneb. Mr. Peak has been General Partner of Dorchester Hugoton, Ltd., an oil and gas exploration and production partnership, for more than the past five years. (10) Mr. Whatley, a director of the Company since July 1989, is also a director of Kaneb. In addition to serving as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989, Mr. Whatley was elected and served in the additional offices of President and Chief Executive Officer of Kaneb from June until October 1986. He also serves as a director of United Financial Group, Inc.. (11) Mr. Ralph Rehm, who is also a director of Kaneb, is President of Northlake Consulting Company, which provides financial consulting services. Mr. Rehm provided consulting services on behalf of one of Kaneb's subsidiaries in 1993 and 1994. Mr. Rehm previously was engaged in financial consulting services for Northlake Consultants from June 1989 to May 1990, prior to which he served as Senior Vice President of Finance and Administration of Kaneb from December 1986. (12) Mr. Biles joined the Company in November 1953 and served as President from January 1985 until his retirement at the close of 1993. He presently serves as a Director of the Company. (13) Units of the Partnership listed are those which are owned by the person indicated, his spouse or children living at home. None of the directors of the Company owns more than two percent of the outstanding Senior Preference Units of the Partnership. Each director had sole power with respect to the Units attributed to him. AUDIT COMMITTEE Messrs. Sangwoo Ahn and James R. Whatley currently serve as the members of the Audit Committee of the Company. Such Committee will, on an annual basis, or more frequently as such Committee may determine to be appropriate, review policies and practices of the Company and the Partnership and deal with various matters as to which conflicts of interest may arise. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Board of Directors does not have a compensation committee or any other committee that performs the equivalent functions. During the fiscal year ended December 31, 1994, none of the Company's officers or employees participated in the deliberations of the Company's Board of Directors concerning executive officer compensation. 26 ITEM 11. EXECUTIVE COMPENSATION The Partnership has no executive officers, but is obligated to reimburse the Company for compensation paid to the Company's executive officers in connection with their operation of the Partnership's business. The following table sets forth information with respect to the aggregate compensation paid or accrued by the Company during the fiscal years 1994, 1993 and 1992, to the President and each of the most highly compensated executive officers and other key policy making personnel of the Company whose aggregate cash compensation exceeded $100,000. SUMMARY COMPENSATION TABLE -------------------------- ANNUAL COMPENSATION -------------------
Name and Principal Other Annual All Other Position Year Salary Bonus Compensation(1) Compensation (2) --------- ---- ------ ----- --------------- ---------------- Leon Hutchens 1994 $158,403 -- -- $6,465 President 1993 132,375 -- 5,561 1992 125,475 -- 5,340 Douglas M. Easum 1994 $125,054 -- $5,795 Vice President- 1993 121,967 -- $6,000(3) 6,232 Bus. Development 1992 119,048 -- 6,015
_________________________ (1) Does not include the values of the personal use of Company paid club memberships, nor the personal use of assets, facilities and services of Company employees. The aggregate amount of additional benefits or compensation to any of the individuals listed in the Summary Compensation Table above did not exceed 10% of the reported compensation. (2) Represents the Company's annual contributions in 1994 to Kaneb's defined contribution thrift plan in which all of the individuals listed in the Summary Compensation Table above were 100% vested with respect to the amounts indicated. (3) Represents a lump sum payment in lieu of cost-of-living salary increases in 1992 and 1993. Retirement Plan Effective April 1, 1991, Kaneb established a defined contribution thrift plan applicable to the Company that permits all full-time employees who have completed one year of service to contribute 2% to 12% of base compensation, on a pre-tax basis, into participant accounts. In addition to mandatory contribution equal to 2% of base compensation per year for each plan participant, the Company makes matching contributions from 25% to 50% of up to the first 6% of base pay contributed by a plan participant. Employee contributions, together with earnings thereon, are not subject to forfeiture. That portion of a participant's account balance attributable to Company contributions, together with earnings thereon, is vested over a five year period at 20% per year. Participants are credited with their prior years of service for vesting purposes, however, no amounts are accrued for the accounts of participants, including the Company's executive officers, for years of service previous to the plan commencement date. Participants may direct the investment of their contributions into any of four funds, including Kaneb common stock. Plan assets are 27 held and distributed pursuant to a trust arrangement. Because levels of future compensation, participant contributions and investment yields cannot be reliably predicted over the span of time contemplated by a plan of this nature, it is impractical to estimate the annual benefits payable at retirement to the individuals listed in the Summary Cash Compensation Table above. Director's Fees. During 1994, each member of the Company's Board of Directors who was not also an employee of the Company or Kaneb was paid an annual retainer of $4,000 in lieu of all attendance fees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At March 17, 1995, no person was known to the Partnership to be the beneficial owner of more than 5% of the Units. See Item 10 with respect to ownership of Senior Preference Units by officers and directors of the Company. At March 17, 1995, the Company owned a combined 2% General Partner interest in the Partnership and the Operating Partnership, and owned preference units and common units representing a limited partner interest of approximately 52%. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Notes 4 and 5 to the Partnership's financial statements. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS
Page ---- Set forth below is a list of financial statements appearing in this report. Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements: Report of Independent Accountants .......................................... F - 1 Consolidated Statements of Income - Three Years Ended December 31, 1994 F - 2 Consolidated Balance Sheets - December 31, 1994 and 1993 ................... F - 3 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1994 F - 4 Consolidated Statements of Partners' Capital Three years ended December 31, 1994 ...................................... F - 5 Notes to Consolidated Financial Statements ................................. F - 6
(A) (2) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (A) (3) LIST OF EXHIBITS 3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference. 10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference. 10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference. 10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lendors, filed herewith. 10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference. 21 List of Subsidiaries, filed herewith. 24.1 Powers of Attorney, filed herewith. 27 Financial Data Schedule, filed herewith. (B) REPORTS ON FORM 8-K - NONE. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KANEB PIPE LINE PARTNERS, L.P. By: Kaneb Pipe Line Company ----------------------- General Partner By: LEON E. HUTCHENS ------------------------ (Leon E. Hutchens) President and Chief Executive Officer Date: March 29, 1995 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Kaneb Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line Company and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- Principal Executive Officer LEON E. HUTCHENS ------------------------ (Leon E. Hutchens) President March 29, 1995 Principal Accounting Officer JIMMY L. HARRISON ------------------------ (Jimmy L. Harrison) Controller March 29, 1995 Directors SANGWOO AHN ------------------------ (Sangwoo Ahn) Director March 29, 1995 JOHN R. BARNES ------------------------ (John R. Barnes) Director March 29, 1995 C.E. BENTLEY ------------------------ (C.E. Bentley) Director March 29, 1995 M.R. BILES ------------------------ (M.R. Biles) Director March 29, 1995 EDWARD D. DOHERTY ------------------------ (Edward D. Doherty) Director March 29, 1995 PRESTON A. PEAK ------------------------ (Preston A. Peak) Director March 29, 1995
30
SIGNATURE TITLE DATE --------- ----- ---- RALPH A. REHM ------------------------ (Ralph A. Rehm) Director March 29, 1995 JAMES R. WHATLEY ------------------------ (James R. Whatley) Director March 29, 1995
31 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Kaneb Pipe Line Partners, L.P. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material respects, the financial position of Kaneb Pipe Line Partners, L.P. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Dallas, Texas March 16, 1995 F - 1 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- Revenues $ 78,745,000 $ 69,235,000 $ 42,179,000 Costs and expenses: Operating costs 33,586,000 29,012,000 14,507,000 Depreciation and amortization 7,257,000 6,135,000 4,124,000 General and administrative 4,924,000 4,673,000 2,752,000 ------------- ------------- ------------ Total costs and expenses 45,767,000 39,820,000 21,383,000 ------------- ------------- ------------ Operating income 32,978,000 29,415,000 20,796,000 Interest and other income 1,299,000 1,331,000 1,721,000 Interest expense (3,706,000) (3,376,000) (2,338,000) ------------- ------------- ------------ Income before minority interest and income taxes 30,571,000 27,370,000 20,179,000 Minority interest in net income (295,000) (266,000) (200,000) Income tax provision (818,000) (450,000) - ------------- ------------- ------------ Net income 29,458,000 26,654,000 19,979,000 General partner's interest in net income (295,000) (266,000) (200,000) ------------- ------------- ------------ Limited partners' interest in net income $ 29,163,000 $ 26,388,000 $ 19,779,000 ============= ============= ============ Allocation of net income per Senior Preference Unit $ 2.20 $ 2.20 $ 2.20 ============= ============= ============
See accompanying notes to consolidated financial statements. F - 2 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 --------------------------------------------------------------------------------
1994 1993 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,145,000 $ 15,061,000 Accounts receivable 5,605,000 4,504,000 Current portion of receivable from general partner 2,241,000 1,954,000 Prepaid expenses 1,924,000 1,667,000 ------------ ------------ Total current assets 13,915,000 23,186,000 ------------ ------------ Receivable from general partner, less current portion 3,544,000 5,785,000 ------------ ------------ Property and equipment 214,556,000 195,048,000 Less accumulated depreciation 68,910,000 61,612,000 ------------ ------------ Net property and equipment 145,646,000 133,436,000 ------------ ------------ $163,105,000 $162,407,000 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt $ 1,548,000 $ 3,850,000 Accounts payable 4,007,000 3,093,000 Accrued expenses 2,052,000 1,725,000 Accrued distributions payable 7,240,000 7,240,000 Deferred terminaling fees 1,641,000 1,600,000 Payable to general partner 786,000 493,000 ------------ ------------ Total current liabilities 17,274,000 18,001,000 ------------ ------------ Long-term debt, less current portion 43,265,000 41,814,000 Other liabilities and deferred taxes 1,820,000 991,000 Minority interest 992,000 1,003,000 Partners' capital: Senior preference unitholders 47,288,000 47,288,000 Preference unitholders 45,247,000 45,247,000 Common unitholders 6,227,000 7,060,000 General partner 992,000 1,003,000 ------------ ------------ Total partners' capital 99,754,000 100,598,000 ------------ ------------ $163,105,000 $162,407,000 ============ ============
See accompanying notes to consolidated financial statements. F - 3 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
Year Ended December 31, ------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- Operating activities: Net income $ 29,458,000 $ 26,654,000 $ 19,979,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,257,000 6,135,000 4,124,000 Minority interest in net income 295,000 266,000 200,000 Deferred income taxes 626,000 414,000 - Changes in working capital components: Accounts receivable (1,101,000) 2,873,000 2,282,000 Prepaid expenses (257,000) (954,000) (125,000) Accounts payable and accrued expenses 1,282,000 1,874,000 (302,000) Payable to general partner 293,000 (78,000) 430,000 ------------- ------------ ------------ Net cash provided by operating activities 37,853,000 37,184,000 26,588,000 ------------- ------------ ------------ Investing activities: Terminal acquisitions (12,320,000) - - Capital expenditures (7,147,000) (8,132,000) (3,183,000) Acquisition of Support Terminal Services, Inc. - (62,677,000) (2,500,000) Other 203,000 242,000 365,000 ------------- ------------ ------------ Net cash used by investing activities (19,264,000) (70,567,000) (5,318,000) ------------- ------------ ------------ Financing activities: Changes in receivable from general partner 1,954,000 1,704,000 1,486,000 Proceeds from issuance of partnership units - 53,159,000 - Issuance of long-term debt 41,350,000 86,300,000 5,100,000 Payments of long-term debt (42,201,000) (62,677,000) (1,027,000) Distributions: Senior preference unitholders (15,950,000) (13,475,000) (11,000,000) Preference unitholders (12,308,000) (19,286,000) (14,978,000) Common unitholders (1,738,000) - - General partner and minority interest (612,000) (669,000) (530,000) ------------- ------------ ------------ Net cash provided (used) by financing (29,505,000) 45,056,000 (20,949,000) activities ------------- ------------ ------------ Increase (decrease) in cash (10,916,000) 11,673,000 321,000 Cash at beginning of period 15,061,000 3,388,000 3,067,000 ------------- ------------ ------------ Cash at end of period $ 4,145,000 $ 15,061,000 $ 3,388,000 ============= ============ ============ Supplemental information - Cash paid for interest $ 3,470,000 $ 3,375,000 $ 2,338,000 ============= ============ ============
See accompanying notes to consolidated financial statements. F - 4 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 --------------------------------------------------------------------------------
Senior Preference Preference Command General Unitholders Unitholders Unitholders Partner Total -------------- -------------- ------------- ------------ ------------- Partners' capital of January 1, 1992 $ 23,934,000 $ 27,047,000 $ 10,319,000 $ 618,000 $ 61,918,000 1992 income allocation 11,000,000 14,978,000 (6,199,000) 200,000 19,979,000 Distributions declared (11,000,000) (14,978,000) - (262,000) (26,240,000) -------------- -------------- ------------- ------------ ------------- Partners' capital at December 31, 1992 23,934,000 27,047,000 4,120,000 556,000 55,657,000 1993 income allocation 14,342,000 19,286,000 (7,240,000) 266,000 26,654,000 Allocation of proceeds from issuance of partnership units 23,354,000 18,200,000 10,180,000 524,000 52,258,000 Distributions declared (14,342,000) (19,286,000) - (343,000) (33,971,000) -------------- -------------- ------------- ------------ ------------- Partners' capital at December 31, 1993 47,288,000 45,247,000 7,060,000 1,003,000 100,598,000 1994 income allocation 15,950,000 12,308,000 905,000 295,000 29,458,000 Distributions declared (15,950,000) (12,308,000) (1,738,000) (306,000) (30,302,000) -------------- -------------- ------------- ------------ ------------- Partners' capital at December 31, 1994 $ 47,288,000 $ 45,247,000 $ 6,227,000 $ 992,000 $ 99,754,000 ============== ============== ============= ============ ============= Limited Partnership Units outstanding at December 31, 1992 5,000,000 5,650,000 3,160,000 (a) 13,810,000 Limited Partnership Units issued in 1993 2,250,000 - - - 2,250,000 -------------- -------------- ------------- ------------ ------------- Limited Partnerships Units outstanding at December 31, 1994 and 1993 7,250,000 (b) 5,650,000 3,160,000 (a) 16,060,000 ============== ============== ============= ============ =============
(a) Kaneb Pipe Line Company owns a 1% interest in Kaneb Pipe Line Partners, L.P. as General Partner. (b) The partnership agreement allows for an additional issuance of up to 7.5 million senior preference units. See accompanying notes to consolidated financial statements. F - 5 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. PARTNERSHIP ORGANIZATION Kaneb Pipe Line Partners, L.P. ("Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. Kaneb Pipe Line Company ("Company"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1% general partner interest in both the Partnership and KPOP. The Company's 1% interest in KPOP is reflected as the minority interest in the financial statements. Effective March 1, 1993, the Partnership acquired Support Terminal Services, Inc. ("ST"), a petroleum products and specialty liquids storage and terminaling company headquartered in Dallas, Texas, for approximately $65 million. The acquisition was accounted for as a purchase, and, accordingly, the Partnership's consolidated statement of income includes the results of operations of ST since March 1, 1993. In connection with the acquisition, the Partnership borrowed $65 million from a group of banks, which was partially repaid with $50.8 million of the proceeds from a Senior Preference Unit ("SPU") offering. In April 1993, the Partnership completed a public offering of 2.25 million SPU at $25.25 per unit. The net proceeds from the offering of $52.8 million was allocated among the equity accounts of the unitholders, general partner and minority interest based on the ownership percentages of the partnership subsequent to the offering. The Partnership believes that this allocation approximates the distribution of the net assets upon liquidation, assuming the Partnership was liquidated at net book value. However, the actual distribution of the net assets upon liquidation could be significantly different as a result of the fair market value of the net assets being substantially different than the net book value of the Partnership's assets in the accompanying financial statements. The SPUs represent an approximate 44% ownership interest in the Partnership. The Company owns an approximate 52% interest as limited partner in the form of Preference Units and Common Units, and as the general partner owns a combined 2% interest. An approximate 2% ownership interest in the form of 60,500 Preference Units and 154,000 Common Units is held by officers of Kaneb. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements. CASH AND CASH EQUIVALENTS The Partnership's policy is to invest cash in highly liquid investments with maturities of three months or less, upon purchase. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents. F - 6 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment are carried at historical cost. Certain leases have been capitalized and the leased assets have been included in property and equipment. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets. The rates used for pipeline and storage facilities of KPOP are the same as those which have been promulgated by the Federal Energy Regulatory Commission. REVENUE AND INCOME RECOGNITION KPOP provides pipeline transportation of refined petroleum products and liquified petroleum gases. Revenue is recognized upon receipt of the products into the pipeline system. ST provides terminaling and other ancillary services. Fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided. ENVIRONMENTAL MATTERS The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes that its operations are in general compliance with applicable environmental regulation, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Partnership's commitment to a formal plan of action. The Company has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (date of formation of the Partnership). The indemnification does not extend to any liabilities that arise after such date to the extent that the liabilities result from changes in environmental laws and regulations. In addition, ST's former owner has agreed to indemnify the Partnership against liabilities for damages to the environment from operations conducted by the former owner prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000 until an aggregate amount of $10 million has been paid by ST's former owner. The Partnership has recorded a reserve for environmental claims in the amount of $1.0 million at December 31, 1994 in other liabilities on the accompanying balance sheet. F - 7 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- INCOME TAX CONSIDERATIONS Income before income tax expense is made up of the following components:
Year Ended December 31, ----------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- Partnership operations $ 28,237,000 $ 26,088,000 $ 19,979,000 Corporation operations 2,039,000 1,016,000 - ------------- ------------- ------------- $ 30,276,000 $ 27,104,000 $ 19,979,000 ============= ============= =============
The Partnership is not subject to federal and state income taxes. However, certain operations of ST are conducted through wholly-owned subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 1994 and 1993 consists of deferred U.S. federal income taxes of $.6 million and $.4 million, respectively, and current federal income taxes of $.2 million in 1994. Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax return of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly. The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of partnership units. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. Management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information. ALLOCATION OF NET INCOME AND EARNINGS PER SENIOR PREFERENCE UNIT Net income is allocated to the limited partnership units in an amount equal to the cash distributions declared for each reporting period and any remaining income or loss is allocated to the class of units that did not receive full distributions. If full distributions are declared to all classes of units, income will be allocated pro rata based on the aggregate amount of distributions declared. Earnings per SPU are calculated by dividing the amount of net income allocated to the SPUs by the weighted average number of SPUs outstanding. F - 8 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- CASH DISTRIBUTIONS The Partnership makes quarterly distributions of 100% of its Available Cash, as defined in the Partnership Agreement, to holders of limited partnership units ("Unitholders") and the Company. Available Cash consists generally of all the cash receipts of the Partnership plus the beginning cash balance less all of its cash disbursements and reserves. The Partnership expects to make distributions of Available Cash for each quarter of not less than $.55 per Senior Preference Unit (the "Minimum Quarterly Distribution"), or $2.20 per Senior Preference Unit on an annualized basis, for the foreseeable future, although no assurance is given regarding such distributions. The Partnership expects to make distributions of all Available Cash within 45 days after the end of each quarter to holders of record on the applicable record date. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and 1992. During 1994, 1993 and 1992, the Partnership paid distributions of $2.20, $3.41 (includes $1.21 of arrearage payments) and $2.65 (includes $.45 of arrearage payments), respectively, to the Preference Unit holders. During 1994, the Partnership paid distributions of $.55 per unit to the Common Unitholders. As of December 31, 1994, no arrearages existed on any class of partnership interest. Distributions by the Partnership of its Available Cash are made 99% to Unitholders and 1% to the Company, subject to the payment of incentive distributions to the General Partner if certain target levels of cash distributions to the Unitholders are achieved. The distribution of Available Cash for each quarter within the Preference Period, as defined, is subject to the preferential rights of the holders of the Senior Preference Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters, before any distribution of Available Cash is made to holders of Preference Units of Common Units for such quarter. In addition, for each quarter within the Preference Period, the distribution of any amounts to holders of Common Units is subject to the preferential rights of the holders of the Preference Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters. The Common Units are not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period will continue indefinitely until the Minimum Distribution has been paid to the holders of the Senior Preference Units, the Preference Units and the Common Units for twelve consecutive quarters. Prior to the end of the Preference Period, 2,650,000 of the Preference Units shall be converted into Senior Preference Units on a one-for-one basis if the Third Target Distribution, as defined, is paid to all Unitholders for four full consecutive quarters. The Third Target distribution is reached when distributions of Available Cash equals $2.80 per Limited Partner ("LP") Unit on an annualized basis. After the Preference Period ends all differences and distinctions between the three classes of units for the purposes of cash distributions will cease. F - 9 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 3. PROPERTY AND EQUIPMENT The cost of property and equipment is summarized as follows:
Estimated Useful Life December 31, December 31, (Years) 1994 1993 ---------- ------------- ------------ Land - $ 4,442,000 $ 3,883,000 Buildings 35 3,659,000 3,282,000 Furniture and fixtures 16 1,493,000 1,382,000 Transportation equipment 6 1,193,000 1,928,000 Machinery and equipment 20 - 40 21,967,000 20,372,000 Pipeline and terminaling equipment 20 - 40 156,990,000 140,532,000 Pipeline equipment under capitalized lease 20 - 40 21,901,000 21,632,000 Construction work-in-progress - 2,911,000 2,037,000 ------------- ------------ Total $ 214,556,000 $195,048,000 ============= ============
4. LONG-TERM DEBT AND LEASES
December 31, December 31, 1994 1993 ------------- ------------ Term loan $ 33,000,000 $ 32,500,000 Obligation under capital lease 11,813,000 13,164,000 ------------- ------------ Total long-term debt 44,813,000 45,664,000 Less current portion 1,548,000 3,850,000 ------------- ------------ Long-term debt, less current portion $ 43,265,000 $ 41,814,000 ============= ============
In 1994, a wholly-owned subsidiary of the Partnership issued $33 million of first mortgage notes ("Notes") to a group of insurance companies. The Notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, a wholly-owned subsidiary entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through November 30, 1997. The credit facility bears interest at variable interest rates and has a commitment fee of .2% per annum of the unused credit facility. No amounts were drawn under the credit facility at December 31, 1994. The Notes and credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership and contain certain financial and operational covenants. F - 10 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The following is a schedule by years of future minimum lease payments under capital and operating leases together with the present value of net minimum lease payments for capital leases as of December 31, 1994:
Capital Operating Year ending December 31: Lease (a) Leases --------------- --------------- 1995 $ 3,080,000 $ 738,000 1996 3,080,000 589,000 1997 3,080,000 360,000 1998 7,198,000 332,000 1999 - 319,000 Thereafter - 2,171,000 --------------- --------------- Total minimum lease payments 16,438,000 $ 4,509,000 =============== Less amount representing interest 4,625,000 --------------- Present value of net minimum lease payments 11,813,000 Less current portion 1,548,000 --------------- Total obligation under capital lease, less current portion $ 10,265,000 ===============
(a) The capital lease is secured by certain pipeline equipment and the Partnership has accrued its option to purchase this equipment at the termination of the lease. Total rent expense under operating leases amounted to $.9 million, $.9 million and $.2 million for the years ended December 31, 1994, 1993 and 1992, respectively. KPOP and the Company entered into a payment priority agreement related to the capital lease obligation for pipeline equipment under which the Company is primarily liable for rental payments of approximately $2.9 million per year through April 1997 and KPOP is primarily liable for the remaining rental payments. KPOP has recorded a receivable of $5.8 million at December 31, 1994 from the Company for the present value of these future lease payments. This receivable bears interest at an annual rate of 13.8%, which reflects the imputed interest rate on the capital lease. KPOP recorded interest income of $.9 million, $1.2 million and $1.4 million from the Company on this receivable balance for the periods ended December 31, 1994, 1993 and 1992, respectively. The amount of the capital lease obligation that exceeds the receivable from the Company ($6.0 million at December 31, 1994) represents the present value of the lease obligation and purchase option due subsequent to April 1997. The Partnership believes that the carrying value of the notes represents their estimated fair value as the notes were issued in December 1994 and that it is not practicable to estimate the fair value of the capital lease obligation and the associated receivable from the general partner. F - 11 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 5. RELATED PARTY TRANSACTIONS The Partnership has no employees and is managed and controlled by the Company. The Company and Kaneb are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $9.0 million, $8.7 million and $7.2 million for the years ended December 31, 1994, 1993 and 1992, respectively, include compensation and benefits paid to officers and employees of the Company and Kaneb, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $7.0 million, $7.0 million and $6.3 million of compensation and benefits, including pension costs, paid to officers and employees of the Company for the periods ended December 31, 1994, 1993 and 1992, respectively, which represent the actual amounts paid by the Company or Kaneb. In addition, the Partnership paid $.2 million during each of these respective periods for an allocable portion of the Company's overhead expenses. At December 31, 1994 and 1993, the Partnership owed the Company $.8 million and $.5 million, respectively, for these expenses which are due under normal invoice terms. 6. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly operating results for 1994 and 1993 are summarized as follows:
Quarter Ended ------------------------------------------------------------------- March 31, June 30, September 30, December 31, -------------- -------------- ------------- -------------- 1994: Revenues $ 18,434,000 $ 18,773,000 $ 20,718,000 $ 20,820,000 ============== ============== ============== ============== Operating income $ 7,218,000 $ 8,107,000 $ 9,099,000 $ 8,554,000 ============== ============== ============== ============== Net income $ 6,379,000 $ 7,289,000 $ 8,067,000 $ 7,723,000 ============== ============== ============== ============== Allocation of net income per Senior Preference Unit $ .55 $ .55 $ .55 $ .55 ============== ============== ============== ============== 1993: Revenues $ 12,094,000 $ 18,125,000 $ 18,515,000 $ 20,501,000 ============== ============== ============== ============== Operating income $ 4,817,000 $ 7,484,000 $ 7,438,000 $ 9,676,000 ============== ============== ============== ============== Net income $ 4,021,000 $ 6,671,000 $ 6,914,000 $ 9,048,000 ============== ============== ============== ============== Allocation of net income per Senior Preference Unit $ .55 $ .55 $ .55 $ .55 ============== ============== ============== ==============
F - 12 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 7. SUBSEQUENT EVENT Effective February 24, 1995, the Partnership, through KPOP, acquired the refined petroleum product pipeline assets of Wyco Pipe Line Company ("Wyco") for $27.1 million. The acquisition was financed by the issuance of first mortgage notes to three insurance companies. The notes are due February 24, 2002 and bear interest at the rate of 8.37% per annum. The acquisition will be accounted for as a purchase and, accordingly, the results of operations of Wyco will be included in the Partnership's consolidated statement of income subsequent to the date of acquisition. The following summarized unaudited pro forma consolidated results of operations for years ended December 31, 1994 and 1993, assume the acquisition occurred as of the beginning of the period presented. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which might have resulted had the combination been in effect at the dates indicated, or which may occur in the future.
1994 1993 ------------- ------------- Revenues $ 92,439,000 $ 80,831,000 ============= ============= Net income $ 32,245,000 $ 28,932,000 ============= ============= Allocation of net income per Senior Preference Unit $ 2.20 $ 2.20 ============= =============
F - 13 INDEX TO EXHIBITS ----------------- 3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference. 10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference. 10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference. 10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lendors, filed herewith. 10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference. 21 List of Subsidiaries, filed herewith. 24.1 Powers of Attorney, filed herewith. 27 Financial Data Schedule, filed herewith. EX-10.3 2 CONFORMED RESTATED CREDIT AGMT Exhibit 10.3 CONFORMED RESTATED CREDIT AGREEMENT* between KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., as Borrower TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Agent and CERTAIN LENDERS, Lenders $15,000,000 BORROWINGS $4,118,000 LCS DECEMBER 22, 1994 TABLE OF CONTENTS ----------------- SECTION 1 DEFINITIONS AND TERMS........................................................ 1 1.1 Definitions.................................................................. 1 1.2 Time References.............................................................. 12 1.3 Other References............................................................. 12 1.4 Accounting Principles........................................................ 12 SECTION 2 BORROWINGS AND LCs........................................................... 12 2.1 Commitments.................................................................. 12 2.2 Borrowings................................................................... 12 2.3 LCs.......................................................................... 13 2.4 Termination.................................................................. 15 SECTION 3 PAYMENT TERMS................................................................ 15 3.1 Notes and Payments........................................................... 15 3.2 Interest and Principal Payments.............................................. 16 3.3 Interest Options............................................................. 16 3.4 Quotation of Rates........................................................... 16 3.5 Default Rate................................................................. 16 3.6 Interest Recapture........................................................... 16 3.7 Interest Calculations........................................................ 16 3.8 Maximum Rate................................................................. 17 3.9 Interest Periods............................................................. 17 3.10 Conversions.................................................................. 17 3.11 Order of Application......................................................... 17 3.12 Sharing of Payments, Etc..................................................... 18 3.13 Offset....................................................................... 18 3.14 Booking Borrowings........................................................... 18 3.15 Basis Unavailable or Inadequate for LIBOR Rate............................... 18 3.16 Additional Costs............................................................. 19 3.17 Change in Laws............................................................... 19 3.18 Foreign Lenders.............................................................. 20 3.19 Funding Loss................................................................. 20 SECTION 4 FEES......................................................................... 20 4.1 Treatment of Fees............................................................ 20 4.2 Administration Fees.......................................................... 20 4.3 Commitment Fee............................................................... 20 4.4 LC Fees...................................................................... 20 SECTION 5 SECURITY..................................................................... 21 5.1 Guaranty..................................................................... 21 5.2 Collateral................................................................... 21 5.3 Additional Security and Guaranties........................................... 21 5.4 Collateral Documentation..................................................... 21 SECTION 6 CONDITIONS PRECEDENT......................................................... 21 6.1 Initial Borrowing or LC...................................................... 21 6.2 All Borrowings and LCs....................................................... 21 6.3 General...................................................................... 22
SECTION 7 REPRESENTATIONS AND WARRANTIES............................................... 22 7.1 Purpose of Credit Facility................................................... 22 7.2 Existence, Good Standing, and Authority...................................... 22 7.3 Subsidiaries................................................................. 22 7.4 Separate Legal Entities...................................................... 22 7.5 Authorization and Contravention.............................................. 23 7.6 Binding Effect............................................................... 24 7.7 Financial Statements......................................................... 24 7.8 Litigation................................................................... 24 7.9 Taxes........................................................................ 24 7.10 Environmental Matters........................................................ 24 7.11 Employee Plans............................................................... 24 7.12 Properties; Lien............................................................. 25 7.13 Government Regulations....................................................... 25 7.14 Affiliate Transactions....................................................... 25 7.15 Debt Cross Defaults.......................................................... 25 7.16 Material Agreements.......................................................... 25 7.17 Insurance.................................................................... 25 7.18 Labor Matters................................................................ 25 7.19 Solvency..................................................................... 25 7.20 Trade Names.................................................................. 25 7.21 Intellectual Property........................................................ 26 7.22 Full Disclosure.............................................................. 26 SECTION 8 AFFIRMATIVE COVENANTS........................................................ 26 8.1 Items to be Furnished........................................................ 26 8.2 Use of Proceeds.............................................................. 27 8.3 Books and Records............................................................ 27 8.4 Inspections.................................................................. 28 8.5 Taxes........................................................................ 28 8.6 Payment of Obligations....................................................... 28 8.7 Expenses..................................................................... 28 8.8 Maintenance of Existence, Assets, and Business............................... 28 8.9 Insurance.................................................................... 28 8.10 Preservation and Protection of Rights; Separate Legal Entities............... 28 8.11 Environmental Laws........................................................... 29 8.12 Subsidiaries................................................................. 29 8.13 Indemnification.............................................................. 29 SECTION 9 NEGATIVE COVENANTS........................................................... 29 9.1 Taxes........................................................................ 29 9.2 [Intentionally Blank]........................................................ 29 9.3 Employee Plans............................................................... 29 9.4 Funded Debt.................................................................. 30 9.5 Liens........................................................................ 30 9.6 Affiliate Transactions....................................................... 31 9.7 Compliance with Laws and Documents........................................... 31 9.8 Loans, Advances, and Investments............................................. 31 9.9 Distributions................................................................ 32 9.10 Asset Transfers.............................................................. 34 Dissolutions, Mergers, and Consolidations.................................... 34 9.12 Assignment................................................................... 35 9.13 Fiscal Year and Accounting Methods........................................... 35 9.14 New Businesses............................................................... 35
9.15 Government Regulations....................................................... 35 9.16 Separate Legal Entities...................................................... 35 SECTION 10 FINANCIAL COVENANTS........................................................... 35 10.1 Current Ratio................................................................ 35 10.2 Tangible Net Worth........................................................... 35 10.3 Leverage Ratio............................................................... 35 10.4 Fixed Charges Coverage Ratio................................................. 36 SECTION 11 DEFAULT....................................................................... 36 11.1 Obligation................................................................... 36 11.2 Covenants.................................................................... 36 11.3 Debtor Relief................................................................ 36 11.4 Misrepresentation............................................................ 36 11.5 Judgments and Attachments.................................................... 36 11.6 Note Agreements or Intercreditor Agreement................................... 36 11.7 Default Under Other Agreements............................................... 36 11.8 Validity and Enforceability of Loan Papers................................... 37 11.9 Change of Control............................................................ 37 11.10 KPC Merger or Consolidation.................................................. 37 SECTION 12 RIGHTS AND REMEDIES........................................................... 37 12.1 Remedies Upon Default........................................................ 37 12.2 KPP Company Waivers.......................................................... 37 12.3 Performance by Agent......................................................... 37 12.4 Not in Control............................................................... 38 12.5 Course of Dealing............................................................ 38 12.6 Cumulative Rights............................................................ 38 12.7 Application of Proceeds...................................................... 38 12.8 Diminution in Value of Collateral............................................ 38 12.9 Certain Proceedings.......................................................... 38 SECTION 13 AGREEMENT AMONG LENDERS...................................................... 38 13.1 Agent........................................................................ 38 13.2 Expenses..................................................................... 40 13.3 Proportionate Absorption of Losses........................................... 40 13.4 Delegation of Duties; Reliance............................................... 40 13.5 Limitation of Agent's Liability.............................................. 40 13.6 Default; Collateral.......................................................... 41 13.7 Limitation of Liability...................................................... 41 13.8 Relationship of Lenders...................................................... 41 13.9 Collateral Matters........................................................... 42 13.10 Benefits of Agreement........................................................ 42 SECTION 14 MISCELLANEOUS................................................................. 42 14.1 Nonbusiness Days............................................................. 42 14.2 Communications............................................................... 42 14.3 Form and Number of Documents................................................. 43 14.4 Exceptions to Covenants...................................................... 43 14.5 Survival..................................................................... 43 14.6 Governing Law................................................................ 43 14.7 Invalid Provisions........................................................... 43 14.8 Venue; Service of Process; Jury Trial........................................ 43 14.9 Amendments, Consents, Conflicts, and Waivers................................. 44
14.10 Multiple Counterparts........................................................ 44 14.11 Successors and Assigns; Participations....................................... 45 14.12 Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances.. 46 14.13 Entirety..................................................................... 46
SCHEDULES AND EXHIBITS Schedule 2.1 Lenders, Commitments, and Wiring Instructions Schedule 2.3 Existing LCs Schedule 6.1 Closing Documents Schedule 7.2 Jurisdictions of Organization and Business Schedule 7.3 Organizational Structure Schedule 7.8 Litigation Schedule 7.10 Environmental Matters Schedule 7.16 Material Agreements Schedule 7.20 Trade Names Schedule 8.9 Insurance Schedule 9.8 Permitted Investments Exhibit A Promissory Note Exhibit B Guaranty Exhibit C-1 Collateral Trust and Intercreditor Agreement Exhibit C-2 Stock Pledge Agreement Exhibit C-3 First Amended and Restated Mortgage and Security Agreement Exhibit D-1 Notice of Borrowing Exhibit D-2 Notice of Conversion Exhibit D-3 LC Request Exhibit D-4 Compliance Certificate Exhibit D-5 Financial Statements Certificate Exhibit E Opinion of Counsel Exhibit F Assignment
RESTATED CREDIT AGREEMENT ------------------------- THIS AGREEMENT is entered into as of December 22, 1994, between KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("BORROWER"), Lenders (defined below), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION (successor by merger with Texas Commerce Bank, National Association) as agent for Lenders. Terms used in this agreement are defined in SECTION 1. Borrower, STI, and certain financial institutions are party to the Existing Credit Agreement. Concurrently with the execution and delivery of this agreement, (1) Borrower, STI, and the other KPP Companies are entering into the Note Agreements with Noteholders, (2) the KPP Companies are (directly or indirectly through intercompany loans or note assignments to Noteholders) causing a portion of the financing proceeds under the Note Agreements to be used to purchase from or pay to all of the lending institutions (other than Lenders) all of the indebtedness owed to them (and are terminating their respective commitments to lend) under the Existing Credit Agreement. Borrower has requested Agent and Lenders to enter into this agreement -- as a renewal, extension, and entire amendment and restatement of the Existing Credit Agreement -- to provide for a revolving credit of Borrowings and LCs (that may never exceed the total Commitments) for the purposes and upon the terms and conditions provided in this agreement. The Obligation under this agreement and the indebtedness under the Note Agreements are to be pari passu secured by the Collateral. ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders, and Agent agree that the Existing Credit Agreement is renewed, extended, and entirely amended and restated as follows: SECTION 1 DEFINITIONS AND TERMS. --------- --------------------- 1.1 Definitions. As used in the Loan Papers: ----------- AFFILIATE of a Person means any other individual or entity who (directly or indirectly through ownership, voting securities, contract, or otherwise) controls, is controlled by, or under common control with that Person. For purposes of this definition (a) "control" or similar terms mean the power to direct or cause the direction of management or policies of that Person, but (b) none of the KPP Companies or Restricted Subsidiaries at any time are "Affiliates" of each other. AGENT means, at any time, Texas Commerce Bank National Association (or its successor appointed under SECTION 13) acting as agent for Lenders under the Loan Papers. References to Agent in respect of LCs are to that institution in its individual capacity. ALTERNATE BASE RATE means, for any day, the annual interest rate (rounded upward, if necessary, to the nearest 0.0625%) equal to the highest of either (a) the Prime Rate, (b) the Secondary CD Rate plus 1%, or (c) the Federal Funds Rate plus 0.50%. ALTERNATE BASE RATE BORROWING means a Borrowing bearing interest at the Alternate Base Rate. BORROWER is defined in the preamble to this agreement. BORROWER COMPANIES means Borrower and its Subsidiaries (other than, for all purposes except financial reporting and financial covenant calculations, its Insignificant Subsidiaries). BORROWER PARTNERSHIP AGREEMENT means the Amended and Restated Agreement of Limited Partnership of Kaneb Pipe Line Operating Partnership, L.P., dated September 27, 1989, a certified copy of which has been delivered to Agent under SCHEDULE 6.1. BORROWING means any amount disbursed (a) by one or more Lenders to Borrower under the Loan Papers, either as an original disbursement of funds or the continuation of an outstanding amount, (b) as a payment of a draw under a LC, or (c) by any Agent or Lender in accordance with, and to satisfy the obligations of any KPP Company under, any Loan Paper. BORROWING DATE is defined in SECTION 2.2(A). BUSINESS DAY means (a) for all purposes, any day other than Saturday, Sunday, and any other day that commercial banks are authorized by Law to be closed in Texas or New York and (b) for purposes of any LIBOR Rate Borrowing, a day when commercial banks are open for international business in London. CODE means the Internal Revenue Code of 1986. COLLATERAL means (a) all present and future issued and outstanding capital stock of STS, (b) Borrower's material and integrally-related pipelines and terminals (and the related assets integral to the operation of those pipelines and terminals), and (c) all other types and items of property described as collateral in the Security Documents. COLLATERAL TRUSTEE means, at any time, Texas Commerce Bank National Association (or its successor appointed under the Intercreditor Agreement) acting as collateral trustee under the Intercreditor Agreement, Mortgage, and Pledge Agreement. COMMITMENT means, for each Lender, the amount stated beside its name on SCHEDULE 2.1, which amount is subject to reduction and cancellation under this agreement. COMMITMENT PERCENTAGE means, for any Lender, the proportion (stated as a percentage) that its Commitment bears to the total Commitments. COMMITMENT USAGE means, at any time, the sum of the Principal Debt plus the LC Exposure. COMPLIANCE CERTIFICATE means, for any Person, a certificate substantially in the form of EXHIBIT D-4 and signed by a Responsible Officer of that Person. CURRENT FINANCIALS means, for KPP or Borrower, as the case may be (a) either (i) their respective consolidated Financial Statements for the year ending December 31, 1993, together with their Financial Statements for the portion of the fiscal year ending on September 30, 1994, or (ii) at any time after their respective annual Financial Statements are first delivered under SECTION 8.1, their annual consolidated Financial Statements then most recently delivered to Lenders under SECTION 8.1, together with their quarterly Financial Statements then most recently delivered to Lenders under SECTION 8.1, but (b) does not include the results of operation and cash flows for any Company for the time period before it becomes a member of KPP's or Borrower's, as the case may be, consolidated group except for any periods for which that Company's Financial Statements were audited by an accounting firm reasonably acceptable to Agent. DEBT -- for any Person, at any time, and without duplication -- means (a) any obligation of that Person either for borrowed money or incurred for the purchase price of assets or services, (b) any indebtedness or obligation secured by or constituting a Lien on property of that Person, whether or not that Person is directly liable for that indebtedness or obligation, (c) the face amount of all LCs, other letters of credit, bankers' acceptances, or similar facilities, whether drawn or undrawn, for which that Person is the account party, (d) every lease obligation that should under GAAP be reflected on that Person's balance sheet as a capitalized-lease obligation, (e) the net amount payable by that Person for settlement of all interest-rate swaps or similar arrangements (based on the assumption that each such swap or similar arrangement terminated) as of the end of the most-recently-ended-fiscal 2 quarter of that Person, and (f) all Guaranty Liabilities of that Person in respect of Debt of any other person or entity. DEBTOR LAWS means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, fraudulent transfer or conveyance, or similar Laws generally affecting creditors' Rights. DEFAULT is defined in SECTION 11. DEFAULT PERCENTAGE means, for any Lender, the proportion (stated as a percentage) that the Principal Debt owed to it bears to the total Principal Debt. DEFAULT RATE means, for any day, an annual interest rate equal from day to day to the lesser of either (a) the then-existing Alternate Base Rate plus 2.0% or (b) the Maximum Rate. DETERMINING LENDERS means, at any time, any combination of Lenders holding at least 51% of either the total Commitments or, if the Commitments have been cancelled or terminated, the Commitment Usage. DISTRIBUTION, for any shares of any capital stock, partnership units or interests, or other equity securities or interests (for purposes of this definition, "SECURITIES") issued by a Person, means (a) the retirement, redemption, purchase, or other acquisition for value of those securities, (b) the declaration or payment of any dividend or other distribution with respect to those securities, (c) any loan or advance by that Person to, or other investment by that Person in, the holder of any of those securities, and (d) any other payment by that Person with respect to those securities. EBITDA -- for any Person, for any period, and without duplication -- means the sum of net income plus (to the extent actually deducted in calculating net income) deferred Taxes, depreciation, amortization, and cash interest payments on Debt (including the interest portion of capitalized leases). (a) Solely for the purposes of determining LIBOR Rate or whether Funded Debt may be assumed or incurred in connection with the purchase of assets of any Person or in connection with a merger or consolidation but specifically not for the purposes of SECTIONS 10.3 and 10.4: (i) the determination of consolidated EBITDA for any 12- calendar-month period includes the consolidated EBITDA attributable solely to the assets or Person that has been or is proposed to be purchased or merged or consolidated with for that period, after elimination of the portions of earnings included in that consolidated EBITDA that are or may be attributable to (A) operations to be discontinued, (B) sources of revenues that are unavailable to the KPP Companies after the purchase, merger, or consolidation, (C) the gain (net of any Tax effect) resulting from the sale of any capital assets other than in the ordinary course of business, (D) the total amount of unusual or nonrecurring gains (net of any Tax effect), and (E) other adjustments (such as additional or increased expenses) appropriate to reflect the earnings that would have been realized by the KPP Companies had the purchase of property or Person or the merger or consolidation occurred at the inception of that period; only if (ii) KPP's chief financial officer provides to Agent a certificate, in form and substance acceptable to Agent, reflecting the determination of the earnings so attributable to that property or Person, which certificate must specifically be based upon, reference and attach either (A) audited Financial Statements that reflect the earnings figures used in that determination and any other source of information used in that certificate or (B) unaudited Financial Statements that reflect the earnings figures used in that determination, which must be prepared in accordance with 3 GAAP (and be accompanied by a certificate of that chief financial officer certifying that they were so prepared), be in form and detail (and otherwise) acceptable to Determining Lenders in their reasonable discretion. (b) For purposes of this definition, the term net income in respect of KPP and its Subsidiaries excludes (i) portions of earnings properly attributable to minority interests (but without excluding the portion of earnings attributable to KPC's 1% general partnership ownership in Borrower), (ii) the loss or earnings of any Subsidiary that is not consolidated with KPP for financial reporting purposes, (iii) except as otherwise expressly provided, the loss or earnings of any Subsidiary for the period before it became a Subsidiary, (iv) the loss or gain of any sale of any capital assets other than in the ordinary course of business, and (iv) all nonrecurring losses or gains (net of any Tax effect). EMPLOYEE PLAN means an employee pension benefit plan covered by Title IV of ERISA and established or maintained by any KPP Company. ENVIRONMENTAL LAW means any Law that relates to the pollution or protection of the environment or to Hazardous Substances. ERISA means the Employee Retirement Income Security Act of 1974. EXISTING CREDIT AGREEMENT means the Credit Agreement dated as of March 1, 1993, between Borrower, certain lenders (including one or more Lenders under this agreement), and, acting as agent for those lenders, Texas Commerce Bank, National Association, and Texas Commerce Bank National Association, providing for extensions of credit to Borrower of up to $75,000,000. EXISTING LCS means the one or more letters of credit issued by Agent or any of Agent's Affiliates for the account of any KPP Company before the date of this agreement and that are described on SCHEDULE 2.3. EXISTING-LC EXPOSURE means the total undrawn and face amount of the Existing LCs. FEDERAL-FUNDS RATE means, for any day, the annual rate (rounded upwards, if necessary, to the nearest 0.01%) determined (which determination is conclusive and binding, absent manifest error) by Agent to be equal to (a) the weighted average of the rates on overnight federal-funds transactions with member banks of the Federal Reserve System arranged by federal-funds brokers on that day, as published by the Federal Reserve Bank of New York on the next Business Day, or (b) if those rates are not published for any day, the average of the quotations at approximately 10:00 a.m. received by Agent from three federal-funds brokers of recognized standing selected by Agent in its sole discretion. FINANCIAL HEDGE means a swap, collar, floor, cap, or other contract between Borrower and Agent or any Lender or another Person reasonably acceptable to Determining Lenders, which is intended to reduce or eliminate the risk of fluctuations in interest rates and which is legal and enforceable under applicable Law. FINANCIAL STATEMENTS, for a Person, means balance sheets, profit and loss statements, reconciliations of capital and surplus or partners' capital accounts, and statements of cash flow prepared (a) according to GAAP, (b) except as stated in SECTION 1.4, in comparative form to prior year-end figures or corresponding periods of the preceding fiscal year, as applicable, and (c) on a consolidated basis if that Person had any consolidated Subsidiaries during the applicable period. FINANCIAL STATEMENTS CERTIFICATE means a certificate substantially in the form of EXHIBIT D-5. 4 FUNDED DEBT -- for any Person, at any time, and without duplication -- means (a) any obligation (including, without limitation, the scheduled current portion of that obligation) of that Person (i) either for borrowed money or incurred for the purchase price of assets or services and (ii) which has a final maturity of (or is renewable or extendable at that Person's option to a final maturity beyond) one year or more from the date that obligation was incurred, (b) any indebtedness or obligation secured by or constituting a Lien on property of that Person, whether or not that Person is directly liable for that indebtedness or obligation, (c) the face amount of all LCs, other letters of credit, bankers' acceptances, or similar facilities, whether drawn or undrawn, for which that Person is the account party and which have a final maturity of one year or more from the date of issuance or creation, as the case may be, (d) every lease obligation that should under GAAP be reflected on that Person's balance sheet as a capitalized-lease obligation, (e) the net amount payable by that Person for settlement of all interest-rate swaps or similar arrangements (based on the assumption that each such swap or similar arrangement terminated) as of the end of the most-recently-ended-fiscal quarter of that Person, and (f) all Guaranty Liabilities of that Person in respect of Funded Debt of any other person or entity. FUNDING LOSS means any loss or expense that any Lender reasonably incurs because (a) Borrower fails or refuses (for any reason whatsoever other than a default by Agent or the Lender claiming such loss or expense) to take any Borrowing that it has requested under this agreement, or (b) Borrower prepays or pays any LIBOR Rate Borrowing or converts any LIBOR Rate Borrowing to an Alternate Base Rate Borrowing, in each case, before the last day of the applicable Interest Period. GAAP means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board that are applicable from time to time. GECC LEASES means the equipment leases, as amended, dated December 1, 1981, and March 31, 1982, executed by First Security Bank of Utah, N.A., and Robert S. Clark (each acting as a trustee under a trust indenture dated December 1, 1981), General Electric Capital Corporation (as lessor), and KPC (as original lessee), all of KPC's obligations under which have been assumed by Borrower under an assumption agreement dated September 21, 1989. GUARANTORS means KPP, STS, STOP, and STI. GUARANTY means the Guaranty substantially in the form of EXHIBIT B. GUARANTY LIABILITY -- of any Person, at any time, and without duplication - - means (a) any guarantee or endorsement by that Person of obligations of any other person or entity (other than endorsements for purposes of collection in the ordinary course of business), (b) any obligation of that Person to purchase goods, services, notes, or securities for the purpose of supplying funds for the purchase, payment, or satisfaction of (or measured by) any obligations of any other person or entity, (c) any other contingent obligation of that Person in respect of, or to purchase or otherwise acquire or service, obligations of, any other person or entity, (d) any obligation of that Person, whether or not contingent, in respect of the obligations of a general or limited partnership of which that Person is a general partner (unless the holder of that obligation has agreed to waive all recourse to that Person for that obligation), and (e) every obligation of that Person for obligations of any other person or entity if that Person has in effect guaranteed by an agreement (contingent or otherwise) to (i) make a loan, advance, or capital contribution to, or other investment in, that other person or entity for the purpose of assuring or maintaining a minimum equity, asset base, working capital, or other balance sheet condition for that other person or entity on any date, (ii) provide funds for the payment of any liability, dividend, or stock liquidation payment of or by that other person or entity, or (iii) otherwise supply funds to or in any manner invest in that other person or entity for that purpose. 5 HAZARDOUS SUBSTANCE means any substance (a) the presence of which requires removal, remediation, or investigation under any Environmental Law, or (b) that is defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance under any Environmental Law. INSIGNIFICANT SUBSIDIARY means a Subsidiary that contributes less than 5% of its parent's consolidated EBITDA, except that (a) if all of the Subsidiaries that would have otherwise been "Insignificant Subsidiaries" of a common parent collectively contribute 5% or more of the parent's consolidated EBITDA, then none of those Subsidiaries are "Insignificant Subsidiaries," and (b) no KPP Company or Restricted Subsidiary is ever an "Insignificant Subsidiary" under any circumstances. INTERCREDITOR AGREEMENT means the Collateral Trust and Intercreditor Agreement dated as of December 22, 1994, between Agent, Lenders, Noteholders, and Collateral Trustee, consented to by each KPP Company, and in substantially the form of EXHIBIT C-1. INTEREST PERIOD is determined in accordance with SECTION 3.9. KPC means Kaneb Pipe Line Company, a Delaware corporation. KPC COMPANIES means KPC and its Subsidiaries (other than its Insignificant Subsidiaries). KPC CREDIT AGREEMENT means the Revolving Credit Agreement dated as of October 11, 1993, between KPC (as borrower) and Texas Commerce Bank National Association (the successor by merger with Texas Commerce Bank, National Association). KPP means Kaneb Pipe Line Partners, L.P., a Delaware limited partnership. KPP COMPANIES means KPP, Borrower, STS, STOP, and STI. KPP PARTNERSHIP AGREEMENT means the Amended and Restated Agreement of Limited Partnership of Kaneb Pipe Line Partners, L.P., dated April 26, 1993, a certified copy of which has been delivered to Agent under SCHEDULE 6.1. KSI means Kaneb Services, Inc., a Delaware corporation. KSI COMPANIES means KSI and its Subsidiaries (other than its Insignificant Subsidiaries). LAWS means all applicable statutes, laws, treaties, ordinances, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions, and interpretations of any Tribunal. LENDER LIENS means Liens in favor of Agent for Lenders, in favor of any Lender, or in favor of Collateral Trustee and securing any of the Obligation, which Liens are, unless otherwise specified, subject to the Intercreditor Agreement until it has been terminated. LENDERS means the financial institutions -- including, without limitation, Agent (possibly acting through one or more of its Affiliates for LCs) in respect of its share of Borrowings and LCs -- named on SCHEDULE 2.1 or on the most recently amended SCHEDULE 2.1, if any, delivered by Agent under this agreement, and, subject to this agreement, their respective successors and assigns (but not any Participant who is not otherwise a party to this agreement). LC means a documentary or standby letter of credit issued by Agent or any of its Affiliates under this agreement and under a LC Agreement. 6 LC AGREEMENT means a letter of credit application and agreement or reimbursement agreement (in form and substance satisfactory to Agent) submitted and executed by Borrower to Agent or any of its Affiliates for an LC for the account of any KPP Company. LC EXPOSURE means, without duplication, the sum of the total face amount of all undrawn and uncancelled LCs plus the total unpaid reimbursement obligations of Borrower under drawings under any LC. LC REQUEST means a request substantially in the form of EXHIBIT D-3. LIBOR RATE means, for a LIBOR Rate Borrowing and for its Interest Period, the annual interest rate (rounded upward, if necessary, to the nearest 0.01%) equal to the sum of: (a) The quotient obtained by dividing (i) the rate that deposits in United States dollars are offered by major banks to other major banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days before the first day of that Interest Period in an amount comparable to the amount of that LIBOR Rate Borrowing and having a maturity approximately equal to the applicable Interest Period, by (b) one minus the Reserve Requirement (expressed as a decimal) for that relevant Interest Period; plus (b) A margin of interest that, for any day, is determined on the basis of the ratio of the KPP's consolidated Funded Debt to EBITDA as follows:
=================================================================== RATIO OF FUNDED DEBT TO EBITDA MARGIN =================================================================== 2.50 to 1.00 or more 1.125% ------------------------------------------------------------------- Less than 2.50 to 1.00, but 2.00 to 1.00 or more 0.875% ------------------------------------------------------------------- Less than 2.00 to 1.00, but 1.75 to 1.00 or more 0.750% ------------------------------------------------------------------- Less than 1.75 to 1.00, but 1.50 to 1.00 or more 0.625% ------------------------------------------------------------------- Less than 1.50 0.500% ===================================================================
For purposes of calculating that ratio, EBITDA is calculated on for the KPP Companies' most recently-completed-four-fiscal quarters, and Funded Debt is determined as of the day the margin of interest is determined. EBITDA is determined from the Current Financials and related Compliance Certificate then most recently delivered to Agent, effective as of the date received by Agent. If Borrower fails to timely furnish to Agent any Financial Statements and related Compliance Certificates required by this agreement, then the margin of 1.125% shall apply and remain in effect until Borrower furnishes them to Agent. LIBOR RATE BORROWING means a Borrowing bearing interest at the LIBOR Rate. LIEN means, with respect to any asset, any Right or interest in that asset of a creditor to secure obligations, indebtedness, or claims owed to that creditor or any other arrangement with that creditor that provides for the payment of that obligation, indebtedness, or claim out of that asset or which allows that creditor to have that obligation, indebtedness, or claim satisfied out of that asset in priority to the general creditors of any owner of it, including, without limitation (a) any lien, mortgage, security interest, pledge, deposit, production payment, Rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent to it, Tax lien, mechanic's or materialman's lien, any other charge or encumbrance for security purposes, whether arising by Law or agreement, or otherwise, and (b) any filed financing statement, any registration of a pledge (such as with an issuer of unregistered securities), or any other arrangement or action which would serve to perfect a Lien otherwise 7 described above, regardless of whether that financing statement is filed, registration is made, or arrangement or action is undertaken before or after the Lien exists. LITIGATION means any action by or before any Tribunal. LOAN PAPERS means (a) this agreement, certificates and reports delivered under this agreement, and exhibits and schedules attached to this agreement, (b) the Notes, LCs, LC Agreements, the Security Documents, and all other agreements, documents, and instruments in favor of Agent or Lenders (or Agent on behalf of Lenders) ever delivered under this agreement, (c) any Financial Hedge between Borrower and any Lender, and (d) all renewals, extensions, refinancings, and restatements of, and amendments and supplements to, any of the foregoing. MATERIAL ADVERSE EVENT means any circumstance or event that, individually or collectively, reasonably is expected to result in any (a) impairment of the ability of any party (other than Agent and Lenders) to any Loan Paper to perform any of its payment or other material obligations under any Loan Paper or the ability of Agent or any Lender to enforce any of those obligations or any of their respective Rights under the Loan Papers, (b) material and adverse effect on the financial condition of the KPC Companies as a whole as represented to Lenders in the Current Financials, (c) material and adverse effect on any part of the Collateral having a fair market value of at least $5,000,000 at such time, or (d) Default or Potential Default. MATERIAL AGREEMENT means, for any Person, any agreement (excluding purchase orders for material or inventory in the ordinary course of business) to which that Person is a party, by which that Person is bound, or to which any assets of that Person may be subject, and that is not cancelable by that Person upon 30 or fewer days notice without liability for further payment other than nominal penalty, and that requires that Person to pay more than $5,000,000 during any 12-month period. MAXIMUM AMOUNT and MAXIMUM RATE respectively mean, for a Lender, the maximum non-usurious amount and the maximum non-usurious rate of interest that, under applicable Law, the Lender is permitted to contract for, charge, take, reserve, or receive on the Obligation. MORTGAGE means the First Amended and Restated Mortgage and Security Agreement (And Financing Statement and Fixture Filing) executed and delivered KPP, Borrower, and Collateral Trustee, and in substantially the form of EXHIBIT C-3. MULTIEMPLOYER PLAN means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Person (that for purposes of Title IV of ERISA, is a member of Borrower's controlled group or is under common control with Borrower within the meaning of Section 414 of the Code) is making, or has made, or is accruing, or has accrued, an obligation to make contributions. NOTE means a promissory note substantially in the form of EXHIBIT A and executed and delivered by Borrower under this agreement. NOTE AGREEMENTS means the Note Purchase Agreements dated as of December 22, 1994, between KPP, Borrower, STS, STOP, and each Noteholder, collectively providing for the issuance by Borrower of its First Mortgage Notes in the total stated principal amount of $27,000,000 and the issuance by STI of its First Mortgage Notes in the total stated principal amount of $33,000,000. NOTEHOLDERS means American General Life Insurance Company, Merit Life Insurance Company, MONY Life Insurance Company of America, The Mutual Life Insurance Company of New York, Principal Mutual Life Insurance Company, and The Variable Annuity Life Insurance Company, together with the successor holders of notes issued under the Note Agreements. 8 NOTICE OF BORROWING means a notice substantially in the form of EXHIBIT D-1. NOTICE OF CONVERSION means a notice substantially in the form of EXHIBIT D-2. OBLIGATION means all present and future indebtedness, liabilities, and obligations, and all renewals, increases, and extensions thereof, or any part thereof, now or hereafter owed to Agent or any Lender by any Person under any Loan Paper, together with all interest accruing thereon, fees, costs, and expenses (including, without limitation, all reasonable attorneys' fees and expenses incurred in the enforcement or collection thereof) payable under the Loan Papers or in connection with the protection of Rights under the Loan Papers. PARTICIPANT is defined in SECTION 14.11(B). PBGC means the Pension Benefit Guaranty Corporation. PERMITTED-FUNDED DEBT means, at any time, Funded Debt permitted under SECTION 9.4. PERMITTED INVESTMENTS means those items described on SCHEDULE 9.8. PERMITTED LIENS means, at any time, the Lenders Liens and other Liens permitted under SECTION 9.5. PERMITTED TRANSFER means, at any time, the Transfers permitted under SECTION 9.10. PERSON means any individual, Tribunal, or other entity. PLEDGE AGREEMENT means the Stock Pledge Agreement executed and delivered by Borrower in favor of Collateral Trustee and substantially in the form of EXHIBIT C-2. POTENTIAL DEFAULT means the occurrence of any event or existence of any circumstance that would, upon notice or lapse of time or both, become a Default. PRIME RATE means, for any day, the prime rate per annum most recently announced by Agent as its prime rate in effect at its principal office in Dallas and thereafter entered into the minutes of Agent's Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such announcement without special notice to Borrower or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. PRINCIPAL DEBT means, at any time, the unpaid principal balance of all Borrowings. PURCHASER is defined in SECTION 14.11(C). QUALIFYING DEBT means, at any time, Funded Debt for money borrowed by Borrower with respect to which all of the following are true: (a) that Debt is permitted to be incurred under SECTION 9.4 at the time it is incurred; (b) that Debt is permitted to be incurred by the terms of, or a prior written consent or waiver under, each agreement, document, or instrument governing other Debt of any KPP Company or any of their Subsidiaries; 9 (c) that Debt is permitted to be pari passu secured with all other Debt that is secured by the Collateral by the terms of, or a prior written consent or waiver under, each agreement, document, or instrument governing all Debt that is secured by the Collateral; (d) each of the one or more initial holders of that Debt (i) is either a commercial bank chartered under (or duly authorized to operate a branch in the United States under) the Laws of the United States of America or any of its states or an insurance company or commercial finance company organized under the Laws of any such state, and (ii) has capital and surplus in excess of $100,000,000 at the time it becomes the holder of that Debt; (e) that Debt is not guarantied in any manner by any Person and is not secured by any Lien unless any that guaranty or Lien concurrently pari passu assures and secures the Obligation; and (f) Borrower has delivered to Agent a certificate (in form and substance acceptable to Agent) of a Responsible Officer of KPC at least 30 days before the incurrence of that Debt certifying that (i) Borrower intends to secure that Debt with the Collateral and (ii) the Debt complies with each of the provisions of this definition in order to constitute "Qualifying Debt." REPRESENTATIVES means representatives, officers, directors, employees, attorneys, accountants, and agents. RESERVE REQUIREMENT means, for any LIBOR Rate Borrowing for the relevant Interest Period, the maximum aggregate reserve requirements (including all basic, supplemental, emergency, special, marginal, and other reserves required by applicable Law) applicable to a member bank of the Federal Reserve System for eurocurrency fundings or liabilities. RESPONSIBLE OFFICER of a Person means its chairman, president, chief executive officer, chief financial officer, or treasurer. RESTRICTED SUBSIDIARY means, at any time, each Subsidiary of KPP other than those that KPP has designated -- by a certificate of its chief financial officer executed and delivered to Agent in form and substance acceptable to Agent -- as NOT being a Restricted Subsidiary, which KPP may do from time to time and at any time so long as (a) Borrower, STS, STI, STOP, and any other Subsidiary ever designated by KPP as a Restricted Subsidiary is always a Restricted Subsidiary for purposes of this agreement and (b) immediately after that designation, no Default or Potential Default exists and $1.00 of additional Funded Debt could be incurred under SECTION 9.4. RIGHTS means rights, remedies, powers, privileges, and benefits. SECONDARY CD RATE means, for any day, an annual rate of interest equal to the sum (rounded upward, if necessary, to the nearest 0.01%) of (a) the quotient of (i) the secondary market rate for 90-day certificates of deposit (secondary market) of major United States money market banks for the most recent weekly period ending Friday either (A) as reported in the Federal Reserve Statistical release entitled "Selected Interest Rates" (currently Publication H.15[519]) or any successor publication released during the week for which the rate is being determined, which rate shall be in effect for purposes of this determination for each day of the week in which the release date of such publication occurs, or (B) if not so reported, as determined by Agent on the basis of bids quoted to Agent at approximately 9:00 a.m. on such day by three New York certificate of deposit dealers selected by Agent and of recognized standing for secondary market morning offerings of negotiable certificates of deposit, with maturities of 90 days, of major United States money market banks, divided by (ii) a percentage equal to 100% minus the then-stated maximum rate of all reserve requirements under regulations issued by the Federal Reserve Board (including, without limitation, any margin, emergency, supplemental, special, or other reserves for a member of the Federal Reserve System having deposits in excess of $1,000,000,000 required by Law) applicable to any Lender, plus (b) the actual (or, if not known, the estimated) per annum assessment rate (rounded upward, if necessary, to 10 the nearest 0.01%) payable by Agent to The Federal Deposit Insurance Corporation (or its successor) for insuring liability for time deposits, as in effect from time to time. SECURITY DOCUMENTS means, collectively, the Intercreditor Agreement, Pledge Agreement, and Mortgage and any other document, financing statements, and stock powers creating or perfecting Lender Liens. SOLVENT means, as to a Person, that (a) the aggregate fair market value of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable it to pay its Debts as they mature, and (c) it does not have unreasonably small capital to conduct its businesses as currently, or proposed to be, conducted. STATED TERMINATION DATE means November 30, 1997. STI means StanTrans, Inc., a Delaware corporation that is a wholly owned Subsidiary of Borrower. STOP means Support Terminals Operating Partnership, L.P., a Delaware limited partnership, of which Borrower is a 99% limited partner and STS is a 1% general partner. STS means Support Terminal Services, Inc., a Delaware corporation that is a wholly owned Subsidiary of Borrower. SUBSIDIARY of any Person means any entity of which at least 50% (in number of votes) of the stock, partnership, or equivalent interests is owned of record or beneficially, directly or indirectly, by that Person. TANGIBLE NET WORTH, for any Person and at any time, means the sum of (a) stockholders' equity or partner capital accounts, as the case may be, as shown on a balance sheet, minus (b) treasury stock, if applicable, minus (c) any surplus resulting from the write-up of assets, minus (d) goodwill, including, without limitation, any amounts representing the excess of the purchase price paid for acquired assets, stock, or partnership interests over the book value assigned to them, minus (e) patents, trademarks, service marks, trade names, and copyrights, minus (f) other intangible assets. TAXES means, for any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. TERM GUARANTIES means the "Guaranties," as that term is defined in the Note Agreements as in effect on the Closing Date. TERMINATION DATE means the earlier of either (a) the Stated Termination Date or (b) the effective date that the Commitments are otherwise cancelled or terminated under this agreement. TERM NOTES means the "Notes," as that term is defined in the Note Agreements as in effect on the Closing Date. TRANSFER means to sell, lease, transfer, or otherwise dispose or, as the context requires, a sale, lease, transfer, or other disposition. TRIBUNAL means any (a) local, state, or federal judicial, executive, or legislative instrumentality, (b) private arbitration board or panel, or (c) central bank. TYPE means any type of Borrowing determined with respect to the applicable interest option. 11 1.2 Time References. Unless otherwise specified, in the Loan Papers (a) --------------- time references (e.g., 10:00 a.m.) are to time in Dallas, Texas, and (b) in calculating a period from one date to another, the word "from" means "from and including" and the word "to" or "until" means "to but excluding." 1.3 Other References. Unless otherwise specified, in the Loan Papers (a) ---------------- where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) heading and caption references may not be construed in interpreting provisions, (c) monetary references are to currency of the United States of America, (d) section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Paper in which they are used, (e) references to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions, (f) references to "including" mean including without limiting the generality of any description preceding that word, (g) the rule of construction that references to general items that follow references to specific items are limited to the same type or character of those specific items is not applicable in the Loan Papers, (h) references to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, (i) references to any Law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (j) references to any Loan Paper or other document include every renewal, extension, and refinancing of it, amendment and supplement to it, and replacement or substitution for it. 1.4 Accounting Principles. Unless otherwise specified, in the Loan --------------------- Papers (a) GAAP determines all accounting and financial terms and compliance with financial covenants, (b) GAAP in effect on the date of this agreement determines compliance with financial covenants, (c) otherwise, all accounting principles applied in a current period must be comparable in all material respects to those applied during the preceding comparable period, and (d) while KPP has any consolidated Subsidiaries (i) all accounting and financial terms and compliance with reporting covenants applicable to KPP must be on a consolidating and consolidated basis, as applicable and (ii) compliance with financial covenants applicable to KPP must be on a consolidated basis. SECTION 2 BORROWINGS AND LCS. --------- ------------------ 2.1 Commitments. Subject to the provisions in the Loan Papers, each ----------- Lender severally and not jointly agrees to lend to Borrower that Lender's Commitment Percentage of Borrowings and Agent (itself or through its Affiliates) agrees to issue LCs -- which Borrowings and LCs may be borrowed, issued, drawn against, repaid, and reborrowed or reissued, as the case may be -- so long as (a) each Borrowing must be made and each LC -- subject also to SECTION 2.3(A) - - must be issued on a Business Day before the Termination Date, (b) the Principal Debt (other than for payments under LCs) may never exceed $15,000,000, (c) the LC Exposure may never exceed $4,118,000, (d) the Commitment Usage may never exceed the total Commitments, (e) the Commitment Usage for any Lender (whether owed directly or through a participation under this agreement) may never exceed its Commitment, (f) the Existing LC Exposure is renewed under this agreement, and (g) the total Principal Debt may never exceed the total Commitments, (d) the Principal Debt owed any Lender may never exceed its Commitment, and (e) the initial Borrowing shall be in an amount at least equal to, and shall constitute a renewal and extension of, the outstanding principal of the Revolving Facility under the Existing Credit Agreement. 2.2 Borrowings. ---------- (a) Borrower may request a Borrowing by submitting to Agent a Notice of Borrowing --which, subject to CLAUSE (D), is irrevocable and binding on Borrower. It must be received by Agent no later than 10:00 a.m. on the third Business Day before the date on which funds are requested (the "BORROWING DATE") for any LIBOR Rate Borrowing or on the Business Day immediately before the Borrowing Date for any Alternate Base Rate Borrowing. Each Borrowing must be at least $100,000 or a $50,000 greater multiple. 12 (b) Each Lender shall remit its Commitment Percentage of each requested Borrowing to Agent's principal office in Dallas, Texas, by wire transfer according to Agent's wiring instructions on SCHEDULE 2.1, in funds that are available for immediate use by Agent by 12:00 Noon on the Borrowing Date. Subject to receipt of those funds, Agent shall (unless to its actual knowledge any of the applicable conditions precedent have not been satisfied by Borrower or waived by Determining Lenders) make those funds available to Borrower as directed in the Notice of Borrowing. (c) Absent contrary written notice from a Lender, Agent may assume that each Lender has made its Commitment Percentage of the requested Borrowing available to Agent on the Borrowing Date, and Agent may, in reliance upon that assumption (but shall not be required to), make available to Borrower a corresponding amount. If a Lender fails to make its Commitment Percentage of any requested Borrowing available to Agent on the Borrowing Date, Agent may recover the applicable amount on demand (i) from that Lender, together with interest at an annual rate equal to the Federal Funds Rate during the period from the date the amount was made available to Borrower by Agent and until the date Agent recovers the amount from that Lender, or (ii) if that Lender fails to pay its amount upon demand, then from Borrower -- who is not liable for any related Funding Loss but is liable for interest at an annual interest rate equal to the rate applicable to the requested Borrowing during the period from the Borrowing Date and until the date Agent recovers the amount from Borrower. No Lender is responsible for the failure of any other Lender to make its Commitment Percentage of any Borrowing. However, failure of any Lender to make its Commitment Percentage of any Borrowing does not excuse any other Lender from making its Commitment Percentage of any Borrowing. As soon as is reasonably practical, Agent shall notify Borrower if a Lender has failed to make its Commitment Percentage of any Borrowing. (d) Borrower may revoke a Notice of Borrowing that requests a LIBOR Rate Borrowing --and not be liable for any resulting Funding Loss -- if, before the LIBOR Rate for the requested Borrowing is established, SECTION 3.15 or 3.17 becomes applicable to it. 2.3 LCs. --- (a) Subject to the terms and conditions of this agreement and applicable Law, Agent (itself or through one of its Affiliates, and references in this SECTION 2.3 to AGENT include those Affiliates) agrees to issue LCs upon Borrower's making or delivering an LC Request and delivering an LC Agreement, both of which must be received by Agent no later than on the Business Day before the requested LC is to be issued, so long as each LC must expire on or before the earlier of either three Business Days before the Stated Termination Date or one year after its issuance. (b) Immediately upon Agent's issuance of any LC, Agent is deemed to have sold and transferred to each other Lender, and each other Lender is deemed irrevocably and unconditionally to have purchased and received from Agent, without recourse or warranty, an undivided interest and participation to the extent of that Lender's Commitment Percentage in the LC and all applicable Rights of Agent in the LC -- other than Rights to receive certain fees provided in SECTION 4.4 to be for Agent's sole account. (c) To induce Agent to issue and maintain LCs, and to induce Lenders to participate in issued LCs, Borrower agrees to pay or reimburse Agent (i) on the date when any draw request is presented under any LC, the amount paid or to be paid by Agent and (ii) promptly, upon demand, the amount of any additional fees Agent customarily charges for the application and issuance of an LC, for amending LC Agreements, for honoring draw requests, and for taking similar action in connection with letters of credit. If Borrower has not reimbursed Agent for any draws paid or to be paid on the date of Agent's demand for reimbursement, Agent is irrevocably authorized to fund Borrower's reimbursement obligations as an Alternate Base Rate Borrowing if proceeds are available under this agreement for it and if the conditions in this agreement for such a Borrowing (other than any notice requirements or minimum funding amounts) 13 have, to Agent's knowledge, been satisfied. The proceeds of that Borrowing shall be advanced directly to Agent to pay Borrower's unpaid reimbursement obligations. If funds cannot be so advanced under this agreement, then Borrower's reimbursement obligation constitutes a demand obligation. Borrower's obligations under this section are absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment that Borrower may have at any time against Agent or any other Person. From Agent's demand for reimbursement to the date paid (including any payment from proceeds of an Alternate Base Rate Borrowing), unpaid reimbursement amounts accrue interest that is payable on demand at the Default Rate thereafter. (d) Agent shall promptly notify Borrower of the date and amount of any draw request presented for honor under any LC (but failure to give notice does not affect Borrower's obligations under this agreement). Agent shall pay the requested amount upon presentment of a draw request unless presentment on its face does not comply with the terms of the applicable LC. When making payment, Agent may disregard (i) any default or potential default that exists under any other agreement and (ii) obligations under any other agreement that have or have not been performed by the beneficiary or any other Person (and Agent is not liable for any of those obligations). Borrower's reimbursement obligations to Agent and Lenders, and each Lender's obligations to Agent, under this section are absolute and unconditional irrespective of, and Agent is not responsible for, (i) the validity, enforceability, sufficiency, accuracy, or genuineness of documents or endorsements (even if they are in any respect invalid, unenforceable, insufficient, inaccurate, fraudulent, or forged), (ii) any dispute by any KPP Company with or any KPP Company's claims, setoffs, defenses, counterclaims, or other Rights against Agent, any Lender, or any other Person, or (iii) the occurrence of any Potential Default or Default. However, nothing in this agreement constitutes a waiver of Borrower's Rights to assert any claim or defense based upon the gross negligence or willful misconduct of Agent or any Lender. Agent shall promptly distribute reimbursement payments received from Borrower to all Lenders according to their Commitment Percentage. (e) If Borrower fails to reimburse Agent as provided in CLAUSE (D) above within 24 hours after Agent's demand for reimbursement, and funds cannot be advanced as a Borrowing under SECTION 2.2 to satisfy the reimbursement obligations, Agent shall promptly notify each Lender of Borrower's failure, of the date and amount paid, and of each Lender's Commitment Percentage of the unreimbursed amount. Each Lender shall promptly and unconditionally make available to Agent in immediately available funds its Commitment Percentage of the unpaid reimbursement obligation. Funds are due and payable to Agent before the close of business on the Business Day when Agent gives notice to each Lender of Borrower's reimbursement failure (if notice is given before 1:00 p.m.) or on the next succeeding Business Day (if notice is given after 1:00 p.m.). All amounts payable by any Lender accrue interest after the due date at the Federal-Funds Rate from the day the applicable draw is paid by Agent to (but not including) the date the amount is paid by the Lender to Agent. (f) Agent agrees with each Lender that it will exercise and give the same care and attention to each LC as it gives to its other letters of credit. Each Lender and Borrower agree that, in paying any draw under any LC, Agent has no responsibility to obtain any document (other than any documents expressly required by the respective LC) or to ascertain or inquire as to any document's validity, enforceability, sufficiency, accuracy, or genuineness or the authority of any Person delivering it. Neither Agent nor its Representatives will be liable to any Lender or any KPP Company for any LC's use or for any beneficiary's acts or omissions. Any action, inaction, error, delay, or omission taken or suffered by Agent or any of its Representatives in connection with any LC, applicable draws or documents, or the transmission, dispatch, or delivery of any related message or advice, if in good faith and in conformity with applicable Laws and in accordance with the standards of care specified in the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (as amended or modified), is binding upon the KPP Companies and Lenders and does not place 14 Agent or any of its Representatives under any resulting liability to any KPP Company or any Lender. Agent is not liable to any KPP Company or any Lender for any action taken or omitted, in the absence of gross negligence or willful misconduct, by Agent or its Representative in connection with any LC. (g) On the Termination Date and if requested by Determining Lenders while a Default exists, Borrower shall provide Agent, for the benefit of Lenders, cash collateral in an amount to equal the then-existing LC Exposure. (h) INDEMNIFICATION. BORROWER SHALL PROTECT, INDEMNIFY, PAY, AND SAVE --------------- AGENT, EACH LENDER, AND THEIR RESPECTIVE REPRESENTATIVES HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, DAMAGES, LOSSES, COSTS, CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) WHICH ANY OF THEM MAY INCUR OR BE SUBJECT TO AS A CONSEQUENCE OF THE ISSUANCE OF ANY LC, ANY DISPUTE ABOUT IT, THE FAILURE OF AGENT TO HONOR A DRAFT OR DRAW REQUEST UNDER ANY LC AS A RESULT OF ANY ACT OR OMISSION (WHETHER RIGHT OR WRONG) OF ANY PRESENT OR FUTURE TRIBUNAL, OR ANY OF THEIR SOLE OR CONCURRENT ORDINARY NEGLIGENCE. However, no Person is entitled to indemnity under the foregoing for its own gross negligence or willful misconduct. (i) LC Agreements. Although referenced in any LC, terms of any ------------- particular agreement or other obligation to the beneficiary are not incorporated into this agreement in any manner. The fees and other amounts payable with respect to each LC are as provided in this agreement, draws under each LC are part of the Obligation, only the events specified in this agreement as a Default constitute a default under any LC, and the terms of this agreement control any conflict between the terms of this agreement and any LC Agreement. 2.4 Termination. Without premium or penalty, and upon giving at least ----------- three Business Days prior written and irrevocable notice to Agent, Borrower may terminate all or part of the unused portion of the total Commitments. Each partial termination must be at least $1,000,000 or a $50,000 greater multiple and must be ratable for Lenders based on their respective Commitment Percentages. Once terminated, no part of any Commitment may be reinstated without the prior written approval of all Lenders. SECTION 3 PAYMENT TERMS. --------- ------------- 3.1 Notes and Payments. ------------------ (a) Principal Debt of Borrowings under SECTION 2.2 shall be evidenced by the Notes, one payable to each Lender in the stated principal amount of its Commitment. Principal Debt of drawings under LCs shall be evidenced by this agreement and all related LC Agreements. (b) Borrower must make each payment and prepayment on the Obligation to Agent's principal office in Dallas, Texas, by wire transfer according to Agent's wiring instructions on SCHEDULE 2.1, in funds that will be available for immediate use by Agent by 12:00 Noon on the day due. Otherwise, but subject to SECTION 3.8, those funds continue to accrue interest as if they were received on the next Business Day. Agent shall pay to each Lender, by wire transfer according to its wiring instructions on SCHEDULE 2.1, any payment or prepayment to which that Lender is entitled on the same day Agent receives the funds from Borrower if Agent receives the payment or prepayment before 12:00 Noon, and otherwise before 12:00 Noon on the following Business Day. If and to the extent that Agent does not make payments to Lenders when due, unpaid amounts shall accrue interest at an annual rate equal to the Federal Funds Rate from the due date until (but not including) the payment date. 15 3.2 Interest and Principal Payments. ------------------------------- (a) Accrued interest on each LIBOR Rate Borrowing is due and payable on the last day of its respective Interest Period. If any Interest Period is a period greater than three months, then accrued interest is also due and payable on the date ending each three month period after the commencement of the Interest Period. Accrued interest on each Alternate Base Rate Borrowing is due and payable on the last day of each February, May, August, and November (commencing February 28, 1995), with a final scheduled interest payment on Borrowings on the Termination Date. (b) Borrower shall repay all Principal Debt (together with all accrued and unpaid interest) by no later than the Termination Date. (c) If any of the limitations in SECTION 2.1 are ever exceeded, then Borrower shall prepay the Principal Debt, in at least the amount of that excess, together with (i) all accrued and unpaid interest on the principal amount so prepaid and (ii) any resulting Funding Loss. 3.3 Interest Options. Except where specifically otherwise provided, ---------------- Borrowings bear interest at an annual rate equal to the lesser of either (a) the Alternate Base Rate or the LIBOR Rate (in each case as designated or deemed designated by Borrower), as the case may be, or (b) the Maximum Rate. Each change in the Alternate Base Rate, the Applicable Margin, and the Maximum Rate is effective, without notice to Borrower or any other Person, upon the effective date of change. 3.4 Quotation of Rates. A Responsible Officer of Borrower may call Agent ------------------ before delivering a Notice of Borrowing to receive an indication of the interest rates then in effect, but the indicated rates do not bind Agent or Lenders or affect the interest rate that is actually in effect when Borrower delivers its Notice of Borrowing or on the Borrowing Date. 3.5 Default Rate. If permitted by Law, all past-due Principal Debt and ------------ accrued interest thereon bears interest from maturity (stated or by acceleration) at the Default Rate until paid, regardless whether payment is made before or after entry of a judgment. 3.6 Interest Recapture. If the designated interest rate applicable to ------------------ any Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is limited to the Maximum Rate, but any subsequent reductions in the designated rate shall not reduce the interest rate thereon below the Maximum Rate until the total amount of accrued interest equals the amount of interest that would have accrued if that designated rate had always been in effect. If at maturity (stated or by acceleration), or at final payment of the Notes, the total interest paid or accrued is less than the interest that would have accrued if the designated rates had always been in effect, then, at that time and to the extent permitted by Law, Borrower shall pay an amount equal to the difference between (a) the lesser of the amount of interest that would have accrued if the designated rates had always been in effect and the amount of interest that would have accrued if the Maximum Rate had always been in effect, and (b) the amount of interest actually paid or accrued on the Notes. 3.7 Interest Calculations. --------------------- (a) Interest will be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed but computed as if each calendar year consisted of 360 days for LIBOR Rate Borrowings and Alternate Base Rate Borrowings based on Secondary CD Rate or the Federal Funds Rate (unless the calculation would result in an interest rate greater than the Maximum Rate, in which event interest will be calculated on the basis of a year of 365 or 366 days, as the case may be), and 365 or 366 days, as the case may be, for Alternate Base Rate Borrowings based on the Prime Rate. All interest rate determinations and calculations by Agent are conclusive and binding absent manifest error. 16 (b) The provisions of this agreement relating to calculation of the Alternate Base Rate and the LIBOR Rate are included only for the purpose of determining the rate of interest or other amounts to be paid under this agreement that are based upon those rates. Each Lender may fund and maintain its funding of all or any part of each Borrowing as it selects. 3.8 Maximum Rate. Regardless of any provision contained in any Loan ------------ Paper, no Lender is entitled to contract for, charge, take, reserve, receive, or apply, as interest on all or any part of the Obligation any amount in excess of the Maximum Rate, and, if Lenders ever do so, then any excess shall be treated as a partial prepayment of principal and any remaining excess shall be refunded to Borrower. In determining if the interest paid or payable exceeds the Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted under applicable Law, (a) treat all Borrowings as but a single extension of credit (and Lenders and Borrower agree that that is the case and that provision in this agreement for multiple Borrowings is for convenience only), (b) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (c) exclude voluntary prepayments and their effects, and (d) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the Obligation. However, if the Obligation is paid in full before the end of its full contemplated term, and if the interest received for its actual period of existence exceeds the Maximum Amount, Lenders shall refund any excess (and Lenders may not, to the extent permitted by Law, be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving, or receiving interest in excess of the Maximum Amount). If the Laws of the State of Texas are applicable for purposes of determining the "Maximum Rate" or the "Maximum Amount," then those terms mean the "indicated rate ceiling" from time to time in effect under Article 1.04, Title 79, Revised Civil Statutes of Texas, as amended. Borrower agrees that Chapter 15, Subtitle 79, Revised Civil Statutes of Texas, 1925, as amended (which regulates certain revolving credit loan accounts and revolving triparty accounts), does not apply to the Obligation. 3.9 Interest Periods. When Borrower requests any LIBOR Rate Borrowing, ---------------- Borrower may elect the applicable interest period (each an "INTEREST PERIOD"), which may be, at Borrower's option, one, two, three, or six months, subject to the following conditions: (a) the initial Interest Period commences on the applicable Borrowing Date or conversion date, and each subsequent applicable Interest Period commences on the day when the next preceding applicable Interest Period expires; (b) if any Interest Period begins on a day for which no numerically corresponding Business Day in the calendar month at the end of the Interest Period exists, then the Interest Period ends on the last Business Day of that calendar month; (c) no Interest Period for any portion of Principal Debt may extend beyond the scheduled repayment date for that portion of Principal Debt; and (d) no more than five Interest Periods may be in effect at one time. 3.10 Conversions. Subject to the dollar limits and denominations of ----------- SECTION 2.1, Borrower may (a) convert a LIBOR Rate Borrowing on the last day of the applicable Interest Period to an Alternate Base Rate Borrowing, (b) convert an Alternate Base Rate Borrowing at any time to a LIBOR Rate Borrowing, and (c) elect a new Interest Period for a LIBOR Rate Borrowing, by giving a Notice of Conversion to Agent no later than 10:00 a.m. on the third Business Day before the conversion date or the last day of the Interest Period, as the case may be (for conversion to a LIBOR Rate Borrowing or election of a new Interest Period), and no later than 10:00 a.m. one Business Day before the last day of the Interest Period (for conversion to an Alternate Base Rate Borrowing). Absent Borrower's notice of conversion or election of a new Interest Period, a LIBOR Rate Borrowing shall be deemed converted to an Alternate Base Rate Borrowing effective when the applicable Interest Period expires. 3.11 Order of Application. The following provisions apply except when and -------------------- to the extent superseded by SECTION 4.09 of the Intercreditor Agreement. (a) If no Default or Potential Default exists, payments on the Obligation must be applied as required by applicable Loan Paper provisions other than CLAUSE (B) below. 17 (b) If a Default or Potential Default exists, any payment must be applied in the following order: (i) all fees and expenses for which Agent or Lenders have not been paid or reimbursed in accordance with the Loan Papers (and if such payment is less than all unpaid or unreimbursed fees and expenses, then the payment shall be paid against unpaid and unreimbursed fees and expenses in the order of incurrence or due date); (ii) accrued interest on the Principal Debt; (iii) the remaining Principal Debt in the order as Determining Lenders may elect (but Determining Lenders agree to apply payments in an order that will minimize any Funding Loss); and (iv) the remaining Obligation in the order and manner Determining Lenders deem appropriate. (c) Agent and Lenders shall attempt to apply mandatory payments against the Obligation in a manner that minimizes Funding Losses. 3.12 Sharing of Payments, Etc.. If any Lender obtains any payment ------------------------- (whether voluntary, involuntary, or otherwise, including, without limitation, as a result of exercising its Rights under SECTION 3.13) that exceeds its Commitment Percentage (or, if a Default exists, its Default Percentage) of that amount, then that Lender shall purchase from the other Lenders participations that will cause the purchasing Lender to share the excess payment ratably with each other Lender per their respective Commitment Percentages or Default Percentages, as applicable. If all or any portion of any excess payment is subsequently recovered from the purchasing Lender, then the purchase shall be rescinded and the purchase price restored to the extent of the recovery. Borrower agrees that any Lender purchasing a participation from another Lender under this SECTION 3.12 may, to the fullest extent permitted by Law, exercise all of its Rights of payment (including the Right of offset) with respect to that participation as fully as if that Lender were the direct creditor of Borrower in the amount of that participation. 3.13 Offset. If a Default exists, each Lender is entitled to exercise ------ (for the benefit of all Lenders in accordance with SECTION 3.12) the Rights of offset and banker's Lien against each and every account and other property, or any interest therein, that any party to a Loan Paper (other than Lenders and Agent) may now or hereafter have with, or which is now or hereafter in the possession of, that Lender to the extent of the full amount of the Obligation owed to it. Each Lender shall promptly notify Borrower of its actions taken under this SECTION 3.13. 3.14 Booking Borrowings. To the extent permitted by Law, any Lender may ------------------ make, carry, or transfer its Borrowings at, to, or for the account of any of its branch offices or the office of any of its Affiliates. However, no Affiliate is entitled to receive any greater payment under SECTION 3.16 than the transferor Lender would have been entitled to receive with respect to those Borrowings. Each Lender agrees that it will use its reasonable efforts (consistent with its internal policies and applicable Law) to make, carry, maintain, or transfer its part of any Borrowing with its Affiliates or branch offices in an effort to eliminate or reduce to the extent possible the aggregate amounts due to it under SECTIONS 3.16 and 3.17 if, in its reasonable judgment, such efforts will not be disadvantageous to it. 3.15 Basis Unavailable or Inadequate for LIBOR Rate. If, on or before any ---------------------------------------------- date when a LIBOR Rate is to be determined for a Borrowing, Agent or any Lender determines (and Determining Lenders agree with that determination) that the basis for determining the applicable rate is not available or that the resulting rate does not accurately reflect the cost to Lenders of making or converting Borrowings at that rate for the applicable Interest Period, then Agent shall promptly notify Borrower and Lenders of that determination (which is conclusive and binding on Borrower absent manifest error). Unless Borrower has revoked the applicable Notice of Borrowing under SECTION 2.2(D), the applicable Borrowing shall bear interest at the sum of the Alternate Base Rate plus the Applicable Margin. Until Agent notifies Borrower that those circumstances no longer exist, Lenders' commitments under this agreement to make or convert to LIBOR Rate Borrowings are suspended. 18 3.16 Additional Costs. ---------------- (a) With respect to any LIBOR Rate Borrowing, (i) if any present or future Law imposes, modifies, or deems applicable (or if compliance by any Lender with any requirement of any Tribunal results in) any requirement that any reserves (including, without limitation, any marginal, emergency, supplemental, or special reserves) be maintained, and if (ii) those reserves reduce any sums receivable by that Lender under this agreement or increase the costs incurred by that Lender in advancing or maintaining any portion of any LIBOR Rate Borrowing and (iii) that Lender determines that the reduction or increase is material (and it may, in determining the material nature of the reduction or increase, utilize reasonable assumptions and allocations of costs and expenses and use any reasonable averaging or attribution method), then (iv) that Lender (through Agent) shall deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount necessary to compensate it for its reduction or increase (which certificate is conclusive and binding absent manifest error), and (iv) Borrower shall pay that amount to that Lender within ten days after demand. The provisions of and undertakings and indemnification set forth in this CLAUSE (A) shall survive the satisfaction and payment of the Obligation and termination of this agreement. (b) With respect to any Borrowing, if any present or future Law regarding capital adequacy or compliance by any Lender with any request, directive, or requirement now existing or hereafter imposed by any Tribunal regarding capital adequacy, or any change in its written policies or in the risk category of this transaction, reduces the rate of return on its capital as a consequence of its obligations under this agreement to a level below that which it otherwise could have achieved (taking into consideration its policies with respect to capital adequacy) by an amount deemed by it to be material (and it may, in determining the amount, utilize reasonable assumptions and allocations of costs and expenses and use any reasonable averaging or attribution method), then (unless the effect is already reflected in the rate of interest then applicable under this agreement) that Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount necessary to compensate it (which certificate is conclusive and binding absent manifest error), and Borrower shall pay that amount to Lender within ten days after demand. The provisions of and undertakings and indemnification set forth in this CLAUSE (B) shall survive the satisfaction and payment of the Obligation and termination of this agreement. (c) Any Taxes payable by Agent or any Lender or ruled (by a Tribunal) payable by Agent or any Lender in respect of this agreement or any other Loan Paper shall -- if permitted by Law and if deemed material by that Agent or Lender (who may, in determining the material nature of the amount payable, utilize reasonable assumptions and allocations of costs and expenses and use any reasonable averaging or attribution method) -- be paid by Borrower, together with interest and penalties, if any (except for Taxes payable on the overall net income of that Agent or that Lender and except for interest and penalties incurred as a result of the gross negligence or willful misconduct of Agent or any Lender). That Agent or Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate setting forth in reasonable detail the calculation of the amount of payable Taxes, which certificate is conclusive and binding (absent manifest error), and Borrower shall pay that amount to Agent for the account of that Agent or Lender, as the case may be, within ten days after demand. If that Agent or that Lender subsequently receives a refund of the Taxes paid to it by Borrower, then the recipient shall promptly pay the refund to Borrower. 3.17 Change in Laws. If any Law makes it unlawful for any Lender to make -------------- or maintain LIBOR Rate Borrowings, then that Lender shall promptly notify Borrower and Agent, and (a) as to undisbursed funds, that requested Borrowing shall be made as an Alternate Base Rate Borrowing unless Borrower has revoked the applicable Notice of Borrowing under SECTION 2.2(D), (b), as to any outstanding Borrowing, (i) if maintaining the Borrowing until the last day of the applicable Interest Period is unlawful, the Borrowing shall be converted to an Alternate Base 19 Rate Borrowing as of the date of notice, and Borrower shall pay any related Funding Loss, or (ii) if not prohibited by Law, the Borrowing shall be converted to an Alternate Base Rate Borrowing as of the last day of the applicable Interest Period, or (iii) if any conversion will not resolve the unlawfulness, Borrower shall promptly prepay the Borrowing, without penalty, together with any related Funding Loss. No Notice of Conversion is required to be delivered in connection with any conversion under this SECTION 3.17. 3.18 Foreign Lenders. Each Lender that is organized under the laws of any --------------- jurisdiction other than the United States of America or any of its states (a) represents to Agent and Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with respect to any payments to be made to it in respect of the Obligation and (ii) it has furnished to Agent and Borrower two duly completed copies of either U.S. Internal Revenue Service Form 4224, Form 1001, or Form W-8 (wherein it claims entitlement to complete exemption from U.S. federal withholding Tax on all interest payments under the Loan Papers), and (b) covenants to (i) provide Agent and Borrower a new Form 4224, Form 1001, or Form W-8 upon the expiration or obsolescence of any previously delivered form according to Law, duly executed and completed by it, and (ii) comply from time to time with all Laws with regard to the withholding tax exemption. If any of the foregoing is not true or the applicable forms are not provided, then Borrower and Agent (without duplication) may deduct and withhold from interest payments under the Loan Papers United States federal income Tax at the full rate applicable under the Code. 3.19 Funding Loss. Borrower agrees to indemnify each Lender against, and ------------ pay to it upon demand, any Funding Loss of that Lender. When any Lender demands that Borrower pay any Funding Loss, that Lender shall deliver to Borrower and Agent a certificate setting forth in reasonable detail the basis for imposing Funding Loss and the calculation of the amount, which calculation is conclusive and binding absent manifest error. The provisions of and undertakings and indemnification set forth in this SECTION 3.19 survives the satisfaction and payment of the Obligation and termination of this agreement. SECTION 4 FEES. --------- ---- 4.1 Treatment of Fees. The fees described in this SECTION 4 (a) are not ----------------- compensation for the use, detention, or forbearance of money, (b) are in addition to, and not in lieu of, interest and expenses otherwise described in this agreement, (c) are payable in accordance with SECTION 3.1, (d) are non- refundable, (e) to the fullest extent permitted by Law, bear interest, if not paid when due, at the Default Rate, and (f) are calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed, but computed as if each calendar year consisted of 360 days, unless computation would result in an interest rate in excess of the Maximum Rate in which event the computation is made on the basis of a year of 365 or 366 days, as the case may be. 4.2 Administration Fees. Borrower shall pay to Agent, solely for its own ------------------- account, fees described in the letter agreement dated as of the date of this agreement between Borrower and Agent. 4.3 Commitment Fee. Borrower shall pay to Agent for the account of -------------- Lenders (based on their respective Commitment Percentages) a commitment fee, payable as it accrues from the date of this agreement as of the last day of each February, May, August, and November (commencing February 28, 1995), and on the Termination Date, equal to 0.20% (per annum) of the amount by which (a) the total Commitments exceeds (b) the average-daily Commitment Usage, determined for the calendar quarter (or portion of a calendar quarter commencing on the date of this agreement or ending on the Termination Date) preceding and including the date it is due. 4.4 LC Fees. As a condition precedent to the issuance (including, ------- without limitation, the extension) of each LC, Borrower shall pay to Agent: (a) For the account of each Lender according to each Lender's Commitment Percentage on the day the fee is payable, an issuance fee payable on the date of issuance equal to a percentage per annum 20 of the face amount of that LC -- equal to the applicable margin in effect for determining the LIBOR Rate under CLAUSE (B) of the definition of that term -- on the date of issuance; and (b) For the account of Agent only (ii) on the day of each issuance of any LC, a fronting fee of 0.125% per annum of the face amount of the LC, and (ii) all normal and customary out of pocket expenses and miscellaneous charges of Agent which are subject to change at any time without notice to Borrower except any notice given generally to Agent's similarly-situated customers. All LC and other fees paid to Agent or any other parties before the date of this agreement in respect of any Existing LCs are solely for the account of those parties without any accounting for them or sharing of them with Agent or Lenders notwithstanding any contrary provision in this agreement. SECTION 5 SECURITY. --------- -------- 5.1 Guaranty. Full and complete payment of the Obligation is guaranteed -------- in accordance with the Guaranty executed by Guarantors. 5.2 Collateral. Full and complete payment of the Obligation is secured ---------- by the Lender Liens on all of the Collateral except that none of the Collateral located in Kansas and covered by the Mortgage secures the LC Exposure unless and until the same become Borrowings under SECTION 2.2 evidenced by the Notes. No Collateral may be subordinated, substituted, or released without the prior written consent of all Lenders. 5.3 Additional Security and Guaranties. Lenders may (as contemplated in ---------------------------------- connection with Qualifying Debt or otherwise), without notice or demand and without affecting any Person's obligations under the Loan Papers, from time to time (a) receive and hold additional collateral from any Person for the payment of all or any part of the Obligation and exchange, enforce, or release all or any part of that collateral and (b) accept and hold any endorsement or guaranty of payment of all or any part of the Obligation and release any endorser or guarantor, or any Person who has given any other security for the payment of all or any part of the Obligation, or any other Person in any way obligated to pay all or any part of the Obligation. 5.4 Collateral Documentation. Borrower shall execute, or cause to be ------------------------ executed, financing statements, stock powers, assignments, consents of partners and other Persons, and other agreements, documents, and instruments, each in the form and content reasonably required by Agent, and Borrower shall pay all costs of filing any financing, continuation, or termination statements, or other action taken by Agent relating to the Collateral, including, without limitation, costs and expenses of any Lien search reasonably required by Agent. SECTION 6 CONDITIONS PRECEDENT. --------- -------------------- 6.1 Initial Borrowing or LC. Lenders are not obligated to fund the ----------------------- initial Borrowing and Agent is not obligated to issue any LC unless Agent has received all of the items described in SCHEDULE 6.1, each in form and substance acceptable to Agent and its counsel. 6.2 All Borrowings and LCs. Lenders are not obligated to fund (as ---------------------- opposed to continue or convert) any Borrowing and Agent is not obligated to issue any LC, unless on the applicable Borrowing Date or LC issue date (and after giving effect to the requested Borrowing or LC, as the case may be): (a) Agent has timely received a Notice of Borrowing or LC Request, as the case may be; (b) all of the representations and warranties in the Loan Papers are true and correct in all material respects (except to the extent that (i) the representations and warranties speak to a specific date or (ii) the facts on which such representations and warranties are based have been changed by transactions contemplated or permitted by this agreement); (c) no Material Adverse Event, Default, or Potential Default exists; and (d) the funding of the Borrowing or issuance of the LC, as the case may be, is permitted by 21 Law. Upon Agent's request, Borrower has delivered to Agent reasonable evidence substantiating any of the matters in the Loan Papers that are necessary to enable Borrower to qualify for the Borrowing or LC, as the case may be. 6.3 General. Each condition precedent in this agreement (including, ------- without limitation, each in SCHEDULE 6.1) is material to the transactions contemplated by this agreement, and time is of the essence with respect to each condition precedent. If Determining Lenders have first approved, Lenders may fund any Borrowing or Agent may issue any LC without all conditions being satisfied. To the extent permitted by Law, that funding or issuance may not be deemed to be a waiver of the requirement that each condition precedent be satisfied as a prerequisite for any subsequent funding or issuance, unless Determining Lenders specifically waive each item in writing. SECTION 7 REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to --------- ------------------------------ Agent and Lenders as follows: 7.1 Purpose of Credit Facility. Borrower will use proceeds of Borrowings -------------------------- for working capital in the ordinary course of business and for acquisitions if otherwise permitted under the Loan Papers. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. No part of the proceeds of any Borrowing will be used, directly or indirectly, for a purpose that violates any Law, including, without limitation, the provisions of Regulation U. 7.2 Existence, Good Standing, and Authority. Each KPP Company is duly --------------------------------------- organized, validly existing, and in good standing under the Laws of its jurisdiction of organization as identified on SCHEDULE 7.2. Except where failure is not a Material Adverse Event, each KPP Company (a) is duly qualified to transact business and in good standing as a foreign entity in each jurisdiction where (i) the Collateral is or may be located and (ii) the nature and extent of its business and properties require due qualification and good standing (those jurisdictions for CLAUSES (I) and (II) being identified on SCHEDULE 7.2 and as otherwise disclosed in writing to Agent and Lenders from time to time after the date of this agreement) and (b) possesses all requisite authority and power to conduct its business as is now being, or is contemplated by this agreement to be, conducted, except where failure is not a Material Adverse Event. As used in this SECTION 7.2, the concept of "good standing" is inapplicable to each KPP Company that is a partnership. 7.3 Subsidiaries. Excluding Insignificant Subsidiaries, KPC has no ------------ Subsidiaries except as disclosed on SCHEDULE 7.3 (and as otherwise disclosed in writing to Agent and Lenders from time to time after the date of this agreement to reflect any changes to the schedule as a result of transactions permitted by this agreement). All of the outstanding shares of capital stock (or similar voting interests) of those Subsidiaries are duly authorized, validly issued, fully paid, and nonassessable, and are owned of record and beneficially as set forth thereon, free and clear of any Liens, restrictions, claims, or Rights of another Person, other than Permitted Liens, and are not subject to any warrant, option, or other acquisition Right of any Person or subject to any transfer restriction except for restrictions imposed by securities Laws and general corporate or partnership Laws. 7.4 Separate Legal Entities. ----------------------- (a) (i) Each KPC Company observes all material corporate or partnership procedures required of it under Delaware Law and, as applicable, its certificate of incorporation and bylaws or its partnership agreement; (ii) each KSI Company observes in all material respects the corporate or partnership, as the case may be, formalities necessary to remain a legal entity separate and distinct from each other KSI Company; (iii) when appropriate, KPC obtains proper authorization from its shareholders, its board of directors, or both for its corporate action; (iv) at least one director of KPC is an executive officer of KPC but not a director, officer, or employee of KSI, and another director of KPC is an executive officer of KPC but not a director of KSI; (v) each KSI Company maintains corporate or partnership records, as the case 22 may be, books of account, and minutes or unanimous consents of its shareholders and directors, if applicable, separate from those of each other KSI Company; (vi) each KPC Company properly withholds federal income tax and FICA taxes on compensation to its employees; (vii) KSI properly provides for the payment -- and federal income Tax, and FICA Tax withholding -- for its own employees but not any of any KPC Company's employees, and each KPC Company properly provides for the payment -- and federal income Tax and FICA Tax withholding -- for its own employees but not any of KSI's employees; (viii) the KSI Companies participate in a common Employee Plan; (ix) the Borrower Companies are included in the consolidated Financial Statements of KPP, the KPP Companies are included in the consolidated Financial Statements of KPC, and the KPC Companies are included in the consolidated Financial Statements of KSI; (x) consolidated Financial Statements for the Borrower Companies (without KPP), audited consolidated Financial Statements for the KPP Companies (without KPC), and consolidated Financial Statements for the KPC Companies (without KSI) are prepared at least annually; (xi) while KSI was restructuring its Debt in 1988 and 1989, KPC continued -- and currently continues -- to pay its obligations in the ordinary course of business and as a separate financial and legal entity; and (xii) except possibly for the KPC Credit Agreement and the GECC Leases, a default by KSI on any of its Debt does not by itself create a default by any KPC Company on any of its Debt. (b) (i) Although received, deposited, withdrawn, and disbursed by a common treasury department, each KSI Company's funds are kept separate from, and are not commingled with, any other KSI Company's funds; (ii) each KPC Company conducts its operational business from an office separate from that of KSI; (iii) KSI conducts its business solely in its own name and not in the name of any KPC Company so as not to mislead others as to its separate identity, and the KPC Companies conduct their collective businesses in one or more of the KPC Companies' names and not in KSI's name; (iv) KSI's taxpayer identification number, telephone numbers, mailing addresses, stationery, and other business forms are separate from those of each KPC Company; (v) substantially all oral and written communications, including, without limitation, letters, invoices, purchase orders, contracts, statements, and applications, are made solely in one or more of the KPC Companies' names if they relate to any KPC Company and solely in KSI's name if they relate to it; (vi) KPC's capitalization is adequate for its business and purpose; (vii) overhead expense is shared to some extent between the KSI Companies, but the KPC Companies are billed for their collective share of the overhead expense by KSI, and the KPC Companies provide for payment of their collective operating expenses and liabilities from their collective funds; (viii) any funds transferred by KPC to KSI are evidenced by a promissory note or a proper inter-company account or reflect Distributions properly declared by that KPC Company's board of directors, and those transfers are properly reflected in the respective Financial Statements of that KPC Company and KSI; (ix) any funds transferred by any KPP Company to KPC are evidenced by a promissory note or reflect Distributions properly made and declared by that KPP Company's board of directors or in accordance with its partnership agreement, as the case may be, and those transfers are properly reflected in the respective Financial Statements of that KPP Company and KPC; (x) KSI is not held out as having - - and KSI has not -- agreed to pay or become liable for any KPC Company's Debt, except as may be provided by any Loan Paper executed by KSI; (xi) no KPC Company is held out as a department or division of KSI or as having -- and no KPC Company has -- agreed to pay or become liable for KSI's Debt; (xii) no KPP Company holds itself out or permits itself to be held out as a department or division of KPC or as having agreed to pay or as being liable for the Debt of KSI or KPC (and no KPP Company has agreed to pay or be liable for the Debt of KSI or KPC); and (xiii) each KPC Company maintains an arm's-length relationship with KSI. 7.5 Authorization and Contravention. The execution and delivery by each ------------------------------- KPP Company of each Loan Paper to which it is a party and the performance by it of its obligations thereunder (a) are within its corporate or partnership power, (b) have been duly authorized by all necessary corporate or partnership action, (c) require no action by or filing with any Tribunal (other than any action or filing that has been taken or made on or before the date of this agreement), (d) do not violate any provision of its certificate or agreement of limited partnership, certificate or articles of incorporation, or bylaws (as applicable), (e) do not violate any provision of Law applicable 23 to it, other than violations that individually or collectively are not a Material Adverse Event, (f) do not violate any Material Agreements to which it is a party, other than violations that are not a Material Adverse Event, or (g) do not result in the creation or imposition of any Lien (other than the Lender Liens) on any asset of any KPP Company. 7.6 Binding Effect. Upon execution and delivery by all parties thereto, -------------- each Loan Paper will constitute a legal and binding obligation of each KPP Company party thereto, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable Debtor Laws and general principles of equity. 7.7 Financial Statements. The Current Financials of KPP were prepared in -------------------- accordance with GAAP and present fairly the consolidated financial condition, results of operations, and cash flows of the KPP Companies as of, and for the portion of the fiscal year ending on the date or dates thereof (subject only to normal year-end adjustments). All material liabilities of the KPP Companies as of the date or dates of the Current Financials are reflected therein or in the notes thereto. Except for transactions directly related to, or specifically contemplated by, the Loan Papers, no subsequent material adverse changes have occurred in the consolidated financial condition of the KPP Companies from that shown in the Current Financials of KPP, nor has any KPP Company incurred any subsequent material liability. 7.8 Litigation. Except as disclosed on SCHEDULE 7.8 and as otherwise ---------- disclosed in writing to Agent and Lenders from time to time after the date of this agreement (if the disclosures are approved by Determining Lenders), no KPP Company or Restricted Subsidiary is subject to, or aware of the threat of, any Litigation that is reasonably likely to be determined adversely to any KPP Company, any Collateral, or any Restricted Subsidiary, or, if so adversely determined, is a Material Adverse Event. No outstanding or unpaid judgments exist against any KPP Company, any Collateral, or any Restricted Subsidiary. 7.9 Taxes. All Tax returns of each KPP Company or Restricted Subsidiary ----- required to be filed have been filed (or extensions have been granted) before delinquency, except for returns for which the failure to file is not a Material Adverse Event, and all Taxes imposed upon each KPP Company and Restricted Subsidiary or any Collateral that are due and payable have been paid before delinquency, other than Taxes for which the relevant criteria for Permitted Liens have been satisfied or for which nonpayment is not a Material Adverse Event. 7.10 Environmental Matters. Except as disclosed on SCHEDULE 7.10 and as --------------------- otherwise disclosed in writing to Agent and Lenders from time to time after the date of this agreement (if the disclosures are approved by Determining Lenders), and other than conditions, circumstances, or violations that are not, individually or in the aggregate, a Material Adverse Event, Borrower (a) knows of no environmental condition or circumstance materially and adversely affecting any KPP Company's or Restricted Subsidiary's properties (including, without limitation, the Collateral) or operations, (b) has received no report of any KPP Company's or Restricted Subsidiary's violation of any Environmental Law, and (c) is not aware that any KPP Company or Restricted Subsidiary is under any obligation to remedy any violation of any Environmental Law. Each KPP Company and Restricted Subsidiary has taken prudent steps to determine that its properties (including, without limitation, the Collateral) and operations do not violate any Environmental Law, other than violations that are not, individually or in the aggregate, a Material Adverse Event. 7.11 Employee Plans. Except where occurrence or existence is not a -------------- Material Adverse Event, (a) no Employee Plan has incurred an "accumulated funding deficiency" (as defined in (S)302 of ERISA or (S)412 of the Code), (b) no KPP Company or Restricted Subsidiary has incurred liability under ERISA to the PBGC in connection with any Employee Plan, (c) no KPP Company or Restricted Subsidiary has withdrawn in whole or in part from participation in a Multiemployer Plan, (d) no KPP Company or Restricted Subsidiary has engaged in any "prohibited transaction" (as defined in (S)406 of ERISA or (S)4975 of the Code), and (e) no "reportable event" (as defined in (S)4043 of ERISA) has occurred, excluding events for which the notice requirement is waived under applicable PBGC regulations. 24 7.12 Properties; Liens. Each KPP Company and Restricted Subsidiary has ----------------- good and marketable title to all its property (including, without limitation, the Collateral) reflected on the Current Financials -- except for title impairments described in SECTION 9.5((B)(II)(C), property that is obsolete, or (c) property that has been disposed in the ordinary course of business or, after the date of this agreement, as otherwise permitted by SECTION 9.10 or SECTION 9.11. Except for Permitted Liens, no Lien exists on any property of any KPP Company (including, without limitation, the Collateral), and the execution, delivery, performance, or observance of the Loan Papers will not require or result in the creation of any Lien (other than Lender Liens) on any property of any KPP Company or Restricted Subsidiary (including, without limitation, the Collateral). 7.13 Government Regulations. No KPP Company or Restricted Subsidiary is ---------------------- subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or any other Law (other than Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System) that regulates the incurrence of Debt. 7.14 Affiliate Transactions. No KPP Company or Restricted Subsidiary is a ---------------------- party to a material (i.e., requiring it to pay more than $100,000 during the term of the governing agreement) transaction with any of its Affiliates other than transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. 7.15 Debt Cross Defaults. Other than the GECC Leases and the KPC Credit ------------------- Agreement, no agreement evidencing Debt of (a) any KPP Company contains a cross- default provision concerning any Debt of KSI or KPC or (b) KSI or KPC contains a cross-default provision concerning any Debt of any KPP Company. 7.16 Material Agreements. No KPP Company or Restricted Subsidiary is a ------------------- party to any Material Agreement, other than the Loan Papers, the Note Agreements, and the Material Agreements described on SCHEDULE 7.16. All described Material Agreements are in full force and effect, and no default or potential default exists on the part of any KPP Company or Restricted Subsidiary thereunder that is a Material Adverse Event. 7.17 Insurance. Each KPP Company and Restricted Subsidiary maintains with --------- financially sound, responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates) insurance concerning its properties (including, without limitation, the Collateral) and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. 7.18 Labor Matters. No actual or -- to Borrower's knowledge -- threatened ------------- strikes, labor disputes, slow downs, walkouts, or other concerted interruptions of operations by the employees of any KPP Company or Restricted Subsidiary exist that are a Material Adverse Event. Hours worked by and payment made to employees of each KPP Company and Restricted Subsidiary have not been in violation of the Fair Labor Standards Act or any other applicable Law dealing with labor matters, other than any violations, individually or collectively, that are not a Material Adverse Event. All payments due from any KPP Company or Restricted Subsidiary for employee health and welfare insurance have been paid or accrued as a liability on its books, other than any nonpayments that are not, individually or collectively, a Material Adverse Event. 7.19 Solvency. On each Borrowing Date, each KPP Company is, and after -------- giving effect to the requested Borrowing will be, Solvent. 7.20 Trade Names. No KPP Company has used or transacted business under ----------- any other corporate, partnership, or trade name in the five-year period preceding the initial Borrowing Date, except as disclosed on SCHEDULE 7.20. 25 7.21 Intellectual Property. Each KPP Company and Restricted Subsidiary --------------------- owns all material licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, and trade names necessary to continue to conduct its businesses as presently conducted by it and proposed to be conducted by it immediately after the date of this agreement. Each KPP Company and Restricted Subsidiary is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret, or other intellectual property right of others, other than any infringements or claims that, if successfully asserted against or determined adversely to any KPP Company, would not, individually or collectively, constitute a Material Adverse Event. To the knowledge of Borrower, no infringement or claim of infringement by others of any material license, patent, copyright, service mark, trademark, trade name, trade secret, or Restricted Subsidiary or other intellectual property of any KPP Company exists. 7.22 Full Disclosure. Each material fact or condition relating to the --------------- Loan Papers or the financial condition, business, or property of any KPP Company and Restricted Subsidiary that is a Material Adverse Event has been disclosed in writing to Agent. All information previously furnished by any KPP Company and Restricted Subsidiary to Agent in connection with the Loan Papers was, and all information hereafter furnished by any KPP Company and Restricted Subsidiary to Agent will be, true and accurate in all material respects or based on reasonable estimates on the date the information is stated or certified. SECTION 8 AFFIRMATIVE COVENANTS. Until neither Agent, nor any Affiliate of --------- --------------------- Agent, nor any Lender has any commitment to extend any credit under any Loan Paper and the LC Exposure, and all other Obligation, is fully paid and performed -- unless Borrower receives a prior written consent to the contrary by Agent on behalf of Determining Lenders -- Borrower covenants and agrees as follows: 8.1 Items to be Furnished. Borrower shall cause the following to be --------------------- furnished to Agent and each Lender: (a) Promptly after preparation, and no later than 95 days after the last day of each fiscal year of KPP, Financial Statements showing the consolidated financial condition and results of operations of the KPP Companies and its Subsidiaries as of, and for the year ended on, that last day, accompanied by: (i) the unqualified opinion of a firm of nationally-recognized independent certified public accountants, based on an audit using generally accepted auditing standards, that the Financial Statements were prepared in accordance with GAAP and present fairly, in all material respects, the consolidated financial condition and results of operations of KPP and its Subsidiaries; (ii) any management letter prepared by the accounting firm delivered in connection with its audit; (iii) a certificate from the accounting firm to Agent indicating that during its audit it obtained no knowledge of any Default or Potential Default or, if it obtained knowledge, the nature and period of existence thereof; and (iv) a Compliance Certificate. (b) Promptly after preparation, and no later than 95 days after the last day of each fiscal year of Borrower, Financial Statements showing the consolidated financial condition and results of operations of the Borrower Companies as of, and for the year ended on, that last day, accompanied by (i) a Financial Statements Certificate executed by the chief financial officer of Borrower and (ii) any audit opinion delivered in connection with the Financial Statements. 26 (c) Promptly after preparation, and no later than 50 days after the last day of each of the first three fiscal quarters of KPP, Financial Statements showing the consolidated financial condition and results of operations of KPP and its Subsidiaries for the applicable fiscal quarter and for the period from the beginning of the current fiscal year to the last day of that fiscal quarter, accompanied by a Compliance Certificate. (d) Promptly after preparation, and no later than 50 days after the last day of each of the first three fiscal quarters of Borrower, Financial Statements showing the consolidated financial condition and results of operations of the Borrower Companies for the applicable fiscal quarter and for the period from the beginning of the current fiscal year to the last day of that fiscal quarter, accompanied by a Financial Statements Certificate executed by the chief financial officer of Borrower. (e) Promptly after receipt, a copy of each interim or special audit report and management letter issued by independent accountants with respect to any KPP Company or Restricted Subsidiary or its financial records. (f) Notice, promptly after Borrower knows, of (i) the commencement of any Litigation that, if determined adversely to any KPP Company or Restricted Subsidiary or the Collateral, would be a Material Adverse Event, (ii) any change in any material fact or circumstance represented or warranted by any KPP Company in any Loan Paper, (iii) the receipt by any KPP Company or Restricted Subsidiary of notice of any violation or alleged violation of any Environmental Law (which individually or collectively with other violations or allegations could constitute a Material Adverse Event), (iv) a Default or Potential Default, specifying the nature thereof and what action Borrower or any other KPP Company or Restricted Subsidiary has taken, is taking, or proposes to take, or (v) the incurrence of any Funded Debt other than under this agreement. (g) Promptly after filing, true, correct, and complete copies of all material reports or filings filed by or on behalf of any KPP Company with any Tribunal. (h) Upon request by Agent at the request of Determining Lenders, full information as to the insurance carried by the KPP Companies and Restricted Subsidiaries, and promptly after receipt by any KPP Company or Restricted Subsidiary, notice from any insurer of any notice of cancellation or nonrenewal of a material insurance policy or material change in insurance coverage from that existing on the date of this agreement. (i) Promptly after publication, copies of all press releases and other statements made available generally by any KPP Company or Restricted Subsidiary to the public concerning material developments in its business. (j) As soon as is reasonably practical, upon reasonable request by Agent or Determining Lenders (through Agent), information (not otherwise required to be furnished under the Loan Papers) respecting the business affairs, assets (including, without limitation, the Collateral), and liabilities of the KPP Companies and Restricted Subsidiaries, and opinions, certifications, and documents in addition to those mentioned in this agreement. 8.2 Use of Proceeds. Borrower shall use the proceeds of Borrowings only --------------- for the purposes represented in this agreement. 8.3 Books and Records. Each KPP Company and Restricted Subsidiary shall ----------------- maintain books, records, and accounts necessary to prepare financial statements in accordance with GAAP (except for any departure with respect to the accounting treatment of the pipeline, terminals, and related assets acquired by Borrower). 27 8.4 Inspections. Upon reasonable request, each KPP Company and ----------- Restricted Subsidiary shall allow Agent or its Representatives (who shall comply with the safety rules disclosed to it or them at the time of inspection) to inspect any of its properties (including, without limitation, the Collateral), to review reports, files, and other records and to make and take away copies, to conduct tests or investigations, and to discuss any of its affairs, conditions, and finances with its other creditors, directors, officers, employees, or representatives from time to time, during reasonable business hours. Fees and expenses incurred under this SECTION 8.4 shall be borne by Agent unless Agent acted under this SECTION 8.4 in order to perform its duties under the Loan Papers or preserve or protect the Rights of Agent and Lenders under the Loan Papers. Agent and its Representatives agree to treat confidential those matters disclosed by Borrower as being confidential; however, Agent and its Representatives may disclose confidential matters (a) to Agent, each Lender, and each actual or prospective Participant or Purchaser, (b) to any Tribunal having jurisdiction over it, and (c) that are public knowledge. 8.5 Taxes. Each KPP Company and Restricted Subsidiary shall promptly pay ----- when due any and all Taxes other than Taxes which are being contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made, and in respect of which levy and execution of any Lien have been and continue to be stayed. 8.6 Payment of Obligations. Each KPP Company and Restricted Subsidiary ---------------------- shall promptly pay (or renew and extend) all of its material obligations as they become due (unless the obligations are being contested in good faith by appropriate proceedings). 8.7 Expenses. Borrower shall promptly pay upon demand (a) all costs, -------- fees, and expenses paid or incurred by Agent incident to any Loan Paper (including, but not limited to, the reasonable fees and expenses of Agent's counsel in connection with the negotiation, preparation, delivery, and execution of the Loan Papers and any related amendment, waiver, or consent, and (b) all reasonable costs and expenses of Lenders and Agent incurred by Agent or any Lender in connection with the enforcement of the obligations of any Person arising under the Loan Papers or the exercise of any Rights arising under the Loan Papers (including, but not limited to, reasonable attorneys' fees and court costs), all of which shall be a part of the Obligation and shall bear interest, if not paid upon demand, at the Default Rate until repaid. 8.8 Maintenance of Existence, Assets, and Business. Except as otherwise ---------------------------------------------- permitted by SECTION 9.11, each KPP Company and Restricted Subsidiary shall (a) maintain its corporate or partnership existence and good standing in its state of organization and its authority to transact business in all other states where the Collateral is or may be located and, additionally, where failure to maintain its authority to transact business is a Material Adverse Event; (b) maintain all licenses, permits, and franchises necessary for its business where failure is a Material Adverse Event; (iii) keep all of its assets that are useful in and necessary to its business in good working order and condition (ordinary wear and tear excepted) and make all necessary repairs and replacements. 8.9 Insurance. Each KPP Company and Restricted Subsidiary, at its cost --------- and expense, shall maintain insurance with financially sound and reputable insurers, in such amounts, and covering such risks, as is ordinary and customary for similar Persons in the industry. However, the insurance coverage, at a minimum, must be in the amounts and cover the risks described on SCHEDULE 8.9. At Agent's request, each KPP Company and Restricted Subsidiary shall deliver to Agent certificates of insurance for each policy of insurance. If any insurance policy covered by an insurance certificate previously delivered to Agent is altered or canceled, then Borrower shall cause to be promptly delivered to Agent a replacement certificate (in form and substance satisfactory to Agent). 8.10 Preservation and Protection of Rights; Separate Legal Entities. Each -------------------------------------------------------------- KPP Company and Restricted Subsidiary shall perform the acts and duly authorize, execute, acknowledge, deliver, file, and record any additional writings as Agent or Determining Lenders may reasonably deem necessary or appropriate to perfect and maintain the Lender Liens and preserve and protect the Rights of Agent and Lenders under any Loan Paper. Additionally, each KPC Company and Restricted Subsidiary shall take (or cause KSI to take) any action that Determining Lenders 28 may reasonably deem necessary or appropriate to maintain and preserve the legal separateness of KSI, KPC, KPP, and each Borrower Company. 8.11 Environmental Laws. Each KPP Company and Restricted Subsidiary shall ------------------ (a) conduct its business and operate the Collateral so as to comply with all applicable Environmental Laws and shall promptly take corrective action to remedy any non-compliance with any Environmental Law, and (b) establish and maintain a management system designed to ensure compliance with applicable Environmental Laws and minimize financial and other risks to each KPP Company and Restricted Subsidiary arising under applicable Environmental Laws or as the result of environmentally related injuries to Persons or property (including, without limitation, the Collateral). Borrower shall deliver reasonable evidence of compliance with the foregoing covenant to Agent within 30 days after any request from Determining Lenders. 8.12 Subsidiaries. Each Person that becomes a Restricted Subsidiary after ------------ the date of this agreement (whether as a result of acquisition, creation, or otherwise) shall execute and deliver a Guaranty within ten days after becoming a Restricted Subsidiary. 8.13 Indemnification. EACH KPP COMPANY, JOINTLY AND SEVERALLY, --------------- INDEMNIFIES, PROTECTS, AND HOLDS AGENT, LENDERS, AND THEIR RESPECTIVE PARENTS, SUBSIDIARIES, REPRESENTATIVE, SUCCESSORS, AND ASSIGNS (COLLECTIVELY, THE "INDEMNIFIED PARTIES") HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, -------------------- OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, CLAIMS, AND PROCEEDINGS AND ALL COSTS, EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL ATTORNEYS' FEES AND LEGAL EXPENSES WHETHER OR NOT SUIT IS BROUGHT), AND DISBURSEMENTS OF ANY KIND OR NATURE (THE "INDEMNIFIED LIABILITIES") THAT MAY AT ----------------------- ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST ANY INDEMNIFIED PARTY, IN ANY WAY RELATING TO OR ARISING OUT OF (A) THE DIRECT OR INDIRECT RESULT OF THE VIOLATION BY ANY KPP COMPANY OF ANY ENVIRONMENTAL LAW, (B) ANY KPP COMPANY'S GENERATION, MANUFACTURE, PRODUCTION, STORAGE, RELEASE, THREATENED RELEASE, DISCHARGE, DISPOSAL, OR PRESENCE IN CONNECTION WITH ITS PROPERTIES (INCLUDING, WITHOUT LIMITATION, THE COLLATERAL) OF A HAZARDOUS SUBSTANCE (INCLUDING, WITHOUT LIMITATION, (I) ALL DAMAGES FROM ANY USE, GENERATION, MANUFACTURE, PRODUCTION, STORAGE, RELEASE, THREATENED RELEASE, DISCHARGE, DISPOSAL, OR PRESENCE, OR (II) THE COSTS OF ANY ENVIRONMENTAL INVESTIGATION, MONITORING, REPAIR, CLEANUP, OR DETOXIFICATION AND THE PREPARATION AND IMPLEMENTATION OF ANY CLOSURE, REMEDIAL, OR OTHER PLANS), (C) THE LOAN PAPERS OR ANY OF THE TRANSACTIONS CONTEMPLATED IN THEM, AND (D) ANY INDEMNIFIED PARTY'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE. HOWEVER, NO INDEMNIFIED PARTY IS ENTITLED TO BE INDEMNIFIED UNDER THE LOAN PAPERS FOR ITS OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT. The provisions of and undertakings and indemnification in this SECTION 8.13 survive the satisfaction and payment of the Obligation and termination of this agreement. SECTION 9 NEGATIVE COVENANTS. Until neither Agent, nor any Affiliate of Agent, --------- ------------------ nor any Lender has any commitment to extend any credit under any Loan Paper and the LC Exposure, and all other Obligation, is fully paid and performed -- unless Borrower receives a prior written consent to the contrary by Agent on behalf of Determining Lenders -- Borrower covenants and agrees as follows: 9.1 Taxes. No KPP Company or Restricted Subsidiary may use any portion ----- of the proceeds of any Borrowing or LCs to pay the wages of employees unless a timely payment to or deposit with the United States of America of all amounts of Tax required to be deducted and withheld with respect to such wages is also made. 9.2 [Intentionally Blank.] 9.3 Employee Plans. Except where a Material Adverse Event would not -------------- result, no event or circumstance described in SECTION 7.11 may exist or occur. 29 9.4 Funded Debt. No KPP Company or Restricted Subsidiary may create, ----------- incur, of suffer to exist any Funded Debt except the following: (a) Funded Debt evidenced by the Notes, Term Notes, and Term Guaranties; (b) other Funded Debt of the KPP Companies outstanding on the "Series B Closing Date" described in SCHEDULE 5 to the Note Agreements as in effect on the date of this agreement (including any amendments and modifications of that Funded Debt, but excluding any amendment, modification, renewal, extension, or refunding of that Funded Debt that has the effect of extending its final maturity or increasing its principal amount); and (c) other Funded Debt of any KPP Company or any Restricted Subsidiary so long as -- at the time of, and immediately after giving effect to, the incurrence of (including any amendments and modifications of, but excluding any amendment, modification, renewal, extension, or refunding that has the effect of extending the final maturity or increasing the principal amount of) it and immediately after giving effect to the concurrent application of any proceeds of it to retire other Funded Debt -- (i) no Default or Potential Default exists and (ii) the ratio of KPP's consolidated Funded Debt to its consolidated EBITDA does not equal or exceed 3.15 to 1.00, with (A) EBITDA being determined for a 12-calendar-month period ending no more than three months before the date on which that KPP Company or Restricted Subsidiary incurs that other Funded Debt and (B) Funded Debt being determined as of the date of the incurrence of the Funded Debt for which the calculation in this CLAUSE (C) is being made. 9.5 Liens. ----- (a) No KPP Company or Restricted Subsidiary may (i) create, assume, or otherwise incur or suffer to exist any Lien upon -- or, whether by Transfer to any other KPP Company or Restricted Subsidiary or otherwise, subject to the priority payment of any obligations, indebtedness, or claim other than the Obligation -- any present, future, real, personal, tangible, or intangible assets (including, without limitation, stock or other securities) of any KPP Company or Restricted Subsidiary, whether now owned or acquired in the future, or any income or profits from any of those assets, (ii) own or acquire or agree to acquire any of those assets subject to or encumbered by any Lien, or (iii) suffer to exist any obligations, indebtedness, or claim of any KPP Company or Restricted Subsidiary or claims or demands against any KPP Company or Restricted Subsidiary, which obligations, indebtedness, claims, or demands, if unpaid, would (in the hands of the holder of any of them, any guarantor of any of them, or any Person who has any Right or obligation to purchase any of them), by law or upon bankruptcy or insolvency or otherwise, be given any priority whatsoever over that KPP Company's or Restricted Subsidiary's general creditors. (b) The restrictions in CLAUSE (A) above neither (i) apply to Lender Liens or other Liens under the Security Documents which are subject to the Intercreditor Agreement, nor (ii) prevent: (A) any Lien existing on the "Series B Closing Date" described on SCHEDULE 5 to the Note Agreements as in effect on the date of this agreement that secure Funded Debt permitted under SECTION 9.4(B) and renewals, extensions, and refundings of that Funded Debt permitted under SECTION 9.4(C) but not extensions of those Liens to cover any additional assets; or (B) any Lien that is incidental to the normal conduct of business or ownership of assets by any KPP Company or Restricted Subsidiary so long as that Lien does not secure Debt and does not materially impair the use of those assets in the operation of that KPP Company's or Restricted Subsidiary's businesses; or 30 (C) any (i) Lien for Taxes not yet due and payable or the nonpayment of which is permitted by SECTION 8.5, (ii) survey exceptions, encumbrances, easements, or reservations of, or Rights of others for, Rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property, and Rights of eminent domain so long as all of the foregoing do not collectively have a material-adverse effect on any assets of any KPP Company or Restricted Subsidiary or materially impair their use in the operation of its businesses, or (iii) mechanic's Liens and materialman's Liens for services or materials for which payment is not yet due and payable and which do not materially impair the use by any KPP Company or Restricted Subsidiary in the operation of its businesses; or (D) any Lien in respect of assets acquired by a KPP Company or Restricted Subsidiary after the date of this agreement to secure Debt assumed or incurred to finance all or any part of the purchase price so long as that Lien (1) must at all times apply solely to the assets so acquired and any improvements on them that become fixtures or accessions to them, (2) secures only a principal amount of Debt that never exceeds the lesser of either the fair market value of the acquired assets at the time of their acquisition or the cost of those assets, (3) must be either existing at the time of the acquisition or created within 120 days after the time of the acquisition, and (4) secures only Debt permitted by SECTION 9.4 at the time the Debt is incurred; or (E) any of the following Liens if (1) the validity, applicability or amount of it is being contested in good faith and by appropriate and lawful proceedings diligently conducted, (2) the KPP Company or Restricted Subsidiary in question has set aside on its books, reserves for it that are deemed adequate in its reasonable opinion, (3) levy and execution of that Lien continue to be stayed, (4) it covers any Collateral and is subordinate to the Lender Liens, and (5) all such Liens do not collectively materially detract from the value of the property of the KPP Company or Restricted Subsidiary in question or materially impair the use of that property in the operation of its business: (a) All claims and Liens of mechanics, materialmen, warehousemen -- other than those described in SECTION 9.5(B)(II)(C)(III), and (b) adverse judgments or orders on appeal for the payment of money not in excess of the total amount of $25,000,000; or (F) any Lien securing Qualifying Debt; or (G) any Lien on assets that are not Collateral and securing Debt permitted by SECTION 9.4 so long as the total amount of Debt so secured never exceeds 10% of KPP's consolidated partners' capital. 9.6 Affiliate Transactions. No KPP Company or Restricted Subsidiary may ---------------------- engage in any transaction with an Affiliate on terms less favorable to it than would have been obtainable in arm's length dealing in the ordinary course of business with a Person not an Affiliate. 9.7 Compliance with Laws and Documents. No KPP Company or Restricted ---------------------------------- Subsidiary may (a) violate the provisions of any Laws applicable to it or of any Material Agreement to which it is a party if that violation alone, or when aggregated with all other violations, would be a Material Adverse Event, or (b) violate, repeal, replace, or amend any provision of its certificate or agreement of limited partnership, certificate or articles of incorporation, or bylaws (as applicable). 9.8 Loans, Advances, and Investments. No KPP Company or Restricted -------------------------------- Subsidiary may make any loan, advance, extension of credit, or capital contribution to, make any investment in, or purchase or commit to purchase any stock or other securities or evidences of Debt of, or interests in, any other Person, except (a) as permitted by SECTIONS 9.9 or 9.11 or (b) Permitted Investments. 31 9.9 Distributions. No KPP Company or Restricted Subsidiary may enter ------------- into or permit to exist any arrangement or agreement that prohibits it from paying Distributions to its equity holders -- other than this agreement and its charter documents in effect as of the date of this agreement -- and neither KPP nor Borrower may declare, make, or pay any Distribution: (a) if it would violate the KPP Partnership Agreement or Borrower Partnership Agreement or a Default or Potential Default is continuing; or (b) for (i) Borrower, the total Distributions paid by it in any calendar quarter would exceed 100% of the "Borrower Available Cash" for the calendar quarter immediately preceding the quarter in which those Distributions are paid, or (ii) KPP, the total Distributions paid by it in any calendar quarter would exceed the "KPP Available Cash" that constitutes "Cash from Operations" or "Cash from Interim Capital Transactions" for the calendar quarter immediately preceding the quarter in which those Distributions are paid. For purposes of this SECTION 9.9 only: BORROWER AVAILABLE CASH means, with respect to any calendar quarter (i) the sum of (a) all cash receipts of Borrower during that quarter from all sources, plus (b) any reduction in reserves established in prior quarters, minus (ii) the sum of (aa) all cash disbursements of Borrower during that quarter, including, without limitation, disbursements for operating expenses, debt service (including the payment of principal, premium, and interest), capital expenditures, and contributions, if any, to any Subsidiary (but excluding all cash Distributions by Borrower), plus (bb) any reserves established in that quarter in such amounts as KPC determines in its reasonable discretion to be necessary or appropriate to provide for the proper conduct of Borrower's business (including reserves for future capital expenditures), plus (cc) any other reserves established in that quarter in such amounts as KPC determines in its reasonable discretion to be necessary because the Distribution of those amounts would be prohibited by applicable Law or by any loan agreement, security agreement, mortgage, debt instrument, or other agreement or obligation to which Borrower is a party or by which it is bound or its assets are subject. For purposes of this definition, notwithstanding the foregoing, "Borrower Available Cash" may not include any cash receipts or reductions in reserves or take into account any disbursements made or reserves established after commencement of the dissolution and liquidation of Borrower. CASH FROM INTERIM CAPITAL TRANSACTIONS means, on any day, the amount of KPP Available Cash that KPC determines to be Cash from Interim Capital Transactions in accordance with Section 5.3 of the KPP Partnership Agreement. CASH FROM OPERATIONS means, on any day before commencement of the dissolution and liquidation of KPP -- on a cumulative basis -- the sum of (a) the sum of all cash receipts of KPP plus $3,526,000 --including Distributions of cash received from Borrower and excluding any cash proceeds from any Interim Capital Transactions or Terminating Capital Transactions during the period since the commencement of operations by KPP through that day -- minus (b) the sum of (i) all cash operating expenditures of KPP during that period, including, without limitation, Taxes on KPP as an entity or Taxes paid by KPP on behalf of, or amounts withheld with respect to, all (but not less than all) of its unitholders, if any, plus (ii) all cash debt service payments of KPP during that period -- other than payments or prepayments of principal and premium required by reason of loan agreements (including covenants and default provisions therein) or by lenders, in each case in connection with sales or other dispositions of assets or made in connection with refinancings or refundings of indebtedness (provided that any payment or prepayment of principal, whether or not then due, must be determined at the election and in the discretion of KPC, to be refunded or refinanced by any indebtedness incurred or to be incurred by KPP simultaneously with or within 180 days before or after that payment or prepayment to the extent of the principal amount of that 32 indebtedness so incurred), plus (iii) all cash capital expenditures of KPP during that period -- other than (A) Expansive Capital Expenditures and (B) cash expenditures made in payment of transaction expenses relating to Interim Capital Transactions -- plus (iv) an amount equal to revenues collected pursuant to a rate increase that are subject to possible refund, plus (v) any additional reserves outstanding as of that day which KPP determines in its reasonable discretion to be necessary or appropriate to provide for the future cash payment of items of the type referred to in CLAUSES (I) through (III) above, plus (vi) any reserves that KPC determines in its reasonable discretion to be necessary or appropriate to provide funds for Distributions with respect to any one or more of the next four calendar quarters, all as determined on a consolidated basis and after elimination of intercompany items and of the interest attributable to the general partner interest in Borrower. For purposes of this definition, Taxes paid by KPP on behalf of less than all of its unitholders may not be considered cash operating expenditures of KPP which reduce "Cash from Operations." EXPANSIVE CAPITAL EXPENDITURES means cash capital expenditures made to increase the throughput or deliverable capacity or terminaling capacity (assuming normal operating conditions, including down-time and maintenance) of the assets of KPP or Borrower, taken as a whole, from the throughput or deliverable capacity or terminaling capacity (assuming normal operating conditions, including down-time maintenance) existing immediately before those capital expenditures. For purposes of this definition, when cash capital expenditures are made in part to increase the throughput or deliverable capacity or terminaling capacity of the assets of KPP, taken as a whole, and in part for other purposes, KPP's good-faith allocation thereof between the portion increasing capacity and the portion for other purposes is conclusive. INTERIM CAPITAL TRANSACTION means (a) borrowing and sales of debt securities (other than for working capital purposes and items purchased on open account in the ordinary course of business) by KPP or Borrower, (b) sales of interest in KPP by KPP or Borrower, and (c) sales or other voluntary or involuntary dispositions of any assets of KPP or Borrower, other than (i) sales or other disposition of inventory in the ordinary course of business, (ii) sales or other dispositions of other current assets including receivables and accounts, or (iii) sales or other dispositions of assets as a part of normal retirements or replacements -- in each case before the commencement of the dissolution and liquidation of KPP. KPP AVAILABLE CASH means, with respect to any calendar quarter (a) the sum of (i) all cash receipts of KPP during that quarter from all sources (including Distributions of cash received from Borrower) plus (ii) any reduction in reserves established in prior quarters, minus (b) the sum of (i) all cash disbursements of KPP during that quarter, including, without limitation, disbursements for operating expenses, Taxes on KPP as an entity or paid by KPP on behalf of, or amounts withheld with respect to, all (but not less than all) of its unitholders, if any, debt service (including the payment of principal, premium, and interest), capital expenditures, and contributions, if any, to a subsidiary corporation or partnership (but excluding all cash Distributions to its partners), plus (ii) any reserves established in that quarter in such amounts as KPC determines in its reasonable discretion to be necessary or appropriate (A) to provide for the proper conduct of KPP's business (including reserves for future capital expenditures) or (B) to provide funds for Distributions with respect to any one or more of the next four calendar quarters, plus (iii) any other reserves established in that quarter in such amounts as KPC determines in its reasonable discretion to be necessary because the Distribution of such amounts would be prohibited by applicable Law or by any loan agreement, security agreement, mortgage, debt instrument, or other agreement or obligation to which KPP is a party or by which it is bound or its assets are subject. For purposes of this definition, Taxes paid by KPP on behalf of, or amounts withheld with respect to, less than all of KPP's unitholders may not be considered cash disbursements of KPP which reduce "KPP Available Cash," and, notwithstanding the foregoing, "KPP Available Cash" may not include any cash receipts or reductions in reserves or take into account any disbursements made or reserves established after commencement of the dissolution and liquidation of KPP. 33 TERMINATING CAPITAL TRANSACTION means any sale or other disposition of assets of KPP or Borrower following commencement of the dissolution and liquidation of KPP or Borrower. 9.10 Asset Transfers. No KPP Company or Restricted Subsidiary may --------------- Transfer any of its assets, issue or sell shares of its capital stock or its partnership units, or Transfer any capital stock or partnership units of a Restricted Subsidiary other than the following: (a) a Transfer in the ordinary course of business (including any Transfer of obsolete or worn-out assets); (b) a Transfer pursuant to a transaction permitted under SECTION 9.11; (c) a Transfer and lease-back of any property within 180 days following the acquisition of the property so long as no Default or Potential Default exists at the time of and after giving effect to that transaction; (d) a Transfer at the time of which and immediately after giving effect to which (i) the Transfer is for fair market value and in the best interests of the Person making it, (ii) no Default or Potential Default exists or would exist after giving effect to it, or (iii) all such Transfers which are to be treated as "Permitted Transfers" under this CLAUSE (D) in any fiscal year consist of assets or of capital stock of a KPP Subsidiary that do not have a total book value (or total fair market value, whichever is higher) --determined with regard to each such asset or such capital stock at the time the same is Transferred -- of more than 10% of KPP's consolidated partners' capital as of the end of the immediately preceding fiscal year; (e) a Transfer for cash so long as, within one year from the date of the Transfer, the KPP Companies or their Subsidiaries use the full amount of the proceeds received from the Transfer, net of all expenses of the KPP Companies or their Subsidiaries incurred in connection with it, either (1) to acquire assets used in the storage, terminaling, pipeline, and transportation business, (2) to pay Funded Debt of the KPP Companies, or (3) any combination of the two; (f) a Transfer to any other KPP Company or wholly owned Restricted Subsidiary; (g) issuance or sale of its capital stock to another KPP Company or wholly owned Restricted Subsidiary; (h) new issuances of limited partnership units of KPP in exchange for cash or property representing fair consideration in the determination of the Board of Directors of KPC; (i) a merger or consolidation that complies with the provisions of SECTION 9.11; or (j) a contribution of capital stock of a Restricted Subsidiary to a joint venture so long as, following that contribution, an additional $1 of Funded Debt could be incurred under SECTION 9.4. 9.11 Dissolutions, Mergers, and Consolidations. No KPP Company or ----------------------------------------- Restricted Subsidiary may liquidate, wind up, or dissolve or merge or consolidate with any other Person other than (a) a Subsidiary of KPP may be merged into or consolidated with another KPP Company or wholly owned Subsidiary of KPP so long as a KPP Company or a wholly owned Subsidiary of KPP (which must be a Restricted Subsidiary if one is involved in the merger or consolidation) is the surviving Person, and (b) a KPP Company or Restricted Subsidiary may merge or consolidate with another corporation, partnership, or limited liability company (other than KSI or KPC) so long as (i) both before and immediately after the merger or consolidation, no Default or Potential Default exists, 34 (ii) following the merger or consolidation. the successor company is a corporation, partnership, or limited liability company that is duly organized and existing under the Laws of the United States of America or any of its states, is Solvent, and maintains substantially all of its assets in the United States of America, (iii) that successor (if not the KPP Company involved) expressly assumes the due and punctual performance and observance of all the obligations, terms, covenants, agreements, and conditions of the Loan Papers to be performed or observed by that KPP Company confirms that the Obligation constitutes a senior-secured obligation of that successor, all by a written instrument in form and substance satisfactory to Agent and Determining Lenders and furnished to Agent and Lenders, (iv) following the merger or consolidation, an additional $1 of Funded Debt could be incurred under SECTION 9.4(C), and (v) immediately before the merger or consolidation, Agent receives (A) a certificate of Responsible Officer of KPP certifying that the merger or consolidation complies with all requirements of this SECTION 9.11 and (B) an opinion of outside counsel in form and substance satisfactory to Agent stating that the merger or consolidation complies with the requirements of CLAUSES (II) (except as to solvency) and (III) preceding. 9.12 Assignment. No KPP Company may assign or transfer any of its Rights, ---------- duties, or obligations under any of the Loan Papers except as a result of a merger or consolidation permitted under SECTION 9.11, in which case the assignment or transfer of the Rights, duties, and obligations of the non- surviving KPP Company is permitted if the survivor assumes in writing all Rights, duties, and obligations of the non-surviving KPP Company under the Loan Papers. 9.13 Fiscal Year and Accounting Methods. No KPP Company or Restricted ---------------------------------- Subsidiary may change its fiscal year or its method of accounting (other than immaterial changes in methods or as required by GAAP). 9.14 New Businesses. No KPP Company or Restricted Subsidiary may engage -------------- in any business except the businesses in which they are presently engaged and any other reasonably related business. 9.15 Government Regulations. No KPP Company or Restricted Subsidiary may ---------------------- conduct its business in a way that it becomes regulated under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or any other Law (other than Regulations G, T, U, and X of the Board of Governors of the Federal Reserve System) that regulates the incurrence of Debt. 9.16 Separate Legal Entities. No event or circumstance materially ----------------------- contrary to SECTION 7.4 may exist or occur. SECTION 10 FINANCIAL COVENANTS. Until neither Agent, nor any Affiliate of ---------- ------------------- Agent, nor any Lender has any commitment to extend any credit under any Loan Paper and the LC Exposure, and all other Obligation, is fully paid and performed -- unless Borrower receives a prior written consent to the contrary by Agent on behalf of Determining Lenders -- Borrower covenants and agrees as follows: 10.1 Current Ratio. The ratio of the current liabilities (excluding ------------- current maturities of Funded Debt and Distributions permitted by this agreement that have been declared but not yet paid) of the KPP Companies and their Subsidiaries to their current assets may never exceed 1.00 to 1.00. 10.2 Tangible Net Worth. The Tangible Net Worth of the KPP Companies and ------------------ their Subsidiaries may never be less than the sum of (a) $70,000,000 plus (b) if contributed to Borrower by KPP, 100% of the net cash proceeds (i.e., the gross cash proceeds less usual and customary costs and expenses related to the offering) received by KPP upon its issuance of partner interests of any kind. 10.3 Leverage Ratio. The ratio of the total Debt of the KPP Companies and -------------- their Subsidiaries on the last day of any fiscal quarter to their EBITDA for the four-consecutive quarters ending on that last day may never exceed 3.15 to 1.00. 35 10.4 Fixed Charges Coverage Ratio. For any four-consecutive-quarterly ---------------------------- period, the ratio of the amount in CLAUSE (A) below to the amount in CLAUSE (B) below may never be less than 1.25 to 1.00: (a) The sum (without duplication) of EBITDA of the KPP Companies and their Subsidiaries plus (to the extent actually deducted in calculating net income feature of EBITDA) cash operating lease payments. (b) The sum (without duplication) of the KPP Companies' and their Subsidiaries' (i) cash interest payments on Debt (including the interest portion of capitalized leases), plus (ii) cash operating lease payments, plus (iii) scheduled cash payments of Funded Debt, plus (iv) cash payments of capital expenditures. SECTION 11 DEFAULT. The term "DEFAULT" means the occurrence of any one or more ---------- ------- of the following events: 11.1 Obligation. The failure or refusal of (a) Borrower to make any ---------- interest payment within five Business Days after it becomes due and payable under the Loan Papers or (b) any KPP Company to pay any other part of the Obligation after it becomes due and payable under the Loan Papers. 11.2 Covenants. The failure or refusal of Borrower (and, if applicable, --------- any other KPP Company) to punctually and properly perform, observe, and comply with any other covenant, agreement, or condition contained in any Loan Paper -- other than the covenants to pay the Obligation -- and that failure or refusal is in respect of a covenant, agreement, or condition (a) in either SECTION 9 or SECTION 10 and it continues for 30 days, or (b) elsewhere in any Loan Paper and it continues for 30 days after the earlier of either (i) any KPP Company receives notice of it or (ii) any Responsible Officer of any KPP Company otherwise obtains knowledge of it. 11.3 Debtor Relief. Any KPC Company (a) is not Solvent, (b) fails to pay ------------- its Debts generally as they become due, (c) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Relief Law, or (d) becomes a party to or is made the subject of any proceeding provided for by any Debtor Relief Law, other than as a creditor or claimant, that could suspend or otherwise adversely affect the Rights of Agent or any Lender granted in the Loan Papers (unless, if the proceeding is involuntary, the applicable petition is dismissed within 60 days after its filing). 11.4 Misrepresentation. Any material representation or warranty made by ----------------- any party (other than Agent and Lenders) contained in any Loan Paper at any time proves to have been materially incorrect when made. 11.5 Judgments and Attachments. Any KPP Company or Restricted Subsidiary ------------------------- fails, within 60 days after entry, to pay, bond, or otherwise discharge any judgment or order for the payment of money in excess of $5,000,000 (individually or collectively) or any warrant of attachment, sequestration, or similar proceeding against any KPP Company's or Restricted Subsidiary's assets having a value (individually or collectively) of $5,000,000, which is neither (a) stayed on appeal nor (b) diligently contested in good faith by appropriate proceedings and adequate reserves have been set aside on its books in accordance with GAAP. 11.6 Note Agreements or Intercreditor Agreement. (a) A payment Event of ------------------------------------------ Default occurs under any Note Agreement, and the applicable grace period under that Note Agreement has expired; (b) any other Event of Default occurs under any Note Agreement that has not been cured or permanently waived before expiration of the applicable grace period under that Note Agreement; or (c) the occurrence and continuance of any Event of Default as defined in the Intercreditor Agreement. 11.7 Default Under Other Agreements. (a) Any KPP Company or Restricted ------------------------------ Subsidiary fails to pay when due (after lapse of any applicable grace period) any Debt in excess (individually or collectively) of $5,000,000; (b) any default exists under any agreement to which a KPP Company or Restricted Subsidiary is a 36 party, the effect of which is to cause, or to permit any Person (other than a KPP Company or Restricted Subsidiary) to cause, an amount in excess (individually or collectively) of $5,000,000 to become due and payable by any KPP Company or Restricted Subsidiary before its stated maturity, and such default is not cured or amount is not paid, as the case may be, within the required time period under the applicable agreement; or (c) any Debt in excess (individually or collectively) of $5,000,000 is declared to be due and payable or required to be prepaid by any KPP Company or Restricted Subsidiary before its stated maturity. 11.8 Validity and Enforceability of Loan Papers. Except in accordance ------------------------------------------ with its terms or as otherwise expressly permitted by this agreement, any Loan Paper, at any time after its execution and delivery ceases to be in full force and effect in any material respect or is declared to be null and void or its validity or enforceability is contested by any party (other than Agent and Lenders) to any Loan Paper, if party thereto, or any party (other than Agent and Lenders) denies that it has any further liability or obligations under any Loan Paper to which it is a party. 11.9 Change of Control. KPC fails to be the sole general partner of KPP ----------------- and Borrower or KPP fails to be the sole limited partner of Borrower. 11.10 KPC Merger or Consolidation. Whether it is the survivor or not, KPC --------------------------- is merged into or consolidated with KSI. SECTION 12 RIGHTS AND REMEDIES. ---------- ------------------- 12.1 Remedies Upon Default. --------------------- (a) If a Default exists under SECTION 11.3, the commitment to extend credit under this agreement automatically terminates and the entire unpaid balance of the Obligation automatically becomes due and payable without any action of any kind whatsoever. (b) If any Default exists, subject to the terms of SECTION 13.5(B), Agent may (with the consent of, and must, upon the request of, Determining Lenders), do any one or more of the following: (i) if the maturity of the Obligation has not already been accelerated under SECTION 12.1(A), declare the entire unpaid balance of all or any part of the Obligation immediately due and payable, whereupon it is due and payable; (ii) terminate the commitments of Lenders to extend credit under this agreement; (iii) reduce any claim to judgment; (iv) to the extent permitted by Law, exercise (or request each Lender to, and each Lender is entitled to, exercise) the Rights of offset or banker's Lien against the interest of any KPP Company in and to every account and other property of any KPP Company that are in the possession of Agent or any Lender to the extent of the full amount of the Obligation (and to the extent permitted by Law, each KPP Company is deemed directly obligated to each Lender in the full amount of the Obligation for this purpose); and (v) exercise any and all other legal or equitable Rights afforded by the Loan Papers, the Laws of the State of Texas, or any other applicable jurisdiction. (c) If, in reliance on SECTION 13.5(B), Agent refuses to take any action under SECTION 12.1(B) at the request of Determining Lenders, then Determining Lenders may take that action. 12.2 KPP Company Waivers. To the extent permitted by Law, each KPP ------------------- Company waives presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest and nonpayment, and agrees that its liability with respect to all or any part of the Obligation is not affected by any renewal or extension in the time of payment of all or any part of the Obligation, by any indulgence, or by any release or change in any security for the payment of all or any part of the Obligation. 12.3 Performance by Agent. If any covenant, duty, or agreement of any KPP -------------------- Company is not performed in accordance with the terms of the Loan Papers, Agent may, while a Default exists, at its option (but 37 subject to the approval of Determining Lenders), perform or attempt to perform that covenant, duty, or agreement on behalf of that KPP Company (and any amount expended by Agent in its performance or attempted performance is payable by the KPP Companies, jointly and severally, to Agent on demand, becomes part of the Obligation, and bears interest at the Default Rate from the date of Agent's expenditure until paid). However, Agent does not assume and shall never have, except by its express written consent, any liability or responsibility for the performance of any covenant, duty, or agreement of any KPP Company. Agent shall promptly notify Borrower of any action taken under this SECTION 12.3. 12.4 Not in Control. None of the covenants or other provisions contained -------------- in any Loan Paper shall, or shall be deemed to, give Agent or Lenders the Right to exercise control over the assets (including, without limitation, real property), affairs, or management of any KPP Company; the power of Agent and Lenders is limited to the Right to exercise the remedies provided in this SECTION 12. 12.5 Course of Dealing. The acceptance by Agent or Lenders of any partial ----------------- payment on the Obligation shall not be deemed to be a waiver of any Default then existing. No waiver by Agent, Determining Lenders, or Lenders of any Default shall be deemed to be a waiver of any other then-existing or subsequent Default. No delay or omission by Agent, Determining Lenders, or Lenders in exercising any Right under the Loan Papers will impair that Right or be construed as a waiver thereof or any acquiescence therein, nor will any single or partial exercise of any Right preclude other or further exercise thereof or the exercise of any other Right under the Loan Papers or otherwise. 12.6 Cumulative Rights. All Rights available to Agent, Determining ----------------- Lenders, and Lenders under the Loan Papers are cumulative of and in addition to all other Rights granted to Agent, Determining Lenders, and Lenders at law or in equity, whether or not the Obligation is due and payable and whether or not Agent, Determining Lenders, or Lenders have instituted any suit for collection, foreclosure, or other action in connection with the Loan Papers. 12.7 Application of Proceeds. Any and all proceeds ever received by Agent ----------------------- or Lenders from the exercise of any Rights pertaining to the Obligation shall be applied to the Obligation according to SECTION 3. 12.8 Diminution in Value of Collateral. Neither Agent nor any Lender has --------------------------------- any liability or responsibility whatsoever for any diminution in or loss of value of any collateral now or hereafter securing payment or performance of all or any part of the Obligation (other than diminution in or loss of value caused by its gross negligence or willful misconduct). 12.9 Certain Proceedings. Borrower will promptly execute and deliver, or ------------------- cause the execution and delivery of, all applications, certificates, instruments, registration statements, and all other documents and papers Agent or Determining Lenders reasonably request in connection with the obtaining of any consent, approval, registration, qualification, permit, license, or authorization of any Tribunal or other Person necessary or appropriate for the effective exercise of any Rights under the Loan Papers. Because Borrower agrees that Agent's and Determining Lenders' remedies at Law for failure of Borrower to comply with the provisions of this paragraph would be inadequate and that that failure would not be adequately compensable in damages, Borrower agrees that the covenants of this paragraph may be specifically enforced. SECTION 13 AGREEMENT AMONG LENDERS. ---------- ----------------------- 13.1 Agent. ----- (a) Each Lender appoints Agent (and Agent accepts appointment) as its nominee and agent, in its name and on its behalf to: (i) act as its nominee and on its behalf in and under all Loan Papers; (ii) take any action that it properly requests under the Loan Papers (subject to the concurrence of other 38 Lenders as may be required under the Loan Papers); (iii) receive all documents and items to be furnished to it under the Loan Papers; (iv) be the secured party, mortgagee, beneficiary, recipient, and similar party in respect of any collateral for the benefit of Lenders; (v) distribute to it all material information, requests, documents, and items required to be delivered to it under the Loan Papers after any KPP Company delivers the same to Agent; and (vi) deliver to the appropriate Persons requests, demands, approvals, and consents received from it. However, Agent may not be required to take any action that exposes it to personal liability or that is contrary to any Loan Paper or applicable Law. (b) Each Lender appoints Agent (and Agent accepts appointment) as its nominee and agent, in its name and on its behalf to: (i) arrange the means whereby its funds are to be made available to Borrower under the Loan Papers; and (ii) promptly distribute to it its ratable part of each payment or prepayment (whether voluntary, as proceeds of collateral upon or after foreclosure, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Papers. However, Agent may not be required to take any action that exposes it to personal liability or that is contrary to any Loan Paper or applicable Law. (c) If the initial or any successor Agent ever ceases to be a party to this agreement or if the initial or any successor Agent ever resigns (whether voluntarily or at the request of Determining Lenders), then Determining Lenders shall appoint the successor Agent from among the Lenders (other than the resigning Agent). If Determining Lenders fail to appoint a successor Agent within 30 days after the resigning Agent has given notice of resignation or Determining Lenders have removed the resigning Agent, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent, which must be a commercial bank having a combined capital and surplus of at least $1,000,000,000 (as shown on its most recently published statement of condition). Upon its acceptance of appointment as successor Agent, the successor Agent succeeds to and becomes vested with all of the Rights of the prior Agent, and the prior Agent is discharged from its duties and obligations of Agent under the Loan Papers, and each Lender shall execute the documents as any Lender, the resigning or removed Agent, or the successor Agent reasonably request to reflect the change. After Agent's resignation or removal as Agent under the Loan Papers, the provisions of this SECTION 13 inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Papers. (d) Agent, in its capacity as a Lender, has the same Rights under the Loan Papers as any other Lender and may exercise those Rights as if it were not acting as Agent; the term "Lender" shall, unless the context otherwise indicates, include Agent; and Agent's resignation or removal shall not impair or otherwise affect any Rights that it has or may have in its capacity as an individual Lender. Each Lender and Borrower agree that Agent is not a fiduciary for Lenders or for Borrower or any other party to a Loan Paper but simply is acting in the capacity described in this agreement to alleviate administrative burdens for Borrower, Lenders, and other parties to the Loan Papers, that Agent has no duties or responsibilities to Lenders or Borrower or other parties to the Loan Papers except those expressly set forth in the Loan Papers, and that Agent in its capacity as a Lender has all Rights of any other Lender. (e) Each KPP Company and Lender acknowledges and agrees that (i) Agent is acting as agent for Lenders under the Loan Papers, is (directly or through its Affiliates) the issuer of LCs under this agreement, is a Lender under the Loan Papers, acted as the private-placement adviser to Borrower and STI in respect of the transactions contemplated in the Note Agreements, is acting as the Collateral Trustee, and is the lender to KPC under the KPC Credit Agreement, and (ii) none of those roles constitutes a conflict of interest for Agent. Furthermore, Agent may now or hereafter be engaged in one or more loan, letter of credit, leasing, or other financing transactions with a KPC Company, act as trustee or depositary for any KPC Company, or otherwise be engaged in other transactions with any KPC Company (collectively, the "OTHER ACTIVITIES") not the subject of the Loan Papers. Without limiting the Rights of Lenders specifically set forth in the Loan Papers, Agent is not responsible to account to Lenders for those other 39 activities, and no Lender shall have any interest in any other activities, any present or future guaranties by or for the account of any KPC Company that are not contemplated or included in the Loan Papers, any present or future offset exercised by Agent in respect of those other activities, any present or future property taken as security for any of those other activities, or any property now or hereafter in Agent's possession or control that may be or become security for the obligations of any KPC Company arising under the Loan Papers by reason of the general description of indebtedness secured or of property contained in any other agreements, documents, or instruments related to any of those other activities (but, if any payments in respect of those guaranties or that property or the proceeds thereof is applied by Agent to reduce the Obligation, then each Lender is entitled to share ratably in the application as provided in the Loan Papers). 13.2 Expenses. Each Lender shall pay its Default Percentage of any -------- reasonable expenses (including, without limitation, court costs, reasonable attorneys' fees and other costs of collection) incurred by Agent (while acting in such capacity) in connection with any of the Loan Papers if Agent is not reimbursed from other sources within 30 days after incurrence. Each Lender is entitled to receive its Default Percentage of any reimbursement that it makes to Agent if Agent is subsequently reimbursed from other sources. 13.3 Proportionate Absorption of Losses. Except as otherwise provided in ---------------------------------- the Loan Papers, nothing in the Loan Papers gives any Lender any advantage over any other Lender insofar as the Obligation is concerned or to relieve any Lender from ratably absorbing any losses sustained with respect to the Obligation (except to the extent unilateral actions or inactions by any Lender result in any KPP Company or any other obligor on the Obligation having any credit, allowance, setoff, defense, or counterclaim solely with respect to all or any part of that Lender's Default Percentage of the Obligation). 13.4 Delegation of Duties; Reliance. Subject to the Rights (including, ------------------------------ without limitation, any required consent) of Agent or any or all Lenders described elsewhere in this agreement, a Lender may perform its duties and exercise its Rights under the Loan Papers by or through Agent, and Lenders and Agent may perform their duties and exercise their Rights under the Loan Papers by or through their respective Representatives (but a Lender's Representatives must work by or through Agent or their respective Representatives). Agent, Lenders, and their respective Representatives (a) are entitled to rely upon (and shall be protected in relying upon) any written or oral statement believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinion of counsel selected by Agent or that Lender (but nothing in this CLAUSE (A) permits Agent to rely on (i) oral statements if a writing is required by this agreement or (ii) any other writing if a specific writing is required by this agreement), (b) are entitled to deem and treat each Lender as the owner and holder of its Default Percentage of the Principal Debt for all purposes until, subject to SECTION 14.11, written notice of the assignment or transfer is given to and received by Agent (and any request, authorization, consent, or approval of any Lender is conclusive and binding on each subsequent holder, assignee, or transferee of or Participant in that Lender's Default Percentage of the Principal Debt until that notice is given and received), (c) are not deemed to have notice of the occurrence of a Default unless a responsible officer of Agent, who handles matters associated with the Loan Papers and transactions thereunder, has actual knowledge or Agent has been notified by a Lender or Borrower, and (d) are entitled to consult with legal counsel (including counsel for any KPP Company), independent accountants, and other experts selected by Agent and are not liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of counsel, accountants, or experts. 13.5 Limitation of Agent's Liability. ------------------------------- (a) Neither Agent nor any of its respective Representatives will be liable for any action taken or omitted to be taken by it under the Loan Papers in good faith and believed by it to be within the discretion or power conferred upon it or them by the Loan Papers or be responsible for the consequences of any error of judgment (except for fraud, gross negligence, or willful misconduct), and neither Agent nor any of its respective Representatives has a fiduciary relationship with any Lender by virtue of the Loan Papers (but 40 nothing in this agreement negates the obligation of Agent to account for funds received by it for the account of any Lender). (b) Unless indemnified to its satisfaction against loss, cost, liability, and expense, Agent may not be compelled to do any act under the Loan Papers or to take any action toward the execution or enforcement of the powers thereby created or to prosecute or defend any suit in respect of the Loan Papers. If Agent requests instructions from Lenders, or Determining Lenders, as the case may be, with respect to any act or action in connection with any Loan Paper, Agent is entitled to refrain (without incurring any liability to any Person by so refraining) from that act or action unless and until it has received instructions. In no event, however, may Agent or any of its Representatives be required to take any action that it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Lender has any right of action against Agent as a result of Agent's acting or refraining from acting under this agreement in accordance with instructions of Determining Lenders. (c) Agent is not responsible to any Lender or any Participant for, and each Lender represents and warrants that it has not relied upon Agent in respect of, (i) the creditworthiness of any party to any Loan Paper and the risks involved to that Lender, (ii) the effectiveness, enforceability, genuineness, validity, or the due execution of any Loan Paper (other than by Agent), (iii) any representation, warranty, document, certificate, report, or statement made therein (other than by Agent) or furnished thereunder or in connection therewith, (iv) the adequacy of any collateral now or hereafter securing the Obligation or the existence, priority, or perfection of any Lien now or hereafter granted or purported to be granted on the collateral under any Loan Paper, or (v) observation of or compliance with any of the terms, covenants, or conditions of any Loan Paper on the part of any KPP Company. Each Lender agrees to indemnify Agent and its respective Representatives and hold them harmless from and against (but limited to such Lender's Default Percentage of) any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses, and reasonable disbursements of any kind or nature whatsoever that may be imposed on, asserted against, or incurred by them in any way relating to or arising out of the Loan Papers or any action taken or omitted by them under the Loan Papers if the applicable Person is not reimbursed for such amounts by any KPP Company. Although Agent and its respective Representatives have the right to be indemnified under this agreement for its or their own ordinary negligence, none of those Persons have the right to be indemnified under this agreement for its or their own fraud, gross negligence, or willful misconduct. 13.6 Default; Collateral. If a Default exists, Lenders agree to promptly ------------------- confer in order that Determining Lenders or Lenders, as the case may be, may agree upon a course of action for the enforcement of the Rights of Lenders; and Agent is entitled to refrain from taking any action (without incurring any liability to any Person for so refraining) unless and until it has received instructions from Determining Lenders. In actions with respect to any property of any KPP Company, Agent is acting for the ratable benefit of each Lender. Agent shall hold, for the ratable benefit of all Lenders, any security it receives for the Obligation or any guaranty of the Obligation it receives upon or in lieu of foreclosure. 13.7 Limitation of Liability. No Lender or any Participant will incur any ----------------------- liability to any other Lender or Participant except for acts or omissions in bad faith, and neither Agent, Lender nor any Participant will incur any liability to any other Person for any act or omission of Agent, any Lender, or any Participant. 13.8 Relationship of Lenders. The Loan Papers do not create a partnership ----------------------- or joint venture among Agent and Lenders or among Lenders. 41 13.9 Collateral Matters. ------------------ (a) Each Lender authorizes and directs Agent to enter into the Security Documents for the ratable benefit of Lenders. Each Lender agrees that any action taken by Agent concerning any Collateral with the consent of, or at the request of, all Lenders in accordance with the provisions of this agreement, the Security Documents, or the other Loan Papers, and the exercise by Agent (with the consent of, or at the request of, all Lenders) of powers concerning any Collateral set forth in any Loan Paper, together with other reasonably incidental powers, shall be authorized and binding upon all Lenders. (b) Agent is authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time to time before a Default or Potential Default, to take any action with respect to any Collateral or Security Documents that may be necessary to perfect and maintain perfected the Lender Liens upon the Collateral granted by the Security Documents. (c) Agent has no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by any KPP Company or is cared for, protected, or insured or has been encumbered or that the Liens granted to Agent for the benefit of Lenders under the Security Documents have been properly or sufficiently or lawfully created, perfected, protected, or enforced, or are entitled to any particular priority. (d) Agent shall exercise the same care and prudent judgment with respect to the Collateral and the Security Documents as it normally and customarily exercises in respect of similar collateral and security documents. (e) Lenders irrevocably authorize Agent, at its option and in its discretion, to release any Lender Lien upon any Collateral (i) upon full payment of the Obligation; (ii) constituting property being sold or disposed of as permitted under SECTION 9.10, if Agent determines that the property being sold or disposed is being sold or disposed in accordance with the requirements and limitations of SECTION 9.10; (iii) constituting property in which no KPP Company owned any interest at the time the Lender Lien was granted or at any time thereafter; (iv) constituting property leased to any KPP Company under a lease that has expired or been terminated in a transaction permitted under this agreement or is about to expire and that has not been, and is not intended by that KPP Company to be, renewed; or (v) consisting of an instrument evidencing Debt pledged to Agent (for the benefit of Lenders), if the Debt evidenced thereby has been paid in full. Upon request by Agent at any time, Lenders will confirm in writing Agent's authority to release particular types or items of Collateral under this SECTION 13.9(E). 13.10 Benefits of Agreement. None of the provisions of this SECTION 13 --------------------- inure to the benefit of any KPP Company or any other Person other than Agent and Lenders; consequently, no KPP Company or any other Person is entitled to rely upon, or to raise as a defense, in any manner whatsoever, the failure of Agent or any Lender to comply with these provisions. SECTION 14 MISCELLANEOUS. ---------- ------------- 14.1 Nonbusiness Days. Any payment or action that is due under any Loan ---------------- Paper on a non-Business Day may be delayed until the next-succeeding Business Day (but interest shall continue to accrue on any applicable payment until payment is in fact made) unless the payment concerns a LIBOR Rate Borrowing, in which case if the next-succeeding Business Day is in the next calendar month, then such payment shall be made on the next-preceding Business Day. 14.2 Communications. Unless otherwise stated, when a Loan Paper requires -------------- or permits any consent, approval, notice, request, or demand from one party to another, it must be written and is deemed given: 42 . if by telecopy, when transmitted to the appropriate telecopy number (but, without affecting the date deemed given, a telecopy communication must be promptly confirmed by telephone); . if by mail, on the third Business Day after enclosed in a properly addressed, stamped, and sealed envelope deposited in the appropriate official postal service; and . if by other means, when actually delivered. Until changed by notice, the address and telecopy number are stated for (a) Borrower and Agent, beside their names on the signature pages below, and (b) each Lender, beside its name on SCHEDULE 2.1. 14.3 Form and Number of Documents. The form, substance, and number of ---------------------------- counterparts of each writing to be furnished under this agreement must be satisfactory to Agent and its counsel. 14.4 Exceptions to Covenants. No party to a Loan Paper may take or fail ----------------------- to take any action that is permitted as an exception to any of the covenants contained in any Loan Paper if that action or omission would result in the breach of any other covenant contained in any Loan Paper. 14.5 Survival. All covenants, agreements, undertakings, representations, -------- and warranties made in any of the Loan Papers survive all closings under the Loan Papers and, except as otherwise indicated, are not affected by any investigation made by any party. 14.6 Governing Law. The Laws (other than conflict-of-laws provisions) of ------------- the State of Texas and of the United States of America govern the Rights and duties of the parties to the Loan Papers and the validity, construction, enforcement, and interpretation of the Loan Papers. 14.7 Invalid Provisions. Any provision in any Loan Paper held to be ------------------ illegal, invalid, or unenforceable is fully severable; the appropriate Loan Paper shall be construed and enforced as if that provision had never been included; and the remaining provisions shall remain in full force and effect and shall not be affected by the severed provision. Agent, Lenders, Borrower, and each other party to the affected Loan Paper shall negotiate, in good faith, the terms of a replacement provision as similar to the severed provision as may be possible and be legal, valid, and enforceable. 14.8 Venue; Service of Process; Jury Trial. EACH PARTY TO ANY LOAN PAPER, ------------------------------------- IN EACH CASE FOR ITSELF, ITS SUCCESSORS AND PERMITTED ASSIGNS, (A) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS, (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THE LOAN PAPERS AND THE OBLIGATION BROUGHT IN DISTRICT COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, (C) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY OF THE AFOREMENTIONED COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THOSE COURTS IN ANY LITIGATION BY THE MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, BY HAND-DELIVERY, OR BY DELIVERY BY A NATIONALLY RECOGNIZED COURIER SERVICE, AND SERVICE SHALL BE DEEMED COMPLETE UPON DELIVERY OF THE LEGAL PROCESS AT ITS ADDRESS SET FORTH IN THIS AGREEMENT, (E) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY TO ANY LOAN PAPER ARISING OUT OF OR IN CONNECTION WITH THE LOAN PAPERS OR THE OBLIGATION MAY BE BROUGHT IN ONE OF THE AFOREMENTIONED COURTS, AND (F) IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN PAPER. The scope of each of the foregoing waivers is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of 43 this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Borrower acknowledges that these waivers are a material inducement to Agent's and each Lender's agreement to enter into a business relationship, that Agent and each Lender has already relied on these waivers in entering into this agreement, and that Agent and each Lender will continue to rely on each of these waivers in related future dealings. Borrower further warrants and represents that it has reviewed these waivers with its legal counsel, and that it knowingly and voluntarily agrees to each waiver following consultation with legal counsel. THE WAIVERS IN THIS SECTION 14.8 ARE IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THESE WAIVERS SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS, AND REPLACEMENTS TO OR OF THIS OR ANY OTHER LOAN PAPER. In the event of Litigation, this agreement may be filed as a written consent to a trial by the court. 14.9 Amendments, Consents, Conflicts, and Waivers. -------------------------------------------- (a) Unless otherwise specifically provided, (i) this agreement may be amended only by an instrument in writing executed by Borrower, Agent, and Determining Lenders and supplemented only by documents delivered or to be delivered in accordance with the express terms of this agreement, and (ii) the other Loan Papers may only be the subject of an amendment, modification, or waiver that has been approved by Determining Lenders and the Person(s) party to those other Loan Papers. (b) Any amendment to or consent or waiver under this agreement or any Loan Paper that purports to accomplish any of the following must be by an instrument in writing executed by each party thereto (and, if not a party thereto, Agent) and executed (or approved, as the case may be) by each Lender: (i) extends the due date or decreases the amount of any scheduled payment of the Obligation beyond the date specified in the Loan Papers; (ii) decreases any rate or amount of interest, fees, or other sums payable to Agent or Lenders under this agreement (except such reductions as are contemplated by this agreement); (iii) changes the definition of "COMMITMENT," "COMMITMENT PERCENTAGE," "DETERMINING LENDERS" or "STATED TERMINATION DATE"; (iv) increases any one or more Lenders' Commitments; (v) waives compliance with, amends, or releases (in whole or in part) any Guaranty or any Collateral; or (vi) changes this CLAUSE (B) or any other matter specifically requiring the consent of all Lenders under this agreement. (c) Any conflict or ambiguity between the terms and provisions of this agreement and terms and provisions in any other Loan Paper is controlled by the terms and provisions of this agreement. (d) No course of dealing or any failure or delay by Agent, any Lender, or any of their respective Representatives with respect to exercising any Right of Agent or any Lender under this agreement operates as a waiver thereof. A waiver must be in writing and signed by Agent and Lenders (or Determining Lenders, if permitted under this agreement) to be effective, and a waiver will be effective only in the specific instance and for the specific purpose for which it is given. 14.10 Multiple Counterparts. Any Loan Paper may be executed in a number --------------------- of identical counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement; but, in making proof of this agreement, it shall not be necessary to produce or account for more than one counterpart. Each Lender need not execute the same counterpart of this agreement so long as identical counterparts are executed by Borrower, each Lender, and Agent. This agreement shall become effective when counterparts of this agreement have been executed and delivered to Agent by each Lender, Agent, and Borrower, or, in the case only of Lenders, when Agent has received telecopied, telexed, or other evidence satisfactory to it that each Lender has executed and is delivering to Agent a counterpart of this agreement. 44 14.11 Successors and Assigns; Participations. -------------------------------------- (a) Each Loan Paper binds and inures to the benefit of the parties thereto, any intended beneficiary thereof, and each of their respective successors and permitted assigns. No Lender may transfer, pledge, assign, sell any participation in, or otherwise encumber its portion of the Obligation except as permitted by this SECTION 14.11. (b) Subject to the provisions of this section and in accordance with applicable Law, any Lender may, in the ordinary course of its commercial banking business, at any time sell to one or more Persons (each a "PARTICIPANT") participating interests in its portion of the Obligation. The selling Lender shall remain a "Lender" under this agreement (and the Participant shall not constitute a "Lender" under this agreement) and its obligations under this agreement shall remain unchanged. The selling Lender shall remain solely responsible for the performance of its obligations under the Loan Papers and shall remain the holder of its share of the Commitment Usage for all purposes under this agreement. Each party to any Loan Paper and Agent shall continue to deal solely and directly with the selling Lender in connection with that Lender's Rights and obligations under the Loan Papers. Participants have no Rights under the Loan Papers, other than those of a Lender under SECTIONS 3, 8.1, 8.4, and 8.13, and certain voting Rights as provided below. Subject to the following, each Lender may obtain (on behalf of its Participants) the benefits of SECTION 3 with respect to all participations in its part of the Obligation outstanding from time to time so long as Borrower is not obligated to pay any amount in excess of the amount that would be due to that Lender under SECTION 3 calculated as though no participations have been made. No Lender may sell any participating interest under which the Participant has any Rights to approve any amendment, modification, or waiver of any Loan Paper, except to the extent the amendment, modification, or waiver extends the due date for payment of any principal, interest, or fees due under the Loan Papers, reduces the interest rate or the amount of principal or fees applicable to the Obligation (except reductions contemplated by this agreement), or releases any Guaranty or any collateral, if any, for the Obligation (other than releases of collateral permitted by SECTION 13.9(E)). Except in the case of the sale of a participating interest to another Lender, the relevant participation agreement shall prohibit the Participant from transferring, pledging, assigning, selling participations in, or otherwise encumbering its portion of the Obligation. (c) Subject to the provisions of this section, any Lender may at any time, in the ordinary course of its commercial banking business, assign a proportionate part (not less than $5,000,000) of all or any part of its Rights and obligations under the Loan Papers (i) without the consent of any Person (including, without limitation, any KPP Company or Agent) to any of its Affiliates, and (ii) if no Default exists and if Borrower and Agent first consent (which consent may not be unreasonably withheld), to any of the following, if the potential assignee does not own any equity interests or Rights (excluding Rights under the Security Documents) to acquire any equity interests in any KSI Company: (A) a commercial bank that is organized under Laws of the United States of America or any of its states and has total assets in excess of $1,000,000,000; (B) a commercial bank that is organized under the Laws of another country that is a member of the Organization for Economic Cooperation and Development (the "OECD") -- or a political subdivision of any such country, has total assets in excess of $1,000,000,000, and is acting either through its main office or a branch or an agency that has total assets in excess of $1,000,000,000 and is located in the country of its organization or another country that is also a member of the OECD; (C) the central bank of any country that is a member of the OECD; or (D) a finance company, insurance company, or other financial institution or fund that has total assets in excess of $1,000,000,000. Each such permitted assignee is called a "PURCHASER." (d) In each case, the Purchaser shall assume those Rights and obligations under an assignment agreement substantially in the form of the attached EXHIBIT F. Each assignment under this SECTION 14.11(C) shall include a ratable interest in the assigning Lender's Rights and obligations under the Loan Papers. 45 Upon (i) delivery of an executed copy of the assignment agreement to Borrower and Agent and (ii) payment of a fee of $1,500 from the transferor to Agent, from and after the assignment's effective date (which shall be after the date of delivery), the Purchaser shall for all purposes be a Lender party to this agreement and shall have all the Rights and obligations of a Lender under this agreement to the same extent as if it were an original party to this agreement with Commitments as set forth in the assignment agreement, and the transferor Lender shall be released from its obligations under this agreement to a corresponding extent, and, except as provided in the following sentence, no further consent or action by Borrower, Lenders, or Agent shall be required. Upon the consummation of any transfer to a Purchaser under this CLAUSE (C), then (x) the then- existing SCHEDULE 2.1 shall automatically be deemed to reflect the name, address, and Commitment of such Purchaser, (y) Borrower shall execute and deliver to each of the transferor Lender and the Purchaser a Note in the face amount of its respective Commitment following transfer, and (z) upon receipt of its new Note, the transferor Lender shall return to Borrower the Note previously delivered to it under this agreement. A Purchaser is subject to all the provisions in this section as if it were a Lender signatory to this agreement as of the date of this agreement. (e) Any Lender may at any time, without the consent of any Person (including, without limitation, any KPP Company or Agent), assign all or any part of its Rights under the Loan Papers to a Federal Reserve Bank without releasing the transferor Lender from its obligations thereunder. (f) Notwithstanding any contrary provision in this agreement, a Lender may not sell or participate any of its interests for a purchase price that, directly or indirectly, reflects a discount from face value, without first offering the sale or participation to the other Lenders on a Default Percentage basis (which must be accepted or rejected within five Business Days after the offer). 14.12 Discharge Only Upon Payment in Full; Reinstatement in Certain ------------------------------------------------------------- Circumstances. Each Person's obligations under the Loan Papers remain in full ------------- force and effect until the total Commitments are terminated and the Obligation is paid in full (except for provisions under the Loan Papers expressly intended to survive payment of the Obligation and termination of the Loan Papers). If at any time any payment of the principal of or interest on any Note or any other amount payable by any KPP Company or any other obligor on the Obligation under any Loan Paper is rescinded or must be restored or returned upon the insolvency, bankruptcy, or reorganization of any Person or otherwise, the obligations of each Person under the Loan Papers with respect to that payment shall be reinstated as though the payment had been due but not made at that time. 14.13 Entirety. THE LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN -------- BORROWER, LENDERS, AND AGENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW. 46 EXECUTED as of the day and year first mentioned. 2400 Lakeside Boulevard, Suite 600 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., Richardson, Texas 75082 as Borrower Attn: Edward D. Doherty, Chairman By: KANEB PIPE LINE COMPANY, Telecopy: 214/699-4025 General Partner By /s/ Edward D. Doherty ------------------------------ Edward D. Doherty, Chairman 2200 Ross Avenue TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Dallas, Texas 75266-0197 as Agent and a Lender Attn: John A. Fields, Jr., Assistant Vice President Telecopy: 214/922-2807 By /s/ W. Paschall Tosch ---------------------------------------- W. Paschall Tosch, Senior Vice President BANK OF MONTREAL, as a Lender By /s/ Michael D. Pincus ---------------------------------------- Michael D. Pincus, Director, U.S. Corporate Banking 47 EX-21.1 3 LIST OF SUBSIDIARIES KANEB PIPE LINE PARTNERS, L.P. Exhibit 21 LIST OF SUBSIDIARIES -------------------- KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. SUPPORT TERMINALS OPERATING PARTNERSHIP, L.P. SUPPORT TERMINAL SERVICES, INC. STANTRANS, INC. EX-24.1 4 POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. LEON E. HUTCHENS ---------------------- (Leon E. Hutchens) In Presence of: Delores A. Hutchens ------------------------ (Delores A. Hutchens) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. JIMMY L. HARRISON ----------------------- (Jimmy L. Harrison) In Presence of: Heather R. Bulba --------------------- (Heather R. Bulba) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. SANGWOO AHN ----------------- (Sangwoo Ahn) In Presence of: Mary K. Mitchum -------------------- (Mary K. Mitchum) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. JOHN R. BARNES -------------------- (John R. Barnes) In Presence of: Mary K. Mitchum -------------------- (Mary K. Mitchum) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. C.E. BENTLEY ------------------ (C.E. Bentley) In Presence of: Mary K. Mitchum -------------------- (Mary K. Mitchum) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. M.R. BILES ---------------- (M.R. Biles) In Presence of: Heather R. Bulba --------------------- (Heather R. Bulba) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. PRESTON A. PEAK --------------------- (Preston A. Peak) In Presence of: Mary K. Mitchum -------------------- (Mary K. Mitchum) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 21st day of March, 1995. RALPH A. REHM ------------------- (Ralph A. Rehm) In Presence of: Mary K. Mitchum -------------------- (Mary K. Mitchum) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as General Partner of Kaneb Pipe Line Partners, L.P. ("KPP"), does hereby constitute and appoint Tony M. Regan or Edward D. Doherty with full power of substitution, his true and lawful attorney and agent to execute and sign for and on behalf of the undersigned the name of the undersigned as a director of KPL to the Form 10-K Annual Report of KPP for the fiscal year ended December 31, 1994 or to any amendment thereto to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and to any instrument or document filed as a part of, as an exhibit to or in connection with said Form 10-K or amendment; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 22nd day of March, 1995. JAMES R. WHATLEY ---------------------- (James R. Whatley) In Presence of: Nathlyne H. Chastian -------------------------- (Nathlyne H. Chastian) EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 DEC-31-1994 4,145 0 5,605 0 0 13,915 214,556 68,910 163,105 17,274 43,265 0 0 0 99,754 163,105 0 78,745 0 45,767 0 0 3,706 30,276 818 29,458 0 0 0 29,458 2.20 2.20