Sunoco Logistics Partners LP--Form 10-Q
Table of Contents

 

 

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, 2010

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.)

 

1818 Market Street, Suite 1500, Philadelphia, PA   19103
(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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   ¨    Smaller reporting company   ¨

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 3, 2010, the number of the registrant’s Common Units outstanding was 31,053,332.

 

 

 


Table of Contents

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, 2010 and 2009 (unaudited)    3
   Condensed Consolidated Statements of Income for the Six Months Ended June 30, 2010 and 2009 (unaudited)    4
   Condensed Consolidated Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009    5
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (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    32
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

 

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Table of Contents

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,
 
     2010     2009  

Revenues

    

Sales and other operating revenue:

    

Affiliates

   $ 214,039      $ 217,560   

Unaffiliated customers

     1,814,832        1,065,137   

Other income

     9,390        7,774   
                

Total Revenues

     2,038,261        1,290,471   
                

Costs and Expenses

    

Cost of products sold and operating expenses

     1,939,120        1,184,794   

Depreciation and amortization

     13,949        11,508   

Selling, general and administrative expenses

     15,584        15,842   
                

Total Costs and Expenses

     1,968,653        1,212,144   
                

Operating Income

     69,608        78,327   

Net interest with affiliates

     67        7   

Other interest cost and debt expense, net

     19,818        12,685   

Capitalized interest

     (1,176     (1,008
                

Net Income

   $ 50,899      $ 66,643   
                

Calculation of Limited Partners’ interest in Net Income:

    

Net Income

   $ 50,899      $ 66,643   

Less: General Partner’s interest in Net Income

     (10,672     (12,988
                

Limited Partners’ interest in Net Income

   $ 40,227      $ 53,655   
                

Net Income per Limited Partner unit:

    

Basic

   $ 1.30      $ 1.76   
                

Diluted

   $ 1.29      $ 1.74   
                

Weighted average Limited Partners’ units outstanding:

    

Basic

     31,050,602        30,551,349   
                

Diluted

     31,215,638        30,756,024   
                

(See Accompanying Notes)

 

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SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except unit and per unit amounts)

 

     Six Months Ended
June 30,
 
     2010     2009  

Revenues

    

Sales and other operating revenue:

    

Affiliates

   $ 387,427      $ 416,404   

Unaffiliated customers

     3,321,952        1,904,326   

Other income

     17,153        12,539   
                

Total Revenues

     3,726,532        2,333,269   
                

Costs and Expenses

    

Cost of products sold and operating expenses

     3,533,827        2,108,488   

Depreciation and amortization

     28,469        23,088   

Selling, general and administrative expenses

     36,170        32,916   
                

Total Costs and Expenses

     3,598,466        2,164,492   
                

Operating Income

     128,066        168,777   

Net interest with affiliates

     122        59   

Other interest cost and debt expense, net

     35,927        23,627   

Capitalized interest

     (1,964     (2,458
                

Net Income

   $ 93,981      $ 147,549   
                

Calculation of Limited Partners’ interest in Net Income:

    

Net Income

   $ 93,981      $ 147,549   

Less: General Partner’s interest in Net Income

     (20,755     (25,517
                

Limited Partners’ interest in Net Income

   $ 73,226      $ 122,032   
                

Net Income per Limited Partner unit:

    

Basic

   $ 2.36      $ 4.12   
                

Diluted

   $ 2.35      $ 4.09   
                

Weighted average Limited Partners’ units outstanding:

    

Basic

     31,034,160        29,628,856   
                

Diluted

     31,212,572        29,829,994   
                

(See Accompanying Notes)

 

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SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     June 30,
2010
    December 31,
2009
 
     (UNAUDITED)        

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 2,000      $ 2,000   

Advances to affiliates

     4,067        8,691   

Accounts receivable, affiliated companies

     65,190        47,791   

Accounts receivable, net

     1,406,868        1,280,062   

Inventories:

    

Crude oil

     363,165        82,511   

Refined products

     3,231        1,857   

Refined product additives

     1,739        1,765   

Materials, supplies and other

     841        841   
                

Total Current Assets

     1,847,101        1,425,518   
                

Properties, plants and equipment

     2,225,033        2,150,493   

Less accumulated depreciation and amortization

     (641,229     (616,772
                

Properties, plants and equipment, net

     1,583,804        1,533,721   
                

Investment in affiliates

     95,032        88,286   

Deferred charges and other assets

     55,273        51,081   
                

Total Assets

   $ 3,581,210      $ 3,098,606   
                

Liabilities and Partners’ Capital

    

Current Liabilities

    

Accounts payable

   $ 1,577,204      $ 1,253,742   

Accrued liabilities

     55,399        49,298   

Accrued taxes other than income taxes

     30,622        30,296   
                

Total Current Liabilities

     1,663,225        1,333,336   
                

Long-term debt

     1,213,262        868,424   

Other deferred credits and liabilities

     40,812        35,232   

Commitments and contingent liabilities

    
                

Total Liabilities

     2,917,299        2,236,992   
                

Partners’ Capital:

    

Limited partners’ interest

     645,421        837,120   

General partner’s interest

     20,359        26,987   

Accumulated other comprehensive loss

     (1,869     (2,493
                

Total Partners’ Capital

     663,911        861,614   
                

Total Liabilities and Partners’ Capital

   $ 3,581,210      $ 3,098,606   
                

(See Accompanying Notes)

 

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SUNOCO LOGISTICS PARTNERS L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash Flows from Operating Activities:

    

Net Income

   $ 93,981      $ 147,549   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     28,469        23,088   

Amortization of financing fees and bond discount

     987        336   

Restricted unit incentive plan expense

     3,992        4,394   

Changes in working capital pertaining to operating activities:

    

Accounts receivable, affiliated companies

     (17,399     40,152   

Accounts receivable, net

     (126,806     (530,779

Inventories

     (282,002     (157,972

Accounts payable and accrued liabilities

     328,831        436,705   

Accrued taxes other than income taxes

     326        3,677   

Other

     (3,571     (28,335
                

Net cash provided by (used in) operating activities

     26,808        (61,185
                

Cash Flows from Investing Activities:

    

Capital expenditures

     (76,175     (70,399
                

Net cash used in investing activities

     (76,175     (70,399
                

Cash Flows from Financing Activities:

    

Distributions paid to Limited Partners and General Partner

     (92,146     (81,765

Repayment of promissory note to General Partner

     (201,282     —     

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

     (2,541     (2,149

Contributions from General Partner for Limited Partner unit transactions

     402        2,398   

Advances (to)/from affiliates, net

     4,624        (7,392

Borrowings under credit facility

     308,000        357,973   

Repayments under credit facility

     (461,723     (420,385

Net Proceeds from issuance of long term debt

     494,033        173,388   

Net Proceeds from issuance of Limited Partner units

     —          109,516   
                

Net cash provided by financing activities

     49,367        131,584   
                

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 period

   $ 2,000      $ 2,000   
                

(See Accompanying Notes)

 

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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 publicly traded Delaware limited partnership that owns and operates a logistics business, consisting of refined product pipelines, terminalling and storage assets, crude oil pipelines, and crude oil acquisition and marketing assets. Sunoco, Inc. and its wholly-owned subsidiaries including Sunoco, Inc. (R&M) are collectively referred to as “Sunoco.” The Partnership is principally engaged in the transport, terminalling and storage of refined products and crude oil and the purchase and sale of crude oil in 13 states located in the northeast, midwest and southwest United States. Sunoco accounted for approximately 10 percent of the Partnership’s total revenues for the three and six months ended June 30, 2010.

The condensed consolidated financial statements reflect the results of Sunoco Logistics Partners L.P. and its wholly-owned subsidiaries, including Sunoco Logistics Partners Operations L.P. (the “Operating Partnership”) and include the accounts of entities in which the Partnership has a controlling financial interest. A controlling financial interest is evidenced by either a voting interest greater than 50% or a risk and rewards model that identifies the Partnership or one of its subsidiaries as the primary beneficiary of a variable interest entity (“VIE”). On January 1, 2010, new accounting guidance became effective which, among other things, clarifies when a company is deemed to be the primary beneficiary and requires ongoing assessment of whether an entity is the primary beneficiary of a VIE. Adoption of this guidance has not impacted the Partnership’s financial statements. Equity ownership interests in corporate joint ventures, in which the Partnership does not have a controlling financial interest, are accounted for under the equity method of accounting.

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. The Partnership expects the interim increase in quantities of inventory to significantly reduce by year end and therefore, has adjusted its interim LIFO calculation to produce a reasonable matching of most recently incurred costs with current revenues. All such adjustments are of a normal recurring nature. Results for the three and six months ended June 30, 2010 are not necessarily indicative of results for the full year 2010.

2. Acquisitions

In July 2010, the Partnership acquired a butane blending business from Texon L.P. for $140.0 million plus inventory. The acquisition includes patented technology for sophisticated blending of butane into gasoline, contracts with customers currently utilizing the patented technology, butane inventories and other related assets. The acquisition was funded by a $100.0 million note from Sunoco, Inc, and borrowings under the Operating Partnership’s $395.0 million Credit Facility. The acquisition will be included within the Terminal Facilities business segment beginning in the third quarter 2010.

In July 2010, the Partnership exercised certain rights to increase its ownership interests in Mid-Valley Pipeline Company, West Texas Gulf Pipe Line Company and West Shore Pipe Line Company (Note 5). All three transactions are expected to close within the next 30 days for an aggregate purchase price of approximately $100 million, which will initially be financed with the Operating Partnership’s $395.0 million Credit Facility.

3. Related Party Transactions

Incentive Distribution Rights Exchange

In January 2010, the Partnership entered into a repurchase agreement with its general partner, whereby the Partnership agreed to repurchase from the general partner the existing incentive distribution rights (“IDRs”) for $201.2 million and issue new incentive distribution rights. Pursuant to this transaction, the Partnership executed the Third Amended and Restated Agreement of Limited Partnership of Sunoco Logistics Partners L.P. (the “new partnership agreement”). The new partnership agreement reflects the cancellation of the original incentive distribution rights and the authorization and issuance of the new incentive distribution rights (Note 10).

The Partnership initially financed this arrangement with a promissory note to the general partner that was due December 31, 2010. Proceeds from the February 2010 issuance of $500.0 million in Senior Notes were used to repay this promissory note in full (Note 6). The transaction was accounted for as a reduction of the limited partners’ and general partner’s capital balances on the Partnership’s balance sheet.

Loans from Affiliate

In July 2010, the Partnership acquired a butane blending business from Texon L.P. for $140.0 million plus inventory. The acquisition was funded by a three-year, $100.0 million note from Sunoco, Inc, which bears interest at three-month LIBOR plus 275 basis points per annum. The balance of the acquisition was funded with borrowings under the Operating Partnership’s $395.0 million Credit Facility.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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 Operating Partnership’s $395.0 million Credit Facility.

Administrative Services

Under the Omnibus Agreement, the Partnership pays Sunoco or the general partner an annual administrative fee that includes expenses incurred by Sunoco and its affiliates to perform centralized corporate functions, such as legal, accounting, treasury, engineering, information technology, insurance, and other corporate services, including the administration of employee benefit plans. This fee was $6.0 million for the year ended December 31, 2009. In addition, the Partnership has incurred additional general and administrative costs which it pays directly. 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) was extended by one year in January 2010. The 2010 annual fee is $5.4 million. 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 2010, 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 other 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, including senior executives, 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 reimburses 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

The Partnership is party to various agreements with Sunoco to supply crude oil and provide pipeline and terminalling services. Affiliated revenues in the condensed consolidated statements of income consist of sales of crude oil as well as the provision of crude oil, sales of refined products, crude oil pipeline transportation and refined product pipeline transportation, terminalling, storage and blending services to Sunoco. Sales of crude oil are priced using market based rates under agreements which automatically renew on a monthly basis unless terminated by either party on 30 days written notice. Sales of refined product are priced using market based rates under agreements which can be terminated by either party on 90 days written notice.

Capital Contributions

In February 2009 and 2010 the Partnership issued 0.1 million common units, in each year, 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.

In April and May 2009 the Partnership completed a public offering of 2.25 million common units. Net proceeds of approximately $109.5 million were used to reduce outstanding borrowings under the Operating Partnership’s $395.0 million Credit Facility and for general partnership purposes. As a result of this offering of common units, the general partner contributed $2.3 million to the Partnership to maintain its 2.0 percent general partner interest.

4. Net Income Per Unit Data

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 10). The general partner was allocated net income of $10.7 million (representing 21.0 percent of total net income for the period) and $13.0 million (representing 19.5 percent of total net income for the period) for the three months ended June 30, 2010 and 2009, respectively, and $20.8 million (representing 22.1 percent of total net income for the period) and $25.5 million (representing 17.3 percent of total net income for the period) for the six months ended June 30, 2010 and 2009, 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 units outstanding and the dilutive effect of incentive unit awards, as calculated by the treasury stock method.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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, 2010 and 2009:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     2010    2009      2010    2009

Weighted average number of limited partner units outstanding – basic

   31,050,602    30,551,349      31,034,160    29,628,856

Add effect of dilutive unit incentive awards

   165,036    204,675      178,412    201,138
                     

Weighted average number of limited partner units – diluted

   31,215,638    30,756,024      31,212,572    29,829,994
                     

5. Investment in Affiliates

The Partnership’s ownership percentages in corporate joint ventures as of June 30, 2010 and December 31, 2009 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.

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, 2010 and 2009 (in thousands of dollars):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Income Statement Data:

           

Total revenues

   $ 122,120    $ 113,847    $ 218,217    $ 225,265

Net income

   $ 36,023    $ 29,393    $ 61,312    $ 58,306

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, 2010 and December 31, 2009 (in thousands of dollars):

 

     June 30,
2010
   December  31,
2009

Balance Sheet Data:

     

Current assets

   $ 138,187    $ 126,330

Non-current assets

   $ 687,078    $ 679,955

Current liabilities

   $ 120,620    $ 123,506

Non-current liabilities

   $ 562,855    $ 568,349

Net equity

   $ 141,790    $ 114,430

The Partnership’s investments in Wolverine, West Shore, Yellowstone, and West Texas Gulf at June 30, 2010 include an excess investment amount of approximately $52.7 million, net of accumulated amortization of $4.9 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.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

As owner of these corporate joint venture interests, the Partnership maintains certain rights providing it with the option to acquire additional ownership interests, should an owner elect to divest its interest in the corporate joint venture. In July 2010, the Partnership exercised certain rights to increase its ownership interests in Mid-Valley Pipeline Company, West Texas Gulf Pipe Line Company and West Shore Pipe Line Company in connection with another owner’s divestiture of its interests. All three transactions are expected to close within the next 30 days for an aggregate purchase price of approximately $100 million, which will initially be financed with the Operating Partnership’s $395.0 million Credit Facility.

6. Long-Term Debt

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

 

     June 30,
2010
    December 31,
2009
 

$62.5 million Credit Facility – due September 2011

   $ 31,250      $ 31,250   

$395.0 million Credit Facility – due November 2012

     84,000        237,722   

Senior Notes – 7.25%, due February 15, 2012

     250,000        250,000   

Senior Notes – 8.75%, due February 15, 2014

     175,000        175,000   

Senior Notes – 6.125%, due May 15, 2016

     175,000        175,000   

Senior Notes – 5.50%, due February 15, 2020

     250,000        —     

Senior Notes – 6.85%, due February 15, 2040

     250,000        —     

Less unamortized bond discount

     (1,988     (548
                
   $ 1,213,262      $ 868,424   
                

Senior Notes

In February 2010, the Operating Partnership issued $250.0 million of 5.50 percent Senior Notes and $250.0 million of 6.85 percent Senior Notes, due February 15, 2020 and February 15, 2040, respectively (“2020 and 2040 Senior Notes”). The 2020 and 2040 Senior Notes are redeemable, at a make-whole premium, and are not subject to sinking fund provisions. The 2020 and 2040 Senior Notes contain various covenants limiting the Operating Partnership’s ability to incur certain liens, engage in certain sale/leaseback transactions, or merge, consolidate or sell substantially all of its assets. The net proceeds of $494.0 million from the 2020 and 2040 Senior Notes, were used to repay the $201.2 million promissory note issued in connection with the Partnership’s repurchase and exchange of the general partner’s IDRs, repay outstanding borrowings under the Operating Partnership’s $395.0 million Credit Facility and pre-fund future growth.

Credit Facilities

During the second quarter of 2010, the Operating Partnership amended its revolving credit facilities as follows.

 

   

In June 2010, Lehman Brothers (“Lehman”) was removed from the list of banks participating in the Operating Partnership’s $400.0 million Credit Facility. The removal relates to Lehman’s September 2008 bankruptcy and failure to fund its $5.0 million share of the Partnership’s borrowings under the facility. Under the amended Credit Facility, the Operating Partnership has access to $395.0 million, which is available to fund the Partnership’s working capital requirements, to finance future acquisitions, to finance future capital projects and for general partnership purposes.

 

   

In April 2010, the Operating Partnership completed an amendment to the $62.5 million Credit Facility, which increased the maximum debt to EBITDA ratio to 4.5 to 1, which can generally be increased to 5.0 to 1 during an acquisition period. The Partnership is in compliance with this covenant as of June 30, 2010.

7. 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, 2010 and December 31, 2009, there were accrued liabilities for environmental remediation in the condensed consolidated balance sheets of $2.3 million and $2.8 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 $0.6 million and $1.8 million for the three-month periods ended June 30, 2010 and 2009, respectively, and $1.1 million and $2.5 million for the six-month periods ended June 30, 2010 and 2009, respectively.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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. 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, 2010. 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, 2010. 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, 2010.

8. Fair Value Measurements

The Partnership applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. The Partnership’s non-financial assets and liabilities that are recognized or disclosed at fair value consist principally of goodwill (for its annual impairment test) and asset retirement obligations.

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. 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 the Financial Accounting Standards Board (“FASB”). 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 estimated fair value of financial instruments has been determined based on the Partnership’s assessment of available market information and appropriate valuation methodologies. The Partnership’s current assets (other than inventories) and current liabilities are financial instruments. At June 30, 2010, the fair values of the credit facilities approximates their carrying values since the interest rates charged reflect current market rates. The estimated fair value of senior notes is determined using observable market prices as these notes are actively traded. The estimated aggregate fair value of the 2012, 2014, 2016, 2020 and 2040 Senior Notes (“Senior Notes”) at June 30, 2010 is $1.2 billion, compared to the carrying amount of $1.1 billion.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

9. 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 partner’s 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 (“DERs”) at the discretion of the Compensation Committee.

The Partnership awarded 72,615 and 84,126 units under the LTIP, net of forfeitures, and recognized share-based compensation expense of $4.0 million and $4.4 million for the six-month periods ended June 30, 2010 and 2009, respectively. Each of the restricted unit grants also have tandem DERs which are recognized as a reduction of Partners’ Capital when earned.

10. 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.

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”. The percentage interests shown for the unitholders and the general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.

In January 2010, the Partnership repurchased, and the general partner transferred and assigned to the Partnership for cancellation, the incentive distribution rights held by the general partner under the Second Amended and Restated Agreement of Limited Partnership, as amended, as consideration for (i) the Partnership’s issuance to the general partner of new incentive distribution rights issued under the Third Amended and Restated Agreement of Limited Partnership and (ii) the Partnership’s issuance to the general partner of a promissory note in the amount of $201.2 million, which was repaid in full during the first quarter of 2010. The new incentive distribution rights provide for target distribution levels and distribution “splits” between the general partner and the holders of the Partnership’s common units equal to those applicable to the cancelled incentive distribution rights, except that (i) the general partner’s distribution split for distributions above the current second target distribution of $0.575 per common unit per quarter (or $2.30 per common unit on an annualized basis) and up to the third target distribution will increase to 37% from 25% (these percentages include the general partner’s 2.0% interest); and (ii) the third target distribution will be increased from $0.70 to $1.5825 per common unit per quarter (or from $2.80 to $6.33 per common unit on an annualized basis).

The following table compares the target distribution levels and distribution “splits” between the general partner and the holders of the Partnership’s common units under the cancelled incentive distribution rights and under the new incentive distribution rights. The new incentive distributions rights were utilized beginning with the determination of the distribution for the first quarter 2010.

 

     Cancelled IDRs     New IDRs  
   Total Quarterly
Distribution  Target
Amount
   Marginal Percentage
Interest in Distributions
    Total
Quarterly
Distribution
Target
Amount
   Marginal Percentage  Interest
in Distributions
 
      General
Partner
    Unitholders        General
Partner
    Unitholders  

Minimum Quarterly Distribution

   $0.450    2   98       

First Target Distribution

   up to $0.500    2   98      No change     

Second Target Distribution

   above $0.500

up to $0.575

   15 %*    85       

Third Target Distribution

   above $0.575

up to $0.700

   25 %*    75   above $0.575

up to $1.5825

   37 %*    63

Thereafter

   above $0.700    50 %*    50   above $1.5825    50 %*    50

 

* Includes 2 percent general partner interest.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Distributions paid by the Partnership for the period from January 1, 2009 through June 30, 2010 are summarized below. The distribution of $201.2 million paid to the general partner in connection with the repurchase and exchange of the general partner’s IDRs has been excluded.

 

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 13, 2009

   $ 0.9900    $ 28.4    $ 10.2

May 15, 2009

   $ 1.0150    $ 31.4    $ 11.8

August 14, 2009

   $ 1.0400    $ 32.2    $ 12.6

November 14, 2009

   $ 1.0650    $ 33.0    $ 13.3

February 12, 2010

   $ 1.0900    $ 33.8    $ 13.6

May 14, 2010

   $ 1.1150    $ 34.6    $ 10.1

On July 27, 2010, Sunoco Partners LLC, the general partner of Sunoco Logistics Partners L.P., declared a cash distribution of $1.14 per common partnership unit ($4.56 annualized), representing the distribution for the second quarter 2010. The $46.0 million distribution, including $10.6 million to the general partner, will be paid on August 13, 2010 to unitholders of record at the close of business on August 9, 2010. The change in the distribution “splits” resulted in a $4.6 million reduction of the general partner’s cash distribution as compared to the previous methodology.

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

11. Business Segment Information

The Partnership operates in three principal business segments: Refined Products Pipeline System, Terminal Facilities, and Crude Oil Pipeline System.

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, 2010 and 2009, respectively (in thousands of dollars). During the three-month period ending June 30, 2009, the Partnership recognized $6.8 million of crude pipeline fees relating to the resolution of certain tariff adjustments from prior years. The amount is not considered material to the prior year results.

 

     Three Months Ended
June 30,
     2010    2009

Segment Operating Income

     

Refined Products Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 19,039    $ 18,410

Unaffiliated customers

     12,401      12,806

Other income

     3,584      3,030
             

Total Revenues

     35,024      34,246
             

Operating expenses

     13,442      15,349

Depreciation and amortization

     3,572      3,182

Selling, general and administrative expenses

     5,345      5,145
             

Total Costs and Expenses

     22,359      23,676
             

Operating Income

   $ 12,665    $ 10,570
             

Terminal Facilities:

     

Sales and other operating revenue:

     

Affiliates

   $ 31,404    $ 23,977

Unaffiliated customers

     27,122      22,927

Other income

     671      1,391
             

Total Revenues

     59,197      48,295
             

Cost of products sold and operating expenses

     21,176      17,613

Depreciation and amortization

     5,381      4,613

Selling, general and administrative expenses

     4,793      4,878
             

Total Costs and Expenses

     31,350      27,104
             

Operating Income

   $ 27,847    $ 21,191
             

Crude Oil Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 163,596    $ 175,173

Unaffiliated customers

     1,775,309      1,029,404

Other income

     5,135      3,353
             

Total Revenues

     1,944,040      1,207,930
             

Cost of products sold and operating expenses

     1,904,502      1,151,832

Depreciation and amortization

     4,996      3,713

Selling, general and administrative expenses

     5,446      5,819
             

Total Costs and Expenses

     1,914,944      1,161,364
             

Operating Income

   $ 29,096    $ 46,566
             

Reconciliation of Segment Operating Income to Net Income:

     

Operating Income:

     

Refined Products Pipeline System

   $ 12,665    $ 10,570

Terminal Facilities

     27,847      21,191

Crude Oil Pipeline System

     29,096      46,566
             

Total segment operating income

     69,608      78,327

Net interest expense

     18,709      11,684
             

Net Income

   $ 50,899    $ 66,643
             

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

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, 2010 and 2009, respectively (in thousands of dollars). During the six-month period ending June 30, 2009, the Partnership recognized $6.8 million of crude pipeline fees relating to the resolution of certain tariff adjustments from prior years. The amount is not considered material to the prior year results.

 

     Six Months Ended
June 30,
     2010    2009

Segment Operating Income

     

Refined Products Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 36,829    $ 37,226

Unaffiliated customers

     23,744      25,390

Other income

     5,860      5,347
             

Total Revenues

     66,433      67,963
             

Operating expenses

     26,649      29,322

Depreciation and amortization

     7,526      6,392

Selling, general and administrative expenses

     12,046      11,087
             

Total Costs and Expenses

     46,221      46,801
             

Operating Income

   $ 20,212    $ 21,162
             

Terminal Facilities:

     

Sales and other operating revenue:

     

Affiliates

   $ 60,314    $ 47,194

Unaffiliated customers

     53,212      45,997

Other income

     766      1,392
             

Total Revenues

     114,292      94,583
             

Cost of products sold and operating expenses

     41,201      32,724

Depreciation and amortization

     11,297      9,338

Selling, general and administrative expenses

     11,396      10,086
             

Total Costs and Expenses

     63,894      52,148
             

Operating Income

   $ 50,398    $ 42,435
             

Crude Oil Pipeline System:

     

Sales and other operating revenue:

     

Affiliates

   $ 290,284    $ 331,984

Unaffiliated customers

     3,244,996      1,832,939

Other income

     10,527      5,800
             

Total Revenues

     3,545,807      2,170,723
             

Cost of products sold and operating expenses

     3,465,977      2,046,442

Depreciation and amortization

     9,646      7,358

Selling, general and administrative expenses

     12,728      11,743
             

Total Costs and Expenses

     3,488,351      2,065,543
             

Operating Income

   $ 57,456    $ 105,180
             

Reconciliation of Segment Operating Income to Net Income:

     

Operating Income:

     

Refined Products Pipeline System

   $ 20,212    $ 21,162

Terminal Facilities

     50,398      42,435

Crude Oil Pipeline System

     57,456      105,180
             

Total segment operating income

     128,066      168,777

Net interest expense

     34,085      21,228
             

Net Income

   $ 93,981    $ 147,549
             

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

The following table provides the identifiable assets for each segment as of June 30, 2010 and December 31, 2009 (in thousands):

 

     June 30,
2010
   December 31,
2009

Refined Products Pipeline System

   $ 514,019    $ 476,484

Terminal Facilities

     634,839      597,502

Crude Oil Pipeline System

     2,386,962      1,988,065

Corporate and other

     45,390      36,555
             

Total identifiable assets

   $ 3,581,210    $ 3,098,606
             

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

12. Supplemental Condensed Consolidating Financial Information

The Partnership serves as guarantor of the Senior Notes and of any obligations under the $395.0 million and $62.5 million Credit Facilities. These guarantees are full and unconditional. For purposes of the following footnote, Sunoco Logistics Partners L.P. is referred to as “Parent Guarantor” and Sunoco Logistics Partners Operations L.P. is referred to as “Subsidiary Issuer.” 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.”

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

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Income

Three Months Ended June 30, 2010

(unaudited)

 

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

Sales and other operating revenue:

            

Affiliates

   $ —      $ —        $ 214,039    $ —        $ 214,039   

Unaffiliated customers

     —        —          1,814,832      —          1,814,832   

Equity in earnings of subsidiaries

     50,895      68,779        7      (119,681     —     

Other income

     —        —          9,390      —          9,390   
                                      

Total Revenues

     50,895      68,779        2,038,268      (119,681     2,038,261   
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —          1,939,120      —          1,939,120   

Depreciation and amortization

     —        —          13,949      —          13,949   

Selling, general and administrative expenses

     —        —          15,584      —          15,584   
                                      

Total Costs and Expenses

     —        —          1,968,653      —          1,968,653   
                                      

Operating Income

     50,895      68,779        69,615      (119,681     69,608   

Net interest with affiliates

     —        (758     825      —          67   

Other interest cost and debt expenses, net

     —        19,818        —        —          19,818   

Capitalized interest

     —        (1,176     —        —          (1,176
                                      

Net Income

   $ 50,895    $ 50,895      $ 68,790    $ (119,681   $ 50,899   
                                      

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Income

Three Months Ended June 30, 2009

(unaudited)

 

     Parent
Guarantor
   Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

            

Sales and other operating revenue:

            

Affiliates

   $ —      $ —        $ 217,560    $ —        $ 217,560   

Unaffiliated customers

     —        —          1,065,137      —          1,065,137   

Equity in earnings of subsidiaries

     66,638      77,497        8      (144,143     —     

Other income

     —        —          7,774      —          7,774   
                                      

Total Revenues

     66,638      77,497        1,290,479      (144,143     1,290,471   
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —          1,184,794      —          1,184,794   

Depreciation and amortization

     —        —          11,508      —          11,508   

Selling, general and administrative expenses

     —        —          15,842      —          15,842   
                                      

Total Costs and Expenses

     —        —          1,212,144      —          1,212,144   
                                      

Operating Income

    
66,638
     77,497        78,335      (144,143     78,327   

Net interest with affiliates

     —        (818     825      —          7   

Other interest cost and debt expenses, net

     —        12,685        —        —          12,685   

Capitalized interest

     —        (1,008     —        —          (1,008
                                      

Net Income

   $ 66,638    $ 66,638      $ 77,510    $ (144,143   $ 66,643   
                                      

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Income

Six Months Ended June 30, 2010

(unaudited)

 

     Parent
Guarantor
   Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

            

Sales and other operating revenue:

            

Affiliates

   $ —      $ —        $ 387,427    $ —        $ 387,427   

Unaffiliated customers

     —        —          3,321,952      —          3,321,952   

Equity in earnings of subsidiaries

     93,976      126,361        13      (220,350     —     

Other income

     —        —          17,153      —          17,153   
                                      

Total Revenues

     93,976      126,361        3,726,545      (220,350     3,726,532   
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —          3,533,827      —          3,533,827   

Depreciation and amortization

     —        —          28,469      —          28,469   

Selling, general and administrative expenses

     —        —          36,170      —          36,170   
                                      

Total Costs and Expenses

     —        —          3,598,466      —          3,598,466   
                                      

Operating Income

     93,976      126,361        128,079      (220,350     128,066   

Net interest with affiliates

     —        (1,578     1,700      —          122   

Other interest cost and debt expenses, net

     —        35,927        —        —          35,927   

Capitalized interest

     —        (1,964     —        —          (1,964
                                      

Net Income

   $ 93,976    $ 93,976      $ 126,379    $ (220,350   $ 93,981   
                                      

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Income

Six Months Ended June 30, 2009

(unaudited)

 

     Parent
Guarantor
   Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
   Consolidating
Adjustments
    Total  

Revenues

            

Sales and other operating revenue:

            

Affiliates

   $ —      $ —        $ 416,404    $ —        $ 416,404   

Unaffiliated customers

     —        —          1,904,326      —          1,904,326   

Equity in earnings of subsidiaries

     147,537      167,115        17      (314,669     —     

Other income

     —        —          12,539      —          12,539   
                                      

Total Revenues

     147,537      167,115        2,333,286      (314,669     2,333,269   
                                      

Costs and Expenses

            

Cost of products sold and operating expenses

     —        —          2,108,488      —          2,108,488   

Depreciation and amortization

     —        —          23,088      —          23,088   

Selling, general and administrative expenses

     —        —          32,916      —          32,916   
                                      

Total Costs and Expenses

     —        —          2,164,492      —          2,164,492   
                                      

Operating Income

     147,537      167,115        168,794      (314,669     168,777   

Net interest with affiliates

     —        (1,591     1,650      —          59   

Other interest cost and debt expenses, net

     —        23,627        —        —          23,627   

Capitalized interest

     —        (2,458     —        —          (2,458
                                      

Net Income

   $ 147,537    $ 147,537      $ 167,144    $ (314,669   $ 147,549   
                                      

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Balance Sheet

June 30, 2010

(unaudited)

 

     Parent
Guarantor
    Subsidiary
Issuer
   Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total

Assets

           

Current Assets

           

Cash and cash equivalents

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

Advances to Affiliates

     (388     47,995      (43,540     —          4,067

Accounts receivable, affiliated companies

     —          —        65,190        —          65,190

Accounts receivable, net

     —          —        1,406,868        —          1,406,868

Inventories

           

Crude oil

     —          —        363,165        —          363,165

Refined product

          3,231          3,231

Refined product additives

     —          —        1,739        —          1,739

Materials, supplies and other

     —          —        841        —          841
                                     

Total Current Assets

     (388     49,995      1,797,494        —          1,847,101
                                     

Properties, plants and equipment, net

     —          —        1,583,804        —          1,583,804

Investment in affiliates

     568,531        1,755,137      95,207        (2,323,843     95,032

Deferred charges and other assets

     —          7,749      47,524        —          55,273
                                     

Total Assets

   $ 568,143      $ 1,812,881    $ 3,524,029      $ (2,323,843   $ 3,581,210
                                     

Liabilities and Partners’ Capital

           

Current Liabilities

           

Accounts payable

   $ —        $ —      $ 1,577,204      $ —        $ 1,577,204

Accrued liabilities

     887        12,882      41,630        —          55,399

Accrued taxes

     —          —        30,622        —          30,622
                                     

Total Current Liabilities

     887        12,882      1,649,456        —          1,663,225
                                     

Long-term debt

     —          1,213,262      —          —          1,213,262

Other deferred credits and liabilities

     —          —        40,812        —          40,812
                                     

Total Liabilities

     887        1,226,144      1,690,268        —          2,917,299
                                     

Total Partners’ Capital

     567,256        586,737      1,833,761        (2,323,843     663,911
                                     

Total Liabilities and Partners’ Capital

   $ 568,143      $ 1,812,881    $ 3,524,029      $ (2,323,843   $ 3,581,210
                                     

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Balance Sheet

December 31, 2009

 

     Parent
Guarantor
   Subsidiary
Issuer
   Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total

Assets

            

Current Assets

            

Cash and cash equivalents

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

Advances to affiliates

     8,306      48,000      (47,615     —          8,691

Accounts receivable, affiliated companies

     —        —        47,791        —          47,791

Accounts receivable, net

     —        —        1,280,062        —          1,280,062

Inventories

            

Crude oil

     —        —        82,511        —          82,511

Refined product

     —        —        1,857        —          1,857

Refined products additives

     —        —        1,765        —          1,765

Materials, supplies and other

     —        —        841        —          841
                                    

Total Current Assets

     8,306      50,000      1,367,212        —          1,425,518
                                    

Properties, plants and equipment, net

     —        —        1,533,721        —          1,533,721

Investment in affiliates

     603,959      1,428,508      88,432        (2,032,613     88,286

Deferred charges and other assets

     —        4,096      46,985        —          51,081
                                    

Total Assets

   $ 612,265    $ 1,482,604    $ 3,036,350      $ (2,032,613   $ 3,098,606
                                    

Liabilities and Partners’ Capital

            

Current Liabilities

            

Accounts payable

   $ —      $ 1    $ 1,253,741      $ —        $ 1,253,742

Accrued liabilities

     980      3,339      44,979        —          49,298

Accrued taxes other than income taxes

     —        —        30,296        —          30,296
                                    

Total Current Liabilities

     980      3,340      1,329,016        —          1,333,336
                                    

Long-term debt

     —        868,424      —          —          868,424

Other deferred credits and liabilities

     —        —        35,232        —          35,232
                                    

Total Liabilities

     980      871,764      1,364,248        —          2,236,992
                                    

Total Partners’ Capital

     611,285      610,840      1,672,102        (2,032,613     861,614
                                    

Total Liabilities and Partners’ Capital

   $ 612,265    $ 1,482,604    $ 3,036,350      $ (2,032,613   $ 3,098,606
                                    

 

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SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2010

(unaudited)

 

     Parent
Guarantor
    Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total  

Net Cash Flows from Operating Activities

   $ 93,883      $ 99,865      $ 53,410      $ (220,350   $ 26,808   
                                        

Cash Flows from Investing Activities:

          

Capital expenditures

     —          —          (76,175     —          (76,175

Intercompany

     190,449        (440,180     29,381        220,350        —     
                                        
     190,449        (440,180     (46,794     220,350        (76,175
                                        

Cash Flows from Financing Activities:

          

Distribution paid to Limited Partners and General Partner

     (92,146     —          —          —          (92,146

Repayment of promissory note to General Partner

     (201,282     —          —          —          (201,282

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

     —          —          (2,541     —          (2,541

Contribution from General Partner for Limited Partner unit transactions

     402        —          —          —          402   

Advances (to)/from affiliates, net

     8,694        5       (4,075     —          4,624   

Borrowings under credit facility

     —          308,000        —          —          308,000   

Repayments under credit facility

     —          (461,723     —          —          (461,723

Net proceeds from issuance of senior notes

     —          494,033        —          —          494,033   

Net proceeds from issuance of Limited Partner units

     —          —          —          —          —     
                                        
     (284,332     340,315        (6,616     —          49,367   
                                        

Net change in cash and cash equivalents

     —          —          —          —          —     

Cash and cash equivalents at beginning of period

     —          2,000        —          —          2,000   
                                        

Cash and cash equivalents at end of period

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

 

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Table of Contents

SUNOCO LOGISTICS PARTNERS L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2009

(unaudited)

 

     Parent
Guarantor
    Subsidiary
Issuer
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Total  

Net Cash Flows from Operating Activities

   $ 206,570      $ 208,568      $ 15,457      $ (491,780   $ (61,185
                                        

Cash Flows from Investing Activities:

          

Capital expenditures

     —          —          (70,399     —          (70,399

Intercompany

     (216,483     (319,544     44,247        491,780        —     
                                        
     (216,483     (319,544     (26,152     491,780        (70,399
                                        

Cash Flows from Financing Activities:

          

Distribution paid to Limited Partners and General Partner

     (81,765     —          —          —          (81,765

Net proceeds from issuance of Limited Partner units

     109,516              109,516   

Contribution from General Partner for Limited Partner unit transactions

     2,398        —          —          —          2,398   

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

     —          —          (2,149     —          (2,149

Advances (to)/from affiliates, net

     (20,236     —          12,844        —          (7,392

Borrowings under credit facility

     —          357,973        —          —          357,973   

Repayments under credit facility

     —          (420,385     —          —          (420,385

Net proceeds from issuance of senior notes

     —          173,388        —          —          173,388   
                                        
     9,913        110,976        10,695        —          131,584   
                                        

Net change in cash and cash equivalents

     —          —          —          —          —     

Cash and cash equivalents at beginning of period

     —          2,000        —          —          2,000   
                                        

Cash and cash equivalents at end of period

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

 

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

Results of Operations – Three Months Ended June 30, 2010 and 2009

Sunoco Logistics Partners L.P.

Operating Highlights

Three Months Ended June 30, 2010 and 2009

 

     Three Months Ended
June 30,
     2010    2009

Refined Products Pipeline System:(1)

     

Total shipments (barrel miles per day)(2)

   51,666,714    58,066,789

Revenue per barrel mile (cents)

   0.669    0.591

Terminal Facilities:

     

Terminal throughput (bpd):

     

Refined product terminals(3)

   487,401    463,611

Nederland terminal

   683,698    646,368

Refinery terminals(4)

   471,164    599,503

Crude Oil Pipeline System:(1)(5)

     

Crude oil pipeline throughput (bpd)

   905,997    670,133

Crude oil purchases at wellhead (bpd)

   190,893    181,496

Gross margin per barrel of pipeline throughput (cents)(6)

   35.7    80.4

 

(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 of the Partnership’s purchase of the Romulus, MI refined products terminal from the acquisition date.

(4)

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

(5)

Includes results of the Partnership’s purchase of the Excel pipeline from the acquisition date.

(6)

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 $50.9 million for the second quarter 2010 as compared with $66.6 million for the second quarter 2009. The $15.7 million decrease in net income was primarily the result of the absence of a wide contango crude oil market structure along with the absence of a $6.8 million non-recurring tariff adjustment in the second quarter of 2010. Also contributing to the decrease in net income was an increase in interest expense, related to the issuance of the $500 million Senior Notes in the first quarter of 2010. The reduction in net income was partially offset by higher crude oil pipeline volumes and fees and improved operating performance at the Partnership’s Nederland and the refined products terminals.

Analysis of Segment Operating Income

The Partnership operates in three principal business segments: Refined Products Pipeline System, Terminal Facilities and Crude Oil Pipeline System.

Refined Products Pipeline System

Operating income for the Refined Products Pipeline System increased $2.1 million to $12.7 million for the second quarter ended June 30, 2010 compared to the prior year’s quarter. Sales and other operating revenue increased slightly to $31.4 million compared to the prior year’s quarter due primarily to higher pipeline volumes and fees which were partially offset by the permanent shut-down of Sunoco’s Eagle Point refinery in the fourth quarter 2009. Operating expenses decreased $1.9 million to $13.4 million compared to the prior year’s quarter due primarily to reduced environmental remediation costs and increased pipeline operating gains which were favorably impacted by higher refined products prices.

 

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Table of Contents

Terminal Facilities

Operating income for the Terminal Facilities segment increased $6.7 million to $27.8 million for the second quarter ended June 30, 2010 compared to the prior year’s quarter. Total revenues for the second quarter of 2010 increased $10.9 million to $59.2 million. Revenue increases during the quarter were due primarily to increased tank revenues and higher volumes at the Nederland facility, including the additional tankage to support Motiva’s Port Arthur, TX refinery and additional volumes from a refined products terminal acquired in September 2009. Revenues and cost of products sold also increased compared to the prior year quarter as a result of the commencement of terminal optimization projects at the Partnership’s refined products terminals during the fourth quarter of 2009. Depreciation and amortization expense increased $0.8 million to $5.4 million for the second quarter 2010 as a result of new tankage at the Partnership’s Nederland facility and a refined products terminal acquired in September 2009.

Crude Oil Pipeline System

Operating income for the Crude Oil Pipeline System decreased $17.5 million to $29.1 million for the second quarter of 2010 compared to the prior year’s quarter. This decrease in operating income was the result of a lower lease acquisition results and the absence of a non-recurring tariff adjustment recognized in 2009 related to prior period activity. Partially offsetting these reductions were higher pipeline revenues, which included revenues from a pipeline in Oklahoma which was acquired in 2009, and increased pipeline operating gains which were favorably impacted by higher crude oil prices. Other income increased $1.8 million compared to the prior year’s quarter due to increased equity income from the Partnership’s joint venture interests. Depreciation and amortization expense increased $1.3 million to $5.0 million for the second quarter 2010 due primarily to the 2009 pipeline acquisition.

Higher crude oil prices were a key driver of the increase in total revenue and 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 $77.99 per barrel for the second quarter of 2010 from $59.61 per barrel for the second quarter of 2009.

Results of Operations – Six Months Ended June 30, 2010 and 2009

Sunoco Logistics Partners L.P.

Operating Highlights

Six Months Ended June 30, 2010 and 2009

 

     Six Months Ended
June 30,
     2010    2009

Refined Products Pipeline System:(1)

     

Total shipments (barrel miles per day)(2)

   51,680,780    58,805,197

Revenue per barrel mile (cents)

   0.648    0.586

Terminal Facilities:

     

Terminal throughput (bpd):(3)

     

Refined product terminals

   473,038    461,831

Nederland terminal

   704,704    649,501

Refinery terminals(4)

   484,398    591,179

Crude Oil Pipeline System:(1)(5)

     

Crude oil pipeline throughput (bpd)

   871,760    667,156

Crude oil purchases at wellhead (bpd)

   187,711    186,302

Gross margin per barrel of pipeline throughput (cents)(6)

   37.8    92.0

 

(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 of the Partnership’s purchase of the Romulus, MI refined products terminal from the acquisition date.

(4)

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

(5)

Includes results of the Partnership’s purchase of the Excel pipeline from the acquisition date.

(6)

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 $94.0 million for the six-month period ended June 30, 2010 as compared with $147.5 million for the comparable period in 2009. The $53.6 million decreases in net income was primarily the result of the absence of a wide contango crude oil market structure along with the absence of a $6.8 million non-recurring tariff adjustment in the second quarter of 2010. Also contributing to the decrease in net income was an increase in interest expense, related to the issuance of the $500 million Senior Notes in the first quarter of 2010. The reduction in net income was partially offset by higher crude oil pipeline volumes and fees and improved operating performance at the Partnership’s Nederland and the refined products terminals.

 

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Table of Contents

Analysis of Segment Operating Income

Refined Products Pipeline System

Operating income for the Refined Products Pipeline System decreased $1.0 million to $20.2 million for the first half of 2010 compared to the prior year period. Sales and other operating revenue decreased $2.0 million to $60.6 million due primarily to the permanent shut-down of Sunoco’s Eagle Point refinery in the fourth quarter 2009 and refinery maintenance activity during the first quarter of 2010, partially offset by higher pipeline fees. Operating expenses decreased $2.7 million to $26.6 million compared to the prior year period due primarily to the timing of maintenance activity, decreased utility costs, and increased pipeline operating gains which were favorably impacted by higher refined products prices. Selling, general and administrative expenses increased to $12.0 million compared to $11.1 million in the prior year period due primarily to the non-recurring expenses related primarily to the Partnership’s incentive distribution rights repurchase and adjustments to compensation costs related to employee departures.

Terminal Facilities

Operating income for the Terminal Facilities segment increased $8.0 million to $50.4 million for the first half of 2010 compared to the prior year period. Total revenues increased $19.7 million to $114.3 million despite reduced volumes in the Partnership’s refinery terminals which were negatively impacted by refinery maintenance activity in the first quarter and the permanent shut-down of the Eagle Point refinery. Revenue increases during the first six months of the year were due primarily to increased tank revenues and higher volumes at the Nederland facility, including the additional tankage to support Motiva’s Port Arthur, TX refinery and additional volumes from the refined products terminal acquired in September 2009. Revenues and cost of products sold also increased compared to the prior year period as a result of the commencement of terminal optimization projects at the Partnership’s refined products terminals during the fourth quarter of 2009. Depreciation and amortization expense increased $2.0 million to $11.3 million for the first half of 2010 as a result of increased tankage at the Partnership’s Nederland facility and the acquisition of a refined products terminal previously mentioned. Selling, general and administrative expenses increased to $11.4 million compared to $10.1 million in the prior year period due primarily to the non-recurring expenses described above.

Crude Oil Pipeline System

Operating income for the Crude Oil Pipeline System decreased $47.7 million to $57.5 million for the first half of 2010 compared to the prior year period. This decrease in operating income was the result of a reduced level of market related income driven primarily by the contraction of the contango market structure in 2010 and the absence of a favorable non-recurring tariff adjustment recognized in 2009. Partially offsetting these reductions were higher pipeline revenues, which included revenues from a crude oil pipeline in Oklahoma acquired in 2009, and increased pipeline operating gains which were favorably impacted by higher crude oil prices. Other income increased $4.7 million compared to the prior year period due primarily to increased equity income from the Partnership’s joint venture interests. Depreciation and amortization expense increased $2.3 million to $9.6 million for the first half of 2010 due primarily to the 2009 crude oil pipeline acquisition. Selling, general and administrative expenses increased to $12.7 million compared to $11.7 million in the prior year period primarily as a result of the non-recurring expenses described above.

Higher crude oil prices were a key driver of the increase in total revenue and cost of products sold and operating expenses from the prior year's period. The average price of West Texas Intermediate crude oil at Cushing, Oklahoma increased to $78.39 per barrel for the six months ended June 30, 2010 from $51.46 per barrel for the six months ended June 30, 2009.

Liquidity and Capital Resources

Liquidity

Cash generated from operations and borrowings under the $395.0 million Credit Facility and the $62.5 million Credit Facility are our primary sources of liquidity. At June 30, 2010, we had net working capital of $183.9 million and available borrowing capacity under the credit facilities of $342.2 million. Our working capital position reflects crude oil and refined products inventories based on historical costs under the LIFO method of accounting. If the inventories had been valued at their current replacement cost, we would have had working capital of $316.6 million at June 30, 2010. We periodically supplement our cash flows from operations with proceeds from debt and equity financing activities.

In February 2010, the Operating Partnership issued $250.0 million of 5.50 percent Senior Notes and $250.0 million of 6.85 percent Senior Notes, due February 15, 2020 and February 15, 2040, respectively (“2020 and 2040 Senior Notes”). The 2020 and 2040 Senior Notes are redeemable, at a make-whole premium, and are not subject to sinking fund provisions. The 2020 and 2040 Senior Notes contain various covenants limiting the Operating Partnership’s ability to incur certain liens, engage in sale/leaseback transactions, or merge, consolidate or sell substantially all of its assets. The net proceeds from the 2020 and 2040 Senior Notes were used to repay in full the $201.2 million promissory note issued in connection with our repurchase and exchange of our general partner’s IDR interests, to repay outstanding borrowings under the $395.0 million Credit Facility and to pre-fund future growth projects.

 

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Capital Resources

Credit Facilities

The Operating Partnership has a five-year $400.0 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 $400.0 million Credit Facility was amended in June 2010 to $395.0 million, related to the removal of Lehman Brothers as a participant. The $395.0 million Credit Facility matures in November 2012. At June 30, 2010, there was $84.0 million outstanding under this credit facility.

The $395.0 million 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 $395.0 million 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 $395.0 million 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 was in compliance with this requirement as of June 30, 2010.

In March 2009, the Operating Partnership entered into a $62.5 million revolving credit facility (“$62.5 million Credit Facility”) with 2 participating financial institutions. The $62.5 million Credit Facility is available to fund the Operating Partnership’s working capital requirements, to finance future acquisitions and for general partnership purposes. The $62.5 million Credit Facility matures in September 2011 and may be repaid at any time. It bears interest at the Operating Partnership’s option, at either (i) LIBOR plus an applicable margin or (ii) the higher of (a) the federal funds rate plus 0.50 percent plus an applicable margin, (b) Toronto Dominion’s prime rate plus an applicable margin, or (c) LIBOR plus 1.0 percent plus an applicable margin. The $62.5 million Credit Facility contains various covenants similar to the $395.0 million credit facility and was amended in April 2010 to require the Operating Partnership to maintain, on a rolling four-quarter basis, a maximum total debt to EBITDA ratio of 4.5 to 1, which can generally be increased to 5.0 to 1 during an acquisition period. The Operating Partnership was in compliance with this requirement as of June 30, 2010. At June 30, 2010, there was $31.3 million outstanding under this credit facility.

Cash Flows and Capital Expenditures

Net cash provided by operating activities for the six months ended June 30, 2010 was $26.8 million compared with $61.2 million of net cash used in operating activities for the first six months of 2009. Net cash provided by operating activities in 2010 related primarily to net income of $94.0 million and depreciation and amortization of $28.5 million offset by a $97.1 million increase in working capital. The increase in working capital was the result of increases in accounts receivable and contango inventory positions partially offset by an increase in accounts payable. The net cash used in operating activities in 2009 related to a $208.2 million increase in working capital, partially offset by net income of $147.5 million and depreciation and amortization of $23.1 million. The increase in working capital was the result of increases in accounts receivable and contango inventory positions partially offset by an increase in accounts payable.

Net cash used in investing activities for the six months of 2010 was $76.2 million compared with $70.4 million for the first six months of 2009.

Net cash provided by financing activities for the first six months of 2010 was $49.4 million compared with $131.6 million net cash provided by financing activities for the first six months of 2009. Net Cash provided by financing activities for the first six months of 2010 resulted from the $500 million issuance of senior notes, net of $6.0 million of note discounts and debt issuance costs. This source of cash was partially offset by $201.2 million in distributions to repay in full the promissory notes issued in connection with the repurchase and exchange of the general partner’s incentive distribution rights, $153.7 million net repayment of the Partnership’s credit facilities and $92.1 million in quarterly distributions to the limited partners and general partner. Net cash provided by financing activities for the first six months of 2009 resulted from $173.4 million issuance of senior notes and $109.5 million public offering completed in April and May of 2009. The net proceeds from these sources were partially offset by $62.4 million net repayment of the Partnership’s credit facilities, and $81.8 million in distributions paid to limited partners and the general partner. Net cash provided by financing activities was utilized to finance operating and investing activities, including contango inventory positions.

 

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Table of Contents

Under a treasury services agreement with Sunoco, the Partnership participates in Sunoco’s centralized cash management program. Advances to affiliates in the Partnership’s condensed consolidated balance sheets at June 30, 2010 and December 31, 2009 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,
     2010    2009

Maintenance

   $ 14,278    $ 9,022

Expansion

     61,897      61,377
             
   $ 76,175    $ 70,399
             

Management continues to expect maintenance capital expenditures to be approximately $32.0 million for the year ended December 31, 2010, excluding acquisitions and 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, 2010 were $61.9 million compared to $61.4 million for the first six months of 2009. Expansion capital for 2010 includes construction projects to expand services at the Partnership’s refined products terminals, increase tankage at the Nederland facility and to expand upon the Partnership’s refined products platform in the southwest United States. Management continues to expect to invest approximately $175.0 million to $200.0 million in expansion capital projects in 2010, excluding acquisitions.

In July 2010, the Partnership acquired a butane blending business from Texon L.P for $140.0 million plus inventory. The acquisition includes patented technology for sophisticated blending of butane into gasoline, contracts with customers currently utilizing the patented technology, butane inventories and other related assets. The acquisition was funded in part by a three-year, $100.0 million note from Sunoco, Inc, which will bear interest at three-month LIBOR plus 275 basis points per annum. The balance was funded under the Operating Partnership’s $395.0 million Credit Facility. The acquisition will be included within the Terminal Facilities business segment beginning in the third quarter 2010.

In July 2010, the Partnership exercised certain rights to increase its ownership interests in Mid-Valley Pipeline Company, West Texas Gulf Pipe Line Company and West Shore Pipe Line Company. All three transactions are expected to close in the third quarter 2010 and to be immediately accretive. These acquisitions are anticipated to be purchased for an aggregate purchase price of approximately $100 million and will initially be financed with the Operating Partnership’s $395.0 million Credit Facility pending more permanent financing.

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 its credit facilities, other borrowings and the issuance of additional common units.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks, including volatility in crude oil commodity prices and interest rates. To manage such exposure, inventory levels and expectations of future commodity prices and interest rates are monitored when making decisions with respect to risk management. We have not entered into derivative transactions that would expose us to price risk.

Interest Rate Risk

We have interest-rate risk exposure for changes in interest rates relating to our outstanding borrowings. We manage our exposure to changing interest rates through the use of a combination of fixed- and variable-rate debt. At June 30, 2010, we had $115.3 million of variable-rate borrowings under our revolving credit facilities. The outstanding borrowings bear interest cost of LIBOR plus an applicable margin. An increase in short-term interest rates will have a negative impact on funds borrowed under variable debt arrangements. Our weighted average interest rate on our variable-rate borrowings was 1.25 percent at June 30, 2010. A one percent change in the weighted average rate would have impacted annual interest expense by approximately $1.2 million.

At June 30, 2010, we had $1.1 billion of fixed-rate senior notes. A hypothetical one-percent decrease in interest rates would increase the fair value of our fixed-rate borrowings at June 30, 2010 by approximately $87.8 million.

Commodity Market Risk

We generally do not acquire and hold futures contracts or other derivative products for the purpose of speculating on crude oil price changes, as these activities could expose us to significant losses. We are 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. Our policy is to purchase only commodity products for which we have a market and to structure our sales contracts so that price fluctuations for those products do not materially affect the margin we receive. We also seek to maintain a position that is substantially balanced within our various commodity purchase and sales activities. In the ordinary course of doing business, we enter into crude purchase contracts with third parties generally for a term of one year or less, with a majority of the transactions on a 30-day renewable basis. Simultaneously, we enter into contracts for the future physical sale and delivery on a specified date of the related crude purchased. Contracts that qualify as derivatives have been designated as normal purchases and sales and are accounted for using traditional accrual accounting. We may experience net unbalanced positions for short periods of time as a result of production, transportation and delivery variances as well as logistical issues associated with inclement weather conditions.

Forward-Looking Statements

Some of the information included in this quarterly report on Form 10-Q contains “forward-looking” statements 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.

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 its 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 our pipeline, terminalling and storage services;

 

   

Changes in the short-term and long-term demand for crude oil we both buy and sell;

 

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Table of Contents
   

The loss of Sunoco as a customer or a significant reduction in its current level of throughput and storage with us;

 

   

An increase in the competition encountered by our 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 we have an equity ownership interest;

 

   

Changes in the general economic conditions in the United States;

 

   

Changes in laws and regulations to which we are subject, including federal, state, and local tax, safety, environmental and employment laws;

 

   

Changes in regulations governing composition of refined petroleum products, that we transport, terminal and store;

 

   

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

 

   

Our 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 we may not be adequately insured;

 

   

The age of, and changes in the reliability and efficiency of our 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 our tariff rates implemented by federal and/or state government regulators;

 

   

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

 

   

Changes in our or Sunoco’s credit ratings, as assigned by ratings agencies;

 

   

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

 

   

Performance of financial institutions impacting our liquidity, including those supporting our credit facilities;

 

   

Changes in interest rates on our outstanding debt, which could increase the costs of borrowing and;

 

   

The costs and effects of legal and administrative claims and proceedings against us 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 we, 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 our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. We undertake no obligation to update publicly any forward-looking statement whether as a result of new information or future events.

 

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Table of Contents
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 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, 2010, the Partnership carried out an evaluation, under the supervision and with the participation of the management of the general partner (including the 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 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, 2010 that has materially affected, or that is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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Table of Contents

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, 2010.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors described previously in Part I, Item IA of the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 23, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use 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.

 

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Table of Contents
Item 6. Exhibits

 

   2.1:    Asset and Membership Interest Purchase and Sale Agreement between Texon Distributing L.P. and Butane Acquisition I LLC, dated as of June 25, 2010
2.1.1:    Schedules and Exhibits to Asset and Membership Interest Purchase and Sale 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 Involuntary Severance Plan, as amended and restated as of July 27, 2010
   10.2:    Sunoco Partners LLC Long-Term Incentive Plan, as amended and restated as of July 27, 2010
10.2.1:    Form of Restricted Unit Agreement (Performance) under the Sunoco Partners LLC Long-Term Incentive Plan
10.2.2:    Form of Restricted Unit Agreement (Time) under the Sunoco Partners LLC Long-Term Incentive Plan
   10.3:    Sunoco Partners LLC Annual Incentive Plan, as amended and restated as of July 27, 2010
   10.4:    Sunoco Partners LLC Directors’ Deferred Compensation Plan, as amended and restated as of July 27, 2010
   10.5:    Sunoco Partners LLC Special Executive Severance Plan, as amended and restated as of July 27, 2010
   10.6:    Sunoco Partners LLC Independent Director Compensation Summary
   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
 101.1:    The following financial statements from Sunoco Logistics Partners L.P.’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2010, filed with the Securities and Exchange Commission on August 4, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Balance Sheets; (iii) the Condensed Consolidated Statement of Cash Flows; and, (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

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

Sunoco Logistics Partners L.P.

Investor Relations

1818 Market Street

Suite 1500

Philadelphia, PA 19103

or through our website at www.sunocologistics.com.

 

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Table of Contents

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/    BRIAN P. MACDONALD        

  Brian P. MacDonald
  Vice President and Chief Financial Officer

Date: August 4, 2010

 

35

Asset and Membership Interest Purchase ans Sale Agreement

Exhibit 2.1

Execution Version

ASSET AND MEMBERSHIP INTEREST

PURCHASE AND SALE AGREEMENT

between

TEXON DISTRIBUTING L.P. d/b/a TEXON L.P.,

and

BUTANE ACQUISITION I LLC

Dated as of June 25, 2010


TABLE OF CONTENTS

 

         Page
SECTION 1.   DEFINITIONS    1
SECTION 2.   PURCHASE OF MEMBERSHIP INTEREST, COMPANY INVENTORY AND INCLUDED SELLER INVENTORY    14

2.1

  Purchase and Sale    14
SECTION 3.   CONSIDERATION    14

3.1

  Consideration    14

3.2

  Combined Inventory    15

3.3

  Resolution of Disputes    17
SECTION 4.   CLOSING    17

4.1

  Closing Date    17

4.2

  Transfer of Membership Interest; Closing Deliveries    17

4.3

  Excluded Assets    19

4.4

  Retained Liabilities    20
SECTION 5.   SELLER’S REPRESENTATIONS AND WARRANTIES    21

5.1

  Enforceability; Authorization; No Conflicts    21

5.2

  Organization    21

5.3

  Capitalization    21

5.4

  Company Records    22

5.5

  Financial Information    22

5.6

  Absence of Certain Changes    23

5.7

  Membership Interest; Certain Contracts    23

5.8

  Real Property Matters    23

5.9

  Litigation    24

5.10

  Compliance with Legal Requirements    24

5.11

  Consents and Approvals    24

5.12

  Environmental Laws    24

5.13

  Permits    25

5.14

  No Violations    25

5.15

  Contracts    25

5.16

  Taxes    26

5.17

  No Finder’s Fee    27

5.18

  Intellectual Property    27

5.19

  Company Employees; Labor Matters    32

5.20

  Seller Employee Benefit Plans; Pension Plans    33

5.21

  Sufficiency of Assets    34

5.22

  Condition of Certain Assets    34

5.23

  Title to Assets    34

5.24

  MCE Blending Matters    34

5.25

  No Further Representations    34

 

i


5.26

  Tax Matters Partner    35
SECTION 6.   REPRESENTATION AND WARRANTIES OF BUYER    35

6.1

  Enforceability; Authorization; No Conflicts    35

6.2

  Organization    35

6.3

  Finder’s Fees    35

6.4

  No Litigation    36

6.5

  Buyer’s Financing    36

6.6

  Buyer Awareness and Acknowledgement    36

6.7

  Buyer as Principal    36

6.8

  No Other Representations, Warranties or Covenants of Seller    36
SECTION 7.   COVENANTS    37

7.1

  Access    37

7.2

  HSR Act Filings    37

7.3

  Permits, Consents, etc.    37

7.4

  Conduct of the Butane Blending Business Pending Closing    37

7.5

  Notification of Certain Events    38

7.6

  Certain Environmental Matters    38

7.7

  Insurance    39

7.8

  Financial Statements and Operating Summaries    39

7.9

  Employee Matters    39

7.10

  Intercompany Obligations    41

7.11

  Actions to Satisfy Closing Conditions    42

7.12

  Preservation of Records    42

7.13

  Use of Names    42

7.14

  Tax Matters    42

7.15

  Risk of Loss    43

7.16

  Hedging Positions    43

7.17

  Non-competition    44

7.18

  Intellectual Property Developments    45

7.19

  Retained Causes of Action    47

7.20

  No Negotiation    47

7.21

  Parts and Inventory    47
SECTION 8.   CONDITIONS PRECEDENT TO BUYER’S OBLIGATIONS    48

8.1

  Representations and Warranties True    48

8.2

  Compliance with Agreement    48

8.3

  HSR Act    48

8.4

  Consents    48

8.5

  No Adverse Litigation    48

8.6

  MCE Blending    48

8.7

  Release of Liens    48
SECTION 9.   CONDITIONS PRECEDENT TO SELLER’S OBLIGATIONS    49

9.1

  Representations and Warranties True    49

9.2

  Compliance with Agreement    49

 

ii


9.3

  HSR Act    49

9.4

  Consents    49

9.5

  No Adverse Litigation    49
SECTION 10.   INDEMNIFICATION    49

10.1

  Obligation of Parties to Indemnify    49

10.2

  [RESERVED]    50

10.3

  Indemnification Procedures for Third Party Claims    50

10.4

  Direct Claims    51

10.5

  Survival of Representations and Warranties; Covenants    51

10.6

  Indemnification Limitations    52

10.7

  Treatment of Payments    52

10.8

  Exclusive Remedy    52

10.9

  Specific Performance    52
SECTION 11.   TERMINATION    53

11.1

  Termination    53

11.2

  Effect of Termination    54

11.3

  Expenses    54
SECTION 12.   GUARANTY OF BUYER    54

12.1

  Buyer Guarantor    54

12.2

  Guaranty Unconditional    55

12.3

  Representations and Warranties    55

12.4

  Waivers of the Buyer Guarantor    55

12.5

  Reinstatement in Certain Circumstances    56

12.6

  Subrogation    56
SECTION 13.   MISCELLANEOUS    56

13.1

  Expenses    56

13.2

  Assignment    56

13.3

  Governing Law    56

13.4

  Amendment and Modification    56

13.5

  Notices    56

13.6

  Entire Agreement    57

13.7

  Successors    57

13.8

  Counterparts    57

13.9

  Headings    58

13.10

  Jurisdiction    58

13.11

  Interpretation    58

13.12

  Public Announcements    58
Exhibit A   Form of Assignment and Bill of Sale   
Exhibit B   Form of Membership Interest Assignment   
Exhibit C   Form of Blending Patents License   
Exhibit D   Form of Software License and Support Agreement   
Exhibit E   Form of Transition Services Agreement   

 

iii


Exhibit F   Form of Transloader Patent License   
Exhibit G   Seller’s Officer’s Certificate   
Exhibit H   Seller’s Secretary’s Certificate   
Exhibit I   Seller’s Non-Foreign Person Affidavit   
Exhibit J   Buyer’s Officer’s Certificate   
Exhibit K   Buyer’s Secretary’s Certificate   
Exhibit L   Form of Membership Interest Assignment (MCE Blending, LLC)   
Exhibit M   Buckeye Letter Agreement   
Exhibit N   Form of Canadian Blending License   
Exhibit O   Form of Consulting Agreement   
Exhibit P   Form of Employment Agreement   
Exhibit Q   Form of Assignment and Assumption Agreement   
Exhibit R   Form of Canadian Butane Supply Agreements   
Schedule 1.1(a)   Seller Officers with “knowledge”   
Schedule 1.1(b)   Company Parts and Equipment   
Schedule 1.1(c)   Description of Company Real Property   
Schedule 1.1(d)   Retained Seller Liabilities   
Schedule 3.1(f)   Allocation Statement   
Schedule 3.2(a)-1   Combined Inventory Valuation Procedures   
Schedule 3.2(a)-2   Combined Inventory Calculation Procedures   
Schedule 4.3(m)   Certain Excluded Assets   
Schedule 4.3(q)   Butane and Gasoline Held in Connection with Buckeye Letter Agreement   
Schedule 5.5(d)   Financial Statement Matters   
Schedule 5.8(a)   Company Real Property Matters   
Schedule 5.8(b)   Notices Regarding Company Real Property   
Schedule 5.9   Litigation   
Schedule 5.10   Compliance with Legal Requirements   
Schedule 5.11   Governmental Authority Consents   
Schedule 5.12   Environmental Matters   
Schedule 5.13   Material Permits   
Schedule 5.14   Violations under Orders, etc. or Permits   
Schedule 5.15(a)   Material Contracts   
Schedule 5.15(b)   Defaults under Material Contracts   
Schedule 5.16   Tax Matters   
Schedule 5.18(b)   Other Intangible Property Necessary to Conduct the Butane Blending Business   
Schedule 5.18(d)   Infringement of the Company’s or the Seller’s Intellectual Property   
Schedule 5.18(e)   Owned Intellectual Property   
Schedule 5.18(i)(iv)   Public Software   
Schedule 5.18(k)   Licenses of Intellectual Property by the Company and Seller   
Schedule 5.18(l)   Licenses of Intellectual Property to the Company and Seller   
Schedule 5.18(o)   Intellectual Property Owned by or Registered to Employees, Consultants or Contractors   
Schedule 5.19(a)   Business Employees; Independent Contractors   

 

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Schedule 5.19(b)   Other Labor Matters   
Schedule 5.20(a)   Seller Employee Benefit Plans   
Schedule 7.3   Required Consents   
Schedule 7.9(a)   Offered Employees   
Schedule 7.9(h)   Benefit Plan Events   

 

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ASSET AND MEMBERSHIP INTEREST

PURCHASE AND SALE AGREEMENT

THIS ASSET AND MEMBERSHIP INTEREST PURCHASE AND SALE AGREEMENT is made and entered into as of June 25, 2010, between TEXON DISTRIBUTING L.P. d/b/a TEXON L.P., a Delaware limited partnership (“Seller”), and BUTANE ACQUISITION I LLC, a Delaware limited liability company (“Buyer”).

RECITALS:

A. Seller owns all of the limited liability company interests (the “Membership Interest”) in Texon Butane Blending LLC, a Delaware limited liability company (the “Company”).

B. The Company develops, constructs and installs equipment for the blending of butane into motor gasoline in pipelines or at gasoline terminals; purchases, transports, stores and handles butane supply for blending; sells or delivers butane for blending to terminal operators; and stores and sells gasoline received by the Company in exchange for butane deliveries (collectively, the “Butane Blending Business”). Seller owns and supplies to or obtains and maintains for the account of the Company certain inventories of butane for use by the Company in the Butane Blending Business.

C. In accordance with the terms of this Agreement, (i) Seller desires to transfer and sell the Membership Interest to Buyer and Buyer desires to purchase from Seller all of the Membership Interest and (ii) concurrently therewith, Seller desires to transfer and sell the Included Seller Inventory (as defined below) to Buyer and Buyer desires to purchase from Seller the Included Seller Inventory.

NOW, THEREFORE, in consideration of the premises and mutual promises, representations, warranties and covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION 1. DEFINITIONS.

The following terms used in this Agreement shall have the following meanings:

“Accounting Expert” is defined in Section 3.3(a).

“Affiliate,” as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through ownership of voting securities or by contract or otherwise. For purposes of this definition, a Person shall be deemed to be “controlled by” a Person if such Person possesses, directly or indirectly, power to vote 10% or more of the securities having ordinary voting power for the election of directors of such first Person.


“Agreement” means this Purchase and Sale Agreement, as it may be amended from time to time.

“Allocation Statement” is defined in Section 3.1(f).

“Assignment and Assumption Agreement” is defined in Section 4.4.

“Assignment and Bill of Sale” means the instrument of conveyance in substantially the form of Exhibit A pursuant to which Seller at Closing shall convey to Buyer all of Seller’s right, title and interest in, to and under the Included Seller Inventory.

“Blending Patents” means issued patents U.S. Patent Nos. 6,679,302, 7,032,629 and 7,631,671, and pending applications U.S. Patent Application Nos. 12/633,431 (filed on December 8, 2009) and 12/569,698 (filed on September 29, 2009), each held by MCE Blending, together with any U.S. patents or patent applications claiming priority in whole or in part to such patents or patent applications, including without limitation any reissues, renewals, extensions, divisions, continuations, continuations-in-part or reexaminations thereof.

“Blending Patents License” means a license agreement in substantially the form of Exhibit C pursuant to which, following the Closing, the Company will grant to Seller an irrevocable, non-exclusive, perpetual license to use the Butane Blending Technology in accordance with the terms thereof.

“Buckeye Letter Agreement” means an agreement in substantially the form of Exhibit M to be entered into immediately following the Closing between Seller and the Company, and acknowledged by Buyer, to be effective as of the Closing Date.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by Legal Requirements to close.

“Business Employees” is defined in Section 5.19(a).

“Business Financial Statements” is defined in Section 5.5(a).

“Butane Blending Business” is defined in Recital B.

“Butane Blending Technology” means the Blending Patents together with certain trade secrets, confidential information, customer lists, proprietary software source code, technical information, data, process technology, plans, drawings, design specifications, training manuals and blue prints of Seller and the Company related to the Butane Blending Business.

“Buyer” is defined in the introductory paragraph.

Buyer Guarantor” is defined in Section 12.1.

“Buyer Indemnitees” is defined in Section 10.1(a).

 

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“Buyer Obligation” is defined in Section 12.1.

“Buyer Section 3.2 Notice of Objection” is defined in Section 3.2(c).

“Canadian Blending License” means a new license agreement in substantially the form of Exhibit N pursuant to which, following the Closing, Seller will grant to the Company an irrevocable, non-exclusive, perpetual sub-license to use the Canadian Blending Technology in accordance with the terms thereof.

“Canadian Blending Technology” means Canadian Patent No. 2647970 (filed on April 20, 2007) held, at the time of Closing, by Seller, together with any Canadian patents or patent applications claiming priority in whole or in part to such patents or patent applications, including without limitation any reissues, renewals, extensions, divisions, continuations, continuations-in-part or reexaminations thereof, and any trade secrets, confidential information, process technology, plans, drawings and design specifications related thereto.

“Canadian Butane Supply Agreement” means the supply agreements in substantially the form of Exhibit R pursuant to which Texon Canada ULC will sell butane to the Company following the Closing.

“Closing” means the closing of the transaction contemplated by this Agreement.

“Closing Date” is defined in Section 4.1.

“Closing Date Amount” means, and is equal to, the sum of the following: (i) the Membership Interest Base Purchase Price plus (ii) the Estimated Company Inventory Value plus (iii) the Estimated Included Seller Inventory Value plus (iv) the purchase price for the Transloader Patent License specified in Section 3.1(c) plus (v) the payment described in Section 3.1(d).

“Closing Date Combined Inventory Statement” is defined in Section 3.2(c).

“Closing Date Combined Inventory Value” is defined in Section 3.2(c).

“Closing Date Hedging Positions” is defined in Section 7.16.

“COBRA Coverage” means continuation coverage required under Section 4980B of the Code and Part 6 of Title I of ERISA.

“Code” means the Internal Revenue Code of 1986, as amended.

“Combined Inventory” means, collectively, the Company Inventory and the Included Seller Inventory.

“Company” is defined in Recital A.

 

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“Company Assets” means all of the properties, rights and interests used by the Company in the operation of the Butane Blending Business, including specifically the Company Real Property and the Company Inventory, but specifically excluding the Excluded Assets.

“Company Inventory” means (i) all grades of butane owned by the Company, wherever located, including any such butane in transit, other than butane held in inventory by the Company related to the Buckeye Letter Agreement that is excluded from the sale pursuant to Section 4.3(q) and identified on Schedule 4.3(q) and (ii) all grades of gasoline owned by the Company, wherever located, including such gasoline in transit, other than gasoline held in inventory by the Company related to the Buckeye Letter Agreement that is excluded from the sale pursuant to Section 4.3(q) and identified on Schedule 4.3(q).

“Company Inventory Value” means the value in U.S. dollars of the Company Inventory, as determined in accordance with this Agreement.

“Company Parts and Equipment” means the equipment, parts and other inventory purchased by Seller or the Company prior to the Closing Date and identified on Schedule 1.1(b).

“Company Real Property” means the real property and interests in real property owned or leased by the Company, which are specifically identified and legally described in Schedule 1.1(c), including all buildings, fixtures, structures and other improvements of any kind or nature situated thereon, together with any tenements, hereditaments, easements, rights-of-way rights, servitudes, rights and privileges relating thereto, which real property is owned or leased by the Company and used by the Company in the operation of the Butane Blending Business.

“Consulting Agreement” means a consulting agreement in substantially the form of Exhibit O pursuant to which, following the Closing, the Company or an Affiliate of the Company will engage the specified individual to provide services to the Company as an independent contractor.

“Copyright” is defined in Section 5.18(a)(iii).

“Contracts” shall mean all oral or written leases, agreements, contracts, arrangements, commitments, licenses and franchises.

“Data” is defined in Section 5.18(n).

“Decision Notices” is defined in Section 3.3(b).

“Defaulting Party” is defined in Section 10.9.

“Defensible Title” shall mean (i) in the case of Company Real Property, good and indefeasible title free and clear of all Liens, security interests and encumbrances, subject to and except for any Permitted Liens and (ii) in the case of (A) a Company Asset not constituting real property or (B) Included Seller Inventory, good and valid title free and clear of all Liens, security interests and encumbrances, subject to and except for any Permitted Liens.

“Dispute Notice” is defined in Section 3.3(a).

 

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“DOJ” is defined in Section 7.2.

“Effective Time” means 12:01 a.m. Central Time on the Closing Date.

Employee Benefit Plan means any written or oral plan, agreement or arrangement involving direct or indirect benefits, other than salary, as compensation for services rendered including insurance coverage, medical or dental plan benefits, severance benefits, disability benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement benefits.

Employment Agreement means an employment agreement in substantially the form of Exhibit P pursuant to which, following the Closing, the Company or an Affiliate of the Company will agree to employ the specified individual and the specified individual will agree to be employed by the Company.

“Environmental Condition” means any contamination by a Hazardous Substance of surface soils, subsurface soils, groundwater, leachate or other sediments present on, in, under or migrating from any of the Company Real Property in violation of any Environmental Law.

“Environmental Laws” means any and all existing federal, state and local laws, regulations, rules, ordinances, decrees and/or orders (unilateral or consent), requirements under permits issued pursuant to any of the foregoing, and other legally binding requirements of any appropriate Governmental Authorities relating to the environment, health, safety, security, any Hazardous Substance, or any activity involving Hazardous Substances, the abatement of pollution or protection of the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Hazardous Materials Transportation Act, the Clean Water Act, the Clean Air Act, Process Safety Management, the Chemical Facility Anti-Terrorism Act, the Hazardous Materials Regulations (41 CFR 172), the Solid Waste Disposal Act and the Occupational Safety and Health Act, as each has been amended and the regulations promulgated pursuant thereto.

Environmental Liabilities” shall mean any and all liabilities, responsibilities, obligations, claims, suits, losses, costs (including remediation, removal, response, abatement, clean-up, investigative, and/or monitoring costs and any other related costs and expenses, court costs, reasonable attorneys’, expert witnesses’ and investigative fees and expenses), damages, assessments, liens, penalties, fines, prejudgment and post-judgment interest, incurred or imposed (i) pursuant to any order, notice, injunction, judgment or similar ruling arising out of or in connection with any Environmental Law, (ii) pursuant to any claim by a Governmental Authority or other Person for personal injury, death, property damage, damage to natural resources, remediation, or similar costs or expenses incurred or asserted by such Governmental Authority or other Person to the extent arising out of a release of Hazardous Materials, or (iii) as a result of Environmental Conditions.

“Equity Commitment” means (i) options, warrants, convertible securities, exchangeable securities, subscription rights, conversion rights, exchange rights, or other Contracts that could require a Person to issue any of its Equity Interests or to sell any Equity Interests it owns in another Person; (ii) any other securities convertible into, exchangeable or exercisable for, or

 

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representing the right to subscribe for any Equity Interest of a Person or owned by a Person; (iii) statutory pre-emptive rights or pre-emptive rights granted under a Person’s organizational documents; and (iv) stock appreciation rights, phantom stock, profit participation, or other similar rights with respect to a Person.

“Equity Interest” means (i) with respect to a corporation, any and all shares of capital stock; (ii) with respect to a partnership, limited liability company, trust or similar Person, any and all units, interests or other partnership/limited liability company interests; and (iii) any other direct or indirect equity ownership or participation in a Person.

“ERISA” means the Employee Retirement Income Security Act of 1974 and the rules and regulations promulgated thereunder.

“ERISA Affiliate” means any Person (whether incorporated or unincorporated) that together with Seller would be deemed a “single employer” within the meaning of Section 414 of the Code.

“Estimated Company Inventory Value” is defined in Section 3.2(a).

“Estimated Included Seller Inventory Value” is defined in Section 3.2(a).

“Excluded Assets” is defined in Section 4.3.

“Final Combined Inventory Adjustment Payment Date” means the date that is two Business Days following the determination of the Post-Closing Combined Inventory Adjustment Amount.

“Final Company Inventory Value” is defined in Section 3.2(c).

“Final Included Seller Inventory Value” is defined in Section 3.2(c).

“Form 8594” is defined in Section 3.1(f).

“FTC” is defined in Section 7.2.

“Fundamental Representations” is defined in Section 10.5.

“GAAP” means generally accepted accounting principles.

“Governmental Authority” means any federal, state, local, municipal, or other government or governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); or any body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police or regulatory power of any nature, in each case having jurisdiction over Seller, the Company or the Butane Blending Business.

 

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“Hazardous Substances” means any substances, materials, or wastes regulated as a “hazardous substance,” “extremely hazardous substance,” “hazardous materials” or “hazardous waste” under any Environmental Law, including petroleum products.

“HSR Act” means the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Included Seller Inventory” means all grades of butane and gasoline owned by Seller, wherever located, including any such butane and gasoline in transit, other than butane and gasoline held in inventory by Seller related to the Buckeye Letter Agreement.

“Included Seller Inventory Value” means the value in U.S. dollars of the Included Seller Inventory, as determined in accordance with this Agreement.

“Income Tax” and “Income Taxes” mean any federal, state, local, or foreign income tax measured by or imposed on net income, including any interest, penalty or addition thereto, whether disputed or not.

“Income Tax Return” means any return, declaration, report, claim for refund, information return, statement, form or other documentation (including any additional supporting material and any amendments or supplements) filed or maintained, or required to be filed or maintained, with respect to or in connection with the calculation, determination, assessment or collection of any Income Taxes.

“Indemnification Cap” is defined in Section 10.6.

“Indemnified Party” is defined in Section 10.3(a).

“Indemnifying Party” is defined in Section 10.3(a).

Independent Contractor means an individual who provides services to the Company and is listed as an “Independent Contractor” on Schedule 5.19(a).

“Intellectual Property” is defined in Section 5.18(a).

“IP Representations” is defined in Section 10.5.

“knowledge,” “known” or words of similar import when used with respect to (i) Buyer, shall mean the actual knowledge of any fact, circumstance or condition by a current officer of such Person and (ii) Seller, shall mean the actual knowledge of any fact, circumstance or condition by the Persons listed on Schedule 1.1(a). References herein to “knowledge” do not include imputed or implied knowledge.

“Legal Requirements” means all laws, including without limitation, statutes, ordinances, rules, regulations, codes, plans, injunctions, judgments, orders, decrees (unilateral or consent), rulings, settlements and charges thereunder by or of federal, state or local Governmental Authorities (in each case, other than Environmental Laws and Tax Laws).

 

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“Lien” means any mortgage, pledge, lien, security interest, charge, option, warrant, purchase right, encumbrance, conditional sale or other installment sales agreement, title retention agreement, device or arrangement or transfer for security for the payment of any indebtedness.

“Losses” is defined in Section 10.1(a).

Marks” is defined in Section 5.18(a)(i).

“Material Adverse Effect” means any change or effect that is material and adverse to (i) the Butane Blending Business taken as a whole, or (ii) the ability of Seller to perform its obligations hereunder; provided, however, that the term “Material Adverse Effect” shall not include effects, events or changes arising out of or resulting from (v) changes in conditions in the U.S. or global economy or capital or financial markets generally (whether general, regional or limited to the area in which the Butane Blending Business is conducted), including changes in interest or exchange rates or fluctuations in the price of or demand for petroleum or petroleum products, (w) changes in legal, regulatory, political, economic or business conditions, or changes in GAAP that, in each case, generally affect the industries in which the Company or Seller conducts business, (x) the negotiation, execution, announcement or performance of this Agreement or the consummation of the transactions contemplated by this Agreement, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, licensors, distributors, lenders, partners or employees or Governmental Authorities, (y) acts of war, sabotage or terrorism, or any escalation or worsening of any such acts of war, sabotage or terrorism threatened or underway as of the date of this Agreement or (z) the failure of the Company or Seller to meet internal projections or forecasts.

“Material Contracts” is defined is Section 5.15(a).

“MCE Blending” means MCE Blending, LLC, a limited liability company organized under the laws of the State of Texas.

“MCE Blending Assignment” is defined in Section 4.2(a)(xii).

“MCEC” means Mid-Continent Energy Company, Incorporated, a Florida corporation.

“MCEC Payment Amount” is defined in Section 4.2(c).

“MCEC Services Agreement” means that certain Blending Projects Services Agreement, dated November 24, 2009, among Seller, the Company and MCEC.

“Membership Interest” is defined in Recital A.

“Membership Interest Assignment” means the instrument of conveyance in substantially the form of Exhibit B pursuant to which at Closing Seller shall convey to Buyer all of Seller’s membership interest in the Company.

“Membership Interest Base Purchase Price” is defined in Section 3.1(a).

 

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“New Permits” means those Permits that are nontransferable and for which Buyer will be required to apply.

“Non-competition Agreement” means a non-competition agreement substantially in the form attached to the MCE Blending Assignment, pursuant to which, following the Closing, MCEC and Larry Mattingly will agree not to compete with the Company or its Affiliates on the terms set forth therein.

“Non-competition Period” means the period from the Closing Date until the later of (i) the expiration of the last expiring Blending Patent and (ii) the termination of the Buckeye Letter Agreement.

“Non-Defaulting Party” is defined in Section 10.9.

“Non-US Patents” means any and all patents or patent applications filed outside of the United States that claim priority to any Blending Patent, including but not limited to Patent Cooperation Treaty Application No. PCT/US07/09671, EP App. No. 07 794 356.1 and CA App. No. 2647970, together with any non-U.S. patents or patent applications claiming priority in whole or in part to such patents or patent applications, including without limitation any reissues, renewals, extensions, divisions, continuations, continuations-in-part or reexaminations thereof, as well as rights to any non-U.S. future filings claiming priority to these applications.

“Notice of Future IP” is defined in Section7.18(a).

“Notice of Intention” is defined in Section 7.18(a)(i).

“Offered Employees” is defined in Section 7.9(a).

“Outside Date” is defined in Section 11.1(g).

“Owner” is defined in Section 5.18(e).

“Party” means Seller or Buyer.

“Patents” is defined in Section 5.18(a)(ii).

“Pension Plan” means any “pension” plan within the meaning of Section 3.2 of ERISA, determined without regard to whether such plan is subject to ERISA.

“Permits” means all legally-mandated registrations, licenses, permits, franchises, certificates, decrees (unilateral or consent), approvals, authorizations, qualifications, entitlements and orders of Governmental Authorities.

“Permitted Liens” means (i) all agreements, leases, instruments, documents, Liens and encumbrances which are described in any Schedule or Exhibit to this Agreement; (ii) any (A) undetermined or inchoate Liens or charges constituting or securing the payment of expenses which were incurred incidental to the conduct of the Butane Blending Business or the operation, storage, transportation, shipment, handling, repair, construction, improvement or maintenance of

 

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the Company Assets or the Included Seller Inventory and (B) materialman’s, mechanics’, repairman’s, employees’, contractors’, operators’, warehousemen’s, barge or ship owner’s and carriers’ Liens or other similar Liens, security interests or charges for liquidated amounts arising in the ordinary course of business incidental to the conduct of the Butane Blending Business or the operation, storage, transportation, shipment, handling, repair, construction, improvement or maintenance of the Company Assets or the Included Seller Inventory, securing amounts the payment of which is not delinquent and that will be paid in the ordinary course of business or, if delinquent, that are being contested in good faith; (iii) any Liens for Taxes not yet delinquent or, if delinquent, that are being contested by the Company or Seller, as the case may be, in the ordinary course of business; (iv) any Liens or security interests created by Legal Requirements or reserved in leases, rights-of-way or other real property interests for rental or for compliance with the terms of such leases, rights-of-way or other real property interests, provided payment of the debt secured is not delinquent or, if delinquent, is being contested by the Company or Seller in the ordinary course of business; (v) all Liens (other than Liens for borrowed money), charges, leases, easements, restrictive covenants, encumbrances, contracts, agreements, instruments, obligations, discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping of improvements, defects, irregularities and other matters affecting or encumbering title to the Company Real Property which individually or in the aggregate are not such as to unreasonably and materially interfere with or prevent any material operations conducted as a part of the Butane Blending Business by the Company or Seller in the manner operated on the date of this Agreement; (vi) Liens securing indebtedness of Seller or any of its Subsidiaries for borrowed money which are released unconditionally at or prior to the Closing Date; (vii) any defect that has been cured by the applicable statutes of limitations or statutes for prescription; (viii) any defect affecting (or the termination or expiration of) any easement, right-of-way, leasehold interest, license or other real property interest which has been replaced by an easement, right-of-way, leasehold interest, license or other real property interest constituting part of the Company Assets covering substantially the same rights to use the land or the portion thereof used by the Company in connection with the Butane Blending Business; (ix) the failure to locate on the ground a “blanket” or similar easement or right-of-way; (x) rights reserved to or vested in any Governmental Authority to control or regulate the Butane Blending Business or any of the Company Assets, and all Legal Requirements of such authorities, including any building or zoning ordinances and all Environmental Laws; (xi) any Contract, instrument, Lien, Permit, amendment, extension or other matter entered into by a Party to this Agreement in accordance with the terms of this Agreement or in compliance with the approvals or directives of the other Party made pursuant to this Agreement; (xii) all agreements and obligations relating to imbalances with respect to shipment, transportation or storage of any Combined Inventory, or any products held for sale by the Company; (xiii) any Lien, Contract, instrument, obligation, defect, irregularity or other matter (A) that is referenced or reflected in any title commitment obtained by Buyer, to the extent such matter is located on a survey or can be reasonably evaluated without review of a survey which locates such matter on the ground, or (B) to the extent Buyer does not assert such matter as a title defect by written notice to Seller prior to the Closing, that is referenced or reflected in any title policy obtained by Buyer; (xiv) any and all matters and encumbrances (including, without limitation, fee mortgages or ground leases) affecting any of the Company Real Property which is leased by the Company as lessee, not created or granted by the Company; and (xv) any of the following: (A) defects in the early chain of the title consisting of the mere failure to recite marital status in a document or omissions of

 

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successions of heirship proceedings, unless Buyer provides affirmative evidence that such failure or omission results in another Person’s superior claim of title to the Company Asset or relevant portion thereof affected thereby; (B) any assertion of a defect based on the lack of a survey; and (C) defects arising out of lack of evidence of corporate authorization, unless Buyer provides affirmative evidence that such corporate action was not authorized and results in another Person’s superior claim of title to the Company Asset or relevant portion thereof affected thereby.

“Person” means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities.

“Post-Closing Combined Inventory Adjustment Amount” means the sum of (i) the Post-Closing Company Inventory Adjustment Amount plus (ii) the Post-Closing Included Seller Inventory Adjustment Amount.

“Post-Closing Company Inventory Adjustment Amount” means the positive or negative amount equal to (i) the Final Company Inventory Value minus (ii) the Estimated Company Inventory Value.

“Post-Closing Included Seller Inventory Adjustment Amount” means the positive or negative amount equal to (i) the Final Included Seller Inventory Value minus (ii) the Estimated Included Seller Inventory Value.

“Public Software” is defined in Section 5.18(i)(iv).

“Records” means Seller’s or the Company’s books and records, in any form or media, operational, maintenance, construction, environmental and technical records relating (and in the case of Seller, only to the extent solely relating) to the Butane Blending Business other than that portion of the Butane Blending Business conducted with Buckeye Terminals, LLC or any of its Affiliates, including without limitation financial information, Tax Returns and related work papers and letters from accountants, if any, deeds, title policies, licenses and permits, customer and supplier lists, engineering designs, blueprints, as-built plans, specifications, procedures, reports and equipment repair, safety, maintenance or service records but specifically excluding the Retained Books and Records.

“Required Consents” is defined in Section 7.3.

“Retained Books and Records” is defined in Section 4.3(j).

“Retained Causes of Action” is defined in Section 4.3(k).

“Retained Liabilities” means:

(a) accounts payable owed by Seller or the Company to the extent arising from operations prior to the Closing;

 

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(b) liabilities of Seller other than those liabilities identified on Schedule 1.1(d);

(c) liability for any indebtedness of Seller or any of its Subsidiaries with respect to borrowed money, including any interest or penalties accrued thereon, as of the Closing Date;

(d) liabilities associated with, related to or arising from any Excluded Asset;

(e) liabilities arising in connection with any Seller Employee Benefit Plan;

(f) liabilities of Seller or the Company arising out of the employment relationship during the period prior to the Closing between Seller or the Company and any employee of Seller or the Company; and

(g) liabilities and obligations of the Company under any Contract related to a Retained Liability, or an Excluded Asset, including the MCEC Services Agreement and the Contribution and Assumption Agreement, dated February 1, 2010, between the Company and Seller.

“Seller” is defined in the introductory paragraph.

“Seller Employee Benefit Plans” is defined in Section 5.20(a).

“Seller Hedging Contracts and Accounts” is defined in Section 7.16.

“Seller Indemnitees” is defined in Section 10.1(b).

“Seller’s Insurance” is defined in Section 7.7(a).

“Software” is defined in Section 5.18(a)(iv).

“Software License and Support Agreement” means a license and agreement in substantially the form of Exhibit D pursuant to which, following the Closing, the Company will grant to Seller a non-exclusive, irrevocable, perpetual, worldwide license to use the proprietary software included in the Butane Blending Technology and provide on-going support services with regard thereto.

“Subsidiary” means, with respect to any Person: (i) any corporation of which more than 50% of the total voting power of all classes of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors is owned by such Person directly or through one or more other Subsidiaries of such Person and (ii) any Person other than a corporation of which at least a majority of the Equity Interests (however designated) entitled (without regard to the occurrence of any contingency) to vote in the election of the governing body, partners, managers or others that will control the management of such entity is owned by such Person directly or through one or more other Subsidiaries of such Person.

 

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“Supplemental Business Financial Statements” means the financial statements described in Section 7.8(a).

“Surviving Positions” is defined in Section 7.16(b).

“SXL Employer” is defined in Section 7.9(a).

“Tangible Personal Property” means all machinery, equipment, tools, furniture, office equipment, computer hardware, supplies, materials, vehicles and other items of tangible personal property of every kind owned or leased by the Company and used in the operation of the Butane Blending Business (wherever located and whether or not carried on the Company’s books).

“Tax” and “Taxes” mean any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, excise, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

“Tax Laws” means the Code and the laws of any other Governmental Authority having jurisdiction over Seller, Buyer and the Company, as applicable, relating to any Tax, as amended from time to time, or any successor law.

“Tax Return” means any return, report, statement, form or other documentation (including any additional or supporting material and any amendments or supplements) filed or maintained, or required to be filed or maintained, with respect to or in connection with the calculation, determination, assessment or collection of any Taxes.

“Termination for Cause” means termination from employment due to gross negligence, misuse or unauthorized appropriation of trade secrets or other confidential information of Buyer or any of its Affiliates, theft of property from Buyer or any of its Affiliates, willful damage to Buyer’s or any of its Affiliates’ property, or any material failure by the employee to perform any term or condition of his or her employment with Buyer or any of its Affiliates.

“Third Party Claim” is defined in Section 10.3(a).

Total Consideration means (i) the Membership Interest Base Purchase Price plus (ii) the Final Company Inventory Value plus (iii) the Final Included Seller Inventory Value plus (iv) the purchase price of the Transloader Patent License.

“Trade Secrets” is defined in Section 5.18(a)(v).

Trademarks means all trademarks, service marks, certification marks, trade dress, Internet domain names, trade names, identifying symbols, designs, product names, company names, slogans, logos or insignia, whether registered or unregistered, and all common law rights, applications and registrations therefor, and all goodwill associated therewith.

“Transfer Taxes” is defined in Section 7.14(a).

 

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Transferred Employees” is defined in Section 7.9(a).

“Transition Employees” is defined in Section 7.9(a).

“Transition Services Agreement” means an agreement in substantially the form of Exhibit E pursuant to which Seller or the Company will provide post-Closing services to the other to the extent and for the period or periods specified therein.

“Transloader Patent” means U.S. Patent No. 6,959,741 held by Seller and pertaining to a method and apparatus for loading and unloading material from a storage medium, together with any U.S. patents or U.S. patent applications claiming priority in whole or in part to such patents, including without limitation any reissues, renewals, extensions, divisions, continuations, continuations-in-part or reexaminations thereof.

“Transloader Patent License” means a license agreement in substantially the form of Exhibit F pursuant to which Seller will grant to Buyer, or its designee, an exclusive, irrevocable, perpetual, fully paid up, worldwide license to use the Transloader Patent; provided, however, Seller will reserve the right to continue its own use of the Transloader Patent after the Closing for any business purposes of Seller or its Affiliates.

SECTION 2. PURCHASE OF MEMBERSHIP INTEREST, COMPANY INVENTORY AND INCLUDED SELLER INVENTORY.

2.1 Purchase and Sale. Subject to the terms and conditions hereof, on the Closing Date Seller will sell, assign, transfer and convey to Buyer and Buyer will purchase all of Seller’s right, title and interest in and to (i) the Membership Interest, the Company Parts and Equipment and the Company Inventory, for the consideration specified in Section 3.1(a) and (ii) the Included Seller Inventory, for the consideration specified in Section 3.1(b).

SECTION 3. CONSIDERATION.

3.1 Consideration.

(a) Membership Interest Purchase Price. The purchase price for the Membership Interest shall be equal to (i) $140,000,000 (one hundred forty million dollars) (the “Membership Interest Base Purchase Price”) plus (ii) the Final Company Inventory Value.

(b) Included Seller Inventory Purchase Price. The purchase price for the Included Seller Inventory shall be equal to the Final Included Seller Inventory Value.

(c) Transloader Patent License. The paid up royalty for the Transloader Patent License shall be equal to $10,000 (ten thousand dollars).

(d) Rail Car Payment. Buyer will pay Seller $176,000 (one hundred seventy-six thousand dollars) as compensation for expenses incurred by Seller in leasing rail cars for the transport and storage of butane.

 

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(e) Payments.

(i) At the Closing, the Closing Date Amount shall be paid as set forth in Section 4.2(b)(i) and Section 4.2(c).

(ii) On the Final Combined Inventory Adjustment Payment Date, (A) if the Post-Closing Combined Inventory Adjustment Amount is greater than zero, Buyer will pay to Seller an amount equal to the Post-Closing Combined Inventory Adjustment Amount and (B) if the Post-Closing Combined Inventory Adjustment Amount is less than zero, then Seller will pay to Buyer an amount equal to the absolute value of the Post-Closing Combined Inventory Adjustment Amount. The Post-Closing Combined Inventory Adjustment Amount shall be paid by wire transfer of immediately available funds in U.S. dollars to such account as the recipient shall designate.

(f) Allocation of Purchase Price. Seller and Buyer have agreed to an allocation of the Membership Interest Base Purchase Price to the Company Assets and the Butane Blending Technology for federal Tax purposes, and to work and cooperate with each other to coordinate their completion of Form 8594, Asset Acquisition Statement (the “Form 8594”) under Section 1060 of the Code, and pursuant to regulations promulgated thereunder, so that the amounts allocated on the Form 8594 will be consistent. In connection therewith, Buyer and Seller shall agree upon the allocation of the Total Consideration in a certificate, the form of which is attached hereto which is attached hereto as Schedule 3.1(f) (the “Allocation Statement”). Seller and Buyer further agree that if the amount of Total Consideration allocated to any of Assets by Seller or Buyer increases (or decreases) after the taxable year that includes the Closing Date, Seller and Buyer shall file “Supplemental Asset Acquisition Statements” on Form 8594 with their income Tax Returns for the taxable year in which the increase (or decrease) is properly taken into account. Not later than 30 days prior to the filing of its respective Form 8594 relating to this transaction, each Party will deliver to the other Party a copy of its Form 8594.

3.2 Combined Inventory.

(a) Three Business Days prior to the expected Closing Date, Seller will deliver to Buyer a written statement of Seller’s good faith estimate of the estimated value of the Combined Inventory as of such date setting forth the ownership, types, characteristics and volumes, on a tank, truck, barge, pipeline or other location basis, of all Combined Inventory. Seller will value the Combined Inventory in accordance with, and the Final Company Inventory Value and the Final Included Seller Inventory Value will be consistent with, the valuation and calculation procedures set forth in Schedule 3.2(a)-1 and Schedule 3.2(a)-2, respectively. At the Closing, Buyer will pay Seller an amount equal to the estimated value (the “Estimated Company Inventory Value,” in the case of the Company Inventory and the “Estimated Included Seller Inventory Value,” in the case of the Included Seller Inventory). If Buyer does not agree with Seller’s calculation of the Estimated Company Inventory Value or the Estimated Included Seller Inventory Value, Buyer and Seller will use their commercially reasonable efforts to agree on a revised estimate, but failing agreement by Closing on a revision, the average of Seller’s estimate and Buyer’s estimate, subject to post-Closing adjustment as provided for in Section 3.2(c), shall

 

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be used as the Estimated Company Inventory Value or the Estimated Included Seller Inventory Value, as the case may be.

(b) Seller will calculate the Combined Inventory as of the Effective Time at the respective locations of the Combined Inventory. Seller will not be required to take physical measurement of the Combined Inventory (insofar as such physical measurement is not practicable); provided, however, if Seller conducts any physical count of any Combined Inventory, Seller will allow Buyer or its authorized representatives to be present and observe any such physical count of any Combined Inventory. The Combined Inventory will be calculated by Seller in accordance with the procedures set forth on Schedule 3.2(a)-1 and Schedule 3.2(a)-2.

(c) As soon as practicable, but in any event no later than 20 Business Days following the Closing Date, Seller will cause to be prepared and delivered to Buyer a statement, together with supporting calculations and information (the “Closing Date Combined Inventory Statement”) setting forth the respective items and volumes of each of the Company Inventory and the Included Seller Inventory as calculated by Seller as of the Effective Time and the value of such Combined Inventory, calculated separately for the Company Inventory and the Included Seller Inventory (collectively, the “Closing Date Combined Inventory Value”), which shall be determined in accordance with the procedures set forth on Schedule 3.2(a)-1 and Schedule 3.2(a)-2. Buyer will give Seller notice of its acceptance of or objection to the computations in the Closing Date Combined Inventory Statement no later than three Business Days following its receipt of such statement. If Buyer fails to give such notice before the end of such three-Business Day period, then the Closing Date Combined Inventory Statement will be deemed final and binding upon the Parties. If Buyer gives such notice to Seller of Buyer’s objection within such three-Business Day period (“Buyer Section 3.2 Notice of Objection”), and Buyer and Seller are unable to resolve the issues in dispute within 20 Business Days after delivery of such notice, the matter will be resolved under Section 3.3. Such amount determined in accordance with this Section 3.2(c) or Section 3.3 is, as applicable, the “Final Company Inventory Value” and the “Final Included Seller Inventory Value.”

(d) Each Party agrees that, following the Closing, it will not take any actions with respect to the accounting books, records, policies and procedures of itself or its Affiliates that would obstruct or prevent the preparation of the Closing Date Combined Inventory Statement as provided in this Section 3.2. From the Closing through the final determination of the Closing Date Combined Inventory Value in accordance with this Section 3.2, (i) Seller will give Buyer access at all reasonable times to the personnel and working papers utilized in determining the Closing Date Combined Inventory Statement for purposes of confirming Seller’s calculation of same and (ii) Seller and Buyer will give one another access at all reasonable times to the personnel, properties, and books and records of the Butane Blending Business for purposes of determining the Closing Date Combined Inventory Value, including permitting the Parties and their respective advisors to participate in any taking of physical inventory. Each Party will cooperate with the other in the preparation of the Closing Date Combined Inventory Statement, if requested by such other Party.

(e) Except as expressly set forth in Section 3.3(c), Buyer and Seller will each bear its own expenses incurred in connection with the preparation and review of the Closing Date Combined Inventory Statement.

 

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3.3 Resolution of Disputes.

(a) If Buyer and Seller have not agreed on the Final Company Inventory Value or the Final Included Seller Inventory Value within 20 Business Days after delivery of a Buyer Section 3.2 Notice of Objection, as the case may be, then Seller and Buyer will have ten Business Days to deliver notice to the other party (the “Dispute Notice”) of its intent to refer the matter for resolution to KPMG LLP (the “Accounting Expert”).

(b) Within five Business Days of the selection of the Accounting Expert, Buyer and Seller will each deliver to the other and to the Accounting Expert a notice setting forth in reasonable detail their calculation and the amount of the Final Company Inventory Value and/or the Final Included Seller Inventory Value, as the case may be (the “Decision Notices”). Within five Business Days after receiving the Decision Notices, the Accounting Expert will determine its best estimate of the Company Inventory Value and/or the Included Seller Inventory Value as of the Closing Date. The amount determined by the Accounting Expert shall be the Final Company Inventory Value and/or the Final Included Seller Inventory Value.

(c) The fees and expenses of the Accounting Expert will be borne equally by the Parties. Each Party will bear the costs of its own counsel, witnesses (if any) and employees.

SECTION 4. CLOSING.

4.1 Closing Date. The Closing will take place on the second Business Day following the satisfaction or waiver of the conditions specified in Section 8 and Section 9 hereof, but in any event not later than the Outside Date, or such other date as the parties may mutually agree upon in writing (the “Closing Date”), at the office of Akin Gump Strauss Hauer & Feld LLP, 1111 Louisiana, 44th Floor, Houston, Texas 77002, or at such other location as shall be mutually agreed.

4.2 Transfer of Membership Interest; Closing Deliveries. In connection with the Closing, on the Closing Date, the Parties will take the following actions and deliver the following items:

(a) Seller’s Deliveries to Buyer. Seller will deliver to Buyer or its designee:

(i) The Membership Interest Assignment, duly executed on behalf of Seller;

(ii) The Assignment and Bill of Sale, duly executed on behalf of Seller;

(iii) The Transition Services Agreement, duly executed on behalf of Seller;

(iv) The Transloader Patent License, duly executed on behalf of Seller;

(v) The Employment Agreement, duly executed on behalf of each of Reid Smith and Steve Vanderbur;

 

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(vi) The Consulting Agreement, duly executed on behalf of Larry Mattingly;

(vii) An Officer’s Certificate, substantially in the form of Exhibit G, duly executed on behalf of Seller, as to whether each condition specified in Section 8 has been satisfied in all respects;

(viii) A Secretary’s Certificate, substantially in the form of Exhibit H, duly executed on behalf of Seller;

(ix) A non-foreign affidavit as referred to in Section 1445(b)(2) of the Code, substantially in the form of Exhibit I;

(x) The resignation, effective as of the Closing, of each officer of the Company and MCE Blending;

(xi) The Non-competition Agreement, duly executed on behalf of MCEC and Larry D. Mattingly;

(xii) An Assignment of Membership Interest (the “MCE Blending Assignment”) in substantially the form of Exhibit L, pursuant to which, at and contemporaneously with the Closing, MCEC shall convey to Buyer all of MCEC’s membership interest in MCE Blending;

(xiii) The Canadian Butane Supply Agreements, duly executed on behalf of Texon Canada ULC; and

(xiv) The Records.

(b) Buyer’s Deliveries to Seller. Buyer will deliver to Seller:

(i) The Closing Date Amount, less the MCEC Payment Amount, in cash, by wire transfer of immediately available funds to an account designated by Seller at least three days prior to the Closing Date;

(ii) The Transition Services Agreement, duly executed on behalf of the Company and Buyer;

(iii) An Officer’s Certificate, substantially in the form of Exhibit J, duly executed on behalf of Buyer, as to whether each condition specified in Section 9 has been satisfied in all respects; and

(iv) A Secretary’s Certificate, substantially in the form of Exhibit K, duly executed on behalf of Buyer.

(c) Buyer’s Delivery to MCEC. Buyer will deliver to MCEC, in cash, by wire transfer of immediately available funds to an account designated by MCEC at least three days prior to the Closing Date, an amount equal to $787,500 (seven hundred eighty-seven

 

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thousand five hundred dollars) representing the consideration payable to MCEC in connection with the transfer of its membership interest in MCE Blending pursuant to the MCE Blending Assignment (the “MCEC Payment Amount”).

(d) Blending Patents License; Software License and Support Agreement. Immediately following consummation of the Closing, (i) Buyer will cause MCE Blending to assign or otherwise transfer the Blending Patents to the Company, (ii) Buyer will cause the Company to deliver to Seller (x) the Blending Patents License, duly executed on behalf of the Company and (y) the Software License and Support Agreement, duly executed on behalf of the Company and (iii) Seller will deliver to the Company the Canadian Blending License, duly executed on behalf of Seller.

(e) Buckeye Letter Agreement. Immediately following consummation of the Closing, Buyer will cause the Company to execute and deliver to Seller, and Seller will execute and deliver to the Company, the Buckeye Letter Agreement.

(f) Name Change. Promptly following consummation of the Closing, Buyer will cause the Company to change the Company’s name so that it no longer includes the word “Texon.”

4.3 Excluded Assets. Notwithstanding anything to the contrary set forth herein, the Company Assets shall not include the following assets, properties and rights of Seller or the Company (collectively, the “Excluded Assets”):

(a) all ownership and other rights with respect to the Seller Employee Benefit Plans;

(b) any Permit that by its terms is not transferable to Buyer, including those indicated on Schedule 5.13 as not being transferable and in respect of which Buyer must obtain a New Permit;

(c) all accounts receivable owed to Seller or the Company to the extent arising from operations prior to the Closing Date;

(d) the minute books, stock ledgers, Tax Returns, books of account and other constituent records relating to the organization of Seller;

(e) all correspondence, agreements or other documents or instruments of Seller related to the sale of the Butane Blending Business contemplated hereby, lists of other prospective purchasers of the Butane Blending Business compiled by Seller, purchase or other transaction bids, offers, proposals or indications of interest submitted to Seller by other prospective purchasers of the Butane Blending Business, analyses by Seller or its representatives of purchase or other transaction bids, offers, proposals or indications of interest submitted by other prospective purchasers of the Butane Blending Business, and correspondence between or among Seller or its Affiliates or their respective representatives with respect to, or with, any other prospective purchasers of the Butane Blending Business;

(f) the rights that accrue to Seller hereunder;

 

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(g) any prepaid insurance, cash, cash equivalents or marketable securities and all rights to any bank accounts of Seller or the Company;

(h) all Trademarks referencing the names of Seller or its Subsidiaries;

(i) all assets, properties, goodwill and rights used in or associated with any business or operations of Seller other than the Butane Blending Business;

(j) all books, records, files and data to the extent relating to the Excluded Assets or the Retained Liabilities (collectively, the “Retained Books and Records”);

(k) all rights to causes of action, lawsuits, judgments, claims and demands of any nature arising from acts, omissions or events occurring prior to the Closing Date available to, or being pursued by, Seller or the Company against any Person or Persons (collectively, the “Retained Causes of Action”);

(l) all rights to claims for insurance except as provided for in Section 7.15(b);

(m) any asset or property specifically identified on Schedule 4.3(m);

(n) any assets or properties that shall have been transferred or disposed of by Seller or the Company prior to the Closing not in violation of this Agreement;

(o) the Seller Hedging Contracts and Accounts (except as otherwise provided in Section 7.16);

(p) all Buckeye Contracts, as such term is defined in the Buckeye Letter Agreement;

(q) all inventories of butane and gasoline held for use in connection with the portion of the Butane Blending Business conducted as of the Closing Date with Buckeye Terminals, LLC or any of its Affiliates and identified on Schedule 4.3(q);

(r) all other property (real, personal or mixed and tangible or intangible) used, or held for use, in connection with the portion of the Butane Blending Business conducted as of the Closing Date with Buckeye Terminals, LLC or any of its Affiliates and identified on Schedule 4.3(m); and

(s) all Intellectual Property owned or licensed by the Company not primarily pertaining to the Butane Blending Business, the Transloader Patent, the Non-US Patents and all Intellectual Property not specifically identified in Schedule 5.18(e).

4.4 Retained Liabilities. The Retained Liabilities shall remain the sole responsibility of, and shall be retained, paid, performed and discharged when due and on a timely basis solely by, Seller and shall not be assumed by Buyer. Immediately prior to the Closing on the Closing Date, Seller and the Company shall execute and deliver an Assignment and Assumption Agreement in substantially the form of Exhibit Q, and deliver a copy of such to Buyer, pursuant to which, effective at the Closing, the Company shall assign to Seller the Retained Liabilities and

 

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the Excluded Assets, and Seller shall assume and agree to pay, perform or discharge when due and on a timely basis the Retained Liabilities (the “Assignment and Assumption Agreement”)

SECTION 5. SELLER’S REPRESENTATIONS AND WARRANTIES.

Except as set forth in a Schedule hereto, Seller represents and warrants to Buyer that the statements contained in this Section 5 are correct and complete as of the date of this Agreement, except to the extent that such statements are expressly made only as of a specified date, in which case Seller represents and warrants that such statements are correct and complete as of such specified date.

5.1 Enforceability; Authorization; No Conflicts.

(a) The execution, delivery and performance of this Agreement by Seller and the Company and the consummation of the transactions contemplated hereby have been duly authorized by all necessary actions of Seller and the Company, as applicable, and this Agreement is, and any documents or instruments to be executed and delivered by Seller or the Company pursuant hereto will be, legal, valid and binding obligations of Seller enforceable in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, moratorium, or similar laws from time to time in effect which affect creditors’ rights generally and by legal and equitable limitations on the availability of equitable remedies.

(b) The execution and delivery of this Agreement and all other agreements, instruments and documents contemplated hereby by Seller or the Company and the consummation of the transactions contemplated hereby and thereby will not conflict with or violate or constitute a breach or default under (i) the organizational documents of Seller or the Company, (ii) any provision of any mortgage, trust indenture, Lien, Contract, court order, judgment or decree to which Seller or the Company is bound or (iii) any Legal Requirement, except in the case of clause (ii) where such breach or default could not reasonably be expected to cause a Material Adverse Effect.

5.2 Organization. Seller is a limited partnership duly organized under the laws of the State of Delaware. The Company is a limited liability company duly organized under the laws of the State of Delaware. MCE Blending is a limited liability company duly organized under the laws of the State of Texas. Seller has all requisite power and authority to operate its business as it is now being operated, to enter into this Agreement and to sell, assign, transfer and convey the Membership Interest to Buyer under this Agreement. The Company has all requisite power and authority to operate its business as it is now being operated, to enter into this Agreement and to perform its obligations hereunder. Each of Seller and the Company is duly qualified to do business as a foreign organization and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification, except for jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect.

5.3 Capitalization.

(a) The Company’s sole member is Seller. Seller owns of record and beneficially the Membership Interest, which represents 100% of the outstanding membership

 

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interests in the Company. No Equity Commitments of the Company exist, and no Contracts exist with respect to the voting or transfer of the Membership Interest. The Company is not obligated to redeem or otherwise acquire any of the Membership Interest.

(b) The Company has no Subsidiaries other than MCE Blending. MCE Blending’s sole record and beneficial members are the Company and MCEC. The Company owns of record and beneficially 85% of the outstanding membership interests in MCE Blending and MCEC owns of record and beneficially the remaining 15% of the outstanding membership interests in MCE Blending. Neither the Company nor MCEC has any Equity Commitments with respect to its membership interests in MCE Blending, and no Contracts exist with respect to the voting or transfer of the Company’s or MCEC’s membership interests in MCE Blending. MCE Blending is not obligated to redeem or otherwise acquire any of its membership interests. Other than its membership interests in MCE Blending, the Company owns no Equity Interests.

5.4 Company Records.

(a) Seller and the Company have provided or made available to Buyer in the data room, or delivered to Buyer pursuant to Buyer’s request, true, correct and complete copies of the constitutional documents of each of the Company and MCE Blending as amended and in effect on the date hereof, including all amendments thereto.

(b) The minute books of the Company and MCE Blending previously made available to Buyer contain true, correct and materially complete records of all meetings, and properly reflect all other limited liability company action of the sole member of the Company, and the members of MCE Blending during such time (if required), as applicable. The Membership Interest transfer ledgers of the Company and MCE Blending previously made available to Buyer are true, correct and materially complete. All membership interest transfer Taxes or duties levied, if any, or payable with respect to all transfers of membership interests in the Company and MCE Blending prior to the date hereof have been paid and appropriate transfer Tax or duty stamps affixed.

(c) All books, records and accounts of the Company and MCE Blending are accurate and complete in all material respects and are maintained in all material respects in accordance with good business practice and all applicable Legal Requirements.

5.5 Financial Information.

(a) Seller has provided to Buyer (i) unaudited adjusted income statements with respect to the Butane Blending Business for each of the fiscal years ended March 31, 2006, 2007, 2008, 2009 and 2010 and for each of the fiscal quarters ended June 30, 2009, September 30, 2009 and December 31, 2009 and (ii) an unaudited balance sheet with respect to the Butane Blending Business as of March 31, 2010 (collectively, the “Business Financial Statements”).

(b) The Business Financial Statements have been prepared from, and are in accordance with, the books and records of Seller and fairly present, in all material respects, the financial position and results of operations of the Butane Blending Business, at the dates and for the periods covered thereby.

 

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(c) The Supplemental Business Financial Statements, when delivered pursuant to Section 7.8, will have been prepared from, and will be in accordance with, the books and records of Seller and will fairly present, in all material respects, the financial position and results of operations of the Butane Blending Business, at the dates and for the periods covered thereby.

(d) Except as disclosed on Schedule 5.5(d), there are no liabilities or obligations directly or indirectly associated with, related to or in connection with the Butane Blending Business (whether absolute, accrued, contingent or otherwise) which would be required to be disclosed on a balance sheet prepared in accordance with GAAP (or in the notes thereto) that are not adequately reflected or provided for in the balance sheet included in the Business Financial Statements, except liabilities and obligations that have been incurred since the date of such balance sheet in the ordinary course of business, consistent with the past practices of Seller, and which would be required to be disclosed on a balance sheet prepared in accordance with GAAP (or in the notes thereto), and which are not (individually or in the aggregate) material to the Butane Blending Business or in the aggregate in excess of $1,000,000 (exclusive of trade payables incurred in the ordinary course).

5.6 Absence of Certain Changes. Since March 31, 2010, the Butane Blending Business has been operated in the ordinary course consistent with past practice, and there has not been (i) any Material Adverse Effect, (ii) any damage, destruction, loss or casualty to the Company Assets with a value in excess of $250,000, whether or not covered by insurance, incurred or (iii) any action taken of the type described in Section 7.4, that had such action occurred following the date hereof without Buyer’s prior approval, would be in violation of such Section 7.4.

5.7 Membership Interest; Certain Contracts. Seller holds of record and owns beneficially all of the Membership Interest, free and clear of any Liens other than Permitted Liens described in clause (vi) of the definition thereof. The Company holds of record and owns beneficially all of the Membership Interests it owns in MCE Blending, free and clear of any Liens other than Permitted Liens described in clause (vi) of the definition thereof. Other than this Agreement, (i) Seller is not a party to any Contract that could require Seller to sell, transfer, or otherwise dispose of the Membership Interest and (ii) the Company is not a party to any Contract that could require the Company to sell, transfer, or otherwise dispose of any of its membership interests in MCE Blending.

5.8 Real Property Matters.

(a) The Company has Defensible Title to the Company Real Property listed in Schedule 5.8(a).

(b) Except as set forth in Schedule 5.8(b) and excluding any representation or warranty relating to Environmental Laws or Environmental Permits, the Company has not received any written notice to the effect that (i) any betterment assessments have been levied against, or condemnation or re-zoning proceedings are pending or threatened with respect to any material parcel of the Company Real Property, or (ii) any zoning, building or similar Legal Requirement is or will be violated by the continued maintenance, operation or use of any

 

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buildings, fixtures or other improvements on any material parcel of the Company Real Property as used and operated on the date of this Agreement. There are no outstanding abatement proceedings or appeals with respect to the assessment of any material parcel of the Company Real Property for the purpose of real property Taxes, and, except as referenced in Schedule 5.8(a), there is no written agreement with any Governmental Authority with respect to such assessments or Taxes on any material parcel of the Company Real Property.

(c) All pipelines, pipeline easements, utility lines, utility easements and other easements, leaseholds, servitudes and rights-of-way burdening or benefiting the Company Assets will not at Closing unreasonably interfere with or prevent any operations conducted on the Company Assets by the Company or Seller in the manner operated on the date of this Agreement, except for (i) such interference or prevention that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect and (ii) any Permitted Liens. Except as set forth in Schedule 5.8(a) and except for Permitted Liens, with respect to any pipeline, utility, access or other easements, servitudes or leaseholds located on or directly serving the Company Assets and owned or used by the Company in connection with its operations at the Company Assets, to Seller’s knowledge, no defaults exist thereunder and no events or conditions exist which, with or without notice or lapse of time or both, would constitute a default thereunder or result in a termination, except for such failures, defaults, terminations and other matters that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

5.9 Litigation. Schedules 5.9 and 5.12 set forth each instance in which Seller or the Company is a party or, to Seller’s knowledge, is threatened to be made a party to, any action, suit, proceeding or hearing in, or before any Governmental Authority or before any mediator or arbitrator which either could reasonably be expected to cause a Material Adverse Effect or in any manner seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement.

5.10 Compliance with Legal Requirements. Except as set forth in Schedules 5.10 and 5.12, to Seller’s knowledge, neither Seller nor the Company is in violation of any Legal Requirements (which term for this purpose shall not include Environmental Laws and Taxes) applicable to the ownership or operation of the Butane Blending Business, except to the extent of any such matters which, individually or in the aggregate, could not reasonably be expected to cause a Material Adverse Effect.

5.11 Consents and Approvals. No consent, approval, authorization of, declaration, filing, or registration with, any Governmental Authority is required to be made or obtained by Seller or the Company in connection with the execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby, except, where applicable, for (i) the filing of a notification and report form under the HSR Act, and the expiration or earlier termination of the applicable waiting period thereunder, (ii) consents, approvals, authorizations, declarations, or rulings identified in Schedules 5.11 and 5.13, and (iii) consents, approvals, authorizations, declarations, or rulings, the failure of which to make or obtain would not reasonably be expected to cause a Material Adverse Effect.

5.12 Environmental Laws. Except as set forth in Schedule 5.12, with respect to the ownership and/or operation of the Butane Blending Business:

 

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(a) Each of Seller and the Company is in compliance with, and at all times has complied with, applicable Environmental Laws, except for such non-compliance which did not, and could not reasonably be expected to, have a Material Adverse Effect.

(b) There are no existing or, to Seller’s knowledge, threatened actions, suits, proceedings or hearings resulting from, related to or arising under any Environmental Law that could reasonably be expected to have a Material Adverse Effect.

Notwithstanding any other provisions of the Agreement, Section 5.12 and Section 5.13 (only as it relates to Permits required by Environmental Laws) contain the sole representations and warranties of Seller with respect to environmental matters.

5.13 Permits. Schedule 5.13 sets forth a list of all of Seller’s and the Company’s material Permits (other than New Permits) relating to the Butane Blending Business. Copies of each of the Permits identified in Schedule 5.13, have been made available to Buyer prior to the Closing Date. The Company has paid or will have paid all fees and charges due prior to the Closing Date in connection with the Permits, except as disclosed in Schedule 5.13. Except as set forth in Schedule 5.13, (i) Seller and the Company are in compliance in all material respects with such Permits; (ii) no Proceeding is pending or, to Seller’s knowledge, threatened to revoke any such Permit; and (iii) neither Seller nor the Company has received written notice from any applicable Governmental Authority that (A) any such existing Permit will be revoked, (B) any pending application for any new such Permit or renewal of any existing Permit will be denied or (C) such Governmental Authority believes Seller or the Company to be in material violation of any term of such Permit.

5.14 No Violations. Except as set forth in Schedule 5.14, neither Seller nor the Company is in violation of (and no event has occurred that with notice or the lapse of time would constitute a violation by Seller or the Company under) any term, condition, or provision of (i) any order, writ, injunction or decree (unilateral or consent) applicable to the Butane Blending Business, (ii) any Permit necessary for the conduct of the Butane Blending Business by the Company or Seller in substantially the same manner as currently being conducted or (iii) any Legal Requirements, except in each instance in (i), (ii) or (iii) above for those violations that could not reasonably be expected to have a Material Adverse Effect.

5.15 Contracts.

(a) All Material Contracts included in the Company Assets are set forth in Schedule 5.15(a). “Material Contracts” means any of the following Contracts included in the Company Assets, but the term “Material Contracts” does not include any Contracts to be executed and delivered pursuant to this Agreement, or Seller Hedging Contracts and Accounts:

(i) any indenture, trust agreement, loan agreement, note or other Contract under which the Company has outstanding indebtedness for borrowed money with respect to the Company Assets or the Butane Blending Business or with respect to which the Company has guaranteed the obligations of any other Person for borrowed money;

 

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(ii) any Contract of surety, guarantee or indemnification by the Company outside of the ordinary course of business of the Company with respect to the Company Assets;

(iii) any Contract containing a covenant not to compete with respect to the Company Assets or the Butane Blending Business;

(iv) any Contract between the Company, on the one hand, and Seller or any Affiliate of Seller (other than the Company), on the other, relating to the provision of goods or services to the Company by Seller or any Affiliate of Seller (other than the Company) which will survive the Closing;

(v) any Contract other than with respect to Company Inventory, that is reasonably expected either to (A) commit the Company or Buyer to aggregate expenditures of more than $100,000 in any calendar year or (B) give rise to anticipated receipts of more than $100,000 in any calendar year;

(vi) any Contract that, to the knowledge of Seller, is reasonably expected to commit the Company to aggregate royalties of more than $100,000 in any calendar year;

(vii) any management service, consulting or other similar type of Contract that, to the knowledge of Seller, is reasonably expected to commit the Company to aggregate fees or other compensation of more than $100,000 in any calendar year; and

(viii) any Contract involving the purchase, sale, supply, exchange, storage, throughput, processing or transportation of butane, gasoline or other petroleum products.

(b) Except (i) for any such breaches, defaults or events as to which requisite waivers or consents have been or are being obtained or which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect or (ii) as disclosed in Schedule 5.15(b), as of the date of this Agreement, neither Seller nor the Company nor, to the knowledge of Seller, any other Person is in breach of or default under any Contract included in the Company Assets.

(c) Except as disclosed in Schedule 5.15(c), the transactions contemplated by this Agreement may be consummated without the consent of any party to any of the Material Contracts.

5.16 Taxes. Except as disclosed in Schedule 5.16:

(a) Each of Seller and the Company has filed all Tax Returns that it was required to file, and has paid all Taxes owed or owing, except where the failure to file Tax Returns or to pay Taxes could not reasonably be expected to have a Material Adverse Effect.

(b) Neither Seller nor the Company has waived any statute of limitations in respect of Income Taxes or agreed to any extension of time with respect to an Income Tax assessment or deficiency.

 

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(c) There is no audit, examination, deficiency or refund litigation pending with respect to any Income Taxes of Seller or the Company and no Taxing authority has given written notice of the intent to commence any such examination, audit or litigation.

(d) Neither Seller nor the Company is a party to any Income Tax allocation or sharing agreement.

(e) The Company is not a party to any agreement regarding sales, use, property or ad valorem Taxes providing for any Tax holidays, special Tax regimes, Tax rates or valuation assessments, Tax exemptions, Tax abatements or other reduced Tax arrangements.

(f) Neither Seller nor the Company has made an election to be treated as a corporation for U.S. tax purposes.

5.17 No Finder’s Fee. Seller has not employed or retained any broker, agent, finder or other party, or incurred any obligation for brokerage fees, finder’s fees or commissions with respect to the transactions contemplated by this Agreement, or otherwise dealt with anyone purporting to act in the capacity of a finder or broker with respect thereto whereby Buyer or the Company may be obligated to pay such a fee or commission.

5.18 Intellectual Property.

(a) Definition of Intellectual Property. The term “Intellectual Property” means:

(i) all U.S. Trademarks (including common law marks), used in the Butane Blending Business (including all U.S. federal and state registrations with respect to any of the foregoing, and applications for registration of any of the foregoing), other than U.S. Trademarks referencing the names of Seller and its Subsidiaries (collectively, “Marks”);

(ii) all U.S. patents (including all reissues, divisions, continuations, continuations in part, reexaminations, and extensions thereof), patent applications, and U.S. rights to inventions and discoveries that may be patentable, that are related to or used in the Butane Blending Business, including the Blending Patents (collectively, “Patents”);

(iii) all U.S. copyrights in both published and unpublished works that are related to or used in the Butane Blending Business (including all U.S. registrations and applications for registration of the foregoing) (collectively, “Copyrights”);

(iv) all computer software (in both source code and object code), except generally available commercial software to the extent that related to or used in the Butane Blending Business as conducted in the U.S., including (A) any and all software implementations of algorithms, models and methodologies, whether in source code or object code, (B) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (C) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, (D) the technology supporting any Internet site(s), (E) all Worldwide Web addresses, URLs, and sites, and (F) all documentation, including system

 

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documentation, user manuals and training materials, relating to any of the foregoing (collectively, “Software”); and

(v) all other know-how, confidential information, trade secrets (as defined by applicable law, “Trade Secrets”), customer lists, technical documentation, technical information, data, technology, research records, plans, drawings, schematics, compilations, devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible that are related to or used in the Butane Blending Business as conducted in the U.S.

(b) Ownership and Use of Intellectual Property. The Company owns, or has the right to use pursuant to licenses, sublicenses, agreements, or permissions, all Intellectual Property. The consummation of the transactions contemplated by this Agreement will not result in the loss or impairment of any such Intellectual Property, and each item of Intellectual Property will be owned or available for use by the Company on identical terms and conditions immediately subsequent to the Closing Date, except as expressly set forth in the Software License and Support Agreement, and the Blending Patents License. Except as set forth on Schedule 5.18(b), the Intellectual Property constitutes all of the intangible property, of any nature whatsoever, necessary to operate the Butane Blending Business in the U.S. consistent with the Company’s and Seller’s past practice for the three year period immediately prior to Closing.

(c) Infringement of Third Party Intellectual Property Rights. To Seller’s knowledge, neither the Company, Seller nor MCE Blending has infringed upon or misappropriated any U.S. intellectual property rights of third Persons. To Seller’s knowledge, the operation of the Butane Blending Business as currently conducted does not infringe upon or misappropriate any U.S. intellectual property rights of third Persons or constitute unfair competition trade practices. To Seller’s knowledge, neither the Company, Seller nor MCE Blending has received any written charge, complaint, claim, demand, or notice alleging any such infringement or misappropriation (including any claim that such Person must license or refrain from using any intellectual property rights of any third Person). For purposes of this Section 5.18(c), and in addition to the definition set forth in Section 1, knowledge shall also include the actual knowledge of any fact, circumstance or condition by Clark Sullivan (patent prosecution counsel of Seller).

(d) Infringement of the Company’s or Seller’s Intellectual Property Rights. Except as disclosed on Schedule 5.18(d), no third Person (including any present or former employee, consultant, or shareholder) has, to Seller’s knowledge, interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property. For purposes of this Section 5.18(d), and in addition to the definition set forth in Section 1, knowledge shall also include the actual knowledge of any fact, circumstance or condition by Clark Sullivan (patent prosecution counsel of Seller).

(e) Owned Intellectual Property. Schedule 5.18(e) identifies each Patent and Copyright for which the Company, Seller or MCE Blending is designated as the owner party, or registrant, as applicable (“Owner”) with respect to any of the Intellectual Property. Owner has made available to Buyer correct and complete copies of all such Patents and Copyrights (each as amended to date). Schedule 5.18(e) also identifies all Software owned by each of the Company,

 

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Seller or MCE Blending with a designation of the Owner (whether or not the Copyright therein has been registered). With respect to each item of Intellectual Property required to be identified in Schedule 5.18(e):

(i) Owner possess all right, title, and interest in and to such item, free and clear of any and all Liens.

(ii) No legal proceeding to which Seller, the Company or MCEC is a party is currently pending (nor, to Seller’s knowledge, is any such proceeding threatened) that challenges the legality, validity, enforceability, use or ownership of the item. For purposes of this Section 5.18(e)(ii), applications pending before the U.S. Patent and Trademark Office are not considered legal proceedings.

(iii) Except for the obligations of Buyer and the Company expressly set forth in Section 4.2(b) of this Agreement and obligations under existing Contracts with customers of the Butane Blending Business, neither the Company, Seller nor MCE Blending is under any obligation to grant any right, license or permission to use any such item, and the consummation of the Closing will not grant or create any obligation to grant any right, license or permission to use any such item.

(iv) No (A) Governmental Authority funding; (B) facilities of a university, college, other educational institution or research center; or (C) funding from any Person (other than funds received in consideration for an Owner’s Equity Interests) was used in the development of the item. To Seller’s knowledge, no current or former employee, consultant or independent contractor of the Company, Seller or MCE Blending who was involved in, or who contributed to, the creation or development of the item, has performed services related to the item for a Governmental Authority, university, college or other educational institution or research center during a period of time during which such employee, consultant or independent contractor was also performing services for the Company, Seller or MCE Blending.

(f) Patents. Except as set forth on Schedule 5.18(e), none of the Company, Seller or MCE Blending has any Patents and none of them has applied for any Patents that are related to or used in connection with the Butane Blending Business as currently conducted in the U.S. and as conducted in the U.S. for the three year period immediately prior to Closing.

(g) Marks. Schedule 5.18(e) sets forth all Marks related to or used in connection with the Butane Blending Business as currently conducted in the U.S. that the Company, Seller or MCE Blending has registered with any Governmental Authority.

(h) Copyrights. Schedule 5.18(e) sets forth all Copyrights related to or used in connection with the Butane Blending Business as currently conducted in the U.S. that the Company, Seller or MCE Blending has registered with any Governmental Authority.

(i) Software. With respect to the Software required to be identified on Schedule 5.18(e):

(i) Such Software was either (A) developed by employees of the Company or Seller within the scope of their employment or (B) developed by independent

 

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contractors or consultants who have assigned all of their rights in and to the Software to the Company or Seller pursuant to written agreements.

(ii) Neither the Company, Seller nor MCE Blending has any obligation to provide maintenance or support services with respect to any such Software to any third Person except pursuant to existing Contracts with customers of the Butane Blending Business.

(iii) Neither the Company, Seller nor MCE Blending has entered into any source code escrow or similar arrangement under which a third Person would have the right to obtain the source code for any such Software.

(iv) Except as set forth on Schedule 5.18(i)(iv), such Software does not contain any Public Software. The list in Schedule 5.18(i)(iv) contains (A) the name of the Public Software, (B) the license name and version pursuant to which the Company or Seller, as applicable, has received a license to such Public Software, and (C) a short statement regarding how the Public Software is being used by the Company or Seller. For purposes of this Agreement, “Public Software” means any software that contains, includes or incorporates, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software (e.g., Linux) or similar licensing or distribution models, including software licensed or distributed under any of the following licenses or distribution models, or licenses or distribution models similar to any version of the following: (I) GNU’s General Public License (GPL) or Lesser/Library GPL (LGPL); (II) the Artistic License (e.g., PERL); (III) the Mozilla Public License; (IV) the Netscape Public License; (V) the Sun Community Source License (SCSL); (VI) the Sun Industry Standards License (SISL); (VII) the BSD License; and (VIII) the Apache License.

(j) Trade Secrets. Each of the Company, Seller and MCE Blending has taken reasonable precautions to protect the secrecy, confidentiality, and value of the Trade Secrets and all Trade Secrets disclosed by any third Person to the Company, Seller or MCE Blending.

(k) Licenses of Intellectual Property by the Company and Seller. Except as set forth on Schedule 5.18(k), neither the Company nor Seller has granted a license, agreement or other permission with respect to its Intellectual Property to any third Person.

(l) Licenses of Intellectual Property to the Company or Seller. Schedule 5.18(l) identifies each item of Intellectual Property that any third Person owns and which, to Seller’s knowledge, the Company, Seller or MCE Blending uses to conduct the Butane Blending Business as it is currently conducted in the U.S. and any licenses, sublicenses, agreements, or permissions (other than software subject to shrink-wrap license agreements) that the Company, Seller or MCE Blending uses to conduct the Butane Blending Business in the U.S. Each of the Company, Seller and MCE Blending has delivered to Buyer true, correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date). Schedule 5.18(l) includes a summary of any license fee, royalty or other payment obligations of the Company, Seller or MCE Blending under the applicable license, sublicense, agreement or permission. With respect to each item of Intellectual Property identified in Schedule 5.18(l), to Seller’s knowledge:

 

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(i) The license, sublicense, agreement, or permission covering the item is legal, valid, binding, enforceable, in full force and effect, and shall inure to the benefit of the Company immediately following Closing.

(ii) The license, sublicense, agreement, or permission will be legal, valid, binding, enforceable by the Company, and in full force and effect on identical terms following the consummation of the transactions contemplated by this Agreement.

(iii) No party to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time or both would constitute a breach or default or permit termination, modification, or acceleration under the license, sublicense, agreement, or permission.

(iv) No party to the license, sublicense, agreement, or permission has repudiated any provision thereof.

(m) Royalties and Other Payment Obligations. Neither the Company, Seller nor MCE Blending is obligated to make any payments by way of any royalties, fees or otherwise to any owner, licensor or other claimant to any intellectual property rights for the ownership, transfer or use thereof in connection with the Butane Blending Business as conducted in the U.S. other than as expressly required under any license, sublicense, agreement or permission expressly disclosed on Schedule 5.18(l).

(n) Data. The data and information used by each of the Company, Seller and MCE Blending in providing products or services to its customers in connection with the Butane Blending Business as conducted in the U.S. (collectively, the “Data”), to Seller’s knowledge, (i) does not violate the privacy rights of any Person, (ii) does not infringe upon, misappropriate, conflict with or violate the intellectual property rights of any Person, (iii) was collected and acquired in accordance with all applicable Legal Requirements, and (iv) when used by the Company or Seller in the manner in which the Data was used prior to the date hereof, does not violate any applicable Legal Requirement or Contract to which any of the Company, Seller or MCE Blending is a party. The Company, Seller and MCE Blending have taken reasonable steps to maintain the confidentiality and proprietary nature of the Data. Neither the Company, Seller nor MCE Blending has, to Seller’s knowledge, experienced any data loss, breach of security or otherwise unauthorized access by third Persons to confidential information related to the Butane Blending Business as conducted in the U.S., including personally identifiable information, in Seller’s possession, custody or control.

(o) Agreements with Employees, Consultants and Independent Contractors. To Seller’s knowledge, the Material Contracts listed on Schedule 5.15(a) include the material Contracts with consultants and independent contractors to any of the Company, Seller or MCE Blending that assign to Seller or the Company rights to inventions, improvements, discoveries or information of such consultant or contractor and all intellectual property that is related to or used in the Butane Blending Business. Except as set forth on Schedule 5.18(o), to Seller’s knowledge, no Intellectual Property used by the Company, Seller or MCE Blending to conduct the Butane Blending Business as currently conducted or as conducted for the three year period

 

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immediately prior to Closing is owned by or registered in the name of any employee, consultant or independent contractor.

5.19 Company Employees; Labor Matters.

(a) Schedule 5.19(a) contains a true and complete list of all of the employees of Seller (whether full-time, part-time or otherwise) devoting substantially all of their time to the Butane Blending Business (“Business Employees”) and all of the Independent Contractors servicing the Butane Blending Business, in each case as of the date hereof, specifying each of their respective names, positions and dates of hire (or entry into an independent contractor agreement), respectively, together with a notation next to the name of any employee or independent contractor on such list who is subject to any written employment agreement. Seller has provided to Buyer true, correct and complete copies of each such employment agreement. To Seller’s knowledge, except as set forth in any such employment agreement, Seller has not made any binding commitment (written or otherwise) to any Business Employee or Independent Contractor with respect to compensation, promotion, retention, termination, or severance in connection with the transactions contemplated by this Agreement for which the Company or Buyer would have any liability. Neither Seller nor the Company has received any pending claim from any Governmental Authority to the effect that Seller or the Company has improperly classified as an independent contractor any Person named as an Independent Contractor on Schedule 5.19(a). Unless otherwise indicated on Schedule 5.19(a), no Business Employee or Independent Contractor has given written notice, or has been given notice by Seller, of an intent to terminate his or her employment or independent contractor relationship with Seller. Seller’s records accurately reflect employment histories of all Business Employees, including their years of service, and all such data is maintained in a usable form.

(b) Except as set forth on Schedule 5.19(b):

(i) No labor organization currently represents any Business Employees;

(ii) no pending representation election petition or application for certification has been received by Seller that names the Business Employees as potentially represented parties, and Seller is not aware of a union organizing campaign or other attempt to organize or establish a labor union, employee organization or labor organization or group involving any Business Employees;

(iii) Seller is not subject to a judicial or administrative determination that it has engaged in an unfair labor practice in connection with the Business Employees and Seller has not received notice of any pending proceeding with respect to any Business Employee;

(iv) no pending grievance or arbitration demand or proceeding has been received by Seller with respect to any Business Employee;

(v) no walkout, strike, slowdown, hand billing, picketing or work stoppage (sympathetic or otherwise) involving any Business Employee is in progress or, to Seller’s knowledge, is being threatened;

 

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(vi) no notice of a pending breach of contract or denial of fair representation claim has been received by Seller with respect to any Business Employee;

(vii) no notice of a pending claim, complaint, charge or investigation for unpaid wages, bonuses, commissions, employment withholding taxes, penalties, overtime or other compensation, benefits, child labor or record-keeping violations has been received by Seller with respect to any Business Employee that remains unresolved at the date hereof;

(viii) no notice of a pending discrimination or retaliation claim, complaint, charge or investigation under any applicable federal Legal Requirement or comparable state employment practices Legal Requirement has been received by Seller with respect to any Business Employee that remains unresolved at the date hereof;

(ix) no pending workers’ compensation or retaliation claim, complaint, charge or investigation has been received, filed or is pending with respect to any Business Employee;

(x) no notice of a pending immigration law-related investigation or citation has been received by Seller with regard to any Business Employee that remains unresolved at the date hereof;

(xi) Seller has not received notice of any pending wrongful discharge, retaliation, libel, slander or other claim, complaint, charge or investigation that arises out of the employment relationship of any Business Employee and that has been filed against Seller by any Business Employee that remains unresolved at the date hereof;

(xii) Seller has maintained and currently maintains the legally required amount of insurance with respect to workers’ compensation claims and unemployment benefits claims for the Business Employees;

(xiii) with respect to the Business Employees, Seller is in material compliance with all applicable Legal Requirements;

(xiv) Seller is not currently liable for any judgment, decree, order, arrearage of wages or Taxes, fine or penalty for failure to comply with any Legal Requirements with respect to the Business Employees; and

(xv) Seller has paid or properly accrued all current assessments under workers’ compensation legislation with respect to the Business Employees, and Seller is not subject to any special or penalty assessment under such legislation that has not been paid.

5.20 Seller Employee Benefit Plans; Pension Plans.

(a) Schedule 5.20(a) lists each material Employee Benefit Plan that Seller maintains or to which Seller contributes (the “Seller Employee Benefit Plans”). The Seller Employee Benefit Plans are duly registered where required and are in compliance in all material respects with all Legal Requirements. All required employer and employee contributions and premiums under the Seller Employee Benefit Plans have been made and the respective funds

 

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established under the Seller Employee Benefit Plans are funded in accordance with applicable Legal Requirements. Other than as disclosed in Schedule 7.9(h), the transactions contemplated by this Agreement do not constitute an event under the terms of any Seller Employee Benefit Plan that results in any payment, acceleration, vesting or increase in benefits with respect to any Business Employee or any acceleration or increase in the funding requirements in respect of such plan. No benefit improvements have been promised under any Seller Employee Benefit Plan other than as mandated by Legal Requirements. Except as disclosed in Schedule 5.20(a), no Seller Employee Benefit Plan Seller provides benefits following retirement.

(b) No Pension Plan exists in respect of the Business Employees.

5.21 Sufficiency of Assets. The Company Assets are sufficient for the continued conduct of the Butane Blending Business following the Closing in substantially the same manner as conducted prior to the Closing.

5.22 Condition of Certain Assets. Taken as a whole, the Tangible Personal Property is in good repair and good operating condition, ordinary wear and tear excepted.

5.23 Title to Assets. The Company has Defensible Title to the Company Assets. Seller has Defensible Title to the Included Seller Inventory.

5.24 MCE Blending Matters.

(a) MCE Blending currently conducts no business or operations other than the holding and licensing (to the Company) of the Blending Patents.

(b) Other than the Blending Patents, MCE Blending has no assets, and has no liabilities (whether absolute, accrued, contingent or otherwise).

(c) MCE Blending does not own or hold, directly or indirectly, any Equity Interests.

(d) MCE Blending has no employees, and has never had any employees. MCE Blending has never maintained, contributed to, sponsored or been a party to any Employee Benefit Plan. Neither MCE Blending nor any ERISA Affiliate of MCE Blending has incurred any liability under Title IV of ERISA.

(e) MCEC holds of record and owns beneficially all of the membership interests in MCE Blending that it owns free and clear of all Liens.

5.25 No Further Representations. Buyer may only rely on the information contained in this Agreement. Seller will not be liable with respect to financial projections or forecasts, or other estimates of the future performance of the Company or the Butane Blending Business. Except and to the extent set forth in this Agreement, Seller does not make any representations or warranties whatsoever (INCLUDING ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, OR ANY IMPLIED OR EXPRESS WARRANTY AS TO THE ENVIRONMENTAL CONDITION THEREOF (INCLUDING, WITHOUT

 

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LIMITATION, THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT OR UNDER ANY COMPANY ASSETS), THE EXISTENCE OF LATENT OR PATENT DEFECTS, QUALITY OR OTHER ASPECT OR CHARACTERISTIC THEREOF) with respect to the Combined Inventory or the Company Real Property (all of which are acknowledged by Buyer to be on as “as-is” basis), and Seller hereby disclaims all liability and responsibility for any representation, warranty, statement or information not included herein that was made, communicated or furnished (orally or in writing) to Buyer or its representatives (including any opinion, information, projection or advice that may have been or may be produced t