Sunoco Logistics Partners LP--Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ________

Commission file number 1-31219

 

 

SUNOCO LOGISTICS PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   23-3096839
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

Mellon Bank Center

1735 Market Street, Suite LL, Philadelphia, PA

  19103-7583
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (866) 248-4344

Former name, former address and formal fiscal year, if changed since last report: Not Applicable

 

 

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  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.:    Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At August 5, 2008, the number of the registrant’s Common Units outstanding was 28,657,485.

 

 

 


SUNOCO LOGISTICS PARTNERS L.P.

INDEX

 

     Page No.

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2008 and 2007 (unaudited)

   3
  

Condensed Consolidated Statements of Income for the Six Months Ended June 30, 2008 and 2007 (unaudited)

   4
  

Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007

   5
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited)

   6
  

Notes to Condensed Consolidated Financial Statements (unaudited)

   7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    25

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    30

Item 4.

   Controls and Procedures    33

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    33

Item 1A.

   Risk Factors    33

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    33

Item 3.

   Defaults Upon Senior Securities    33

Item 4.

   Submission of Matters to a Vote of Security Holders    33

Item 5.

   Other Information    33

Item 6.

   Exhibits    34
SIGNATURE    35

 

2


PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except unit and per unit amounts)

 

     Three Months Ended
June 30,
 
     2008     2007  

Revenues

    

Sales and other operating revenue:

    

Affiliates (Note 3)

   $ 756,718     $ 391,370  

Unaffiliated customers

     2,558,703       1,238,910  

Other income

     8,783       7,698  
                

Total Revenues

     3,324,204       1,637,978  
                

Costs and Expenses

    

Cost of products sold and operating expenses

     3,240,861       1,580,330  

Depreciation and amortization

     9,830       9,407  

Selling, general and administrative expenses

     14,126       13,487  
                

Total Costs and Expenses

     3,264,817       1,603,224  
                

Operating Income

     59,387       34,754  

Net interest with affiliates (Note 3)

     523       1,059  

Other interest cost and debt expense, net

     8,405       9,386  

Capitalized interest

     (864 )     (945 )
                

Net Income

   $ 51,323     $ 25,254  
                

Calculation of Limited Partners’ interest in Net Income (Note 4):

    

Net Income

   $ 51,323     $ 25,254  

Less: General Partner’s interest in Net Income

     (16,565 )     (3,552 )
                

Limited Partners’ interest in Net Income

   $ 34,758     $ 21,702  
                

Net Income per Limited Partner unit:

    

Basic

   $ 1.21     $ 0.76  
                

Diluted

   $ 1.21     $ 0.76  
                

Weighted average Limited Partners’ units outstanding (Note 4):

    

Basic

     28,657,485       28,586,280  
                

Diluted

     28,840,262       28,723,884  
                

(See Accompanying Notes)

 

3


SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except unit and per unit amounts)

 

     Six Months Ended
June 30,
 
     2008     2007  

Revenues

    

Sales and other operating revenue:

    

Affiliates (Note 3)

   $ 1,393,104     $ 843,439  

Unaffiliated customers

     4,316,706       2,336,411  

Other income

     13,609       12,737  
                

Total Revenues

     5,723,419       3,192,587  
                

Costs and Expenses

    

Cost of products sold and operating expenses

     5,564,111       3,079,588  

Depreciation and amortization

     19,489       18,311  

Selling, general and administrative expenses

     29,557       29,006  

Impairment charge (Note 5)

     5,674       —    
                

Total Costs and Expenses

     5,618,831       3,126,905  
                

Operating Income

     104,588       65,682  

Net interest cost paid to affiliates (Note 3)

     417       1,594  

Other interest cost and debt expense, net

     16,981       18,025  

Capitalized interest

     (1,636 )     (1,498 )
                

Net Income

   $ 88,826     $ 47,561  
                

Calculation of Limited Partners’ interest in Net Income (Note 4):

    

Net Income

   $ 88,826     $ 47,561  

Less: General Partner’s interest in Net Income

     (26,219 )     (5,631 )
                

Limited Partners’ interest in Net Income

   $ 62,607     $ 41,930  
                

Net Income per Limited Partner unit:

    

Basic

   $ 2.19     $ 1.47  
                

Diluted

   $ 2.17     $ 1.46  
                

Weighted average Limited Partners’ units outstanding (Note 4):

    

Basic

     28,642,571       28,575,697  
                

Diluted

     28,823,146       28,713,365  
                

(See Accompanying Notes)

 

4


SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     June 30,
2008
    December 31,
2007
 
     (UNAUDITED)        

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 2,000     $ 2,000  

Advances to affiliates (Note 3)

     14,234       8,060  

Accounts receivable, affiliated companies (Note 3)

     279,072       62,167  

Accounts receivable, net

     1,977,472       1,200,782  

Inventories:

    

Crude oil

     37,647       29,145  

Refined product additives

     424       682  

Materials, supplies and other

     842       842  
                

Total Current Assets

     2,311,691       1,303,678  
                

Properties, plants and equipment

     1,672,338       1,625,782  

Less accumulated depreciation and amortization

     (555,418 )     (536,520 )
                

Properties, plants and equipment, net

     1,116,920       1,089,262  
                

Investment in affiliates (Note 6)

     85,623       84,985  

Deferred charges and other assets

     36,094       26,717  
                

Total Assets

   $ 3,550,328     $ 2,504,642  
                

Liabilities and Partners’ Capital

    

Current Liabilities

    

Accounts payable

   $ 2,294,493     $ 1,289,402  

Accrued liabilities

     48,113       45,159  

Accrued taxes other than income taxes

     46,807       34,277  
                

Total Current Liabilities

     2,389,413       1,368,838  

Long-term debt (Note 7)

     514,201       515,104  

Other deferred credits and liabilities

     28,683       29,655  

Commitments and contingent liabilities (Note 8)

    
                

Total Liabilities

     2,932,297       1,913,597  
                

Partners’ Capital:

    

Limited partners’ interest

     597,186       582,357  

General partner’s interest

     20,845       8,688  
                

Total Partners’ Capital

     618,031       591,045  
                

Total Liabilities and Partners’ Capital

   $ 3,550,328     $ 2,504,642  
                

(See Accompanying Notes)

 

5


SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Six Months Ended
June 30,
 
     2008     2007  

Cash Flows from Operating Activities:

    

Net Income

   $ 88,826     $ 47,561  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     19,489       18,311  

Impairment charge

     5,674       —    

Restricted unit incentive plan expense

     2,280       3,389  

Changes in working capital pertaining to operating activities:

    

Accounts receivable, affiliated companies

     (216,905 )     23,026  

Accounts receivable, net

     (776,690 )     (145,799 )

Inventories

     (8,244 )     (21,351 )

Accounts payable and accrued liabilities

     1,007,970       124,153  

Accrued taxes other than income

     12,530       (2,916 )

Other

     (754 )     6,978  
                

Net cash provided by operating activities

     134,176       53,352  
                

Cash Flows from Investing Activities:

    

Capital expenditures

     (52,495 )     (50,642 )

Completed Acquisitions

     —         (13,173 )

MagTex Acquisition deposit

     (10,462 )     —    
                

Net cash used in investing activities

     (62,957 )     (63,815 )
                

Cash Flows from Financing Activities:

    

Distributions paid to Limited Partners and General Partner

     (64,694 )     (57,271 )

Payments of statutory withholding on net issuance of Limited Partner units under restricted unit incentive plan

     (1,278 )     (1,479 )

Contributions from General Partner for Limited Partner unit transactions

     76       58  

Advances to affiliates, net

     (6,174 )     (3,874 )

Borrowings under credit facility

     85,000       91,900  

Repayments under credit facility

     (86,000 )     (20,000 )

Contributions from affiliate

     1,851       752  
                

Net cash (used in) provided by financing activities

     (71,219 )     10,086  
                

Net change in cash and cash equivalents

     —         (377 )

Cash and cash equivalents at beginning of year

     2,000       9,412  
                

Cash and cash equivalents at end of period

   $ 2,000     $ 9,035  
                

(See Accompanying Notes)

 

6


SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Basis of Presentation

Sunoco Logistics Partners L.P. (the “Partnership”) is a Delaware limited partnership formed by Sunoco, Inc. (“Sunoco”) in October 2001 to acquire, own and operate a substantial portion of Sunoco’s logistics business, consisting of refined product pipelines, terminalling and storage assets, crude oil pipelines, and crude oil acquisition and marketing assets located in the Northeast, Midwest and South Central United States. Sunoco, Inc. and its wholly-owned subsidiaries including Sunoco, Inc. (R&M) are collectively referred to as “Sunoco”. The financial statements of the Partnership contain the accounts of the Partnership and its subsidiaries. Equity ownership interests in corporate joint ventures, which are not consolidated, are accounted for under the equity method.

The consolidated financial statements reflect the results of Sunoco Logistics Partners L.P. and its wholly-owned partnerships, including Sunoco Logistics Partners Operations L.P. (the “Operating Partnership”). Equity ownership interests in corporate joint ventures, which are not consolidated, are accounted for under the equity method.

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States for interim financial reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature, except for the impairment charge (Note 5). Results for the six months ended June 30, 2008 are not necessarily indicative of results for the full year 2008.

 

2. Acquisitions

Syracuse Terminal Acquisition

On June 4, 2007, the Partnership purchased a 50% undivided interest in a refined products terminal located in Syracuse, New York from Mobil Pipe Line Company, an affiliate of Exxon Mobil Corporation for approximately $13.4 million. Total terminal storage capacity is approximately 550,000 barrels. The purchase price of the acquisition was funded with borrowings under the Partnership’s Credit Facility, and has been preliminarily allocated to property, plants and equipment based on the relative fair value of the assets acquired on the acquisition date. The results of the acquisition are included in the financial statements within the Terminal Facilities business segment from the date of acquisition.

MagTex Refined Products Pipeline System Acquisition

On April 28, 2008, Sunoco Pipeline L.P., a subsidiary of the Partnership, entered into a definitive agreement to acquire a refined products pipeline system and certain other real and personal property interests and assets from Mobil Pipe Line Company, an affiliate of Exxon Mobil Corporation. The pipeline system consists of approximately 275 miles of refined products pipeline originating in Beaumont and Port Arthur, Texas and terminating in Hearne, Texas and an additional 197 miles of refined products pipeline extending from Beaumont, Texas and terminating in Waskom, Texas. In addition to the pipeline system, Sunoco Partners Marketing &Terminals L.P., a subsidiary of the Partnership, entered into definitive agreements with Exxon Mobil Corporation, Mobil Pipe Line Company and ExxonMobil Oil Corporation, also affiliates of Exxon Mobil Corporation, to acquire six refined products terminal facilities. The terminal facilities are located in Hearne, Hebert, Waco, Center and Waskom, Texas and Arcadia, Louisiana and have combined storage capacity of approximately 1.2 million shell barrels. The acquisitions are subject to certain closing conditions. The transactions, with a combined purchase price of approximately $200.0 million, are expected to be completed in the third quarter of 2008.

 

3. Related Party Transactions

Advances to/from Affiliate

The Partnership has a treasury services agreement with Sunoco pursuant to which it, among other things, participates in Sunoco’s centralized cash management program. Under this program, all of the Partnership’s cash receipts and cash disbursements are processed, together with those of Sunoco and its other subsidiaries, through Sunoco’s cash accounts with a corresponding credit or charge to an intercompany account. The intercompany balances are settled periodically, but no less frequently than monthly. Amounts due from Sunoco earn interest at a rate equal to the average rate of the Partnership’s third-party money market investments, while amounts due to Sunoco bear interest at a rate equal to the interest rate provided in the Partnership’s $400 million revolving credit facility (see Note 7).

 

7


Administrative Services

Selling, general and administrative expenses in the condensed consolidated statements of income include costs incurred by Sunoco for the provision of certain centralized corporate functions such as legal, accounting, treasury, engineering, information technology, insurance and other corporate services, including the administration of employee benefit plans. These are provided to the Partnership under an omnibus agreement (“Omnibus Agreement”) with Sunoco for an annual administrative fee. The fee for the annual period ended December 31, 2007 was $6.5 million. In January 2008, the parties extended the term of Section 4.1 of the Omnibus Agreement (which concerns the Partnership’s obligation to pay the annual fee for provision of certain general and administrative services) by one year. The annual administrative fee applicable to this one-year extension is $6.0 million, which reflects the Partnership directly incurring some of these general and administrative costs. These costs may be increased if the acquisition or construction of new assets or businesses requires an increase in the level of general and administrative services received by the Partnership. There can be no assurance that Section 4.1 of the Omnibus Agreement will be extended beyond 2008, or that, if extended, the administrative fee charged by Sunoco will be at or below the current administrative fee. In the event that the Partnership is unable to obtain such services from Sunoco or third parties at or below the current cost, the Partnership’s financial condition and results of operations may be adversely impacted.

The annual administrative fee does not include the costs of shared insurance programs, which are allocated to the Partnership based upon its share of the cash premiums incurred. This fee also does not include salaries of pipeline and terminal personnel or other employees of the general partner, or the cost of their employee benefits. These employees are employees of the Partnership’s general partner or its affiliates, which are wholly-owned subsidiaries of Sunoco. The Partnership has no employees. Allocated Sunoco employee benefit plan expenses for employees who work in the pipeline, terminalling, storage and crude oil gathering operations, including senior executives, include non-contributory defined benefit retirement plans, defined contribution 401(k) plans, employee and retiree medical, dental and life insurance plans, incentive compensation plans, and other such benefits. The Partnership is reimbursing Sunoco for these costs and other direct expenses incurred on its behalf. These expenses are reflected in cost of products sold and operating expenses and selling, general and administrative expenses in the condensed consolidated statements of income.

Affiliated Revenues and Accounts Receivable, Affiliated Companies

Affiliated revenues in the statements of income consist of sales of crude oil as well as the provision of crude oil and refined product pipeline transportation, terminalling and storage services to Sunoco. Sales of crude oil are priced using market based rates. Pipeline revenues are generally determined using posted tariffs. In 2002, the Partnership entered into a pipelines and terminals storage and throughput agreement and various other agreements with Sunoco under which the Partnership is charging Sunoco fees for services provided under these agreements that, in management’s opinion, are comparable to those charged in arm’s-length, third-party transactions. Under the pipelines and terminals storage and throughput agreement, Sunoco has agreed to pay the Partnership a minimum level of revenues for transporting refined products. Sunoco also has agreed to minimum throughputs of crude oil and liquefied petroleum gas in the Partnership’s Inkster Terminal, Fort Mifflin Terminal Complex and certain crude oil pipelines. During the first quarter of 2007, the agreement to throughput at the Partnership’s refined product terminals and to receive and deliver refined product into the Partnership’s Marcus Hook Tank Farm expired. On March 1, 2007 the Partnership entered into new five year agreements with Sunoco to provide these services. These new agreements contain no minimum throughput obligations for Sunoco.

Under various other agreements entered into in 2002, Sunoco is, among other things, purchasing from the Partnership, at market-based rates, particular grades of crude oil that the Partnership’s crude oil acquisition and marketing business purchases for delivery to certain pipelines. These agreements automatically renew on a monthly basis unless terminated by either party on 30 days’ written notice. Sunoco has also leased the Partnership’s 58 miles of interrefinery pipelines between Sunoco’s Philadelphia and Marcus Hook refineries for a term of 20 years.

Capital Contributions

The Partnership has agreements with Sunoco which requires Sunoco to, among other things, reimburse the Partnership for certain expenditures. These agreements include:

 

   

the Interrefinery Lease Agreement, which requires Sunoco to reimburse the Partnership for any non-routine maintenance expenditures incurred, as defined through February 2022; and

 

   

the Eagle Point purchase agreements, which requires Sunoco to reimburse the Partnership for certain capital improvement projects incurred regarding the assets acquired. On January 24, 2008 Sunoco and the Partnership entered into an Amended and Restated Dock and Terminal Throughput Agreement for the Eagle Point logistics assets. Pursuant to the amended agreement the Partnership is obligated to make certain capital improvements to the Eagle Point docks. The term for the parties’ obligations with respect to the docks has been extended from March 31, 2016 to December 31, 2026. The rates to be paid by Sunoco for throughput across the docks have been modified to reflect the capital improvements, and the rates escalate annually based on the Consumer Price Index. Sunoco’s throughput obligations across the docks remain unchanged.

 

8


 

The parties’ obligations with respect to the Eagle Point terminal remain unchanged except that the throughput rates escalate annually based on the increase in the Consumer Price Index.

During the six months ended June 30, 2008 and 2007, the Partnership was reimbursed $1.9 million and $0.8 million, respectively, associated with these agreements. The reimbursement of these amounts was recorded by the Partnership as capital contributions to Partners’ Capital within the condensed consolidated balance sheet at June 30, 2008.

In February 2008 and 2007 the Partnership issued 0.1 million common units in each period to participants in the Sunoco Partners LLC Long-Term Incentive Plan (“LTIP”) upon completion of award vesting requirements. As a result of these issuances of common units, the general partner contributed $0.1 million in each period to the Partnership to maintain its 2.0 percent general partner interest. The Partnership recorded these amounts as capital contributions to Partners’ Capital within its condensed consolidated balance sheets.

 

4. Net Income Per Unit Data

Basic and diluted net income per limited partner unit is calculated by dividing net income, after deducting the amount allocated to the general partner’s interest, by the weighted-average number of limited partner common and subordinated units outstanding during the period.

The general partner’s interest in net income consists of its 2.0 percent general partner interest and “incentive distributions”, which are increasing percentages, up to 50 percent of quarterly distributions in excess of $0.50 per limited partner unit (see Note 11). The general partner was allocated net income of $16.6 million (representing 32.3 percent of total net income for the period) and $3.6 million (representing 14.1 percent of total net income for the period) for the three months ended June 30, 2008 and 2007, respectively, and $26.2 million (representing 29.5 percent of total net income for the period) and $5.6 million (representing 11.8 percent of total net income for the period) for the six months ended June 30, 2008 and 2007, respectively diluted net income per limited partner unit is calculated by dividing net income applicable to limited partners’ by the sum of the weighted-average number of common and subordinated units outstanding and the dilutive effect of incentive unit awards, as calculated by the treasury stock method.

The following table sets forth the reconciliation of the weighted average number of limited partner units used to compute basic net income per limited partner unit to those used to compute diluted net income per limited partner unit for the three and six months ended June 30, 2008 and 2007:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Weighted average number of limited partner units outstanding – basic

   28,657,485    28,586,280    28,642,571    28,575,697

Add effect of dilutive unit incentive awards

   182,777    137,604    180,575    137,668
                   

Weighted average number of limited partner units – diluted

   28,840,262    28,723,884    28,823,146    28,713,365
                   

 

5. Impairment Charge

Long-lived assets other than those held for sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In the first quarter of 2008, the Partnership recognized an impairment of $5.7 million related to Management’s decision to discontinue efforts to expand liquefied petroleum gas storage capacity at its Inkster, Michigan facility. The impairment charge reflects the entire cost associated with the project.

 

6. Investment in Affiliates

The Partnership’s ownership percentages in corporate joint ventures as of June 30, 2008 and December 31, 2007 were as follows:

 

     Partnership
Ownership
Percentage
 

Explorer Pipeline Company

   9.4 %

West Shore Pipe Line Company

   12.3 %

Yellowstone Pipe Line Company

   14.0 %

Wolverine Pipe Line Company

   31.5 %

West Texas Gulf Pipe Line Company

   43.8 %

Mid-Valley Pipeline Company(1)

   55.3 %

 

(1)

The Partnership’s interest in the Mid-Valley Pipeline Company includes 50 percent voting rights.

 

9


The following table provides summarized combined statement of income data on a 100 percent basis for the Partnership’s corporate joint venture interests for the three and six months ended June 30, 2008 and 2007 (in thousands of dollars):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Income Statement Data:

           

Total revenues

   $ 123,870    $ 133,564    $ 232,173    $ 243,253

Net income

   $ 30,741    $ 40,573    $ 56,152    $ 70,545

The following table provides summarized combined balance sheet data on a 100 percent basis for the Partnership’s corporate joint venture interests as of June 30, 2008 and December 31, 2007 (in thousands of dollars):

 

     June 30,
2008
   December 31,
2007

Balance Sheet Data:

     

Current assets

   $ 133,770    $ 181,683

Non-current assets

   $ 667,483    $ 692,331

Current liabilities

   $ 126,108    $ 122,229

Non-current liabilities

   $ 591,213    $ 661,777

Net equity

   $ 83,932    $ 90,008

The Partnership’s investments in Wolverine, West Shore, Yellowstone, and West Texas Gulf at June 30, 2008 include an excess investment amount of approximately $54.0 million, net of accumulated amortization of $3.6 million. The excess investment is the difference between the investment balance and the Partnership’s proportionate share of the net assets of the entities. The excess investment was allocated to the underlying tangible and intangible assets. Other than land and indefinite-lived intangible assets, all amounts allocated, principally to pipeline and related assets, are amortized using the straight-line method over their estimated useful life of 40 years and included within depreciation and amortization in the condensed consolidated statements of income.

 

7. Long-Term Debt

The components of long-term debt are as follows (in thousands of dollars):

 

     June 30,
2008
    December 31,
2007
 

Credit Facility – due November 2012

   $ 90,000     $ 91,000  

Credit Facility – due May 2009

     —         —    

Senior Notes – 7.25%, due February 15, 2012

     250,000       250,000  

Senior Notes – 6.125%, due May 15, 2016

     175,000       175,000  

Less unamortized bond discount

     (799 )     (896 )
                
   $ 514,201     $ 515,104  
                

$400 Million Credit Facility

Sunoco Logistics Partners Operations L.P. (the “Operating Partnership”), a wholly-owned entity of the Partnership, has a five-year $400 million credit facility (“Credit Facility”). The Credit Facility is available to fund the Operating Partnership’s working capital requirements, to finance future acquisitions, to finance future capital projects and for general partnership purposes. The Credit Facility matures in November 2012 and may be prepaid at any time. It bears interest at the Operating Partnership’s option, at either (i) LIBOR plus an applicable margin, (ii) the higher of the federal funds rate plus 0.50 percent or the Citibank prime rate (each plus the applicable margin) or (iii) the federal funds rate plus an applicable margin. The Credit Facility contains various covenants limiting the Operating Partnership’s ability to incur indebtedness; grant certain liens; make certain loans, acquisitions and investments; make

 

10


any material change to the nature of its business; acquire another company; or enter into a merger or sale of assets, including the sale or transfer of interests in the Operating Partnership’s subsidiaries. The Credit Facility also limits the Operating Partnership, on a rolling four-quarter basis, to a maximum total debt to EBITDA ratio of 4.75 to 1, which can generally be increased to 5.25 to 1 during an acquisition period. The Operating Partnership is in compliance with this requirement as of June 30, 2008. The Partnership’s ratio of total debt to EBITDA was 2.5 to 1 at June 30, 2008.

$100 Million Credit Facility

In anticipation of the pending MagTex Acquisition, the Operating Partnership, entered into a $100 million 364 day revolving credit facility (“$100 million Credit Facility”) on May 28, 2008. The $100 million Credit Facility is available to fund the same activities as the Credit Facility described above. If the MagTex Acquisition is terminated, this new revolver will be terminated. The $100 million Credit Facility matures in May 2009 and can be prepaid at any time. Interest on outstanding borrowings is calculated, at the Operating Partnership’s option, using either (i) LIBOR plus an applicable margin or (ii) the higher of (a) the Federal funds rates plus 0.50 percent plus an applicable margin, and (b) the Citibank prime rate plus an applicable margin. The $100 million Credit Facility contains the same covenant requirements as the Credit Facility described above. As of June 30, 2008 there were no borrowings outstanding under the $100 million Credit Facility.

Letters of Credit

The Partnership entered into two standby letters of credit totaling $130.4 million. The letters of credit, which were effective January 1, 2008, are required in connection with certain crude oil exchange contracts in which the Partnership is a party. During the quarter, the Partnership met certain performance requirements defined within these contracts which reduced the letters of credit to $88.0 million. The letters of credit, which will expire in September 2008, are subject to commitment fees, which are not material.

Interest Rate Swap

The Partnership uses interest rate swaps, a type of derivative financial instrument, to manage interest costs and minimize the effects of interest rate fluctuations on cash flows associated with its credit facility. The Partnership does not use derivatives for trading or speculative purposes. While interest rate swaps are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures being hedged. The Partnership minimizes the risk of credit loss by entering into these agreements with major financial institutions that have high credit ratings. The Partnership accounts for its interest rate swaps in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), which requires that all derivatives be recorded on the balance sheet at fair value. SFAS 133 also requires that changes in the fair value be recorded each period in current earnings or other comprehensive income, depending on whether a derivative has been designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. Interest rate swaps are designated as cash flow hedges. Changes in the fair value of a cash flow hedge, to the extent the hedge is effective, are recorded, net of tax, in other comprehensive income (loss), a component of Partners’ capital, until earnings are affected by the variability of the hedged cash flows. Cash flow hedge ineffectiveness, defined as the extent that the changes in the fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded currently in earnings.

In January 2008, the Partnership entered into a $50.0 million floating to fixed interest rate swap agreement (the “Swap”), maturing January 2010. Under the Swap, the Partnership receives interest equivalent to the three-month LIBOR and pays a fixed rate of interest of 3.489 percent with settlements occurring quarterly. The objective of the hedge is to eliminate the variability of cash flows in interest payments for $50.0 million of floating rate debt. To maintain hedge accounting for the Swap, the Partnership is committed to maintaining at least $50.0 million in borrowings at an interest rate based on the three-month LIBOR, plus an applicable margin, through January 2010. The Swap’s fair value of ($0.1) million as of June 30, 2008, is included in accrued liabilities on the condensed consolidated balance sheet and the corresponding change in fair value is included in other comprehensive income, a component of Partners’ equity.

 

8. Commitments and Contingent Liabilities

The Partnership is subject to numerous federal, state and local laws which regulate the discharge of materials into the environment or that otherwise relate to the protection of the environment. These laws and regulations result in liabilities and loss contingencies for remediation at the Partnership’s facilities and at third-party or formerly owned sites. At June 30, 2008 and December 31, 2007, there were accrued liabilities for environmental remediation in the condensed consolidated balance sheets of $0.9 million and $1.1 million, respectively. The accrued liabilities for environmental remediation do not include any amounts attributable to unasserted claims, nor have any recoveries from insurance been assumed. Charges against income for environmental remediation totaled $0.3 million and $1.9 million for the three month periods ended June 30, 2008 and 2007, respectively, and $0.5 million and $2.3 million for the six month periods ended June 30, 2008 and 2007, respectively.

 

11


Total future costs for environmental remediation activities will depend upon, among other things, the identification of any additional sites, the determination of the extent of the contamination at each site, the timing and nature of required remedial actions, the technology available and needed to meet the various existing legal requirements, the nature and extent of future environmental laws, inflation rates and the determination of the Partnership’s liability at multi-party sites, if any, in light of uncertainties with respect to joint and several liability, and the number, participation levels and financial viability of other parties. As discussed below, the Partnership’s current and future costs have been and will be impacted by an indemnification from Sunoco.

The Partnership is a party to certain pending and threatened claims. Although the ultimate outcome of these claims cannot be ascertained at this time, it is reasonably possible that some portion of them could be resolved unfavorably to the Partnership and its predecessor. Management does not believe that any liabilities which may arise from such claims and the environmental matters discussed above would be material in relation to the financial position of the Partnership at June 30, 2008. Furthermore, Management does not believe that the overall costs for such matters will have a material impact, over an extended period of time, on the Partnership’s operations, cash flows or liquidity.

Sunoco has indemnified the Partnership for 30 years from environmental and toxic tort liabilities related to the assets contributed to the Partnership that arise from the operation of such assets prior to the closing of the February 2002 IPO. Sunoco has indemnified the Partnership for 100 percent of all losses asserted within the first 21 years of closing of the February 2002 IPO. Sunoco’s share of liability for claims asserted thereafter will decrease by 10 percent a year. For example, for a claim asserted during the twenty-third year after closing of the February 2002 IPO, Sunoco would be required to indemnify the Partnership for 80 percent of its loss. There is no monetary cap on the amount of indemnity coverage provided by Sunoco. The Partnership has agreed to indemnify Sunoco for events and conditions associated with the operation of the Partnership’s assets that occur on or after the closing of the February 2002 IPO and for environmental and toxic tort liabilities to the extent Sunoco is not required to indemnify the Partnership.

Sunoco also has indemnified the Partnership for liabilities, other than environmental and toxic tort liabilities related to the assets contributed to the Partnership, that arise out of Sunoco’s ownership and operation of the assets prior to the closing of the February 2002 IPO and that are asserted within 10 years after closing of the February 2002 IPO. In addition, Sunoco has indemnified the Partnership from liabilities relating to certain defects in title to the assets contributed to the Partnership and associated with failure to obtain certain consents and permits necessary to conduct its business that arise within 10 years after closing of the February 2002 IPO as well as from liabilities relating to legal actions currently pending against Sunoco or its affiliates and events and conditions associated with any assets retained by Sunoco or its affiliates.

Management of the Partnership does not believe that any liabilities which may arise from claims indemnified by Sunoco would be material in relation to the financial position of the Partnership at June 30, 2008. There are certain other pending legal proceedings related to matters arising after the February 2002 IPO that are not indemnified by Sunoco. Management believes that any liabilities that may arise from these legal proceedings will not be material in relation to the financial position of the Partnership at June 30, 2008.

Sunoco Partners Marketing & Terminals L.P. (“SPMT”), which is wholly owned by the Partnership, has received a proposed penalty assessment from the Internal Revenue Service (“IRS”) in the aggregate amount of $5.1 million based on a failure to timely file excise tax information returns relating to its terminal operations during the calendar years 2004 and 2005. SPMT became current on its information return filings with the IRS in July of 2006. SPMT believes it had reasonable cause for the failure to not file the information returns on a timely basis, and provided this information to the IRS on October 19, 2007 in a formal filing. SPMT is currently awaiting a response from the IRS. The proposed penalties are for the failure to file information returns rather than any failure to pay taxes due, as no taxes were owed by SPMT in connection with such information. The timing or outcome of this claim, and the total costs to be incurred by SPMT in connection therewith, cannot be reasonably estimated at this time.

 

9. Fair Value Measurements

Effective January 1, 2008, the Partnership adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) which pertain to certain balance sheet items measured at fair value on a recurring basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about such measurements that are permitted or required under other accounting pronouncements. While SFAS No. 157 may change the method of calculating fair value, it does not require any new fair value measurements.

In accordance with SFAS No. 157, the Partnership determines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As required, the Partnership utilizes valuation techniques that maximize the use of observable inputs (levels 1 and 2) and minimize the use of unobservable inputs (level 3) within the fair value hierarchy established by SFAS No. 157. The Partnership generally applies the “market approach” to determine fair value. This method uses pricing and other information generated by market transactions for identical or comparable assets and liabilities. Assets and liabilities are classified within the fair value hierarchy based on the lowest level (least observable) input that is significant to the measurement in its entirety. The Partnership’s financial instruments recorded at fair value were not material at June 30, 2008. The Partnership is currently evaluating the impact on its financial statements of the remaining provisions of SFAS No. 157, which must be adopted by January 1, 2009.

 

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In addition, in February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) was issued and became effective January 1, 2008. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other eligible items at fair value that were not previously required to be measured at fair value, with unrealized gains and losses on such items reported in earnings. The Partnership did not adopt the use of fair value measurements for any new items as of the January 1, 2008 effective date of this new standard.

 

10. Management Incentive Plan

Sunoco Partners LLC, the general partner of the Partnership, participates in the Sunoco Partners LLC Long-Term Incentive Plan (“LTIP”) for employees and directors of the general partner who perform services for the Partnership. The LTIP is administered by the independent directors of the Compensation Committee of the general partner’s board of directors with respect to employee awards, and by the non-independent members of the general partners’ board of directors with respect to awards granted to the independent members. The LTIP currently permits the grant of restricted units and unit options covering an aggregate of 1,250,000 common units. There have been no grants of unit options since the inception of the LTIP. Restricted unit awards may also include tandem distribution equivalent rights (“DER’s”) at the discretion of the Compensation Committee.

The Partnership issued 71,205 and 50,410 common units under the LTIP for the six month periods ended June 30, 2008 and 2007, respectively, and recognized share-based compensation expense of $3.4 million in both of the six month periods ended June 30, 2008 and 2007. Each of the restricted unit grants also have tandem DER’s which are recognized as a reduction of Partners’ Capital when earned.

 

11. Cash Distributions

Within 45 days after the end of each quarter, the Partnership distributes all cash on hand at the end of the quarter, less reserves established by the general partner in its discretion. This is defined as “available cash” in the partnership agreement. The general partner has broad discretion to establish cash reserves that it determines are necessary or appropriate to properly conduct the Partnership’s business. The Partnership will make quarterly distributions to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the general partner.

The Partnership issued 11,383,639 subordinated units to its general partner in connection with the initial public offering in February 2002. These subordinated units were convertible to common units on a one-for-one basis provided the Partnership met applicable financial tests set forth in the partnership agreement. The Partnership met the minimum quarterly distribution requirements on all outstanding units for each of the four-quarter periods ended December 31, 2005 and 2006. As a result, subordinated units converted to common units in February 2005 and 2006 with the balance converting in February, 2007.

If cash distributions exceed $0.50 per unit in a quarter, the general partner will receive increasing percentages, up to 50 percent, of the cash distributed in excess of $0.70 per unit. These distributions are referred to as “incentive distributions”.

Distributions paid by the Partnership for the period from January 1, 2007 through June 30, 2008 were as follows:

 

Date Cash

Distribution Paid

   Cash
Distribution
per Limited
Partner Unit
   Total Cash
Distribution to
Limited Partners
   Total Cash
Distribution to

the General
Partner
          ($ in millions)    ($ in millions)

February 14, 2007

   $ 0.8125    $ 23.2    $ 5.1

May 15, 2007

   $ 0.8250    $ 23.6    $ 5.4

August 14, 2007

   $ 0.8375    $ 23.9    $ 5.8

November 14, 2007

   $ 0.8575    $ 24.3    $ 6.1

February 14, 2008

   $ 0.8700    $ 24.9    $ 6.7

May 15, 2008

   $ 0.8950    $ 25.6    $ 7.5

On July 22, 2008, Sunoco Partners LLC, the general partner of Sunoco Logistics Partners L.P., declared a cash distribution of $0.9350 per common partnership unit ($3.74 annualized), representing the distribution for the second quarter 2008. The $35.4 million distribution, including $8.6 million to the general partner, will be paid on August 14, 2008 to unitholders of record at the close of business on August 7, 2008.

 

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12. Business Segment Information

The following table sets forth condensed statement of income information concerning the Partnership’s business segments and reconciles total segment operating income to net income for the three months ended June 30, 2008 and 2007, respectively (in thousands of dollars):

 

     Three Months Ended
June 30,
     2008    2007

Segment Operating Income

     

Eastern Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 20,875    $ 19,455

Unaffiliated customers

     8,076      8,461

Other income

     2,971      3,796
             

Total Revenues

     31,922      31,712
             

Operating expenses

     10,034      13,627

Depreciation and amortization

     2,465      2,249

Selling, general and administrative expenses

     4,866      5,021
             

Total Costs and Expenses

     17,365      20,897
             

Operating Income

   $ 14,557    $ 10,815
             

Terminal Facilities:

     

Sales and other operating revenue:

     

Affiliates

   $ 24,966    $ 23,038

Unaffiliated customers

     14,306      12,241

Other income

     825      —  
             

Total Revenues

     40,097      35,279
             

Operating expenses

     13,913      12,797

Depreciation and amortization

     4,056      3,815

Selling, general and administrative expenses

     4,218      3,139
             

Total Costs and Expenses

     22,187      19,751
         

Operating Income

   $ 17,910    $ 15,528
             

Western Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 710,877    $ 348,870

Unaffiliated customers

     2,536,321      1,218,208

Other income

     4,987      3,909
             

Total Revenues

     3,252,185      1,570,987
             

Cost of products sold and operating expenses

     3,216,914      1,553,906

Depreciation and amortization

     3,309      3,343

Selling, general and administrative expenses

     5,042      5,327
             

Total Costs and Expenses

     3,225,265      1,562,576
             

Operating Income

   $ 26,920    $ 8,411
             

Reconciliation of Segment Operating Income to Net Income:

     

Operating Income:

     

Eastern Pipeline System

   $ 14,557    $ 10,815

Terminal Facilities

     17,910      15,528

Western Pipeline System

     26,920      8,411
             

Total segment operating income

     59,387      34,754

Net interest expense

     8,064      9,500
             

Net Income

   $ 51,323    $ 25,254
             

 

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The following table sets forth condensed statement of income information concerning the Partnership’s business segments and reconciles total segment operating income to net income for the six months ended June 30, 2008 and 2007, respectively (in thousands of dollars):

 

     Six Months Ended
June 30,
     2008    2007

Segment Operating Income

     

Eastern Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 41,114    $ 38,299

Unaffiliated customers

     16,729      16,591

Other income

     4,250      6,332
             

Total Revenues

     62,093      61,222
             

Operating expenses

     21,985      25,583

Depreciation and amortization

     4,879      4,556

Selling, general and administrative expenses

     9,936      10,580
             

Total Costs and Expenses

     36,800      40,719
             

Operating Income

   $ 25,293    $ 20,503
             

Terminal Facilities:

     

Sales and other operating revenue:

     

Affiliates

   $ 49,676    $ 44,474

Unaffiliated customers

     28,980      23,685

Other income

     825      —  
             

Total Revenues

     79,481      68,159
             

Operating expenses

     27,601      25,278

Depreciation and amortization

     7,993      7,490

Selling, general and administrative expenses

     9,093      7,608

Impairment charge

     5,674      —  
             

Total Costs and Expenses

     50,361      40,376
             

Operating Income

   $ 29,120    $ 27,783
             

Western Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 1,302,314    $ 760,651

Unaffiliated customers

     4,270,997      2,296,135

Other income

     8,534      6,420
             

Total Revenues

     5,581,845      3,063,206
             

Cost of products sold and operating expenses

     5,514,525      3,028,727

Depreciation and amortization

     6,617      6,265

Selling, general and administrative expenses

     10,528      10,818
             

Total Costs and Expenses

     5,531,670      3,045,810
             

Operating Income

   $ 50,175    $ 17,396
             

Reconciliation of Segment Operating Income to Net Income:

     

Operating Income:

     

Eastern Pipeline System

   $ 25,293    $ 20,503

Terminal Facilities

     29,120      27,783

Western Pipeline System

     50,175      17,396
             

Total segment operating income

     104,588      65,682

Net interest expense

     15,762      18,121
             

Net Income

   $ 88,826    $ 47,561
             

 

15


The following table provides the identifiable assets for each segment as of June 30, 2008 and December 31, 2007 (in thousands):

 

     June 30,
2008
   December 31,
2007

Eastern Pipeline System

   $ 378,820    $ 370,278

Terminal Facilities

     417,187      400,509

Western Pipeline System

     2,720,731      1,710,093

Corporate and other

     33,590      23,762
             

Total identifiable assets

   $ 3,550,328    $ 2,504,642
             

Corporate and other assets consist primarily of cash and cash equivalents, advances to affiliates and deferred charges.

 

  13. Supplemental Condensed Consolidating Financial Information

The Partnership and the operating partnerships of the Operating Partnership served as joint and several guarantors of the Senior Notes and of any obligations under the previous credit facility. The Partnership continues to serve as guarantor of the Senior Notes and of any obligations under the new credit facilities. These guarantees are full and unconditional. In connection with the Partnership’s $400 million Credit Facility, the Subsidiary Guarantors were released from their obligations both under the previous credit facility, and the 7.25 percent and 6.125 percent Senior Notes in August 2007. Given that certain, but not all subsidiaries of the Partnership were guarantors, the Partnership was required to present the following supplemental condensed consolidating financial information. For purposes of the following footnote, Sunoco Logistics Partners, L.P. is referred to as “Parent” and Sunoco Logistics Partners Operations L.P. is referred to as “Subsidiary Issuer.” In the 2008 schedules and 2007 balance sheet schedule, Sunoco Partners Marketing and Terminals L.P., Sunoco Pipeline L.P., Sun Pipeline Company of Delaware LLC, Sunoco Pipeline Acquisition LLC, Sunoco Logistics Partners GP LLC, Sunoco Logistics Partners Operations GP LLC and Sunoco Partners Lease Acquisition & Marketing LLC, are collectively referred to as “Non-Guarantor Subsidiaries.” In the 2007 schedules of income and cash flows, Sunoco Partners Marketing and Terminals L.P., Sunoco Pipeline L.P., Sun Pipeline Company of Delaware LLC and Sunoco Pipeline Acquisition LLC are collectively referred to as the “Subsidiary Guarantors”, and Sunoco Logistics Partners GP LLC, Sunoco Logistics Partners Operations GP LLC and Sunoco Partners Lease Acquisition & Marketing LLC, are referred to as “Non-Guarantor Subsidiaries.”

The following supplemental condensed consolidating financial information (in thousands) reflects the Parent’s separate accounts, the Subsidiary Issuer’s separate accounts, the combined accounts of the Subsidiary Guarantors, the combined accounts of the Non-Guarantor Subsidiaries, the combined consolidating adjustments and eliminations and the Parent’s consolidated accounts for the dates and periods indicated. For purposes of the following condensed consolidating information, the Parent’s investments in its subsidiaries and the Subsidiary Issuer’s investments in its subsidiaries are accounted for under the equity method of accounting.

 

16


Condensed Consolidating Statement of Income

Three Months Ended June 30, 2008

(unaudited)

 

     Parent    Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

            

Sales and other operating revenue:

            

Affiliates

   $ —      $ —       $ 756,718    $ —       $ 756,718  

Unaffiliated customers

     —        —         2,558,703      —         2,558,703  

Equity in earnings of subsidiaries

     51,321      58,560       6      (109,887 )     —    

Other income

     —        —         8,783      —         8,783  
                                      

Total Revenues

     51,321      58,560       3,324,210      (109,887 )     3,324,204  
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —         3,240,861      —         3,240,861  

Depreciation and amortization

     —        —         9,830      —         9,830  

Selling, general and administrative expenses

     —        —         14,126      —         14,126  
                                      

Total Costs and Expenses

     —        —         3,264,817      —         3,264,817  
                                      

Operating Income

     51,321      58,560       59,393      (109,887 )     59,387  

Net interest cost paid to (received from) affiliates

     —        (302 )     825      —         523  

Other interest cost and debt expenses, net

     —        8,405       —        —         8,405  

Capitalized interest

     —        (864 )     —        —         (864 )
                                      

Net Income (Loss)

   $ 51,321    $ 51,321     $ 58,568    $ (109,887 )   $ 51,323  
                                      

 

17


Condensed Consolidating Statement of Income

Three Months Ended June 30, 2007

(unaudited)

 

     Parent    Subsidiary
Issuer
    Subsidiary
Guarantors
   Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total  

Revenues

              

Sales and other operating revenue:

              

Affiliates

   $ —      $ —       $ 391,370    $ —       $ —       $ 391,370  

Unaffiliated customers

     —        —         1,238,910      —         —         1,238,910  

Equity in earnings of subsidiaries

     25,257      33,932       —        3       (59,192 )     —    

Other income

     —        —         7,698      —         —         7,698  
                                              

Total Revenues

     25,257      33,932       1,637,978      3       (59,192 )     1,637,978  
                                              

Costs and Expenses

              

Cost of products sold and operating expenses

     —        —         1,580,324      6       —         1,580,330  

Depreciation and amortization

     —        —         9,407      —         —         9,407  

Selling, general and administrative expenses

     —        —         13,487      —         —         13,487  
                                              

Total Costs and Expenses

     —        —         1,603,218      6       —         1,603,224  
                                              

Operating Income

     25,257      33,932       34,760      (3 )     (59,192 )     34,754  

Net interest cost paid to affiliates

     —        234       825      —         —         1,059  

Other interest cost and debt expenses, net

     —        9,386       —        —         —         9,386  

Capitalized interest

     —        (945 )     —        —         —         (945 )
                                              

Net Income (Loss)

   $ 25,257    $ 25,257     $ 33,935    $ (3 )   $ (59,192 )   $ 25,254  
                                              

 

18


Condensed Consolidating Statement of Income

Six Months Ended June 30, 2008

(unaudited)

 

     Parent    Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

            

Sales and other operating revenue:

            

Affiliates

   $ —      $ —       $ 1,393,104    $ —       $ 1,393,104  

Unaffiliated customers

     —        —         4,316,706      —         4,316,706  

Equity in earnings of subsidiaries

     88,825      102,937       10      (191,772 )     —    

Other income

     —        —         13,609      —         13,609  
                                      

Total Revenues

     88,825      102,937       5,723,429      (191,772 )     5,723,419  
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —         5,564,111      —         5,564,111  

Depreciation and amortization

     —        —         19,489      —         19,489  

Selling, general and administrative expenses

     —        —         29,557      —         29,557  

Impairment charge

     —        —         5,674      —         5,674  
                                      

Total Costs and Expenses

     —        —         5,618,831      —         5,618,831  
                                      

Operating Income

     88,825      102,937       104,598      (191,772 )     104,588  

Net interest cost paid to / (received from) affiliates

     —        (1,233 )     1,650      —         417  

Other interest cost and debt expenses, net

     —        16,981       —        —         16,981  

Capitalized interest

     —        (1,636 )     —        —         (1,636 )
                                      

Net Income

   $ 88,825    $ 88,825     $ 102,948    $ (191,772 )   $ 88,826  
                                      

 

19


Condensed Consolidating Statement of Income

Six Months Ended June 30, 2007

(unaudited)

 

     Parent    Subsidiary
Issuer
    Subsidiary
Guarantors
   Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

               

Sales and other operating revenue:

               

Affiliates

   $ —      $ —       $ 843,439    $ —      $ —       $ 843,439  

Unaffiliated customers

     —        —         2,336,411      —        —         2,336,411  

Equity in earnings of subsidiaries

     47,561      64,032       —        6      (111,599 )     —    

Other income

     —        —         12,737      —        —         12,737  
                                             

Total Revenues

     47,561      64,032       3,192,587      6      (111,599 )     3,192,587  
                                             

Costs and Expenses

               

Cost of products sold and operating expenses

     —        —         3,079,582      6      —         3,079,588  

Depreciation and amortization

     —        —         18,311      —        —         18,311  

Selling, general and administrative expenses

     —        —         29,006      —        —         29,006  
                                             

Total Costs and Expenses

     —        —         3,126,899      6      —         3,126,905  
                                             

Operating Income

     47,561      64,032       65,688      —        (111,599 )     65,682  

Net interest cost paid to / (received from) affiliates

     —        (56 )     1,650      —        —         1,594  

Other interest cost and debt expenses, net

     —        18,025       —        —        —         18,025  

Capitalized interest

     —        (1,498 )     —        —        —         (1,498 )
                                             

Net Income

   $ 47,561    $ 47,561     $ 64,038    $ —      $ (111,599 )   $ 47,561  
                                             

 

20


Condensed Consolidating Balance Sheet

June 30, 2008

(unaudited)

 

     Parent    Subsidiary
Issuer
   Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total

Assets

            

Current Assets

            

Cash and cash equivalents

   $ —      $ 2,000    $ —       $ —       $ 2,000

Advances to affiliates

     21,617      48,000      (55,383 )     —         14,234

Accounts receivable, affiliated companies

     —        —        279,072       —         279,072

Accounts receivable, net

     —        —        1,977,472       —         1,977,472

Inventories

            

Crude oil

     —        —        37,647       —         37,647

Refined product

     —        —        424       —         424

Materials, supplies and other

     —        —        842       —         842
                                    

Total Current Assets

     21,617      50,000      2,240,074       —         2,311,691
                                    

Properties, plants and equipment, net

     —        —        1,116,920       —         1,116,920

Investment in affiliates

     505,151      1,005,772      660,933       (2,086,233 )     85,623

Deferred charges and other assets

     —        2,971      33,123       —         36,094
                                    

Total Assets

   $ 526,768    $ 1,058,743    $ 4,051,050     $ (2,086,233 )   $ 3,550,328
                                    

Liabilities and Partners’ Capital Current Liabilities

            

Accounts payable

   $ —      $ —      $ 2,294,493     $ —       $ 2,294,493

Accrued liabilities

     981      2,555      44,577       —         48,113

Accrued taxes other than income taxes

     —        —        46,807       —         46,807
                                    

Total Current Liabilities

     981      2,555      2,385,877       —         2,389,413
                                    

Long-term debt

     —        514,201      —         —         514,201

Other deferred credits and liabilities

     —        —        28,683       —         28,683
                                    

Total Liabilities

     981      516,756      2,414,560       —         2,932,297
                                    

Total Partners’ Capital

     525,787      541,987      1,636,490       (2,086,233 )     618,031
                                    

Total Liabilities and Partners’ Capital

   $ 526,768    $ 1,058,743    $ 4,051,050     $ (2,086,233 )   $ 3,550,328
                                    

 

21


Condensed Consolidating Balance Sheet

December 31, 2007

 

     Parent    Subsidiary
Issuer
   Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total

Assets

            

Current Assets

            

Cash and cash equivalents

   $ —      $ 2,000    $ —       $ —       $ 2,000

Advances to affiliates

     4,348      46,000      (42,288 )     —         8,060

Accounts receivable, affiliated companies

     —        —        62,167       —         62,167

Accounts receivable, net

     —        —        1,200,782       —         1,200,782

Inventories

            

Crude oil

     —        —        29,145       —         29,145

Refined product additives

     —        —        682       —         682

Materials, supplies and other

     —        —        842       —         842
                                    

Total Current Assets

     4,348      48,000      1,251,330       —         1,303,678
                                    

Properties, plants and equipment, net

     —        —        1,089,262       —         1,089,262

Investment in affiliates

     584,060      1,101,139      85,084       (1,685,298 )     84,985

Deferred charges and other assets

     —        3,278      23,439       —         26,717
                                    

Total Assets

   $ 588,408    $ 1,152,417    $ 2,449,115     $ (1,685,298 )   $ 2,504,642
                                    

Liabilities and Partners’ Capital Current Liabilities

            

Accounts payable

   $ —      $ —      $ 1,289,402     $ —       $ 1,289,402

Accrued liabilities

     980      3,863      40,316       —         45,159

Accrued taxes other than income taxes

     —        —        34,277       —         34,277
                                    

Total Current Liabilities

     980      3,863      1,363,995       —         1,368,838
                                    

Long-term debt

     —        515,104      —         —         515,104

Other deferred credits and liabilities

     —        —        29,655       —         29,655
                                    

Total Liabilities

     980      518,967      1,393,650       —         1,913,597
                                    

Total Partners’ Capital

     587,428      633,450      1,055,465       (1,685,298 )     591,045
                                    

Total Liabilities and Partners’ Capital

   $ 588,408    $ 1,152,417    $ 2,449,115     $ (1,685,298 )   $ 2,504,642
                                    

 

22


Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2008

(unaudited)

 

     Parent     Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total  

Net Cash Flows from Operating Activities

   $ 88,826     $ 87,749     $ 149,373     $ (191,772 )   $ 134,176  
                                        

Cash Flows from Investing Activities:

          

Capital expenditures

     —         —         (52,495 )     —         (52,495 )

MagTex Acquisition

     —         —         (10,462 )     —         (10,462 )

Intercompany

     (6,939 )     (84,749 )     (100,084 )     191,772       —    
                                        
     (6,939 )     (84,749 )     (163,041 )     191,772       (62,957 )
                                        

Cash Flows from Financing Activities:

          

Distribution paid to Limited Partners and General Partner

     (64,694 )     —         —         —         (64,694 )

Payments of statutory withholding on net issuance of Limited Partner units under restricted unit incentive plan

     —         —         (1,278 )     —         (1,278 )

Contribution from General Partner for Limited Partner unit transactions

     76       —         —         —         76  

Advances to affiliates, net

     (17,269 )     (2,000 )     13,095       —         (6,174 )

Borrowings under credit facility

     —         85,000       —         —         85,000  

Repayments under credit facility

     —         (86,000 )     —         —         (86,000 )

Contributions from affiliate

     —         —         1,851       —         1,851  
                                        
     (81,887 )     (3,000 )     13,668       —         (71,219 )
                                        

Net change in cash and cash equivalents

     —         —         —         —         —    

Cash and cash equivalents at beginning of year

     —         2,000       —         —         2,000  
                                        

Cash and cash equivalents at end of year

   $ —       $ 2,000     $ —       $ —       $ 2,000  
                                        

 

23


Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2007

(unaudited)

 

     Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Net Cash Flows from Operating Activities

   $ 47,514     $ 46,293     $ 71,144     $ —      $ (111,599 )   $ 53,352  
                                               

Cash Flows from Investing Activities:

             

Capital expenditures

     —         —         (50,642 )     —        —         (50,642 )

Acquisitions

     —         —         (13,173 )     —        —         (13,173 )

Intercompany

     2,726       (109,054 )     (5,271 )     —        111,599       —    
                                               
     2,726       (109,054 )     (69,086 )        111,599       (63,815 )
                                               

Cash Flows from Financing Activities:

             

Distribution paid to Limited Partners and General Partner

     (57,271 )     —         —         —        —         (57,271 )

Payments of statutory withholding on net issuance of Limited Partner units under restricted unit incentive plan

     —         —         (1,479 )     —        —         (1,479 )

Contribution from General Partner for Limited Partner unit transactions

     58       —         —         —        —         58  

Repayments from (advances to) affiliates, net

     6,973       (9,516 )     (1,331 )     —        —         (3,874 )

Borrowings under credit facility

     —         91,900       —         —        —         91,900  

Repayments under credit facility

     —         (20,000 )     —         —        —         (20,000 )

Contributions from (distributions to) affiliate

     —         —         752       —        —         752  
                                               
     (50,240 )     62,384       (2,058 )     —        —         10,086  
                                               

Net change in cash and cash equivalents

     —         (377 )     —         —        —         (377 )

Cash and cash equivalents at beginning of year

     —         9,412       —         —        —         9,412  
                                               

Cash and cash equivalents at end of period

   $ —       $ 9,035     $ —       $ —      $ —       $ 9,035  
                                               

 

24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations – Three Months Ended June 30, 2008 and 2007

Sunoco Logistics Partners L.P.

Operating Highlights

Three Months Ended June 30, 2008 and 2007

 

     Three Months Ended
June 30,
     2008    2007

Eastern Pipeline System:(1)

     

Total shipments (barrel miles per day)(2)

   61,028,163    63,253,888

Revenue per barrel mile (cents)

   0.521    0.485

Terminal Facilities:

     

Terminal throughput (bpd):

     

Refined product terminals(3)

   428,704    440,152

Nederland terminal

   526,350    529,462

Refinery terminals(4)

   622,011    715,462

Western Pipeline System:(1)

     

Crude oil pipeline throughput (bpd)

   547,489    535,715

Crude oil purchases at wellhead (bpd)

   177,317    180,390

Gross margin per barrel of pipeline throughput (cents)(5)

   54.1    20.2

 

 

(1)

Excludes amounts attributable to equity ownership interests in corporate joint ventures.

 

(2)

Represents total average daily pipeline throughput multiplied by the number of miles of pipeline through which each barrel has been shipped.

 

(3)

Includes results from the Partnership’s purchase of a 50% undivided interest in a refined products terminal in Syracuse, New York in June 2007.

 

(4)

Consists of the Partnership’s Fort Mifflin Terminal Complex, the Marcus Hook Tank Farm and the Eagle Point Dock.

 

(5)

Represents total segment sales minus cost of products sold and operating expenses and depreciation and amortization divided by crude oil pipeline throughput.

Analysis of Consolidated Net Income

Net income was $51.3 million for the second quarter 2008 as compared with $25.3 million for the second quarter 2007, an increase of $26.0 million. The increase was the result of continued margin improvement across all segments, stronger asset utilization in the Western Pipeline system and additional tankage placed into service at the Nederland terminal during 2007 and 2008. These increases were partially offset by lower volumes in our Eastern Pipeline and Terminal systems.

Net interest expense decreased $1.4 million to $8.1 million for the second quarter 2008 from $9.5 million for the prior year’s quarter primarily due to lower interest rates related to the Partnership’s revolving Credit Facility.

Analysis of Segment Operating Income

Eastern Pipeline System

Operating income for the Eastern Pipeline System increased $3.8 million to $14.6 million for the second quarter 2008 from $10.8 million for the second quarter 2007. Sales and other operating revenue increased by $1.0 million to $29.0 million due primarily to higher fees across the Partnership’s refined product and crude oil pipelines, partially offset by decreased volumes. Other income decreased $0.8 million compared to the prior year’s quarter due primarily to a decrease in equity income associated with the Partnership’s joint venture interests. Cost of goods sold and operating expenses decreased by $3.6 million to $10.0 million compared to the prior year’s quarter due primarily to the impact of increased crude oil and refined product prices on operating gains and a decreased level of environmental charges. These decreases were partially offset by increased utility costs throughout the system.

 

25


Terminal Facilities

The Terminal Facilities business segment had operating income of $17.9 million for the second quarter 2008, as compared to $15.5 million for the prior year’s second quarter. Sales and other operating revenue increased by $4.0 million to $39.3 million due primarily to the addition of tankage at the Nederland terminal, increased terminal fees, sales of product overages which were favorably impacted by the increased price of crude oil and increased product additive revenues. Other income increased $0.8 million from the prior year’s second quarter as a result of the final insurance recovery for hurricane damage sustained during 2005 at the Partnership’s Nederland terminal. Cost of goods sold and operating expenses increased by $1.1 million to $13.9 million for the second quarter of 2008 due primarily to increased product additive costs, higher utility costs and timing of maintenance activity. Selling, general and administrative expenses increased by $1.1 million to $4.2 million for the second quarter of 2008. During 2007, expenses were reduced by $0.9 million in connection with an insurance recovery.

Western Pipeline System

Operating income for the Western Pipeline System increased $18.5 million to $26.9 million for the second quarter of 2008 compared to the prior year’s quarter due primarily to improved asset utilization resulting from the creation of a bi-directional pipeline connection to the Partnership’s Nederland terminal, increased pipeline volumes and fees and higher lease acquisition margins. Additionally, the Partnership benefited in the second quarter of 2008 from third party contracts, to purchase and sell crude oil inventory, that were entered into in conjunction with a contract to exchange crude oil inventory with the Department of Energy (“DOE”). In accordance with accounting standards, these third party contracts were deemed to be derivatives, which required a mark to market adjustment to be recorded in income during the second quarter of 2008. The accounting for the third party contracts, along with the exchange contract with the DOE, resulted in $3.2 million in income being recognized during the second quarter 2008. These contracts will be settled during the third quarter of 2008. Other income increased $1.1 million compared to the prior year’s quarter due primarily to a gain recognized on the insurance recovery discussed earlier.

Higher crude oil prices were a key driver of the overall increase in total revenue, cost of products sold and operating expenses from the prior year’s quarter. The average price of West Texas Intermediate crude oil at Cushing, Oklahoma increased to $124.00 per barrel for the second quarter of 2008 from $65.02 per barrel for the second quarter of 2007.

Results of Operations – Six Months Ended June 30, 2008 and 2007

Sunoco Logistics Partners L.P.

Operating Highlights

Six Months Ended June 30, 2008 and 2007

 

     Six Months Ended
June 30,
     2008    2007

Eastern Pipeline System:(1)

     

Total shipments (barrel miles per day)(2)

   60,705,947    63,372,001

Revenue per barrel mile (cents)

   0.524    0.479

Terminal Facilities:

     

Terminal throughput (bpd):

     

Refined product terminals(3)

   423,662    427,923

Nederland terminal

   539,702    536,840

Refinery terminals(4)

   648,604    664,768

Western Pipeline System:(1)

     

Crude oil pipeline throughput (bpd)

   548,957    534,816

Crude oil purchases at wellhead (bpd)

   174,381    182,757

Gross margin per barrel of pipeline throughput (cents)(5)

   52.3    22.5

 

 

(1)

Excludes amounts attributable to equity ownership interests in corporate joint ventures.

 

(2)

Represents total average daily pipeline throughput multiplied by the number of miles of pipeline through which each barrel has been shipped.

 

(3)

Includes results from the Partnership’s purchase of a 50% undivided interest in a refined products terminal in Syracuse, New York.

 

26


(4)

Consists of the Partnership’s Fort Mifflin Terminal Complex, the Marcus Hook Tank Farm and the Eagle Point Dock.

 

(5)

Represents total segment sales and other operating revenue minus cost of products sold and operating expenses and depreciation and amortization divided by crude oil pipeline throughput.

Analysis of Consolidated Net Income

Net income was $88.8 million for the six month period ended June 2008 as compared with $47.6 million for the comparable period in 2007. The increase was driven primarily by higher operating income resulting from higher margins and fees across all segments, improved asset utilization within the Western Pipeline system and additional tankage placed into service at the Nederland terminal during 2007 and 2008. These improvements to operating income were partially offset by lower volumes in the Eastern Pipeline system and Terminal Facilities along with a $5.7 million non-cash impairment charge related to a cancelled project. A decrease in interest expense further contributed to the $41.2 million increase in net income.

Net interest expense decreased $2.4 million to $15.8 million for the first six months of 2008 from $18.1 million for the first six months of 2007 due to decreased borrowings and lower interest rates related to the Partnership’s revolving Credit Facility.

Analysis of Segment Operating Income

Eastern Pipeline System

Operating income for the Eastern Pipeline System increased $4.8 million to $25.3 million for the first six months of 2008 from $20.5 million for the first six months of 2007. Sales and other operating revenue increased from $54.9 million for the prior year’s period to $57.8 million for the six months ended June 2008 due mainly to higher fees across the Partnership’s refined product and crude oil pipelines, partially offset by decreased volumes. Other income decreased by $2.1 million to $4.2 million for the first six months of 2008 from $6.3 million for the prior year period due primarily to a decrease in equity income associated with the Partnership’s joint venture interests. Operating expenses decreased by $3.6 million to $22.0 million due primarily to the impact of increased crude oil and refined product prices on operating gains and a decreased level of environmental charges. This decrease was partially offset by increased utility costs throughout the system.

Terminal Facilities

The Terminal Facilities segment had operating income of $29.1 million for the six months ended June 2008, as compared to $27.8 million for the first six months of 2007. Operating income was reduced during the first six months of 2008 due to a $5.7 million non-cash impairment charge related to the Partnership’s decision to discontinue efforts to expand LPG storage capacity at its Inkster, Michigan facility. Sales and other operating revenue increased $10.5 million to $78.7 million in the first half of 2008 due primarily to the addition of new tankage at the Nederland terminal, higher fees at the Partnership’s Nederland and refined products terminals, the sale of product overages which were favorably impacted by the increased price of crude oil and increased product additive revenues. The increases were partially offset by decreased volumes in the Partnership’s refinery and refined product terminals. Other income increased $0.8 million from the first six months of 2008 as a result of the insurance recovery discussed above. Cost of goods sold and operating expenses increased by $2.3 million to $27.6 million for the six months ended June 2008 due primarily to increased utility costs and timing of maintenance activity. Selling, general and administrative expenses increased by $1.5 million to $9.1 million for the six months ended June 30, 2008. During 2007, expenses were reduced by $0.9 million in connection with an insurance recovery.

Western Pipeline System

Operating income for the Western Pipeline System increased $32.8 million to $50.2 million for the first six months of 2008 from $17.4 million for the first six months of 2007. The increase was due primarily to improved asset utilization resulting from creation of a bi-directional pipeline connection to the Partnership’s Nederland terminal, increased pipeline volumes and fees and higher lease acquisition margins. Additionally, the Partnership benefited in the first six months of 2008 from third party contracts, to purchase and sell crude oil inventory, that were entered into in conjunction with a contract to exchange crude oil inventory with the Department of Energy (“DOE”). In accordance with accounting standards, these third party contracts were deemed to be derivatives, which required a mark to market adjustment to be recorded in income during the second quarter of 2008. The accounting for the third party contracts, along with the exchange contract with the DOE, resulted in $5.1 million in income being recognized for the first six months of 2008. These contracts will be settled during the third quarter of 2008. Other income also contributed to the increased profitability due to increased equity income associated with the Partnership’s joint venture interests and the gain on an insurance recovery discussed above.

 

27


Higher crude oil prices were a key driver of the overall increase in total revenue, cost of products sold and operating expenses from the prior year period. The average price of West Texas Intermediate crude oil at Cushing, Oklahoma increased to $110.98 per barrel for the first six months of 2008 from $61.64 per barrel for the first six months of 2007.

Liquidity and Capital Resources

Liquidity

Cash generated from operations and borrowings under the credit facilities are the Partnership’s primary sources of liquidity. At June 30, 2008, the Partnership had available borrowing capacity under the credit facilities of $410.0 million. The Partnership’s working capital position reflects crude oil inventories based on historical costs under the LIFO method of accounting. If the inventories had been valued at their current replacement cost, the Partnership would have had working capital of $181.2 million at June 30, 2008.

On April 28, 2008, Sunoco Pipeline L.P., a subsidiary of the Partnership, entered into a definitive agreement to acquire a refined products pipeline system and certain other real and personal property interests and assets from Mobil Pipe Line Company. In addition to the pipeline system, Sunoco Partners Marketing & Terminals L.P., a subsidiary of the Partnership, entered into definitive agreements with Exxon Mobil Corporation, Mobil Pipe Line Company and ExxonMobil Oil Corporation, to acquire six refined products terminal facilities. Subject to necessary regulatory filings and approvals and the satisfaction of certain closing conditions, the transactions, with a combined purchase price of approximately $200.0 million, are expected to be completed in the third quarter of 2008. These acquisitions are expected to be funded through a combination of cash on hand and the Partnership’s revolving credit facilities and other borrowings. For further information on these transactions see “Item 1. Notes to Condensed Consolidated Financial Statements (unaudited)—Note 2.”

Capital Resources

The Partnership periodically supplements its cash flows from operations with proceeds from debt and equity financing activities.

$400 Million Credit Facility

Sunoco Logistics Partners Operations L.P. (the “Operating Partnership”), a wholly-owned entity of the Partnership, has a five-year $400 million Credit Facility, which is available to fund the Operating Partnership’s working capital requirements, to finance future acquisitions, to finance future capital projects and for general partnership purposes. The Credit Facility matures in November 2012. At December 31, 2007, there was $91.0 million outstanding under the credit facility. During the first six months of 2008, the Partnership had net repayments of $1.0 million resulting in an outstanding balance of $90.0 million at June 30, 2008.

The Credit Facility bears interest at the Operating Partnership’s option, at either (i) LIBOR plus an applicable margin, (ii) the higher of the federal funds rate plus 0.50 percent or the Citibank prime rate (each plus the applicable margin) or (iii) the federal funds rate plus an applicable margin.

The Credit Facility contains various covenants limiting the Operating Partnership’s ability to a) incur indebtedness, b) grant certain liens, c) make certain loans, acquisitions and investments, d) make any material change to the nature of its business, e) acquire another company, or f) enter into a merger or sale of assets, including the sale or transfer of interests in the Operating Partnership’s subsidiaries. The Credit Facility also requires the Operating Partnership to maintain, on a rolling four-quarter basis, a maximum total debt to EBITDA ratio of 4.75 to 1, which can generally be increased to 5.25 to 1 during an acquisition period. The Operating Partnership is in compliance with this requirement as of June 30, 2008. The Partnership’s ratio of total debt to EBITDA was 2.5 to 1 at June 30, 2008.

$100 Million Credit Facility

In anticipation of the pending MagTex Acquisition, the Operating Partnership entered into a $100 million 364 day revolving credit facility (“$100 million Credit Facility”) on May 28, 2008. This $100 million Credit Facility is available to fund the same activities as the Credit Facility described above. If the MagTex Acquisition is terminated, this new revolver will be terminated. The $100 million Credit Facility matures in May 2009 and can be prepaid at any time. Interest on outstanding borrowings is calculated, at the Operating Partnership’s option, using either (i) LIBOR plus and applicable margin or (ii) the higher of (a) the federal funds rates plus 0.50 percent plus an applicable margin, and (b) the Citibank prime rate plus an applicable margin. The $100 million Credit Facility contains the same covenant requirements as the Credit Facility described above. As of June 30, 2008 there were no borrowings outstanding under the $100 million Credit Facility.

 

28


Letters of Credit

The Partnership entered into two standby letters of credit totaling $130.4 million. The letters of credit, which were effective January 1, 2008, are required in connection with certain crude oil exchange contracts in which the Partnership is a party. During the quarter, the Partnership met certain performance requirements defined within these contracts which reduced the letters of credit to $88.0 million. The letters of credit, which will expire in September 2008, are subject to commitment fees, which are not material.

Cash Flows and Capital Expenditures

Net cash provided by operating activities for the six months ended June 30, 2008 was $134.2 million compared with $53.4 million of net cash provided by operating activities for the first six months of 2007. Net cash provided by operating activities for the first six months of 2008 was primarily the result of net income of $88.8 million, depreciation and amortization of $19.5 million, the $5.7 million impairment charge, and an $18.7 million decrease in working capital. The decrease in working capital was the result of an increase in both accounts payable and accounts receivable activity driven primarily by commodity prices. Net cash provided by operating activities for the first six months of 2007 was primarily the result of net income of $47.5 million and depreciation and amortization of $18.3 million, partially offset by a $22.9 million increase in working capital. The increase in working capital was primarily attributable to an increase in revenues along with an increase in inventory volumes associated with contango inventory positions.

Net cash used in investing activities for the first six months of 2008 was $63.0 million compared with $63.8 million for the first six months of 2007.

Net cash used in financing activities for the first six months of 2008 was $71.2 million compared with $10.1 million net cash provided by financing activities for the first six months of 2007. Net cash used in financing activities for the first six months of 2008 resulted from $64.7 million in distributions paid to limited partners and the general partner and an increase in advances to affiliates of $6.2 million. Net cash provided by financing activities for the first six months of 2007 was the result of $71.9 million increase in net borrowings under the Partnership’s Credit Facility to fund the Partnership’s organic growth capital program, contango inventory positions, and to purchase a 50% undivided interest in a refined products terminal located in Syracuse, New York. This increase was partially offset by $57.3 million in distributions paid to limited partners and the general partner and $3.9 million in net advances to affiliates.

Under a treasury services agreement with Sunoco, the Partnership participates in Sunoco’s centralized cash management program. Advances from affiliates in the Partnership’s condensed consolidated balance sheets at June 30, 2008 represent amounts due to Sunoco under this agreement. Advances to affiliates at December 31, 2007 represent amounts due from Sunoco under this agreement.

Capital Requirements

The pipeline, terminalling, and crude oil transport operations are capital intensive, requiring significant investment to maintain, upgrade or enhance existing operations and to meet environmental and operational regulations. The capital requirements have consisted, and are expected to continue to consist, primarily of:

 

   

Maintenance capital expenditures, such as those required to maintain equipment reliability, tankage and pipeline integrity and safety, and to address environmental regulations; and

 

   

Expansion capital expenditures to acquire assets to grow the business and to expand existing and construct new facilities, such as projects that increase storage or throughput volume.

The following table summarizes maintenance and expansion capital expenditures, including net cash paid for acquisitions, for the periods presented (in thousands of dollars):

 

     Six Months Ended
June 30,
     2008    2007

Maintenance

   $ 7,771    $ 7,541

Expansion

     44,724      56,274
             
   $ 52,495    $ 63,815
             

 

29


Management anticipates maintenance capital expenditures to be approximately $26.0 million for the year ended December 31, 2008, excluding reimbursements from Sunoco in accordance with the terms of certain agreements. Maintenance capital expenditures for both periods presented include recurring expenditures such as pipeline integrity costs, pipeline relocations, repair and upgrade of field instrumentation, including measurement devices, repair and replacement of tank floors and roofs, upgrades of cathodic protection systems, crude trucks and related equipment, and the upgrade of pump stations.

Expansion capital expenditures for the six months ended June 30, 2008 were $44.7 million compared to $56.3 million for the first six months of 2007. The decrease is attributable to the $13.4 million acquisition of a 50 percent interest in the Syracuse, New York refined products terminal in 2007. Expansion capital for 2008 includes construction in progress, in connection with the Partnership’s agreement with Motiva Enterprises LLC, of three crude oil storage tanks at its Nederland Terminal and a crude oil pipeline from Nederland to Motiva’s Port Arthur, Texas refinery. Expansion capital also includes construction of five additional crude oil storage tanks at Nederland, of which two began construction during the second quarter of 2008. These five crude oil storage tanks will have a combined shell capacity of approximately 3.0 million barrels.

The Partnership expects to fund capital expenditures, including pending and future acquisitions, from both cash provided by operations and, to the extent necessary, from the proceeds of borrowings under the Credit Facility, other borrowings and the issuance of additional common units.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our exposure to interest-rate risk relates primarily to variable-rate borrowings. Variable-rate debt outstanding at June 30, 2008 was $90.0 million and averaged $73.7 million during the second quarter of 2008. The Partnership issues long-term debt either at fixed rates or use interest rate swaps to limit exposure to changes in interest rates on variable-rate, long-term debt. On January 8, 2008, the Partnership entered into an interest rate swap with a notional amount of $50.0 million maturing January 2010. Under the swap agreement, the Partnership receives interest equivalent to the three-month LIBOR and pays a fixed rate of interest of 3.489 percent with settlements occurring quarterly. To maintain hedge accounting for the Swap, the Partnership is committed to maintaining at least $50.0 million in borrowings at an interest rate based on the three-month LIBOR, plus an applicable margin, through January 2010. Additional variable-rate borrowings under the revolving credit facilities will be subject to fluctuations in interest rates.

Commodity Market Risk

The Partnership is exposed to volatility in crude oil commodity prices. To manage such exposures, inventory levels and expectations of future commodity prices are monitored when making decisions with respect to risk management and inventory carried. The Partnership does not hold or issue any derivative instruments for trading purposes. In January 2008, the Partnership commenced an exchange contract with the Department of Energy (“DOE”). Under the terms of this contract, the DOE was required to deliver various grades of crude oil to the Partnership during the period of January 2008 through June 2008. In return, the Partnership agreed to deliver an equivalent amount of crude oil to the DOE during the period of February 2008 through July 2008. In connection with this contract, the Partnership entered into third party contracts to balance the timing of crude oil receipts and purchases. In accordance with accounting standards, these third party contracts were deemed to be derivatives, and therefore a mark to mark adjustment was recorded in income during the second quarter of 2008. The combination of these contracts, along with the exchange contract with the DOE, resulted in $5.1 million of income being recognized as of June 30, 2008. These contracts will be settled during the third quarter of 2008.

Forward-Looking Statements

Some of the information included in this quarterly report on Form 10-Q contains “forward-looking” statements, as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and information relating to Sunoco Logistics Partners L.P. that is based on the beliefs of its management as well as assumptions made by and information currently available to management.

Forward-looking statements discuss expected future results based on current and pending business operations, and may be identified by words such as “anticipates,” “believes,” “expects,” “planned,” “scheduled” or similar expressions. Although management of the Partnership believes these forward-looking statements are reasonable, they are based upon a number of assumptions, any or all of which may ultimately prove to be inaccurate. Statements made regarding future results are subject to numerous assumptions, uncertainties and risks that may cause future results to be materially different from the results stated or implied in this document.

 

30


The following are among the important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted:

 

   

Our ability to successfully consummate announced acquisitions or expansions and integrate them into our existing business operations;

 

   

Delays related to construction of, or work on, new or existing facilities and the issuance of applicable permits;

 

   

Changes in demand for, or supply of, crude oil, refined petroleum products and natural gas liquids that impact demand for the Partnership’s pipeline, terminalling and storage services;

 

   

Changes in the demand for crude oil we both buy and sell;

 

   

The loss of Sunoco R&M as a customer or a significant reduction in its current level of throughput and storage with the Partnership;

 

   

An increase in the competition encountered by the Partnership’s petroleum products terminals, pipelines and crude oil acquisition and marketing operations;

 

   

Changes in the financial condition or operating results of joint ventures or other holdings in which the Partnership has an equity ownership interest;

 

   

Changes in the general economic conditions in the United States;

 

   

Changes in laws and regulations to which the Partnership is subject, including federal, state, and local tax, safety, environmental and employment laws;

 

   

Changes in regulations concerning required composition of refined petroleum products that result in changes in throughput volumes, pipeline tariffs and/or terminalling and storage fees;

 

   

Improvements in energy efficiency and technology resulting in reduced demand for petroleum products;

 

   

The Partnership’s ability to manage growth and/or control costs;

 

   

The effect of changes in accounting principles and tax laws and interpretations of both;

 

   

Global and domestic economic repercussions, including disruptions in the crude oil and petroleum products markets, from terrorist activities, international hostilities and other events, and the government’s response thereto;

 

   

Changes in the level of operating expenses and hazards related to operating facilities (including equipment malfunction, explosions, fires, spills and the effects of severe weather conditions);

 

   

The occurrence of operational hazards or unforeseen interruptions for which the Partnership may not be adequately insured;

 

   

The age of, and changes in the reliability and efficiency of the Partnership’s operating facilities;

 

   

Changes in the expected level of capital, operating, or remediation spending related to environmental matters;

 

   

Changes in insurance markets resulting in increased costs and reductions in the level and types of coverage available;

 

   

Risks related to labor relations and workplace safety;

 

   

Non-performance by or disputes with major customers, suppliers or other business partners;

 

   

Changes in the Partnership’s tariff rates implemented by federal and/or state government regulators;

 

   

The amount of the Partnership’s indebtedness, which could make the Partnership vulnerable to adverse general economic and industry conditions, limit the Partnership’s ability to borrow additional funds, place it at competitive disadvantages compared to competitors that have less debt, or have other adverse consequences;

 

   

Restrictive covenants in the Partnership’s or Sunoco, Inc.’s credit agreements;

 

   

Changes in the Partnership’s or Sunoco, Inc.’s credit ratings, as assigned by ratings agencies;

 

   

The condition of the debt capital markets and equity capital markets in the United States, and the Partnership’s ability to raise capital in a cost-effective way;

 

31


   

Changes in interest rates on the Partnership’s outstanding debt, which could increase the costs of borrowing;

 

   

Claims of the Partnership’s non-compliance with regulatory and statutory requirements; and

 

   

The costs and effects of legal and administrative claims and proceedings against the Partnership or any entity in which it has an ownership interest, and changes in the status of, or the initiation of new litigation, claims or proceedings, to which the Partnership, or any entity in which it has an ownership interest, is a party.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of the Partnership’s forward-looking statements. Other factors could also have material adverse effects on future results. The Partnership undertakes no obligation to update publicly any forward-looking statement whether as a result of new information or future events.

 

32


Item 4. Controls and Procedures

(a) Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Partnership reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Partnership reports under the Exchange Act is accumulated and communicated to management, including the President and Chief Executive Officer of Sunoco Partners LLC (the Partnership’s general partner) and the Vice President and Chief Financial Officer of the general partner, as appropriate, to allow timely decisions regarding required disclosure.

(b) As of June 30, 2008, the Partnership carried out an evaluation, under the supervision and with the participation of the management of the general partner (including the President and Chief Executive Officer and the Vice President and Chief Financial Officer), of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the general partner’s President and Chief Executive Officer, and its Vice President and Chief Financial Officer, concluded that the Partnership’s disclosure controls and procedures are effective.

(c) No change in the Partnership’s internal control over financial reporting has occurred during the fiscal quarter ended June 30, 2008 that has materially affected, or that is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

There are certain legal and administrative proceedings arising prior to the February 2002 IPO pending against the Partnership’s Sunoco-affiliated predecessors and the Partnership (as successor to certain liabilities of those predecessors). Although the ultimate outcome of these proceedings cannot be ascertained at this time, it is reasonably possible that some of them may be resolved unfavorably. Sunoco has agreed to indemnify the Partnership for 100 percent of all losses from environmental liabilities related to the transferred assets arising prior to, and asserted within 21 years of February 8, 2002. There is no monetary cap on this indemnification from Sunoco. Sunoco’s share of liability for claims asserted thereafter will decrease by 10 percent each year through the thirtieth year following the February 8, 2002 date. Any remediation liabilities not covered by this indemnity will be the Partnership’s responsibility. In addition Sunoco is obligated to indemnify the Partnership under certain other agreements executed after the February 2002 IPO.

There are certain other pending legal proceedings related to matters arising after the February 2002 IPO that are not indemnified by Sunoco. Management believes that any liabilities that may arise from these legal proceedings will not be material to the Partnership’s financial position at June 30, 2008.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors described previously in Part I, Item 1A of the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 26, 2008.

 

Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

Item 5. Other Information

None.

 

33


Item 6. Exhibits

Exhibits

 

2.1    Sale and Purchase Agreement for Magtex Refined Products Pipeline System between Mobil Pipe Line Company and Sunoco Pipeline L.P., executed April 28, 2008
2.1.1    List of Schedules and Exhibits to Sale and Purchase Agreement omitted from this filing. Registrant hereby undertakes, pursuant to Regulation S-K Item 601(2) to furnish any such schedules and exhibits to the SEC supplementally, upon request.
2.2    Terminals Sale and Purchase Agreement for Center, TX, Hearne(East), TX, Waco, TX and Waskom, TX Terminals between ExxonMobil Oil Corporation and Sunoco Partners Marketing & Terminals L.P., executed April 28, 2008
2.2.1    List of Schedules and Exhibits to Terminals and Purchase Agreement omitted from this filing. Registrant hereby undertakes, pursuant to Regulation S-K Item 601(2) to furnish any such schedules and exhibits to the SEC supplementally, upon request.
2.3    Terminals Sale and Purchase Agreement for Arcadia, LA Terminal between Exxon Mobil Corporation and Sunoco Partners Marketing & Terminals L.P., executed April 28, 2008
2.3.1    List of Schedules and Exhibits to Terminals and Purchase Agreement omitted from this filing. Registrant hereby undertakes, pursuant to Regulation S-K Item 601(2) to furnish any such schedules and exhibits to the SEC supplementally, upon request.
2.4    Terminals Sale and Purchase Agreement for Hearne, TX (West) Terminal between Mobil Pipe Line Company and Sunoco Partners Marketing & Terminals L.P., executed April 28, 2008
2.4.1    List of Schedules and Exhibits to Terminals and Purchase Agreement omitted from this filing. Registrant hereby undertakes, pursuant to Regulation S-K Item 601(2) to furnish any such schedules and exhibits to the SEC supplementally, upon request.
10.1    Sunoco Partners LLC Executive Summary Compensation Sheet
12.1    Statement of Computation of Ratio of Earnings to Fixed Charges
31.1    Chief Executive Officer Certification of Periodic Report Pursuant to Exchange Act Rule 13a-14(a)
31.2    Chief Financial Officer Certification of Periodic Report Pursuant to Exchange Act Rule 13a-14(a)
32.1    Chief Executive Officer Certification of Periodic Report Pursuant to Exchange Act Rule 13a-14(b) and U.S.C. §1350
32.2    Chief Financial Officer Certification of Periodic Report Pursuant to Exchange Act Rule 13a-14(b) and U.S.C. §1350

 

We are pleased to furnish this Form 10-Q to unitholders who request it by writing to:

Sunoco Logistics Partners L.P.

Investor Relations

Mellon Bank Center

1735 Market Street

Philadelphia, PA 19103-7583

or through our website at www.sunocologistics.com.

 

34


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        Sunoco Logistics Partners L.P.
By:   /s/ NEAL E. MURPHY
  Neal E. Murphy
  Vice President and Chief Financial Officer

Date: August 6, 2008

 

35

Sale and Purchase Agreement

 

Exhibit 2.1

SALE AND PURCHASE AGREEMENT

FOR

MAGTEX REFINED PRODUCTS PIPELINE SYSTEM

BETWEEN

MOBIL PIPE LINE COMPANY,

SELLER

AND

SUNOCO PIPELINE L.P.,

BUYER

April 28, 2008

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


 

TABLE OF CONTENTS

 

          Page

Section 1.

   Sale and Purchase    8

Section 2.

   Exclusions    10

Section 3.

   Purchase Price and Additional Payments    11

Section 4.

   Seller’s Representations and Warranties    12

Section 5.

   Buyer’s Representations and Warranties    14

Section 6.

   Operational Review Period    15

Section 7.

   Environmental Review Period    16

Section 8.

   Employment    20

Section 9.

   Right of Entry    22

Section 10.

   Title    22

Section 11.

   Confidentiality    24

Section 12.

   Records    24

Section 13.

   Option to Terminate    24

Section 14.

   Indemnification and Release    25

Section 15.

   Indemnification    27

Section 16.

   Closing    28

Section 17.

   Permits    32

Section 18.

   Property Taxes    32

Section 19.

   Other Taxes    32

Section 20.

   Allocation of Carrier Obligations and Proceeds    33

Section 21.

   Notices    33

Section 22.

   Default    33

Section 23.

   Governing Law and Venue    34

Section 24.

   Assignment    34

Section 25.

   Entire Agreement; Amendments    34

Section 26.

   Publicity    34

Section 27.

   Survival    34

Section 28.

   No Third Party Beneficiary    34

Section 29.

   Joint Efforts    34

Section 30.

   Headings    34

Section 31.

   Updates to Schedules    35

Section 32.

   Severability    35

Section 33.

   Further Assurances and Documents    35

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


 

TABLE OF CONTENTS

(Continued)

 

          Page

Section 34.

   Tax-deferred Exchange    35

Section 35.

   Parent Guaranty or Insurance    35

Section 36.

   Limitations of Damages    36

Section 37.

   Tariff Rates and Continuation of Services    36

Section 38.

   Condition of Assets    36

Section 39.

   Interim Operations    36

Section 40.

   Transition    36

Section 41.

   Facilities Separation    36

Section 42.

   Information Technology and SCADA    36

Section 43.

   Required Repairs    37

Section 44.

   Aldine Option to Purchase    37

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 1 of 39

 

SALE AND PURCHASE AGREEMENT

FOR MAGTEX REFINED PRODUCTS PIPELINE SYSTEM

This Sale and Purchase Agreement for MAGTEX REFINED PRODUCTS PIPELINE SYSTEM (the “Agreement”) is made and entered into this 28th day of April, 2008 (the “Effective Date”) by and between MOBIL PIPE LINE COMPANY, a Delaware corporation (“SELLER” or “MPLCO”) and SUNOCO PIPELINE L.P., a Texas limited partnership (“BUYER”). SELLER and BUYER are hereinafter sometimes referred to individually as “Party” or collectively as “Parties” in this Agreement.

PRELIMINARY STATEMENTS

SELLER owns and operates a pipeline system originating at Beaumont, Texas and terminating at destinations in Houston and other east Texas markets. SELLER now desires to sell this pipeline system and related rights, and BUYER wishes to purchase the system on the terms and conditions set forth below.

TERMS OF AGREEMENT

SELLER and BUYER therefore agree as follows:

 

Definitions. The following terms shall have the meanings set forth below for all purposes of this Agreement:

 

  (A) Affiliate” shall mean a party’s Parent Company and Affiliated Companies; for the purpose of this definition (a) a party’s “Parent Company” shall mean a company or companies having a Controlling Interest in such party; (b) a party’s “Affiliated Companies” shall mean any and all companies in which the party, or the Parent Company of such party, has a direct or indirect Controlling Interest; and (c) “Controlling Interest” shall mean a legal or beneficial ownership of more than fifty percent (50%) of the voting stock in a company.

 

  (B) Aldine Consideration” has the meaning provided in Section 44(A).

 

  (C) Aldine Option” has the meaning provided in Section 44(A).

 

  (D) Aldine Option Closing” has the meaning provided in Section 44(A).

 

  (E) Aldine Option Parcel” shall mean Parcel A together with that portion of Parcel B, if any, which BUYER elects to exercise the Aldine Option on.

 

  (F) Aldine Parcel” has the meaning provided in Section 1(A)(viii).

 

  (G) Assets” has the meaning provided in Section 1.

 

  (H) Assignment and Assumption Agreement” has the meaning provided in Section 1(D).

 

  (I) Assumed Environmental Liabilities” has the meaning provided in Section 7(D).

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 3 of 39

 

  (J) Authorized Representative” means any employee, agent, representative, consultant, contractor, or subcontractor.

 

  (K) Baseline Condition” has the meaning provided in Section 7(B).

 

  (L) Buyer Indemnitee” has the meaning provided in Section 15(A).

 

  (M) Cause” means and includes fraud, theft, act(s) constituting a felony, gross neglect of duties, material dishonesty, gross insubordination, gross misconduct, disloyalty, intentional or grossly negligent violation of any state or federal law(s), attending work under the influence of alcohol or illegal drugs, or public conduct materially detrimental to the reputation of the employer.

 

  (N) Claim” and “Claims” means all liability, costs (including without limitation any attorney fees and costs), expenses, claims, demands, fines, penalties, causes of action or other obligation of whatever nature, whether under express or implied contract, at common law or under any applicable law, rule or regulation, including without limitation applicable Environmental Laws.

 

  (O) Closing” has the meaning provided in Section 16.

 

  (P) Closing Date” has the meaning provided in Section 16.

 

  (Q) Closing Credits” has the meaning provided in Section 18.

 

  (R) Code” has the meaning provided in Section 24.

 

  (S) Consent” has the meaning provided in Section 4(E)

 

  (T) Damages” means any and all obligations, liabilities, damages (including, without limitation, physical damage to real or personal property or natural resources), fines, liens, penalties, deficiencies, losses, judgments, settlements, personal injuries (including, without limitation, injuries or death arising from exposure to Regulated Substances), costs and expenses (including, without limitation, environmental costs, accountants’ fees, attorneys’ fees, fees of engineers, health, safety, environmental and other outside consultants and investigators, and reasonable court costs, appellate costs, and bonding fees), whether based in tort, contract or any local, state or federal law, common law, statute, ordinance or regulation, whether legal or equitable, past, present or future, ascertained or unascertained, known or unknown, suspected or unsuspected, absolute or contingent, liquidated or unliquidated, choate or inchoate or otherwise.

 

  (U) Easements” has the meaning provided in Section 1(C).

 

  (V) Effective Date” has the meaning provided in the preamble to this Agreement.

 

  (W) Employees” has the meaning provided in Section 8(A).

 

  (X) Environmental Condition” means the existence of Regulated Substances in or on the soil, surface water, groundwater at, on or under the Assets, or migrating from the Assets to a contiguous property or properties to the extent the levels of any such Regulated Substances exceed naturally occurring background levels in such areas.

 

  

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  (Y) Environmental Documents” means all of the documents set forth in Exhibit I.

 

  (Z) Environmental Law” or “Environmental Laws” means any and all applicable common law, statutes and regulations, of the United States, the State of Texas, and local and county areas concerning the environment, preservation or reclamation of natural resources, natural resource damages, human health and safety, prevention or control of spills or pollution, or to the management (including, without limitation, generation, treatment, storage, transportation, arrangement for transport, disposal, arrangement for disposal, or other handling), Release or threatened Release of Regulated Substances, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. §9601 et seq.), the Hazardous Material Transportation Authorization Act of 1994 (49 U.S.C. §5101 et seq.), the Solid Waste Disposal Act (42 U.S.C. §6901 et seq.) (including the Resource Conservation and Recovery Act of 1976, as amended), the Clean Water Act (33 U.S.C. §1251 et seq.), the Oil Pollution Act of 1990 (33 U.S.C. §2701 et seq.), the Clean Air Act (42 U.S.C. §7401 et seq.), the Toxic Substances Control Act (15 U.S.C. §2601 et seq.), the Safe Drinking Water Act (42 U.S.C. §300(f) et seq.), the Emergency Planning and Right-To-Know Act of 1986 (42 U.S.C. §11101 et seq.), the Endangered Species Act of 1973 (16 U.S.C. §1531 et seq.), the Lead-Based Paint Exposure Reduction Act (15 U.S.C. §2681 et seq.), and the National Environmental Policy Act of 1969 (42 U.S.C. §4321 et seq.), and all State of Texas, county and local laws of a similar nature to federal law, and the rules and regulations promulgated thereunder, each as amended and, unless otherwise provided in this Agreement, in effect as of the Closing Date.

 

  (AA)  “Environmental Liabilities” means any Damages or Proceedings (whether incurred, existing or first occurring on, before or after the Closing Date) relating to or arising out of ownership or operation of the Assets (whether on, before or after the Closing Date) pursuant to any applicable Environmental Laws as in effect at any time, including without limitation: (i) any Third Party Environmental Claim; (ii) any Governmental Environmental Enforcement Action; or (iii) any Remediation Activities.

 

  (BB)  Environmental Permits” shall mean those permits, authorizations, approvals, registrations, certificates, Orders, waivers, variances or other approvals and licenses issued by or required to be filed with any Governmental Authority under any applicable Environmental Law that are related to the Assets.

 

  (CC)  “ERISA” means the United States Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

 

  (DD)  “ERISA Affiliate” means any entity, trade or business (whether or not incorporated) that is controlled by, controlling or under common control (within the meaning of Section 414 of the Code or Section 4001(a)(14) or Section 4001(b)(1) of ERISA) with the SELLER.

 

  (EE)  Excluded Employees” has the meaning provided in Section 8(A).

 

  (FF)  Excluded Equipment” has the meaning provided in Section 2(A).

 

  (GG)  “Excluded Books and Records” has the meaning provided in Section 2(B).

 

  (HH)

 “ExxonMobil/Ancon Policy” shall mean any property and/or liability insurance policies issued to SELLER, Exxon Mobil Corporation or any of their divisions or Affiliates,

 

  

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including without limitation, any property and/or liability coverage policies issued to SELLER, Exxon Mobil Corporation or any of their divisions or Affiliates by Ancon Insurance Company, Inc. (“Ancon”), a Vermont corporation, (which is Exxon Mobil Corporation’s wholly-owned captive insurer), or its predecessor companies or by a locally admitted insurer which are reinsured by Ancon.

 

  (II) Facilities” has the meaning provided in Section 1(A)(xi).

 

  (JJ) FMV” has the meaning provided in Section 44(A)(ii).

 

  (KK)  “Final Repair Plans” has the meaning provided in Section 43

 

  (LL)  Governmental Authority” or “Governmental Authorities” means any federal, state or local governmental authority, administrative agency, regulatory body, board, commission, judicial body or other body having jurisdiction over the matter.

 

  (MM)  “Governmental Environmental Enforcement Action” means any order, settlement agreement, consent decree, directive, notice of violation, notice of enforcement, letter of notice, notice of noncompliance, corrective action, or similar type of legal requirement or instrument that is issued by, entered into with, or otherwise required by a Governmental Authority with respect to an actual or alleged noncompliance under applicable Environmental Laws.

 

  (NN)  “Hired Employees” has the meaning provided in Section 8(A).

 

  (OO)  “Identified Defects” means such defects or conditions identified by the Pipeline Integrity Assessments requiring repair in accordance with prudent petroleum pipeline industry practices and applicable Law.

 

  (PP)  Intended Hired Employees” has the meaning provided in Section 8(A).

 

  (QQ) IRS” means the United States Internal Revenue Service and, to the extent relevant, the United States Department of the Treasury.

 

  (RR)  Knowledge means the knowledge of individuals currently employed by Seller or Buyer, as applicable, in supervisory positions at any time during the two year period immediately preceding the Closing Date who, in the normal scope of their employment would have knowledge of the matter.

 

  (SS)  Laws” has the meaning provided in Section 1(F)

 

  (TT)  MPLCO” means Mobil Pipe Line Company or Seller, a party to this Agreement.

 

  (UU)  “Magtex System” has the meaning provided in Section 1(A).

 

  (VV)  “Memorandum of Option” has the meaning provided in Section 44(B).

 

  (WW)  “MPLCO Information” has the meaning provided in Section 11.

 

  (XX)  “Off-Site” means those areas contiguous to the Real Property to be conveyed under this Agreement and not considered On-Site.

 

  

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(YY) “Off-Site Disposal Activities” means any off-site transportation, storage, disposal, or treatment, or any arrangement for off-site transportation, storage, disposal, or treatment of any Regulated Substance; provided however, that the term “Off-Site Disposal Activities” shall not include the Off-Site portion of an Environmental Condition that has migrated from the Assets.

(ZZ) “Off-Site Remediation Activities” means any Remediation Activities with respect to the Assets that relate to Off-Site Disposal Activities.

 

  (AAA) On-Site” means the Real Property to be conveyed under this Agreement.

 

  (BBB) Operational Assessment” has the same meaning as provided in Section 6 of this Agreement.

 

  (CCC) Option Exercise Notice” has the meaning provided in Section 44(A).

 

  (DDD) Option Period” has the meaning provided in Section 44(A).

 

  (EEE) Order” means any judgment, order, settlement agreement, writ, injunction or decree of any Governmental Authority having jurisdiction over the matter and still in effect as of the Closing Date.

 

  (FFF) Parcel A” means that parcel labeled Parcel A on Exhibit AA.

 

  (GGG) Parcel B” means that parcel labeled Parcel B on Exhibit AA.

 

  (HHH) Party” means SELLER (also “MPLCO”) or Buyer, individually.

 

  (III) Parties” mean SELLER (also “MPLCO”) and Buyer, collectively.

 

  (JJJ) Permit” means any license, permit, concession, franchise, authority, consent or approval granted by any Governmental Authority, excluding Environmental Permits.

 

  (KKK) Permitted Exceptions” means (i) liens for taxes, assessments and government or other similar charges that are not yet due and payable; (ii) covenants, conditions, restrictions, easements, encroachments or encumbrances of record that do not materially interfere with the present occupancy of the Real Property or BUYER’S anticipated use of such Real Property; and (iii) zoning, building codes and other land use laws regulating the use or occupancy of the Real Property or the activities conducted thereon which are imposed by any governmental authority having jurisdiction over the Real Property and not violated by the present occupancy of the Real Property.

 

  (LLL) Permitted Title Exceptions” has the meaning provided for in Section 4(F).

 

  (MMM) “Pipeline Integrity Assessments” means the inspections of the Facilities, including in-line inspections, conducted for the purpose of assessing the integrity and general operating condition of the Facilities.

 

  (NNN) Proceedings” means any actions, causes of action, written demands, written claims, suits, investigations, arbitration, administrative or judicial proceeding, and any appeals.

 

  

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  (OOO)  “Property Taxes” has the meaning provided in Section 18.

 

  (PPP)  “Real Property” means the real property being conveyed under this Agreement as described further in Section 1(B) and Exhibit A-2.

 

  (QQQ)  “Records” has the meaning provided in Section 1(F).

 

  (RRR)  “Regulated Substance” means any (a) chemical, substance, material, or waste that is designated, classified, or regulated as “industrial waste,” “hazardous waste,” “hazardous material,” “hazardous substance,” “toxic substance,” or words of similar import, under any applicable Environmental Law; (b) petroleum, petroleum hydrocarbons, petroleum products, petroleum substances, crude oil, and components, fractions, derivatives, or by-products thereof; (c) asbestos or asbestos-containing material (regardless of whether in a friable or non-friable condition), or polychlorinated biphenyls; and (d) substance that, whether by its nature or its use, is subject to regulation under any applicable Environmental Law in effect at that time or for which a Governmental Authority requires Remediation Activities with respect to the Assets.

 

  (SSS)  “Release” shall have the meaning specified in CERCLA; provided, however, that, to the extent the Environmental Laws in effect at any time after the Closing Date establish a meaning for “Release” that is broader than that specified in CERCLA, such broader meaning shall apply to any “Release” occurring after Closing.

 

  (TTT)  “Release Agreement” has the meaning provided in Section 7(G).

 

  (UUU)  “Remediation Activities” means any investigation, study, assessment, testing, monitoring, containment, removal, disposal, closure, corrective action, remediation (regardless of whether active or passive), natural attenuation, bioremediation, response, cleanup or abatement of an Environmental Condition to standards required by applicable Environmental Laws in effect at such time or as required by an appropriate Governmental Authority for property used for continued usage as the Assets are currently being used. It is expressly understood, however, that taking no action other than monitoring and sampling may constitute Remediation Activities if, after investigation, taking no action other than monitoring and sampling is determined to be consistent with or allowed under applicable Environmental Laws in effect at that time. If taking no action other than monitoring and sampling is not consistent with or allowed under applicable Environmental Laws in effect at that time, the alternative to taking no action other than monitoring and sampling, such as (i) a risk-based closure that may or may not require institutional controls including, without limitation, structure and land use restrictions, well restrictions, declarations of environmental restriction or other forms of deed notice regarding the presence of contamination, and establishment of groundwater classification exception areas, or (ii) the installation of engineering controls to contain or stabilize Regulated Substances including, without limitation, caps, covers, dikes, trenches, leachate collection systems, signs, fences and access controls may constitute Remediation Activities, provided that any such alternative is consistent with or otherwise allowed under applicable Environmental Laws in effect at the time of performance.

 

  (VVV)  “Required Repairs” means the repair of each Identified Defect in accordance with prudent petroleum pipeline industry practices and applicable Law for the operation of the Facilities in accordance with SELLER’s current practices, including current operating pressures.

 

  

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  (WWW)  “Required Repair Costs” means the cost to make all Required Repairs to the standards prescribed by applicable Law and in accordance with prudent petroleum pipeline industry practices. Such costs (i) shall include excavation, technical analysis (on-site and/or laboratory) expense, purging costs (if required) and material costs and (ii) shall be as mutually agreed by the Parties or, absent such mutual agreement, as determined by a qualified engineering firm selected by BUYER and reasonably satisfactory to SELLER. The fees and costs of any such engineering firm shall be borne equally by SELLER and BUYER.

 

  (XXX)  “Retained Environmental Liability” has the meaning provided in Section 7(C) of this Agreement.

 

  (YYY)  “Schedules” means the schedules attached to this Agreement and referenced herein.

 

  (ZZZ)  “Seller Benefit Plan” means any employee benefit plan, program, policy, agreement or other arrangement (including any “employee benefit plan,” as defined in Section 3(3) of ERISA) sponsored, maintained or contributed to by SELLER or any ERISA Affiliate for the benefit of any current or former Employees.

 

  (AAAA)  “Seller Indemnitor” has the meaning provided in Section 15(A).

 

  (BBBB)  “Subdividing” has the meaning provided in Section 44(A)(iii).

 

  (CCCC)  “Survey” has the meaning provided in Section 10(C).

 

  (DDDD)  “Tax” means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Authority or payable under any tax-sharing agreement or any other contract.

 

  (EEEE)  “Third Party” means any individual or legal business entity other than: (i) a Party; (ii) a Party’s Affiliates; (iii) a Party’s Authorized Representatives; (iv) employees, officers, directors, agents and representatives and all successors of a Party and its Affiliates; and, (v) a Party’s permitted assigns.

 

  (FFFF)

 “Third Party Environmental Claim” means a Proceeding by any Third Party alleging Damages relating to or arising out of exposure to, or Off-Site migration of, a Regulated Substance (including, without limitation, Damages for Proceedings arising under applicable Environmental Laws in connection with Damages for Remediation Activities undertaken by a Third Party at its property). Notwithstanding anything to the contrary in this Agreement, to the extent that Remediation Activities are required by Governmental Entities as a result of a Third Party Environmental Claim, such

 

  

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Remediation Activities shall be governed by the provisions under this Agreement dealing with Remediation Activities; provided that in no event shall a Third Party Environmental Claim include any Claim resulting from, or based on, a Retained Environmental Liability.

 

  (GGGG)  Title Commitment” has the meaning provided in Section 10(B).

 

  (HHHH)  Title Company” means Stewart Title Guaranty Company.

 

  (IIII)  Title Cure Period” has the meaning provided in Section 10(D).

 

  (JJJJ)  Title Objections” has the meaning provided in Section 10(D).

 

  (KKKK)  Title Policies” has the meaning provided in Section 16(B)(vii).

Capitalized terms defined in this Agreement shall be equally applicable to both the singular and plural forms of such defined terms. As used in this Agreement, (i) “include”, “includes” and “including” shall be deemed to be followed by “without limitation” whether or not they are in fact followed by such words or words of like import, (ii) unless otherwise specified, “hereof”, “herein”, “hereunder” and comparable terms refer to this entire Agreement and not to any particular article, section or other subdivisions, and (iii) pronouns of whatever gender, shall include all natural persons, corporations, limited liability companies, partnerships, associations and other entities of every kind and character unless the context otherwise requires.

 

1. Sale and Purchase. Subject to the terms and conditions of this Agreement, SELLER agrees to sell and BUYER agrees to buy all of SELLER’s right, title and interest in the following (collectively, the “Assets”):

 

  (A) The MPLCO Magtex Refined Products Pipeline System originating in and around Beaumont in Jefferson County, Texas and terminating at various points throughout Houston, Texas and other east Texas locations, collectively described as the “Magtex System” and more specifically described as follows:

 

  (i) The Beaumont to Hebert mainline segment (“Beaumont Line”) consisting of approximately 12 miles of 10/12/14-inch diameter pipe extending from ExxonMobil’s Beaumont Refinery in Jefferson County, Texas to MPLCO’s Hebert Station in Jefferson County, Texas, including approximately 1 mile of 8-inch diameter pipe extending laterally into TEPPCo’s facility in Jefferson County; and

 

  (ii) The Port Arthur to Hebert mainline segment (“Port Arthur Line”) consisting of approximately 10.5 miles of 12-inch diameter pipe extending from a point near the Motiva Refinery in Jefferson County, Texas to MPLCO’s Hebert Station; and

 

  (iii) The Hebert to Center/Waskom mainline segment (“East Texas Line”) consisting of approximately 179 miles of 8-inch diameter pipe extending from Hebert Station in Jefferson County, Texas to Center, Texas in Shelby County and extending to Waskom, Texas in Harrison County; and

 

  (iv)

The Hebert to Houston mainline segment (“Houston Line”) consisting of approximately 98 miles of 8/6-inch diameter pipe extending from Hebert Station

 

  

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in Jefferson County, Texas to points in Houston, Texas near the Petroleum Wholesalers, Inc terminal and extending to Motiva Enterprises LLC terminal, both located in Harris County; and

 

  (v) The Hebert to Hearne mainline segment (“Hearne Line”) consisting of approximately 178 miles of 12-inch diameter pipe extending from Hebert Station in Jefferson County, Texas to terminals near Hearne, Texas in Robertson County; and

 

  (vi) The Aldine to Hull No. 4 Crude segment (“No. 4 Line”) consisting of approximately 48 miles of idle 8-inch diameter pipe extending from Aldine Station in Harris County, Texas to Hull Station in Liberty County, Texas; and

 

  (vii) The MPLCO Hebert Pipeline Station and storage tanks (“Hebert Station”) and Hebert Truck Terminal (“Hebert Terminal”) consisting of approximately 68.5 acres of land, and the truck rack located thereon ( “Hebert Truck Rack”) in the William Sigler Survey A-48, Jefferson County, Texas; and

 

  (viii) The Aldine parcel, which shall include the MPLCO Aldine Warehouse consisting of approximately 2.75 acres which constitutes all of the real property included in lots 257 and 264 and lots 217 and 224 inclusive to the Aldine Townsite, according to the plat of said townsite recorded in record of maps and plats, Volume 2, page 27, Harris County, Texas, all being located in the Christopher Walter Survey, Abstract No. 849, along with the twenty seven and one-half (27.5) acre parcel depicted as the eastern most parcel on Exhibit AA and labeled “Part of Sale” (collectively, the “Aldine Parcel”); and

 

  (ix) The known MPLCO idle line segments as described on Exhibit A-1 and any other unknown idle line segments owned by MPLCO and located adjacent or parallel to the existing operating pipelines described in this Section 1(A); and

 

  (x) The MPLCO microwave towers located in Hardin County and Harris County, Texas as listed in Exhibit A-1; and

 

  (xi) All of the Assets as listed in this Section 1(A) and as more particularly described in Exhibit A-1 and attached hereto and made a part hereof, together with attached pumps, motors, valves, fittings, pipe, spare parts inventory, and all related facilities (the “Facilities”), and SELLER covenants and agrees to assign at the Closing to BUYER the Beaumont Pump Station Easement and the Beaumont Pump Station Access Agreement.

 

(B)    (i) Subject to the Permitted Title Exceptions, all of MPLCO’s real property related to the Assets and owned by it in fee, listed in Exhibit A-2 (the “Real Property”), other than the Hebert Station, and the Aldine Parcel, which shall be conveyed to BUYER by one or more Deeds Without Warranty in the form of Exhibit P of this Agreement. Commencing with the Closing, BUYER shall lease back to MPLCO the real property described in, and subject to the terms of, the Ground Lease, substantially in the form of Exhibit V hereto.

 

  

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  (ii) Subject to the Permitted Title Exceptions, the Hebert Station and Aldine Parcel properties, which shall be conveyed to BUYER by one or more Special Warranty Deeds in the form of Exhibit O of this Agreement.

 

  (C) To the extent assignable, the easements, right of way agreements, and, those land-use and water crossing licenses, permits, governmental authorizations, and other real property entitlements relating to the Facilities, listed in Exhibit B hereto (collectively, the “Easements”). At Closing, where SELLER is not retaining an Easement or rights thereunder, SELLER shall execute, and fully assign to BUYER, one or more of the Assignments in the form of Exhibit G-1; and where SELLER is retaining an Easement or rights thereunder, SELLER shall execute, and partially assign to BUYER, one or more of the Assignments in the form of Exhibit G-2.

 

  (D) The Environmental Permits and all other Permits to be assigned and assumed pursuant to the terms of an assignment and assumption agreement in the form of Exhibit N (the “Assignment and Assumption Agreement”).

 

  (E) All of SELLER’s right-of-way and Department of Transportation records, files and other data, pertaining to the Easements and the Facilities, subject to SELLER’s right to retain such records, files and other data (i) deemed necessary or required in SELLER’s reasonable judgment to be in compliance with applicable regulations, provided, that, BUYER shall be entitled to copies of such retained records, files and other data to be provided at SELLER’s expense or (ii) which pertain to SELLER facilities not included in the Assets.

 

  (F) The historical books and records relating to the Facilities (the “Records”), including, but not limited to, all non-proprietary records, cathodic protection records, pipeline repair records, electrical drawings, pipeline drawings, mechanical drawings, operating manuals and maps used by SELLER in its operation of the Facilities and to maintain compliance with any other law, regulation, Order or other legal requirement of any Governmental Authority (the “Laws”), excluding any confidential files relating to employees, and also including any such documents that are stored or maintained in electronic storage format, such as computer disks or tapes. If any required Records are not delivered, then SELLER at its expense will provide such Records as are required to comply with such applicable Laws.

 

  (G) All programmable logic controllers, human machine interface (HMI) computers and displays located at pump stations, surveillance sites, or control buildings included with the Assets, flow computers, electronic control equipment, TANO spare cards and copies of programs for all computerized control equipment associated with each of the Facilities. EMPCo SCADA hub computers and their respective licensed or proprietary software are not part of the Assets.

 

2. Exclusions.

 

  (A) Except as specifically provided in Exhibit A-1, the Assets do not include any vehicles, boats, tools, computers, warehouse stock, equipment or materials temporarily located on the property where any of the Assets are located unless the same are intended for use in connection with the Assets or any inventory, equipment, materials, pipelines, fixtures or interests owned by any person or entity other than SELLER (the “Excluded Equipment”).

 

  

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  (B) The Assets specifically do not include the books and records relating to the Facilities and which are set forth in Exhibit A-3 (the “Excluded Books and Records”).

 

  (C) This Agreement does not license or authorize BUYER to use or display the “Mobil” name or any trademark owned by SELLER, Exxon Mobil Corporation, or any of their Affiliates and BUYER shall, at its expense, remove (or, with respect to pipeline markers, cover) all signs and markings at or on the Assets which indicate that they were ever owned or operated by SELLER, Exxon Mobil Corporation or any of their Affiliates and return any removed signs to SELLER. BUYER shall remove (or, with respect to pipeline markers, cover) all signs and markings located at or on the Assets within ninety (90) days after Closing (as defined in Section 16).

 

  (D) The Assets do not include any interest in any insurance or bonds maintained by or on behalf of SELLER or Exxon Mobil Corporation, or any of their divisions or Affiliates. No claims regarding any matter whatsoever, whether or not arising from events occurring prior to Closing, shall be made by BUYER, its successors or assigns, against or with respect to any insurance policy covering the assets or operations of SELLER, any other ExxonMobil entity insurance policy or ExxonMobil/Ancon Policy regardless of their date of issuance. Accordingly, BUYER, individually and on behalf of its successors and assigns, does hereby disclaim any right or interest under any insurance policy covering the assets or operations of SELLER, any other ExxonMobil entity insurance policies or such ExxonMobil/Ancon Policies generally and specifically with regard to the Assets or any claims associated with the Assets.

 

  (E) Any insurance coverage under any insurance policies that relate to the Assets, or any part of the Assets, and any rights under such insurance policies, whether such policies benefit Seller, or any Affiliate of Seller, or any other person or entity, and whether such insurance policies are underwritten by one or more of Seller’s Affiliates, or an unaffiliated Third Party. Any and all such policies that, but for the Closing, would have insured the Assets, or any part of the Assets, are deemed to be terminated, commuted and cancelled as of the moment of Closing.

 

3. Purchase Price and Additional Payments.

 

  A. Amount. The total monetary consideration (the “Purchase Price”) to be paid by Buyer to SELLER for the Assets shall be (i) ONE HUNDRED SEVENTY-FIVE MILLION AND NO/100 U.S. Dollars ($ 175,000,000).

As evidence of good faith, BUYER, upon execution of this Agreement, shall deposit (i) the amount of $ EIGHT MILLION, SEVEN HUNDRED AND FIFTY THOUSAND AND NO/100 ($ 8,750,000) (the “Earnest Money”) with the Title Company, to be held by the Title Company in an interest-bearing account for payment to Seller at Closing or otherwise for application as provided in this Agreement, and (ii) the amount of FIVE HUNDRED AND NO/100 DOLLARS ($500) (the “Independent Consideration”) with Seller. The Independent Consideration shall be in addition to and independent of any other consideration provided under this Agreement, shall be non-refundable and shall be retained by SELLER under all circumstances. The Parties acknowledge the sufficiency of the Independent Consideration to support this Agreement. The Earnest Money, exclusive of any interest (which SELLER shall retain for its own account), will be applied to the Purchase Price at Closing. Except as specifically provided otherwise in this Agreement, the Earnest Money shall be non-refundable.

 

  

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  B. Payment of Purchase Price. At Closing, BUYER shall pay to SELLER the Purchase Price, less the (i) Earnest Money, (ii) the Independent Consideration, (iii) the Aldine Consideration, and (iv) Seller’s allocated share of property taxes under Section 18 of this Agreement, in U. S. currency in immediately available funds via bank wire-transfer to a bank account designated by SELLER in writing to BUYER not less than three (3) business days prior to the Closing Date.

 

  C. Allocation of Purchase Price. The Purchase Price shall be allocated for tax accounting purposes in accordance with Schedule 3(C) attached hereto. BUYER and SELLER agree that they will not take (and will not permit any Affiliate to take), for income tax purposes, any position inconsistent with the allocation on Schedule 3(C).

 

4. SELLER’s Representations and Warranties.

SELLER hereby represents and warrants the following:

 

  (A) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES OF SELLER EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER WILL SELL THE ASSETS TO BUYER ON AN AS-IS, WHERE-IS AND WITH ALL FAULTS BASIS. SELLER MAKES NO REPRESENTATIONS OR EXPRESS OR IMPLIED WARRANTIES (OTHER THAN AS EXPRESSLY CONTAINED HEREIN) WITH RESPECT TO THE ASSETS. SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED (OTHER THAN AS EXPRESSLY CONTAINED HEREIN), AS TO THE ACCURACY OR COMPLETENESS OF ANY FILES, RECORDS, DATA, INFORMATION, OR MATERIALS HERETOFORE OR HEREAFTER FURNISHED BUYER IN CONNECTION WITH THE ASSETS AND EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT BUYER’S SOLE RISK. BUYER EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER XVII, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), VERNON’S TEXAS CODE ANNOTATED, BUSINESS AND COMMERCE CODE (THE “DECEPTIVE TRADE PRACTICES—CONSUMER PROTECTION ACT” AS WELL AS THE PROVISIONS OF ANY SIMILAR LAW OF ANY OTHER STATE HAVING JURISDICTION OVER ANY PARTY HERETO OR THE ASSETS).

 

  (B) SELLER is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to carry on its business in the state of Texas.

 

  (C) SELLER has the corporate power and authority to execute and deliver this Agreement and each agreement and instrument to be delivered by SELLER under it, and to carry out its obligations under this Agreement.

 

  (D) (i) The execution, delivery and performance of this Agreement and each agreement and instrument to be delivered pursuant hereto by SELLER, and the consummation of the transactions contemplated by the Parties under this Agreement have been duly authorized and approved by all requisite corporate action of MPLCO, (ii) no other corporate act or proceeding on the part of SELLER or its Affiliates or shareholders is necessary to authorize the execution, delivery or performance of this Agreement and (iii) this Agreement is a legal, valid, binding and enforceable obligation of SELLER, except as may be limited by bankruptcy or other laws of such general application affecting creditors’ rights generally.

 

  

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  (E) Except as specified in Schedule 4(E), no consent, approval, or notices of or to any other person (“Consent”) is required with respect to SELLER or any of its Affiliates in connection with the execution, delivery or enforceability of this Agreement or the consummation of the transactions provided for hereby other than (i) those for which any adverse consequence arising out of the failure to obtain such Consent or to make such filing are immaterial, individually and in the aggregate, to the Assets, (ii) those required for the transfer of the Easements, if any, and (iii) filings made under the Hart- Scott- Rodino Antitrust Improvements Act of 1976, as amended.

 

  (F) Except for the Easements and the fee properties being transferred hereunder by Deeds Without Warranty, and except as specified in Schedule 4(F), Seller has, and on the Closing Date will have, good and valid title to the Assets, free and clear of all liens of any kind. SELLER has not leased or otherwise granted to any person the right to use or occupy the Assets or any portion thereof; and there are no outstanding options, rights of first offer or refusal to purchase the Assets or any portion thereof or interest therein or any other preferential purchase rights held by any person or entity to purchase or acquire any interest in the Assets. At Closing, SELLER will convey the Assets to BUYER free and clear of all mortgages, liens (including federal, state and local tax liens), claims, judgments, assessments, charges, pledges, security interests and other encumbrances, subject to the following items (collectively, the “Permitted Title Exceptions”):

 

  (i) Permitted Exceptions; and

 

  (ii) any materialman’s and/or mechanic’s lien.

 

  (G) Except as set forth in Schedule 4(G), there is no suit, action, claim, arbitration, administrative or legal or other proceeding or governmental investigation, pending or, to SELLER’s Knowledge, threatened against or related to the Assets, and (ii) to SELLER’s Knowledge, there are no facts or events which can give rise to a claim against SELLER related to the Assets. Except as set forth in Schedule 4(G), there is no Order in effect relating specifically to the Assets. There is no condemnation or eminent domain proceeding pending or, to SELLER’s Knowledge, threatened against the Assets by publication or other writing.

 

  (H) SELLER has not incurred any obligation or liability, contingent or otherwise, for brokers’ or finders’ fees in connection with the transactions contemplated by this Agreement for which BUYER shall have any responsibility or liability. SELLER agrees to pay and to indemnify fully, hold harmless and defend BUYER and its Affiliates from and against, and pay, any claims by any person alleging a right to a broker’s or finder’s fee based upon any actions of SELLER or its Affiliates in connection with these transactions.

 

  (I) Exhibit I identifies all information of which Seller has Knowledge related to, affecting or concerning the Environmental Condition or status of the Assets and that such information could reasonably be expected to form the basis of an Environmental Liability Claim.

 

  (J)

Exhibit J lists all material Environmental Permits in effect (and all pending applications therefor) with respect to the Assets on the date of this Agreement. Except as disclosed on Exhibit 4(J), neither Seller nor its Affiliates has received any notice of any violation,

 

  

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claim or default relating to the Environmental Permits. All such permits are final, valid and in full force and effect and the permit holder is in compliance in all material respects therewith.

 

  (K) Except as listed on Schedule 4(K), there is no collective bargaining relationship or agreement with any labor organization representing any Employees.

 

  (L) For all Taxes that are due and payable on or before the Closing Date, SELLER has paid, or prior to the Closing Date will pay, all Taxes assessed against, arising from or related to the Assets for all taxable years or taxable periods prior to the Closing Date (including portions of taxable years or periods with respect to which Taxes are due and payable on or before the Closing Date). Seller may incur and will be responsible for Taxes that are assessed at the time of the audit for any taxable years prior to the Closing Date.

 

  (M) With respect to the ownership of the Assets, SELLER is not in violation of any Law, except for violations that would not reasonably be expected to have a material adverse effect. No investigation or review by any Governmental Authority relating to the conduct of the business of Seller or the ownership of the Assets is pending or, to Seller’s Knowledge, threatened. Except as set forth in Schedule 4(M), as of the Closing Date, Seller has not received written notice of any violation of any Law related to the Assets, nor is Seller in default with respect to any Order applicable to any of the Assets, other than violations and defaults the consequences of which would not reasonably be expected to have a material adverse effect.

 

  (N) Set forth (i) on Exhibit X is a listing of each Pipeline Integrity Assessment scheduled to be conducted in respect of the Facilities prior to the Closing Date, and (ii) on Exhibit U is a listing of the Final Repair Plans identifying those Identified Defects, resulting from the Pipeline Integrity Assessment(s), the repairs of which have not been completed by SELLER prior to the Closing Date.

 

5. BUYER’s Representations and Warranties.

Buyer hereby represents and warrants the following:

 

  (A) BUYER IS ACQUIRING THE ASSETS FOR ITS OWN BENEFIT AND ACCOUNT AND NOT WITH THE INTENT OF DISTRIBUTING FRACTIONAL UNDIVIDED INTERESTS THEREOF SUCH AS WOULD BE SUBJECT TO REGULATION BY FEDERAL OR STATE SECURITIES LAWS.

 

  (B) BY REASON OF BUYER’S KNOWLEDGE AND EXPERIENCE IN THE EVALUATION, ACQUISITION, AND OPERATION OF SIMILAR PROPERTIES, BUYER HAS EVALUATED THE MERITS AND RISKS OF PURCHASING THE ASSETS AND HAS FORMED AN OPINION BASED UPON BUYER’S KNOWLEDGE AND EXPERIENCE AND NOT UPON ANY REPRESENTATIONS OR WARRANTIES (OTHER THAN AS EXPRESSLY CONTAINED HEREIN) BY SELLER WITH RESPECT TO THE ASSETS OR AS TO THE ACCURACY OR COMPLETENESS OF ANY FILES, RECORDS, DATA, INFORMATION, OR MATERIALS HERETOFORE OR HEREAFTER FURNISHED TO BUYER IN CONNECTION WITH THE ASSETS, AND ANY RELIANCE ON OR USE OF THE SAME HAS BEEN AND WILL BE AT BUYER’S SOLE RISK.

 

  

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  (C) BUYER HAS MADE ALL INVESTIGATION NECESSARY IN ITS JUDGMENT TO PURCHASE THE ASSETS, INCLUDING, BUT NOT LIMITED TO, INVESTIGATION OF ENVIRONMENTAL AND PHYSICAL CONDITIONS OF THE PREMISES.

 

  (D) BUYER is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas.

 

  (E) BUYER has the partnership power and authority to execute and deliver this Agreement and each agreement and instrument to be delivered by BUYER pursuant hereto, and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement and each agreement and instrument to be delivered pursuant hereto by BUYER and the consummation of the transactions provided for hereby have been duly authorized and approved by all requisite partnership action of BUYER and no other partnership act or proceeding on the part of BUYER or its Affiliates or partners is necessary to authorize the execution, delivery or performance of this Agreement and this Agreement is a legal, valid, binding and enforceable obligation of BUYER, except as may be limited by bankruptcy or other laws of such general application affecting creditors’ rights generally.

 

  (F) No Consent or filing is required with respect to BUYER or any of its Affiliates in connection with the execution, delivery or enforceability of this Agreement or the consummation of the transactions provided for hereby, other than (i) those for which any adverse consequence arising out of the failure to obtain such Consent are immaterial, individually and in the aggregate, to the sale and purchase of the Assets, and (ii) filings made under the Hart- Scott- Rodino Antitrust Improvements Act of 1976, as amended.

 

  (G) The execution and delivery of this Agreement and the consummation of the transactions provided for hereby does not violate any other agreement, contract, or instrument to which BUYER is subject or is a party.

 

  (H) No action, suit, proceeding, order or Claim is pending or to BUYER’s Knowledge threatened against BUYER seeking to restrain or prohibit this Agreement or the transactions contemplated hereby, or to obtain damages, a discovery order or other relief in connection with this Agreement or the transactions contemplated hereby.

 

  (I) BUYER has not incurred any obligation or liability, contingent or otherwise, for brokers’ or finders’ fees in connection with the transactions contemplated by this Agreement for which SELLER shall have any responsibility or liability. BUYER agrees to pay and to indemnify fully, hold harmless and defend SELLER and its Affiliates from and against, and pay, any claims by any person alleging a right to a broker’s or finder’s fee based upon any actions of BUYER or its Affiliates in connection with these transactions.

 

6.

Operational Review Period. BUYER acknowledges that prior to signing this Agreement, BUYER was given the opportunity and waived such opportunity to conduct, or BUYER conducted or had conducted on its behalf, at its own risk and expense and to BUYER’s satisfaction, an assessment of the Assets consisting of (a) Easements, permits, licenses or other matters related to title of the Assets; (b) operational files, including available historical files regarding, maintenance, and regulatory required inspections, if any, for the Assets; and (c) financial data associated specifically with the Assets. Except as set forth in this Agreement, BUYER acknowledges that SELLER makes no representations or warranties, express or implied,

 

  

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with regard to the accuracy or completeness of any files or other records reviewed. The activities covered by this paragraph are collectively called the “Operational Assessment”. Notwithstanding the foregoing, the preceding provisions of this Section 6 shall not preclude any additional assessment as BUYER shall determine to be necessary in preparation for its taking ownership of the Assets.

 

7. Environmental Review Period.

 

  A. Environmental Assessment. BUYER acknowledges that prior to signing this Agreement, BUYER was given the opportunity and waived such opportunity to conduct, or BUYER conducted or had conducted on its behalf, at its own risk and expense and to BUYER’s satisfaction, an environmental assessment of the Assets consisting of (i) a non-intrusive surface inspection of the Assets, and (ii) an inspection of Seller’s available historical files for information, if any, covering any environmental issues, including but not limited to, spills or disposal of crude oil, petroleum, petroleum products or hazardous substances, underground injection or solid waste disposal on the Real Property. In the event that BUYER determines that additional assessments or inspections in addition to (i) above are necessary, BUYER shall submit an inspection plan to Seller which details the locations, methods and other information pertaining to the desired inspection for Seller’s approval. Such approval shall not be unreasonably withheld. BUYER acknowledges that except as expressly set forth in this Agreement, Seller makes no representations or warranties, express or implied, with regard to the accuracy or completeness of any files or other records reviewed. The activities covered by this paragraph are collectively called the “Environmental Assessment”.

 

  B. Baseline Condition. In order to establish the Environmental Condition of the Assets, Seller, BUYER and its Authorized Representatives have reviewed or acknowledged the existence of the Environmental Documents, which include the results of all tests conducted by BUYER and its Authorized Representatives under Section 7(A), if any, and have agreed that Exhibit I includes or references all material information, known to exist by either Party, related to, affecting or concerning the Environmental Condition or status of the Assets as of the Closing Date and that such information shall constitute the Baseline Condition of the Assets (the “Baseline Condition”). Seller shall not be responsible for any Environmental Condition whether or not identified as part of the Baseline Condition.

 

  C. SELLER’s Retained Environmental Liabilities. SELLER shall retain and be solely responsible only for Environmental Liabilities in connection with Off-Site Disposal Activities performed by Seller prior to the Closing Date (“Retained Environmental Liability”).

 

  D.

BUYER’s Assumed Environmental Liabilities. Except for SELLER’s Retained Environmental Liability, from and after the Closing Date, BUYER shall assume and be solely responsible for all Environmental Liabilities of SELLER relating to or arising out of SELLER’S ownership or operation of the Assets, whether existing or asserted before, on or after the Closing Date, whether known or unknown, whether based on past, present or future conditions or events, including but not limited to undertaking such Remediation Activities of the Environmental Conditions as may be required by applicable laws, regulations, or governmental orders (such Environmental Liabilities, other than the Retained Environmental Liability the “Assumed Environmental Liabilities”). In no event, absent the express written consent of SELLER, shall BUYER’s obligations under

 

  

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this Section 7 terminate upon the lease, sale, or other transfer of the Assets or any portion of the Assets regardless of any assumption of such obligations by a subsequent lessee, purchaser, or other transferee.

 

  E. Seller’s Environmental Indemnity. For purposes of this Section 7(E), where BUYER is the indemnified party, the term “BUYER” shall include BUYER and its Affiliates and the directors, officers and employees, and all successors and assigns of the foregoing. From and after the Closing Date, SELLER agrees to indemnify, hold harmless and defend BUYER from and against any Damages and Proceedings asserted against or incurred by BUYER relating to or arising out of Retained Environmental Liabilities. SELLER’s obligations under this Section 7(E) with respect to Retained Environmental Liabilities shall not be limited by and shall survive beyond the Closing Date.

 

  F. BUYER’s Environmental Indemnity. For purposes of this Section 7(F), where Seller is the indemnified party, the term “Seller” shall include Seller and its Affiliates and the directors, officers and employees, and all successors and assigns of the foregoing. From and after the Closing Date, BUYER shall indemnify, hold harmless and defend Seller from and against any Damages and Proceedings asserted against or incurred by Seller relating to the Assumed Environmental Liabilities, including but not limited to, those resulting from:

 

  (i) Any Release of any Regulated Substance related to operations of the Assets occurring prior to, on or after the Closing Date;

 

  (ii) Any residual Environmental Condition remaining at the Assets or any areas Off-Site on or after the Closing Date;

 

  (iii) Any Third Party Environmental Claim made by a Third Party on or after the Closing Date related to or arising out of ownership or operation of the Facilities occurring before, on or after the Closing Date;

 

  (iv) Any Governmental Environmental Enforcement Action that is taken against Buyer or Seller for events or conditions occurring before, on or after the Closing Date;

 

  (v) Any Off-Site Disposal Activities resulting from the ownership or operation of the Assets on or after the Closing Date;

 

  (vi) Any On-Site or Off-Site Remediation Activities resulting from the ownership or operation of the Assets occurring before, on or after the Closing Date;

 

  (vii) Exacerbation of any Environmental Condition (whether resulting in On-Site or Off-Site impacts) by BUYER or its Authorized Representatives (which for purposes of this Section 7(F) shall include its tenants, customers, invitees, licensees, or any users of the Assets (except Seller); and

 

  (viii) Failure to comply with any Environmental Permit, including transferred or assigned Environmental Permits identified on Exhibit J by BUYER or its Authorized Representatives.

 

  

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Buyer’s indemnity obligations under this Section 7(F) will be set forth in the deed(s) conveying the Real Property, will be a covenant running with the land, and will bind the successors, heirs and assigns of Buyer.

 

  G. Buyer’s Release of Seller for Environmental Liabilities. BUYER, in consideration of the negotiated amount of the Purchase Price, hereby unconditionally, completely and forever releases and discharges Seller, its Affiliates, and employees, officers, directors, agents and representatives and all successors and assigns of the foregoing, from all Environmental Liabilities except Seller’s Retained Environmental Liability, including but not limited to the following:

 

  (i) Any Governmental Environmental Enforcement Action taken against BUYER and attributable to any failure by Seller to own or operate the Assets prior to the Closing Date in compliance with applicable Environmental Laws;

 

  (ii) Any Third Party Environmental Claim with respect to the Assets resulting from any Release occurring prior to the Closing Date and caused by Seller’s ownership or operation of the Assets; and

 

  (iii) Any obligation by Seller to perform or ensure the performance of any Remediation Activities.

On the Closing Date, Buyer shall execute and deliver to Seller a release agreement in the form of Exhibit M (the “Release Agreement”). Buyer’s obligations to conduct, and to assume responsibility for, Remediation Activities will be set forth in the deed conveying the Real Property, will be a covenant running with the land, and will bind the successors, heirs and assigns of Buyer.”

 

  H. Seller’s Access to the Assets. Upon request by Seller in connection with any written request or demand from any Governmental Authority, BUYER shall, at no cost to Seller, permit Seller, its Affiliates, and its Authorized Representatives reasonable access to the Assets for the purpose, and to the extent reasonably required to permit Seller to respond to such Governmental Authority request or demand. Seller, its Affiliates or Authorized Representatives shall provide forty-eight (48) hours written notice to BUYER for any routine access by Seller or its Affiliates or Authorized Representatives. Seller will provide thirty (30) days written notice to BUYER for any access that may reasonably be expected to result in a material impact to BUYER’s operations. Seller will make reasonable efforts to minimize impacts on BUYER’s operations. Such access shall be subject to such conditions or procedures relating to the health and safety as BUYER may reasonably impose. BUYER’s obligations under this Section 7(H) will be set forth in any Special Warranty Deed or other instrument of conveyance, conveying any Real Property to be conveyed under this agreement and will under this Section 7 be a covenant running with the land and will bind the successors and assigns of BUYER. Upon written request by Seller, in connection with any request to Seller from any Governmental Authority, BUYER shall provide Seller at Seller’s cost copies of all reports, correspondence, notices and communications in BUYER’s possession or control sent or received from Governmental Authorities regarding the Environmental Condition of the Assets or any remediation and/or investigation at the Assets related to the Baseline Condition or other copies of all reports, correspondence, notices and communications in BUYER’s possession or control sent to or received from third parties concerning conditions that would obligate Seller, financially or otherwise.

 

  

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I. Environmental Issues.

 

  (i) BUYER acknowledges that there may have been spills of wastes, crude oil, petroleum products, produced water, or other materials in the past at or on the Assets or in connection with their operation, and tank bottoms or other wastes may have been placed at, on or under the Assets. In addition, the Assets may contain asbestos in piping coating, undisplaced crude oil, coats of lead-based paints, PCB’s in transformers, mercury in electrical switches, Naturally Occurring Radioactive Material (NORM), and other materials, substances and contaminants. Except to the extent it may constitute SELLER’s Retained Environmental Liabilities, BUYER assumes all liability for or in connection with the assessment, remediation, removal, transportation, and disposal of any such materials and associated activities in accordance with all relevant rules, regulations, and requirements of governmental agencies.

 

  (ii) As part of the consideration for the sale of the Assets, BUYER for itself, its successors and permitted assigns, covenants and agrees that no part of the Real Property may be used for any of the following specifically listed facilities or uses, or any similar facility or use: residential, child care, nursery school, preschool, or any other educational facility, place of worship, playground, hotel, motel, inn, bed and breakfast or rooming house, nursing home, rehabilitation center, hospital or community center and that the installation of any water wells for drinking or irrigation purposes along with the construction of basements is prohibited, provided, however, that none of the restrictions contained herein shall in any way limit or restrict BUYER’S right to maintain, repair and replace all water wells in use at the Real Property immediately prior to the date of Closing; that these covenants and agreements shall survive the Closing; that these covenants and agreements are to run with the Real Property; that these restrictive measures will be inserted in the Special Warranty Deed to be delivered at the Closing and that similar restrictive covenants shall be inserted in any deed, lease or other instrument conveying or demising the Real Property or any part thereof. Furthermore, BUYER for itself, its successors and permitted assigns agrees to execute any documents required by any Governmental Authority having jurisdiction over the Assets that are consistent with the above use restrictions.

 

  (iii) If Closing does not occur within the time required by this Agreement, or upon earlier termination of this Agreement, upon Seller’s request, BUYER shall promptly deliver to Seller all originals and copies (whether written or electronic) that are in BUYER’s or its Authorized Representatives’ possession of the information, reports, or materials including specifically those concerning the environmental or other condition of the Assets together with all information, reports, or material furnished to BUYER by Seller, and BUYER shall promptly cause third parties to deliver to Seller such materials that are in their possession.

 

  (iv)

BUYER and Seller shall cooperate with each other in all reasonable respects as to the transfer or assignment of the Environmental Permits or Orders that can be transferred or assigned under applicable Environmental Laws and the making of any filings or notifications or obtaining any authorizations required under applicable Environmental Laws in connection with the transfer of the Assets to BUYER. Seller shall, if applicable, assist BUYER in the transfer or assignment of any Environmental Permits or Orders. BUYER, however, shall be solely

 

  

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responsible for all subsequent communications and filings needed to follow through and complete the timely transfer or assignment of such Environmental Permits or Orders. With respect to any Environmental Permits or Orders issued under applicable Environmental Laws prior to the Closing Date that are transferred to BUYER, Seller, within thirty (30) calendar days after the Closing Date shall submit a letter to each applicable Governmental Authority acknowledging that BUYER is assuming the obligations of Seller under such Permit or Order, such letter to be in the form of Exhibit Z.

 

  (v) As between BUYER and Seller, BUYER shall be responsible for all filing costs and administrative expenses associated with such transfer or assignment of any Environmental Permits or Orders pursuant to this Agreement and for all costs and expenses relating to or arising out of any change in terms or conditions of such Environmental Permits or Orders resulting from any transfer, assignment or re-issuance of such Environmental Permits or Orders to BUYER, except for any such costs and expenses related to or arising out of Seller’s non-compliance with such Environmental Permits or Orders. With respect to those Environmental Permits or Orders that cannot be transferred or assigned under applicable Environmental Laws, will use reasonable efforts at BUYER’s cost and expense to obtain new permits or orders.

 

8. Employment.

 

  (A)

Schedule 8(A) contains a list of all of the SELLER’s eligible employees who are actively involved in the operation of the Assets or the Terminals (as such term is defined in the Terminals Sale and Purchase Agreement, dated as of the date hereof, between ExxonMobil Oil Corporation and Sunoco Partners Marketing & Terminals L.P.) prior to the Closing Date (the “Employees”). As soon as reasonably practicable after the Effective Date, and in any event within fifteen (15) days following execution of this Agreement by both Parties, SELLER shall provide BUYER and its Affiliates the opportunity to meet with and interview all of the Employees. Within thirty (30) calendar days following the Effective Date, BUYER shall provide SELLER with a list of Employees to whom BUYER or one of its Affiliates intends to offer employment as of the Closing Date (the “Intended Hired Employees”). Employees not included on the list of Intended Hired Employees, and employees on the list of Intended Hired Employees who do not become employees of BUYER or one of its Affiliates in connection with the consummation of the transactions contemplated by this Agreement shall be referred to herein as “Excluded Employees”. During the period from the Effective Date to the Closing Date, SELLER shall take no action to interfere with or discourage the ongoing employment of any Intended Hired Employees, will comply with the terms of any applicable employment contracts in existence on the Effective Date, and will undertake commercially reasonable efforts, consistent with past practices, to maintain good relationships with the Intended Hired Employees; provided, however, SELLER may terminate any Employee (a) for Cause upon notice to BUYER or (b) with BUYER’s prior written consent, which shall not be unreasonably withheld or delayed. On the Closing Date, or as soon thereafter as reasonably practicable, BUYER shall provide notice to SELLER of any Intended Hired Employees who do not accept BUYER’s or one of its Affiliate’s offer of employment. On the Closing Date, SELLER shall terminate all of the Intended Hired Employees and BUYER shall hire all of the Intended Hired Employees who accept BUYER’s or one of its Affiliate’s offer of employment (the “Hired Employees”). SELLER shall retain all liability for any liability, claim or obligation

 

  

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relating to or arising out of the employment by SELLER, or termination of employment by SELLER, of SELLER’s employees. BUYER shall have exclusive liability for any liability, claim or obligation relating to or arising out of the employment of any Hired Employees by BUYER or one of its Affiliates, or BUYER’s termination of the employment of any Hired Employee.

 

  (B) Neither BUYER nor any of its Affiliates shall be under any obligation to offer employment to any of the Employees; provided, however, BUYER shall comply with applicable federal, state and local laws prohibiting discrimination in hiring, and shall be liable for the failure to comply with such laws. Neither BUYER nor any of its Affiliates shall be under any obligation to accept, assume or adopt any existing collective bargaining agreement, provisions, letters of understanding, amendments, letters, notices, memorandum of agreement or other similar documents relating to any Employee of SELLER.

 

  (C) SELLER shall be responsible for any severance benefit payments with respect to the termination of employment of the Excluded Employees, and BUYER shall be under no obligation to provide severance pay or any other termination benefit with respect to the termination by SELLER of any Employees.

 

  (D) Neither BUYER nor any of its Affiliates shall assume or be deemed to have assumed any Seller Benefit Plans nor shall any of them have any obligations under, or assume any liabilities with respect to, any Seller Benefit Plans. Without limiting the scope of the preceding sentence, SELLER shall retain all responsibility and liabilities for all severance and employment obligations for the Employees (regardless of whether they become Hired Employees) for the period prior to the Closing and associated with the termination of any Employee’s employment from SELLER.

 

  (E) Effective as of the Closing Date, and subject to the consummation of the Closing, each Hired Employee shall receive credit for service with the Seller for purposes of Buyer’s vacation policies, but for no other purpose. Subject to Section 8(D) hereof, each Hired Employee and his or her eligible dependents shall be eligible for coverage under employee benefit plans, programs, practices or arrangements as determined and provided for in the sole discretion of BUYER. Claims by any Hired Employee for workers’ compensation benefits from claims arising out of occurrences prior to the Closing Date, whether such claims were made prior to, on or after the Closing Date, shall be the responsibility of SELLER. Claims by any Hired Employee for workers’ compensation benefits arising out of occurrences on or after the Closing Date shall be the responsibility of BUYER. Claims by a Hired Employee for all employment related issues arising out of occurrences prior to the Closing Date, whether such claims were made prior to, on or after the Closing Date, shall be the responsibility of SELLER. Claims by a Hired Employee for all employment related issues arising out of occurrences on or after the Closing Date shall be the responsibility of BUYER. Nothing in this Agreement shall be deemed or construed to (i) give rise to any rights, claims, benefits or causes of action by any Excluded Employee or (ii) prevent, restrict or limit BUYER following the Closing from terminating the employment of any Hired Employee, modifying the terms of employment of any Hired Employee or modifying, terminating or replacing any of its employee related matters as it may deem appropriate, subject to applicable law.

 

  

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  (F) The parties agree to furnish each other with such information concerning employees, and to take such other action as is necessary and appropriate to effect the transactions contemplated by this Section 8.

 

  (G) Prior to Closing, SELLER will not create any new Seller Benefit Plan, enter into any collective bargaining or labor agreement on behalf of Employees or permit the transfer, promotion or increase in compensation of any Employee outside of the ordinary course of business.

 

  (H) Each of SELLER and BUYER hereby covenants and agrees that, unless this Agreement is terminated, for a period of one year after the Closing Date, it will not, whether for its own account or for the account of any other person, solicit for hire or employment any person who is an employee of the other party with respect to the Assets except with the written permission of such person’s employer or as otherwise specifically contemplated by this Agreement; provided, however, that this Section 8(H) shall not apply to (i) contact initiated by an employee or (ii) any solicitation (or any hiring as a result of any solicitation) that consists of advertising in a newspaper or periodical of general circulation or through the Internet.

 

9. Right of Entry. BUYER agrees that the provisions of this Section 9 shall apply to any and all access to the Assets or other SELLER property in connection with this Agreement, whether such access occurred before or will occur after the execution of this Agreement. SELLER will, to the extent it has the legal right to do so, provide BUYER and any Authorized Representative of BUYER with reasonable access to the Assets to conduct the Environmental Assessment and Operational Assessment. BUYER and/or its contractor shall comply with prudent safety and industrial hygiene procedures, including without limitation, the Safety Requirements set forth in Exhibit C attached hereto, and shall review such procedures with SELLER prior to commencement of the Environmental Assessment and Operational Assessment. BUYER, its employees, agents and/or contractors shall comply with the Drug and Alcohol Prohibitions and Requirements set forth in Exhibit D attached hereto, while present on the Assets or other SELLER property.

BUYER shall submit schedules to SELLER which show when BUYER plans to enter the Assets or other SELLER property. BUYER shall ensure that the schedules provide sufficient detail to allow SELLER to determine in advance the approximate number of employees, contractors, subcontractors and equipment that BUYER will have on the sites where the Assets are located at any time. BUYER also shall provide the schedules to SELLER sufficiently in advance of the date or dates of entry to enable SELLER to arrange to have an inspector(s) present at the site(s).

BUYER shall not enter the real property on which the Assets are located without the presence of an MPLCO employee or MPLCO contractor. It is understood that there are risks associated with entry onto the Assets, and BUYER assumes responsibility for the safety of personnel and property of both BUYER and BUYER’s contractors. BUYER agrees to inspect the Assets for safety purposes prior to such entry and to exercise precautions and conduct its actions in a way that will, in so far as reasonably possible, assure the safety of persons and property.

 

10. Title.

 

  A.

Review of Title. Prior to the Closing Date, BUYER will have conducted a review of the Easements, including permits and licenses, made available by Seller to determine whether Seller has valid rights to the Easements and whether any consents or approvals

 

  

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are required for assignment of the Easements and/or Permits. If consents or approvals are required for assignment of any Easement, Seller shall, prior to, and if necessary, immediately following Closing, use commercially reasonable efforts to obtain such consents and/or approvals, provided that (i) Seller shall not be required to incur any expense beyond Seller’s usual overhead administrative expense, (ii) Seller shall make no compensation to the grantor for the assignment or transfer of any Easements and or Permits, (iii) BUYER shall cooperate in obtaining any such consents and or approvals, and (iv) BUYER shall execute any reasonable documentation requested by the Party(ies) whose consent or approval may be required, and (v) BUYER accepts the assignment documents in the form attached hereto as Exhibits G-1 and G-2.

If SELLER cannot obtain consents after ninety (90) days following Closing, SELLER shall retain the applicable Easements until the earlier of (i) the date on which BUYER has exercised its right of eminent domain and obtained such Easements or (ii) the date which is three hundred sixty five (365) days following the expiration of such ninety (90) day period. SELLER shall have no other responsibility to obtain consent and BUYER shall endeavor to obtain such assignments or transfers of easements. SELLER shall execute any reasonable documentation requested by the parties whose consent or approval may be required.

 

  B. Title Insurance. BUYER shall promptly place an order to procure a commitment for an ALTA Owner’s Title Insurance Policy 2006 Form (or other form of policy available in the jurisdiction and acceptable to BUYER) for the Hebert Station and Aldine Parcel properties from the Title Company, together with a copy of all documents referenced therein (the “Title Commitment”). Any abstracting, title certification, and charges for title examination will be at BUYER’s expense. BUYER shall cause the Title Company to deliver to BUYER, with a copy to SELLER, a title commitment setting forth the status of title to the Hebert Station and Aldine Parcel properties on or before the thirtieth (30th) day following the Effective Date.

 

  C. Survey. BUYER shall promptly cause to be prepared, at its expense, current land title surveys of the Hebert Station and Aldine Parcel properties, prepared by a licensed surveyor satisfactory to BUYER and conforming to 2005 Minimum Detail Requirements for ALTA/ACSM Land Title Surveys, including Table A Items Nos. 1, 2, 3, 4, 6, 7(a), 7(b)(l), 7(c), 8, 9, 10, 11(b), 13, 14, 15, 16, 17, 18 and 19 and such other standards as the Title Company and BUYER require as a condition to the removal of any survey exceptions from the Title Commitments, and certified by BUYER and the Title Company (the “Survey”). Upon completion of the Survey, BUYER shall deliver promptly three (3) prints thereof to SELLER and at least one (1) print to the Title Company. The Survey will (i) show the location of all streets, roads, railroads, creeks or other water courses, fences, easements, rights-of-way and other encumbrances or encroachments on or adjacent to the property, including all of the title matters shown on the Title Commitment and (ii) set forth a certified legal description of the properties. SELLER agrees to furnish the surveyor with copies of all existing deeds.

 

  D.

Title Objections. Within fifteen (15) days after receiving the later of the Title Commitment or the Survey, BUYER shall notify SELLER if the Title Commitment or Survey reveals any liens, encumbrances, claims or exceptions that, in BUYER’S reasonable judgment, are unacceptable (“Title Objections”). If SELLER is unable or unwilling to cure any Title Objections, SELLER will provide written notice thereof to BUYER within fifteen (15) days following receipt of notice of Title Objections from

 

  

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BUYER and BUYER shall have the right, at its option, by written notice to SELLER within fifteen (15) days following receipt of SELLER’S written notice, either (i) to terminate this Agreement and obtain a refund of the Earnest Money and all interest thereon, whereafter both Parties shall be relieved and discharged of any rights, liabilities or obligations hereunder, or (ii) to waive such defect and proceed to Closing. BUYER’S failure to exercise the right to terminate within the said fifteen (15) day period shall constitute a waiver of BUYER’S right to terminate with respect to such title matters. However, if SELLER elects to cure the Title Objections (although SELLER will have no such obligation to do so), SELLER shall provide BUYER with notice of its intention to cure same within the fifteen (15) days aforesaid and SELLER shall have an opportunity, at its expense, to remove such Title Objections within sixty (60) days following receipt of written notice from BUYER identifying the Title Objections (the “Title Cure Period”). In no event shall SELLER have any obligation to commence litigation or to incur costs in excess of One Thousand Dollars ($1,000.00) to cure or remove any Title Objections. If SELLER is unable to cure any Title Objections within the Title Cure Period that, in the reasonable opinion of the Title Company or BUYER, must be cured in order to deliver good and marketable title, BUYER may, as its sole and exclusive remedy, and upon written notice to SELLER within fifteen (15) days after expiration of the Title Cure Period, terminate this Agreement, in which event the Earnest Money shall be fully refunded to BUYER.

 

11. Confidentiality. SELLER and BUYER are parties to a Confidentiality Agreement dated August 9, 2006, a copy of which is attached hereto as Exhibit E. The Parties hereby agree that the terms of the Confidentiality Agreement shall be deemed to cover not only the “Evaluative Information” described in that agreement, but also any other information obtained by Buyer from SELLER in connection with or as part of the Assets including, without limitation, the provisions of this Agreement (collectively “MPLCO Information”). In accordance with the provisions of the Confidentiality Agreement, BUYER shall maintain in confidence and not disclose to third parties or its employees who are not involved in evaluating this asset acquisition any MPLCO Information obtained in the review of title or any other information obtained from SELLER.

 

12. Records. BUYER shall not destroy or otherwise dispose of any records, files and other data acquired hereunder for a period of three (3) years following Closing (except as to tax records, for which the period shall be the applicable statute of limitations) except upon thirty (30) days prior written notice to SELLER. During such periods, BUYER shall, at SELLER’s reasonable expense, make such records, files and other data available to SELLER or its authorized representatives to the extent reasonably required in connection with any Proceeding or Claim in a manner which does not have a material adverse effect on or the unreasonably interfere with BUYER’s business operations. Additionally, SELLER shall have the right to retain copies of any records, files or other data transferred to BUYER hereunder.

 

13. Option to Terminate.

 

  (A) Except as hereinafter provided, BUYER shall have the option of terminating this Agreement by providing written notice to SELLER in the event BUYER determines prior to Closing that the Assets are subject to any (i) Material Defect (as defined below) in the Facilities or (ii) Material Defect in the title to any of the Assets. To be effective, any such notice shall specifically identify and describe the basis for such termination, and shall include reasonable evidence thereof. Minor deviations in the location of a pipeline relative to a defined right of way in an Easement shall not be deemed to constitute a title defect for purposes of this Agreement.

 

  

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For purposes of this Section, 13, a “Material Defect” shall mean either a condition or series of conditions which, when taken together, will significantly impair the operating functions or safety of the Facilities or a defect or such defects in title which (a) would cost in excess of ONE MILLION AND NO/100 DOLLARS ($1,000,000) cash to cure or remedy, and (b) was not disclosed to or to the Knowledge of BUYER prior to BUYER’s execution of this Agreement. To be included in the calculation of the cumulative amount of Material Defects an applicable individual Material Defect must exceed ONE HUNDRED THOUSAND AND NO/100 U.S. DOLLARS ($100,000.00).

Notwithstanding the delivery of such a notice of termination by BUYER to SELLER, this Agreement shall not be terminated if within thirty (30) days after SELLER’s receipt of such notice (1) SELLER remedies or agrees to remedy, to a degree which is mutually agreed upon in writing prior to Closing, such Material Defect or (2) SELLER and BUYER mutually agree in writing on an adjustment to the Purchase Price.

 

  (B) In addition to the rights under Section 13(A), this Agreement may be terminated at any time prior to the Closing:

 

  (i) by the mutual consent of SELLER and BUYER; or

 

  (ii) if the Closing has not occurred by the close of business on September 30, 2008, then by SELLER if any condition specified in Section 16(A) has not been satisfied on or before such close of business, and shall not theretofore have been waived by SELLER, provided that the failure to consummate the transactions contemplated hereby on or before such date did not result from the failure by SELLER to fulfill any undertaking or commitment provided for herein on the part of SELLER that is required to be fulfilled on or prior to Closing; or

 

  (iii) if the Closing has not occurred by the close of business on September 30, 2008, then by BUYER if any condition specified in Section 16(B) has not been satisfied or waived on or before such close of business, and shall not theretofore have been waived by BUYER, provided that the failure to consummate the transactions contemplated hereby on or before such date did not result from the failure by BUYER to fulfill any undertaking or commitment provided for herein on the part of BUYER that is required to be fulfilled on or prior to Closing.

If the Agreement is terminated pursuant to Section 13(A), 13(B)(i) or 13(B)(ii), or Section 13(B)(iii) so long as the failure of any condition specified therein is not the fault of BUYER, the Earnest Money shall be returned to BUYER.

 

14. Indemnification and Release. In addition to BUYER’s release or indemnity in any other Section of this Agreement or in any other agreement executed pursuant to or in connection with this Agreement, BUYER agrees, except with respect to any Assumed Environmental Liabilities which are addressed in Section 7, as follows:

 

  (A)

BUYER, its successors and assigns (hereinafter in this Section 14 individually and collectively, “BUYER Indemnitor”) agrees to release, indemnify, defend, and hold harmless SELLER, Exxon Mobil Corporation and its Affiliates, and their respective officers, directors, employees, contractors, representatives, successors, and assigns (hereinafter in this Section 14 individually and collectively, “SELLER Indemnitee”) from all Claims arising from or related to the ownership, operation, use, repair, removal,

 

  

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separation or control of the Assets at any time after the Closing (and BUYER Indemnitor expressly disclaims any liability in respect of any such Claim related to any time prior to the Closing) including, without limitation, performance of BUYER Indemnitor’s obligations under Sections 5, 6, 7, 9, 11, and 22 of this Agreement, but excluding any such Claim based on any event or circumstance for which SELLER Indemnitor would have liability pursuant to Section 15(A) or Section 15(B) without regard to the proviso to such Section or any applicable statute of limitations or other time limitation; provided, however, that no Seller Indemnitee shall be entitled to indemnity pursuant to this Section 14 for any breach of any covenant, obligation, condition or agreement of which SELLER had Knowledge at the Closing; provided, that no Seller Indemnitee shall be entitled to indemnity pursuant to this Section 14 for any breach of any covenant, obligation, condition or agreement of which SELLER had Knowledge at the Closing.

 

  (B) IT IS THE EXPRESS INTENTION OF THE PARTIES THAT THE RELEASES AND INDEMNITIES IN THIS SECTION 14 SHALL APPLY TO CLAIMS THAT MAY ARISE IN WHOLE OR IN PART FROM THE NEGLIGENCE, OR STRICT LIABILITY OF SELLER’S INDEMNITEE, WHETHER ACTIVE, PASSIVE, JOINT, CONCURRENT, OR SOLE. THE PARTIES HERETO ALSO ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND CONSTITUTES CONSPICUOUS NOTICE.

 

  (C) If any provision or provisions of this Section 14, or any portions thereof, should be deemed invalid or unenforceable pursuant to a final determination of any court of competent jurisdiction or as a result of future laws, such determination or action shall be construed so as not to affect the validity or effect of any other portion or portions of this Section 14 not held to be invalid or unenforceable.

 

  (D) BUYER Indemnitor shall select (subject to SELLER Indemnitee’s reasonable approval) the attorneys to defend any matter subject to indemnification and/or taking all actions necessary or appropriate to resolve, defend, and/or settle such matters, and shall be entitled to contest, on its own behalf and on the SELLER Indemnitee’s behalf, the existence or amount of any obligation, cost, expense, debt or liability giving rise to such claim. Nothing in this Section 14(D) shall be construed as prohibiting SELLER Indemnitee from participating in the defense (which may include hiring its own counsel) in any matter subject to indemnification, as long as SELLER Indemnitee does so at its own expense, unless and to the extent that BUYER Indemnitor or an Affiliate is also subject to such claim and SELLER Indemnitee has determined in good faith that BUYER Indemnitor has a conflict of interest vis-à-vis SELLER Indemnitee and/or SELLER Indemnitee has defenses available to it that are not available to BUYER Indemnitor, in which case BUYER Indemnitor shall be responsible for the expense of SELLER Indemnitee’s counsel. The BUYER Indemnitor shall keep SELLER Indemnitee fully and timely informed as to actions taken on such matters. The SELLER Indemnitee shall cooperate fully with BUYER Indemnitor and its counsel and shall provide them reasonable access to SELLER’s employees, consultants, agents, attorneys, accountants, and files to the extent necessary or appropriate to defend or resolve the matter, BUYER Indemnitor reimbursing SELLER Indemnitee with respect to the reasonable cost of any such access. With respect to any matter for which a Party has an indemnification and/or defense obligation under this Agreement, the Parties shall maintain a joint defense privilege, where applicable, in connection with such matters for the Party’s post-Closing communications and those of their respective Affiliates and Authorized Representatives, which post-Closing communications concern the matters subject to such indemnification and/or defense obligation.

 

  

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15. Indemnification. In addition to SELLER’s indemnity in any other Section of this Agreement or in any other agreement executed pursuant to or in connection with this Agreement, SELLER agrees, except with respect to any Assumed Environmental Liabilities which are addressed in Section 7, as follows:

 

  (A) SELLER, its successors and assigns (hereinafter in this Section 15 individually and collectively, “SELLER Indemnitor”) agrees to release, indemnify, defend, and hold harmless BUYER and its Affiliates, and their respective officers, directors, partners, employees, contractors, representatives, successors, and permitted assigns (hereinafter in this Section 15 individually and collectively, “BUYER Indemnitee”) from all Claims arising from or related to the inaccuracy of any representation or the breach of any representation or warranty of SELLER set forth in this Agreement; provided, however, that no BUYER Indemnitee shall be entitled to indemnification pursuant to this Section 15 for any breach of a representation or warranty of which BUYER had Knowledge at or prior to the Closing.

 

  (B) SELLER Indemnitor agrees to release, indemnify, defend, and hold harmless BUYER Indemnitee from all Claims arising from or related to the breach of any covenant, obligation, condition, or agreement of SELLER set forth in this Agreement or from the exercise by SELLER of its rights under Section 7(H); provided however that no BUYER Indemnitee shall be entitled to indemnity pursuant to this Section 15 for any breach of such covenant, obligation, condition or agreement of which BUYER had Knowledge at Closing.

 

  (C) If any provision or provisions of this Section 15, or any portions thereof, should be deemed invalid or unenforceable pursuant to a final determination of any court of competent jurisdiction or as a result of future laws, such determination or action shall be construed so as not to affect the validity or effect of any other portion or portions of this Section 15 not held to be invalid or unenforceable.

 

  (D)

SELLER Indemnitor shall select (subject to the BUYER Indemnitee’s reasonable approval) the attorneys to defend any matter subject to indemnification and/or taking all actions necessary or appropriate to resolve, defend, and/or settle such matters, and shall be entitled to contest, on its own behalf and on the Indemnitee’s behalf, the existence or amount of any obligation, cost, expense, debt or liability giving rise to such claim. Nothing in this Section 15(D) shall be construed as prohibiting the BUYER Indemnitee from participating in the defense (which may include hiring its own counsel) in any matter subject to indemnification, as long as the BUYER Indemnitee does so at its own expense, unless and to the extent that the SELLER Indemnitor or an Affiliate is also subject to such claim and BUYER Indemnitee has determined in good faith that SELLER Indemnitor has a conflict of interest vis-à-vis BUYER Indemnitee and/or BUYER Indemnitee has defenses available to it that are not available to SELLER Indemnitor, in which case the SELLER Indemnitor shall be responsible for the expense of the BUYER Indemnitee’s counsel. The SELLER Indemnitor shall keep the BUYER Indemnitee fully and timely informed as to actions taken on such matters. The BUYER Indemnitee shall cooperate fully with the SELLER Indemnitor and its counsel and shall provide them reasonable access to the BUYER’s employees, consultants, agents, attorneys, accountants, and files to the extent necessary or appropriate to defend or resolve the

 

  

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matter, the SELLER Indemnitor reimbursing the BUYER Indemnitee with respect to the reasonable cost of any such access. With respect to any matter for which a Party has an indemnification and/or defense obligation under this Agreement, the Parties shall maintain a joint defense privilege, where applicable, in connection with such matters for the Party’s post-Closing communications and those of their respective Affiliates and Authorized Representatives, which post-Closing communications concern the matters subject to such indemnification and/or defense obligation.

 

  (E) SELLER Indemnitor agrees to release, indemnify, defend, and hold harmless BUYER Indemnitee from all Claims arising from any liabilities arising from or in connection with Section 4(F)(ii) of this Agreement.

 

  (F) SELLER shall have no indemnification obligation under Section 15(A) unless SELLER has received a claim from BUYER, specifying in reasonable detail the basis for such claim, within one (1) year following the Closing, except, that, in the case of (i) a claim based on the representations and warranties set forth in Section 4(B) and Section 4(C), SELLER shall have received such claim from BUYER at any time and (ii) a claim based on the representations and warranties set forth in Section 4(M), SELLER shall have received such claim from BUYER within ninety (90) days following the termination of the applicable statute of limitations.

 

16. Closing. The closing of the sale of Assets under this Agreement (the “Closing”) shall occur no later than September 30, 2008 (the “Closing Date”), at the offices of SELLER at 800 Bell Street, Houston, Texas, unless the parties mutually agree to another location. Time shall be of the essence to this Agreement. The obligations of the Parties shall be subject to the following:

 

  A. Conditions Precedent to Seller’s Obligations. SELLER’s obligation to consummate the transactions contemplated by this Agreement is subject to the satisfaction (or waiver by SELLER) of each of the following conditions:

 

  (i) the representations and warranties of BUYER in Section 5 as of the Closing Date shall be true and correct (in the case of any such representation and warranty qualified by materiality) and true and correct in all material respects (in the case of all other representation and warranties);

 

  (ii) BUYER must have performed and complied with in all material respects all of its covenants required by this Agreement to be performed or complied with on or prior to the Closing;

 

  (iii) all consents and notifications necessary for the transfer of the Assets to BUYER (except those consents related to the assignment of the Easements, if any), and the assumption by BUYER of the obligations and liabilities to be transferred to and assumed by BUYER, at the Closing shall have been obtained or made (and must be in full force and effect), in each case in form and substance reasonably satisfactory to SELLER, all necessary declarations, filings, and registrations with Governmental Authorities shall have been made by BUYER, and all applicable waiting and other time periods (including extensions thereof, if any) under any applicable legislation or regulation, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, of any relevant jurisdiction shall have expired, lapsed, or been terminated;

 

  

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  (iv) there must not be issued and in effect any order, decree or ruling restraining, enjoining or prohibiting the transactions contemplated hereby;

 

  (v) BUYER shall have executed and delivered the documents to which it is a party listed in Section 16(C); and

 

  (vi) BUYER shall have delivered to SELLER a certificate in form and substance reasonably satisfactory to SELLER to the effect that each of the conditions specified above in this Section 16(A) is satisfied in all respects.

 

  B. Conditions Precedent to Buyer’s Obligations. BUYER’s obligation to consummate the transactions contemplated by this Agreement is subject to the satisfaction (or waiver by BUYER) of each of the following conditions:

 

  (i) the representations and warranties of SELLER in Section 4 as of the Closing Date shall be true and correct (in the case of any such representation and warranty qualified by materiality) and true and correct in all material respects (in the case of all other representation and warranties);

 

  (ii) SELLER must have performed and complied with in all material respects all of its covenants required by this Agreement to be performed or complied with on or prior to the Closing;

 

  (iii) all consents and notifications necessary for the transfer of the Assets to BUYER (except those consents related to the assignment of the Easements, if any), and the assumption by BUYER of the obligations and liabilities to be transferred and assumed by BUYER, at the Closing shall have been obtained or made (and must be in full force and effect), in each case in form and substance reasonably satisfactory to BUYER, all necessary declarations, filings, and registrations with Governmental Authorities shall have been made by SELLER, and all applicable waiting and other time periods (including extensions thereof, if any) under any applicable legislation or regulation, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, of any relevant jurisdiction shall have expired, lapsed, or been terminated;

 

  (iv) there must not be issued and in effect any order, decree or ruling restraining, enjoining or prohibiting the transactions contemplated hereby;

 

  (v) SELLER shall have delivered to BUYER a certificate in form and substance reasonably satisfactory to BUYER to the effect that each of the conditions specified above in this Section 16(B) is satisfied in all respects;

 

  (vi) SELLER shall have executed and delivered the documents to which it is a party listed in Section 16(C);

 

  (vii)

BUYER shall have obtained title insurance policies (which may be in the form of a mark-up of a pro forma of the Title Commitments) in accordance with the Title Commitments, insuring the BUYER’S fee simple title to the Hebert Station and Aldine Parcel properties and insuring BUYER’S rights to the Aldine Option as of the Closing Date (including all recordable appurtenant easements insured as separate legal parcels) with gap coverage from Seller through the date of

 

  

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recording, subject only to Permitted Title Exceptions (the “Title Policies”). Each of the Title Policies shall have the creditor’s rights exception deleted, and shall include an extended coverage endorsement (insuring over the general or standard exceptions), comprehensive endorsement, access endorsement, contiguity endorsement, and all other endorsements reasonably requested by BUYER, in form and substance reasonably satisfactory to BUYER; and

 

  (viii) BUYER shall have obtained a Title Insurance Policy for the Aldine Option, which Title Insurance Policy shall insure that there are no other options or rights of first refusal to the Aldine Option Parcel and which shall in all other ways be reasonably acceptable to BUYER.

 

  C. At the Closing, SELLER and/or BUYER, as appropriate shall execute and/or deliver each of the following documents:

 

  (i) a Special Warranty Deed for the Real Property listed in Exhibit A-2, and described in Section 1(A) paragraphs (vii) and (viii) as Hebert Station and Aldine Parcel respectively and in the form attached hereto as Exhibit O, in recordable form, signed and duly notarized, with the Special Warranty Deed for the Aldine Parcel to be held in escrow by the Title Company on behalf of BUYER in the event that any necessary subdividing or platting has not been completed as of the Closing;

 

  (ii) a Deed Without Warranty for the Real Property listed in Exhibit A-2, in the form attached hereto as Exhibit P and in recordable form, signed and duly notarized;

 

  (iii) Intentionally Omitted;

 

  (iv) a Bill of Sale to Buyer in the form attached hereto as Exhibit F-1 covering the Facilities (other than the Hebert Truck Rack) and a Bill of Sale to Sunoco Partners Marketing & Terminals L.P. in the form attached hereto as Exhibit F-2 covering the Hebert Truck Rack;

 

  (v) an Assignment in the form attached hereto as Exhibits G-1 and G-2 covering the Easements, in recordable form, signed and duly notarized;

 

  (vi) a Parent Guaranty in the form attached hereto as Exhibit H;

 

  (vii) a certificate of non-foreign status provided to BUYER by SELLER in the form attached hereto as Exhibit Y;

 

  (viii) Incumbency certificates for all signatory officers of BUYER and SELLER;

 

  (ix) Articles of Incorporation & Bylaws, or other similar organizational documents, of BUYER and SELLER, certified as true and correct by the corporate secretary or officer of similar authority;

 

  (x) Certified Corporate Resolutions of BUYER and SELLER authorizing all aspects of transactions contemplated under this Agreement;

 

  (xi) a Closing Statement;

 

  

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  (xii) Environmental Baseline Condition of the Assets as mutually agreed to by the parties prior to Closing and attached hereto as Exhibit I;

 

  (xiii) Environmental Permits;

 

  (xiv) a Release Agreement in the form of Exhibit M;

 

  (xv) an Assignment and Assumption Agreement in the form of Exhibit N;

 

  (xvi) any other documents, instruments, and/or certificates reasonably requested by SELLER or BUYER or otherwise contemplated by this Agreement;

 

  (xvii) Tariff and Continuing Services Agreement, in the form of Exhibit Q;

 

  (xviii) Facilities Sharing Agreement in the form of Exhibit R;

 

  (xix) Facilities Separation Agreement in the form of Exhibit S, with such changes as shall be reasonably acceptable to BUYER and SELLER;

 

  (xx) Beaumont Pump Station Access Agreement in the form of Exhibit T-1, with such changes as shall be reasonably acceptable to BUYER and SELLER;

 

  (xxi) Beaumont Pump Station Easement in the form of Exhibit T-2, with such changes as shall be reasonably acceptable to BUYER and SELLER, in recordable form, signed and duly notarized;

 

  (xxii) Final Repair Plans in the form of Exhibit U;

 

  (xxiii) Hebert Ground Lease in the form of Exhibit V;

 

  (xxiv) Memorandum of Option to Purchase in the form of Exhibit BB, in recordable form, signed and duly notarized; and

 

  (xxv) Easement Agreements, as necessary, pertaining to that property which the Magtex System runs over, but which SELLER will retain title to, in the form of Exhibit CC.

The above listed closing documents shall be executed at Closing and made effective as of 12:01 a.m. on the Closing Date unless SELLER and BUYER mutually agree to the contrary. BUYER shall deliver the balance of the Purchase Price to SELLER’s account by wire transfer of immediately available funds at Closing, without discount or deduction other than as expressly set forth in this Agreement and shown on a closing statement executed by both BUYER and SELLER.

 

  D. Closing Contingency. Notwithstanding anything to the contrary in this Agreement, the Parties’ respective obligations to close the transactions contemplated by this Agreement are contingent upon the simultaneous closing of the sale and purchase of Exxon Mobil Corporation’s Arcadia, LA terminal under a separate agreement, the simultaneous closing of the sale and purchase of ExxonMobil Oil Corporation’s Center, Hearne (East), Waco and Waskom, TX terminals under a separate agreement, and the simultaneous closing of the sale and purchase of SELLER’s Hearne (West), TX terminal also under a separate agreement.

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 32 of 39

 

17. Permits. It shall be BUYER’s responsibility to obtain the issuance or transfer of all Permits (except for the issuance, transfer, or assignment of Environmental Permits, which shall be governed by the provisions of Sections 7(I)(iv) and (v)); provided however, that SELLER shall reasonably cooperate with BUYER’s reasonable efforts to obtain the transfer of such permits. Seller will notify the permit issuing agency of the transfer of ownership of the “Assets” after the Closing Date or the termination of registration.

 

18. Property Taxes. All ad valorem taxes and special assessments for the current year (“Property Taxes”) applicable to the Assets shall be allocated between SELLER and BUYER as of the Closing Date on the basis of no applicable discount. The allocation shall be based on the number of days that each party owns the Assets during the year of the sale. If the amount of such Property Taxes with respect to any of the Assets for the calendar year in which the Closing occurs has not been determined as of the Closing Date, then the Property Taxes with respect to such Assets for the preceding calendar year, on the basis of no applicable discount, shall be used to calculate such allocations, with known changes in valuation applied. SELLER’s allocated share of the Property Taxes for the current year shall be credited to BUYER at Closing as a reduction in Purchase Price and BUYER shall assume the responsibility to pay the Property Taxes, unless SELLER has already paid the current year’s Property Taxes, in which case SELLER shall be credited at Closing as an increase in Purchase Price with BUYER’s allocated share of the Property Taxes (the “Closing Credits”). If the actual amount of any Property Taxes varies by more than Twenty Thousand Dollars ($20,000) from estimates used at the Closing to prorate such Property Taxes, then the parties shall re-prorate such Property Taxes within ten (10) days following a request by either party based on the actual amount of the tax bills. After the Closing Date, if BUYER receives a bill for any Property Taxes assessed against the Assets that includes taxes for taxable years or taxable periods on or before the Closing Date (including taxes assessed for portions of taxable years or periods on or before the Closing Date), BUYER shall forward the bill to SELLER for payment. After the Closing Date, if SELLER receives a bill for any Taxes assessed against the Assets that includes Taxes for taxable years or taxable periods after the Closing Date (including Taxes assessed for portions of taxable years or taxable periods after the Closing Date), SELLER shall forward the bill to BUYER for payment.

 

19. Other Taxes. As may be required by relevant taxing agencies, SELLER shall collect and BUYER shall pay on the date of Closing all applicable state and local sales tax, use tax, gross receipts tax, business license tax, other taxes except taxes imposed by reason of capital or income of SELLER and fees. SELLER and BUYER agree that no Texas sales and use taxes will be reported on any of the Assets transferred to BUYER since such Assets fall within the Texas occasional sale exemption. Any state or local tax specified above, inclusive of any penalty and interest, assessed at a future date against SELLER with respect to the transaction covered herein shall be paid by BUYER or, if paid by SELLER, BUYER shall promptly reimburse SELLER therefor. Any documentary stamp tax which may be due shall be paid by BUYER. After the Closing Date, if BUYER receives a bill for any Taxes assessed against the Assets that includes taxes for taxable years or taxable periods on or before the Closing Date (including taxes assessed for portions of taxable years or periods on or before the Closing Date), BUYER shall forward the bill to SELLER for payment. After the Closing Date, if SELLER receives a bill for any Taxes assessed against the Assets that includes Taxes for taxable years or taxable periods after the Closing Date (including Taxes assessed for portions of taxable years or taxable periods after the Closing Date), SELLER shall forward the bill to BUYER for payment.

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 33 of 39

 

20. Allocation of Carrier Obligations and Proceeds. The Facilities may contain petroleum product which is held for the account of shipper(s). It is understood that title to the contents of the Facilities will remain with the shipper(s) and that BUYER assumes the obligation to deliver such contents in accordance with SELLER’s existing arrangements with the shipper(s), whether under a published tariff or a private transportation or storage agreement. Further, to the extent that petroleum products have been offered for shipment in the Facilities under a published tariff or pursuant to rights under a private transportation agreement, but not yet delivered to SELLER, BUYER shall receive those products for transportation in the normal course of business. Tariff charges for transportation during the month of sale shall be allocated between SELLER and BUYER on the basis of the number of days that each party owns the Facilities during the month of sale, provided that payments of such charges shall be allocated and divided between SELLER and BUYER only after receipt thereof, unless received prior to the date of Closing. On the day immediately preceding the Closing, the amount of petroleum products in the Facilities shall be determined by SELLER and BUYER in accordance with the procedures set forth in the form of Exhibit W hereto.

 

21. Notices. All notices, requests, demands, instructions and other communications required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed by registered mail, postage prepaid, as follows:

If to BUYER, addressed to:

Sunoco Pipeline L.P.

Attention: Vice President & General Counsel

1735 Market Street

Suite LL – 29th Floor

Philadelphia, PA 19103

Fax: (215) 246-8113

If to SELLER, addressed to:

Mobil Pipe Line Company

Attention: Business Development Manager

P.O. Box 2220

Houston, Texas 77252-2220

or to such other place as either Party may designate as to itself by written notice to the other. All notices will be deemed given on the date of receipt at the appropriate address.

 

22. Default. If BUYER defaults on or prior to Closing in a material way on BUYER’s obligations, including but not limited to BUYER’s absence at the designated time and place for Closing, SELLER, as its sole and exclusive remedy hereunder, shall be entitled to retain the Earnest Money as liquidated damages. Further, SELLER shall be free immediately to sell the Assets to any third party without any restriction under or by reason of this Agreement. If SELLER defaults on or prior to Closing in a material way on SELLER’s obligations, including but not limited to SELLER’s absence at the designated time and place for Closing, BUYER, as its sole and exclusive remedy hereunder, may terminate this Agreement and receive a refund of the Earnest Money.

Upon termination of this Agreement in accordance with its terms, the Parties shall have no further rights, duties or obligations under this Agreement except with respect to any provisions of this Agreement that are designated to survive such termination.

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 34 of 39

 

23. Governing Law and Venue. The provisions of this Agreement and the documents delivered pursuant hereto shall be governed by and construed in accordance with the laws of the State of Texas without regard to its conflicts of laws provisions which if applied might require the application of the laws of another jurisdiction. Each Party hereby submits to the exclusive jurisdiction of the courts of the State of Texas and the United States District Court located in Harris County Texas. Furthermore, each Party hereby waives any right or basis it may have to object to or claim a venue other than Harris County Texas.

 

24. Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except for any assignment of this Agreement to effectuate a like kind exchange in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the “Code”), this Agreement may not be assigned, in whole or in part, without the prior written consent of the other Party hereto, and any such assignment that is made without such consent shall be void and of no force and effect.

 

25. Entire Agreement; Amendments. This Agreement, including the attached Exhibits, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, superseding any and all prior negotiations, discussions, agreements and understandings, whether oral or written, relating to such subject matter. Exhibits A-1 through CC and the enumerated Schedules, as more specifically described herein or in the attached “Schedule and Exhibits”, are incorporated herein for all purposes. This Agreement may not be amended and no rights hereunder may be waived except by a written document signed by the Party to be charged with such amendment or waiver.

 

26. Publicity. All notices to third parties and other publicity concerning the transactions contemplated by this Agreement shall be jointly planned and coordinated by and between BUYER and SELLER; provided, however, no such notices or other publicity shall disclose the Purchase Price, except as required by law or applicable stock exchange rules. No party shall act unilaterally in this regard without the prior written approval of the other, unless required by Law or applicable stock exchange rules.

 

27. Survival. The following provisions of this Agreement shall not survive the Closing: Section 1, 3(A), 3(B) and 16. Such provisions will be merged with and will be superseded by the documents executed at Closing. Notwithstanding the fact that the other provisions of this Agreement are not expressly included in the conveyance documents, all other provisions of this Agreement shall survive Closing and shall not be deemed merged therewith.

 

28. No Third Party Beneficiary. It is expressly understood that the provisions of this Agreement do not impart enforceable rights in anyone who is not a Party or a successor or assign of a party hereto.

 

29. Joint Efforts. This Agreement was prepared with each of the Parties having access to their own legal counsel. Accordingly, the Parties stipulate and agree that this Agreement shall be deemed and considered for all purposes as prepared through the joint efforts of the Parties and shall not be construed against one Party or the other as a result of the preparation, submittal or other event of negotiation or drafting.

 

30. Headings. The division of this Agreement into articles, sections, and subsections and the insertion of headings and table of contents, if any, are for convenience only and shall not be used in or affect the construction or interpretation of this Agreement.

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 35 of 39

 

31. Updates to Schedules. SELLER will update the Schedules hereto between the signing of this Agreement and Closing in order to make these representations true as stated at Closing; provided, however, that for the purpose of determining whether SELLER’s obligation pursuant to Section 16(B) has been satisfied, no such update by SELLER to the Schedules subsequent to the signing of this Agreement shall be considered to have been made unless expressly accepted by BUYER, which acceptance or rejection shall not be unreasonably delayed.

 

32. Severability. If any term or provision or portions thereof is deemed invalid or unenforceable pursuant to a final determination of any court of competent jurisdiction or as a result of future laws, such determination or action shall be construed so as not to affect the validity or effect of any other portion or portions of this Agreement. Furthermore, it is the intent and agreement of the Parties that this Agreement shall be deemed amended by modifying such term or provision to the extent necessary to render it valid and enforceable while preserving the original intent of the affected term or provision or if that is not possible, by substituting therefor another provision that is valid and enforceable and achieves the same objective.

 

33. Further Assurances and Documents. Each Party shall promptly take such further actions, including the execution of further documents, as shall be reasonably required in order to carry out the intent and purposes of this Agreement or to protect the rights and remedies hereby created or intended to be created in favor of one or both Parties including, without limitation, assisting in obtaining any consents that may be required for the transfer of any Assets. SELLER shall use its good faith efforts, and shall cause its agents and employees to use their good faith efforts, in effecting the transition of the operations of the Facilities to BUYER, including, but not limited to, assisting in the transfer of permits related to the operation of Facilities to BUYER. In connection with the foregoing, SELLER shall provide BUYER and its Affiliates with reasonable access to the agents and employees of SELLER who have significant responsibility for the Assets for the purpose of ensuring a smooth transition.

 

34. Tax-deferred Exchange. Notwithstanding the general prohibition against an assignment of all or any portion of this Agreement contained in Section 24 of this Agreement, BUYER hereby agrees that SELLER may elect to structure the transaction contemplated herein as a tax-deferred exchange in accordance with Section 1031 of the Code provided that SELLER shall give the BUYER notice of not less than ten (10) days prior to the Closing, and provided further that notwithstanding any such assignment, SELLER shall remain liable for each of its obligations under this Agreement and under each instrument and agreement required to be delivered by SELLER hereunder at the Closing to the same extent as though no such assignment had occurred. In the event that SELLER elects to effect a tax-deferred exchange, BUYER further agrees to reasonably assist and accommodate SELLER by (1) consenting and agreeing to the assignment from SELLER to a qualified intermediary of all of SELLER’s right, title and interest in and to this Agreement; and (2) agreeing to accept title to the Assets in the form of a cash sale direct from SELLER, and (3) agreeing to pay the full purchase price, adjusted for any Closing Credits due to BUYER hereunder, for the Property at the closing of the sale contemplated herein direct to the qualified intermediary. BUYER shall incur no additional costs, delays, expenses, or liabilities in this transaction as a result of or in connection with said tax-deferred exchange and all of the foregoing shall be the sole responsibility of Seller.

 

35. Parent Guaranty or Insurance. BUYER shall obtain an executed Parent Guaranty from its parent organization in the form of Exhibit H and shall deliver such guaranty to SELLER as provided in Section 16(C).

 

  

PIPELINE SALE AND PURCHASE AGREEMENT

EXECUTION VERSION


Sale and Purchase Agreement

SUNOCO PIPELINE L.P.

Page 36 of 39

 

36. Limitations of Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NEITHER PARTY SHALL BE LIABLE OR RESPONSIBLE TO ANOTHER PARTY HERETO OR ITS AFFILIATES FOR ANY CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES, OR FOR LOSS OF PROFITS OR REVENUES (COLLECTIVELY REFERRED TO AS SPECIAL DAMAGES) INCURRED BY SUCH PARTY OR ITS AFFILIATES THAT ARISE OUT OF OR RELATE TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIM ARISES UNDER OR RESULTS FROM CONTRACT, TORT OR STRICT LIABILITY, provided that the foregoing limitation is not intended and shall not affect Special Damages imposed in favor of individuals or entities that are not Parties to this Agreement.

 

37. Tariff Rates and Continuation of Services. The Parties and/or their Affiliates have agreed on certain matters concerning the pipeline tariff rates to be charged on the Beaumont Line, Port Arthur Line, Houston Line, Hearne Line, and East Texas line following Closing and on certain matters concerning the continuation of transportation services. The agreements are specifically described in the Tariff and Continuing Services Agreement in the Form of Exhibit Q.

 

38. Condition of Assets. SELLER has maintained and operated the Assets in the ordinary course of its business. Until Closing, SELLER will continue to operate and maintain the Assets in accordance with its historic practices including the conduct of any scheduled Pipeline Integrity Assessments as listed on Exhibit X.

 

39. Interim Operations. Prior to Closing the Parties and/or their Affiliates will have agreed on the interim operations of the assets and training of personnel as specifically described in the Interim Monitoring and Operations Control Center Agreement in the form set forth on Exhibit L.

 

40. Transition. In order to permit the efficient and orderly transition of the operation of the Magtex Systems, SELLER shall assist BUYER, for a period of ninety (90) days, and on such terms as are