-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QHiFnE7jH6c1frLAkBVS9Ua4gkcpYo/r1YSyQmZl7WQmpOLwgTBFFuAljwH0pFFf YRChTxnKcXASvftAVobwhA== 0000950134-97-002116.txt : 19970326 0000950134-97-002116.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950134-97-002116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANEB PIPE LINE PARTNERS L P CENTRAL INDEX KEY: 0000853890 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 752287571 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10311 FILM NUMBER: 97561884 BUSINESS ADDRESS: STREET 1: P.O. BOX 650283 CITY: DALLAS STATE: TX ZIP: 75265-0283 BUSINESS PHONE: 2146994031 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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: (972) 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 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.[ ] Aggregate market value of the voting units held by non-affiliates of the registrant: $310,142,490. This figure is estimated as of March 10, 1997, at which date the closing price of the Registrant's Senior Preference Units on the New York Stock Exchange was $30.25 per unit and the closing price of the Registrant's Preference Units on the New York Stock Exchange was $27.675, and assumes that only the General Partner of the Registrant and officers and directors of the General Partner of the Registrant were affiliates. Number of Senior Preference Units of the Registrant outstanding at March 10, 1997: 7,250,000. Number of Preference Units of the Registrant outstanding at March 10, 1997: 4,650,000. 2 PART I ITEM I. BUSINESS GENERAL The pipeline system of Kaneb Pipe Line Company was initially created in 1953. In September 1989, Kaneb Pipe Line Partners, L.P. (the "Partnership"), a Delaware limited partnership, was formed to acquire, own and operate the refined petroleum products pipeline business (the "East Pipeline") previously conducted by Kaneb Pipe Line Company, a Delaware corporation ("KPL" or the "Company"), a wholly owned subsidiary of Kaneb Services, Inc., a Delaware corporation ("Kaneb"). KPL owns a combined 2% interest as general partner of the Partnership and of Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership ("KPOP"). The pipeline operations of the Partnership are conducted through KPOP, of which the Partnership is the sole limited partner and KPL is the sole general partner. The terminaling business of the Partnership is conducted through (i) Support Terminals Operating Partnership, L.P. ("STOP"), (ii) Support Terminal Services, Inc., (iii) StanTrans, Inc., (iv) StanTrans Partners L.P. ("STPP"), and (v) StanTrans Holdings, Inc. KPOP, STOP and STPP are collectively referred to as the "Operating Partnerships". The Partnership is engaged, through its Operating Partnerships, in the refined petroleum products pipeline business and the terminaling of petroleum products and specialty liquids. PRODUCTS PIPELINE BUSINESS Introduction The Partnership's pipeline business consists primarily of the transportation, as a common carrier, of refined petroleum products in Kansas, Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The Partnership owns and operates two common carrier pipelines (the "Pipelines") as shown on the map below: [MAP] 2 3 East Pipeline Construction of the East Pipeline commenced in the 1950's with a line from southern Kansas to Geneva, Nebraska. During the 1960's, the East Pipeline was expanded north to its present terminus at Jamestown, North Dakota. In 1981, the line from Geneva, Nebraska to North Platte, Nebraska was built and, in 1982, the 16" line from McPherson, Kansas to Geneva, Nebraska was built. In 1984, the Partnership acquired a 6" pipeline from Champlin Oil Company. A portion of this line runs south from Shickley, Nebraska through Superior, Nebraska, to Hutchinson, Kansas. The Partnership is building a new 6" pipeline from Conway, Kansas to Windom, Kansas (approximately 22 miles north of Hutchinson) that will allow the Hutchinson Terminal to be supplied directly from McPherson; a significantly shorter route than currently used. Once the new pipeline is operational (anticipated to be April 1997), the segment of the old Champlin line between Windom and Shickley will be shut down. 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 Partnership's Yankton/Milford line to terminate at Rock Rapids, Iowa. The East Pipeline system also consists of 16 product terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota (with total storage capacity of approximately 3.2 million barrels) and an additional 23 product tanks with total storage capacity of approximately 922,000 barrels at its tank farm installations at McPherson and El Dorado, Kansas. The system further has six origin pump stations at refineries in Kansas and 38 booster pump stations situated along the system in Kansas, Nebraska, Iowa, South Dakota and North Dakota. Additionally, the system maintains various office and warehouse facilities, and an extensive quality control laboratory. KPOP owns the entire 2,075 mile East Pipeline, except for the 203-mile North Platte line, which is held under a capitalized lease that expires at the end of 1998 and which provides rights to renew the lease for an additional five years. At the end of the lease term, KPOP has the option to purchase the North Platte line for approximately $5 million or, if such option is not exercised, the lessor can require KPOP to purchase the line at a lower price. KPOP leases office space for its operating headquarters in Wichita, Kansas. The East Pipeline is a pipeline transporting refined petroleum products, including propane, received from refineries in southeast Kansas and other connecting pipelines to terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota and to receiving pipeline connections in Kansas. Shippers on the East Pipeline obtain refined petroleum products from refineries connected to the East Pipeline directly or through other pipelines. These refineries obtain their crude oil primarily from producing areas in Kansas, Oklahoma and Texas. Five connecting pipelines can deliver propane for shipment through the East Pipeline from gas processing plants in Texas, New Mexico, Oklahoma and Kansas. West Pipeline KPOP acquired the West Pipeline in February 1995 through an asset purchase from WYCO Pipe Line Company for a purchase price of $27.1 million. The acquisition of the West Pipeline increased the Partnership's pipeline business in South Dakota and expanded it into Wyoming and Colorado. The West Pipeline system includes approximately 550 miles of underground pipe line in Wyoming, Colorado and South Dakota, four truck loading terminals and numerous pump stations situated along the system. The system has four product terminals having a total storage capacity of over 1.7 million barrels. The West Pipeline originates at Casper, Wyoming. Strouds station, which is located east of Casper in Evansville, Wyoming, serves as a connecting point with Sinclair's Little America refinery and the Seminoe Pipeline that delivers product from Billings, Montana area refineries. From Strouds, the West Pipeline continues easterly through its 8" line to Douglas, Wyoming, where a 6" pipeline branches off to serve the Partnership's Rapid City, South Dakota terminal approximately 190 miles away. The 6" pipeline also receives product from Wyoming Refining's pipeline at a connection located near the Wyoming/South Dakota border approximately 30 miles south of Wyoming Refining's Newcastle refinery. The Rapid City terminal has a three bay bottom loading truck rack and storage tank capacity of 256,000 barrels. At Douglas Junction, the Partnership's 8" pipeline continues southward through a delivery point at the Burlington Northern Junction to the Cheyenne terminal. The Cheyenne terminal has a two bay bottom loading truck rack and storage tank capacity of 345,000 barrels. The Cheyenne terminal also serves as a receiving point 3 4 for products from the Frontier refinery. Products can also be delivered to the Cheyenne Pipe Line at the Cheyenne terminal. From the Cheyenne terminal, the pipeline extends south into Colorado to the Dupont terminal located in the Denver metropolitan area. The Dupont terminal is the largest terminal on the West Pipeline system, with a six bay bottom loading truck rack and tankage capacity of 692,000 barrels. The 8" pipeline continues to the Commerce City station, where the West Pipeline can receive from and transfer product to the Total Petroleum and Conoco refineries and the Phillips Petroleum terminal. From the Commerce City station, a 6" line continues south 90 miles where the system terminates at the Fountain, Colorado terminal. The Fountain terminal has a five bay bottom loading truck rack and storage tank capacity of 366,000 barrels. The West Pipeline system parallels KPP's East Pipeline to the west. The East Pipeline's North Platte line terminates in western Nebraska, approximately 200 miles east of the West Pipeline's Cheyenne, Wyoming terminal. The small Cheyenne Pipe Line moves products from west to east from the West Pipeline's Cheyenne terminal to near the East Pipeline's North Platte terminal, although that line has been deactivated from Sidney, Nebraska (approximately 100 miles from Cheyenne) to North Platte. The West Pipeline serves Denver and other eastern Colorado markets and supplies jet fuel to Ellsworth Air Force Base at Rapid City, South Dakota, as compared to the East Pipeline's largely agricultural service area. The West Pipeline has a relatively small number of shippers, who, with few exceptions, are also shippers on the Partnership's East Pipeline system. Pipelines Products and Activities The Pipelines' 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 East Pipeline for each of the periods indicated and by the West Pipeline since its acquisition on February 24, 1995.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- Volume (1) .............. 55,111 56,234 54,546 74,965 73,839 Barrel miles (2) ........ 14,287 14,160 14,460 16,594 16,735 Revenues (3) ............ $ 42,179 $ 44,107 $ 46,117 $ 60,192 $ 63,441
(1) Volumes are expressed in thousands of barrels of refined petroleum product. (2) Barrel miles are shown in millions. A barrel mile is the movement of one barrel of refined petroleum product one mile. (3) Revenues are expressed in thousands of dollars. The following table sets forth volumes of gasoline, diesel and fuel oil, propane and other refined petroleum products transported by the East Pipeline during each of the periods indicated and by the West Pipeline since its acquisition by the Partnership in February 1995.
YEAR ENDED DECEMBER 31, (THOUSANDS OF BARRELS) ------------------------------------------ 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ Gasoline .......................... 24,816 25,407 23,958 37,348 36,063 Diesel and fuel oil ............... 23,374 25,308 26,340 33,411 32,934 Propane ........................... 4,676 4,153 4,204 4,146 4,842 Other ............................. 2,245 1,366 44 60 -0- ------------------------------------------ Total ........................... 55,111 56,234 54,546 74,965 73,839 ====== ====== ====== ====== ======
Diesel and fuel oil are used in farm machinery and equipment, over-the-road transportation, railroad fueling and residential fuel oil. Gasoline is primarily used in over-the-road transportation. Propane is used for crop drying, residential heating and to power irrigation equipment. The mix of refined petroleum products delivered 4 5 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 markets served by the East Pipeline affect the demand for and the mix of the refined petroleum products delivered through the East 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 product delivered. In October, 1991, two single-use pipelines were acquired from Calnev Pipe Line Company for $2.65 million. Each system, one located in Umatilla, Oregon and the other in Rawlins, Wyoming, supplies diesel fuel to Union Pacific Railroad fueling facilities under contracts having an initial term of five years, expiring in October 1996. These contracts were automatically renewed for two years and 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 which supplies diesel fuel to a Burlington Northern Railroad fueling facility. For the year ended December 31, 1996, the three systems combined transported a total of 3.5 million barrels of diesel fuel, representing an aggregate of $1.3 million in revenues. Maintenance and Monitoring The Pipelines have been constructed and are maintained consistent with applicable federal, state and local laws and regulations, standards prescribed by the American Petroleum Institute and accepted industry practice. Further, to prolong the useful lives of the Pipelines, routine preventive maintenance is performed. Such maintenance includes cathodic protection to prevent external corrosion and inhibitors to prevent internal corrosion, periodic inspection of the Pipelines and frequent patrols of the Pipelines' rights-of-way. The Pipelines are patrolled at regular intervals to identify equipment or activities by third parties that, if left unchecked, could result in encroachment of the Pipelines and other problems. Supervisory Control and Data Acquisition ("SCADA"), a remote supervisory control software program, continuously monitors the Pipelines from the Wichita, Kansas headquarters. The system monitors quantities of refined petroleum products injected in and delivered through the Pipelines and automatically signals the Wichita headquarters of any deviation from normal operations that requires attention. A new, state-of-the-art SCADA system was installed and in operation on the West Pipeline as of October 1995 and was completed on the East Pipeline during January 1997. Pipeline Operations Both the East Pipeline and the West Pipeline are interstate pipelines and thus subject to federal regulation by such governmental agencies as the Federal Energy Regulatory Commission ("FERC") and the Department of Transportation. Additionally, the West Pipeline is subject to state regulation of certain intrastate rates in Colorado and Wyoming and the East Pipeline is subject to state regulation in Kansas. The Pipelines are also subject to the regulations of other governmental agencies such as the Environmental Protection Agency. (See: "Regulation") Except for the three single-use pipelines and certain ethanol facilities, all of the Partnership's pipeline operations constitute common carrier operations and are subject to federal tariff regulation. Also, certain of its intrastate common carrier operations are subject to state tariff regulation. Common carrier activities are those under which transportation through the Pipelines are available at published tariffs filed with the FERC, in the case of interstate shipments, or the relevant state authority, in the case of intrastate shipments in Kansas, Colorado and Wyoming, to any shipper of refined petroleum products who requests such services and satisfies the conditions and specifications for transportation. In general, a shipper on one of the Pipelines acquires refined petroleum products from refineries connected to such Pipeline, or, if the shipper already owns the refined petroleum products, delivers such products to the Pipeline from those refineries or through pipelines that connect with such Pipeline. Tariffs for transportation are charged to shippers based upon transportation from the origination point on the Pipeline to the point of delivery. Such tariffs also include charges for terminaling and storage of product at the Pipeline's terminals. Pipelines are generally the lowest cost method for intermediate and long-haul overland transportation of refined petroleum products. 5 6 Each shipper transporting product on a Pipeline is required to supply KPOP with a notice of shipment indicating sources of products and destinations. All shipments are tested or receive refinery certifications to ensure compliance with KPOP's specifications. Shippers are generally invoiced by KPOP immediately upon the product entering one of the Pipelines. The operations of the Pipelines include 20 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, the number of tanks owned by KPOP, its storage capacity in barrels and truck capacity. Except as indicated in the notes to the table, each terminal is owned by KPOP.
LOCATION OF NUMBER TANKAGE TRUCK TERMINALS OF TANKS CAPACITY CAPACITY(a) -------------- -------- --------- ----------- COLORADO: Dupont 18 692,000 6 Fountain 13 366,000 5 IOWA: LeMars 9 103,000 2 Milford(b) 11 172,000 2 Rock Rapids 12 366,000 2 KANSAS: Concordia(c) 7 79,000 2 Hutchinson 9 162,000 1 NEBRASKA: Columbus(d) 12 191,000 2 Geneva 39 678,000 8 Norfolk 16 187,000 4 North Platte 22 198,000 5 Osceola 8 79,000 2 Superior(e) 11 192,000 1 NORTH DAKOTA: Jamestown 13 188,000 2 SOUTH DAKOTA: Aberdeen 12 181,000 2 Mitchell 8 72,000 2 Rapid City 13 256,000 3 Wolsey 21 149,000 4 Yankton 25 246,000 4 WYOMING: Cheyenne 15 345,000 2 -------- --------- TOTALS 294 4,902,000 ======== =========
- -------------- (a) Number of trucks that may be simultaneously loaded. (b) 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 the lease upon its expiration for an additional term of 20 years at the same annual rental rate. (c) The Concordia terminal is situated on land leased through the year 2060 for a total rental of $2,000. (d) Also loads rail tank cars. (e) Out of service as of March 15, 1997. 6 7 The East Pipeline includes intermediate storage facilities consisting of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson, Kansas with aggregate capacities of approximately 388,000 and 534,000 barrels, respectively. During 1996, approximately 60% and 92% of the deliveries of the East Pipeline and the West Pipeline, respectively, were made through their terminals, and approximately 40% and 8% of the respective deliveries of such lines were made to other pipelines and customer owned storage tanks. Storage of product at terminals pending delivery is considered by the Partnership to be an integral part of the product delivery service of the Pipelines. Shippers generally store refined petroleum products for less than one week. Ancillary services, including injection of shipper-furnished and generic additives, are available at each terminal. Demand for and Sources of Refined Petroleum Products The Partnership's pipeline business depends in large part on (i) the level of demand for refined petroleum products in the markets served by the Pipelines and (ii) the ability and willingness of refiners and marketers having access to the Pipelines to supply such demand by deliveries through the Pipelines. Most of the refined petroleum products delivered through the East Pipeline are ultimately used 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 East Pipeline. The agricultural sector is also affected by government agricultural policies and crop prices. Although periods of drought suppress agricultural demand for some refined petroleum products, particularly those used for fueling farm equipment, during such times the demand for fuel for irrigation systems often increases. While there is some agricultural demand for the refined petroleum products delivered through the West Pipeline, as well as military jet fuel volumes, most of the demand is centered in the Denver and Colorado Springs/Fountain areas. Because demand on the West Pipeline is significantly weighted toward urban and suburban areas, the product mix on the West Pipeline includes a substantially higher percentage of gasoline than the product mix on the East Pipeline. The Pipelines are also dependent upon adequate levels of production of refined petroleum products by refineries connected to the Pipelines, directly or through connecting pipelines. The refineries are, in turn, dependent upon adequate supplies of suitable grades of crude oil. The refineries connected directly to the East Pipeline obtain crude oil from producing fields located primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from other domestic or foreign sources. Refineries in Kansas, Oklahoma and Texas are connected to the East Pipeline through other pipelines. These refineries obtain their supplies of crude oil from a variety of sources. The refineries connected directly to the West Pipeline are located in Casper and Cheyenne, Wyoming and Denver, Colorado. Refineries in Billings and Laurel, Montana are connected to the West Pipeline through other pipelines. These refineries obtain their supplies of crude oil primarily from Rocky mountain sources. If operations at any one refinery were discontinued, the Partnership believes (assuming unchanged demand for refined petroleum products in markets served by the Pipelines) that the effects thereof would be short-term in nature, and the Partnership's business would not be materially adversely affected over the long term because such discontinued production could be replaced by other refineries or by other sources. The majority of the refined petroleum product transported through the East Pipeline is produced at four refineries located at McPherson, El Dorado and Arkansas City, Kansas and Ponca City, Oklahoma, and operated by National Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco"), Total Petroleum ("Total") and Conoco, Inc. respectively. The NCRA, Texaco and Total refineries are connected directly to the East Pipeline, however, the Total refinery was shut down on September 1, 1996. One of such refineries, the McPherson, Kansas refinery operated by NCRA, accounted for approximately 37% of the total amount of product shipped over the East Pipeline in 1996. The East Pipeline also has direct access by third party pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies of products through connecting pipelines that receive products from a pipeline originating on the Gulf Coast. Five connecting pipelines can deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to the East Pipeline for shipment. 7 8 The majority of the refined petroleum products transported through the West Pipeline is produced at the Frontier Oil & Refining Company refinery located at Cheyenne, Wyoming, the Total Petroleum and Conoco Oil refineries located at Denver, Colorado and Sinclair's Little America refinery located at Casper, Wyoming, all of which are connected directly to the West Pipeline. The West Pipeline also has access to three Billings, Montana area refineries through a connecting pipeline. Principal Customers KPOP had a total of approximately 52 shippers in 1996. The principal shippers include four integrated oil companies, three refining companies, two large farm cooperatives and one railroad. Transportation revenues attributable to the top 10 shippers of the Pipelines were $46.5 million, $43.7 million and $35.8 million, which accounted for 76%, 75% and 80% of total revenues for each of the years 1996, 1995 and 1994, respectively. These amounts were based upon revenue shipped during the periods indicated. Competition and Business Considerations The East Pipeline's major competitor is an independent regulated common carrier pipeline system owned by The Williams Companies, Inc. that operates approximately 100 miles east of and parallel with the East Pipeline. The Williams system is a substantially more extensive system than the East Pipeline. Furthermore, Williams and its affiliates have capital and financial resources that are substantially greater than those of the Partnership. Competition with Williams is based primarily on transportation charges, quality of customer service and proximity to end users, although refined product pricing at either the origin or terminal point on a pipeline may outweigh transportation costs. Fifteen of the East Pipeline's 16 delivery terminals are in direct competition with Williams' terminals, as they are located within two to 145 miles of one another. The West Pipeline competes with the truck loading racks of the Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline Company and Phillips Petroleum pipelines. Diamond Shamrock terminals in Denver and Colorado Springs, connected to a Diamond Shamrock pipeline from their Texas Panhandle refinery, are major competitors to the West Pipeline's Denver and Fountain terminals, respectively. Because pipelines are generally the lowest cost method for intermediate and long-haul movement of refined petroleum products, the Pipelines' more significant competitors are common carrier and proprietary pipelines owned and operated by major integrated and large independent oil companies and other companies in the areas where the Pipelines deliver products. Competition between common carrier pipelines is based primarily on transportation charges, quality of customer service and proximity to end users. The Partnership believes high capital costs, tariff regulation, environmental considerations and problems in acquiring rights-of-way make it unlikely that other competing pipeline systems comparable in size and scope to the Pipelines will be built in the near future, provided the Pipelines have available capacity to satisfy demand and its tariffs remain at reasonable levels. The costs associated with transporting products from a loading terminal to end users limit the geographic size of the market that can be served economically by any terminal. Transportation to end users from the loading terminals of the Partnership is conducted principally by trucking operations of unrelated third parties. Trucks may competitively deliver products in some of the areas served by the Pipelines. However, trucking costs render that mode of transportation not competitive for longer hauls or larger volumes. The Partnership does not believe that trucks are, or will be, over the long term effective competition to its long-haul volumes. 8 9 LIQUIDS TERMINALING Introduction The Partnership's Support Terminal Services, Inc. operation ("ST") is one of the largest independent petroleum products and specialty liquids terminaling companies in the United States. For the year ended December 31, 1996, the Partnership's terminaling business accounted for approximately 46% of the Partnership's revenues. As of December 31, 1996, ST operates 31 facilities in 16 states and the District of Columbia, with a total storage capacity of approximately 17.2 million barrels. ST and its predecessors have been in the terminaling business for 40 years and handle a wide variety of products from petroleum products to specialty chemicals to edible liquids. ST's terminal facilities provide storage on a fee basis for petroleum products, specialty chemicals and other liquids. ST's five largest terminal facilities are located in Piney Point, Maryland; Jacksonville, Florida; Texas City, Texas; Baltimore, Maryland; and, Westwego, Louisiana. These facilities accounted for approximately 75% of ST's revenues and 65% of its tankage capacity in 1996. Description of Terminals Piney Point, Maryland. The largest terminal currently owned by ST is located on approximately 400 acres on the Potomac River. The facility was acquired as part of the purchase of the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively "Steuart") in December 1995 (See: Recent Developments - Steuart Petroleum Company Acquisition). The Piney Point terminal has approximately 5.4 million barrels of storage capacity in 28 tanks and is the closest deep water facility to Washington, D.C. This terminal competes with other large petroleum terminals in the East Coast water-borne market extending from New York Harbor to Norfolk, Virginia. The terminal currently stores petroleum products, consisting primarily of fuel oils and asphalt. The terminal has a dock with a 36-foot draft for tankers and four berths for barges. It also has truck loading facilities and product blending capabilities and is connected to a pipeline which supplies residual fuel oil to two power generating stations. Jacksonville, Florida. The Jacksonville terminal, also acquired as part of the Steuart transaction, is located on approximately 86 acres at the St. John's River and consists of a main terminal and two annexes with combined storage capacity of approximately 2.1 million barrels in 28 tanks. The terminal is currently used to store petroleum products including gasoline, No. 2 oil, No. 6 oil, diesel and kerosene. This terminal has a tanker berth with a 38-foot draft and six barge berths and also offers truck and rail car loading facilities and facilities to blend residual fuels for ship bunkering. Texas City, Texas. The Texas City facility is situated on 39 acres of land leased from the Texas City Terminal Railway Company ("TCTRC") with long-term renewal options. It is located on Galveston Bay near the mouth of the Houston Ship Channel, 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 TCTRC. The three deep-water docks include two 36-foot draft docks and a 40-foot draft dock. The docking facilities can accommodate any ship or barge capable of navigating the 40-foot draft of the Houston Ship Channel. ST is charged dockage and wharfage fees on a per vessel and per unit basis, respectively, by TCTRC, which it passes directly to its customers. 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, including among other things, linings and/or 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 and has direct pipeline connections to refineries in Texas City. 9 10 The Texas City terminal consists of 124 tanks with a total capacity of approximately 2 million barrels. 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 engineered structural measures to minimize the possibility of the occurrence and the level of damage in the event of a spill or fire. All loading areas, tanks, pipes and pumping areas are "contained" to collect any spillage and insure that only properly treated water is discharged from the site. 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-foot finger pier with a 33-foot draft channel and berth at the facility. The dock gives ST the ability to receive and deliver shipments of product from and to barge and ship. Additionally, the terminal can receive products by pipeline, truck and rail and deliver them via truck and rail. Similar to the Texas City facility, Baltimore is a specialty liquids terminal. The primary products stored at the Baltimore facility include asphalt, fructose, caustic solutions, military jet fuel, latex and other chemicals. The Baltimore tank facility consists of 50 tanks with a total capacity of approximately 826,000 barrels. All of the utilized tanks are dedicated to specific products of customers under contract. The tanks are specifically equipped to handle the requirements of the products they store. Westwego, Louisiana. The Westwego facility is situated on 27 acres of owned land adjacent to the West bank of the Mississippi River across from New Orleans. Its dock 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 of the facility has contracted with ST until June 1999 for terminaling in five large molasses tanks. In recent years, the terminal has broadened its product mix to include fertilizer, latex and caustic solutions. The facility includes a blending plant for the formulation of certain molasses-based feeds. The facility consists of 54 tanks with a total capacity of approximately 858,000 barrels. There are additional smaller tanks for blending and formulation of the liquid feeds. Other Terminal Sites. In addition to the five major facilities described above, ST has 26 other terminal facilities located throughout the United States, not separately counting two terminal facilities acquired in 1996 that are adjacent to facilities that were already owned by the Partnership (See: Recent Developments). The 26 facilities represented approximately 35% of ST's total tankage capacity and approximately 25% of its total revenue for 1996. With the exception of the facilities in Columbus, Georgia, which handles aviation gasoline and specialty chemicals, Winona, Minnesota, which handles nitrogen fertilizer solutions, and Savannah, Georgia which handles chemicals and caustic, these facilities primarily store petroleum products for a variety of customers. These facilities provide ST with a geographically diverse base of customers and revenue. The storage and transport of jet fuel for the U.S. Department of Defense is also an important part of ST's business. Ten of ST's terminal sites are involved in the terminaling or transport (via pipeline) of jet fuel for the Department of Defense. Six of the ten locations are utilized solely by the U.S. Government. Five of the locations include pipelines which deliver jet fuel directly to nearby military bases. Additionally, a sixth location is the former Steuart facility supplying Andrews Air Force Base, Maryland, consists of a barge receiving dock, an 11.3 mile pipeline, three 24,000 barrel double-bottomed tanks and an administration building located on the base. This facility provides the barge receipt, pipeline transportation and terminaling services for jet fuel to Andrews Air Force Base on a tariff basis for the Defense Fuel Supply Center and has served the base for the past 30 years. 10 11 The following table outlines ST's terminal locations, capacities, tanks and primary products handled:
TANKAGE NO. OF PRIMARY PRODUCTS FACILITY CAPACITY TANKS HANDLED - --------------------------------------------------------------------------------- PRIMARY TERMINALS: Piney Point, MD 5,403,000 28 Petroleum Jacksonville, FL 2,061,000 28 Petroleum Texas City, TX 2,002,000 124 Chemicals and Petrochemicals Westwego, LA 858,000 54 Molasses, Fertilizer, Caustic Baltimore, MD 826,000 50 Chemicals, Asphalt, Jet Fuel OTHER TERMINALS: Montgomery, AL(a) 162,000 7 Petroleum, Jet Fuel Moundville, AL 310,000 6 Jet Fuel Tuscon, AZ(b) 181,000 7 Petroleum Imperial, CA 124,000 6 Petroleum Stockton, CA 314,000 18 Petroleum Farragut St., DC 176,000 5 Petroleum M Street, DC 133,000 3 Petroleum Homestead, FL(a) 72,000 2 Jet Fuel Augusta, GA 110,000 8 Petroleum Bremen, GA 180,000 8 Petroleum, Jet Fuel Brunswick, GA 302,000 3 Petroleum, Pulp Liquor Columbus, GA 180,000 25 Petroleum, Chemicals Macon, GA(a) 307,000 10 Petroleum Savannah, GA 696,000 17 Petroleum, Chemicals Chillicothe, IL 270,000 6 Petroleum Peru, IL 221,000 8 Petroleum, Fertilizer Indianapolis, IN 410,000 18 Petroleum Salina, KS 98,000 10 Petroleum Andrews AFB Pipeline, MD 72,000 3 Jet Fuel Winona, MN 229,000 7 Fertilizer Alamogordo, NM(a) 120,000 5 Jet Fuel Drumright, OK 315,000 4 Jet Fuel San Antonio, TX 207,000 4 Jet Fuel Cockpit Point, VA 545,000 16 Petroleum, Asphalt Virginia Beach, VA(a) 40,000 2 Jet Fuel Milwaukee, WI 308,000 7 Petroleum ---------- ---------- 17,232,000 499 ========== ==========
(a) Facility also includes pipelines to U.S. government military base locations. (b) The terminal is 50% owned by ST. 11 12 Recent Developments Steuart Petroleum Company Acquisition In December 1995, the Partnership, through its subsidiary partnership STOP, acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively "Steuart") for $68 million and the assumption of certain environmental liabilities. The Steuart terminaling assets acquired in the transaction consisted of eight facilities located in the District of Columbia, Florida, Georgia, Maryland and Virginia, including the pipeline servicing Andrews Air Force Base in Maryland. Strategically, the Steuart acquisition allowed the Partnership to significantly increase its presence on the East Coast of the United States, which has been further enhanced by the Powell-Duffryn and Sun acquisitions described below. Powell-Duffryn Acquisition In October 1996, the Partnership, through STOP, acquired a chemical liquids terminaling facility located in Savannah, Georgia from Powell-Duffryn, Inc. for $2.5 million plus transaction costs and the assumption of certain environmental liabilities. The terminal facility consists of five tanks having a total capacity of approximately 389,000 barrels and is also close to an existing petroleum terminal that was acquired by the Partnership in the Steuart acquisition. The acquisition of the Powell-Duffryn facility expanded the size, customer base and range of services provided by ST in Savannah, as it handles chemicals and caustic solutions rather than the petroleum products historically handled at the Partnership's existing Savannah terminal. Cockpit Point Acquisition In December 1996, the Partnership, through STOP, acquired an asphalt terminal in Cockpit Point, Virginia from Sun Company, Inc. (R&M) for $5.0 million plus transaction costs. The terminal is also adjacent to an existing facility, that was acquired by the Partnership in the Steuart acquisition and added 12 tanks having a total storage capacity of 89,000 barrels to the Partnership's existing operations at Cockpit Point. Until January 1, 1997, ST provided terminaling for Sun, at which time CITGO Asphalt Refining Company commenced using the terminal under a long term agreement with ST for the terminaling of CITGO's asphalt products. The acquisition was financed under the Partnership's $15 existing million revolving bank credit facility. Competition and Business Considerations In addition to the terminals owned by independent terminal operators, such as ST, many major energy and chemical companies own extensive terminal storage facilities. Although such terminals often have the same capabilities as terminals owned by independent operators, they generally do not provide terminaling services to third parties. In many instances, major energy and chemical companies that own storage and terminaling facilities are also significant customers of independent terminal operators. Such companies typically have strong demand for terminals owned by independent operators when independent terminals have more cost effective locations near key transportation links, such as deep-water ports. Major energy and chemical companies also need independent terminal storage when their owned storage facilities are inadequate, either because of size constraints, the nature of the stored material or specialized handling requirements. Independent terminal owners generally compete on the basis of the location and versatility of terminals, service and price. A favorably located terminal will have access to various cost effective transportation modes both to and from the terminal. Possible transportation modes include waterways, railroads, roadways and pipelines. Terminals located near deep-water port facilities are referred to as "deep-water terminals" and terminals without such facilities are referred to as "inland terminals"; though some inland facilities are served by barges on navigable rivers. Terminal versatility is a function of the operator's ability to offer handling for diverse products with complex handling requirements. The service function typically provided by the terminal includes, among other things, the safe storage of the product at specified temperature, moisture and other conditions, as well as receipt at and delivery from the terminal. An increasingly important aspect of versatility and the service function is an operator's ability to offer 12 13 product handling and storage in compliance with environmental regulations. A terminal operator's ability to obtain attractive pricing is often dependent on the quality, versatility and reputation of the facilities owned by the operator. Although many products require modest terminal modification, operators with a greater diversity of terminals with versatile storage applications typically require less modification prior to usage, ultimately making the storage cost to the customer more attractive. Several companies offering liquid terminaling facilities have significantly more capacity than ST. However, 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 Terminals Corporation, Williams, Northville Industries Corporation and Petroleum Fuel & Terminal Company, have facilities used primarily for petroleum related products. As a result, most of Steuart's terminals will be competing against other large petroleum products terminals rather than the specialty liquids facilities offered by tankage at ST's terminals. Such specialty or "niche" tankage is less abundant in the U.S. and "specialty" liquids typically command higher terminal fees than lower-price bulk terminaling for petroleum products. CAPITAL EXPENDITURES Capital expenditures by the Pipelines, were $2.2 million, $3.4 million and $3.5, respectively, for the three years ended from December 31, 1994 to December 31, 1996. 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, excluding acquisitions, by ST were $5.0 million, $5.6 million and $4.7 million, respectively, for the three years ending from December 31, 1994 to December 31, 1996. Capital expenditures of the Partnership during 1997 are expected to be approximately $8 to 10 million. (See: "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity"). Additional expansion-related capital expenditures will depend on future opportunities to expand the Partnership's operation. The General Partner intends to finance future expansion capital expenditures primarily through Partnership borrowings. Such future expenditures, however, will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and federal governmental regulations, fuel conservation efforts and the availability of financing on acceptable terms. No assurance can be given that required capital expenditures will not exceed anticipated amounts during the year or thereafter or that the Partnership will have the ability and/or choose to finance such expenditures through borrowing. REGULATION Interstate Regulation. The interstate common carrier pipeline operations of the Partnership are subject to rate regulation by FERC under the Interstate Commerce Act. The Interstate Commerce Act provides, among other things, that to be lawful the rates of common carrier petroleum pipelines must be "just and reasonable" and not unduly discriminatory. New and changed rates must be filed with the FERC, which may investigate their lawfulness on protest or its own motion. The FERC may suspend the effectiveness of such rates for up to seven months. If the suspension expires before completion of the investigation, the rates go into effect, but the pipeline can be required to refund to shippers, with interest, any difference between the level the FERC determines to be lawful and the filed rates under investigation. Rates that have become final and effective may be challenged by complaint to FERC filed by a shipper or on the FERC's own initiative and reparations may be recovered by the party filing the complaint for the two year period prior to the complaint, if FERC finds the rate to be unlawful. 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 13 14 pipeline's "rate base". Generally, the "rate base" is a measure 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 should 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. This 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 typically 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, 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. The Partnership has not attempted to depart from cost-based rates. Instead, it has continued to rely on the traditional, cost-based TOC methodology. The TOC methodology has not been subject to judicial review. Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"), rates that were in effect on October 24, 1991 that were not subject to a protest, investigation or complaint are deemed to be just and reasonable. Such rates are subject to challenge only for limited reasons, relating to (i) substantially changed circumstances in either the economic circumstances of the subject pipeline or the nature of the services, (ii) a contractual bar that prevented the complainant from previously challenging the rates or (iii) a claim that such rates are unduly discriminatory or preferential. Any relief granted pursuant to such challenges may be prospective only. Because the Partnership's rates that were in effect on October 24, 1991, were subject to investigation and protest at that time, its rates were not deemed to be just and reasonable pursuant to the EP Act. The Partnership's current rates became final and effective in April 1994, and the Partnership believes that its currently effective tariffs are just and reasonable and would withstand challenge under the FERC's cost-based rate standards. Because of the complexity of rate making, however, the lawfulness of any rate is never assured. On October 22, 1993, the FERC issued Order No. 561 implementing the EP Act. Order No. 561, among other things, adopted a simplified and generally acceptable rate making methodology for future oil pipeline rate changes in the form of indexation. Indexation, which is also known as price cap regulation, establishes ceiling prices on oil pipeline rates based on application of a broad-based measure of inflation in the general economy to existing rates. Rate increases up to the ceiling level are to be discretionary for the pipeline, and, for such rate increases, there will be no 14 15 need to file cost-of-service or supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline may make a limitless number of rate change filings. The pipeline rates in effect at December 31, 1994, which are determined to be just and reasonable, become the "Base Rates" for application of the indexing mechanism. This indexing mechanism calculates a ceiling rate. The pipeline may increase its rates to this calculated ceiling rate without filing a formal cost based justification and with limited risk of shipper protests. Shippers may still be permitted to protest pipeline rates, even if the rate change does not exceed the index ceiling, if the shipper can demonstrate that the "increase is so substantially in excess of the actual cost increase incurred by the pipeline" that the proposed rate would be unjust and unreasonable. The index is cumulative, attaching to the applicable ceiling rate and not to the actual rate charged. Thus, a rate that is not increased to the ceiling level in a given year may still be increased to the ceiling level in the following year. The pipeline may be required to decrease the current rate if the rate being charged exceeds the ceiling level. The index underlying Order No. 561 is to serve as the principal basis for the establishment of oil pipeline rate changes in the future. As explained by the FERC in Order Nos. 561 and 561-A, however, there may be circumstances where the indexing mechanism will not apply. Specifically, the FERC determined that a pipeline may utilize any one of the following three alternative methodologies to indexing: (i) a cost-of-service methodology may be utilized by a pipeline to justify a change in a rate if a pipeline can demonstrate that its increased costs are prudently incurred and that there is a substantial divergence between such increased costs and the rate that would be produced by application of the index; (ii) a pipeline may file a rate change as part of a settlement when it secures the agreement of all of its existing shippers; and (iii) a pipeline may base its rates upon a "light-handed" market-based form of regulation if it is able to demonstrate a lack of significant market power in the relevant markets. The indexing mechanism does not apply to initial rates of a pipeline, which will still generally be established using the traditional TOC methodology. Order No. 561 provides, however, that a pipeline can file an initial rate based upon the agreement of at least one non-affiliated shipper, without an accompanying cost-of-service justification for such rate. Yet, if this agreed-upon rate is protested by another shipper, the pipeline will be required to justify the initial rate on a cost-of-service basis. The initial rate that is established by the pipeline becomes the pipeline's "Base Rate", and the indexing mechanism will be applicable to that rate in subsequent years. On October 28, 1994, after hearings and public comment period, the FERC issued Order Nos. 571 and 572, intended as procedural follow-ups to Order No. 561. In Order No. 571, the FERC (i) articulated cost-of-service and reporting requirements to be applicable to pipeline initial rates and to situations where indexing is determined to be inappropriate; (ii) adopted rules for the establishment of revised depreciation rates; and (iii) revised the information required to be reported by pipelines in their Form No. 6, "Annual Report for Oil Pipelines". Order No. 572 establishes the filing requirements and procedures that must be followed when a pipeline seeks to charge market-based rates. In the FERC's Lakehead decision issued June 15, 1995, the FERC partially disallowed Lakehead's inclusion of income taxes in its cost of service. Specifically, the FERC held that Lakehead was entitled to receive an income tax allowance with respect to income attributable to its corporate partners, but was not entitled to receive such an allowance for income attributable to the Partnership interests held by individuals. Lakehead's motion for rehearing was denied by the FERC and Lakehead appealed the decision to the US Court of Appeals. Subsequently the case was settled by Lakehead and the appeal was withdrawn. In another FERC proceeding that has not yet reached the hearing stage, involving a different oil pipeline limited partnership, various shippers have challenged such pipeline's inclusion of an income tax allowance in its cost of service. The FERC Staff has also filed testimony that supports the disallowance of income taxes. If the FERC were to disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, the General Partner believes that the Partnership's ability to pay the Minimum Quarterly Distribution to the holders of the Senior Preference Units, Preference Units and Preference B Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard. Intrastate Regulation. The intrastate operations of the East Pipeline in Kansas are subject to regulation by the Kansas Corporation Commission, and the intrastate operations of the West Pipeline in Colorado and Wyoming are subject to regulation by the Colorado Public Utility commission and the Wyoming Public Service Commission, respectively. Like the FERC, the state regulatory authorities require that shippers be notified of proposed intrastate 15 16 tariff increases and have an opportunity to protest such increases. KPOP also files with such state authorities copies of interstate tariff changes filed with the FERC. In addition to challenges to new or proposed rates, challenges to intrastate rates that have already become effective are permitted by complaint of an interested person or by independent action of the appropriate regulatory authority. ENVIRONMENTAL MATTERS General. The operations of the Partnership are subject to federal, state and local laws and regulations relating to the 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, past and present, 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. Regulations concerning the environment are continually being developed and revised in ways that may impose additional regulatory burdens on the Partnership. Contamination resulting from spills or releases of refined petroleum products are not unusual within the petroleum pipeline industry. The East Pipeline has experienced limited groundwater contamination at five terminal sites (Milford, Iowa, Norfolk and Columbus, Nebraska, and Aberdeen and Yankton, South Dakota) resulting from spills of refined petroleum products. Regulatory authorities have been notified of these findings and remediation projects are underway or under construction using various remediation techniques. The Partnership estimates that $719,000 has been expended to date for remediation at these five sites and that ongoing remediation expenses at each site will be less than $5,000 per year for the next several years. Groundwater contamination is also known to exist at East 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 East Pipeline experienced a spill due to third party damage during the first quarter of 1991. Remediation of the ground water impacted by this spill was performed from the second quarter of 1991 through the second quarter of 1996. During the fourth quarter of 1996, additional site assessment work was performed to determine the extent of the remaining contamination and to develop a more effective remediation approach. Also during the fourth quarter of 1996, a settlement was reached with the parties previously named in the related damage suit filed by the Partnership. Future remediation expenses relative to this site are not expected to have a material effect upon the results of the Partnership. During 1994, the East 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, 1994, 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. Although the Partnership has expended approximately $210,000 to date for remediation at these rupture sites, the total amount of remediation expenses that will be required has not yet been determined. These expenses are not expected to have a material effect upon the results of the Partnership. 16 17 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 current approach, clean up will not be required, however based on risk assessment, the site will continue to be monitored and tested. 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 has expended approximately $500,000 through 1996 for remediation at these four sites and estimates that on-going remediation expenses will aggregate approximately $200,000 to $300,000 over the next three 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 the facility. Star Enterprises, the former owner of the Montgomery terminal, has indemnified ST for contamination at a portion of the Montgomery site where contamination was identified prior to ST's acquisition of the facility. A remediation system is in place to address groundwater contamination at the ST terminal facility in Augusta, Georgia. Star Enterprises, the former owner of the Augusta terminal, has indemnified ST for this contamination and has retained responsibility for the remediation system. 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 ("TLC") 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 TLC procedure and require additional treatment prior to its disposal. The Partnership has installed totally enclosed wastewater treatment systems at all East Pipeline terminal sites to treat such petroleum contaminated water, especially tank bottom water. The EPA has also 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. Groundwater remediation efforts are ongoing at the West Pipeline's Dupont and Fountain, Colorado terminals and at the Cheyenne, Wyoming terminal and Bear Creek, Wyoming station and will be required at one other West Pipeline terminal. Regulatory officials have been consulted in the development of remediation plans. In the course of acquisition negotiations for this terminal, KPOP's regulatory group and its outside environmental consultants agreed upon the expense and costs of these required remediations. In connection with the purchase of the West Pipeline, KPOP agreed to implement the agreed remediation plans at these specific sites over the succeeding five years following the acquisition in return for the payment by the seller, Wyco Pipe Line Company, of $1,312,000 to KPOP to cover the discounted estimated future costs of these remediations. In conjunction with the acquisition, the Partnership accrued $2.1 million for these future remediation expenses. The former Steuart terminals have experienced groundwater contamination at the Piney Point, Maryland, Jacksonville, Florida and each of the Washington, D.C. facilities. Foreseeable remediation expenses are estimated not to exceed $1.8 million. The Partnership agreed to assume the existing remediation and the costs thereof up to $1.8 million and the Asset Purchase Agreements provided, with respect to unknown environmental damages that are 17 18 discovered after the closing and that were caused by operations conducted by Steuart prior to the closing, that the Partnership and Steuart will share those expenses at a ratio of 20% for the Partnership and 80% for Steuart until a total of $2.5 million has been expended. Thereafter, such expenses will be the Partnership's responsibility. This indemnity will expire in December, 1998. In conjunction with the acquisition, the Partnership accrued $2.3 million for potential environmental liabilities arising from the Steuart acquisition. 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 statutes require that such tanks include secondary containment systems or that the operators take certain alternative precautions to ensure that no contamination results from any leaks or spills from the tanks. Although there is not currently a federal statute regulating these above ground tanks, there is a possibility that such a law will be passed within the next couple of years. The Partnership is in substantial compliance with all above ground storage tank laws in the states with such laws. Although no assurance can be given, the Partnership believes that the future implementation of above ground storage tank laws by either additional states or by the federal government will not have a material adverse effect on the Partnership's financial condition or results of operations. Air Emissions. The operations of the Partnership are subject to the Federal Clean Air Act and comparable state and local statutes. The Partnership believes that the operations of the Pipelines are in substantial compliance with such statues in all states in which they operate. 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 have been and are to be developed and implemented by the EPA and state environmental agencies. Pursuant to these Clean Air Act Amendments, those Partnership facilities that emit volatile organic compounds ("VOC") or nitrogen oxides will be subject to increasingly stringent regulations, including requirements that certain sources install maximum or 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 that 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 proposed in May 1994. These regulations will control VOC emissions from the loading and unloading of tank vessels. In 1995, ST completed the installation of a marine vapor collection system and large flare at its Texas City terminal at a cost of approximately $2.0 million. Although the Partnership is in substantial compliance with applicable air pollution laws, in anticipation of the implementation of stricter air control regulations, the Partnership is taking actions to substantially reduce its air emissions. The Partnership plans to install bottom loading and vapor recovery equipment on the loading racks at selected terminal sites along the East Pipeline that do not already have such emissions control equipment. These modifications will substantially reduce the total air emissions from each of these facilities. Having begun in 1993, this project is being phased in over a period of years. Solid Waste. The Partnership generates non-hazardous solid waste that is subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. 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 18 19 Partnership may be required to clean up such contaminated soils. Although these costs should not have a material adverse effect on the Partnership, no assurance can be given in this regard. Superfund. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the site and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Partnership may generate waste that may fall within CERCLA's definition of a "hazardous substance". The Partnership may be responsible under CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed. ST has been named a potentially responsible party for a site located at Elkton, Maryland, operated by Spectron, Inc. until August 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. KPL has agreed to indemnify the Partnership against liabilities for damage to the environment resulting from operations of the East Pipeline prior to October 3, 1989. Such indemnification does not extend to any liabilities that arise after such date to the extent such liabilities result from change in environmental laws or regulations. Under such indemnity, KPL is presently liable for the remediation of 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 owners 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. In addition, with respect to unknown environmental expenses from operations conducted by Wyco Pipe Line Company prior to the closing of the Partnership's acquisition of the West Pipeline, KPOP has agreed to pay the first $150,000 of such expenses, KPOP and Wyco Pipe Line Company will share, on an equal basis, the next $900,000 of such expenses and Wyco Pipe Line Company will indemnify KPOP for up to $2,950,000 of such expenses thereafter. The indemnity expires in August 1999. To the extent that environmental liabilities exceed the amount of such indemnity, KPOP has affirmatively assumed the excess environmental liabilities. Also, the Steuart terminals Asset Purchase Agreements provide, with respect to unknown environmental damages that are discovered after the closing of the Steuart terminals acquisition and that were caused by operations conducted by Steuart prior to the closing, that the Partnership and Steuart will share expenses associated with such environmental damages at a ratio of 20% for the Partnership and 80% for Steuart until a total of $2.5 million has been expended. Thereafter, such expenses will be the Partnership's responsibility. This indemnity will expire in December 1998. SAFETY REGULATION The Pipelines are 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 their pipeline facilities. The HLPSA covers petroleum and petroleum products pipelines and requires any entity that owns or operates pipeline facilities to comply with such safety regulations and 19 20 to permit access to and copying of records and to make certain reports and provide information as required by the Secretary to Transportation. The Federal Pipeline Safety Act of 1992 amended the HLPSA to include requirements of the future use of internal inspection devices. The Partnership does not believe that it will be required to make any substantial capital expenditures to comply with the requirements of HLPSA as so amended. 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 statues require the Partnership to organize information about the hazardous materials used in its operations. Certain parts of this information must be reported to employees, state and local governmental authorities, and local citizens upon request. In general, the Partnership expects to increase its expenditures during the next decade to comply with higher industry and regulatory safety standards such as those described above. Such expenditures cannot be accurately estimated at this time, although they are not expected to have a material adverse impact on the Partnership. EMPLOYEES The Partnership has no employees. The business of the Partnership is conducted by the General Partner, KPL, which at December 31, 1996, employed 426 persons, 201 of whom were salaried and 225 were hourly rate employees. Approximately 167 of the persons employed by KPL were subject to representation by unions for collective bargaining purposes; however, only 55 persons employed by the terminal division of KPL were represented by the Oil, Chemical and Atomic Workers International Union AFL-CIO ("OCAW"). The terminal division has an agreement with OCAW for 38 of the above employees, which is in effect through June 28, 1999. The agreement is subject to automatic renewal for successive one-year periods unless one of the parties serves written notice to terminate such agreement in a timely manner. The terminal division is currently bargaining in good faith with OCAW to reach a collective bargaining agreement for the remaining 17 of such 55 employees. 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 The Partnership did not hold a meeting of unitholders or otherwise submit any matter to a vote of security holders in the fourth quarter of 1996. 20 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND PREFERENCE UNITS AND RELATED UNITHOLDER MATTERS The Partnership's senior preference limited partner interests ("Senior Preference Units") and Preference Units are listed and traded on the New York Stock Exchange. At March 10, 1997, there were approximately 1,000 Senior Preference Unitholders of record and approximately 200 Preference Unitholders of record. Set forth below are prices and cash distributions for Senior Preference Units and Preference Units, respectively, on the New York Stock Exchange.
SENIOR PREFERENCE PREFERENCE CASH UNIT PRICES UNIT PRICES DISTRIBUTIONS YEAR HIGH LOW HIGH LOW DECLARED - ---- ------ ------ ------ ------ ------------- 1995: First Quarter 24 3/4 20 5/8 .55 Second Quarter 24 1/2 20 3/4 .55 Third Quarter 24 3/4 22 3/8 22 5/8(a) 22 .55 Fourth Quarter 25 23 1/8 22 1/2 21 5/8 .55 1996: First Quarter 26 1/2 23 7/8 24 5/8 22 1/4 .55 Second Quarter 26 5/8 24 1/4 24 5/8 23 1/8 .55 Third Quarter 26 5/8 24 3/4 25 7/8 22 7/8 .60 Fourth Quarter 30 25 5/8 28 1/8 25 .60 1997: First Quarter 31 1/4 28 5/8 28 5/8 26 1/2 (through March 10, 1997)
(a) Preference Units commenced trading on September 20, 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 distributions in the second, third and fourth quarters of 1991 totaling $9,323,000 which have since been satisfied and no arrearages remain as of December 31, 1996. Prior to 1994, no distributions were paid on the outstanding Common Units, which are not entitled to arrearages in the payment of the Minimum Quarterly. Distributions paid on the Common Units were $1,738,000; $4,582,000 and $7,110,000 for 1994, 1995 and 1996, respectively. Under the terms of its financing agreements, the Partnership is prohibited from declaring or paying any distribution if a default exists thereunder. 21 22 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 (the "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, ------------------------------------------------------------- 1992 1993(a) 1994 1995(b) 1996 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Revenues ....................... $ 42,179 $ 69,235 $ 78,745 $ 96,928 $ 117,554 --------- --------- --------- --------- --------- Operating costs ................ 14,507 29,012 33,586 40,617 49,925 Depreciation and amortization .. 4,124 6,135 7,257 8,261 10,981 General and administrative ..... 2,752 4,673 4,924 5,472 5,259 --------- --------- --------- --------- --------- Total costs and expenses .... 21,383 39,820 45,767 54,350 66,165 --------- --------- --------- --------- --------- Operating income ............... 20,796 29,415 32,978 42,578 51,389 Interest and other income ...... 1,721 1,331 1,299 894 776 Interest expense ............... (2,338) (3,376) (3,706) (6,437) (11,033) Minority interest .............. (200) (266) (295) (360) (403) --------- --------- --------- --------- --------- Income before income taxes ..... 19,979 27,104 30,276 36,675 40,729 Income taxes (c) ............... -- (450) (818) (627) (822) --------- --------- --------- --------- --------- Net income ..................... $ 19,979 $ 26,654 $ 29,458 $ 36,048 $ 39,907 ========= ========= ========= ========= ========= Allocation of net income(d) per: Senior Preference Unit ...... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.46 ========= ========= ========= ========= ========= Preference Unit ............. $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.46 ========= ========= ========= ========= ========= Preference Unit arrearages .. $ .45 $ 1.20 $ -- $ -- $ -- ========= ========= ========= ========= ========= Cash Distributions declared per: Senior Preference Unit ...... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.30 ========= ========= ========= ========= ========= Preference Unit ............. $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.30 ========= ========= ========= ========= ========= Preference Unit arrearages .. $ .45 $ 1.20 $ -- $ -- $ -- ========= ========= ========= ========= ========= BALANCE SHEET DATA (AT PERIOD END): Property and equipment, net .... $ 66,956 $ 133,436 $ 145,646 $ 246,471 $ 249,733 Total assets ................... 86,409 162,407 163,105 267,787 274,765 Long-term debt ................. 20,864 41,814 43,265 136,489 139,453 Partners' capital .............. 55,657 100,598 99,754 100,748 103,340
(a) Includes the operations of ST since its acquisition on March 2, 1993. (b) Includes the operations of the West Pipeline since its acquisition in February 1995 and the operations of Steuart since its acquisition in December 1995. (c) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in taxable entities. (d) 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 the same amount of cash distributions per unit (if any). If the same cash distributions per unit are declared to all classes of units, income is allocated pro rata based on the aggregate amount of distributions declared. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the consolidated financial statements of Kaneb Pipe Line 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 ("KPL"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and operate its refined petroleum products pipeline business. The Partnership operates through KPOP, a limited partnership in which the Partnership holds a 99% interest as limited partner and KPL owns a 1% interest as general partner in both the Partnership and KPOP. The Partnership is engaged through operating subsidiaries in the refined petroleum products pipeline business and, since 1993, terminaling and storage of petroleum products and specialty liquids. The Partnership's pipeline business consists primarily of the transportation through the East Pipeline and the West Pipeline, as common carriers, of refined petroleum products. The Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was financed by the issuance of $27 million of first mortgage notes to a group of insurance companies due February 24, 2002, which bear interest at the rate of 8.37% per annum. The East Pipeline and the West Pipeline are collectively referred to as the "Pipelines." The Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The products are transported from refineries connected to the Pipeline, directly or through other pipelines, to agricultural users, railroads and wholesale customers in the states in which the Pipelines are located and in portions of other states. Substantially all of the Pipelines' operations constitute common carrier operations that are subject to federal or state tariff regulations. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products. The Partnership's business of terminaling petroleum products and specialty liquids is conducted under the name ST Services ("ST"). The Partnership is the third largest independent terminaling company in the United States. With the acquisition of Steuart (see below), ST operates 31 facilities in 16 states and the District of Columbia with an aggregate tankage capacity of approximately 17.2 million barrels. The Texas City terminal is a deep-water facility primarily serving the Gulf Coast petrochemical industry. The Westwego terminal, purchased in June 1994 and located on the West bank of the Mississippi River across from New Orleans, handles molasses, animal and vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore terminal is the largest independent terminal facility in the Baltimore area and handles asphalt, fructose, latex, caustic solutions and other liquids. ST acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") in December 1995 for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was initially financed with a $68 million bridge loan from a bank. The Partnership refinanced this bridge loan in June 1996 with a series of first mortgage notes (the "Steuart Notes") to a group of insurance companies bearing interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in June 2001, 2003, 2006 and 2016. The Steuart terminaling assets consist of seven petroleum product terminal facilities located in the District of Columbia, Florida, Georgia, Maryland and Virginia and the pipeline and terminaling facilities serving Andrews Air Force Base in Maryland. The Piney Point, Maryland terminal is the closest petroleum storage facility to Washington D.C. which has access to deep water. The Jacksonville terminal has 28 tanks with approximately 2.1 million barrels of aggregate storage capacity, which are currently used to store petroleum products. The remainder of ST's terminals primarily handle petroleum products. The Partnership acquired ST in March 1993 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 23 24 bank loan was partially repaid with $50.8 million of the proceeds from the offering, and the balance was refinanced with first mortgage notes in December 1994. The Partnership continually evaluates other potential acquisitions. PIPELINE OPERATIONS
Year Ended December 31, ------------------------------ 1994 1995 1996 -------- -------- -------- Revenues .................................... $ 46,117 $ 60,192 $ 63,441 Operating costs ............................. 17,777 22,564 23,692 Depreciation and amortization ............... 4,276 4,843 4,817 General and administrative .................. 2,908 3,038 2,711 -------- -------- -------- Operating income ............................ $ 21,156 $ 29,747 $ 32,221 ======== ======== ========
The Pipelines' revenues are based on volumes shipped and the distances over which such volumes are transported. Revenues increased $3.2 million and $14.1 million in 1996 and 1995, respectively. The increases in both years are primarily due to the acquisition of the West Pipeline in February 1995. Because tariff rates are regulated by the FERC, the Pipelines compete primarily on the basis of quality of service, including delivering products at convenient locations on a timely basis to meet the needs of its customers. Barrel miles totaled 16.7 billion in 1996 compared to 16.6 billion in 1995. Barrel miles in 1995 increased from 14.5 billion barrel miles in 1994, primarily due to the acquisition of the West Pipeline. Operating costs which include fuel and power costs, materials and supplies, maintenance and repair costs, salaries, wages and employee benefits, and property and other taxes, increased $1.1 million in 1996 and $4.8 million in 1995. The 1996 increase is primarily due to higher materials and supplies, including additives and outside services, and the 1995 increase is primarily a result of the West Pipeline acquisition. The 1995 increase in depreciation and amortization is a direct result of the February 1995 acquisition of the West Pipeline. General and administrative costs include managerial, accounting and administrative personnel costs, office rental and expense, legal and professional costs and other non-operating costs. The decrease in 1996 from 1995 was primarily due to lower legal and professional and other non-operating costs. TERMINALING OPERATIONS
Year Ended December 31, ------------------------------ 1994 1995 1996 -------- -------- -------- Revenues .................................... $ 32,628 $ 36,736 $ 54,113 Operating costs ............................. 15,809 18,053 26,233 Depreciation and amortization ............... 2,981 3,418 6,164 General and administrative .................. 2,016 2,434 2,548 -------- -------- -------- Operating income ............................ $ 11,822 $ 12,831 $ 19,168 ======== ======== ========
The increases in revenues are attributable to acquisitions and increases in prices charged for storage and tankage volumes utilized. Revenues increased 47% in 1996 primarily from the acquisition of the Steuart Petroleum terminals in December 1995 and 13% in 1995. Average annual tankage utilized increased 5.2 million barrels in 1996 to 11.9 million barrels compared to 6.7 million barrels in 1995 primarily as a result of the Steuart terminals acquired and increased 600,000 barrels in 1995 over 1994 also primarily as a result of other terminal acquisitions. Average annual revenues per barrel of tankage utilized was $4.55 per barrel in 1996 compared to $5.46 per barrel in 1995. The decrease in per barrel averages is due to the large proportionate volumes of petroleum products being stored at the Steuart terminals with lower rates per barrel than specialty chemicals with higher rates per barrel that are stored at other terminals. Average annual revenues per barrel of tankage utilized increased $0.13 per barrel in 1995 over 1994. Total tankage capacity (17.2 million barrels at December 31, 1996) has been, and is expected to remain, adequate to meet existing customer storage requirements. Customers consider factors such as location, access to cost effective transportation and quality of service in addition to pricing when selecting terminal storage. Operating costs increased $8.2 million and $2.2 million and depreciation and amortization increased $2.7 million and $.4 million in 1996 and 1995, respectively, primarily as a result of terminal acquisitions. 24 25 LIQUIDITY AND CAPITAL RESOURCES The ratio of current assets to current liabilities was 1.02 to 1 at December 31, 1996 and 0.9 to 1 at December 31, 1995. Cash provided by operating activities was $49.2 million, $44.5 million and $37.9 million for the years 1996, 1995 and 1994 respectively. The increase in cash flow from operating activities in 1995 was primarily a result of the West Pipeline and terminal acquisitions while the increase in cash flow from operating activities in 1996 was primarily a result of the acquisition of the Steuart terminaling assets. Capital expenditures, excluding expansion capital expenditures, were $7.1 million, $9.0 million and $7.2 million for 1996, 1995 and 1994, respectively. During all periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not, and are not expected in the future to be, material. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages. Capital expenditures of the Partnership during 1997 are expected to be approximately $8 to $10 million. The Partnership makes distributions of 100% of its Available Cash to Unitholders and the General Partner. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. Distributions of $2.30 per unit were declared to Senior Preference Unitholders and Preference Unitholders in 1996 and $2.20 per unit was declared in 1995 and 1994. During 1996, 1995 and 1994, the Partnership declared distributions of $7.3 million ($2.30 per unit); $6.3 million ($2.00 per unit); and $1.7 million ($0.55 per unit), respectively, to the holders of Common Units. The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures are expected to be funded through additional Partnership borrowings. In 1994, a subsidiary of the Partnership issued $33 million of first mortgage notes (the "Series B Notes") to a group of insurance companies. Proceeds from these notes were used to refinance existing debt of the Partnership that was incurred in connection with the ST acquisition in 1993 and the terminal acquisitions in 1994. The notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, the Partnership entered into the Credit Agreement with two banks that provides a $15 million revolving credit facility for working capital and other partnership purposes. Borrowings under the Credit Agreement bear interest at variable rates and are due and payable in November 1997. The Credit Agreement has a commitment fee of 0.2% per annum of the unused credit facility. $5 million was drawn under this credit facility at December 31, 1996. The Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the issuance of $27 million of first mortgage notes (the "Series A Notes") due February 24, 2002, which bear interest at the rate of 8.37% per annum. The Series A and B Notes and credit facility are secured by a mortgage on the East Pipeline. The acquisition of the Steuart terminaling assets was initially financed by a $68 million bank bridge loan. The Partnership refinanced this bridge loan in June 1996 with a series of first mortgage notes (the "Steuart Notes") bearing interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in June 2001, 2003, 2006 and 2016. The Steuart Notes are secured, pari passu with the Series A and B Notes and credit facility, by a mortgage on the East Pipeline. In the FERC's Lakehead decision issued June 15, 1995, the FERC partially disallowed Lakehead's inclusion of income taxes in its cost of service. Specifically, the FERC held that Lakehead was entitled to receive an income tax allowance with respect to income attributable to its corporate partners, but was not entitled to receive such an allowance for income attributable to the partnership interests held by individuals. Lakehead's motion for rehearing was denied by the FERC and Lakehead appealed the decision to the U. S. Court of Appeals. Subsequently, the case was settled by Lakehead and the appeal withdrawn. In another FERC proceeding that has not yet reached the hearing stage, involving 25 26 a different oil pipeline limited partnership, various shippers have challenged such pipeline's inclusion of an income tax allowance in its cost of service. The FERC Staff has also filed testimony that supports the disallowance of income taxes. If the FERC were to disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, the General Partner believes that the Partnership's ability to pay the Minimum Quarterly Distribution to the holders of the Senior Preference Units, Preference Units and Preference B Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard. NEW ACCOUNTING PRONOUNCEMENT In March 1995, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995 and requires the write-down to market of certain long-lived assets. The Partnership adopted SFAS 121 in the first quarter of 1996 and such adoption did not have a material effect on the Partnership's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Partnership begin on page F-1 of this report. Such information is hereby incorporated by reference into this item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 26 27 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 executive 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.
UNITS BENEFICIALLY OWNED AT MARCH 10, 1997(L) YEARS OF SERVICE ---------------------------------------------------- POSITION WITH WITH THE SENIOR % OF PREFERENCE % OF COMMON % OF NAME AGE THE COMPANY COMPANY PREFERENCE CLASS UNITS CLASS UNITS CLASS - --------------------------------------------------------------------------------------------------------------- Edward D. Doherty 61 Chairman of 7(a) 8,326 * 1,200 * 75,000 2.4% the Board and Chief Executive Officer Leon E. Hutchens 62 President 37(b) 148 * -0- * -0- * Howard C. Wadsworth 52 Vice President 3(c) -0- * -0- * -0- * Treasurer and Secretary Jimmy L. Harrison 43 Controller 5(d) -0- * -0- * -0- * John R. Barnes 52 Director 10(e) 76,600 1% 60,500 1% 79,000 2.5% Charles R. Cox 54 Director 2(f) -0- * -0- * -0- * Sangwoo Ahn 58 Director 8(g) 35,000 * -0- * -0- * Frank M. Burke, Jr 57 Director -(h) -0- * -0- * -0- * James R. Whatley 70 Director 8(i) 22,400 * -0- * -0- * Ralph A. Rehm 51 Director 6(j) -0- * -0- * -0- * Murray A. Biles 66 Director 43(k) 500 * -0- * -0- *
- -------------- *Less than one percent (a) Mr. Doherty, Chairman of the Board of the Company since September 1989, is also Senior Vice President of Kaneb. (b) Mr. Hutchens assumed his current position in January 1994, having been with KPL since January 1960. Mr. Hutchens had been Vice President since January 1981. Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981. (c) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary for Kaneb. Mr. Wadsworth joined Kaneb in October, 1990. (d) Mr. Harrison assumed his present position in November, 1992, prior to which he served in a variety of financial positions including Assistant Secretary and Treasurer with ARCO Pipe Line Company for approximately 19 years. (e) Mr. Barnes, a director of the Company, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. (f) Mr. Cox, a director of the Company since September 1995, is also a director of Kaneb. Mr. Cox has held senior executive level positions for more than the past five years of his twenty-seven year career with Fluor Daniel, Inc. (g) 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 Gradall Industries, Inc., ITI Technologies, Inc., PAR Technology Corporation, Quaker Fabric Corporation, and Stuart Entertainment, Inc. (h) Mr. Burke, elected as a director of the Company in January 1997, is also a director of Kaneb. Mr. Burke has been Chairman and Managing General Partner of Burke, Mayborn Company, Ltd., a private investment company, for more than the past five years. He was previously associated with Peat, Marwick, Mitchell & Co. (now KPMG Peat Marwick, LLP), an international firm of certified public accountants, for twenty-four years. 27 28 (i) 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. (j) Mr. Ralph Rehm, who is also a director of Kaneb, is President of NorthLake Consulting Company, which provides financial consulting services. (k) Mr. Biles joined the Company in November 1953 and served as President from January 1985 until his retirement at the close of 1993. (l) 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 or Preference Units, respectively, of the Partnership. Each director had sole power with respect to all or substantially all of the Units attributed to him. AUDIT COMMITTEE Messrs. Sangwoo Ahn and, effective February 20, 1997, Frank M. Burke, Jr. 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, 1996, none of the Company's officers or employees participated in the deliberations of the Company's Board of Directors concerning executive officer compensation. 28 29 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 1996, 1995 and 1994, to the Chief Executive Officer and each of the most highly compensated executive officers of the Company whose aggregate cash compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
Annual Compensation Name and Principal ------------------------ All Other Position Year Salary Bonus(a) Compensation(b) - -------------------- ---- ------ -------- --------------- Edward D. Doherty(c) 1996 $200,333(d) $ 93,040 $6,832 Chairman of the 1995 190,833 133,100 6,096 Board and Chief 1994 180,417 40,000 6,833 Executive Officer Leon E. Hutchens 1996 173,700 15,000 7,051 President 1995 164,644 30,000 7,278 1994 158,403 5,000 6,465 Jimmy L. Harrison 1996 105,532 4,000 3,775 Controller 1995 100,670 8,500 5,450
(a) Amounts earned in year shown and paid the following year. (b) Represents the Company's contributions to Kaneb's Savings Investment Plan (a 401(k) plan) and the imputed value of Company-paid group term life insurance exceeding $50,000. (c) The Compensation for this individual is paid by Kaneb which is reimbursed for all or substantially all of such compensation by the Company. (d) Includes deferred compensation of $14,901. Retirement Plan Effective April 1, 1991, Kaneb established the Savings Investment Plan, a defined contribution 401(k) plan, that permits all full-time employees of the Company 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 a variety of investments, including Kaneb common stock. Plan assets are 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 1996, 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. 29 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At March 10, 1997, the Company owned a combined 2% General Partner interest in the Partnership and the Operating Partnership, and owned Preference Units, Preference B Units and Common Units representing an aggregate limited partner interest of approximately 31%. 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 5 and 6 to the Partnership's financial statements. 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: Consolidated Statements of Income - Three Years Ended December 31, 1996 ....... F-1 Consolidated Balance Sheets - December 31, 1996 and 1995 ...................... F-2 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1996 ... F-3 Consolidated Statements of Partners' Capital Three Years ended December 31, 1996 ......................................... F-4 Notes to Consolidated Financial Statements ...................................... F-5 Report of Independent Accountants ............................................... F-13
(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) which exhibit is hereby incorporated 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. Filed as Exhibit 10.1 of the exhibits to Registrant's current Report on Form 8-K, dated March 16, 1993, which exhibit is hereby incorporated by reference. 10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P. ("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other Lenders, dated December 22, 1994, filed as Exhibit 10.13 of the exhibits to the Registrant's 1994 Form 10-K, which exhibit is hereby incorporated by reference. 10.3 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL") and TCB, dated October 11, 1993, filed as Exhibit 10.3 of the exhibits to the Registrant's 1993 Form 10-K, which exhibit is hereby incorporated by reference. 30 31 10.4 Note Purchase Agreement, dated December 22, 1994 (the "1994 Note Purchase Agreement"), filed as Exhibit 10.2 of the exhibits to Registrant's Current Report on Form 8-K, dated March 13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby incorporated by reference. 10.5 Note Purchase Agreements, dated June 27, 1996, filed herewith. 10.6 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to the Registrant's 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. 10.7 Asset Purchase Agreements between and among Steuart Petroleum Company, SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and KPOP, as amended, dated August 27, 1995. Said documents are on file as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's current report on Form 8-K dated January 3, 1996, and said exhibits are hereby incorporated by reference. 21 List of Subsidiaries, filed herewith. 24.1 Powers of Attorney, not applicable. 27 Financial Data Schedule, filed herewith. (b) REPORTS ON FORM 8-K - NONE. 31 32 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Revenues ................................. $117,554,000 $ 96,928,000 $ 78,745,000 ------------ ------------ ------------ Costs and expenses: Operating costs ....................... 49,925,000 40,617,000 33,586,000 Depreciation and amortization ......... 10,981,000 8,261,000 7,257,000 General and administrative ............ 5,259,000 5,472,000 4,924,000 ------------ ------------ ------------ Total costs and expenses ........... 66,165,000 54,350,000 45,767,000 ------------ ------------ ------------ Operating income ......................... 51,389,000 42,578,000 32,978,000 Interest and other income ................ 776,000 894,000 1,299,000 Interest expense ......................... (11,033,000) (6,437,000) (3,706,000) ------------ ------------ ------------ Income before minority interest and income taxes ............. 41,132,000 37,035,000 30,571,000 Minority interest in net income .......... (403,000) (360,000) (295,000) Income tax provision ..................... (822,000) (627,000) (818,000) ------------ ------------ ------------ Net income ............................... 39,907,000 36,048,000 29,458,000 General partner's interest in net income ......................... (403,000) (360,000) (295,000) ------------ ------------ ------------ Limited partners' interest in net income ......................... $ 39,504,000 $ 35,688,000 $ 29,163,000 ============ ============ ============ Allocation of net income per Senior Preference Unit and Preference Unit ....................... $ 2.46 $ 2.20 $ 2.20 ============ ============ ============ Weighted average number of Partnership units outstanding: Senior Preference Units ............... 7,250,000 7,250,000 7,250,000 Preference Units ...................... 4,650,000 5,400,000 5,650,000
See notes to consolidated financial statements. F-1 33 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 1996 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................ $ 8,196,000 $ 6,307,000 Accounts receivable ...................................... 11,540,000 10,210,000 Current portion of receivable from general partner ....... 975,000 2,571,000 Prepaid expenses ......................................... 4,321,000 1,254,000 ------------ ------------ Total current assets .................................... 25,032,000 20,342,000 ------------ ------------ Receivable from general partner, less current portion ...... -- 974,000 ------------ ------------ Property and equipment ..................................... 337,202,000 323,671,000 Less accumulated depreciation .............................. 87,469,000 77,200,000 ------------ ------------ Net property and equipment .............................. 249,733,000 246,471,000 ------------ ------------ $274,765,000 $267,787,000 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt ........................ $ 2,036,000 $ 1,777,000 Accounts payable ......................................... 2,764,000 3,022,000 Accrued expenses ......................................... 4,355,000 3,293,000 Accrued distributions payable ............................ 9,833,000 9,016,000 Accrued taxes, other than income taxes ................... 1,763,000 1,687,000 Deferred terminaling fees ................................ 2,874,000 2,634,000 Payable to general partner ............................... 711,000 963,000 ------------ ------------ Total current liabilities .............................. 24,336,000 22,392,000 ------------ ------------ Long-term debt, less current portion ....................... 139,453,000 136,489,000 ------------ ------------ Other liabilities and deferred taxes ....................... 6,612,000 7,160,000 ------------ ------------ Minority interest .......................................... 1,024,000 998,000 ------------ ------------ Partners' capital: Senior preference unitholders ............................ 48,446,000 47,288,000 Preference unitholders ................................... 37,982,000 37,239,000 Preference B unitholders ................................. 8,168,000 8,008,000 Common unitholders ....................................... 7,720,000 7,215,000 General partner .......................................... 1,024,000 998,000 ------------ ------------ Total partners' capital ................................ 103,340,000 100,748,000 ------------ ------------ $274,765,000 $267,787,000 ============ ============
F-2 34 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Operating activities: Net income ............................................ $ 39,907,000 $ 36,048,000 $ 29,458,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 10,981,000 8,261,000 7,257,000 Minority interest in net income ..................... 403,000 360,000 295,000 Deferred income taxes ............................... 601,000 624,000 626,000 Changes in working capital components: Accounts receivable ............................... (1,330,000) (4,605,000) (1,101,000) Prepaid expenses .................................. (3,067,000) 670,000 (257,000) Accounts payable and accrued expenses ............. 1,697,000 1,943,000 1,241,000 Deferred terminaling fees ......................... 240,000 993,000 41,000 Payable to general partner ........................ (252,000) 177,000 293,000 ------------ ------------ ------------ Net cash provided by operating activities ....... 49,180,000 44,471,000 37,853,000 ------------ ------------ ------------ Investing activities: Capital expenditures .................................. (7,075,000) (8,946,000) (7,147,000) Acquisitions of pipelines and terminals ............... (8,507,000) (97,850,000) (12,320,000) Other ................................................. (630,000) 2,429,000 203,000 ------------ ------------ ------------ Net cash used by investing activities ........... (16,212,000) (104,367,000) (19,264,000) ------------ ------------ ------------ Financing activities: Changes in receivable from general partner ............ 2,570,000 2,240,000 1,954,000 Issuance of long-term debt ............................ 73,000,000 96,500,000 41,350,000 Payments of long-term debt ............................ (69,777,000) (3,047,000) (42,201,000) Distributions: Senior preference unitholders ....................... (16,313,000) (15,950,000) (15,950,000) Preference and Preference B unitholders ............. (12,712,000) (12,430,000) (12,308,000) Common unitholders .................................. (7,110,000) (4,582,000) (1,738,000) General partner and minority interest ............... (737,000) (673,000) (612,000) ------------ ------------ ------------ Net cash provided (used) by financing activities ..................................... (31,079,000) 62,058,000 (29,505,000) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents ........ 1,889,000 2,162,000 (10,916,000) Cash and cash equivalents at beginning of period ........ 6,307,000 4,145,000 15,061,000 ------------ ------------ ------------ Cash and cash equivalents at end of period .............. $ 8,196,000 $ 6,307,000 $ 4,145,000 ============ ============ ============ Supplemental information - Cash paid for interest ....... $ 10,368,000 $ 5,479,000 $ 3,470,000 ============ ============ ============
F-3 35 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNER'S CAPITAL
SENIOR PREFERENCE PREFERENCE PREFERENCE B COMMON GENERAL UNITHOLDERS UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER TOTAL ------------ ------------ ------------ ------------ ------------ ------------ Partners' capital at January 1, 1994 ............. $ 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 Unit Conversion .............. -- (8,008,000) 8,008,000 -- -- -- 1995 income allocation ....... 15,950,000 11,880,000 550,000 7,308,000 360,000 36,048,000 Distributions declared ....... (15,950,000) (11,880,000) (550,000) (6,320,000) (354,000) (35,054,000) ------------ ------------ ------------ ------------ ------------ ------------ Partners' capital at December 31, 1995 ........... 47,288,000 37,239,000 8,008,000 7,215,000 998,000 100,748,000 1996 income allocation ....... 17,833,000 11,438,000 2,460,000 7,773,000 403,000 39,907,000 Distributions declared ....... (16,675,000) (10,695,000) (2,300,000) (7,268,000) (377,000) (37,315,000) ------------ ------------ ------------ ------------ ------------ ------------ Partners' capital at December 31, 1996 ........... $ 48,446,000 $ 37,982,000 $ 8,168,000 $ 7,720,000 $ 1,024,000 $103,340,000 ============ ============ ============ ============ ============ ============ Limited Partnership Units outstanding at January 1, 1994 ............. 7,250,000 5,650,000 -- 3,160,000 (a) 16,060,000 Unit Conversion in 1995 ...... -- (1,000,000) 1,000,000 -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Limited Partnership Units outstanding at December 31, 1995 and 1996 .................... 7,250,000(b) 4,650,000 1,000,000 3,160,000 (a) 16,060,000 ============ ============ ============ ============ ============ ============
(a) Kaneb Pipe Line Company owns a combined 2% interest in Kaneb Pipe Line Partners, L.P. as General Partner. (b) The Partnership Agreement allows for an additional issuance of up to 7.75 million senior preference units. See notes to consolidated financial statements. F-4 36 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PARTNERSHIP ORGANIZATION Kaneb Pipe Line Partners, L.P. (the "Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling 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 (the "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. In September 1995, a subsidiary of the Company sold 3.5 million of the Preference Units ("PU") it held in a public offering and exchanged 1.0 million of its PU's for 1.0 million Preference B Units, which are subordinate to the PU's until September 30, 1997. At December 31, 1996, the Company owns an approximate 31% interest as a limited partner in the form of Preference Units, Preference B Units and Common Units, and as a general partner owns a combined 2% interest. The SPU's represent an approximate 44% interest in the Partnership and the 3.5 million publicly held Preference Units represent an approximate 22% interest. An approximate 1% ownership interest in the form of 61,700 PU's 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. The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. The Partnership does not have any derivative financial instruments. 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. F-5 37 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 its operations are in general compliance with applicable environmental regulations, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance 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 Partnership has recorded a reserve in other liabilities for environmental claims in the amount of $4.3 million at December 31, 1996, including $3.5 million relating to the acquisitions of the West Pipeline and Steuart. 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 $0.1 million, up to a maximum of $10 million. INCOME TAX CONSIDERATIONS Income before income tax expense is made up of the following components:
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Partnership operations ............ $ 37,950,000 $ 35,269,000 $ 28,156,000 Corporate operations .............. 2,779,000 1,406,000 2,120,000 ------------ ------------ ------------ $ 40,729,000 $ 36,675,000 $ 30,276,000 ============ ============ ============
Partnership operations are not subject to federal or state income taxes. However, certain operations of ST are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 1996, 1995 and 1994 consists of deferred U.S. federal income taxes of $.7 million, $.6 million and $.6 million, respectively, and current federal income taxes of $.2 million in 1996 and 1994. The net deferred tax liability of $2.3 million and $1.7 million at December 31, 1996 and 1995, respectively, consists of deferred tax liabilities of $7.4 million and $6.3 million, respectively, and deferred tax assets of $5.1 million and $4.6 million, respectively. The deferred tax liabilites consists primarily of tax depreciation in excess of book depreciation and the deferred tax assets consists primarily of net operating losses. The corporate operations have net operating losses for tax purposes totaling approximately $13.5 million which expire in years 2008 and 2011. Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If any such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly. F-6 38 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 the same amount of cash distributions per unit (if any). If the same cash distributions per unit are declared to all classes of units, income is allocated pro rata based on the aggregate amount of distributions declared. Earnings per SPU and PU are calculated by dividing the amount of net income allocated to the SPU's and PU's by the weighted average number of SPUs and PUs outstanding, respectively. 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 Unit (the "Minimum Quarterly Distribution"), or $2.20 per 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. Distributions of $2.30, $2.20 and $2.20 per unit were declared to Senior Preference and Preference Unitholders in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Partnership declared distributions of $2.30, $1.45 and $.55, respectively, per unit to the Common Unitholders. As of December 31, 1996, 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, Preference B Units or 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 B 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, the Preference B Units and the Common Units for twelve consecutive quarters. The Minimum Quarterly distribution has been paid to all classes of Unitholders for all four quarters in 1996 and for the quarters ended September 30 and December 31, 1995. Prior to the end of the Preference Period, up to 2,650,000 of the Preference Units and the Preference B Units may 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-7 39 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHANGE IN PRESENTATION Certain financial statement items have been reclassified to conform with the 1996 presentation. 3. ACQUISITIONS In February 1995, the Partnership acquired, through KPOP, the refined petroleum product pipeline assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The West Pipeline was owned 60% by a subsidiary of GATX Terminals Corporation and 40% by a subsidiary of Amoco Pipe Line Company. The acquisition was financed by the issuance of $27 million of first mortgage notes. The assets acquired from Wyco Pipe Line Company did not include certain assets that were leased to Amoco Pipe Line Company and the purchase agreement did not provide for either (i) the continuation of an arrangement with Amoco Pipe Line Company for the monitoring and control of pipeline flows or (ii) the extension or assumption of certain credit agreements that Wyco Pipe Line Company had with its shareholders. In December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition price was initially financed by the issuance of a $68 million bank bridge loan which was refinanced during 1996 for $68 million of first mortgage notes. The asset purchase agreement includes a provision for an earn-out payment based upon revenues of one of the terminals exceeding a specified amount for a seven-year period beginning in January 1996. No amount was payable under the earn-out provision in 1996. The contracts also include a provision for the continuation of all terminaling contracts in place at the time of the acquisition, including those contracts with Steuart. The acquisitions have been accounted for using the purchase method of accounting. The total purchase price has been allocated to the assets and liabilities based on their respective fair values based on valuations and other studies. Assuming the above acquisitions in 1995 occurred as of the beginning of the year ended December 31, 1995, the summarized unaudited pro forma revenues, net income and allocation of net income per SPU and PU for 1995 would be $117.9 million, $35.7 million and $2.20, respectively. 4. PROPERTY AND EQUIPMENT The cost of property and equipment is summarized as follows:
Estimated Useful December 31, Life --------------------------------- (Years) 1996 1995 ------------ ------------ ----------- Land ................................ - $ 18,289,000 $ 9,557,000 Buildings ........................... 35 6,442,000 5,134,000 Furniture and fixtures .............. 16 2,074,000 1,587,000 Transportation equipment ............ 6 1,871,000 1,691,000 Machinery and equipment ............. 20 - 40 34,945,000 33,465,000 Pipeline and terminating equipment .. 20 - 40 249,841,000 248,274,000 Pipeline equipment under capitalized lease ................. 20 - 40 22,270,000 21,972,000 Construction work-in-progress ....... - 1,470,000 1,991,000 ------------ ------------ Total $337,202,000 $323,671,000 ============ ============
F-8 40 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LONG-TERM DEBT AND LEASES
December 31, --------------------------- 1996 1995 ------------ ------------ First mortgage notes due 2001 and 2002 ........ $ 60,000,000 $ 60,000,000 Bank bridge loan refinanced in 1996 ........... -- 68,000,000 First mortgage notes due 2001 through 2016 .... 68,000,000 -- Obligation under capital lease ................ 8,489,000 10,266,000 Revolving credit facility ..................... 5,000,000 -- ------------ ------------ Total long-term debt .......................... 141,489,000 138,266,000 Less current portion .......................... 2,036,000 1,777,000 ------------ ------------ Long-term debt, less current portion .......... $139,453,000 $136,489,000 ============ ============
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. Also in 1994, another wholly-owned subsidiary entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through January 31, 1998. The credit facility bears interest at variable interest rates and has a commitment fee of .2% per annum of the unused credit facility. At December 31, 1996, $5.0 million was drawn under the credit facility. No amounts were drawn under the credit facility at December 31, 1995. In 1995, the Partnership financed the acquisition of the West Pipeline with the issuance of $27 million of Notes due February 24, 2002 which bear interest at the rate of 8.37% per annum. The Notes and the credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership and contain certain financial and operational covenants. The acquisition of the Steuart terminaling assets was initially financed by a $68 million bridge loan from a bank. In June 1996, the Partnership refinanced this obligation with $68.0 million of new first mortgage notes (the "Steuart notes") bearing interest at rates ranging from 7.08% to 7.98%. $35 million of the Steuart notes is due June 2001, $8.0 million is due June 2003, $10.0 million is due June 2006 and $15.0 million is due June 2016. The loan is secured, pari passu with the existing Notes and credit facility, by a mortgage on the East Pipeline. 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, 1996:
Capital Operating Year ending December 31: Lease (a) Leases ---------- ---------- 1997 ......................................... $3,080,000 $999,000 1998 ......................................... 7,198,000 898,000 1999 ......................................... -- 751,000 2000 ......................................... -- 658,000 2001 ......................................... -- 535,000 Thereafter ................................... -- 2,176,000 ---------- ---------- Total minimum lease payments ................. 10,278,000 $6,017,000 ========== Less amount representing interest ............ 1,789,000 ---------- Present value of net minimum lease payments .. 8,489,000 Less current portion ......................... 2,036,000 ---------- Total obligation under capital lease, less current portion ..................... $6,453,000 ==========
F-9 41 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (a) The capital lease is secured by certain pipeline equipment and the Partnership has accrued its obligation to purchase this equipment for approximately $4.1 million at the termination of the lease. Total rent expense under operating leases amounted to $1.2, $.9 and $.9 million for each of the years ended December 31, 1996, 1995 and 1994, 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 $1.0 million at December 31, 1996 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 $.3 million, $.7 million and $.9 million from the Company on this receivable balance for the periods ended December 31, 1996, 1995 and 1994, respectively. The amount of the capital lease obligation that exceeds the receivable from the Company ($7.5 million at December 31, 1996) represents the present value of the lease obligation and purchase option due subsequent to April 1997. The estimated fair value of all long term debt (excluding capital leases) as of December 31, 1996 was approximately $134 million as compared to the carrying value of $133 million. These fair values were estimated using discounted cash flow analysis, based on the Partnership's current incremental borrowing rates for similar types of borrowing arrangements. The Partnership has not determined the fair value of its capital leases as it is not practicable. These estimates are not necessarily indicative of the amounts that would be realized in a current market exchange. The Partnership has no derivative financial instruments. 6. 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 $10.5 million, $9.5 million and $9.0 million for the years ended December 31, 1996, 1995 and 1994, 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 $8.4 million, $7.7 million and $7.0 million of compensation and benefits, including pension costs, paid to officers and employees of the Company for the periods ended December 31, 1996, 1995 and 1994, 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, 1996 and 1995, the Partnership owed the Company $.7 million and $1.0 million, respectively, for these expenses which are due under normal invoice terms. F-10 42 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly operating results for 1996 and 1995 are summarized as follows:
Quarter Ended --------------------------------------------------------- March 31, June 30, September 30, December 31, ------------ ------------ ------------ ------------ 1996: Revenues .......... $ 27,826,000 $ 28,795,000 $ 29,963,000 $ 30,971,000 ============ ============ ============ ============ Operating income .. $ 11,600,000 $ 12,841,000 $ 12,832,000 $ 14,116,000 ============ ============ ============ ============ Net income ........ $ 8,677,000 $ 10,007,000 $ 9,872,000 $ 11,351,000 ============ ============ ============ ============ Allocation of net income per SPU and PU ....... $ .55 $ .62 $ .61 $ .70 ============ ============ ============ ============ 1995: Revenues .......... $ 20,382,000 $ 23,342,000 $ 26,533,000 $ 26,671,000 ============ ============ ============ ============ Operating income .. $ 8,626,000 $ 10,097,000 $ 10,863,000 $ 12,992,000 ============ ============ ============ ============ Net income ........ $ 7,299,000 $ 8,458,000 $ 9,209,000 $ 11,082,000 ============ ============ ============ ============ Allocation of net income per SPU and PU ....... $ .55 $ .55 $ .55 $ .55 ============ ============ ============ ============
F-11 43 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. BUSINESS SEGMENT DATA Selected financial data pertaining to the operations of the Partnership's business segments is as follows:
Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Revenues: Pipeline operations ...................... $ 63,441,000 $ 60,192,000 $ 46,117,000 Terminaling operations ................... 54,113,000 36,736,000 32,628,000 ------------ ------------ ------------ $117,554,000 $ 96,928,000 $ 78,745,000 ============ ============ ============ Operating Income: Pipeline operations ...................... $ 32,221,000 $ 29,747,000 $ 21,156,000 Terminaling operations ................... 19,168,000 12,831,000 11,822,000 ------------ ------------ ------------ $ 51,389,000 $ 42,578,000 $ 32,978,000 ============ ============ ============ Depreciation and Amortization: Pipeline operations ...................... $ 4,817,000 $ 4,843,000 $ 4,276,000 Terminaling operations ................... 6,164,000 3,418,000 2,981,000 ------------ ------------ ------------ $ 10,981,000 $ 8,261,000 $ 7,257,000 ============ ============ ============ Capital Expenditures (including capitalized leases and excluding acquisitions): Pipeline operations ...................... $ 3,446,000 $ 3,381,000 $ 2,237,000 Terminaling operations ................... 3,629,000 5,565,000 4,951,000 ------------ ------------ ------------ $ 7,075,000 $ 8,946,000 $ 7,188,000 ============ ============ ============ Identifiable assets: Pipeline operations ...................... $102,391,000 $105,464,000 $ 75,739,000 Terminaling operations ................... 172,374,000 162,323,000 87,366,000 ------------ ------------ ------------ $274,765,000 $267,787,000 $163,105,000 ============ ============ ============
F-12 44 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 30 present fairly, in all material respects, the financial position of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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 February 20, 1997 F-13 45 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: EDWARD D. DOHERTY ---------------------------- Chairman of the Board and Chief Executive Officer Date: March 24, 1997 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 EDWARD D. DOHERTY Chairman of the Board March 24, 1997 - ---------------------------- and Chief Executive Officer Principal Accounting Officer JIMMY L. HARRISON Controller March 24, 1997 - ---------------------------- Directors SANGWOO AHN Director March 24, 1997 - ---------------------------- JOHN R. BARNES Director March 24, 1997 - ---------------------------- M.R. BILES Director March 24, 1997 - ---------------------------- CHARLES R. COX Director March 24, 1997 - ---------------------------- EDWARD D. DOHERTY Director March 24, 1997 - ---------------------------- FRANK M. BURKE, JR. Director March 24, 1997 - ---------------------------- RALPH A. REHM Director March 24, 1997 - ---------------------------- JAMES R. WHATLEY Director March 24, 1997 - ----------------------------
46 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------- 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) which exhibit is hereby incorporated 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. Filed as Exhibit 10.1 of the exhibits to Registrant's current Report on Form 8-K, dated March 16, 1993, which exhibit is hereby incorporated by reference. 10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P. ("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other Lenders, dated December 22, 1994, filed as Exhibit 10.13 of the exhibits to the Registrant's 1994 Form 10-K, which exhibit is hereby incorporated by reference. 10.3 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL") and TCB, dated October 11, 1993, filed as Exhibit 10.3 of the exhibits to the Registrant's 1993 Form 10-K, which exhibit is hereby incorporated by reference. 10.4 Note Purchase Agreement, dated December 22, 1994 (the "1994 Note Purchase Agreement"), filed as Exhibit 10.2 of the exhibits to Registrant's Current Report on Form 8-K, dated March 13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby incorporated by reference. 10.5 Note Purchase Agreements, dated June 27, 1996, filed herewith. 10.6 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to the Registrant's 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. 10.7 Asset Purchase Agreements between and among Steuart Petroleum Company, SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and KPOP, as amended, dated August 27, 1995. Said documents are on file as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's current report on Form 8-K dated January 3, 1996, and said exhibits are hereby incorporated by reference. 21 List of Subsidiaries, filed herewith. 24.1 Powers of Attorney, not applicable. 27 Financial Data Schedule, filed herewith.
EX-10.5 2 NOTE PURCHASE AGREEMENTS 1 EXHIBIT 10.5 =============================================================================== KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. Issuer STANTRANS, INC. and KANEB PIPE LINE PARTNERS, L.P. and SUPPORT TERMINAL SERVICES, INC. and SUPPORT TERMINALS OPERATING PARTNERSHIP, L.P. and STANTRANS HOLDINGS, INC. and STANTRANS PARTNERS, L.P. as Guarantors ____________________________ NOTE PURCHASE AGREEMENT dated as of June 27, 1996 ____________________________ FIRST MORTGAGE NOTES OF KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. =============================================================================== 2 TABLE OF CONTENTS
Page ---- NOTE PURCHASE AGREEMENT......................................................................................... 1 SECTION 1. THE NOTES AND NOTE AGREEMENTS.............................................................. 1 1.1 Series C Notes....................................................................... 1 1.2 Series D Notes....................................................................... 2 1.3 Series E Notes....................................................................... 3 1.4 Series F Notes....................................................................... 4 1.5 Closing.............................................................................. 4 1.6 Acquisition for Investment; ERISA.................................................... 5 SECTION 2. REPRESENTATIONS AND WARRANTIES............................................................. 5 2.1 Financial Statements................................................................. 5 2.2 Private Placement Memorandum......................................................... 6 2.3 No Material Adverse Change........................................................... 6 2.4 Subsidiaries; Organization, Authority and Good Standing.............................. 6 2.5 Title to Properties; Liens and Leases; Existing Debt and Investments................. 7 2.6 Licenses............................................................................. 7 2.7 Binding Obligations.................................................................. 8 2.8 Litigation; Compliance with Laws..................................................... 8 2.9 No Burdensome Provisions............................................................. 8 2.10 Compliance with Other Instruments, etc............................................... 9 2.11 Use of Proceeds; Federal Reserve Board Regulations................................... 9 2.12 ERISA................................................................................ 10 2.13 Tax Liability........................................................................ 10 2.14 Governmental Action.................................................................. 11 2.15 Offering of Notes.................................................................... 11 2.16 Environmental Matters................................................................ 12 2.17 Disclosure........................................................................... 12 2.18 Solvency............................................................................. 13 2.19 Status Under Certain Statutes........................................................ 13 SECTION 3. CONDITIONS OF CLOSING...................................................................... 13 3.1 Conditions to Purchase and Sale of Notes............................................. 13 SECTION 4. PREPAYMENTS AND PAYMENTS OF THE NOTES...................................................... 16 4.1 Optional Prepayments................................................................. 16 4.2 Allocation of Prepayments............................................................ 16 4.3 Acquisition of Notes; No Reissuance.................................................. 16 SECTION 5. FINANCIAL STATEMENTS, ETC.................................................................. 17 SECTION 6. INSPECTION; CONFIDENTIALITY................................................................ 20 SECTION 7. AFFIRMATIVE COVENANTS...................................................................... 21 7.1 Maintenance of Office or Agency...................................................... 21 7.2 To Keep Books........................................................................ 22 7.3 Payment of Taxes; Corporate Existence; Maintenance of Properties..................... 22 7.4 To Insure............................................................................ 22 7.5 Compliance with Laws................................................................. 23 SECTION 8. NEGATIVE COVENANTS......................................................................... 24 8.1 Funded Debt.......................................................................... 24 8.2 Liens................................................................................ 24 8.3 Restricted Payments.................................................................. 27 8.4 Merger or Consolidation.............................................................. 27 8.5 Disposition of Assets................................................................ 28 8.6 Investments.......................................................................... 29 8.7 Sale and Leaseback................................................................... 29 8.8 Transactions with Affiliates......................................................... 29 8.9 Fiscal Year.......................................................................... 29 8.10 Subsidiaries......................................................................... 29 8.11 Restricted Subsidiaries.............................................................. 29 SECTION 9. DEFINITIONS AND ACCOUNTING................................................................. 30 SECTION 10. SECURITY.................................................................................. 43 10.1 The Security......................................................................... 43 10.2 Agreement to Deliver Security Documents.............................................. 43 10.3 Perfection and Protection of Security Interests and Liens............................ 44 10.4 Additional Secured Debt.............................................................. 44 SECTION 11. DEFAULTS AND REMEDIES..................................................................... 45 11.1 Events of Default.................................................................... 45
3
Page ---- 11.2 Suits for Enforcement................................................................ 49 11.3 Remedies Cumulative.................................................................. 50 11.4 Remedies Not Waived.................................................................. 50 11.5 Indemnity............................................................................ 50 SECTION 12. CONSENTS, WAIVERS AND AMENDMENTS.......................................................... 51 SECTION 13. SPECIAL RIGHTS OF PURCHASER............................................................... 53 13.1 Method of Payment; Indemnity; Notation Prior to Transfer............................. 53 13.2 Expenses............................................................................. 54 SECTION 14. REGISTRATION, TRANSFER OR EXCHANGE OF NOTES............................................... 55 14.1 Note Register........................................................................ 55 14.2 Surrender for Transfer............................................................... 55 14.3 Loss, Theft, Destruction or Mutilation of Notes...................................... 56 14.4 Holders.............................................................................. 56 SECTION 15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; SUCCESSORS AND ASSIGNS........................ 56 SECTION 16. NOTICES AND OTHER COMMUNICATIONS.......................................................... 56 SECTION 17. SEVERABILITY.............................................................................. 57 SECTION 18. REFERENCES AND TITLES..................................................................... 57 SECTION 19. COUNTERPARTS.............................................................................. 57 SECTION 20. GOVERNING LAW............................................................................. 57 SECTION 21. LIMITATION ON INTEREST ................................................................... 58
ii 4 EXHIBIT A - FORM OF SERIES C NOTE EXHIBIT B - FORM OF SERIES D NOTE EXHIBIT C - FORM OF SERIES E NOTE EXHIBIT D - FORM OF SERIES F NOTE EXHIBIT E - FORM OF SOLVENCY CERTIFICATE EXHIBIT F - FORM OF INSTRUMENT OF TRANSFER EXHIBIT G - FORM OF OPINION OF NEW YORK COUNSEL EXHIBIT H - FORM OF OPINION OF COUNSEL OF THE KPP COMPANIES SCHEDULE 1 - LIST OF SERIES C NOTES AND HOLDERS SCHEDULE 2 - LIST OF SERIES D NOTES AND HOLDERS SCHEDULE 3 - LIST OF SERIES E NOTES AND HOLDERS SCHEDULE 4 - LIST OF SERIES F NOTES AND HOLDERS SCHEDULE 5 - SECURITY SCHEDULE SCHEDULE 6 - LIST AND DESIGNATION OF SUBSIDIARIES SCHEDULE 7 - LIST OF DEBT AND LIENS SCHEDULE 8 - LIST OF INVESTMENTS SCHEDULE 9 - LIST OF LITIGATION AND JUDGMENTS SCHEDULE 10 - ENVIRONMENTAL DISCLOSURES SCHEDULE 11 - LIST OF CHIEF EXECUTIVE OFFICES SCHEDULE 12 - LIST OF FACILITIES TO BE CLOSED SCHEDULE 13 - INSURANCE SCHEDULE 14 - DEFINITION OF AVAILABLE CASH SCHEDULE 15 - UNRESTRICTED SUBSIDIARIES iii 5 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. 2435 North Central Expressway Richardson, Texas 75080 NOTE PURCHASE AGREEMENT Richardson, Texas As of June 27, 1996 To the Holder Identified on the Signature Page at the End of this Agreement Ladies and Gentlemen: The undersigned, Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership ("KPOP"), StanTrans, Inc., a Delaware corporation ("STI"), Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (the "Partnership"), Support Terminal Services, Inc., a Delaware corporation ("STS"), Support Terminals Operating Partnership, L.P., a Delaware limited partnership ("STOP"), StanTrans Holdings, Inc., a Delaware corporation ("STH"), and StanTrans Partners, L.P., a Delaware limited partnership ("STPP") hereby agree with you as follows: SECTION 1. THE NOTES AND NOTE AGREEMENTS. 1.1 Series C Notes. (a) KPOP has duly authorized the issuance and sale to the institutional purchasers named on Schedule 1 hereto of KPOP's 7.08% First Mortgage Notes due June 27, 2001 (the "Series C Final Maturity Date") in the aggregate principal amount of $35,000,000 to be dated the date of issuance, to mature on the Series C Final Maturity Date and to be substantially in the form set forth in Exhibit A hereto, with only such revisions, deletions and amendments as shall be acceptable to you and the other purchasers of Series C Notes under the Note Agreements. The term "Note Agreements" as used herein refers collectively to this Note Purchase Agreement (this "Agreement") and to the other Note Purchase Agreements of even date herewith with the various institutional purchasers named on Schedules 1, 2, 3 and 4. The term "Series C Notes" as used herein refers collectively to the Series C Notes delivered pursuant to the provisions of this Agreement and the other Note Agreements, and also to each Series C Note delivered in substitution or exchange for or in lieu of any such Series C Note. (b) The unpaid principal amount of the Series C Notes shall bear interest at the rate of 7.08% per annum (the "Series C Contract Rate") from the date of issuance thereof until such unpaid principal amount shall have become due and payable. Any principal amount of the Series C Notes and any Applicable Premium Amount, as the case may be, not paid when due, and (to the extent permitted by law) any due and unpaid interest accrued thereon, shall bear interest at the Series C Overdue Rate for the period that the same is overdue. The Series C Overdue Rate (herein so called) is equal to the greater of (i) 9.08%, or (ii) two percent per annum (2.0%) plus the Prime Rate; provided that the Series C Overdue Rate shall in no event exceed the maximum rate permitted by applicable law. Interest at the Series C Contract Rate and the Series C Overdue Rate shall be computed on the basis of a 360-day year of twelve 30-day months. Interest at the Series C Overdue Rate shall, to the extent permitted by law, be compounded monthly. Interest at the Series C Contract Rate shall be payable semi-annually as it accrues on the 27th day of June and December of each year (or if any such date shall not be a Business Day, the immediately following Business Day), beginning on December 27, 1996 and continuing regularly thereafter until the Series C Notes are paid in full. Interest at the Series C Overdue Rate shall be payable upon demand and, whether or not demand is made, on the last day of each calendar month. All interest on the Series C Notes, if not already due and payable, shall be due and payable on the Series C Final Maturity Date. 1.2 Series D Notes. (a) KPOP has duly authorized the issuance and sale to the institutional purchasers named on Schedule 2 hereto of KPOP's 7.43% First Mortgage Notes due June 27, 2003 (the "Series D Final Maturity Date") in the aggregate principal amount of $8,000,000 to be dated the date of issuance, to mature on the Series D Final Maturity Date and to be substantially in the form set forth in Exhibit B hereto, with only such revisions, deletions and amendments as shall be acceptable to you and the other purchasers of Series D Notes under the Note Agreements. The term "Series D Notes" as used herein refers collectively to the Series D Notes delivered pursuant to the provisions of this Agreement and the other Note Agreements, and also to each Series D Note delivered in substitution or exchange for or in lieu of any such Series D Note. 1 6 (b) The unpaid principal amount of the Series D Notes shall bear interest at the rate of 7.43% per annum (the "Series D Contract Rate") from the date of issuance thereof until such unpaid principal amount shall have become due and payable. Any principal amount of the Series D Notes and any Applicable Premium Amount, as the case may be, not paid when due, and (to the extent permitted by law) any due and unpaid interest accrued thereon, shall bear interest at the Series D Overdue Rate for the period that the same is overdue. The Series D Overdue Rate (herein so called) is equal to the greater of (i) 9.43% per annum or (ii) two percent (2.0%) per annum plus the Prime Rate; provided that the Series D Overdue Rate shall in no event exceed the maximum rate permitted by applicable law. Interest at the Series D Contract Rate and the Series D Overdue Rate shall be computed on the basis of a 360-day year of twelve 30-day months. Interest at the Series D Overdue Rate shall, to the extent permitted by law, be compounded monthly. Interest at the Series D Contract Rate shall be payable semi-annually as it accrues on the 27th day of June and December of each year (or if any such date shall not be a Business Day, the immediately following Business Day), beginning December 27, 1996 and continuing regularly thereafter until the Series D Notes are paid in full. Interest at the Series D Overdue Rate shall be payable upon demand and, whether or not demand is made, on the last day of each calendar month. All interest on the Series D Notes, if not already due and payable, shall be due and payable on the Series D Final Maturity Date. 1.3 Series E Notes. (a) KPOP has duly authorized the issuance and sale to the institutional purchasers named on Schedule 3 hereto of KPOP's 7.6% First Mortgage Notes due June 27, 2006 (the "Series E Final Maturity Date") in the aggregate principal amount of $10,000,000 to be dated the date of issuance, to mature on the Series E Final Maturity Date and to be substantially in the form set forth in Exhibit C hereto, with only such revisions, deletions and amendments as shall be acceptable to you and the other purchasers of Series E Notes under the Note Agreements. The term "Series E Notes" as used herein refers collectively to the Series E Notes delivered pursuant to the provisions of this Agreement and the other Note Agreements, and also to each Series E Note delivered in substitution or exchange for or in lieu of any such Series E Note. (b) The unpaid principal amount of the Series E Notes shall bear interest at the rate of 7.6% per annum (the "Series E Contract Rate") from the date of issuance thereof until such unpaid principal amount shall have become due and payable. Any principal amount of the Series E Notes and any Applicable Premium Amount, as the case may be, not paid when due, and (to the extent permitted by law) any due and unpaid interest accrued thereon, shall bear interest at the Series E Overdue Rate for the period that the same is overdue. The Series E Overdue Rate (herein so called) is equal to the greater of (i) 9.6%, or (ii) two percent per annum (2.0%) plus the Prime Rate; provided that the Series E Overdue Rate shall in no event exceed the maximum rate permitted by applicable law. Interest at the Series E Contract Rate and the Series E Overdue Rate shall be computed on the basis of a 360-day year of twelve 30-day months. Interest at the Series E Overdue Rate shall, to the extent permitted by law, be compounded monthly. Interest at the Series E Contract Rate shall be payable semi-annually as it accrues on the 27th day of June and December of each year (or if any such date shall not be a Business Day, the immediately following Business Day), beginning on December 27, 1996 and continuing regularly thereafter until the Series E Notes are paid in full. Interest at the Series E Overdue Rate shall be payable upon demand and, whether or not demand is made, on the last day of each calendar month. All interest on the Series E Notes, if not already due and payable, shall be due and payable on the Series E Final Maturity Date. 1.4 Series F Notes. (a) KPOP has duly authorized the issuance and sale to the institutional purchaser named on Schedule 4 hereto of KPOP's 7.98% First Mortgage Notes due June 27, 2016 (the "Series F Final Maturity Date") in the aggregate principal amount of $15,000,000 to be dated the date of issuance, to mature on the Series F Final Maturity Date and to be substantially in the form set forth in Exhibit D hereto, with only such revisions, deletions and amendments as shall be acceptable to you under the Note Agreement. The term "Series F Notes" as used herein refers collectively to the Series F Notes delivered pursuant to the provisions of this Agreement, and also to each Series F Note delivered in substitution or exchange for or in lieu of any such Series F Note. The term "Notes" as used herein refers collectively to the Series C Notes, the Series D Notes, the Series E Notes and the Series F Notes delivered pursuant to the provisions of this Agreement and the other Note Agreements, and also to each such Note delivered in substitution or exchange for or in lieu of any such Note. (b) The unpaid principal amount of the Series F Notes shall bear interest at the rate of 7.98% per annum (the "Series F Contract Rate") from the date of issuance thereof until such unpaid principal amount shall have become due and payable. Any principal amount of the Series F Notes and any Applicable Premium Amount, as the case may be, not paid when due, and (to the extent permitted by law) any due and unpaid interest accrued thereon, shall bear interest at the Series F Overdue Rate for the period that the same is overdue. The Series F Overdue Rate (herein so called) is equal to the greater of (i) 9.98%, or (ii) two percent per annum (2.0%) plus the Prime Rate; provided that the Series F Overdue Rate shall in no event exceed the maximum rate permitted by applicable law. Interest at the Series F Contract Rate and the Series F Overdue Rate shall be computed on the basis 2 7 of a 360-day year of twelve 30-day months. Interest at the Series F Overdue Rate shall, to the extent permitted by law, be compounded monthly. Interest at the Series F Contract Rate shall be payable semi-annually as it accrues on the 27th day of June and December of each year (or if any such date shall not be a Business Day, the immediately following Business Day), beginning on December 27, 1996 and continuing regularly thereafter until the Series F Notes are paid in full. Interest at the Series F Overdue Rate shall be payable upon demand and, whether or not demand is made, on the last day of each calendar month. All interest on the Series F Notes, if not already due and payable, shall be due and payable on the Series F Final Maturity Date. 1.5 Closing. Subject to the terms and conditions of this Agreement, KPOP will sell to you, and you will purchase from KPOP, on or before June 27, 1996, or such other date agreed to by you and KPOP (the "Closing Date"), a duly executed Series C Note, Series D Note, Series E Note, or Series F Note, as applicable, each dated the Closing Date in the principal amount set forth opposite your name on Schedule 1, Schedule 2, Schedule 3, or Schedule 4, as applicable, registered in your name, at the purchase price of 100% of the principal amount thereof. Delivery of the applicable Notes so to be purchased by you shall be made on the Closing Date at the offices of Thompson & Knight, P.C., your special counsel, at 1700 Pacific Avenue, Suite 3300, Dallas, Texas 75201. Such delivery shall be made against payment to KPOP by wire transfer of immediately available funds in such amount to Texas Commerce Bank-Houston, ABA No. 113000609, GL# 13681-7800, Ref KPL 008-0192153. KPOP hereby represents and warrants that concurrently herewith it is entering into each of the other Note Agreements in a form identical hereto except for the signature of the purchaser thereunder at the end thereof. 1.6 Acquisition for Investment; ERISA. This Agreement is made with you in reliance upon your representation to KPOP (which, by your acceptance hereof you confirm) that (a) you are an "accredited investor" within the meaning of Rule 501 under the Securities Act of 1933, as amended (in this section, the "Act"); (b) each Note which you are acquiring is being acquired for your own account for investment, and not with a view to the sale or distribution thereof, nor with any present intention of selling or distributing such Note, but subject, nevertheless, to your right to have the disposal of all or any part of your property (including such Note) at all times be within your control; and (c) no part of the funds used by you to purchase such Note constitutes assets allocated to any separate account (as defined in ERISA) maintained by you, in which any employee benefit plan participates to the extent of 10% or more. By your acceptance hereof you further acknowledge that such Note has not been registered under the Act or the securities laws of any state on the ground that the original sale contemplated hereby is exempt from registration under the Act and such state securities laws, and you agree that in the absence of such registration such Note will be sold or disposed of only pursuant to an exemption from registration under the Act and such state securities laws. SECTION 2. REPRESENTATIONS AND WARRANTIES. Each of the KPP Companies hereby represent and warrant that: 2.1 Financial Statements. The Partnership has delivered to you a copy of (i) its audited Consolidated financial statements for the years ended December 31, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 which contain balance sheets as of the end of each year and statements of income, of cash flows and of changes in partners' capital for each such year and (ii) the unaudited financial statements contained in its form 10Q for its first fiscal quarter. Such financial statements fairly present the Consolidated financial condition of the Partnership as of the respective dates of the balance sheets and the results of its operations and cash flows for the periods ending on such dates and, except as otherwise stated therein or in the notes thereto, such financial statements have been prepared in accordance with GAAP consistently applied. 2.2 Private Placement Memorandum. The KPP Companies have delivered to you a copy of the Confidential Information Memorandum dated April 1996 (the "Private Placement Memorandum"). The information contained in the Private Placement Memorandum, as well as other information provided to you, was, as of the date thereof, true and correct in all material respects and fairly describes generally the business, operations and principal properties of the KPP Companies and their Subsidiaries as of the date thereof and hereof, except as supplemented by the most recent form 10Q and projections provided to you in writing prior to the date hereof. Any estimated amounts included in projections or assumptions in projections provided in the Private Placement Memorandum are based upon the best information available in light of all conditions existing as of the date thereof and hereof, except as supplemented by projections provided to you in writing prior to the date hereof. 2.3 No Material Adverse Change. There has been no material adverse change in the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually or the KPP Companies and their Subsidiaries taken as a whole, since December 31, 1995, and none of the KPP Companies nor any of their Subsidiaries have any material liabilities (contingent or otherwise) which are not disclosed either in the Private Placement Memorandum, or in the most recent audited balance sheets referred to in Section 2.1. 3 8 2.4 Subsidiaries; Organization, Authority and Good Standing. (a) Schedule 6 hereto sets forth a complete and correct list of all Subsidiaries of the Partnership, together with the name of each Subsidiary, its jurisdiction of incorporation, the percentage of its shares or partnership units owned by a KPP Company or another of their Subsidiaries. Except as set forth on Schedule 6: (i) all outstanding shares or partnership units issued by any KPP Companies or any of their Subsidiaries have been validly issued, are fully paid and non-assessable, and are owned beneficially by the record owner thereof, and (ii) there are no outstanding options, warrants or other rights to acquire shares in any KPP Company or in any of their Subsidiaries. (b) Each KPP Company and each of their Subsidiaries is a partnership or corporation duly formed or organized and validly existing in good standing under the laws of its jurisdiction of organization or incorporation (which is a state of the United States of America) and has full partnership or corporate power and authority to own or lease the properties and assets it purports to own or hold under lease, and to conduct the business which it now conducts. (c) Each of STI, KPOP, STOP, and STPP is duly qualified and in good standing as a foreign corporation or partnership in each jurisdiction within the United States wherein the character of the properties owned or held by it or the nature of the business transacted by it makes such qualification necessary. Each KPP Company (other than STI, KPOP, STOP, and STPP) and each of their Subsidiaries is duly qualified and in good standing as a foreign corporation or partnership in each jurisdiction in which the failure to be qualified would materially and adversely affect the business, operations, properties, assets or condition, financial or otherwise of such KPP Company, such Subsidiary or the KPP Companies and their Subsidiaries taken as a whole. (d) Each of the KPP Companies has duly authorized the execution and delivery of the Note Agreements, the Notes and the other Note Purchase Documents to which it is a party and the performance of its obligations hereunder and thereunder. The issuance and sale of the Notes are within the partnership power and authority of KPOP. 2.5 Title to Properties; Liens and Leases; Existing Debt and Investments. (a) The KPP Companies and their Subsidiaries each (i) have good and marketable title to all properties it purports to own, free and clear of all Liens, other than those permitted under Section 8.2, and (ii) enjoys peaceful and undisturbed possession under all leases necessary for the conduct of its business, and all such leases are valid and subsisting and in full force and effect. Upon payment in full of the Interim Debt, the Liens securing the Interim Debt shall be released and the lenders under the Interim Debt will no longer be parties to the Intercreditor Agreement. (b) Schedule 7 hereto sets forth a list, complete and correct in all respects, of all outstanding Debt of the KPP Companies and their Subsidiaries, together with the outstanding principal amount of each such item of Debt, the name of its obligor (including any guarantor), the names of the holders thereof, its interest rate and maturity date and a brief description of the properties (if any) securing such Debt and the priority of the Lien on such properties. (c) None of the KPP Companies, nor any of their Subsidiaries, hold any Restricted Investments. Schedule 8 hereto sets forth a list, complete and correct in all respects, of all outstanding Permitted Investments of the KPP Companies and their Subsidiaries (other than Permitted Investments described in subparagraphs (a), (b), (d), (e), (f) and (g) of the definition of Permitted Investments contained herein), together with the outstanding amount of each such Permitted Investment, the name of the Person in which such investment is made and a brief description of the terms of such investment. 2.6 Licenses. Each KPP Company and its Subsidiaries owns or has the right to use all trademarks, trade names, service marks, copyrights, patents, computer software and other technology rights and licenses, governmental licenses, franchises, certificates, consents, permits and approvals necessary to enable it to own the properties and assets and to conduct the business which it now owns and conducts, without known conflict with the rights of others (except where such conflicts are not material) and has made all of the filings with respect thereto with the appropriate state and federal governmental agencies and authorities to protect its rights therein. To the best knowledge of each of the KPP Companies and their Subsidiaries, all such trademarks, trade names, service marks, copyrights, patents, computer software and other technology rights and licenses, governmental licenses, franchises, certificates, consents, permits and approvals are valid and subsisting. 2.7 Binding Obligations. The Note Agreements, Notes and the other Note Purchase Documents constitute the legal, valid and binding obligations of each KPP Company which is a party thereto enforceable in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by the availability of equitable remedies. 2.8 Litigation; Compliance with Laws. (a) Schedule 9 hereto sets forth a list, complete and correct in all material respects, of all actions, suits or proceedings (whether or not purportedly on behalf of any KPP 4 9 Company, any of their Subsidiaries or any of their Affiliates) pending (or, to the knowledge of any Responsible Officer, threatened) against or affecting any KPP Company or any of their Subsidiaries at law or in equity or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind: (i) which involves any of the transactions herein contemplated, or (ii) which would materially and adversely affect the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually, the KPP Companies and their Subsidiaries taken as a whole, or any KPP Company's ability to perform under the Note Agreements or under the Notes or the other Note Purchase Documents. (b) Except as disclosed in Schedule 9, none of the KPP Companies nor any of their Subsidiaries is in default, or has suffered an event of default or violation of any law, judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which default, or has suffered an event of default or violation would materially and adversely affect (i) the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually, or the KPP Companies and their Subsidiaries taken as a whole, or (ii) any KPP Company's ability to perform under this Note Agreement or under the Notes or the other Note Purchase Documents or to perform any of the transactions contemplated herein or therein. 2.9 No Burdensome Provisions. None of the KPP Companies nor any of their Subsidiaries is a party to any agreement or instrument or subject to any charter or other corporate restriction which materially and adversely affects the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually, the KPP Companies and their Subsidiaries taken as a whole or any KPP Company's ability to perform under the Note Agreements or under the Notes or the other Note Purchase Documents. 2.10 Compliance with Other Instruments, etc. None of the KPP Companies nor any of their Subsidiaries is in default or event of default in, and no temporary waiver of default or event of default is in effect with respect to, the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (a) any bond, debenture, note or other evidence of Debt of any KPP Company or any of their Subsidiaries, (b) any agreement or instrument under or pursuant to which any such bond, debenture, note or other evidence of Debt has been issued or made and delivered, or (c) any agreement or instrument pursuant to which any properties of any KPP Company or any of their Subsidiaries are subject, which default or event of default would materially and adversely affect the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually, the KPP Companies and their Subsidiaries taken as a whole or any KPP Company's ability to perform under the Note Agreements or under the Notes or the other Note Purchase Documents. Neither the execution and delivery of the Note Agreements, the Notes or the other Note Purchase Documents by the KPP Companies to which each is a party, nor the consummation of the transactions herein and therein contemplated, nor compliance with the terms, conditions and provisions hereof and thereof by the KPP Companies, will conflict with or result in a breach of any of the terms, conditions or provisions of the partnership agreement, charter or by-laws of any KPP Company or any of their Subsidiaries or of any material agreement or instrument to which any of them is now a party or by which any of them or any of their properties is or may be bound, or constitute a default or event of default thereunder, or result in the creation or imposition of any Lien upon any of their material properties or assets. None of the KPP Companies nor any of their Subsidiaries is in default or event of default in the performance of any of the covenants and agreements contained herein. No event has occurred and is continuing which constitutes, or which with the lapse of time would constitute, a Default or Event of Default. 2.11 Use of Proceeds; Federal Reserve Board Regulations. The proceeds from the sale of the Notes will be used by KPOP first, to the extent thereof to repay all of the outstanding Interim Debt in full. None of the proceeds received by KPOP from the sale of the Notes will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation G of the Board of Governors of the Federal Reserve System ("Margin Stock") or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any Margin Stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulation G. None of the transactions contemplated herein or in the Notes will (i) violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II or (ii) require any Holder to complete a Federal Reserve System form G-3. Margin Stock does not, and no KPP Company intends or foresees that Margin Stock will at any time, constitute a substantial part of such KPP Company's assets. 2.12 ERISA. (a) The issuance and delivery by KPOP of each Note purchased by you will not involve any prohibited transaction within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"). The representation by the KPP Companies in this Section 2.12(a) is made in reliance upon and subject to the accuracy of 5 10 your representation in Section 1.6 as to the source of the funds to be used by you to acquire such Note. (b) Based upon ERISA and the regulations and published interpretations thereunder, each of the KPP Companies and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA. No Reportable Event has occurred with respect to any Plan (other than a Reportable Event for which the 30 days' notice requirement with respect to such Reportable Event has been waived by the PBGC). None of the KPP Companies and their ERISA Affiliates has incurred any liability to the PBGC under Section 4062 of ERISA or to any Plan. None of the KPP Companies nor any of their Subsidiaries is currently obligated to contribute to a multi-employer plan, as defined in Section 4001(a)(3) of ERISA. (c) The term "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA. The term "Plan" shall mean any plan defined in Section 4021(a) of ERISA in respect of which the KPP Companies or any of their ERISA Affiliates is an "employer" or a "substantial employer" as such terms are defined in Sections 3(5) and 4001(a)(2), respectively, of ERISA. The term "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any governmental agency or agencies substituted therefor, and the term "ERISA Affiliate" shall mean any Person which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the KPP Companies or is under common control (within the meaning of Section 414(c) of the Code) with the KPP Companies. 2.13 Tax Liability. (a) All federal income tax returns which are required to be filed by each of the KPP Companies or any of their Subsidiaries have been filed. The federal income tax liabilities of the KPP Companies and their Subsidiaries have not been subject to a notice of audit by the Internal Revenue Service and accordingly has been finally determined and paid for all fiscal years up to and including the fiscal year ended December 31, 1990. (b) All state and local income and franchise tax returns which are required to be filed by any KPP Company or any of their Subsidiaries have been filed by it or on its behalf, to the extent, if any, that it files combined or consolidated returns. (c) All taxes shown on such returns have been paid to the extent that such taxes have become due, except those taxes, assessments, charges, levies or claims the amount, applicability or validity of which is currently being contested in good faith by it and which in respect thereof, such KPP Company or any such Subsidiary shall have set aside on its books reserves deemed adequate in the reasonable opinion of such KPP Company or such Subsidiary. In the opinion of the KPP Companies, all tax liabilities of the KPP Companies and their Subsidiaries were adequately provided for as of December 31, 1995, and are now so provided for on the books of the KPP Companies and their Subsidiaries. 2.14 Governmental Action. No action of any governmental or public body or authority (i.e., no consent, transfer license, etc.) is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of the Note Agreements, the Notes or the other Note Purchase Documents. 2.15 Offering of Notes. None of the KPP Companies nor any agents acting on their behalf have, either directly or indirectly, sold or offered for sale or disposed of, or attempted or offered to dispose of, the Notes or any part thereof, or any similar obligation of the KPP Companies, to, or has solicited any offers to buy any of the Notes or any part thereof, or any similar obligation of the KPP Companies from, or has otherwise approached or negotiated in respect of the Notes or any part thereof, or any similar obligation of the KPP Companies, with any Person or Persons other than you and not more than thirty-nine (39) other accredited institutional investors, each of whom had a pre-existing business relationship with one or more of the KPP Companies or their directors, officers, employees or agents (including, without limitation, the KPP Companies' investment banker placing the Notes), was known to be regularly engaged in the business of evaluating and making investments in instruments similar to the Notes and was provided with a Private Placement Memorandum and was given access to all other material financial and other pertinent information about the KPP Companies; during the twelve month period preceding the date hereof, none of the KPP Companies nor any agents acting on their behalf have, either directly or indirectly, issued or sold any securities of the KPP Companies that are of the same or similar class to the Notes in a transaction exempt from the provisions of Section 5 of the Securities Act of 1933, as amended; and the KPP Companies agree that neither they nor any agent acting on their behalf will sell or offer for sale or dispose of, or attempt or offer to dispose of, any of the Notes or any part thereof to, or any similar obligation of the KPP Companies, or solicit any offers to buy any of the Notes or any part thereof from, or otherwise approach or negotiate in respect of the Notes or any part thereof, or any similar obligation of the KPP Companies with, any Person or Persons so as thereby to bring the issuance or sale of the Notes within the provisions of Section 5 of the Securities Act of 1933, as amended. 2.16 Environmental Matters. Except as disclosed in Schedule 10 with respect to clauses (a) and (b) below: 6 11 (a) each of the KPP Companies and each of their Subsidiaries is in compliance with all applicable federal, state and local laws and regulations relating to pollution control and environmental contamination, including all laws and regulations governing the generation, use, collection, treatment, storage, transportation, recovery, removal, discharge or disposal of Hazardous Materials and all laws and regulations with regard to record keeping, notification and reporting requirements respecting Hazardous Materials; (b) none of the KPP Companies nor any of their Subsidiaries has been alleged to be in violation of, or to have any obligation for remediation under, or has been subject to any administrative or judicial proceeding pursuant to, such laws or regulations, nor has any Claim under CERCLA, RCRA or any other federal, state or local environmental statute or regulation been asserted against any KPP Company or any Subsidiary, except in each case as to matters that have been finally and fully resolved (with any judgment, fine or other payment owing by any KPP Company or any of their Subsidiaries in connection therewith having been paid in full); and (c) there are no facts or circumstances that the KPP Companies reasonably believe form the basis, or could form the basis, for the assertion of any Claim against any KPP Company or any of their Subsidiaries relating to any environmental matter that would materially and adversely affect the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually or the KPP Companies and their Subsidiaries taken as a whole, including any Claim arising from past or present environmental practices asserted under CERCLA, RCRA or any other federal, state or local environmental statute or regulation. 2.17 Disclosure. None of the Note Agreements, the Notes, the other Note Purchase Documents, the Private Placement Memorandum nor any of the instruments, certificates or statements furnished to you by any KPP Company or any of their Subsidiaries in connection with the transactions contemplated hereby or thereby, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. There is no fact peculiar to any KPP Company or their respective Subsidiaries which has not been disclosed to you in writing which materially adversely affects or, as far the KPP Companies can reasonably foresee, will materially adversely affect the properties, business, profits or condition (financial or otherwise) of KPOP individually or the KPP Companies and their Subsidiaries taken as a whole. 2.18 Solvency. No KPP Company is, and upon giving effect to the issuance of the Notes no KPP Company will be, "insolvent", as such term is used in Section 24.003 of the Texas Business and Commerce Code or 11 U.S.C. 101 (32)(a). 2.19 Status Under Certain Statutes. No KPP Company is an "investment company" or a Person directly or indirectly "controlled" by or "acting on behalf of" an investment company within the meaning of the Investment Company Act of 1940, as amended. No KPP Company nor any of their Subsidiaries is a "national" of any foreign country designated in the Foreign Assets Control Regulations, the Transaction Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Cuban Assets Control Regulations, the Nicaraguan Trade Control Regulations, the Iraqi Sanctions Regulations, the Haitian Transactions Regulations or the Libyan Sanctions Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended). None of the proceeds of the sale of the Notes will be used, directly or indirectly, for the purpose of engaging in any transaction which violates any of such Regulations or which violates the Foreign Funds Control Regulations or the Transaction Control Regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended), or any regulation or ruling issued thereunder. SECTION 3. CONDITIONS OF CLOSING. 3.1 Conditions to Purchase and Sale of Notes. Your obligation to purchase and pay for the Notes to be purchased by you on the Closing Date, as provided in Section 1.5 shall be subject to the performance by each of the KPP Companies of all its agreements theretofore or simultaneously to be performed hereunder and under the Notes, to the accuracy of its representations and warranties contained herein and in the Notes, and to the satisfaction, on or prior to such purchase, of the following further conditions: (a) Opinion of Counsel. You shall have received from Hutton, Ingram, Yuzek, Gaines, Carroll & Bertolotti, New York counsel for the KPP Companies, and from Michael B. Glazer, corporate counsel for the KPP Companies, favorable opinions in form and substance acceptable to you as to the matters set forth on Exhibits F and G, and from your own special counsel, Thompson & Knight, P.C., a favorable opinion in form and substance acceptable to you. 7 12 (b) Schedules. All Schedules hereto shall be true and correct as of the Closing Date. (c) Proceedings and Documents. All proceedings to be taken in connection with the transactions contemplated by this Agreement and the other Note Purchase Documents, and all documents incident thereto, shall be reasonably satisfactory in form and substance to you; and you shall have received copies of the following documents in form and substance satisfactory to you: (i) your Series C Note, Series D Note, Series E Note or Series F Note, as applicable; (ii) copies of the other Note Agreements; (iii) the Security Documents; (iv) the Intercreditor Agreement; (v) a Solvency Certificate of the chief financial officer of KPL as general partner of KPOP in the form of Exhibit E hereto; (vi) certificates of due formation and good standing in each of the KPP Companies' and their Subsidiaries' states of organization; (vii) certificates of due qualification and good standing in each state in which any KPP Company (other than STOP) or any of their Subsidiaries owns property; (viii) an "Officers' Certificate" of the Secretary and of the Chairman of the Board or President of each KPP Company or its general partner, which shall contain the names and signatures of the officers of such KPP Company or its general partner authorized to execute Note Purchase Documents and which shall certify to the truth, correctness and completeness of the following exhibits attached thereto: (i) a copy of resolutions duly adopted by the Board of Directors of such KPP Company or its general partner and in full force and effect at the time this Agreement is entered into, authorizing the execution of this Agreement and the other Note Purchase Documents delivered or to be delivered in connection herewith and the consummation of the transactions contemplated herein and therein, (ii) a copy of the charter documents or partnership agreement of such KPP Company and all amendments, thereto, certified by the appropriate official of such KPP Company's state of organization, and (iii) a copy of any bylaws of such KPP Company; (ix) confirmation from the KPP Companies' investment bankers as to matters discussed in Section 2.15; (x) environmental site assessment reports prepared by Pilko & Associates as of a date not earlier than sixty (60) days prior to the Closing Date, which update the environmental site assessment reports prepared by Pilko & Associates as of December, 1994), and cover both the real property pledged pursuant to the Mortgage and the real property owned by STI; (xi) evidence of insurance required pursuant to Section 7.4; and all other documents and other evidence which you may reasonably request in connection with such transactions, including without limitation all records of corporate proceedings in connection therewith. (d) Legality of Notes. The Notes being acquired by you on the Closing Date, shall then qualify as a legal investment for insurance companies under the laws of any jurisdiction to which you may be subject (without resort to any "basket" or "leeway" provision of any such law, permitting limited investments by you without restriction as to the character of the particular investment) and such purchase shall not subject you to any penalty or other onerous condition under or pursuant to any applicable law or government regulation; and you shall have received such certificates or other evidence as you may reasonably request to establish compliance with this condition. (e) Private Placement Number. The Notes shall have been assigned a private placement number by Standard and Poor's CUSIP Service Bureau. 8 13 (f) Fees Payable at Closing. You and your special counsel shall have received the fees and expenses required to be paid or reimbursed by the KPP Companies, as provided in Section 13.2, in connection with the preparation and review of the Note Agreements, the Notes, the other Note Purchase Documents and the other documents and instruments relating thereto, the negotiations thereof and other matters in connection therewith. The KPP Companies shall have paid all fees and expenses of Pilko & Associates with respect to the site assessment described in Section 3.1(c)(x). (g) Representations and Warranties. All representations and warranties made by any KPP Company or its Subsidiaries in any Note Purchase Document shall be true on and as of the Closing Date as if such representations and warranties had been made as of the Closing Date (or where a representation or warranty is given as of a specified date, the date so specified). SECTION 4. PREPAYMENTS AND PAYMENTS OF THE NOTES. 4.1 Optional Prepayments. (a) From time to time KPOP may at its option prepay its Notes then outstanding, in whole or in part, so long (unless such payment is a result of a Permitted Transfer) as the aggregate amount of all partial prepayments of principal concurrently paid on the Notes equals $500,000 or any higher integral multiple of $100,000, by giving each Holder written notice thereof not less than 30 days nor more than 60 days prior to the date fixed for such prepayment (the "Prepayment Date", which date shall be a Business Day), which notice shall also specify the principal amount of the Notes held by such Holder so to be prepaid and an estimate of the Applicable Premium Amount of the Notes to be so prepaid and accrued interest due thereon, along with the computation thereof set forth in reasonable detail. (b) The KPP Companies shall deliver to all Holders, by facsimile transmission, with copies delivered by overnight delivery service with proof of delivery, on the second Business Day preceding the Prepayment Date a certificate signed by a principal financial officer of the Partnership setting forth the Applicable Premium Amount of the Notes held by all Holders to be so prepaid, which certificate shall set forth in reasonable detail the computation thereof. If the KPP Companies do not timely deliver such certificate to all Holders or if less than the Requisite Holders agree with the Partnership's calculation of the Applicable Premium Amount contained in such certificate, the Requisite Holders may calculate or recalculate, as the case may be, the Applicable Premium Amount of the Notes held by all Holders to be so prepaid, which calculation shall be binding upon the KPP Companies and the other Holders absent manifest error. (c) On the Prepayment Date, KPOP shall prepay to each Holder the principal amount of the Notes held by such Holder to be so prepaid, the interest accrued on such principal amount to the Prepayment Date, and the Applicable Premium Amount, if any. 4.2 Allocation of Prepayments. In the event of any prepayment of less than all of the outstanding Notes pursuant to Section 4.1, the KPP Companies will allocate the principal amount to be so prepaid, if any, among the Holders of the Notes in proportion, as nearly as may be, to the respective unpaid principal amounts of the Notes held by them. Payments of interest on the principal amount prepaid hereunder and the Applicable Premium Amount related thereto, if any, will be allocated among the Holders of Notes of the applicable series in proportion, as nearly as may be, to the respective unpaid principal amounts of the Notes of such series held by them. 4.3 Acquisition of Notes; No Reissuance. No KPP Company will, nor will it permit any Subsidiary or Affiliate to, directly or indirectly prepay, redeem, retire, purchase or otherwise acquire any Note of a series, except pursuant to (a) Section 4.1, or (b) an offer to all Holders of Notes to prepay, redeem, retire, purchase or otherwise acquire the Notes held by them on the same terms and conditions and in proportion, as nearly as may be, to the respective unpaid principal amounts of the Notes held by them. Any Note prepaid in full pursuant to Section 4.1 or otherwise acquired by any KPP Company or any of their Subsidiaries shall be surrendered to the KPP Companies for cancellation, shall not be reissued and shall not be deemed outstanding, and no Note shall be issued in lieu of any principal amount of any Note so prepaid. SECTION 5. FINANCIAL STATEMENTS, ETC. Each KPP Company covenants and agrees that the KPP Companies will furnish to each Holder: (a) as soon as practicable, and in any event within 65 days after the end of each quarterly period in each fiscal year of KPL and the KPP Companies, the unaudited Consolidated statements of income, of cash flows and of partners' capital of KPL and the Partnership, the unaudited consolidating statement of income of each of the KPP Companies and their Subsidiaries (indicating which Subsidiaries are Unrestricted Subsidiaries) and the 9 14 unaudited Consolidated statements of income, of cash flows and of partners' capital of the KPP Companies and their Restricted Subsidiaries in each case for such period and for that part of the fiscal year ended with such quarterly period, and the Consolidated and consolidating balance sheet of KPL and of the KPP Companies and their Subsidiaries as at the end of each such fiscal period (indicating which Subsidiaries are Unrestricted Subsidiaries) and the unaudited Consolidated balance sheet of the KPP Companies and their Restricted Subsidiaries as at the end of each such fiscal period, in each case setting forth in comparative form the corresponding figures for the corresponding period or part of the preceding fiscal year, all in reasonable detail, prepared in conformity with GAAP applied on a basis consistent with that of the previous year (except as otherwise stated therein or in the notes thereto) and certified by the chief financial officers of KPL and KPOP as (x) having been prepared in conformity with GAAP applied on a basis consistent with that of the previous year (except as otherwise stated therein or in the notes thereto) and (y) presenting fairly the financial condition and results of operations of KPL and of the KPP Companies and their Subsidiaries, as at the end of and for the fiscal periods to which they relate, subject to normal year-end adjustments; (b) as soon as practicable, and in any event within 95 days after the end of each fiscal year of KPL and the KPP Companies, the audited Consolidated statements of income, of cash flows and of changes in partners' capital of KPL and of the Partnership, the unaudited consolidating statement of income of each of the KPP Companies and their Subsidiaries (indicating which Subsidiaries are Unrestricted Subsidiaries) and the unaudited Consolidated statements of income, of cash flows and of partners' capital of the KPP Companies and their Restricted Subsidiaries as at the end of and for such year, and the audited Consolidated and unaudited consolidating balance sheet of KPL and of the KPP Companies and their Subsidiaries as at the end of such year (indicating which Subsidiaries are Unrestricted Subsidiaries) and the unaudited Consolidated balance sheet of the KPP Companies and their Restricted Subsidiaries as at the end of each such year, in each case setting forth in comparative form the corresponding figures of the previous fiscal year, all in reasonable detail, prepared in conformity with GAAP applied on a basis consistent with that of the previous year (except as otherwise stated therein or in the notes thereto) and certified by the Chairman or President of the Partnership as (x) having been prepared in conformity with GAAP applied on a basis consistent with that of the previous year (except as otherwise stated therein or in the notes thereto) and (y) presenting fairly the financial condition and results of operations of KPL and the KPP Companies and their Subsidiaries as at the end of such fiscal year, and accompanied by a report or opinion of Price Waterhouse (or other independent certified public accountants which have a recognized national standing) stating that such financial statements present fairly the consolidated financial condition and results of operations of KPL and the KPP Companies and their Subsidiaries, in accordance with GAAP consistently applied (except for changes in application with which such accountants concur) and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards; (c) concurrently with the financial statements delivered pursuant to Section 5(b), a letter that conforms to professional pronouncements promulgated by the American Institute of Certified Public Accountants from the firm of independent certified accountants that reported on such financial statements to the effect that in the course of, and based solely upon, their audit of such financial statements, nothing has come to their attention to cause them to believe that there existed on the date of such statements any Default or Event of Default, provided that, if in the opinion of such accountants any such Default or Event of Default exists, such accountants shall describe its nature and the length of time it has existed; (d) concurrently with the financial statements delivered pursuant to Sections 5(a) and (b), a certificate of the Chairman or President of the Partnership (i) setting forth, as of the end of the respective fiscal period, the extent to which the KPP Companies have complied, and have caused their Subsidiaries to comply, with the requirements of Section 8 hereof, including, in the case of any Debt, merger or consolidation, Permitted Investment, Lien securing Debt, Restricted Payment, sale and leaseback, Transfer or sale incurred or made during such fiscal period, all necessary computations reflecting the manner in which such compliance was determined and a reference to the source of each number included in such computations, (ii) stating that the activities of the KPP Companies and their Subsidiaries during such fiscal period have been monitored under such officer's supervision to determine whether the KPP Companies have fulfilled all of their obligations under the Note Agreements, the Notes and 10 15 the other Note Purchase Documents, and (iii) stating that no Default or Event of Default existed as of the end of such fiscal period, on the date of such certificate or at any time during the period covered by such financial statements, or, if any Default or Event of Default exists or existed, specifying such Default, Defaults, Event of Default or Events of Default, the nature and status thereof, and what action the KPP Companies have or are taking or propose to take with respect thereto; (e) concurrently with the sending or filing thereof (or promptly thereafter), copies of all such financial statements, proxy statements and reports as Kaneb Services, Inc., KPL or any KPP Company shall send to its stockholders or partnership unitholders pursuant to SEC requirements, including all registration statements, annual reports on form 10-K, quarterly reports on form 10-Q, current reports on form 8-K and other regular periodic reports which Kaneb Services, Inc., KPL or any KPP Company or any of their Subsidiaries may file with the SEC; (f) promptly but in any event not later than 3 Business Days after a Responsible Officer of any KPP Company becomes aware of the existence of a Default or an Event of Default or a default or an event of default or a claimed default, whether or not waived, under any other Debt of any KPP Company or any of their Subsidiaries which Debt is in an aggregate principal amount of $1,000,000 or more, a written notice to each Holder, the Trustee and each other creditor under the Intercreditor Agreement, specifying the nature and period of existence thereof and what action such KPP Company or such Subsidiary, as the case may be, is taking or proposes to take with respect thereto; (g) promptly but in any event not later than 3 Business Days after receipt thereof by any KPP Company or any of their Subsidiaries, any notice from any governmental agency asserting (i) any violation by, or possible remedial obligation owed by, any KPP Company or any of their Subsidiaries under CERCLA, RCRA or any other federal, state or local environmental statute or regulation, or (ii) any Claim against any KPP Company or any of its Subsidiaries relating to any environmental matter (including any Claim arising from past or present environmental practices asserted under CERCLA, RCRA or any other federal, state or local environmental statute or regulation) if such violation or Claim could reasonably result in any KPP Company or any of their Subsidiaries incurring liability, including but not limited to fines and remediation costs, of $1,000,000 or more, and promptly (but in any event not later than 30 days after receipt thereof by such KPP Company or Subsidiary) to be followed by the KPP Companies' statement of what action the KPP Companies or such Subsidiary, as the case may be, is taking or proposes to take with respect thereto; (h) promptly but in any event not later than 3 Business Days after a Responsible Officer of any KPP Company becomes aware thereof, a written notice of the existence of any condition or occurrence of any event which, in the opinion of such officer, would have a material and adverse effect on (i) the business, operations, properties, assets or condition, financial or otherwise, of KPOP individually or the KPP Companies and their Subsidiaries taken as a whole or (ii) on the ability of any KPP Company or any of its Subsidiaries to perform under this Note Agreement, the Notes or any other Note Purchase Document or to perform any of the transactions contemplated herein or therein; (i) immediately upon becoming aware of the occurrence of any (i) "reportable event", as such term is defined in Section 4043(b) of ERISA, (ii) "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, or (iii) "prohibited transaction", as such term is defined in Section 4975 of the Code, in connection with any pension plan or trust created thereunder, a written notice specifying the nature thereof, what action the KPP Companies are taking or propose to take with respect thereto, and, when known, any action by the Internal Revenue Service with respect thereto; and (j) promptly upon reasonable request by you or any subsequent Holder, copies of all other information relating in any way to any KPP Company or any of its Subsidiaries, including any information required in connection with a proposed sale of any of the Notes under Rule 144A. SECTION 6. INSPECTION; CONFIDENTIALITY. (a) Upon reasonable notice to the KPP Companies, any Holder of any portion of the Notes at the time outstanding shall have the right to visit and inspect (at the expense of such Holder) during normal business hours, any of the offices or properties of any KPP Company or any of its Subsidiaries, to examine any of their books of account, make copies therefrom and photocopies and photographs thereof, and to write down and record any information obtained therefrom, and to discuss their affairs, finances and accounts with their officers and independent public accountants, as often as such Holder may reasonably request. Notwithstanding the foregoing, any visit or inspection by or on behalf of any Holder during the continuance of any Default or Event of Default shall be at the expense of the KPP Companies. (b) Each Holder will keep in confidence, in accordance with its normal, customary practices, any 11 16 information, including financial information, which is marked by the KPP Companies as being non-public and confidential or proprietary in nature that is disclosed to such Holder by any of the KPP Companies (as a result of any examination of the books and records of the KPP Companies and their Subsidiaries or otherwise); provided, however, that you or such other Holder may disclose any such information: (i) to your employees and representatives, including without limitation, your attorneys and accountants who would ordinarily have access to such information in the normal course of performance of their duties, in confidence in accordance with your normal, customary practices; (ii) to another Holder, (iii) to actual or prospective purchasers of the Notes or any participations therein or any successor, assignee or Affiliate of yours with respect to the Notes; (iv) such third parties as you may, in your discretion, deem reasonably necessary or desirable in connection with or in response to: (A) compliance with any law, ordinance or governmental order, regulation, rule, policy, investigation or regulatory authority (including, without limitation, The National Association of Insurance Commissioners, its successors, or any other insurance industry regulatory authority) requirement or request, (B) any order, decree, judgment, subpoena, notice of discovery or similar request or testimony, or pleading issued, filed, served or purported on its face to be issued, filed or served (x) by or under authority of any court, tribunal, arbitration board, any governmental or industry agency, commission, authority, board or similar entity or (y) in connection with any proceeding, case or matter pending (or on its face purported to be pending) in any court, tribunal, arbitration board, or any governmental agency, commission, authority, board or similar entity, (C) the enforcement of your rights hereunder and under the Notes during the continuance of a Default or Event of Default or (D) the filing of any documents which are necessary or appropriate, in your opinion, for the protection of any security interest or collateral relative to the Note Purchase Documents and the transactions contemplated herein; (v) any Person holding your debt or securities who shall have requested to inspect such information in its capacity as a holder of such debt or securities; and (vi) any rating agency or service who rates your debt or claims paying ability or any entity which you regularly report to as a member of any industry of which you are a part. SECTION 7. AFFIRMATIVE COVENANTS. Each KPP Company covenants and agrees that so long as any Note shall be outstanding: 7.1 Maintenance of Office or Agency. Each KPP Company will maintain its chief executive office and principal place of business at the respective addresses set forth on Schedule 11 hereto (or such other place in the United States of America as such KPP Company may designate in writing to the Holders at least twenty Business Days prior to the date it moves such chief executive office and principal place of business) and will keep its books and records regarding the Collateral at the respective addresses set forth on Schedule 11 hereto (or such other place in the United States of America as such KPP Company may designate in writing to the Holders at least twenty Business Days prior to the date it moves such books and records). No KPP Company will, nor will it permit any of its Subsidiaries to, change its name (except to such name as such KPP Company may designate in writing to the Holders at least twenty Business Days prior to the date it changes its name). Each notice given under this Section 7.1 must specifically state that such notice is given pursuant to this Agreement. 7.2 To Keep Books. Each KPP Company will, and will cause its Subsidiaries to, keep proper books of record and account in accordance with GAAP. 7.3 Payment of Taxes; Corporate Existence; Maintenance of Properties. Each KPP Company will, and will cause its Subsidiaries to, (a) pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon it, its income or profits or its property before the same shall become in default, as well as all lawful claims and liabilities of any kind (including claims and liabilities for labor, materials and supplies) which, if unpaid, might by law become a Lien upon its property; provided that none of the KPP Companies and their Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim if (i) the amount, applicability or validity thereof shall currently be contested in good faith by appropriate and lawful proceedings diligently conducted, (ii) such KPP Company or Subsidiary shall have set aside on its books reserves in respect thereof deemed adequate in the reasonable opinion of such KPP Company or such Subsidiary and (iii) any Lien placed upon any property of any KPP Company or any of its Subsidiaries as a result thereof will not impair the operation of such property by the KPP Companies; (b) subject to Sections 8.4 and 8.5, do all things necessary to preserve and keep in full force and effect the corporate or partnership existence, rights (charter and statutory) and franchises of each KPP Company and of each of their Subsidiaries; (c) maintain the general nature of its operations and businesses in the refined petroleum products storage, terminaling and transportation industry; and 12 17 (d) maintain and keep all the properties, except for those facilities which are listed on Schedule 12 hereto, of the KPP Companies and their Subsidiaries which are used or useful in the conduct of their respective businesses in good condition, repair and working order and supplied with all necessary equipment and make all necessary repairs, renewals, replacements, betterments and improvements thereof, all as may be reasonably necessary so that the business carried on in connection therewith may be conducted at all times. 7.4 To Insure. Each KPP Company will, and will cause its Subsidiaries to, (a) keep all of its insurable properties owned by it insured against all risks usually insured against by Persons operating like properties in the localities where the properties are located, all in amounts sufficient to prevent such KPP Company or Subsidiary, as the case may be, from becoming a coinsurer within the terms of the policies in question, but in any event in amounts not less than the amounts set forth on Schedule 13 hereto or if greater, the amounts which would be maintained by a prudent company in the same industry and location; (b) maintain public liability insurance against claims for personal injury, death or property damage suffered by others upon or in or about any premises occupied by it or occurring as a result of its maintenance or operation of any airplanes, automobiles, trucks or other vehicles or other facilities (including any machinery used therein or thereon) or as the result of the use of products sold by it or services rendered by it; (c) maintain such other types of insurance with respect to its business as are usually carried by Persons of comparable size engaged in the same or a similar business and similarly situated, including business interruption insurance; and (d) maintain all such workmen's compensation or similar insurance as may be required under the laws of any State or jurisdiction in which it may be engaged in business. All such insurance shall be maintained in amounts consistent with the practices of prudent Persons of comparable size and established reputation engaged in the same or a similar business and similarly situated and in compliance with any applicable laws; provided, however, such insurance shall at a minimum be in such amounts, against such risks and with such deductible limits as set forth on Schedule 13. All insurance herein provided for shall be effected under a valid and enforceable policy or policies issued by reputable and financially sound insurers. Any insurance policies covering Collateral shall be (i) endorsed to provide for payment of losses to Trustee as its interests may appear, pursuant to a mortgage clause (without contribution) of standard form made part of the applicable policy, (ii) provide that such policies may not be cancelled, reduced or affected in any manner for any reason without fifteen days prior notice to Trustee and (iii) provide for any other matters specified in any applicable Security Document or which Trustee may reasonably require. In the event that any KPP Company or any of its Subsidiaries shall fail to maintain all insurance in accordance with this Section 7.4, any Holder and/or the Trustee shall have the right (but shall be under no obligation) to procure such insurance and the KPP Companies agree to reimburse such Holder or the Trustee, as the case may be, for all costs and expenses of procuring such insurance. 7.5 Compliance with Laws. Each KPP Company and its Subsidiaries will conduct their respective operations, and will obtain all environmental, health and safety permits, licenses and other authorizations necessary for their respective operations and will maintain such authorizations in full force and effect, in compliance in all material respects with applicable federal, state and local laws and regulations, including without limitation the Occupational Safety and Health Act of 1970, as amended, ERISA and all laws and regulations relating to pollution control and environmental contamination, those governing the generation, use, collection, treatment, storage, transportation, recovery, removal, discharge or disposal of Hazardous Materials, and all laws and regulations relating to record keeping, notification and reporting requirements respecting Hazardous Materials. Each KPP Company will, and will cause its Subsidiaries to, keep their respective properties free and clear of any Liens imposed pursuant to CERCLA, RCRA or any other federal, state or local environmental statute or regulation. SECTION 8. NEGATIVE COVENANTS. Each KPP Company covenants and agrees that so long as any Note shall be outstanding: 8.1 Funded Debt. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, create, assume, incur, guarantee or otherwise become or be liable in respect of, or maintain or otherwise allow to exist, any Funded Debt, except for the following: (a) Funded Debt represented by the Notes and the Guaranties; 13 18 (b) Funded Debt of the KPP Companies outstanding on the Closing Date, as set forth in Schedule 7 hereto and amendments or modifications thereof (but excluding any extension in the maturity of or any increase in the principal amount of such Funded Debt and any refunding, refinancing or renewal of such Funded Debt which extends the maturity of or increases the principal amount of such Funded Debt); and (c) other Funded Debt of any of the KPP Companies, provided that at the time of, and immediately after giving effect to, the incurrence (including the incurrence of any extension in the maturity of or any increase in the principal amount of such Funded Debt and any refunding, refinancing or renewal of such Funded Debt which extends the maturity of or increases the principal amount of such Funded Debt) thereof and giving effect to the contemporaneous application of any proceeds thereof to retire other Funded Debt, (i) no Default or Event of Default has occurred and is continuing and (ii) Consolidated Funded Debt shall not equal or exceed 3.15 times Consolidated Cash Flow for a 12 calendar month period ending not more than 3 months prior to the date on which such KPP Company incurs such additional Funded Debt. 8.2 Liens. No KPP Company shall, nor shall permit its Restricted Subsidiaries to: (i) create, assume or otherwise incur or suffer to exist any Lien upon (or, whether by Transfer to any KPP Company or any of its Restricted Subsidiaries or otherwise, subject, or permit any KPP Company or any of its Restricted Subsidiaries to subject, to the prior payment of any obligations, indebtedness or claim other than KPOP's obligation under the Notes) any property or assets (real or personal, tangible or intangible, including any stock or other securities) of any KPP Company or any of its Restricted Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, (ii) own or acquire or agree to acquire any property or assets (real or personal, tangible or intangible, including any stock or other securities) subject to or encumbered by any Lien, or (iii) suffer to exist any obligations, indebtedness or claim of any KPP Company or any of its Restricted Subsidiaries or claims or demands against any KPP Company or any of its Restricted Subsidiaries, which obligations, indebtedness, claims or demands, if unpaid, would (in the hands of the holder thereof or anyone who shall have guaranteed the same or who has any right or obligation to purchase the same), by law or upon bankruptcy or insolvency or otherwise, be given any priority whatsoever over its general creditors; provided that the foregoing restrictions (I) shall not apply to Liens under the Security Documents or Liens arising by rights of offset securing the Bank Debt which are subject to the Intercreditor Agreement and (II) shall not prevent: (a) the KPP Companies or any of their Restricted Subsidiaries from suffering to exist any Liens existing on the Closing Date, as set forth in Schedule 7 hereto, which secure Funded Debt permitted under Section 8.1(b) and renewals, extensions and refundings (but not increases in principal amount) thereof which are permitted under Section 8.1(c), provided that such Liens are not extended to cover additional property; or (b) the KPP Companies or any of their Restricted Subsidiaries from creating, assuming, incurring or suffering to exist any Liens which are incidental to its normal conduct of business or ownership of its properties or assets, provided that such Liens do not secure Debt and do not materially impair the use of such properties or assets in the operation of the KPP Companies' and their Restricted Subsidiaries' businesses; or (c) any KPP Company or any of its Restricted Subsidiaries from creating, assuming or incurring or suffering to exist: (i) Liens for taxes not yet due and payable or the nonpayment of which is permitted by Section 7.3(a), (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 properties, and rights of eminent domain, which Liens, exceptions, encumbrances, easements, reservations, rights and restrictions do not in the aggregate have a material adverse effect on such KPP Company or Restricted Subsidiary or materially impair their use in the operation of their businesses, or (iii) mechanics 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 such KPP Company or Restricted Subsidiary in the operation of its businesses; or (d) any KPP Company or any of its Restricted Subsidiaries from creating, assuming, incurring or suffering to exist Liens in respect of property acquired by such KPP Company or Restricted Subsidiary after the date hereof to secure Debt assumed or incurred to finance all or any part of the purchase price, provided that: (i) each such Lien shall at all times apply solely to the property so acquired and the improvements thereon which are to become fixtures or accessions thereto, (ii) the principal amount of Debt secured by any such Lien in respect of any such property shall at no time exceed the fair market value of such property at the time of acquisition thereof by such KPP Company or Restricted Subsidiary or, if less, the cost of such acquisition, 14 19 (iii) each such Lien shall be either existing at the time of acquisition or created within 120 days thereafter, and (iv) the Debt secured by such Lien is permitted by Section 8.1 at the time such Debt is incurred; or (e) any KPP Company or any of its Restricted Subsidiaries from creating, assuming or incurring or suffering to exist the following Liens if (i) the validity, applicability or amount thereof is being contested in good faith and by appropriate and lawful proceedings diligently conducted, (ii) the KPP Company or its Restricted Subsidiary in question shall have set aside on its books, reserves in respect thereof which are deemed adequate in the reasonable opinion of such KPP Company or such Restricted Subsidiary, (iii) levy and execution thereof continue to be stayed, (iv) any of which Liens covering any Collateral are subordinate to the Liens in favor of the Holders, and (v) such Liens do not in the aggregate materially detract from the value of the property of the KPP Company or its Restricted Subsidiary in question, or materially impair the use of that property in the operation of its business: (A) claims and Liens of mechanics, materialmen, warehousemen (other than those claims and Liens described in Section 8.2(c)(iii)), and (B) adverse judgments or orders on appeal for the payment of money not in excess of the aggregate amount of $25,000,000; or (f) any KPP Company or any of its Restricted Subsidiaries from creating, assuming, incurring or suffering to exist Liens permitted by Section 10.4; or (g) any KPP Company or any of its Restricted Subsidiaries from creating, assuming, incurring or suffering to exist other Liens, on property which is not Collateral, securing Debt permitted by Section 8.1, provided that the aggregate amount of Debt so secured shall at no time exceed ten percent (10%) of Partners' Capital. 8.3 Restricted Payments. No KPP Company shall, nor shall it permit any of its Restricted Subsidiaries to, make any Restricted Payment (or incur any liability to make any Restricted Payment), except (i) KPOP may make Restricted Payments in cash where on the date such Restricted Payment is made and immediately after giving effect thereto no Default or Event of Default has occurred and is continuing, or will occur with the passage of time, and such Restricted Payment does not exceed "KPOP Available Cash" for the fiscal quarter immediately preceding the quarter in which such Restricted Payment is paid, and (ii) the Partnership may make Restricted Payments in cash where on the date such Restricted Payment is made and immediately after giving effect thereto no Default or Event of Default has occurred and is continuing, or will occur with the passage of time, and such Restricted Payment does not exceed "Partnership Available Cash" for the fiscal quarter immediately preceding the quarter in which such Restricted Payment is paid. For purposes of this Section 8.3, the terms "KPOP Available Cash" and "Partnership Available Cash" shall have the meaning set forth on Schedule 14. 8.4 Merger or Consolidation. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, consolidate with or merge into any Person, or permit any Person to merge into it, except that any KPP Company or any of its Restricted Subsidiaries may take any of the following actions: (a) any Restricted Subsidiary may be merged into or consolidated with any KPP Company or any other Wholly Owned Restricted Subsidiary so long as a KPP Company or a Wholly Owned Restricted Subsidiary is the surviving Person; and (b) any KPP Company or any Restricted Subsidiary may merge or consolidate with another corporation, partnership or limited liability company if: (i) both prior to and after taking the effects of the merger or consolidation into account, no Default, or Default with the passage of time that will become an Event of Default, or Event of Default has occurred and is continuing; (ii) following the merger or consolidation the successor formed thereby is a corporation, partnership or limited liability company which (A) is duly organized and existing under the laws of the United States of America or any State thereof, (B) is not "insolvent" (as defined in 11 U.S.C. 101(32)(A) or Section 24.003 of the Texas Business and Commerce Code) and (C) maintains substantially all of its assets in the United States of America; (iii) the due and punctual performance and observance of all the obligations, terms, covenants, agreements and conditions of the Note Agreements, the Notes and the other Note Purchase Documents to 15 20 be performed or observed by such KPP Company shall, by written instrument in form and substance satisfactory to the Requisite Holders and furnished to each Holder, be expressly assumed by such successor (if other than such KPP Company), and such successor (if other than the KPP Company) shall expressly confirm, by written instrument in form and substance satisfactory to the Requisite Holders and furnished to each Holder, that the Notes constitute a senior secured obligation of such successor; (iv) following the merger or consolidation an additional $1 of Funded Debt could be incurred in compliance with Section 8.1(c); and (v) immediately prior to such merger or consolidation, you receive a certificate of Responsible Officers of the KPP Companies certifying that such merger or consolidation complies with all requirements set forth in this Section 8.4, and an opinion of outside counsel in form and substance satisfactory to the Holders, stating that the successor is a corporation, partnership or limited liability company which is duly organized and existing under the laws of the United States of America or any State thereof and will upon consummation of the merger or consolidation succeed to the assets and liabilities of the KPP Company or Restricted Subsidiary that is a party thereto. 8.5 Disposition of Assets. No KPP Company shall, nor shall it permit any of its Subsidiaries to, Transfer any Collateral. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, Transfer any of its other properties and assets (including securities of its Restricted Subsidiaries) at any time except: (a) a Transfer in the ordinary course of business (including any Transfer of obsolete or worn-out assets); or (b) a Transfer pursuant to a transaction in compliance with Section 8.4 or Section 8.7; or (c) a Permitted Transfer. No KPP Company will, nor will permit any of its Restricted Subsidiaries to, issue or sell shares of its capital stock to any Person other than a KPP Company or another Wholly-Owned Restricted Subsidiary of the KPP Companies, other than new issuances of limited partnership units of the Partnership in exchange for cash or property representing fair consideration in the determination of the Board of Directors of KPL. No KPP Company will, nor will permit any of its Subsidiaries to, Transfer any capital stock of a Restricted Subsidiary other than (i) a merger or consolidation which complies with the provisions of Section 8.4, (ii) a contribution of capital stock of a Restricted Subsidiary to a joint venture, provided that following the contribution of such capital stock an additional $1 of Funded Debt could be incurred by the KPP Companies in compliance with Section 8.1(c), or (iii) a Permitted Transfer. 8.6 Investments. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, make or acquire any Restricted Investment. 8.7 Sale and Leaseback. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, sell and lease-back any of its properties or assets; provided, however, that within 180 days following the acquisition of any property or asset, the KPP Companies may sell to and lease-back from another Person such property or asset so long as no Default or Event of Default exists at the time of and after giving effect to such transaction. 8.8 Transactions with Affiliates. No KPP Company shall, nor shall permit any of its Restricted Subsidiaries to, engage in any transaction with an Affiliate on terms less favorable to such KPP Company or Restricted Subsidiary than would have been obtainable in arm's length dealing in the ordinary course of business with a Person not an Affiliate. 8.9 Fiscal Year. No KPP Company shall, nor shall permit any of its Subsidiaries to, change its fiscal year to anything other than the calendar year. 8.10 Subsidiaries. No KPP Company shall have or own any Subsidiary unless such Subsidiary shall either (i) not be a Restricted Subsidiary or (ii) be a Guarantor of the Notes and be a Restricted Subsidiary. No KPP Company may become an Unrestricted Subsidiary. No KPP Company will, or will permit any Restricted Subsidiary to, directly or indirectly, enter into, create, or otherwise allow to exist any contract or other consensual restriction (other than as may exist pursuant to the partnership agreements of the Partnership and KPOP) on the ability of any Restricted Subsidiary of any KPP Company to pay distributions to any KPP Company or any of its Restricted 16 21 Subsidiaries, to redeem equity interests in it held by any KPP Company or any of its Restricted Subsidiaries, to repay loans owing by it to any KPP Company or any of their Restricted Subsidiaries or to transfer any of its assets to any KPP Company or any of its Restricted Subsidiaries. Each KPP Company shall, and shall cause its Restricted Subsidiaries to, provide notice of the Guaranties to any holder of Debt of such KPP Company or such Restricted Subsidiary. 8.11 Restricted Subsidiaries. (a) As used herein the term "Restricted Subsidiary" means any Subsidiary of any KPP Company other than an Unrestricted Subsidiary. The term "Unrestricted Subsidiary" means any Subsidiary of any KPP Company which the KPP Companies have designated as such, provided that the KPP Companies will not designate any Subsidiary as an Unrestricted Subsidiary unless at the time of such designation and immediately after giving effect thereto (i) no Default or Event of Default shall have occurred and be continuing and (ii) an additional $1 of Funded Debt could be incurred in compliance with Section 8.1(c). (b) The KPP Companies may redesignate any Unrestricted Subsidiary as a Restricted Subsidiary so long as at the time of such redesignation and immediately after giving effect thereto (i) no Default or Event of Default shall have occurred and be continuing and (ii) an additional $1 of Funded Debt could be incurred in compliance with Section 8.1(c). To the extent that any Unrestricted Subsidiary becomes a Restricted Subsidiary hereunder, such Subsidiary shall always remain a Restricted Subsidiary. (c) On Schedule 15, the KPP Companies shall designate which Subsidiaries they designate as Unrestricted Subsidiaries as of the Closing Date in accordance with the provisions of this Section. Thereafter, promptly upon any Subsidiary being designated by the KPP Companies as a Restricted Subsidiary or an Unrestricted Subsidiary, the KPP Companies shall deliver to each Holder a certificate of the chief financial officer of the Partnership setting forth the name of the Subsidiary, its jurisdiction of incorporation or formation and a brief description of its business and properties, certifying the status of such Subsidiary as an Unrestricted Subsidiary or a Restricted Subsidiary pursuant to the provisions of this Section. SECTION 9. DEFINITIONS AND ACCOUNTING. For all purposes of this Note Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Affiliate" means any Person (other than the KPP Companies or any of their Restricted Subsidiaries) which, directly or indirectly, controls or is controlled by or is under common control with the KPP Companies or their Subsidiaries or which beneficially owns or holds or has the power to direct the voting of 10% or more of any class of Voting Stock (or in the case of a Person which is not a corporation, 10% or more of its equity interest) of any KPP Company or any of its Subsidiaries or which has 10% or more of its Voting Stock (or in the case of a Person which is not a corporation, 10% or more of its equity interest) beneficially owned or held, directly or indirectly, by any KPP Company or any of its Subsidiaries. For purposes of this definition, "control" means the power to direct the management and policies of a Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" has the meaning specified in Section 1.1(a). "Applicable Premium Amount" shall mean, with respect to any prepayment of principal owing under the Notes pursuant to Section 4.1 or any acceleration of principal owing under the Notes pursuant to Section 11.1 (such prepaid or accelerated principal amount being herein called the "Called Principal"), an amount equal to the greater of (i) zero, and (ii) the excess of the Discounted Value of such Called Principal over the amount of such Called Principal. As used in this definition: "Discounted Value" of any Called Principal means the sum of: (a) the amount obtained by discounting such Called Principal from the scheduled maturity date of such Called Principal to (i) in the case of Called Principal which is prepaid pursuant to Section 4.1, the related Prepayment Date, or (ii) in the case of Called Principal which is accelerated pursuant to Section 11.1, the date of acceleration (either such date being herein called the "Settlement Date" for such Called Principal), plus (b) the amounts obtained by discounting each remaining payment of interest that would be due on such Called Principal from the date on which such payment would be made to the Settlement Date for such Called Principal, with all such discounting being made in accordance with accepted financial practice and at a discount 17 22 factor (applied on a semi-annual basis) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to any Called Principal, one-half of one percent (0.5%) per annum plus the yield to maturity for the actively traded marketable United States Treasury fixed interest rate security with a maturity equal to the scheduled maturity of the Called Principal of the Notes as of the Settlement Date, as set forth on the display designated as "Page 500" on the Telerate Access Service (or such other display as may replace Page 500 on Telerate Access Service or if Telerate Access Service is not available, then any other nationally recognized trading screen reporting on-line intraday trading in United States Treasury fixed interest rate securities) at 11:00 A.M. (New York City time) as of the second Business Day preceding the date such Applicable Premium Amount becomes due and payable. In the event that no such nationally recognized trading screen reporting on-line trading in the United States Treasury fixed interest rate securities is available, "Treasury Rate" shall mean the yield to maturity implied by the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the second Business Day preceding such Settlement Date, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded United States Treasury securities having a constant maturity equal to the period from such Settlement Date to the scheduled maturity date of such Called Principal. Such yield shall be determined, if necessary, by (a) converting United States Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between reported yields. "Bankruptcy Default" has the meaning specified in Section 11.1. "Bank Debt" means indebtedness, which has an original principal amount not in excess of $15,000,000, of KPOP owing to Texas Commerce Bank National Association and Bank of Montreal and their respective successors or assigns, under or pursuant to the Bank Debt Documents. "Bank Debt Documents" means that certain Restated Credit Agreement dated as of December 22, 1994, by and among KPOP, Texas Commerce Bank National Association, as Agent and Lenders which are a party thereto, as such agreement may be amended, restated, supplemented or refinanced from time to time. "Business Day" means any day on which banks are required to be open to carry on their normal business in the States of New York and Texas. "Capitalized Lease" means and includes at any time any lease of property (real, personal or mixed) which in accordance with GAAP would at such time be required to be capitalized on a balance sheet of the lessee. "Capitalized Lease Obligation" means at any time the capitalized amount of the rental commitment under a Capitalized Lease which in accordance with GAAP would at such time be required to be shown on a balance sheet of the lessee. "CERCLA" has the meaning specified below in the definition of "Hazardous Materials". "Claim" means any and all claims, demands, causes of action, suits, proceedings, administrative proceedings, losses, judgments, decrees, debts, damages, liabilities, court costs and attorneys' fees and other expenses incurred, assessed or sustained by or against any KPP Company or any of its Subsidiaries. "Closing Date" has the meaning specified in Section 1.5. "Code" has the meaning specified in Section 2.12(a). "Collateral" means all property of any kind which is subject to a Lien in favor of Holders or which, under the terms of any Security Document, is purported to be subject to such a Lien. "Consolidated" refers to the consolidation of any Person, in accordance with GAAP, with its properly consolidated subsidiaries. References herein to a Person's Consolidated financial statements, financial position, financial condition, liabilities, etc. refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated subsidiaries. "Consolidated Cash Flow" means for the period in question, the sum of (i) Consolidated Net Income for such period, plus (ii) depreciation and amortization, deferred taxes, other non-cash charges and interest expense (including without duplication, interest expense related to Capitalized Leases), for such period that was taken into account in determining such Consolidated Net Income but which did not involve a current expenditure of funds; provided that: 18 23 (a) The determination of Consolidated Cash Flow for a particular 12 month period shall exclude earnings taken into account in determining Consolidated Cash Flow which are attributable to any of the following which have occurred or will have occurred after giving effect to the transaction which necessitates the determination of whether additional Consolidated Funded Debt may be incurred: (i) discontinued operations; (ii) operations represented by properties or assets Transferred or to be Transferred; (iii) a Subsidiary which ceases to be a Consolidated Subsidiary; (iv) minority interests created in a Subsidiary; or (v) the interest in a Subsidiary attributable to capital stock Transferred or to be Transferred. (b) Solely for the purpose of determining whether (i) Funded Debt may be assumed or incurred, pursuant to Section 8.1, to finance all or any part of the purchase price of property or (ii) a KPP Company may merge or consolidate pursuant to Section 8.4, or may assume or incur Funded Debt, pursuant to Section 8.1, in connection with such merger or consolidation, the determination of Consolidated Cash Flow for a particular 12 month period shall include the Consolidated Cash Flow which is attributable solely to the property to be so purchased or the Person with whom the KPP Company is to merge or consolidate for such 12 month period, after elimination of the portions of earnings included in such Consolidated Cash Flow that are or may be attributable to (A) operations to be discontinued, (B) sources of revenues that will not or may not be available 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 aggregate 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 the merger or consolidation occurred at the inception of such 12 month period; provided that Holders shall have received a certificate of the chief financial officer of the Partnership, or its general partner, in form and scope satisfactory to each Holder, reflecting the determination of the earnings so attributable to such property or Person, which certificate must specifically be based upon, reference and attach either (x) audited financial statements that reflect the earnings figures used in such determination and any other source of information used in such certificate or (y) unaudited financial statements that reflect the earnings figures used in such determination which must be prepared in accordance with GAAP (and be accompanied by a certificate of such chief financial officer certifying that they were so prepared), be in form and detail acceptable to Requisite Holders and be otherwise acceptable to Required Holders in their reasonable discretion. "Consolidated Funded Debt" means the aggregate, after eliminating all intercompany items, of all Funded Debt of the Partnership and its Consolidated Subsidiaries, consolidated in accordance with GAAP. Without limiting the foregoing, an obligations that may be Funded Debt of more than one of the KPP Companies and their Subsidiaries shall not be counted more than once in determining Consolidated Funded Debt. "Consolidated Net Income" means, for the period in question, the Consolidated net income of the Partnership and its Consolidated Subsidiaries (after eliminating all intercompany items and portions of earnings properly attributable to minority interests, but without eliminating the portion of earnings attributable to KPL's 1% general partnership interest in KPOP), all as determined in accordance with GAAP excluding (A) any net loss or undistributed net income, as determined in accordance with GAAP, of any Person in which any KPP Company or any of their Consolidated Subsidiaries has an ownership interest, but which is not a Consolidated Subsidiary, (B) the net income or loss of any Consolidated Subsidiary for any time period included in the computation of such net income prior to the date it became a Consolidated Subsidiary (except in the limited circumstances set forth in paragraph (b) of the definition of Consolidated Cash Flow), (C) the gain or loss (net of any tax effect) resulting from the sale of any capital assets other than in the ordinary course of business, and (D) the aggregate amount of unusual or nonrecurring gains or losses (net of any tax effect). "Debt" of any Person on any date means, without duplication, (a) any obligation of such Person for borrowed money or which was incurred for the purchase price of assets or services, (b) any indebtedness or obligation secured by or constituting a Lien existing on property owned by such Person, whether or not such Person is directly liable for such indebtedness or obligation, (c) the face amount of all letters of credit, bankers acceptances or other similar facilities, whether drawn or undrawn, for which such Person is the account party, (d) all Capitalized Lease Obligations of such Person, (e) the net amount payable for settlement of interest rate swaps of such Person as determined in respect thereof as of the end of the most recently ended fiscal quarter of such Person, based on the assumption that such swaps had terminated at the end of such fiscal quarter, and (f) all Guaranty Liabilities by such Person. "Default" means any event which, with notice or lapse of time or both, would constitute an Event of Default. 19 24 "ERISA" has the meaning specified in Section 2.12(a). "ERISA Affiliate" has the meaning specified in Section 2.12(c). "Event of Default" has the meaning specified in Section 11.1. "Funded Debt" of any Person on any date means, without duplication, (a) any obligation of such Person for borrowed money or which was incurred for the purchase price of assets or services, in each case having a final maturity of one or more than one year from the date such obligation was incurred (or which is renewable or extendable at the option of such Person to a maturity beyond one year from the date of incurrence thereof), including all payments in respect thereof that are required to be made within one year from the date of any determination of Funded Debt, whether or not the obligation to make such payments shall constitute a current liability of such Person under GAAP, (b) any indebtedness or obligation secured by or constituting a Lien existing on property owned by such Person, whether or not such Person is directly liable for such indebtedness or obligation, (c) the face amount of all letters of credit, bankers acceptances or other similar facilities, whether drawn or undrawn, for which such Person is the account party and which have a final maturity of one or more than one year from the date such letter of credit was issued, (d) all Capitalized Lease Obligations of such Person, (e) the net amount payable for settlement of interest rate swaps of such Person as determined in respect thereof as of the end of the most recently ended fiscal quarter of such Person, based on the assumption that such swaps had terminated at the end of such fiscal quarter, and (f) all Guaranty Liabilities by such Person in respect of Funded Debt of another Person. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor). "Guaranties" means, collectively, the guaranties of even date herewith given by each of STI, the Partnership, STS, STOP, STH and STPP for the benefit of the Holders, as from time to time amended, modified or restated, and all other guaranties hereafter delivered to Holders in connection with the transactions contemplated herein. "Guaranty Liabilities" of any Person on any date means, without duplication, (a) any guarantee or endorsement by such Person of obligations of another (other than endorsements for purposes of collection in the ordinary course of business), (b) any obligation of such Person to purchase goods, services, notes or securities for the purpose of supplying funds for the purchase, payment or satisfaction of, or measured by, obligations of another, (c) any other contingent obligation of such Person in respect of, or to purchase or otherwise acquire or service, obligations of another, (d) any obligation of such Person, whether or not contingent, in respect of the obligations of a general or limited partnership of which such Person is a general partner, unless the holder of such obligation has agreed to waive all recourse to such Person for such obligation, and (e) every obligation of such Person for obligations of another which such Person has in effect guaranteed by an agreement, contingent or otherwise, to make a loan, advance or capital contribution to or other investment in such debtor for the purpose of assuring or maintaining a minimum equity, asset base, working capital or other balance sheet condition for such debtor on any date, or to provide funds for the payment of any liability, dividend or stock liquidation payment of or by such debtor, or otherwise to supply funds to or in any manner invest in such debtor for such purpose. "Hazardous Materials" means materials defined as "hazardous substances", "hazardous wastes", "hazardous constituents" or "solid wastes" in (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section Section 9601 et seq. and any amendments thereto and regulations thereunder ("CERCLA"), (b) the Resource Conservation and Recovery Act, 42 U.S.C. Section Section 6901 et seq. and any amendments thereto and regulations thereunder ("RCRA") and (c) any other federal, state or local environmental statute or regulation. "Holder" means a Person to whom any Note is originally issued and any subsequent holder of a Note shown in the register of KPOP to hold such Note. "Intercreditor Agreement" means that certain Collateral Trust and Intercreditor Agreement dated as of December 22, 1994 by and among Texas Commerce Bank National Association, Bank of Montreal, each Holder listed on Schedule 1, Schedule 2, Schedule 3 and Schedule 4, each holder of the 1994 Notes and Texas Commerce Bank National Association, as Trustee as such agreement may be amended, restated or supplemented from time to time. "Interim Debt" means the Debt of KPOP under the Bridge Financing Agreement dated December 18, 1995, 20 25 as heretofore amended and modified, among KPOP, Texas Commerce Bank National Association, as Agent, and the lenders parties thereto; the funds advanced thereunder have been used by KPOP to acquire the assets of Steuart Petroleum Company. "KPL" means Kaneb Pipe Line Company, a Delaware corporation. "KPOP" means Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership. "KPP Companies" means, collectively, KPOP, STI, the Partnership, STS, STOP, STH and STPP and, subject to Section 8.4, their successors and assigns. "Lien" means, with respect to any property or assets, any right or interest therein of a creditor to secure obligations, indebtedness or claims owed to him or any other arrangement with such creditor which provides for the payment of such obligation, indebtedness or claim out of such property or assets or which allows him to have such obligation, indebtedness or claim satisfied out of such property or assets prior to the general creditors of any owner thereof, including 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 thereto, tax lien, mechanic's or materialman's lien, any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise. "Lien" also means 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 described in the preceding sentence, regardless of whether such financing statement is filed, such registration is made, or such arrangement or action is undertaken before or after such Lien exists. "Margin Stock" has the meaning specified in Section 2.11. "Mortgage" means that certain First Amended and Restated Mortgage and Security Agreement dated as of December 22, 1994, executed by KPOP and KPL, as amended by that certain Modification of First Amended and Restated Mortgage and Security Agreement dated as of December 18, 1995, and that certain Second Modification of First Amended and Restated Mortgage and Security Agreement dated of even date herewith. "1994 Notes" means those certain Series A Notes issued by KPOP and those certain Series B Notes issued by STI pursuant to those certain Note Purchase Agreements dated as of December 22, 1994, among KPOP, STI, the Partnership, STS, and STOP and the parties named therein as purchasers. "Note Agreements" has the meaning specified in Section 1.1(a). "Note Purchase Documents" means this Agreement, the other Note Agreements, the Notes, the Security Documents, the Intercreditor Agreement, and all other agreements, certificates, documents, instruments and writings at any time delivered in connection herewith or therewith. "Notes" has the meaning specified in Section 1.4(a). "Partners' Capital" means, at the time in question, the partners' capital of the Partnership, as consolidated with its Subsidiaries, as determined in accordance with GAAP, including without limitation, the elimination of minority interests. "Partnership" means Kaneb Pipe Line Partners, L.P., a Delaware limited partnership. "PBGC" has the meaning specified in Section 2.12(c). "Permitted Investment" means any investment by any KPP Company or any of their Restricted Subsidiaries in any other Person, whether by acquisition of stock or Debt, by loan, advance, guarantee, or transfer of property out of the ordinary course of business, by capital contribution, by extension of credit or otherwise by any KPP Company or any of their Restricted Subsidiaries in any of the following: (a) any marketable obligation maturing not later than one year after the date of acquisition thereof, issued or guaranteed by the United States of America or by any agency of the United States of America which has the full faith and credit of the United States of America; (b) commercial paper which is rated "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investor Service, Inc., and maturing not later than one year after the date of acquisition thereof, 21 26 issued by any corporation organized under the laws of the United States or any state thereof and which has capital, surplus and undivided profits of at least $100,000,000; (c) any demand deposit or time deposit (including certificates of deposit and money market or sweep accounts) with a commercial bank or trust company organized under the laws of the United States or any state thereof and having capital, surplus and undivided profits of at least $100,000,000 whose senior debt securities are rated "A" or higher by Standard & Poor's Corporation or "A-2" or higher by Moody's Investor Service, Inc., provided that such deposit must either be payable on demand or mature not later than twelve months from the date of investment therein; (d) any demand deposit with a commercial bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $100,000,000 maintained for use in the ordinary course of business; (e) any tax-exempt security which is rated "A" or higher by Standard & Poor's Corporation or "A-2" or higher by Moody's Investor Services, Inc., maturing not later than one year from the date of acquisition thereof and which is issued by any institution having capital, surplus and undivided profits of at least $100,000,000; (f) any advance to directors, officers or employees of any KPP Company in the ordinary course of business which has been approved by such KPP Company, provided that the aggregate amount of all such advances outstanding at any one time may not exceed $1,000,000; (g) all accounts receivables on normal trade terms which arise from the sale of goods or services in the ordinary course of business; (h) intercompany advances, loans or extensions of credit by any KPP Company or any of their Wholly Owned Restricted Subsidiaries to any other KPP Company or any of their Wholly Owned Restricted Subsidiaries provided that such intercompany advances, loans or extensions of credit shall be subordinated to the Notes and the Guaranties upon terms satisfactory to the Holders; (i) investments, other than pursuant to the preceding clause (h) (by transfer of property, capital contribution or otherwise) in the Partnership, KPOP, STS, STI, STOP, STH or STPP or any other Person provided that such Person is or shall immediately therewith become a Guarantor and a Wholly Owned Restricted Subsidiary of the KPP Companies; and (j) any other investment so long as the aggregate book value of such investments does not at any time exceed ten percent (10%) of the Partners' Capital as of the end of the fiscal year immediately preceding the date in question. "Permitted Transfer" means a Transfer of property or assets or a Transfer of capital stock or partnership units of a Subsidiary of any KPP Company (other than a Subsidiary that is one of the KPP Companies other than STOP) if: (a) at the time of such Transfer, and immediately after giving effect thereto: (i) such Transfer is for fair market value and in the best interests of the Person making such Transfer, (ii) no Default or Event of Default has occurred and is continuing or would exist after giving effect thereto, or (iii) all such Transfers which are to be treated as "Permitted Transfers" under this subsection (a) in any fiscal year shall consist of properties or assets or of capital stock of a Subsidiary which do not in the aggregate have a book value (determined with regard to each such property or asset or such capital stock at the time the same is Transferred) of more than ten percent (10%) of the Partners' Capital as of the end of the immediately preceding fiscal year; or (b) any other Transfer for cash provided that within one year from the date of such Transfer, the KPP Companies or their Subsidiaries use the full amount of the proceeds received therefrom, net of all expenses of the KPP Companies or their Subsidiaries incurred in connection with such Transfer, either (or in combination): 22 27 (i) to acquire property or assets used in the storage, terminaling, pipeline and transportation business, or (ii) to pay Funded Debt of the KPP Companies. (c) the Transfer is to any other KPP Company or any of their Wholly Owned Restricted Subsidiaries. "Person" means an individual, a corporation, a partnership, a trust, a joint venture, an unincorporated organization or a government or any agency or political subdivision thereof. "Plan" has the meaning specified in Section 2.12(c). "Prepayment Date" has the meaning specified in Section 4.1. "Prime Rate" means, on any day, the rate quoted by J. P. Morgan Company as its prime rate, base rate or similar reference for such day; or, if such rate is no longer quoted by J. P. Morgan Company, such other similar reference rate for such day readily available as selected by the Requisite Holders to be the Prime Rate. "Private Placement Memorandum" has the meaning specified in Section 2.2. "RCRA" has the meaning specified in the above definition of "Hazardous Materials". "Reportable Event" has the meaning specified in Section 2.12(c). "Requisite Holders" means the Holder or Holders of not less than 51% in aggregate principal amount of all Notes at the time outstanding, exclusive of any Notes held by the KPP Companies, any of their Subsidiaries or any Affiliate of such Persons. "Responsible Officer" means any of the following officers, agents or employees of any KPP Company, or in the case of a partnership, of the Managing General Partner of such KPP Company: the Chairman, the President, the Chief Executive Officer, the Chief Operating Officer and, and the Chief Financial Officer (and any Person who performs one of the same functions under a different title). "Restricted Investment" means any investment by any KPP Company or any of their Restricted Subsidiaries in any other Person, whether by acquisition of stock or Debt, by loan, advance, guarantee, or transfer of property out of the ordinary course of business, by capital contribution, by extension of credit or otherwise; provided that the term "Restricted Investment" shall not include any Permitted Investment. "Restricted Payment" means (a) any dividend on, or other distribution in respect of, shares of class of capital stock of, or partnership or other interest in any KPP Company or any of their Subsidiaries (other than a dividend or other distribution payable solely in capital stock of such company or a dividend or other distribution payable solely to KPOP or to one of its Wholly-Owned Restricted Subsidiaries), (b) any payment on account of the purchase, redemption or other retirement of any such shares of capital stock or partnership interest, or of any warrant, option or other right to acquire shares of capital stock or partnership interest in, KPL, Kaneb Services, Inc., any KPP Company or any of their Subsidiaries, or (c) any other distribution made to a holder of any such shares of capital stock or partnership interest, either directly or indirectly (other than a distribution payable solely in capital stock of any KPP Company), including any forgiveness of debt owed by such shareholder or partner to KPL, any KPP Company or any of their Subsidiaries. "Restricted Subsidiary" has the meaning given it in Section 8.11. "Rule 144A" means Rule 144A promulgated by the SEC, as amended from time to time. "SEC" means the Securities and Exchange Commission, or any governmental agency or agencies substituted therefor. "Security Documents" means the Guaranties, all other instruments listed in the Security Schedule and all other security agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing statements, 23 28 continuation statements, extension agreements and other agreements or instruments now, heretofore, or hereafter delivered by any Person to Holders or the Trustee in connection with this Note Agreement or any transaction contemplated hereby to secure or guarantee the payment of any part of the Note or the performance of the KPP Companies' or any other Person's other duties and obligations under the Note Purchase Documents. "Security Schedule" means Schedule 5 hereto. "Series C Contract Rate" has the meaning specified in Section 1.1(b). "Series C Final Maturity Date" has the meaning specified in Section 1.1(a). "Series C Overdue Rate" has the meaning specified in Section 1.1(b). "Series D Contract Rate" has the meaning specified in Section 1.2(b). "Series D Final Maturity Date" has the meaning specified in Section 1.2(a). "Series D Overdue Rate" has the meaning specified in Section 1.2(b). "Series E Contract Rate" has the meaning specified in Section 1.3(b). "Series E Final Maturity Date" has the meaning specified in Section 1.3(a). "Series E Overdue Rate" has the meaning specified in Section 1.3(b). "Series F Contract Rate" has the meaning specified in Section 1.4(b). "Series F Final Maturity Date" has the meaning specified in Section 1.4(a). "Series F Overdue Rate" has the meaning specified in Section 1.4(b). "STH" means StanTrans Holdings, Inc., a Delaware corporation. "STI" means StanTrans, Inc., a Delaware corporation. "STOP" means Support Terminals Operating Partnership, L.P., a Delaware limited partnership. "STPP" means StanTrans Partners, L.P., a Delaware limited partnership. "STS" means Support Terminal Services, Inc., a Delaware corporation. "Subsidiary" means, with respect to any KPP Company, any corporation, association or other business entity in which such KPP Company or one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such KPP Company or one or more of its Subsidiaries or such KPP Company and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such KPP Company or one or more of its Subsidiaries). "Transfer" means to sell, lease, transfer or otherwise dispose. "Trustee" means the Trustee appointed and acting pursuant to the Intercreditor Agreement. "Unrestricted Subsidiary" has the meaning given it in Section 8.11. "Voting Stock" of a Person means the issued and outstanding capital stock or equity interest of such Person with the power to elect, appoint or cause the election or appointment of the members of its board of directors or other similar governing body. "Wholly Owned Restricted Subsidiary" means, at any time, any Restricted Subsidiary one hundred percent (100%) of all the equity interests, voting interests and Debt of which are owned by any one or more of the KPP 24 29 Companies and their other Wholly Owned Restricted Subsidiaries at such time. SECTION 10. SECURITY. 10.1 The Security. The Notes will be secured by the Security Documents listed in the Security Schedule and any additional Security Documents hereafter delivered by any Person and accepted by Requisite Holders. 10.2 Agreement to Deliver Security Documents. Each KPP Company agrees to deliver and to cause its Subsidiaries to deliver, to further secure the Notes whenever requested by Requisite Holders in their sole and absolute discretion, deeds of trust, mortgages, chattel mortgages, security agreements, financing statements and other Security Documents in form and substance satisfactory to Requisite Holders for the purpose of granting, confirming, and perfecting first and prior liens in the Collateral. Each KPP Company also agrees to deliver and to cause its Subsidiaries to deliver, whenever Requisite Holders determine in their sole and absolute discretion, reasonably exercised, that any of the matters described below is in question, favorable opinions from legal counsel acceptable to the Requisite Holders as to such matter (a) confirming that such properties and interests are subject to Security Documents securing the Notes that constitute and create legal, valid and duly perfected first deed of trust liens, or mortgage liens or security interests in such properties and interests and the proceeds thereof, (b) stating that such properties and interests are free and clear of all Liens except those in favor of Trustee and that such Person has good and defensible title thereto, and (c) covering such other matters as Requisite Holders may request. 10.3 Perfection and Protection of Security Interests and Liens. The KPP Companies will from time to time deliver to the Trustee financing statements, continuation statements, extension agreements and other documents, properly completed and executed (and acknowledged when required) by the KPP Companies or any of their Subsidiaries in form and substance satisfactory to the Requisite Holders. 10.4 Additional Secured Debt. (a) Funded Debt for money borrowed by KPOP with respect to which all of the following are true is herein called "Qualifying Debt": (i) such Debt is permitted to be incurred by Section 8.1(c) at the time such Debt is incurred, (ii) such Debt is permitted to be incurred pursuant to the terms of each document or instrument governing other Debt of any of the KPP Companies or any of their Subsidiaries (or a written consent given thereunder), (iii) such Debt is permitted to be secured on a pari passu basis with all other Debt which is secured by the Collateral pursuant to the terms of each document or instrument governing such Debt that is secured by the Collateral (or a written consent given thereunder), (iv) the initial holders of such Debt are Financial Institutions, (v) such Debt is not guarantied in any manner by any Person and is not secured by any Lien unless any such guaranty or Lien shall concurrently benefit and secure all Notes on a pari passu basis, (vi) any consent or approval of any governmental or public body or authority which is required for the incurrence of such Debt has been obtained, and (vii) KPOP has given an officer's certificate addressed to each Holder of KPOP's intent to secure such Debt with the Collateral, which certificate shall have been given not less than 30 days prior to the incurrence of such Debt and shall contain representations, warranties and covenants (in form and substance approved by the Trustee) that such Debt complies with each of the provisions of this Section 10.4. To the extent that the principal amount of the Notes exceeds $68,000,000, the principal amount of the 1994 Notes exceeds $60,000,000 or the amount of loans, letters of credit or commitments to make loans or issue letters of credit under the Bank Debt Documents exceeds $15,000,000 (exclusive of the amount of premium, interest, expenses, fees, indemnifications and similar amounts that may be incurred in respect of such amount), such excess principal amount or excess loans, letters of credit or commitments shall not be treated as Funded Obligations under the Intercreditor Agreement unless the same shall be Qualifying Debt. As used in this Section 10.4, "Financial Institution" shall mean a commercial bank chartered under, or duly authorized to operated a branch in the United States under, the law of the United States or any state thereof, or an insurance company or commercial finance company organized under the laws of any State of the United States, in each case with capital and surplus in excess of $100,000,000 at the time it shall become a creditor hereunder, or a separate account administered by such an insurance company. (b) The Trustee shall be authorized to execute amendments or supplements to the Security Documents reasonably acceptable to the Trustee and the KPP Companies to provide for the securing of Qualifying Debt on a pari passu basis with the Notes, subject to and on the conditions that (i) the KPP Companies and the holder of the Qualifying Debt shall have complied with such conditions as the Trustee may reasonable require to assure that such Debt is Qualifying Debt on the date so secured and (ii) the holders of such Qualifying Debt shall have executed a written agreement agreeing to be bound by all of the terms and conditions of the Intercreditor Agreement in the form attached thereto as Exhibit B. Notwithstanding anything to the contrary contained in this Agreement, any Note Purchase Document, Bank Debt Document or the 1994 Notes or any document executed in connection therewith, the Intercreditor Agreement shall at all times provide that, to the extent (i) the Liens upon the Collateral securing any such Qualifying Debt are or become subject or subordinate to any claims or Liens of any other Person 25 30 to which the Notes are not similarly subject or subordinate or (ii) the Qualifying Debt, or the Liens upon the Collateral securing the Qualifying Debt, shall become subject or subordinate to claims of any other Person or defenses of any of the KPP Companies or any other Person (including without limitation avoidability by a trustee in any bankruptcy or insolvency proceeding) to which any of the Notes are not subject (each an "Intervening Claim"), any amount which must be applied against such Intervening Claim shall be deducted from the amount allocable to such Qualifying Debt by the Trustee or any Holder pursuant to the provisions of the Intercreditor Agreement. SECTION 11. DEFAULTS AND REMEDIES. 11.1 Events of Default. If one or more of the following events (each an "Event of Default") shall occur for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of principal of any Note when and as the same shall become due and payable, or default in the payment of the Applicable Premium Amount of any Note when and as the same shall become due and payable; or (b) default in the payment of any interest upon any Note when such interest becomes due and payable and continuance of such default for a period of 5 Business Days; or (c) default in the performance or observance of any covenant, agreement or condition contained in Section 8 hereof which shall not have been remedied, waived or cured by the 30th day after the occurrence of such default; or (d) default in the performance or observance of any covenant, agreement or condition contained in the Notes, in the Note Agreements or in any other Note Purchase Document (other than specified in subsections (a), (b) or (c) above) which shall not have been remedied, waived or cured by the 30th day after the earlier of the date on which (i) any KPP Company receives notice of such default from a Holder or (ii) a Responsible Officer otherwise obtains knowledge of such default; or (e) (i) any default occurs in the payment when due of any principal, premium or interest on the Bank Debt, the 1994 Notes or any "Qualifying Debt" secured by Liens on the Collateral and any applicable grace period thereof has expired, or (ii) any other default or event of default occurs in respect of the Bank Debt or any such Qualifying Debt or under any agreement relating to such obligation or indebtedness, and any such default or event of default has not been cured or permanently waived prior to the expiration of any applicable grace period, or (iii) any default occurs in the payment when due of any principal, premium or interest on any Debt of any KPP Company or any of their Subsidiaries (other than the Notes and the Bank Debt or such Qualifying Debt) which Debt exceeds $5,000,000 in the aggregate and any applicable grace period thereof has expired, or (iv) any other default or event of default occurs in respect of such Debt described in (e)(iii) or under any agreement relating to such obligation or indebtedness, and any such default or event of default has not been cured or permanently waived prior to the expiration of any applicable grace period; or (f) any KPP Company or any of their Subsidiaries shall file a petition seeking relief for itself under Title 11 of the United States Code, as now constituted or hereafter amended, or an answer consenting to, admitting the material allegations of or otherwise not controverting, or shall fail to timely controvert, a petition filed against such KPP Company or Subsidiary seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended; or any KPP Company or any of their Subsidiaries shall file such a petition or answer with respect to relief under the provisions of any other now existing or future bankruptcy, insolvency or other similar law of the United States of America or any State thereof or of any other country or jurisdiction providing for the reorganization, winding-up or liquidation of corporations or an arrangement, composition, extension or adjustment with creditors; or (g) a court of competent jurisdiction shall enter an order for relief which is not stayed within 90 days from the date of entry thereof against any KPP Company or any of their Subsidiaries under Title 11 of the United States Code, as now constituted or hereafter amended; or there shall be entered an order, judgment or decree by operation of law or by a court having jurisdiction in the premises which is not stayed within 90 days from the date of entry thereof adjudging any KPP Company or any of their Subsidiaries as bankrupt or insolvent, or ordering relief against any KPP Company or any of their Subsidiaries, or approving as properly filed a petition seeking relief against any KPP Company or any of their Subsidiaries, under the provisions of any other now existing or future bankruptcy, insolvency or other similar law of the United States of America or any State thereof or of any other 26 31 country or jurisdiction providing for the reorganization, winding-up or liquidation of corporations or an arrangement, composition, extension or adjustment with creditors, or appointing a receiver, liquidator, assignee, sequestrator, trustee, custodian or similar official of any KPP Company or any of their Subsidiaries or of any part of the Collateral or a substantial part of any of its other property, or ordering the reorganization, winding-up or liquidation of its affairs; or any involuntary petition against any KPP Company or any of their Subsidiaries seeking any of the relief specified in this clause shall not be dismissed within 90 days of its filing; or (h) any KPP Company or any of their Subsidiaries shall make a general assignment for the benefit of its creditors; or any KPP Company or any of their Subsidiaries shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, sequestrator, trustee, custodian or similar official of such KPP Company or Subsidiary or of any part of the Collateral or any substantial part of its other property; or any KPP Company or any of their Subsidiaries shall have admitted to its insolvency or inability to pay, or shall have failed to pay, its debts generally as such debts become due; or any KPP Company or any of their Subsidiaries or their directors or majority stockholders shall take any action looking to the dissolution or liquidation of such KPP Company or Subsidiary (other than as contemplated by Section 8.4 or Section 8.5); or (i) there shall remain in force, undischarged, unsatisfied, unbonded and unstayed, for more than 30 consecutive days final judgments, decrees or orders for the payment of money in excess of an aggregate amount of $25,000,000 against any KPP Company or any of their Subsidiaries; or (j) (i) any KPP Company or any ERISA Affiliate shall incur any liability in excess of $5,000,000 to a Plan or to the Internal Revenue Service or the Pension Guaranty Benefit Corporation with respect to a Plan or (ii) a statutory Lien shall be placed on the property of any KPP Company or any ERISA Affiliate pursuant to ERISA which secures obligations in excess of $5,000,000; or (k) any representation or warranty by or on behalf of the KPP Companies in the Note Agreements, the Notes, any other Note Purchase Document or in any certificate or instrument furnished in connection therewith proves to have been false or misleading in any material respect as of the date given or made; then (i) upon the occurrence of any Event of Default described in subsections (f), (g) or (h) of this section with respect to any KPP Company (each a "Bankruptcy Default"), all of the Notes shall automatically become immediately due and payable; (ii) upon the occurrence with respect to any Note of any Event of Default described in subsection (a) or (b), the Holder of any Note may at any time during its continuance, by written notice to the KPP Companies, declare its Note to be due and payable, whereupon such Note shall forthwith mature and become due and payable; or (iii) upon the occurrence of any other Event of Default, the Requisite Holders may at any time during its continuance, by written notice to the KPP Companies, declare all of the Notes to be due and payable, whereupon in each case all of the Notes shall forthwith mature and become due and payable. The amount payable upon the occurrence of a Bankruptcy Default shall be, to the extent permitted by law, the entire unpaid principal amount of the Notes, together with interest accrued thereon, and such amount shall be payable without presentment, demand, protest or other requirement of any kind, all of which are expressly waived by the KPP Companies and their Subsidiaries. The amount payable upon an acceleration based on any other Event of Default shall be, to the extent permitted by law, the entire unpaid principal amount of the Notes so accelerated, the interest accrued thereon to the date of acceleration, and the Applicable Premium Amount, and such amount shall be payable without presentment, demand, protest or further notice, all of which are expressly waived by the KPP Companies. One Business Day prior to giving notice declaring all of the Notes to be due and payable pursuant to Section 11.1(iii), the Computing Holder (as defined below) shall give written notice to all other Holders of the amount of the Applicable Premium Amount of the Notes to be so accelerated, which notice shall set forth in reasonable detail the computation thereof. Each Holder shall notify the Computing Holder within one Business Day of receipt of the notice from the Computing Holder whether or not it accepts such calculation of the Applicable Premium Amount. Failure of any Holder to give such notice within such time period shall be deemed to constitute acceptance of the Computing Holder's calculation. If less than the Requisite Holders agree with the Computing Holder's calculation of the Applicable Premium Amount, the Requisite Holders may calculate the Applicable Premium Amount due on the Notes so accelerated, which calculation shall be binding absent manifest error. On any date on which written notice is given to the KPP Companies declaring all of the Notes to be due and payable pursuant to Section 11.1(iii), the Computing Holder shall give written notice to the KPP Companies and to all the other Holders of the amount of the Applicable Premium Amount due on the Notes so accelerated, which notice shall set forth in reasonable detail the computation thereof. For purposes of this paragraph, the "Computing Holder" shall be the Holder owning, as of the second Business Day prior to the date of any notice being given pursuant to the 27 32 immediately preceding sentence, an aggregate principal amount of Notes greater than any other Holders to be prepaid. For purposes of determining the Computing Holder, holdings of all affiliated companies shall be aggregated. Within five Business Days after Requisite Holders receive notice that any other Holder has given written notice to the KPP Companies declaring its Note to be due and payable pursuant to Section 11.1(ii), the Holder of such Note shall give written notice to the KPP Companies of the amount of the Applicable Premium Amount due on the Note so accelerated, which notice shall set forth in reasonable detail the computation thereof, and the KPP Companies shall provide written notice of such Applicable Premium Amount to the other Holders. The Applicable Premium Amount set forth in any such notice shall be binding on the KPP Companies and the Holders absent manifest error. If, at any time after any or all of the Notes shall have been declared due and payable pursuant to this Section 11.1 and before any judgment or decree for the payment of monies due shall have been obtained or entered, the KPP Companies shall pay in full the principal, interest and Applicable Premium Amount which shall have become due and payable in respect of the Notes otherwise than by such declaration, with interest upon all such overdue principal and the Applicable Premium Amount and (to the extent that payment of such interest is enforceable under applicable law) upon overdue interest at the Series C Overdue Rate, the Series D Overdue Rate, the Series E Overdue Rate, and the Series F Overdue Rate, as applicable, to the date of such payment, and an additional amount sufficient to reimburse the Holders for their costs and expenses incurred in connection with any such declaration, and the KPP Companies shall remedy every other Event of Default, then the Requisite Holders, by written notice to the KPP Companies, may (but shall have no obligation to) rescind and annul such declaration and its consequences; but no such rescission or annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. 11.2 Suits for Enforcement. Subject to the exercise by Trustee of its powers under the Security Documents, in case any one or more of the Events of Default specified in Section 11.1 shall occur and be continuing, the Holder of each Note may proceed to protect and enforce its rights by suit in equity, action at law or by other appropriate proceeding, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in such Note or the Note Agreements or any other Note Purchase Document or in aid of the exercise of any power granted therein, or may proceed to enforce the payment of such Note or to enforce any other legal or equitable right of such Holder. If any Holder of a Note shall demand payment thereof or take any action in respect of a Default or an Event of Default, the KPP Companies will forthwith give written notice to the other Holders of Notes, specifying such action and the nature of the Default or Event of Default. The notice to each Holder shall also set forth the respective names and addresses of, and principal amounts of the Notes held by, the other Holders. In case of a Default or Event of Default, the KPP Companies will pay to each Holder such further amount as shall be sufficient to cover such Holder's costs and expenses of collection and enforcement, including attorneys' fees, to the extent provided in Section 13.2. 11.3 Remedies Cumulative. No remedy herein conferred upon any Holder is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 11.4 Remedies Not Waived. No course of dealing or unwritten agreement or practice between the KPP Companies and any Holder shall operate as a waiver of any right of any Holder and no delay on the part of any Holder in exercising any right shall so operate. 11.5 Indemnity. Each KPP Company and their Subsidiaries, jointly and severally, agrees to indemnify and reimburse each Holder, upon demand, against and for any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (including reasonable fees of attorneys, accountants, experts and advisors) of any kind or nature whatsoever (in this section collectively called "liabilities and costs") which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against such Holder growing out of, resulting from, or in any other way associated with the Note Agreements, the Notes, the other Note Purchase Documents or the transactions and events (including the enforcement or defense thereof) at any time associated herewith or therewith or contemplated herein or therein. THE FOREGOING INDEMNIFICATION AND REIMBURSEMENT OBLIGATIONS OF THE KPP COMPANIES SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY 28 33 KIND BY SUCH HOLDER, PROVIDED THAT: (a) Except as provided in the following subsection (b), no Holder shall be entitled under this section to receive indemnification for (i) that portion of any final judgment for liabilities and costs which portion, determined in accordance with principles of comparative fault, is based upon a finding that such Holder has been grossly negligent or has engaged in willful misconduct, or (ii) the liabilities and costs representing that portion of any out-of-court settlement by a Holder which has been allocated by the parties to such settlement to a claim that such Holder has been grossly negligent or has engaged in willful misconduct. (b) Each Holder shall be entitled under this section to receive indemnification and reimbursement for any liabilities and costs arising from a final judgment in favor of an Outside Party to the effect that such Holder is somehow legally responsible (due to a theory of imputed negligence or otherwise) for the negligence or other acts or omissions of any KPP Company or any of their Affiliates. (c) Each KPP Company shall (upon demand as the same are incurred) indemnify and reimburse each Holder for all costs, expenses, and disbursements of any kind or nature whatsoever (including reasonable fees of attorneys, accountants, experts and advisors) which are incurred by such Holder in defending against any claim or allegation that such Holder has been grossly negligent or has engaged in willful misconduct. Each Holder agrees to reimburse the KPP Companies for amounts paid to such Holder under this Section 11.5(c) upon the determination in a final judgment that such Holder has been grossly negligent or has engaged in willful misconduct. (d) No Holder shall, without the consent of the KPP Companies, which consent shall not be unreasonably withheld, enter into any out-of-court settlement of any claim for liabilities and costs if the KPP Companies would be obligated under this section to indemnify such Holder for amounts paid by such Holder under such settlement. The KPP Companies will, however, consent to any settlement proposed by such Holder which is reasonable in light of the then existing circumstances. As used in this section: the term "Holder" shall refer not only to each Person who is the Holder of any Note at the time in question but also to any former Holder of such Note (or of any predecessor Note) and to each director, officer, agent, attorney, employee, representative and affiliate of such present or former Holder, and the term "Outside Party" shall refer, with respect to any Holder, to any Person other than such Holder, its owners, and the insurance or other regulatory authorities which exercise jurisdiction over its ability to purchase promissory notes and engage in transactions of the kind contemplated herein. SECTION 12. CONSENTS, WAIVERS AND AMENDMENTS. Any term, covenant, agreement or condition of the Notes or the Note Agreements or any other Note Purchase Document may, with the consent of the KPP Companies, be amended or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), but any such amendment or waiver must be made in writing by one or more instruments signed by the Requisite Holders; provided that: (a) no such amendment or waiver shall, without the consent of all Holders, (1) change the maturity of the principal of, or any installment of interest on, any of the Notes, or reduce the principal amount thereof or the interest thereon, or subordinate or otherwise modify the terms of payment of the principal thereof or interest or premium thereon including any extension of the time for, or change in the application or priority of, any such payment, or (2) give to any Note any preference over any other Note, or (3) reduce the percentage of the principal amount of Notes the Holders of which are required to approve any such amendment or effectuate any such waiver, or (4) except as provided in Section 10.4, amend any Guaranty or amend any other Security Document where the effect of such amendment releases any Collateral or adversely affects the perfection or priority of any Lien on the Collateral, or (5) amend or waive any of the provisions of this Section 12, (6) amend any of the provisions of the Intercreditor Agreement, and 29 34 (b) no such waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon. The KPP Companies will not, directly or indirectly, solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement, the Notes or other Note Purchase Documents unless each Holder (irrespective of the amount of Notes then owned by it) shall concurrently be informed thereof by the KPP Companies and shall be afforded the opportunity of considering the same and shall be supplied by the KPP Companies with sufficient information, including but not limited to the making of updated representations and warranties comparable in scope to those set forth in Section 2, to enable it to make an informed decision with respect thereto. The KPP Companies will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Holder as consideration for or as an inducement to the entering into by any Holder of any waiver or amendment of any of the terms and provisions of this Agreement or other Note Purchase Documents unless such remuneration is concurrently paid, on the same terms (except for differences in interest rate and maturity), ratably to each Holder of then outstanding Notes. The KPP Companies will not in connection with any solicitation, request or negotiation of any waiver or amendment, directly or indirectly, prepay or offer to prepay (and shall represent that they do not contemplate prepaying within the next twelve months) any series that would not be prepaid ratably with the Notes of the other series, and any prepayment made by the KPP Companies during the twelve months immediately following such waiver or amendment, must be pro rata among the Series C Notes, the Series D Notes, the Series E Notes and the Series F Notes, except for such difference in the offer price between Series C Notes, Series D Notes, the Series E Notes and the Series F Notes which reflects only the differences in the interest rates thereon and payment dates or maturity date thereof and is reasonably determined. Subject to the last sentence of this paragraph, any amendment or waiver pursuant to this Section 12 shall apply equally to all Holders and shall be binding upon them, upon each further Holder of any Note and upon the KPP Companies whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right related thereto. For purposes of determining whether the Holders of the requisite aggregate principal amount of Notes at any time have agreed or consented to any amendment or waiver pursuant to the provisions of this Section 12, any Notes held by any KPP Company, any of their Subsidiaries or any Affiliate shall not be deemed outstanding. Any consent made by a Holder that has transferred or has agreed to transfer its Notes to a KPP Company, any of their Subsidiaries or any Affiliate thereof and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force and effect except solely as to such Holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consent of all other Holders that were acquired under the same or similar conditions) shall be void and of no force and effect retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such Holder. SECTION 13. SPECIAL RIGHTS OF PURCHASER. 13.1 Method of Payment; Indemnity; Notation Prior to Transfer. Anything contained in the Notes to the contrary notwithstanding, in the case of each Note held by you, KPOP will make all payments in respect of its Notes (including the final payment) of principal thereof and the Applicable Premium Amount (if any) and interest thereon by wire transfer in immediately available funds not later than 11:00 a.m. (local time at your address for payment specified on Schedule 1, Schedule 2, Schedule 3, or Schedule 4, as appropriate), on the date each such payment is due pursuant to the terms hereof and the terms of the Notes, to the account specified under your name on Schedule 1, Schedule 2, Schedule 3, or Schedule 4, as appropriate (or in such other manner or at such other address or account in the United States as you may from time to time designate to the KPP Companies in writing), each such payment being accompanied by the reference number specified on Schedule 1, Schedule 2, Schedule 3, or Schedule 4, as appropriate, and by such other information as is necessary to identify the source and application thereof, and all without any presentment or surrender of such Note and without any notation of such payment being made thereon. The KPP Companies agree that, in the event that any Note held by you is lost, stolen or destroyed and application is made, pursuant to the provisions of Section 14.3, for the execution and delivery of a new Note in lieu thereof, an unsecured indemnity agreement signed by you shall constitute indemnity satisfactory to the KPP Companies. You agree that in the event you shall sell or transfer such Note you will notify the KPP Companies of that fact and will prior to the delivery of such Note make, or cause to be made, a notation thereon of all principal, if any, theretofore paid on such Note and of the date to which interest has been paid on such Note. 30 35 13.2 Expenses. Whether or not the transactions contemplated herein shall be consummated, the KPP Companies shall pay all of your and the Trustee's expenses, including out-of-pocket expenses, arising in connection therewith, including the fees and disbursements of your special counsel and Trustee's special counsel for all services incident to the preparation and negotiation of the Note Agreements, the Notes, the other Note Purchase Documents and all other documents and instruments delivered in connection therewith. The KPP Companies shall also pay all compensation to the Trustee and any and all costs, expenses or disbursements (including reasonable fees of attorneys, accountants, experts and advisers) of any kind or nature whatsoever which is incurred by the Trustee resulting from or in any other way associated with any of the Collateral, the Note Purchase Documents and the transactions and events (including the enforcement or defense thereof) at any time associated therewith or contemplated therein. The KPP Companies shall also pay, and save you harmless from, any and all liabilities with respect to the assignment of a private placement number from Standard and Poor's CUSIP Service Bureau, trustee's fees and expenses, environmental assessment charges, title charges, survey costs, filing, registration and recording fees, mortgage recording taxes, stamp and other taxes, duties, imposts, assessments and other charges which may be payable or deemed to be payable in connection with the execution and delivery of this Note Agreement, the Notes and the other Note Purchase Documents. The KPP Companies agree, to the extent permitted by applicable law, to pay and indemnify you against any costs and expenses, including reasonable attorneys' and accountants' fees, incurred by you, any subsequent Holder or the Trustee in evaluating (in connection with any controversy or potential controversy) and enforcing, exercising or defending any rights or remedies under this Agreement, the Notes and the other Note Purchase Documents or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby or by reason of your or any subsequent Holder's having acquired any Note, including without limitation, costs and expenses incurred in any bankruptcy case. Without limiting the foregoing, to the extent permitted by applicable law, the KPP Companies also will pay the reasonable fees, expenses and disbursements of an investment bank or other firm acting as adviser (which fees, expenses and disbursements may include, without limitation, reasonable legal and accounting fees) to the Holders of the Notes following the occurrence and during the continuance of a Default or an Event of Default or in connection with any such amendment or waiver proposed in connection with any potential Default or Event of Default or any workout, restructuring or similar negotiations relating to this Agreement, the Notes and the other Note Purchase Documents or any other Holder. The obligations of the KPP Companies under this Section 13.2 shall survive the transfer of any Note or portion thereof or interest therein by you or any subsequent Holder and the payment of any Note. SECTION 14. REGISTRATION, TRANSFER OR EXCHANGE OF NOTES. 14.1 Note Register. The KPP Companies shall keep at their office or agency maintained as provided in Section 7.1 a register in which the KPP Companies shall provide for the registration of Notes and for the registration of transfer and exchange of Notes. 14.2 Surrender for Transfer. The Holder of each Note at its option may either in person or by duly authorized attorney surrender the same for registration of transfer or exchange at such office or agency of the KPP Companies and, without expense to such Holder (other than for transfer taxes, if any), receive in exchange therefor a Note or Notes, each in the face amount of at least $900,000 (or if the outstanding principal amount of a Note being so transferred or exchanged is less than $900,000 at such time, then in the face amount of amount then outstanding), dated as of the date to which interest has been paid on the surrendered Note, and registered in the name of such Person or Persons as may be designated by such Holder, for the same aggregate principal amount as the then unpaid principal amount of such surrendered Note. Every Note presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in the form of Exhibit F to this Agreement, duly executed by the Holder of such Note or his attorney duly authorized in writing. Every Note so made and delivered in exchange for any surrendered Note shall in all other respects be in the same form and have the same terms as such surrendered Note. No transfer or exchange of any Note shall be valid unless made in the foregoing manner at such office or agency. 14.3 Loss, Theft, Destruction or Mutilation of Notes. Upon receipt of evidence reasonably satisfactory to the KPP Companies of the loss, theft, destruction or mutilation of any Note, and, in the case of any such loss, theft or destruction, upon receipt of indemnity or instrument reasonably satisfactory to the KPP Companies which may include unsecured corporate obligations in the case of any institutional investor, or in the case of any such mutilation, upon surrender and cancellation of the mutilated Note, the KPP Companies will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Note, a new Note of like tenor and unpaid principal amount, dated as of the date to which interest has been paid on such earlier Note. 14.4 Holders. Provided that the KPP Companies have complied with their obligation to register any transfer or exchange of a Note under Section 14.2, the KPP Companies may deem and treat the Holder of each Note 31 36 as the owner and holder of such Note for the purpose of receiving payment of principal and interest on such Note and for all other purposes whatsoever, whether or not such Note shall be overdue. SECTION 15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; SUCCESSORS AND ASSIGNS. All covenants, agreements, representations and warranties made herein, in the Notes, and in any documents and certificates delivered pursuant hereto shall be deemed to have been relied upon by you, notwithstanding any investigation heretofore or hereafter made by you or on your behalf, and shall survive the issuance and delivery of the Notes and your purchase thereof and payment therefor and shall continue in full force and effect so long as any Note is outstanding and unpaid. In addition, the KPP Companies' obligations under Sections 11.5 and 13.2 hereof shall survive the payment of the Notes. Whenever in this Agreement either of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, agreements, representations and warranties in this Agreement contained by or on behalf of the KPP Companies, or by or on behalf of you, shall bind and inure to the benefit of the respective successors and assigns of the parties hereto; provided that the KPP Companies may not assign any of their rights under this Agreement or any other Note Purchase Document without your written consent. SECTION 16. NOTICES AND OTHER COMMUNICATIONS. All notices and other communications provided for under the Note Agreements or under the Notes or the other Note Purchase Documents shall be in writing and either delivered by overnight delivery service with proof of delivery, or sent by facsimile transmission, with copies delivered by overnight delivery service with proof of delivery: (a) if to any Holder, at its address (or addresses) specified on Schedule 1, Schedule 2, Schedule 3, or Schedule 4, as appropriate; and (b) if to the KPP Companies, at: 2435 North Central Expressway Richardson, Texas 75080 Telecopier No.: (214) 699-1894 Attention: Edward D. Doherty with a copy to: Michael B. Glazer, Esq. or at such other address as each party referred to in this section may hereafter designate by like notice to the other parties. Any such notice or communication shall be deemed to have been given (i) in the case of overnight delivery service, as of the date of first attempted delivery at the address provided herein, and (ii) in the case of facsimile transmission, when actually received. SECTION 17. SEVERABILITY. If any term or provision hereof or of the Notes shall be determined to be illegal or unenforceable all other terms and provisions hereof and of the Notes shall nevertheless remain effective and shall be enforced to the fullest extent permitted by applicable law. SECTION 18. REFERENCES AND TITLES. All references in this Agreement to Exhibits, Schedules, sections, subsections and other subdivisions refer to the Exhibits, Schedules, sections, subsections and other subdivisions of this Agreement and the other Note Agreements unless expressly provided otherwise. Titles appearing at the beginning of any subdivisions are for convenience only and do not constitute any part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words "this Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this section" and "this subsection" and similar phrases refer only to the sections or subsections hereof in which such phrases occur. The word "or" is not exclusive, and the word "including" (in its various forms) means "including without limitation". Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. SECTION 19. COUNTERPARTS. This Agreement may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Agreement. SECTION 20. GOVERNING LAW. THIS AGREEMENT, THE NOTES, THE OTHER NOTE PURCHASE DOCUMENTS, AND ALL OTHER DOCUMENTS AND INSTRUMENTS EXECUTED IN CONNECTION HEREWITH OR THEREWITH SHALL BE DEEMED CONTRACTS AND 32 37 INSTRUMENTS MADE UNDER THE INTERNAL LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 21. LIMITATION ON INTEREST. The Holders and the KPP Companies intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained herein or in the Notes shall ever be construed to provide for interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. No KPP Company nor any of their Subsidiaries nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any obligations hereunder or under the Notes shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this paragraph shall control over all other provisions herein or in the Notes which may be in conflict or apparent conflict herewith. THIS WRITTEN NOTE AGREEMENT, THE NOTES AND THE OTHER NOTE PURCHASE DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. 33 38 Upon your signing the form of acceptance on the enclosed counterpart of this Agreement and returning such counterpart to the KPP Companies, this Agreement shall become a binding agreement between you and the KPP Companies. Very truly yours, KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Edward D. Doherty Chairman of the Board STANTRANS, INC. By: ---------------------------- Edward D. Doherty Chairman of the Board KANEB PIPE LINE PARTNERS, L.P By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Edward D. Doherty Chairman of the Board SUPPORT TERMINAL SERVICES, INC. By: ---------------------------- Edward D. Doherty Chairman of the Board SUPPORT TERMINAL OPERATING PARTNERSHIP, L.P. By: Support Terminal Services, Inc., its General Partner By: ---------------------------- Edward D. Doherty Chairman of the Board STANTRANS HOLDINGS, INC. By: ---------------------------- Michele Wilson Vice President STANTRANS PARTNERS, L.P. By: StanTrans, Inc., its General Partner By: ---------------------------- Edward D. Doherty Chairman of the Board 34 39 The foregoing agreement is agreed to and accepted by: [NAME OF HOLDER] By: ------------------------------- Name: Title: By: ------------------------------- Name: Title: 35 40 EXHIBIT A FORM OF SERIES C NOTE 7.08% First Mortgage Notes Due June 27, 2001 R-___ Richardson, Texas $____________ _________,1996 Private Placement Number 48417#AB8 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., a limited partnership duly organized and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to ________________________________________ or registered assigns, the principal amount of ____________________ DOLLARS ($___________) as provided herein and in the Note Agreement (as hereinafter defined). The principal of this Note, together with all interest accrued and unpaid herein, shall be due and payable in full on June 27, 2001 (the "Series C Final Maturity Date"). The interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance of this Note shall accrue at the rate of 7.08% per annum from the date hereof, and shall be payable semiannually on the 27th day of June and December of each year, commencing on December 27, 1996; provided that interest (as so computed) on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, shall accrue at the Series C Overdue Rate. If any payment of principal or interest becomes due on a day other than a Business Day, such payment shall be payable on the immediately following Business Day, together with interest to date of payment. Each payment on account of this Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, at ________________________________. This Note is one of an authorized issue of registered 7.08% First Mortgage Notes (together with all notes delivered in substitution or replacement for any thereof, the "Series C Notes") made by the Company in an aggregate principal amount of $_______________, maturing on the Series C Final Maturity Date, and bearing interest payable at the same rate and on the same dates as the interest on the principal amount of this Note. This Note is (i) issued pursuant to and is entitled to the benefits of that certain Note Purchase Agreement dated as of June 27, 1996 among the Company, StanTrans, Inc., Kaneb Pipe Line Partners, L.P., Support Terminal Services, Inc., Support Terminals Operating Partnership, L.P., StanTrans Holdings, Inc., StanTrans Partners, L.P. and each Holder identified on a signature page thereto (the "Note Agreement") and (ii) is secured by and entitled to the benefits of certain Security Documents, including the Guaranties (as such terms are defined in the Note Agreement). Payments on this Note shall be made and applied as provided herein and in the Note Agreement. Reference is hereby made to the Note Agreement for the meaning of terms defined therein which are used herein without further definition. The holders of this Note and the Company intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained herein or in the Note Agreement under which this Note was purchased shall ever be construed to provide for interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither Company nor any of its Subsidiaries nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any obligations hereunder or under the Note Agreement shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this paragraph shall control over all other provisions herein or in the Note Agreement which may be in conflict or apparent conflict herewith. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE INTERNAL LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 1 41 IN WITNESS WHEREOF, the undersigned has caused its corporate name to be affixed hereunto and this Note to be signed by its duly authorized officer, and has further caused this Note to be dated as of the day and year first above written. KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Name: Title: 2 42 EXHIBIT B FORM OF SERIES D NOTE 7.43% First Mortgage Notes Due June 27, 2003 R-___ Richardson, Texas $____________ _________,199_ Private Placement Number 48417#AC6 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., a limited liability partnership duly organized and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to ________________________________________ or registered assigns, the principal amount of ____________________ DOLLARS ($___________) as provided herein and in the Note Agreement (as hereinafter defined). The principal of this Note, together with all interest accrued and unpaid herein, shall be due and payable in full on June 27, 2003 (the "Series D Final Maturity Date"). The interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance of this Note shall accrue at the rate of 7.43% per annum from the date hereof, and shall be payable semiannually on the 27th day of June and December of each year, commencing on December 27, 1996; provided that interest (as so computed) on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, shall accrue at the Series D Overdue Rate. If any payment of principal or interest becomes due on a day other than a Business Day, such payment shall be payable on the immediately following Business Day, together with interest to date of payment. Each payment on account of this Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, at _____________________________. This Note is one of an authorized issue of registered 7.43% First Mortgage Notes (together with all notes delivered in substitution or replacement for any thereof, the "Series D Notes") made by the Company in an aggregate principal amount of $_______________, maturing on the Series D Final Maturity Date, and bearing interest payable at the same rate and on the same dates as the interest on the principal amount of this Note. This Note is (i) issued pursuant to and is entitled to the benefits of that certain Note Purchase Agreement dated as of June 27, 1996, among the Company, StanTrans, Inc., Kaneb Pipe Line Partners, L.P., Support Terminal Services, Inc., Support Terminals Operating Partnership, L.P., StanTrans Holdings, Inc., StanTrans Partners, L.P. and each Holder identified on a signature page thereto (the "Note Agreement") and (ii) is secured by and entitled to the benefits of certain Security Documents, including the Guaranties (as such terms are defined in the Note Agreement). Payments on this Note shall be made and applied as provided herein and in the Note Agreement. Reference is hereby made to the Note Agreement for the meaning of terms defined therein which are used herein without further definition. The holders of this Note and the Company intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained herein or in the Note Agreement under which this Note was purchased shall ever be construed to provide for interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither Company nor any of its Subsidiaries nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any obligations hereunder or under the Note Agreement shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this paragraph shall control over all other provisions herein or in the Note Agreement which may be in conflict or apparent conflict herewith. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE INTERNAL LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the undersigned has caused its corporate name to be affixed hereunto and this Note to be signed by its duly authorized officer, and has further caused this Note to be dated as of the day and year first above written. KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Name: Title: 1 43 EXHIBIT C FORM OF SERIES E NOTE 7.6% First Mortgage Notes Due June 27, 2006 R-___ Richardson, Texas $____________ _________,199_ Private Placement Number 48417#AD4 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., a limited liability partnership duly organized and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to ________________________________________ or registered assigns, the principal amount of ____________________ DOLLARS ($___________) as provided herein and in the Note Agreement (as hereinafter defined). The principal of this Note, together with all interest accrued and unpaid herein, shall be due and payable in full on June 27, 2006 (the "Series E Final Maturity Date"). The interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance of this Note shall accrue at the rate of 7.6% per annum from the date hereof, and shall be payable semiannually on the 27th day of June and December of each year, commencing on December 27, 1996; provided that interest (as so computed) on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, shall accrue at the Series E Overdue Rate. If any payment of principal or interest becomes due on a day other than a Business Day, such payment shall be payable on the immediately following Business Day, together with interest to date of payment. Each payment on account of this Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, at ________________________________. This Note is one of an authorized issue of registered 7.6% First Mortgage Notes (together with all notes delivered in substitution or replacement for any thereof, the "Series E Notes") made by the Company in an aggregate principal amount of $_______________, maturing on the Series E Final Maturity Date, and bearing interest payable at the same rate and on the same dates as the interest on the principal amount of this Note. This Note is (i) issued pursuant to and is entitled to the benefits of that certain Note Purchase Agreement dated as of June 27, 1996, among the Company, StanTrans, Inc., Kaneb Pipe Line Partners, L.P., Support Terminal Services, Inc., Support Terminals Operating Partnership, L.P., StanTrans Holdings, Inc., StanTrans Partners, L.P. and each Holder identified on a signature page thereto (the "Note Agreement") and (ii) is secured by and entitled to the benefits of certain Security Documents, including the Guaranties (as such terms are defined in the Note Agreement). Payments on this Note shall be made and applied as provided herein and in the Note Agreement. Reference is hereby made to the Note Agreement for the meaning of terms defined therein which are used herein without further definition. The holders of this Note and the Company intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained herein or in the Note Agreement under which this Note was purchased shall ever be construed to provide for interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither Company nor any of its Subsidiaries nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any obligations hereunder or under the Note Agreement shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this paragraph shall control over all other provisions herein or in the Note Agreement which may be in conflict or apparent conflict herewith. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE INTERNAL LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the undersigned has caused its corporate name to be affixed hereunto and this Note to be signed by its duly authorized officer, and has further caused this Note to be dated as of the day and year first above written. KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Name: Title: 1 44 EXHIBIT D FORM OF SERIES F NOTE 7.98% First Mortgage Notes Due June 27, 2016 R-___ Richardson, Texas $____________ _________,199_ Private Placement Number 48417#AE2 KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., a limited liability partnership duly organized and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to ________________________________________ or registered assigns, the principal amount of ____________________ DOLLARS ($___________) as provided herein and in the Note Agreement (as hereinafter defined). The principal of this Note, together with all interest accrued and unpaid herein, shall be due and payable in full on June 27, 2016 (the "Series F Final Maturity Date"). The interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance of this Note shall accrue at the rate of 7.98% per annum from the date hereof, and shall be payable semiannually on the 27th day of June and December of each year, commencing on December 27, 1996; provided that interest (as so computed) on any overdue principal and premium and, to the extent permitted by applicable law, on any overdue interest, shall accrue at the Series F Overdue Rate. If any payment of principal or interest becomes due on a day other than a Business Day, such payment shall be payable on the immediately following Business Day, together with interest to date of payment. Each payment on account of this Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, at ________________________________. This Note is one of an authorized issue of registered 7.98% First Mortgage Notes (together with all notes delivered in substitution or replacement for any thereof, the "Series F Notes") made by the Company in an aggregate principal amount of $15,000,000, maturing on the Series F Final Maturity Date, and bearing interest payable at the same rate and on the same dates as the interest on the principal amount of this Note. This Note is (i) issued pursuant to and is entitled to the benefits of that certain Note Purchase Agreement dated as of June 27, 1996, among the Company, StanTrans, Inc., Kaneb Pipe Line Partners, L.P., Support Terminal Services, Inc., Support Terminals Operating Partnership, L.P., StanTrans Holdings, Inc., StanTrans Partners, L.P. and each Holder identified on a signature page thereto (the "Note Agreement") and (ii) is secured by and entitled to the benefits of certain Security Documents, including the Guaranties (as such terms are defined in the Note Agreement). Payments on this Note shall be made and applied as provided herein and in the Note Agreement. Reference is hereby made to the Note Agreement for the meaning of terms defined therein which are used herein without further definition. The holders of this Note and the Company intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained herein or in the Note Agreement under which this Note was purchased shall ever be construed to provide for interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. Neither Company nor any of its Subsidiaries nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any obligations hereunder or under the Note Agreement shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this paragraph shall control over all other provisions herein or in the Note Agreement which may be in conflict or apparent conflict herewith. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. THIS NOTE SHALL BE DEEMED A CONTRACT AND INSTRUMENT MADE UNDER THE INTERNAL LAWS OF THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN WITNESS WHEREOF, the undersigned has caused its corporate name to be affixed hereunto and this Note to be signed by its duly authorized officer, and has further caused this Note to be dated as of the day and year first above written. KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. By: Kaneb Pipe Line Company, its General Partner By: ---------------------------- Name: Title: 1 45 EXHIBIT E SOLVENCY CERTIFICATE (KPOP) Reference is made to those certain Note Purchase Agreements dated as of June 27, 1996 (the "Agreements") among Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership ("KPOP"), StanTrans, Inc., a Delaware corporation, Kaneb Pipe Line Partners, L.P., a Delaware limited partnership, Support Terminal Services, Inc., a Delaware corporation, Support Terminals Operating Partnership, L.P., a Delaware limited partnership, StanTrans Holdings, Inc., a Delaware corporation, StanTrans Partners, L.P., a Delaware limited partnership, and the Holders (as defined therein). Terms which are defined in the Agreements and which are used but not defined herein shall have the meanings given them in the Agreements. In order to confirm to the Holders certain fundamental factors in the Holders' decision to enter into the Agreements and to accept the Notes thereunder, the undersigned, in his capacity as ____________ of KPOP, hereby certifies to the Holders as follows: 1. I have carefully reviewed the contents of this Certificate and have made such investigations and inquiries (including consultation with counsel) as I have deemed necessary or prudent in connection with the matters set forth herein. I am familiar with the properties, businesses, assets and liabilities of KPOP, and I have reviewed (or caused to be reviewed) the Agreements and any other agreements, instruments, or documents in respect of Debt (as defined below). This Certificate is based, in part, on certain estimates and assumptions. I am making this Certificate in good faith, believing that the information, estimates, and assumptions which underlie and form the basis for the statements made in this Certificate are reasonable and are the best available on the date hereof. 2. For the purposes of this Certificate: (a) "Transactions" means (i) the execution and delivery of the Agreements, the Notes and the other Note Purchase Documents and (ii) the satisfaction of all conditions precedent to the purchase and sale of the Notes under the Agreements. (b) "Debt" means, with respect to KPOP, all obligations and liabilities of such Person, whether matured or unmatured; liquidated or unliquidated; disputed or undisputed; secured or unsecured; senior or subordinated; absolute, fixed or contingent; full-recourse, limited-recourse, or non-recourse; and whether or not required to be disclosed pursuant to generally accepted accounting principles. 3. As of the date of KPOP's most recently prepared financial statements and after giving effect to the Transactions, the present fair salable value of the assets of KPOP will exceed the Debts of KPOP, exclusive of the Notes. On the date hereof and after giving effect to the Transactions, the present fair salable value of the assets of KPOP is approximately $____________ and the amount of Debt of KPOP, exclusive of the Notes, is approximately $____________. 4. KPOP is able on the date hereof, before giving effect to the Transactions, to realize upon its assets and pay its presently existing Debts as such Debts mature in the expected course of business. After giving effect to the Transactions and to the Debts incurred as a part thereof, KPOP will remain able to realize upon its assets and pay its Debts as such Debts mature in the expected course of business. In making the above statements I have taken into account estimated future transfers of cash and other assets (whether as dividends, loans, repayments or otherwise) among KPOP and its Affiliates, as well as any restrictions on their abilities to make such transfers. 5. With respect to the businesses and transactions in which KPOP is engaged or about to engage: (i) on the date hereof, before giving effect to the Transactions, KPOP does not have an unreasonably small capital, and (ii) after giving effect to the Transactions, KPOP will not have an unreasonably small capital. 6. Taking into account the Transactions and all other businesses and transactions in which KPOP is engaged or intends to be engaged, KPOP does not intend or believe that it will incur Debts that will be beyond its ability to pay as such Debts mature. 7. In consummating the Transactions, KPOP does not intend to disturb, hinder, delay or defraud any of its present or future creditors or any other Persons to which it is or will become, on or after the date hereof, obligated or indebted. IN WITNESS WHEREOF, I have executed this Certificate in my capacity as ____________________________, as of _____________, 199 . ---------------------------- Name: Title: 1 46 EXHIBIT F FORM OF LETTER OF TRANSFER OF NOTES [DATE] KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. 2435 N. Central Expressway, Suite 700 Richardson, Texas 75080 Re: Transfer of $__________ Principal Amount of ______% Senior Note Due ________________, ________ (the "Note") from [Seller] to [Purchaser] Dear Sirs: Pursuant to Section 14.2 of the Note Purchase Agreement dated as of June 27, 1996 among Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership ("KPOP"), StanTrans, Inc., a Delaware corporation, Kaneb Pipe Line Partners, L.P., a Delaware limited partnership, Support Terminal Services, Inc., a Delaware corporation, Support Terminals Operating Partnership, L.P., a Delaware limited partnership, StanTrans Holdings, Inc., a Delaware corporation, StanTrans Partners, L.P., a Delaware limited partnership, and the original holder of the Note (the "Note Agreement") and KPOP __________% Senior Notes due , ________, this letter is to advise you that [Seller] (the "Seller") has transferred the Note or a portion thereof in the above-referenced principal amount to [Purchaser] (the "Purchaser"). Capitalized terms defined in the Note Agreement shall have same meanings whenever used herein. In connection with such transfer the Purchaser and the Seller hereby request that KPOP deliver to the Purchaser a Note in the above-referenced principal amount in the form of Exhibit [A][B][C][D] to the Note Agreement. 1. In connection with the transfer, the Seller hereby represents that the transfer of the Note will not require registration of the Note under the Securities Act of 1933 or under any state securities law. 2. In connection with the transfer, the Purchaser represents that: (i) the Purchaser is an "accredited investor" within the meaning of Rule 501 under the Securities Act of 1933, as amended (the "Act"); (ii) the Purchaser is acquiring the Note for its own account as principal and not with a view to the distribution or resale of the Note or any portion thereof (it being understood, however, that the disposition of the Note shall at all times be within the Purchaser's control); and (iii) [*NO PART OF THE FUNDS USED BY THE PURCHASER TO PURCHASE THE NOTE CONSTITUTES ASSETS ALLOCATED TO ANY SEPARATE ACCOUNT (AS DEFINED IN SECTION 3(17) OF THE EMPLOYMENT RETIREMENT INCOME SECURITY ACT OF 1874, AS AMENDED) MAINTAINED BY THE PURCHASER, IN WHICH ANY EMPLOYEE BENEFIT PLAN PARTICIPATES TO THE EXTENT OF 10% OR MORE./TO THE EXTENT THAT ANY PART OF THE FUNDS USED BY THE PURCHASER TO PURCHASE THE NOTE CONSTITUTES ASSETS ALLOCATED TO ANY SEPARATE ACCOUNT (AS DEFINED IN SECTION 3(17) OF THE EMPLOYMENT RETIREMENT INCOME SECURITY ACT OF 1874, AS AMENDED) MAINTAINED BY THE PURCHASER, THE PURCHASER HAS DISCLOSED TO KPOP OF EACH EMPLOYEE PENSION BENEFIT PLAN WHOSE ASSETS IN SUCH ACCOUNT EXCEED TEN PERCENT (10%) OF THE TOTAL ASSETS OF SUCH ACCOUNT AS OF THE DATE HEREOF.] 3. The Purchaser acknowledges that the Note has not been registered under the Act or the securities 2 47 laws of any state on the ground that the original sale contemplated hereby is exempt from registration under the Act and such state securities laws and agrees that in the absence of such registration the Note will be sold or disposed of only pursuant to an exemption from registration under the Act and such state securities laws. 4. The Purchaser is concurrently herewith delivering a written agreement agreeing to be bound by all of the terms and conditions of the Intercreditor Agreement in the form attached thereto as Exhibit B. 5. For the purposes of making any payment to the Purchaser of principal, interest, premiums, if any, under the Note, or any other amount payable thereunder, such payment shall be made to the following account: [BANK] [ADDRESS] [ABA NO.] [ACCOUNT NO.] [REFERENCE:] 6. For the purpose of giving any notice or providing information to the Purchaser required under the Note or the Note Agreement, any such notice or information shall be delivered to the Purchaser at the following address: [ADDRESS] [ATTENTION:] [TELEPHONE] [TELECOPY] [7. Please deliver the registered Note to the Purchaser via courier at the following address:] [SELLER] By: ----------------------------------- Name: Title: [PURCHASER] By: ----------------------------------- Name: Title: EX-21 3 LIST OF SUBSIDIARIES 1 EXHIBIT 21 KANEB PIPE LINE PARTNERS, L.P. SUBSIDIARY LIST
JURISDICTION OF SUBSIDIARY NAME INCORPORATION --------------- --------------- Kaneb Pipe Line Operating Partnership, L.P. Delaware Support Terminals Operating Partnership, L.P. Delaware Support Terminal Services, Inc. Delaware StanTrans, Inc. Delaware StanTrans Holding, Inc. Delaware StanTrans Partners, L.P. Delaware
EX-27 4 FDS
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 8,196 0 0 0 0 25,032 337,202 87,469 274,765 24,336 139,453 0 0 0 103,340 274,765 0 117,554 0 66,165 0 0 11,033 41,132 822 39,907 0 0 0 39,907 2.46 2.46
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