<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 2000
REGISTRATION NO. 333-43668
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
SHAMROCK LOGISTICS, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4610 74-2958817
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6000 NORTH LOOP 1604 WEST
SAN ANTONIO, TEXAS 78249-1112
(210) 592-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
CURTIS V. ANASTASIO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6000 NORTH LOOP 1604 WEST
SAN ANTONIO, TEXAS 78249
(210) 592-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
ANDREWS & KURTH L.L.P. BAKER BOTTS L.L.P.
600 TRAVIS, SUITE 4200 ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 229-1234
ATTN: GISLAR DONNENBERG ATTN: JOSHUA DAVIDSON
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
[SHAMROCK LOGO]
Subject to Completion. Dated December 19, 2000.
4,000,000 Common Units
SHAMROCK LOGISTICS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
----------------------
This is an initial public offering by Shamrock Logistics, L.P. of common
units representing limited partner interests. Shamrock Logistics intends to
distribute to each common unit the minimum quarterly distribution of $0.60 per
quarter or $2.40 per year, to the extent it has sufficient cash from operations
after payment of fees and expenses to its general partner. During the
subordination period, which will generally not end before December 31, 2005, the
common units must receive the full minimum quarterly distribution for all
quarters before the subordinated units, which are held by an affiliate of the
general partner, are entitled to receive any distributions.
Prior to this offering, there has been no public market for the common
units. We currently estimate that the initial public offering price per common
unit will be between $19.00 and $21.00. The common units have been approved for
listing on the New York Stock Exchange under the symbol "UDL," subject to notice
of issuance.
Our general partner and its affiliates will receive substantially all of
the proceeds of the offering.
See "Risk Factors" on page 14 to read about important risks that you should
consider before buying common units.
These risks include the following:
- We may not generate sufficient cash from operations to pay the minimum
quarterly distribution on the common units every quarter.
- The success of our operations depends upon the continued use of our
pipelines, terminals, and storage facilities by Ultramar Diamond
Shamrock.
- A material decline in production by Ultramar Diamond Shamrock's
refineries would materially reduce the volumes of crude oil or refined
product transported in our pipelines.
- A reduced demand for refined products could decrease the volumes
transported in our pipelines.
- Conflicts of interest may arise between the general partner and its
affiliates, on the one hand, and Shamrock Logistics and the unitholders,
on the other hand. The legal duties of our general partner and its
affiliates to unitholders are limited.
- Our general partner manages our business. You will have limited voting
rights and limited ability to remove our general partner.
- Purchasers of common units will experience immediate and substantial
dilution.
- You may be required to pay taxes on income from us even if you receive no
cash distributions.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per
Common Unit Total
----------- -----
<S> <C> <C>
Initial public offering price............................. $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to Shamrock Logistics.......... $ $
</TABLE>
To the extent that the underwriters sell more than 4,000,000 common units,
the underwriters have the option to purchase up to an additional 600,000 common
units from Shamrock Logistics at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the common units against payment in New
York, New York on , 2001.
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
UBS WARBURG LLC
----------------------
Prospectus dated , 2001.
<PAGE> 3
[MAP OF SHAMROCK LOGISTICS OPERATIONS]
Map showing the locations of the following pipelines, Terminals and
Refineries:
CRUDE OIL PIPELINES
Corpus Christi to Three Rivers, Texas
Ringgold to Wasson to Ardmore, Oklahoma
Dixon to McKee, Texas
Cheyenne Wells, Colorado to McKee, Texas
Hooker, Oklahoma to Clawson to McKee, Texas
Healdton to Ringling, Oklahoma
REFINED PRODUCT PIPELINES
McKee, Texas to Colorado Springs to Denver, Colorado
McKee to El Paso, Texas
Amarillo, Texas to Albuquerque, New Mexico
Ardmore to Wynnewood, Oklahoma
Three Rivers to Laredo, Texas
Three Rivers to San Antonio, Texas
McKee to Amarillo to Abernathy, Texas
McKee, Texas to Denver, Colorado
<TABLE>
<CAPTION>
TERMINALS LOCATION
--------- --------
<S> <C>
Denver Terminal CO
Colorado Springs Terminal CO
Albuquerque Terminal NM
El Paso Terminal TX
Amarillo Terminal TX
Abernathy Terminal TX
San Antonio Terminal TX
Laredo Terminal TX
Corpus Christi Marine Terminal TX
Harlingen Marine Terminal TX
</TABLE>
<TABLE>
<CAPTION>
REFINERIES LOCATION
---------- --------
<S> <C>
McKee Refinery TX
Ardmore Refinery OK
Three Rivers Refinery TX
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
Shamrock Logistics........................................ 1
Expansion Projects........................................ 1
Business Strategies....................................... 2
Competitive Strengths..................................... 2
Our Relationship with Ultramar Diamond Shamrock........... 3
SUMMARY OF RISK FACTORS..................................... 4
Risks Inherent in Our Business............................ 4
Risks Inherent in an Investment in Shamrock Logistics..... 5
Tax Risks................................................. 5
SHAMROCK LOGISTICS STRUCTURE AND MANAGEMENT................. 6
OWNERSHIP CHART............................................. 7
THE OFFERING................................................ 8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA...................................................... 10
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES.......................................... 13
RISK FACTORS................................................ 14
Risks Inherent in Our Business............................ 14
Risks Inherent in an Investment in Shamrock Logistics..... 23
Tax Risks................................................. 25
USE OF PROCEEDS............................................. 28
CAPITALIZATION.............................................. 29
DILUTION.................................................... 30
CASH DISTRIBUTION POLICY.................................... 31
Quarterly Distributions of Available Cash................. 31
Operating Surplus and Capital Surplus..................... 32
Incentive Distribution Rights............................. 32
Subordination Period...................................... 32
Distributions of Available Cash from Operating Surplus
During the Subordination Period........................ 33
Distributions of Available Cash from Operating Surplus
After the Subordination Period......................... 34
Tabular Illustration of Distributions of Available Cash
from Operating Surplus................................. 34
Distributions from Capital Surplus........................ 35
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.................................... 35
Distributions of Cash upon Liquidation.................... 36
CASH AVAILABLE FOR DISTRIBUTION............................. 38
SELECTED HISTORICAL AND OPERATING DATA OF THE ULTRAMAR
DIAMOND SHAMROCK LOGISTICS BUSINESS AND SHAMROCK LOGISTICS
OPERATIONS, AND PRO FORMA FINANCIAL AND OPERATING DATA OF
SHAMROCK LOGISTICS........................................ 40
Impact of Tariff Rate and Terminalling Revenue Changes.... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 47
Introduction.............................................. 47
Overview.................................................. 47
Results of Operations -- Nine Months ended September 30,
1999 Compared to Nine Months Ended September 30,
2000................................................... 49
Results of Operations -- Year Ended December 31, 1998
Compared to Year Ended December 31, 1999............... 52
Results of Operations -- Year Ended December 31, 1997
Compared to Year Ended December 31, 1998............... 54
Liquidity and Capital Resources........................... 56
Environmental............................................. 62
Impact of Inflation....................................... 62
New Accounting Pronouncements............................. 62
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C>
Quantitative and Qualitative Disclosures About Market
Risk................................................... 63
BUSINESS.................................................... 64
Our Relationship with Ultramar Diamond Shamrock........... 66
Business Strategies....................................... 67
Competitive Strengths..................................... 68
Pipeline Operations....................................... 70
Crude Oil Pipelines....................................... 71
Refined Product Pipelines................................. 73
Recently Completed and Planned Expansion Projects......... 77
Recently Completed Expansion Projects..................... 78
Planned Expansion Projects................................ 78
Terminalling and Storage Operations....................... 79
Crude Oil Storage Facilities.............................. 79
Refined Product Terminals................................. 79
Pipeline, Storage Facility, and Terminal Control
Operations............................................. 81
Safety and Maintenance.................................... 81
Competition............................................... 81
Ultramar Diamond Shamrock's Refining and Marketing
Operations............................................. 83
Refineries................................................ 83
Marketing................................................. 85
Assets Retained by Ultramar Diamond Shamrock.............. 86
Regulation................................................ 87
Environmental Regulation.................................. 92
Environmental Remediation................................. 95
Title to Properties....................................... 97
Employees................................................. 97
Legal Proceedings......................................... 98
MANAGEMENT.................................................. 99
Management of Shamrock Logistics.......................... 99
Directors and Executive Officers of Shamrock Logistics GP,
LLC.................................................... 100
Administrative Fee and Reimbursement of Expenses.......... 101
Executive Compensation.................................... 101
Compensation of Directors................................. 101
Employment Agreement...................................... 102
Intermediate-Term Incentive Plan.......................... 103
Long-Term Incentive Plan.................................. 103
Short-Term Incentive Plan................................. 104
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 105
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 106
Distributions and Payments to the General Partner and its
Affiliates............................................. 106
Agreements Governing the Transactions..................... 107
Omnibus Agreement......................................... 107
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 109
Conflicts of Interest..................................... 109
Fiduciary Duties Owed to Unitholders by the General
Partner are Prescribed by Law and the Partnership
Agreement.............................................. 112
DESCRIPTION OF THE COMMON UNITS............................. 114
The Units................................................. 114
Transfer Agent and Registrar.............................. 114
Transfer of Common Units.................................. 114
DESCRIPTION OF THE SUBORDINATED UNITS....................... 117
Conversion of Subordinated Units.......................... 117
Limited Voting Rights..................................... 117
Distributions upon Liquidation............................ 118
</TABLE>
ii
<PAGE> 6
<TABLE>
<S> <C>
THE PARTNERSHIP AGREEMENT................................... 119
Organization and Duration................................. 119
Purpose................................................... 119
Power of Attorney......................................... 119
Capital Contributions..................................... 120
Limited Liability......................................... 120
Issuance of Additional Securities......................... 121
Amendment of the Partnership Agreement.................... 122
Merger, Sale or Other Disposition of Assets............... 124
Termination and Dissolution............................... 124
Liquidation and Distribution of Proceeds.................. 125
Withdrawal or Removal of the General Partner.............. 125
Transfer of General Partner Interests and Incentive
Distribution Rights.................................... 126
Change of Management Provisions........................... 127
Limited Call Right........................................ 127
Meetings; Voting.......................................... 128
Status as Limited Partner or Assignee..................... 129
Non-Citizen Assignees; Redemption......................... 129
Indemnification........................................... 129
Books and Reports......................................... 130
Right to Inspect Shamrock Logistics' Books and Records.... 130
Registration Rights....................................... 130
UNITS ELIGIBLE FOR FUTURE SALE.............................. 131
TAX CONSIDERATIONS.......................................... 133
Partnership Status........................................ 133
Tax Treatment of Unitholders.............................. 135
Tax Treatment of Operations............................... 139
Disposition of Common Units............................... 141
Tax-Exempt Organizations and Other Investors.............. 144
Administrative Matters.................................... 145
State, Local and Other Tax Considerations................. 147
INVESTMENT IN SHAMROCK LOGISTICS BY EMPLOYEE BENEFIT
PLANS..................................................... 149
UNDERWRITING................................................ 151
VALIDITY OF THE COMMON UNITS................................ 153
EXPERTS..................................................... 153
WHERE YOU CAN FIND MORE INFORMATION......................... 154
FORWARD-LOOKING STATEMENTS.................................. 154
</TABLE>
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS............................... F-1
Appendix A -- Form of Second Amended and Restated Agreement
of Limited Partnership.................................... A-1
Appendix B -- Form of Application for Transfer of Common
Units..................................................... B-1
Appendix C -- Glossary of Terms............................. C-1
Appendix D -- Pro Forma Available Cash from Operating
Surplus................................................... D-1
</TABLE>
iii
<PAGE> 7
PROSPECTUS SUMMARY
The summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in the common units. You should read the entire prospectus carefully,
including the historical and pro forma financial statements and notes to those
financial statements. We refer to the assets and related operations that have
been transferred to Shamrock Logistics Operations, L.P. effective as of July 1,
2000, as the "Ultramar Diamond Shamrock logistics business." The information
presented in this prospectus assumes that the underwriters' over-allotment
option is not exercised. Please read "Summary of Risk Factors" on page 4 and
"Risk Factors" on page 14 for more information about important factors that you
should consider before buying common units. A glossary of some of the terms used
in this prospectus is included as Appendix C.
SHAMROCK LOGISTICS
We own and operate most of the crude oil and refined product pipeline,
terminalling, and storage assets that support Ultramar Diamond Shamrock
Corporation's refining and marketing operations located in Texas, Oklahoma,
Colorado, New Mexico, and Arizona. Effective July 1, 2000, Ultramar Diamond
Shamrock transferred assets to us representing 72% of the book value of its
pipeline, terminalling, and storage assets supporting those refining and
marketing operations. Our pipeline, terminalling, and storage assets consist of:
- approximately 510 miles of crude oil pipelines, including approximately
31 miles jointly owned with third parties, and three major crude oil
storage facilities with a total storage capacity of approximately 2.1
million barrels; and
- approximately 2,820 miles of refined product pipelines, including
approximately 1,970 miles jointly owned with third parties, and ten
refined product terminals, one of which is jointly owned, with a total
storage capacity of approximately 2.5 million barrels.
We generate revenues by charging tariffs for transporting crude oil and
refined products through our pipelines and by charging a fee for use of our
terminals. We do not own any of the crude oil or refined products transported
through our pipelines, and we do not engage in the trading of crude oil or
refined products. As a result, we will not be directly exposed to any risks
associated with fluctuating commodities prices, although these risks indirectly
influence our activities and results of operations.
In the first nine months of 2000, we transported an average of 296,413
barrels per day through our crude oil pipelines, and an average of 315,807
barrels per day through our refined product pipelines and handled an average of
167,650 barrels per day through our refined product terminals. Assuming our
current tariff rates had been in effect on January 1, 1999, our revenues for the
year ended December 31, 1999, and the nine-month period ended September 30, 2000
would have been approximately $87.9 million and $69.4 million, respectively.
Effective January 1, 2000, we filed revised tariff rates on many of our
pipelines to reflect the total cost of the pipelines, the current capacity and
utilization of the pipelines and other market conditions, which resulted in a
$21.9 million or 20% reduction in revenues for the year ended December 31, 1999.
EXPANSION PROJECTS
Since 1995, we have expanded the total capacity of our refined product
pipelines by 46,250 barrels per day by adding pumping stations to increase
horsepower and replacing existing pipe with larger-diameter pipe. By the end of
the first quarter of 2002, we expect to exercise options to purchase the
following assets from Ultramar Diamond Shamrock:
- For $64 million, the 271.7-mile crude oil pipeline from Wichita Falls,
Texas to Ultramar Diamond Shamrock's McKee Refinery, along with related
crude oil storage facilities, once
<PAGE> 8
Ultramar Diamond Shamrock has completed increasing the capacity on this
pipeline from 85,000 to 110,000 barrels per day.
- For $6.5 million, crude oil storage facilities with a capacity of 600,000
barrels being constructed at Ringgold, Texas.
- For $5.7 million, a 19-mile refined product pipeline with a capacity of
12,000 barrels per day that Ultramar Diamond Shamrock plans to construct
from our Laredo, Texas refined product terminal to the refined product
terminal operated by Petroleos Mexicanos, or Pemex, in Nuevo Laredo,
Mexico.
BUSINESS STRATEGIES
The primary objective of our business strategies is to increase
distributable cash flow per unit by:
- Sustaining high levels of volumes transported in our pipelines and cash
flow;
- Increasing volumes transported in our existing pipelines and shifting
volumes to higher tariff pipelines;
- Increasing our pipeline capacity through expansions and new construction;
- Pursuing selective strategic and accretive acquisitions that complement
our existing asset base; and
- Continuing to improve our operating efficiency.
COMPETITIVE STRENGTHS
We believe we are well positioned to successfully execute our business
strategies due to the following competitive strengths:
- Our pipelines provide the principal access to and from Ultramar Diamond
Shamrock's McKee, Three Rivers and Ardmore refineries located near
Amarillo, Texas, Corpus Christi, Texas and Ardmore, Oklahoma. As a
result, we transport approximately 75% of the crude oil and other raw
material supplied to, and approximately 75% of the refined products
produced by, these refineries.
- Our refined product pipelines serve Ultramar Diamond Shamrock's marketing
operations in the southwestern and Rocky Mountain regions of the United
States. These operations are concentrated in metropolitan areas in the
states of Texas, Colorado, New Mexico, and Arizona that are expected to
exceed the national average of projected cumulative population growth for
the next 10 years.
- We believe our pipeline, terminalling, and storage assets are modern,
efficient, and well maintained, with 50% of our ownership mileage having
been built since 1990.
- Our pipelines have available capacity that provides us the opportunity to
increase the volumes transported in our pipelines and distributable cash
flow from existing assets.
- Our $120 million revolving credit facility, coupled with our ability to
issue new partnership units, provides us with financial flexibility to
pursue expansion and acquisition opportunities.
You should be aware that our business is subject to a number of risks.
Please read "Risk Factors" for a description of the risk factors that you should
consider before electing to purchase our common units.
2
<PAGE> 9
OUR RELATIONSHIP WITH ULTRAMAR DIAMOND SHAMROCK
Description of Ultramar Diamond Shamrock's Business. Ultramar Diamond
Shamrock is an independent refiner and marketer of high-quality refined products
and convenience store merchandise in the central, southwest, and northeast
regions of the United States, and eastern Canada. Its operations consist of
refineries, convenience stores, pipelines and terminals, a home heating oil
business, and related petrochemical and natural gas liquids operations.
We transport crude oil to and refined products from three of Ultramar
Diamond Shamrock's seven refineries through our pipelines. These three
refineries have the capacity to process a total of approximately 353,000 barrels
of crude oil and other raw materials per day.
Our operations are strategically located within Ultramar Diamond Shamrock's
refining and marketing supply chain in the southwestern and Rocky Mountain
regions of the United States, but we do not own or operate any refining or
marketing operations. Ultramar Diamond Shamrock is dependent upon us to provide
transportation services that support its refining and marketing operations in
these markets. Ultramar Diamond Shamrock and its affiliates accounted for 99% of
our pro forma revenues in 1999 and in the first nine months of 2000. Ultramar
Diamond Shamrock has advised us that it currently does not intend to close any
of the McKee, Three Rivers, or Ardmore refineries or to cause any changes that
would have a materially adverse effect on these refineries' operations.
Our Pipelines and Terminals Usage Agreement with Ultramar Diamond
Shamrock. Ultramar Diamond Shamrock has generally agreed to transport at least
75% of the aggregate volumes of crude oil shipped to and at least 75% of the
aggregate volumes of refined products shipped from the McKee, Three Rivers, and
Ardmore refineries in our crude oil pipelines and refined product pipelines,
respectively, and to use our refined product terminals for terminalling services
for at least 50% of the refined products shipped from these refineries. These
percentages reflect the recent historical volumes shipped to and from these
refineries and terminalled at these terminals.
Ultramar Diamond Shamrock's obligation to use our pipelines and terminals
will be suspended if material changes in market conditions occur that have a
material adverse effect on Ultramar Diamond Shamrock or if we are unable to
handle the volumes due to operational difficulties with the pipelines or
terminals. For a more detailed description of this agreement, please read
"Business -- Our Relationship with Ultramar Diamond Shamrock."
In addition, Ultramar Diamond Shamrock has agreed, for a period of seven
years, to remain the shipper for its crude oil or refined products transported
in our pipelines, and not to challenge our tariff rates for the transportation
of crude oil, refined products, or petrochemical products.
Ultramar Diamond Shamrock Owns Our General Partner. Ultramar Diamond
Shamrock owns and controls our general partner, Riverwalk Logistics, L.P. and
will indirectly own an aggregate 75.5% limited partner interest in Shamrock
Logistics and Shamrock Logistics Operations.
Risks Associated with Our Relationship with Ultramar Diamond Shamrock. We
are dependent on the continued use of our pipelines, terminals, and storage
facilities by Ultramar Diamond Shamrock and the ability of Ultramar Diamond
Shamrock's refineries to maintain their production of refined products.
Conflicts of interest are inherent in our relationship with Ultramar Diamond
Shamrock. We have entered into an omnibus agreement with Ultramar Diamond
Shamrock which governs potential competition between us and Ultramar Diamond
Shamrock. For a more detailed description of this agreement, please read
"Certain Relationships and Related Transactions -- Omnibus Agreement."
3
<PAGE> 10
SUMMARY OF RISK FACTORS
RISKS INHERENT IN OUR BUSINESS
- We may not be able to generate sufficient cash from operations to enable
us to pay the minimum quarterly distribution on the common units every
quarter.
- You may receive less than the minimum quarterly distribution because fees
and cost reimbursements due to Ultramar Diamond Shamrock and its
affiliates may be substantial and will reduce our cash available for
distribution.
- We depend upon Ultramar Diamond Shamrock for the crude oil and refined
products transported in our pipelines and handled at our terminals and
storage facilities, and any reduction in those quantities could reduce
our ability to make distributions to our unitholders.
- Distributions to unitholders could be adversely affected by a significant
decrease in demand for refined products in the markets served by our
pipelines.
- Our ability to make distributions to unitholders could be reduced by a
material decline in production by any of Ultramar Diamond Shamrock's
McKee, Three Rivers, or Ardmore refineries.
- Ultramar Diamond Shamrock's seven-year agreement to use our pipelines and
terminals will be suspended if material changes in market conditions
occur that have a material adverse effect on Ultramar Diamond Shamrock,
which could adversely affect our ability to make distributions to our
unitholders.
- Any loss by Ultramar Diamond Shamrock of customers in the markets served
by our refined product pipelines may adversely affect our ability to make
distributions to unitholders.
- If our assumptions concerning population growth are inaccurate or
Ultramar Diamond Shamrock's growth strategy is not successful, our
ability to make or increase distributions to unitholders may be adversely
affected.
- New competing refined product pipelines could cause downward pressure on
market prices, as a result of which Ultramar Diamond Shamrock might
decrease the volumes transported in our pipelines.
- If one or more of our tariff rates is reduced, if future increases in our
tariff rates do not allow us to recover future increases in our costs, or
if ratemaking methodologies are altered, our ability to make
distributions to unitholders may be adversely affected.
- A material decrease in the supply, or a material increase in the price,
of crude oil available for transport through our pipelines to Ultramar
Diamond Shamrock's refineries, could materially reduce our ability to
make distributions to unitholders.
- If we are not able to successfully acquire, expand, and build pipelines
and other logistics assets or attract shippers in addition to Ultramar
Diamond Shamrock, the growth of our business will be limited.
- Any reduction in the capability of or the allocations to our shippers on
interconnecting third party pipelines could cause a reduction of volumes
transported in our pipelines and could negatively affect our ability to
distribute cash to unitholders.
- Ultramar Diamond Shamrock and its affiliates have conflicts of interest
and limited fiduciary responsibilities, which may permit them to favor
their own interests to the detriment of unitholders.
4
<PAGE> 11
- Our indebtedness may limit our ability to borrow additional funds, make
distributions to unitholders, or capitalize on business opportunities.
- The transportation and storage of crude oil and refined products is
subject to federal and state laws relating to environmental protection
and operational safety and results in a risk that crude oil and other
hydrocarbons may be released into the environment, potentially causing
substantial expenditures that could limit our ability to make
distributions to unitholders.
RISKS INHERENT IN AN INVESTMENT IN SHAMROCK LOGISTICS
- Even if the unitholders are dissatisfied, they cannot remove our general
partner without its consent.
- Purchasers of common units will experience immediate and substantial
dilution of $7.13 per common unit.
- We may issue additional common units without your approval, which may
dilute existing unitholders' interests.
- Our general partner has a limited call right that may require you to sell
your common units at an undesirable time or price.
- You may not have limited liability if a State or court finds that we are
not in compliance with the applicable statutes or that unitholder action
constitutes control of our business.
TAX RISKS
- The IRS could treat us as a corporation, which would substantially reduce
the cash available for distribution to unitholders.
- A successful IRS contest of the federal income tax positions we take may
adversely impact the market for common units and the costs of any contest
will be borne by some or all of the unitholders.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions.
- Tax gain or loss on the disposition of common units could be different
than expected.
- Investors, other than individuals who are U.S. residents, may have
adverse tax consequences from owning common units.
- We have registered as a "tax shelter" with the Secretary of the Treasury.
This may increase the risk of an IRS audit of us or a unitholder.
- We treat a purchaser of common units as having the same tax benefits as
the seller. A successful IRS challenge could adversely affect the value
of the common units.
- You will likely be subject to state and local taxes and return filing
requirements as a result of an investment in common units.
5
<PAGE> 12
SHAMROCK LOGISTICS STRUCTURE AND MANAGEMENT
Our subsidiary, Shamrock Logistics Operations, L.P., owns our operating
assets and conducts our operations. Upon consummation of the offering of the
common units:
- Shamrock Logistics will own a 98.9899% limited partner interest in
Shamrock Logistics Operations;
- Riverwalk Logistics, L.P., our general partner, will own a 1% general
partner interest in Shamrock Logistics, a 1.0101% general partner
interest in Shamrock Logistics Operations, and all of the incentive
distribution rights; and
- UDS Logistics LLC, the limited partner of our general partner, will own a
combined 75.5% limited partner interest in us and Shamrock Logistics
Operations.
Our general partner, therefore, will own a 2% general partner interest in
us and Shamrock Logistics Operations on a combined basis. In this prospectus, we
refer to this interest owned by the general partner as its combined 2% general
partner interest.
Our general partner will have sole responsibility for the management and
operation of our business. The senior management and employees of Ultramar
Diamond Shamrock and its affiliates who currently manage and operate our
business will continue to do so. Ultramar Diamond Shamrock and its affiliates
will receive an annual administrative fee, initially in the amount of $5.2
million, in connection with its management of our business.
Our principal executive offices are located at 6000 North Loop 1604 West,
San Antonio, Texas 78249-1112, and our phone number is (210) 592-2000.
The chart on the following page depicts the organization and ownership of
Shamrock Logistics and Shamrock Logistics Operations after giving effect to the
offering of the common units and the related transactions. The percentages
reflected in the organization chart represent the approximate ownership interest
in Shamrock Logistics and Shamrock Logistics Operations individually and not on
a combined basis, unlike the other presentations in this prospectus.
6
<PAGE> 13
[CHART]
EFFECTIVE AGGREGATE OWNERSHIP OF SHAMROCK LOGISTICS, L.P.
AND SHAMROCK LOGISTICS OPERATIONS, L.P.
Organizational chart depicting the following organizational and ownership
information.
OWNERSHIP OF UDS LOGISTICS, LLC (THE LIMITED PARTNER OF THE GENERAL PARTNER)
<TABLE>
<S> <C>
Percentage Interest Interest Held By
---------------------- ------------------
100% Ultramar Diamond Shamrock
and its wholly owned subsidiaries
</TABLE>
OWNERSHIP OF SHAMROCK LOGISTICS GP, LLC (THE GENERAL PARTNERS OF THE GENERAL
PARTNER)
<TABLE>
<S> <C>
Percentage Interest Interest Held By
---------------------- ------------------
100% Ultramar Diamond Shamrock
and its wholly owned subsidiaries
</TABLE>
OWNERSHIP OF RIVERWALK LOGISTICS, L.P. (THE GENERAL PARTNER)
<TABLE>
<S> <C>
Percentage/Type of Interest Held Interest Held By
--------------------------------------- ------------------
0.1% general partner Shamrock Logistics GP, LLC
99.9% limited partner UDS Logistics, LLC
</TABLE>
OWNERSHIP OF SHAMROCK LOGISTICS, L.P. (THE PARTNERSHIP)
<TABLE>
<S> <C> <C>
Percentage/Type of Interest Number/Type of Unit Rights Interest Held By
Held ------------------------------- ------------------
-------------------------------
1.0% general partner Incentive Distribution Rights Riverwalk Logistics, L.P.
76.2% limited partner 8,999,322 subordinated units UDS Logistics, LLC
and
4,399,322 common units
22.8% limited partner 4,000,000 common units public unitholders
</TABLE>
OWNERSHIP OF SHAMROCK LOGISTICS OPERATIONS, L.P.
(THE OPERATING PARTNERSHIP)
<TABLE>
<S> <C>
Percentage/Type of Interest Held Interest Held By
--------------------------------------- ------------------
1.0101% general partner Riverwalk Logistics, L.P.
98.9899% limited partner Shamrock Logistics, L.P.
</TABLE>
OWNERSHIP OF SKELLY-BELVIEU PIPELINE COMPANY, L.L.C.
<TABLE>
<S> <C>
Percentage Interest Interest Held By
---------------------- ------------------
50% Shamrock Logistics Operations, L.P.
50% Phillips Petroleum Company
</TABLE>
7
<PAGE> 14
THE OFFERING
Common units offered....... 4,000,000 common units.
4,600,000 common units if the underwriters exercise
their over-allotment option in full.
Units outstanding after
this offering.............. 8,399,322 common units and 8,999,322 subordinated
units, representing 47.3% and 50.7% limited partner
interests in Shamrock Logistics.
If the underwriters exercise their over-allotment
option in full, 8,999,322 common units and
8,999,322 subordinated units, representing 49.0%
and 49.0% limited partner interests in Shamrock
Logistics, will be outstanding.
Cash distributions......... We are required to distribute all of our cash on
hand at the end of each quarter, less reserves
established by our general partner in its
discretion. We refer to this cash as "available
cash" and its meaning is defined in our partnership
agreement. We have also included this definition in
our glossary in Appendix C. The amount of this cash
may be greater than or less than the minimum
quarterly distribution.
Prior to making quarterly distributions, our
general partner may establish reserves for our
operations. Our general partner has broad
discretion in establishing reserves.
In general, we intend to pay cash distributions
each quarter in the following manner:
- first, 98% to the common units and 2% to the
general partner, until each common unit has
received a minimum quarterly distribution of
$0.60 plus any arrearages in the payment of the
minimum quarterly distribution from prior
quarters; and
- second, 98% to the subordinated units and 2% to
the general partner, until each subordinated unit
has received a minimum quarterly distribution of
$0.60.
If cash distributions exceed $0.60 per unit in a
quarter, our general partner will receive a higher
percentage of the cash distributed. If cash
distributions exceed still higher target levels,
our general partner will receive increasingly
higher percentages of the cash distributed, up to
50%. We refer to these distributions as incentive
distributions.
We intend to make cash distributions generally
within 45 days after the end of each quarter. We
will make the first distribution to unitholders
within 45 days after the quarter ending December
31, 2000. We will adjust the minimum quarterly
distribution downward for the period from the
closing of the offering through December 31, 2000
based on the actual length of the period.
Based on the assumptions listed on page 38 of the
prospectus, we believe that we will have sufficient
cash from operations to enable us to make the
minimum quarterly distribution of $0.60 on the
common units and the subordinated units for each
8
<PAGE> 15
quarter through December 31, 2001. The amount of
pro forma cash available for distribution generated
during the year ended December 31, 1999 and the
nine and twelve months ended September 30, 2000, as
adjusted to reflect the revised tariff rates, would
have been sufficient to allow us to pay the full
minimum quarterly distribution on the common units
and the subordinated units during these periods.
Please read "Cash Available for Distribution."
Subordination period....... The subordination period will end once we meet the
financial tests in the partnership agreement, but
it generally cannot end before December 31, 2005.
When the subordination period ends, all
subordinated units will convert into common units
on a one-for-one basis, and the common units will
no longer be entitled to arrearages.
Issuance of additional
units...................... In general, during the subordination period we can
issue up to 4,199,661 additional common units
without obtaining unitholder approval. We can also
issue an unlimited number of common units for
acquisitions that increase cash flow from
operations per unit on a pro forma basis.
Voting rights.............. Our general partner will manage and operate
Shamrock Logistics. Unlike the holders of common
stock in a corporation, you will have only limited
voting rights on matters affecting our business.
You will have no right to elect our general partner
or the directors of its general partner on an
annual or other continuing basis. The general
partner may not be removed except by a vote of the
holders of at least 66 2/3% of the outstanding
units, including any units owned by our general
partner and its affiliates.
Limited call right......... If at any time not more than 20% of the outstanding
common units are held by persons other than our
general partner and its affiliates, our general
partner has the right, but not the obligation, to
purchase all of the remaining common units at a
price not less than the then current market price
of the common units.
Estimated ratio of taxable
income to
distributions............ We estimate that if you hold the common units you
purchase in this offering through December 31,
2003, you will be allocated, on a cumulative basis,
an amount of federal taxable income for that period
that will be approximately 20% of the cash
distributed to you with respect to that period.
Please read "Tax Considerations -- Tax Treatment of
Unitholders -- Ratio of Taxable Income to
Distributions" for the basis of this estimate.
NYSE symbol................ "UDL"
9
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth summary historical financial and operating
data of the Ultramar Diamond Shamrock logistics business and Shamrock Logistics
Operations, and pro forma financial and operating data of Shamrock Logistics, in
each case for the periods and as of the dates indicated. "Ultramar Diamond
Shamrock logistics business" refers to the assets and liabilities and related
operations transferred to Shamrock Logistics Operations effective July 1, 2000.
The assets and liabilities of the Ultramar Diamond Shamrock logistics business
have been transferred at historical cost to Shamrock Logistics Operations. These
tables are derived from, should be read together with, and are qualified in
their entirety by reference to the historical and pro forma financial statements
and accompanying notes included elsewhere in this prospectus.
The pro forma financial information adjusts the historical financial
information to give effect to the formation of Shamrock Logistics and the
completion of this offering and related transactions. The historical and pro
forma financial statements included in this prospectus reflect the actual
pipeline tariff rates in effect during the periods presented. The tariff rates
on many of the pipelines were revised effective as of January 1, 2000 to reflect
the total cost of the pipeline, the current capacity and utilization of the
pipelines, and other market conditions. For comparative purposes, we have
included a pro forma, as adjusted column for the year ended December 31, 1999
and an as adjusted column for the nine months ended September 30, 1999, to give
effect to the revised tariff rates. In addition, beginning January 1, 1999, the
Ultramar Diamond Shamrock logistics business began charging a separate
terminalling fee at its refined product terminals.
We define Adjusted EBITDA as operating income, less gain on sale of
property, plant and equipment, plus depreciation and amortization, plus
distributions from Skelly-Belvieu Pipeline Company, of which we own 50%, and
excluding the impact of volumetric expansions, contractions, and measurement
discrepancies in our pipelines. Beginning July 1, 2000, the impact of these
exclusions is borne by the shippers in our pipelines and is therefore not
reflected in operating income. Adjusted EBITDA provides additional information
for evaluating our ability to make the minimum quarterly distribution and is
presented solely as a supplemental measure. You should not consider Adjusted
EBITDA as an alternative to net income, income before income taxes, cash flows
from operations, or any other measure of financial performance presented in
accordance with generally accepted accounting principles. Our Adjusted EBITDA
may not be comparable to EBITDA or similarly titled measures of other entities
as other entities may not calculate EBITDA in the same manner as we do. Excluded
from Adjusted EBITDA is the impact of volumetric expansions, contractions, and
measurement discrepancies in our pipelines of a $1,647,000 loss for 1997, a
$555,000 loss for 1998, and a $378,000 loss for 1999.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets to maintain the existing operating
capacity of existing assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand our operating capacity of
existing assets, whether through construction or acquisition. Repair and
maintenance expenses associated with existing assets that are minor in nature
and do not extend the useful life of existing assets are charged to operating
expenses as incurred. The capital expenditure amounts in the following table
exclude the capital expenditures relating to our interest in the Skelly-Belvieu
Pipeline Company.
Use of the term throughput in this prospectus generally refers to the crude
oil or refined product barrels, as applicable, that pass through each pipeline,
even if those barrels also are transported in another of our pipelines for which
we received a separate tariff. In the case of four of our pipelines, the
pipelines transport barrels relating to two tariff rates, one of which begins at
this pipeline's origin and ends at this pipeline's destination, and one of which
is a longer tariff route with an origin or destination in another pipeline of
ours which connects to this pipeline. Throughput for those pipelines reflect
only the barrels subject to the tariff route beginning at the pipeline's origin
and ending at the pipeline's destination. To accurately determine the actual
capacity utilization of those pipelines, as well as aggregate capacity
utilization, all barrels passing through the pipelines have been taken into
account for purposes of calculating capacity utilization.
10
<PAGE> 17
The pro forma financial information adjusts the historical financial
information to give effect to the formation of Shamrock Logistics and the
completion of this offering and related transactions. The pro forma as adjusted
financial information further adjusts the pro forma financial information to
give effect to the revised tariff rates. The amounts in the table below, except
for the operating data and per unit data, are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
YEAR ENDED DECEMBER 31, -----------------------
------------------------------ PRO FORMA
1997(1) 1998 1999 PRO FORMA AS ADJUSTED
------- ---- ---- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................... $84,881 $ 97,883 $109,773 $109,773 $ 87,881
Operating costs and expenses:
Operating expenses............................... 24,042 28,027 24,248 24,248 24,248
General and administrative expenses.............. 4,761 4,552 4,698 4,698 4,698
Depreciation and amortization.................... 11,328 12,451 12,318 12,318 12,318
Taxes other than income taxes.................... 4,235 4,152 4,765 4,765 4,765
-------- -------- -------- -------- --------
Total operating costs and expenses......... 44,366 49,182 46,029 46,029 46,029
Gain on sale of property, plant and equipment(2)... -- 7,005 2,478 2,478 2,478
-------- -------- -------- -------- --------
Operating income................................... 40,515 55,706 66,222 66,222 44,330
Interest expense................................. (158) (796) (777) (5,930) (5,930)
Equity income from Skelly-Belvieu................ 3,025 3,896 3,874 3,874 3,874
-------- -------- -------- -------- --------
Income before income taxes......................... 43,382 58,806 69,319 64,166 42,279
Provision for income taxes....................... (16,559) (22,517) (26,521) -- --
-------- -------- -------- -------- --------
Net income......................................... $26,823 $ 36,289 $ 42,798 $ 64,166 $ 42,279
======== ======== ======== ======== ========
Pro forma net income per unit...................... $ 3.61 $ 2.38
======== ========
Pro forma weighted average limited partners' units
outstanding...................................... 17,399 17,399
======== ========
OTHER FINANCIAL DATA:
Adjusted EBITDA.................................... $57,499 $ 65,399 $ 80,678 $ 80,678 $ 58,786
Distributions from Skelly-Belvieu.................. 4,009 3,692 4,238 4,238 4,238
Net cash provided by operating activities.......... 44,731 44,950 49,977
Net cash provided by (used in) investing
activities....................................... (52,141) 18,395 6,865
Net cash provided by (used in) financing
activities....................................... 7,410 (63,345) (56,842)
Maintenance capital expenditures................... 633 2,345 2,060 2,060 2,060
Expansion capital expenditures..................... 12,359 9,952 7,313 7,313 7,313
Total capital expenditures................. 12,992 12,297 9,373 9,373 9,373
OPERATING DATA:
Crude oil pipeline throughput (barrels/day)........ 282,736 265,243 280,041 280,041 280,041
Refined product pipeline throughput
(barrels/day).................................... 257,183 268,064 297,397 297,397 297,397
Refined product terminal throughput
(barrels/day).................................... 136,454 144,093 161,340 161,340 161,340
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net property, plant and equipment.................. $319,169 $297,121 $284,954
Total assets....................................... 346,082 321,002 308,213
Long-term debt, including current portion.......... 11,738 11,455 11,102
Net parent investment/partners' equity............. 295,403 268,497 254,806
</TABLE>
---------------
(1) On September 25, 1997, Ultramar Diamond Shamrock acquired Total Petroleum
(North America) Ltd. in a purchase business combination. The purchase price
was allocated to the various assets (including three refineries, 550
convenience stores and various crude oil and refined product pipeline and
storage assets) and liabilities acquired based on their fair value. The
acquired assets included in the Ultramar Diamond Shamrock logistics business
consist of pipelines and a crude oil storage facility serving the Ardmore
refinery, which were allocated $43,158,000 of the purchase price, including
$5,994,000 of goodwill. The results of operations of the crude oil and
refined product pipelines and the crude oil storage facility serving the
Ardmore refinery have been included from the date of acquisition.
(2) In March 1998, the Ultramar Diamond Shamrock logistics business recognized a
gain on the sale of a 25% interest in the McKee to El Paso refined product
pipeline and the El Paso refined product terminal to Phillips Petroleum
Company. In August 1999, the Ultramar Diamond Shamrock logistics business
recognized a gain on the sale of an additional 8.33% interest in the McKee
to El Paso refined product pipeline and terminal to Phillips Petroleum
Company.
11
<PAGE> 18
Excluded from Adjusted EBITDA is the impact of volumetric expansions,
contractions and measuring discrepancies in our pipelines of a $62,000 gain in
the first nine months of 1999 and a $916,000 loss in the first nine months of
2000. The as adjusted financial information adjusts the historical financial
information to give effect to the revised tariff rates. The amounts in the table
below, except for the operating data and per unit data, are in thousands and are
unaudited.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, -----------------------
------------------- 1999 2000
1999 2000 AS ADJUSTED PRO FORMA
---- ---- ----------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................... $ 81,535 $ 69,406 $ 65,397 $ 69,406
Operating costs and expenses:
Operating expenses........................................ 17,183 22,465 17,183 22,465
General and administrative expenses....................... 3,523 3,771 3,523 3,771
Depreciation and amortization............................. 9,162 9,889 9,162 9,889
Taxes other than income taxes............................. 3,624 3,318 3,624 3,318
-------- -------- -------- --------
Total operating costs and expenses.................. 33,492 39,443 33,492 39,443
-------- -------- -------- --------
Gain on sale of property, plant and equipment............. 2,478 -- 2,478 --
-------- -------- -------- --------
Operating income............................................ 50,521 29,963 34,383 29,963
Interest expense.......................................... (669) (2,808) (669) (4,519)
Equity income from Skelly-Belvieu......................... 2,370 3,044 2,370 3,044
-------- -------- -------- --------
Income before income taxes.................................. 52,222 30,199 36,084 28,488
Benefit (provision) for income taxes...................... (19,980) 30,812 (13,806) --
-------- -------- -------- --------
Net income.................................................. $ 32,242 $ 61,011 $ 22,278 $ 28,488
======== ======== ======== ========
Pro forma net income per unit............................... $ 1.60
========
Pro forma weighted average limited partners' units
outstanding............................................... 17,399
========
OTHER FINANCIAL DATA:
Adjusted EBITDA............................................. $ 59,751 $ 44,256 $ 43,613 $ 44,256
Distributions from Skelly-Belvieu........................... 2,608 3,488 2,608 3,488
Net cash provided by operating activities................... 40,420 18,140
Net cash provided by (used in) investing activities......... 8,178 (2,398)
Net cash used in financing activities....................... (48,598) (15,741)
Maintenance capital expenditures............................ 1,842 1,804 1,842 1,804
Expansion capital expenditures.............................. 4,588 4,082 4,588 4,082
Total capital expenditures.......................... 6,430 5,886 6,430 5,886
OPERATING DATA:
Crude oil pipeline throughput (barrels/day)................. 277,930 296,413 277,930 296,413
Refined product pipeline throughput (barrels/day)........... 294,799 315,807 294,799 315,807
Refined product terminal throughput (barrels/day)........... 159,367 167,650 159,367 167,650
</TABLE>
<TABLE>
SEPTEMBER 30,
---------------------------------------------
1999 2000 2000
-------- -------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net property, plant and equipment........................... $285,092 281,176 281,176
Total assets................................................ 308,683 319,035 313,419
Long-term debt, including current portion................... 11,149 118,494 74,536
Net parent investment/partners' equity...................... 252,447 195,191 233,533
</TABLE>
12
<PAGE> 19
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Riverwalk Logistics, L.P., our general partner, has a legal duty to manage
us in a manner beneficial to our unitholders. This legal duty originates in
statutes and judicial decisions and is commonly referred to as a "fiduciary"
duty. However, because Riverwalk Logistics is indirectly owned by Ultramar
Diamond Shamrock the officers and directors of Shamrock Logistics GP, LLC, who
manage and operate our general partner, have fiduciary duties to manage the
business of our general partner in a manner beneficial to Ultramar Diamond
Shamrock and its affiliates. As a result of this relationship, conflicts of
interest may arise in the future between Shamrock Logistics and our unitholders,
on the one hand, and our general partner and its affiliates, on the other hand.
For a more detailed description of the conflicts of interest and fiduciary
responsibilities of our general partner, including issues related to setting
tariff rates, please read "Conflicts of Interest and Fiduciary
Responsibilities."
Our partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. Our partnership agreement also
restricts the remedies available to unitholders for actions that might otherwise
constitute breaches of our general partner's fiduciary duty. By purchasing a
common unit, you are treated as having consented to various actions contemplated
in the partnership agreement and conflicts of interest that might otherwise be
considered a breach of fiduciary or other duties under applicable state law.
Ultramar Diamond Shamrock and its controlled affiliates have generally
agreed not to engage in the business of transporting crude oil or refined
products or operating crude oil storage or refined products terminalling assets
in the southwestern and Rocky Mountain regions of the United States, although
there are exceptions to this agreement. For a more detailed discussion of this
noncompete agreement, please read "Certain Relationships and Related
Transactions -- Omnibus Agreement."
13
<PAGE> 20
RISK FACTORS
Limited partner interests are inherently different from the capital stock
of a corporation, although many of the business risks to which we are subject
are similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together with
all of the other information included in this prospectus in evaluating an
investment in the common units.
If any of the following risks were actually to occur, our business,
financial condition, or results of operations could be materially adversely
affected. In that case, the trading price of our common units could decline and
you could lose all or part of your investment.
RISKS INHERENT IN OUR BUSINESS
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO ENABLE US TO
PAY THE MINIMUM QUARTERLY DISTRIBUTION ON THE COMMON UNITS EVERY QUARTER.
Because the amount of cash we are able to distribute on the common units is
principally dependent on the amount of cash we are able to generate from
operations, which will fluctuate from quarter to quarter based on our
performance, we may not be able to pay the minimum quarterly distribution on the
common units for each quarter. The amount of cash flow we generate from
operations is in turn principally dependent on the average daily volumes of
crude oil and refined products transported through our pipelines, the tariff
rates and terminalling fees we charge, and our level of operating costs.
In determining the number of units we would have outstanding after the
offering and the minimum quarterly distribution, and therefore our expected cash
available for distribution, we necessarily made some assumptions about
throughput, tariffs and fees and operating costs. Whether these assumptions are
realized is not within our control or the control of our general partner and if
they are not realized, we may not generate sufficient cash to pay the full
minimum quarterly distribution on the common units.
Other factors affecting the actual amount of cash that we will have
available to distribute to unitholders include the following:
- required principal and interest payments on our debt;
- the costs of acquisitions;
- restrictions contained in our debt instruments;
- issuances of debt and equity securities;
- fluctuations in working capital;
- capital expenditures; and
- adjustments in reserves made by the general partner in its discretion.
Cash distributions are dependent primarily on cash flow, including cash
flow from financial reserves and working capital borrowings, and not solely on
profitability, which is affected by non-cash items. Therefore, we may make cash
distributions during periods when we record losses and may not make cash
distributions during periods when we record net income.
YOU MAY RECEIVE LESS THAN THE MINIMUM QUARTERLY DISTRIBUTION BECAUSE FEES AND
COST REIMBURSEMENTS DUE TO ULTRAMAR DIAMOND SHAMROCK AND ITS AFFILIATES MAY BE
SUBSTANTIAL AND WILL REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION.
Prior to making any distribution on the common units, we will pay Ultramar
Diamond Shamrock and its affiliates an annual administrative fee that will
initially equal $5.2 million as a
14
<PAGE> 21
reimbursement of the overhead and administrative expenses incurred by them on
our behalf. Our general partner, with approval and consent of the conflicts
committee of its general partner, will have the right to increase the annual
administrative fee by up to 1.5% each year, as further adjusted for inflation,
during the eight-year term of the services agreement between us and the general
partner and may agree to further increases in connection with expansions of our
operations through the acquisition or construction of new logistics assets that
require additional management personnel. Additionally, we will reimburse
Ultramar Diamond Shamrock and its affiliates for direct expenses it incurs on
our behalf (for example, salaries). On a pro forma basis for 1999, we estimate
that the direct expenses to be reimbursed to Ultramar Diamond Shamrock and its
affiliates would have been $9.7 million. The payment of the annual
administrative fee and the reimbursement of expenses could adversely affect our
ability to make cash distributions to our unitholders.
WE DEPEND UPON ULTRAMAR DIAMOND SHAMROCK FOR THE CRUDE OIL AND REFINED
PRODUCTS TRANSPORTED IN OUR PIPELINES AND HANDLED AT OUR TERMINALS AND STORAGE
FACILITIES, AND ANY REDUCTION IN THOSE QUANTITIES COULD REDUCE OUR ABILITY TO
MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
Because of the geographic location of our pipelines, terminals, and storage
facilities, we depend almost exclusively upon Ultramar Diamond Shamrock to
provide throughput for our pipelines and terminals. If Ultramar Diamond Shamrock
were to decrease the throughput of crude oil and/or refined products transported
in our pipelines for any reason, we would experience great difficulty in
replacing those lost barrels. Because our operating costs are primarily fixed, a
reduction in throughput would result in not only a reduction of revenues but a
decline in net income and cash flow of similar or greater magnitude, which would
reduce our ability to make distributions to our unitholders.
Ultramar Diamond Shamrock may reduce throughput in our pipelines either
because of market conditions that affect refiners generally or because of
factors that specifically affect Ultramar Diamond Shamrock. These conditions and
factors include the following:
- a decrease in demand for refined products in the markets served by our
pipelines;
- a temporary or permanent decline in the ability of the McKee, Three
Rivers, or Ardmore refineries to produce refined products;
- a decision by Ultramar Diamond Shamrock to redirect refined products
transported in our pipelines to markets not served by our pipelines or to
transport crude oil other than in our pipelines;
- a loss of customers by Ultramar Diamond Shamrock in the markets served by
our pipelines or a failure to gain additional customers in growing
markets; and
- the completion of competing refined product pipelines in the western,
southwestern, and Rocky Mountain market regions.
DISTRIBUTIONS TO UNITHOLDERS COULD BE ADVERSELY AFFECTED BY A SIGNIFICANT
DECREASE IN DEMAND FOR REFINED PRODUCTS IN THE MARKETS SERVED BY OUR
PIPELINES.
Any sustained decrease in demand for refined products in the markets served
by our pipelines could result in a significant reduction in throughput in our
crude oil and refined product pipelines and therefore in our cash flow, reducing
our ability to make distributions to unitholders. Factors that could lead to a
decrease in market demand include:
- a recession or other adverse economic condition that results in lower
spending by consumers on gasoline, diesel, and travel;
- higher fuel taxes or other governmental or regulatory actions that
increase, directly or indirectly, the cost of gasoline;
15
<PAGE> 22
- an increase in fuel economy, whether as a result of a shift by consumers
to more fuel-efficient vehicles or technological advances by
manufacturers. There is also pending legislation in the U.S. Congress
proposing to mandate higher fuel economy;
- an increase in the market price of crude oil that leads to higher refined
product prices, which may reduce demand for gasoline. Market prices for
crude oil and refined products are subject to wide fluctuation in
response to changes in global and regional supply over which neither we
nor Ultramar Diamond Shamrock have any control, and recent significant
increases in the price of crude oil may result in a lower demand for
refined products; and
- the increased use of alternative fuel sources, such as battery-powered
engines. Several state and federal initiatives mandate this increased
use. For example, under the Energy Policy Act of 1992, 75% of new
vehicles purchased by state governments must use some type of alternative
fuels by 2002, and California has enacted a law requiring that by the
year 2003, 10% of all fleets delivered to California be zero-emissions
vehicles.
OUR ABILITY TO MAKE DISTRIBUTIONS TO UNITHOLDERS COULD BE REDUCED BY A
MATERIAL DECLINE IN PRODUCTION BY ANY OF ULTRAMAR DIAMOND SHAMROCK'S MCKEE,
THREE RIVERS, OR ARDMORE REFINERIES.
Any significant curtailing of production at the McKee, Three Rivers, or
Ardmore refineries could, by reducing throughput in our pipelines, result in our
realizing materially lower levels of revenues and cash flow for the duration of
the shutdown. Operations at a refinery could be partially or completely shut
down, temporarily or permanently, as the result of a number of circumstances,
none of which are within our control, such as:
- unscheduled turnarounds or catastrophic events at the refinery, such as
the power failure and resulting fire at the Ardmore refinery which caused
a 50% decrease in production for two months in the summer of 1998;
- labor difficulties that result in a work stoppage or slowdown at a
refinery;
- environmental proceedings or other litigation that compel the cessation
of all or a portion of the operations at a refinery;
- increasingly stringent environmental regulations. The Clean Gasoline Act
of 1999, currently pending before both the Senate and House of
Representatives, would amend the Clean Air Act of 1990 to limit the
concentration of sulfur in motor gasoline and diesel fuel;
- a disruption in the supply of crude oil to a refinery; and
- a governmental ban or other limitation on the use of an important product
of the refinery.
The magnitude of the effect on us of any shutdown will depend on the length
of the shutdown and the extent of the refinery operations affected by the
shutdown. Furthermore, we have no control over the factors that may lead to a
shutdown or the measures Ultramar Diamond Shamrock may take in response to a
shutdown. Ultramar Diamond Shamrock will make all decisions at the refineries
concerning levels of production, regulatory compliance, refinery turnarounds,
labor relations, environmental remediation, and capital expenditures.
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ULTRAMAR DIAMOND SHAMROCK'S SEVEN-YEAR AGREEMENT TO USE OUR PIPELINES AND
TERMINALS WILL BE SUSPENDED IF MATERIAL CHANGES IN MARKET CONDITIONS OCCUR
THAT HAVE A MATERIAL ADVERSE EFFECT ON ULTRAMAR DIAMOND SHAMROCK, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
If market conditions with respect to the transportation of crude oil or
refined products or with respect to the end markets in which Ultramar Diamond
Shamrock sells refined products change in a material manner such that Ultramar
Diamond Shamrock would suffer a material adverse effect if it were to continue
to use our pipelines and terminals at the required levels, Ultramar Diamond
Shamrock's obligation to us will be suspended during the period of the change in
market conditions to the extent required to avoid the material adverse effect.
Any suspension of Ultramar Diamond Shamrock's obligation could adversely affect
throughput in our pipelines and terminals and therefore our ability to make
distributions to our unitholders.
The concepts of a material change in market conditions and material adverse
effect on Ultramar Diamond Shamrock are not defined in the agreement. However,
situations that might constitute a material change in market conditions having a
material adverse effect on Ultramar Diamond Shamrock include the cost of
transporting crude oil or refined products by our pipelines becoming materially
more expensive than transporting crude oil or refined products by other means or
a material change in refinery profit that makes it materially more advantageous
for Ultramar Diamond Shamrock to shift large volumes of refined products from
markets served by our pipelines to pipelines retained by Ultramar Diamond
Shamrock or owned by third parties. Ultramar Diamond Shamrock may suspend
obligations by presenting a certificate from its chief financial officer that
there has been a material change in market conditions having a material adverse
effect on Ultramar Diamond Shamrock. If we disagree with Ultramar Diamond
Shamrock, we have the right to refer the matter to an independent accounting
firm for resolution.
ANY LOSS BY ULTRAMAR DIAMOND SHAMROCK OF CUSTOMERS IN THE MARKETS SERVED BY
OUR REFINED PRODUCT PIPELINES MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
DISTRIBUTIONS TO UNITHOLDERS.
Should Ultramar Diamond Shamrock's retail marketing efforts become
unsuccessful and result in declining or stagnant sales of its refined products,
Ultramar Diamond Shamrock would have to find other end-users for its refined
products. It may not choose or be able to replace lost branded retail sales
through wholesale, spot, and exchange sales. Any failure by Ultramar Diamond
Shamrock to replace lost branded retail sales could adversely affect throughput
in our pipelines and, therefore, our cash flow and ability to make distributions
to unitholders.
IF OUR ASSUMPTIONS CONCERNING POPULATION GROWTH ARE INACCURATE OR ULTRAMAR
DIAMOND SHAMROCK'S GROWTH STRATEGY IS NOT SUCCESSFUL, OUR ABILITY TO MAKE OR
INCREASE DISTRIBUTIONS TO UNITHOLDERS MAY BE ADVERSELY AFFECTED.
Our growth strategy is dependent upon:
- the accuracy of our assumption that many of the markets that we serve in
the southwestern and Rocky Mountain regions of the United States will
experience population growth that is higher than the national average;
and
- upon the willingness and ability of Ultramar Diamond Shamrock to capture
a share of this additional demand in its existing markets and to identify
and penetrate new markets in the southwestern and Rocky Mountain regions
of the United States.
If our assumption about growth in market demand proves incorrect, Ultramar
Diamond Shamrock may not have any incentive to increase refinery capacity and
production, shift additional throughput to our pipelines, or shift volumes from
our lower tariff pipelines to our higher tariff pipelines, which would adversely
affect our growth strategy. Furthermore, Ultramar Diamond Shamrock is under no
obligation to pursue a growth strategy with respect to its
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business that favors us. If Ultramar Diamond Shamrock chooses not, or is unable,
to gain additional customers in new or existing markets in the western,
southwestern, and Rocky Mountain regions of the United States, our growth
strategy would be adversely affected.
NEW COMPETING REFINED PRODUCT PIPELINES COULD CAUSE DOWNWARD PRESSURE ON
MARKET PRICES, AS A RESULT OF WHICH ULTRAMAR DIAMOND SHAMROCK MIGHT DECREASE
THE VOLUMES TRANSPORTED IN OUR PIPELINES.
We are aware of a number of proposals or industry discussions regarding
refined product pipeline projects that, if or when undertaken and completed,
could adversely impact some of the most significant markets we serve. One of
these projects, the Longhorn Pipeline, will transport refined products from the
Texas Gulf Coast to El Paso. Most of the pipeline has been constructed and it
has obtained regulatory approval but is awaiting the resolution of litigation to
commence operations. It is uncertain if and when this pipeline will commence
operations. Another of these announced projects, the southern section of the
Aspen Pipeline, which will transport refined products from western Texas to New
Mexico could begin its services as early as 2001. The completion of the Longhorn
Pipeline and the southern section of the Aspen Pipeline Project will increase
the amount of refined products available in the El Paso, New Mexico, and Arizona
markets, which could put downward pressure on refined product prices in those
markets. As a result, Ultramar Diamond Shamrock might not find it economically
attractive to maintain its current market share in those markets and might
decrease the throughput in our pipelines to those markets.
IF ONE OR MORE OF OUR TARIFF RATES IS REDUCED, IF FUTURE INCREASES IN OUR
TARIFF RATES DO NOT ALLOW US TO RECOVER FUTURE INCREASES IN OUR COSTS, OR IF
RATEMAKING METHODOLOGIES ARE ALTERED, OUR ABILITY TO MAKE DISTRIBUTIONS TO
UNITHOLDERS MAY BE ADVERSELY AFFECTED.
Our interstate pipelines are subject to extensive regulation by the Federal
Energy Regulatory Commission under the Interstate Commerce Act. This Act allows
the FERC, shippers, and potential shippers to challenge our current rates that
are already effective and any proposed changes to those rates, as well as our
terms and conditions of service. The FERC may subject any proposed changes to
investigation and possible refund or reduce our current rates and order that we
pay reparations for overcharges caused by these rates during the two years prior
to the beginning of the FERC's investigation. In addition, a state commission
could also investigate our intrastate rates or our terms and conditions of
service on its own initiative or at the urging of a shipper or other interested
parties.
Ultramar Diamond Shamrock has agreed not to challenge, or cause others to
challenge, our tariff rates for seven years. This agreement does not prevent
other shippers or future shippers from challenging our tariff rates. At the end
of the seven years, Ultramar Diamond Shamrock will be free to challenge, or
cause other parties to challenge, our tariff rates. If Ultramar Diamond Shamrock
or any third party is successful in challenging our tariff rates, we may not be
able to sustain our rates, which may adversely affect our revenues. Cash
available for distribution to you could be materially reduced by a successful
challenge to our rates.
Despite Ultramar Diamond Shamrock's agreement not to challenge rates,
adverse market conditions could nevertheless cause us to lower our tariff rates.
Ultramar Diamond Shamrock may find it economically advantageous to reduce the
feedstock consumption or the production of refined products at the McKee, Three
Rivers, or Ardmore refineries or to transport refined products to markets other
than those we serve, any of which would have the effect of reducing throughput
in our pipelines. If a material change in market conditions occurs, the
pipelines and terminals usage agreement allows Ultramar Diamond Shamrock to
reduce throughput in our pipelines. Accordingly, we could be forced to lower our
tariff rates in an effort to make transportation through our pipelines
economically attractive to Ultramar Diamond Shamrock in order to maintain
throughput volumes. However, even a significant reduction of our tariffs may
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not provide enough economic incentive to Ultramar Diamond Shamrock to maintain
historical throughput levels.
Under the FERC's current ratemaking methodology, the maximum rate we may
charge with respect to interstate pipelines is adjusted up or down each year by
the percentage change in the producer price index for finished goods minus 1%.
The FERC's current methodology also allows us, in some circumstances, to change
rates based either on our cost of service, or market-based rates, or on a
settlement or agreement with all of our shippers, instead of the index-based
rate change. Under any of these methodologies, our ability to set rates based on
our true costs may be limited or delayed. If for any reason future increases in
our tariff rates are not sufficient to allow us to recover increases in our
costs, our ability to make distributions to unitholders may be adversely
affected.
Potential changes to current ratemaking methods and procedures of the FERC
and state regulatory commissions may impact the federal and state regulations
under which we will operate in the future. In addition, if the FERC's petroleum
pipeline ratemaking methodology were reviewed by a federal appeals court and
changed, this change could reduce our revenues and reduce cash available for
distribution to our unitholders. Please read "Business -- Regulation -- Rate
Regulation" for more information on our tariff rates.
A MATERIAL DECREASE IN THE SUPPLY, OR A MATERIAL INCREASE IN THE PRICE, OF
CRUDE OIL AVAILABLE FOR TRANSPORT THROUGH OUR PIPELINES TO ULTRAMAR DIAMOND
SHAMROCK'S REFINERIES, COULD MATERIALLY REDUCE OUR ABILITY TO MAKE
DISTRIBUTIONS TO UNITHOLDERS.
The volume of crude oil we transport in our crude oil pipelines depends on
the availability of attractively-priced crude oil produced in the areas
accessible to our crude oil pipelines, imported to our Corpus Christi storage
facilities, and received from common carrier pipelines outside of our areas of
operations. If Ultramar Diamond Shamrock does not replace volumes lost due to a
material temporary or permanent decrease in supply from any of these sources
with volumes transported in one of our other crude oil pipelines, we would
experience an overall decline in volumes of crude oil transported through our
pipelines and therefore a corresponding reduction in cash flow. Similarly, if
there were a material increase in the price of crude oil supplied from any of
these sources, either temporary or permanent, which caused Ultramar Diamond
Shamrock to reduce its shipments in the related crude oil pipelines, we could
experience a decline in volumes of crude oil transported in our pipelines and
therefore a corresponding reduction in cash flow. Furthermore, a reduction of
supply from our pipelines, either because of the unavailability or high price of
crude oil, would likely result in reduced production of refined product at the
McKee, Three Rivers, and Ardmore refineries, causing a reduction in the volumes
of refined products we transport and our cash flow. Some of the local gathering
systems that supply crude oil transported to McKee and Ardmore refineries are
experiencing a decline in production. Furthermore, international political and
economic uncertainties over which neither we nor Ultramar Diamond Shamrock have
any control may affect imports of crude oil.
IF WE ARE NOT ABLE TO SUCCESSFULLY ACQUIRE, EXPAND, AND BUILD PIPELINES AND
OTHER LOGISTICS ASSETS OR ATTRACT SHIPPERS IN ADDITION TO ULTRAMAR DIAMOND
SHAMROCK, THE GROWTH OF OUR BUSINESS WILL BE LIMITED.
We intend to grow our business in part through selective acquisitions,
expansions of pipelines, and construction of new pipelines, as well as by
attracting shippers in addition to Ultramar Diamond Shamrock. Each of these
components has uncertainties and risks associated with it, and none of these
approaches may be successful.
We may be unable to consummate any acquisitions or identify attractive
acquisition candidates in the future, to acquire assets or businesses on
economically acceptable terms, or to obtain financing for any acquisition on
satisfactory terms or at all. Ultramar Diamond Shamrock
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may not make any acquisitions that would provide acquisition opportunities to us
or, if these opportunities arose, they may not be on terms attractive to us.
Moreover, Ultramar Diamond Shamrock is not obligated in all instances to offer
to us logistics assets acquired as part of an acquisition by it. Ultramar
Diamond Shamrock is also under no obligation to sell to us any pipeline assets
being retained by it, except the Nuevo Laredo pipeline, the Wichita Falls crude
oil pipeline and storage facility and the Ringgold, Texas crude storage facility
which we may acquire under options.
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, and services of the acquired
companies or business segments, the diversion of management's attention from
other business concerns, and the potential loss of key employees of the acquired
businesses. As a result, our business could be adversely affected by an
acquisition.
The construction of a new pipeline or the expansion of an existing
pipeline, by adding additional horsepower or pump stations or by adding a second
pipeline along an existing pipeline, involves numerous regulatory,
environmental, political, and legal uncertainties beyond our control. These
projects may not be completed on schedule or at all or at the budgeted cost.
Moreover, our revenues may not increase immediately upon the expenditure of
funds on a particular project. For instance, if we build a new pipeline, the
construction will occur over an extended period of time and we will not receive
any material increases in revenues until after completion of the project. This
could have an adverse affect on our ability to distribute cash to unitholders.
Once we increase our capacity through acquisitions, construction of new
pipelines, or expansion of existing pipelines, we may not be able to obtain or
sustain throughput to utilize the new available capacity. The underutilization
of a recently acquired, constructed, or expanded pipeline could adversely affect
our ability to distribute cash to unitholders.
We may not be able to obtain financing of any acquisitions, expansions, and
new construction on satisfactory terms or at all. Furthermore, any debt we incur
may adversely affect our ability to make distributions to the unitholders, or
any future acquisitions, expansions or new construction may dilute net income
per unit and distributions to the unitholders.
We also plan to seek volumes of crude oil or refined products to transport
on behalf of shippers other than Ultramar Diamond Shamrock. However, volumes
transported by us for third parties have been very limited historically and
because of our lack of geographic relationship or inter-connections with other
refineries, we may not be able to obtain material third party volumes.
ANY REDUCTION IN THE CAPABILITY OF OR THE ALLOCATIONS TO OUR SHIPPERS ON
INTERCONNECTING THIRD PARTY PIPELINES COULD CAUSE A REDUCTION OF VOLUMES
TRANSPORTED IN OUR PIPELINES AND COULD NEGATIVELY AFFECT OUR ABILITY TO
DISTRIBUTE CASH TO UNITHOLDERS.
Ultramar Diamond Shamrock and the other shippers in our pipelines are
dependent upon connections to third party pipelines both to receive crude oil
from the Texas Gulf Coast, the Permian Basin, and other areas and to deliver
refined products to outlying market areas in Arizona, the midwestern United
States, and the Rocky Mountain region of the United States. Any reduction of
capabilities in these interconnecting pipelines due to testing, line repair,
reduced operating pressures, or other causes could result in reduced volumes
transported in our pipelines. Similarly, any reduction in the allocations to our
shippers on these interconnecting pipelines because additional shippers begin
transporting volumes over the pipelines could also result in reduced volumes
transported in our pipelines. Any reduction in volumes transported in our
pipelines could adversely affect our profitability.
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ULTRAMAR DIAMOND SHAMROCK AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST AND
LIMITED FIDUCIARY RESPONSIBILITIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN
INTERESTS TO THE DETRIMENT OF UNITHOLDERS.
Following the offering, Ultramar Diamond Shamrock and its affiliates will
have an aggregate 75.5% limited partner interest in us and Shamrock Logistics
Operations and will own and control our general partner. Conflicts of interest
may arise between Ultramar Diamond Shamrock and its affiliates, including the
general partner, on the one hand, and us, on the other hand. As a result of
these conflicts, the general partner may favor its own interests and the
interests of its affiliates over the interests of the unitholders. These
conflicts include, among others, the following situations:
- Ultramar Diamond Shamrock, as the primary shipper in our pipelines, has
an economic incentive to seek lower tariff rates for our pipelines and
lower terminalling fees.
- Some officers of Ultramar Diamond Shamrock, who will provide services to
us, will also devote significant time to the businesses of Ultramar
Diamond Shamrock and will be compensated by Ultramar Diamond Shamrock for
the services rendered to them.
- Neither the partnership agreement nor any other agreement requires
Ultramar Diamond Shamrock to pursue a business strategy that favors us or
utilizes our assets, including whether to increase or decrease refinery
production or what markets to pursue or grow. Ultramar Diamond Shamrock's
directors and officers have a fiduciary duty to make these decisions in
the best interests of the stockholders of Ultramar Diamond Shamrock.
- Ultramar Diamond Shamrock and its affiliates may engage in limited
competition with us.
- Ultramar Diamond Shamrock may use other transportation methods or
providers for up to 25% of its crude oil and refined products and is not
required to use our pipelines and terminals to the extent that there is a
material change in the market conditions for the transportation of crude
oil and refined products, or in the markets for refined products served
by these refineries that has a material adverse effect on Ultramar
Diamond Shamrock.
- Our general partner is allowed to take into account the interests of
parties other than us, such as Ultramar Diamond Shamrock, in resolving
conflicts of interest, limiting its fiduciary duty to the unitholders.
- Our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. As a result of purchasing units, holders consent to some
actions and conflicts of interest that might otherwise constitute a
breach of fiduciary or other duties under applicable state law.
- Our general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings, issuance of additional
limited partner interests and reserves, each of which can affect the
amount of cash that is distributed to unitholders.
- Our general partner determines which costs incurred by Ultramar Diamond
Shamrock and its affiliates are reimbursable by us.
- The partnership agreement does not restrict our general partner from
causing us to pay the general partner or its affiliates for any services
rendered on terms that are fair and reasonable to us or entering into
additional contractual arrangements with any of these entities on our
behalf.
- Our general partner controls the enforcement of obligations owed to us by
our general partner and its affiliates, including the pipelines and
terminals usage agreement with Ultramar Diamond Shamrock.
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- Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
- In some instances, our general partner may cause us to borrow funds in
order to permit the payment of distributions, even if the purpose or
effect of the borrowing is to make a distribution on the subordinated
units or to make incentive distributions or to hasten the expiration of
the subordination period.
The partnership agreement gives our general partner broad discretion in
establishing financial reserves for the proper conduct of our business. These
reserves also will affect the amount of cash available for distribution. Our
general partner may establish reserves for distributions on the subordinated
units, but only if those reserves will not prevent us from distributing the full
minimum quarterly distribution, plus any arrearages, on the common units for the
following four quarters.
OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS, MAKE
DISTRIBUTIONS TO UNITHOLDERS, OR CAPITALIZE ON BUSINESS OPPORTUNITIES.
Upon completion of the transactions contemplated in this prospectus, we
expect our total indebtedness to be $74.5 million, consisting of approximately
$63.7 million outstanding under our revolving credit facility and $10.8 million
of other partnership debt. Our leverage may:
- adversely affect our ability to finance future operations and capital
needs;
- limit our ability to pursue acquisitions and other business
opportunities; and
- make our results of operations more susceptible to adverse economic or
operating conditions.
Assuming the underwriters do not exercise their over-allotment option, we
expect to make interest payments of approximately $5.9 million per year on the
amount of debt expected to be outstanding immediately after the offering of
which approximately $5.2 million will be interest payments under our revolving
credit facility and the remainder will be interest payments on the debt assumed
July 1, 2000.
In addition, we will have approximately $56.3 million of aggregate unused
borrowing capacity under our revolving credit facility at the closing of this
offering. Future borrowings, under our revolving credit facility or otherwise,
could result in a significant increase in our leverage.
The payment of principal and interest on our indebtedness will reduce the
cash available for distribution on the units. We will not be able to make any
distributions to our unitholders if there is or will be an event of default
under our debt agreements. Our ability to make principal and interest payments
depends on our future performance, which is subject to many factors, several of
which are outside our control.
The revolving credit facility contains restrictive covenants that limit our
ability to incur additional debt and to engage in some types of transactions.
These limitations could reduce our ability to capitalize on business
opportunities that arise. Any subsequent refinancing of our current indebtedness
or any new indebtedness could have similar or greater restrictions.
The revolving credit facility contains provisions relating to changes in
ownership. If these provisions are triggered, the outstanding debt may become
due. If that happens, we cannot guarantee that we would be able to pay the debt.
The general partner and its direct and indirect owners are not prohibited by the
partnership agreement from entering into a transaction that would trigger these
change-in-ownership provisions.
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THE TRANSPORTATION AND STORAGE OF CRUDE OIL AND REFINED PRODUCTS IS SUBJECT TO
FEDERAL AND STATE LAWS RELATING TO ENVIRONMENTAL PROTECTION AND OPERATIONAL
SAFETY AND RESULTS IN A RISK THAT CRUDE OIL AND OTHER HYDROCARBONS MAY BE
RELEASED INTO THE ENVIRONMENT, POTENTIALLY CAUSING SUBSTANTIAL EXPENDITURES
THAT COULD LIMIT OUR ABILITY TO MAKE DISTRIBUTIONS TO UNITHOLDERS.
Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. Risks of
substantial costs and liabilities are inherent in pipeline, gathering, storage,
and terminalling operations, and we may incur these costs and liabilities in the
future.
Moreover, it is possible that other developments, such as increasingly
strict environmental and safety laws, regulations and enforcement policies of
those laws, and claims for damages to property or persons resulting from our
operations, could result in substantial costs and liabilities to us. If we were
not able to recover these resulting costs through insurance or increased
revenues, cash distributions to unitholders could be adversely affected. The
transportation and storage of crude oil and refined products results in a risk
of a sudden or gradual release of crude oil or refined products into the
environment, potentially causing substantial expenditures for a response action,
significant government penalties, liability for natural resources damages to
government agencies, personal injury, or property damages to private parties and
significant business interruption.
RISKS INHERENT IN AN INVESTMENT IN SHAMROCK LOGISTICS
EVEN IF THE UNITHOLDERS ARE DISSATISFIED, THEY CANNOT REMOVE OUR GENERAL
PARTNER WITHOUT ITS CONSENT.
The general partner will manage and operate Shamrock Logistics. Unlike the
holders of common stock in a corporation, you will have only limited voting
rights on matters affecting our business. You will have no right to elect the
general partner or the directors of its general partner on an annual or other
continuing basis. Furthermore, our general partner and its affiliates will own
sufficient units upon completion of the offering to be able to prevent its
removal as general partner.
In addition, the effect of the following provisions of the partnership
agreement may be to discourage a person or group from attempting to remove our
general partner or otherwise change the management of Shamrock Logistics:
- if the holders of at least 66 2/3% of the units remove the general
partner without cause, all remaining subordinated units will
automatically convert into common units and will share distributions with
the existing common units pro rata, existing arrearages on the common
units will be extinguished and the common units will no longer be
entitled to arrearages if we fail to pay the minimum quarterly
distribution in any quarter. Cause is narrowly defined to mean that a
court of competent jurisdiction has entered a final, non-appealable
judgment finding the general partner liable for actual fraud, gross
negligence, or willful or wanton misconduct in its capacity as our
general partner;
- any units held by a person that owns 20% or more of any class of units
then outstanding, other than the general partner and its affiliates,
cannot be voted on any matter; and
- the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
As a result of these provisions, the price at which the common units will
trade could be diminished because of the absence or reduction of a takeover
premium in the trading price.
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PURCHASERS OF COMMON UNITS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF $7.13 PER COMMON UNIT.
The assumed initial public offering price of $20.00 per unit exceeds pro
forma tangible book value of $12.87 per unit. Based on the assumed price, you
will incur immediate and substantial dilution of $7.13 per common unit. Please
read "Dilution."
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH MAY DILUTE
EXISTING UNITHOLDERS' INTERESTS.
During the subordination period, our general partner, without the approval
of the unitholders, may cause us to issue common units in a number of
circumstances such as:
- the exercise of the underwriters' over-allotment option;
- the conversion of the general partner interest and the incentive
distribution rights as a result of the withdrawal of our general partner;
or
- other future issuances of common units.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- your proportionate ownership interest in Shamrock Logistics will
decrease;
- the amount of cash available for distribution on each unit may decrease;
- since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Our partnership agreement does not give the unitholders the right
to approve our issuance of equity securities ranking junior to the common units
at any time.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own 80% or more of
the common units, our general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining common units held by unaffiliated
persons at a price not less than their then-current market price. As a result,
you may be required to sell your common units at an undesirable time or price
and may therefore not receive any return on your investment. You may also incur
a tax liability upon a sale of your units. For additional information about the
call right, please read "The Partnership Agreement -- Limited Call Right."
YOU MAY NOT HAVE LIMITED LIABILITY IF A STATE OR COURT FINDS THAT WE ARE NOT
IN COMPLIANCE WITH THE APPLICABLE STATUTES OR THAT UNITHOLDER ACTION
CONSTITUTES CONTROL OF OUR BUSINESS.
The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states. You could be held liable in
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some circumstances for Shamrock Logistics' obligations to the same extent as a
general partner if a state or a court determined that:
- Shamrock Logistics had been conducting business in any state without
compliance with the applicable limited partnership statute; or
- the right or the exercise of the right by the unitholders as a group to
remove or replace our general partner, to approve some amendments to the
partnership agreement, or to take other action under the partnership
agreement constituted participation in the "control" of Shamrock
Logistics' business.
The general partner, under applicable state law, has unlimited liability
for the obligations of the partnership, for example its debts and environmental
liabilities, if any, except for those contractual obligations of the partnership
that are expressly made without recourse to the general partner.
In addition, under some circumstances a unitholder may be liable to
Shamrock Logistics for the amount of a distribution for a period of three years
from the date of the distribution. Please read "The Partnership
Agreement -- Limited Liability" for a discussion of the implications of the
limitations on liability to a unitholder.
TAX RISKS
For a discussion of all of the expected material federal income tax
consequences of owning and disposing of common units, please read "Tax
Considerations."
THE IRS COULD TREAT US AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE THE
CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS.
The federal income tax benefit of an investment in us depends largely on
our classification as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting us. We have, however, received an opinion of counsel
that, based on current law, we will be a partnership for federal income tax
purposes. Opinions of counsel are based on specified factual assumptions and are
not binding on the IRS or any court.
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, currently 35%, distributions
would generally be taxed again to you as corporate distributions, and no income,
gains, losses, or deductions would flow through to you. Because a tax would be
imposed upon us as an entity, the cash available for distribution to you would
be substantially reduced. Treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to you and
thus would likely result in a substantial reduction in the value of the common
units.
Current law may change so as to cause us to be taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then distributions will be decreased to reflect
the impact of that law on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR COMMON UNITS AND THE COSTS OF ANY CONTEST WILL
BE BORNE BY SOME OR ALL OF THE UNITHOLDERS.
We have not requested any ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes or any other
matter affecting us. The IRS may adopt
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<PAGE> 32
positions that differ from counsel's conclusions expressed in this prospectus.
It may be necessary to resort to administrative or court proceedings in an
effort to sustain some or all of counsel's conclusions or positions we take. A
court may not concur with some or all of our conclusions. Any contest with the
IRS may materially and adversely impact the market for the common units and the
prices at which common units trade. In addition, the costs of any contest with
the IRS will be borne directly or indirectly by some or all of the unitholders
and the general partner.
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU DO NOT RECEIVE
ANY CASH DISTRIBUTIONS.
You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your share of our taxable income, whether or not you
receive cash distributions from us. You may not receive cash distributions equal
to your allocable share of our taxable income or even the tax liability that
results from that income. Further, you may incur a tax liability, in excess of
the amount of cash you receive, upon the sale of your common units.
TAX GAIN OR LOSS ON THE DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
Upon a sale of common units, you will recognize gain or loss equal to the
difference between the amount realized and your adjusted tax basis in those
common units. Prior distributions from us in excess of the total net taxable
income you were allocated for a common unit which decreased your tax basis in
the common unit will, in effect, become taxable income if the common unit is
sold at a price greater than your tax basis in the common unit, even if the
price is less than your original cost. A portion of the amount realized whether
or not representing gain, will likely be ordinary income. Furthermore, should
the IRS successfully contest some conventions we use, you could realize more
gain on the sale of common units than would be the case under those conventions
without the benefit of decreased income in prior years.
INVESTORS, OTHER THAN INDIVIDUALS WHO ARE U.S. RESIDENTS, MAY HAVE ADVERSE TAX
CONSEQUENCES FROM OWNING COMMON UNITS.
Investment in common units by some tax-exempt entities, regulated
investment companies (mutual funds) and foreign persons raises issues unique to
these persons. For example, virtually all of the taxable income derived by most
organizations exempt from federal income tax, including individual retirement
accounts and other retirement plans, from the ownership of a common unit will be
unrelated business income and thus will be taxable to the unitholder. Very
little of our income will be qualifying income to a regulated investment
company. Distributions to foreign persons will be reduced by withholding taxes.
Foreign persons will be required to file federal income tax returns and pay tax
on their share of our taxable income.
WE HAVE REGISTERED AS A "TAX SHELTER" WITH THE SECRETARY OF THE TREASURY. THIS
MAY INCREASE THE RISK OF AN IRS AUDIT OF US OR A UNITHOLDER.
We have registered as a "tax shelter" with the Secretary of the Treasury.
As a result, we may be audited by the IRS and tax adjustments could be made. The
rights of a unitholder owning less than a 1% interest in us to participate in
the income tax audit process are very limited. Further, any adjustments in our
tax returns will lead to adjustments in your tax returns and may lead to audits
of your tax returns and adjustments of items unrelated to us. You would bear the
cost of any expenses incurred in connection with an examination of your personal
tax return.
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<PAGE> 33
WE TREAT A PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX BENEFITS AS THE
SELLER. A SUCCESSFUL IRS CHALLENGE COULD ADVERSELY AFFECT THE VALUE OF THE
COMMON UNITS.
Because we cannot match transferors and transferees of common units and
because of other reasons, we will adopt depreciation conventions that do not
conform with all aspects of final Treasury regulations. A successful IRS
challenge to those conventions could adversely affect the amount of tax benefits
available to you or could affect the timing of these tax benefits or the amount
of gain from the sale of common units and could have a negative impact on the
value of the common units or result in audit adjustments to your tax returns.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES AND RETURN FILING
REQUIREMENTS AS A RESULT OF AN INVESTMENT IN COMMON UNITS.
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance, or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. You will likely be
required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which we do business
or own property and may be subject to penalties for failure to comply with those
requirements. We will initially own property and conduct business in Texas,
Colorado, New Mexico, Kansas, and Oklahoma. Of these states, Colorado, New
Mexico, Kansas, and Oklahoma currently impose a personal income tax. It is the
responsibility of each unitholder to file all federal, state and, local tax
returns that may be required of the unitholder. Our counsel has not rendered an
opinion on the state or local tax consequences of an investment in us.
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<PAGE> 34
USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering of
common units will be approximately $74.4 million, assuming an initial public
offering price of $20.00 per unit after deducting the underwriting discount, but
before paying other offering expenses. We anticipate using the net proceeds of
this offering and $63.7 million of borrowings under our $120 million revolving
credit facility to:
- repay all of the $107.7 million in indebtedness due to Ultramar Diamond
Shamrock and its affiliates that we assumed in connection with the
transfer of the assets to us effective July 1, 2000. This indebtedness
bears interest at an annual rate of 8% and matures June 30, 2005;
- make a distribution of approximately $20.5 million to affiliates of
Ultramar Diamond Shamrock for reimbursement of capital expenditures,
incurred with respect to the assets transferred to us, including capital
expenditures to expand the McKee to Colorado Springs and the McKee to El
Paso refined product pipelines;
- pay $4.9 million in fees and expenses incurred in connection with this
offering and the related transactions; and
- have approximately $5.0 million available for working capital and other
general corporate purposes.
We will use the proceeds from any exercise of the underwriters'
over-allotment option to repay a portion of the indebtedness incurred under the
revolving credit facility at closing.
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<PAGE> 35
CAPITALIZATION
The following table shows:
- our historical capitalization as of September 30, 2000; and
- our pro forma capitalization as of September 30, 2000, adjusted to
reflect the offering of the common units, the borrowings under the
revolving credit facility, and the application of the net proceeds we
receive in the offering and these financings in the manner described
under "Use of Proceeds."
This table is derived from, should be read together with and is qualified in its
entirety by reference to our historical and pro forma financial statements and
the accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000
--------------------
ACTUAL PRO FORMA
------ ---------
(in thousands)
<S> <C> <C>
Long-term debt, including current portion................... $ 10,818 $ 74,536
Debt due to parent.......................................... 107,676 --
Equity:
Net partnership equity.................................... 195,191 --
Common unitholders........................................ -- 122,553
Subordinated unitholders.................................. -- 107,707
General partner........................................... -- 3,273
-------- --------
Total equity...................................... 195,191 233,533
-------- --------
Total capitalization.............................. $313,685 $308,069
======== ========
</TABLE>
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<PAGE> 36
DILUTION
On a pro forma basis as of September 30, 2000 after giving effect to the
offering of common units and the related transactions, our net tangible book
value was $228.4 million, or $12.87 per common unit. Purchasers of common units
in this offering will experience substantial and immediate dilution in net
tangible book value per common unit for financial accounting purposes, as
illustrated in the following table.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common unit....... $20.00
Pro forma net tangible book value per common unit before the
offering(1)............................................... 11.53
Increase in net tangible book value per common unit
attributable to new investors............................. 1.34
------
Less: Pro forma net tangible book value per common unit
after the offering(2)................................. 12.87
------
Immediate dilution in net tangible book value per common
unit to new investors..................................... $ 7.13
======
</TABLE>
---------------
(1) Determined by dividing the number of units (4,399,322 common units,
8,999,322 subordinated units and the combined 2% general partner interest,
which has a dilutive effect equivalent to 355,074 units) to be issued to
affiliates of the general partner for their contribution of assets and
liabilities to Shamrock Logistics into the net tangible book value of the
contributed assets and liabilities.
(2) Determined by dividing the total number of units (8,399,322 common units,
8,999,322 subordinated units and the combined 2% general partner interest,
which has a dilutive effect equivalent to 355,074 units) to be outstanding
after the offering into the pro forma net tangible book value of Shamrock
Logistics, after giving effect to the application of the net proceeds of the
offering.
The following table sets forth the number of units that we will issue and
the total consideration contributed to Shamrock Logistics by the general partner
and its affiliates in respect of their units and by the purchasers of common
units in this offering upon consummation of the transactions contemplated by
this prospectus.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
UNITS ACQUIRED ------------------------
-------------------- AMOUNT
NUMBER PERCENT (IN THOUSANDS) PERCENT
------ ------- -------------- -------
<S> <C> <C> <C> <C>
General partner and affiliate(1)(2)......... 13,753,718 77.5% $163,633 67.2%
New investors............................... 4,000,000 22.5 80,000 32.8
---------- ----- -------- -----
Total............................. 17,753,718 100.0% $243,633 100.0%
========== ===== ======== =====
</TABLE>
---------------
(1) Upon the consummation of the transactions contemplated by this prospectus, a
subsidiary of Ultramar Diamond Shamrock will own an aggregate of 4,399,322
common units and 8,999,322 subordinated units and our general partner will
own a 2% general partner interest in Shamrock Logistics having a dilutive
effect equivalent to 355,074 units.
(2) The assets contributed by the general partner and its affiliates were
recorded at historical cost in accordance with generally accepted accounting
principles. Book value of the consideration provided by the general partner
and its affiliates, as of September 30, 2000, after giving effect to the
application of the net proceeds of the offering, is as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C> <C>
Book value of net assets contributed........................ $195,191
Less: Distribution of Shamrock Logistics Operations net
income from July 1, 2000 through September 30, 2000....... (11,041)
Less: Reimbursement of capital expenditures to affiliates of
Ultramar Diamond Shamrock incurred with respect to
transferred assets........................................ (20,517)
--------
Total consideration............................... $163,633
========
</TABLE>
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<PAGE> 37
CASH DISTRIBUTION POLICY
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
General. Within approximately 45 days after the end of each quarter,
beginning with the quarter ending December 31, 2000, we will distribute all of
our available cash to unitholders of record on the applicable record date and to
our general partner.
Definition of Available Cash. Available cash is defined in the glossary and
generally means, for each fiscal quarter, all cash on hand at the end of the
quarter.
- less the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of our general partner to:
- provide for the proper conduct of our business;
- comply with applicable law or any of our debt agreements or other
agreements; or
- provide funds for distributions to unitholders and the general
partner for any one or more of the next four quarters;
- plus all cash on hand from working capital borrowings after the end of
the quarter.
Available Cash is net of all our expenses, including the annual
administrative fee we will pay to Ultramar Diamond Shamrock, the additional
administrative fee as a result of us being a public entity and the cost
reimbursements to our general partner. For a more detailed description, please
read "Management -- Administrative Fee and Reimbursement of Expenses." Available
Cash is also net of our interest expenses.
Intent to Distribute the Minimum Quarterly Distribution. We intend, to the
extent we have sufficient available cash from operating surplus, as defined
below, to distribute to each common unit and subordinated unit at least the
minimum quarterly distribution of $0.60 per quarter or $2.40 per year. We will
adjust the minimum quarterly distribution and the target distribution levels for
the period from the closing of the offering through December 31, 2000 based on
the actual length of this period. However, there is no guarantee that we will
pay the minimum quarterly distribution on the common units in any quarter and we
will be prohibited from making any distributions to unitholders if it would
cause an event of default under our revolving credit facility.
Distribution of Available Cash During Subordination Period. During the
subordination period, which will generally not end prior to December 31, 2005,
to the extent we generate sufficient available cash, the holders of the common
units will have the right to receive the minimum quarterly distribution of $0.60
per unit, plus the amount of any arrearages in payments of minimum quarterly
distributions on the common units from prior quarters, prior to any distribution
of available cash to the holders of subordinated units.
Arrearages. If we distribute less than $0.60 per common unit for any
quarter during the subordination period, holders of common units will be
entitled to arrearages. After the subordination period, the common units will no
longer be entitled to arrearages.
Conversion of Subordinated Units. At the end of the subordination period,
the subordinated units will convert into common units on a one-for-one basis.
The converted subordinated units will then participate pro rata with the other
common units in distributions of available cash.
Event of Default under the Credit Facility. The revolving credit facility
we will enter into simultaneously with the closing of this offering will contain
a prohibition on distributions by Shamrock Logistics Operations to us if any
event of default under the revolving credit facility is continuing or would
result from the distribution. As a result, we would not be able to make
distributions to our unitholders.
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<PAGE> 38
OPERATING SURPLUS AND CAPITAL SURPLUS
General. All cash distributed to unitholders will be characterized either
as "operating surplus" or "capital surplus." Available cash from operating
surplus is distributed differently from available cash from capital surplus.
Definition of Operating Surplus. Operating surplus for any period is
defined in the glossary and generally means:
- our cash balance date on the closing date of this offering, plus
- $10 million, plus
- all of our cash receipts since the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales of assets outside the ordinary
course of business, plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter, less
- all of our operating expenditures since the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures.
Definition of Capital Surplus. Capital surplus is also defined in the
glossary and will generally be generated only by:
- borrowings other than working capital borrowings,
- sales of debt and equity securities, and
- sales or other dispositions of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
distributed in excess of operating surplus, regardless of its source, as capital
surplus. We do not anticipate that we will make significant distributions from
capital surplus.
INCENTIVE DISTRIBUTION RIGHTS
We issued incentive distribution rights to our general partner as partial
consideration for the transfer to us of the Ultramar Diamond Shamrock logistics
business. These rights entitle the general partner to receive increasingly
higher percentages of quarterly distributions, or incentive distributions, as
the amount of cash from operating surplus distributed exceeds the minimum
quarterly distributions and specified target distribution levels. The general
partner may transfer the incentive distribution rights separately from its
general partner interest, subject to restrictions contained in the partnership
agreement.
SUBORDINATION PERIOD
General. During the subordination period, which is defined below, the
common units will have the right to receive distributions of available cash from
operating surplus in an amount equal to the minimum quarterly distribution of
$0.60 per quarter, plus any arrearages in the payment of the minimum quarterly
distribution on the common units from prior quarters, before any distributions
of available cash from operating surplus may be made on the subordinated
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<PAGE> 39
units. The purpose of the subordinated units is to increase the likelihood that
during the subordination period there will be cash available to be distributed
on the common units.
Definition of Subordination Period. The subordination period is defined in
the glossary and will extend until the first day of any quarter beginning after
December 31, 2005 that each of the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the "adjusted operating surplus" generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2% general
partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
If the unitholders remove the general partner without cause, the
subordination period may end before December 31, 2005.
Definition of Adjusted Operating Surplus. "Adjusted operating surplus" for
any period generally means:
- operating surplus generated during that period, less
- any net increase in working capital borrowings during that period, less
- any net reduction in cash reserves for operating expenditures during that
period not relating to an operating expenditure made during that period,
plus
- any net decrease in working capital borrowings during that period, plus
- any net increase in cash reserves for operating expenditures during that
period required by any debt agreement for the repayment of principal,
interest or premium.
Generally speaking, adjusted operating surplus is intended to reflect the
cash generated from operations during a particular period and therefore excludes
net increases in working capital borrowings and net drawdowns of reserves of
cash generated in prior periods.
Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause, the subordination period will end, any
then-existing arrearages on the common units will terminate, and each
subordinated unit will immediately convert into one common unit.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter during the subordination period as follows:
- First, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we have distributed for each outstanding common unit an
amount equal to the minimum quarterly distribution of $0.60 for that
quarter;
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<PAGE> 40
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we have distributed for each outstanding common unit an
amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units for any prior quarters during the
subordination period;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until we have distributed for each outstanding
subordinated unit an amount equal to the minimum quarterly distribution
of $0.60 for that quarter;
- Fourth, 90% to all unitholders, pro rata, 8% to the holders of the
incentive distribution rights, and 2% to the general partner, until we
have distributed for each unit a total amount of $0.66 (the "first target
distribution") for that quarter;
- Fifth, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, and 2% to the general partner, until we
have distributed for each unit a total amount of $0.90 (the "second
target distribution") for that quarter; and
- Thereafter, 50% to all unitholders, pro rata, 48% to the holders of the
incentive distribution rights, and 2% to the general partner.
In each case, the amount of the target distribution set forth above
excludes any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution on the common units.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period as follows:
- First, 98% to the unitholders, pro rata, and 2% to the general partner,
until we have distributed for each outstanding unit an amount equal to
the minimum quarterly distribution of $0.60 for that quarter;
- Second, 90% to all unitholders, pro rata, 8% to the holders of the
incentive distribution rights, and 2% to the general partner, until we
have distributed for each outstanding unit a total amount of $0.66 for
that quarter;
- Third, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, and 2% to the general partner, until we
have distributed for each outstanding unit a total amount of $0.90 for
that quarter; and
- Thereafter, 50% to all unitholders, pro rata, 48% to the holders of the
incentive distribution rights, and 2% to the general partner.
TABULAR ILLUSTRATION OF DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS
The following table illustrates the amount of available cash from operating
surplus that would be distributed on a yearly basis to the unitholders and the
general partner at each of the target distribution levels. This table is based
on the 8,399,322 common units and the 8,999,322 subordinated units to be
outstanding immediately after the offering and assumes that there are no
arrearages in payment of the minimum quarterly distribution on the common units.
The "Marginal Percentage" columns under "Yearly Distributions" in the table
below show the percentage interest of the unitholders and the general partner in
available cash from operating surplus that would be distributed on a yearly
basis between the indicated target distribution levels. The "Amount" columns
under "Yearly Distributions" in the table below show the cumulative amount
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<PAGE> 41
that would be distributed on a yearly basis to the unitholders and the general
partner if available cash from operating surplus equaled the indicated target
distribution level.
<TABLE>
<CAPTION>
YEARLY DISTRIBUTIONS
---------------------------------------------------
UNITHOLDERS GENERAL PARTNER
QUARTERLY ------------------------ ------------------------
AMOUNT PER AMOUNT MARGINAL AMOUNT MARGINAL
TARGET DISTRIBUTION UNIT (THOUSANDS) PERCENTAGE (THOUSANDS) PERCENTAGE
------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution............... $ 0.60 $ 41,757 98% $ 852 2%
First Target Distribution.... 0.66 45,932 90% 1,316 10%
Second Target Distribution... 0.90 62,635 75% 6,884 25%
Thereafter................... above 0.90 -- 50% -- 50%
</TABLE>
The amounts and percentages shown under "Yearly Distributions -- General
Partner" include its combined 2% general partner interest and the general
partner's incentive distribution rights. The amounts and percentages shown under
"Yearly Distributions -- Unitholders" include amounts distributable on both the
common units and the subordinated units.
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we have distributed for each common unit that was issued in this
offering, an amount of available cash from capital surplus equal to the
initial public offering price;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we have distributed for each common unit that was issued
in the offering, an amount of available cash from capital surplus equal
to any unpaid arrearages in payment of the minimum quarterly distribution
on the common units; and
- Thereafter, all distributions of available cash from capital surplus will
be distributed as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per unit
is referred to as the "unrecovered initial unit price." Each time a distribution
of capital surplus is made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as the corresponding
reduction in the unrecovered initial unit price. Because distributions of
capital surplus will reduce the minimum quarterly distribution, after any such
distributions have been made it may be easier for the general partner to receive
incentive distributions and for the subordinated units to convert into common
units. However, any distribution of capital surplus before the unrecovered
initial unit price is reduced to zero cannot be applied to the payment of the
minimum quarterly distribution or any arrearages.
Once we have distributed capital surplus on a unit issued in this offering
in an amount equal to the initial unit price, the minimum quarterly distribution
and the target distribution levels will be reduced to zero and all future
distributions will be made from operating surplus, with 50% being paid to the
holders of units, 48% to the holders of the incentive distribution rights and 2%
to the general partner.
ADJUSTMENT OF THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, we will
proportionately adjust the minimum quarterly
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<PAGE> 42
distribution, target distribution levels, unrecovered initial unit price, the
number of common units issuable during the subordination period without a
unitholder vote and the number of common units into which a subordinated unit is
convertible if we combine our units into fewer units or subdivide our units into
a greater number of units. In addition, if legislation is enacted or if existing
law is modified or interpreted in a manner that causes us to become taxable as a
corporation or otherwise subject to taxation as an entity for federal, state or
local income tax purposes, we will reduce the minimum quarterly distribution and
the target distribution levels by multiplying the same by one minus the sum of
the highest marginal federal corporate income tax rate that could apply and any
increase in the effective overall state and local income tax rates. For example,
if we became subject to a maximum marginal federal, and effective state and
local, income tax rate of 38%, then the minimum quarterly distribution and the
target distributions levels would each be reduced to 62% of their previous
levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon the
liquidation of Shamrock Logistics, to the extent required to permit common
unitholders to receive their unrecovered initial unit price plus the minimum
quarterly distribution for the quarter during which liquidation occurs plus any
unpaid arrearages in payment of the minimum quarterly distribution on the common
units. However, there may not be sufficient gain upon liquidation of Shamrock
Logistics to enable the holder of common units to fully recover all of these
amounts, even though there may be cash available for distribution to the holders
of subordinated units. Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive distribution rights
of the general partner.
Manner of Adjustments for Gain. The manner of the adjustment is as provided
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain, or unrealized gain attributable
to assets distributed in kind, to the partners in the following manner:
- First, to the general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until the capital account for each common unit is equal to the
sum of:
(1) the unrecovered initial unit price for that common unit; plus
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum quarterly distribution
on that common unit;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until the capital account for each subordinated unit is
equal to the sum of:
(1) the unrecovered initial unit price on that subordinated unit; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
36
<PAGE> 43
- Fourth, 90% to all unitholders, pro rata, 8% to the holders of the
incentive distribution rights, and 2% to the general partner, until there
has been allocated under this paragraph an amount per unit equal to:
(1) the sum of the excess of the first target distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the first target distribution per
unit that was distributed 90% to the units, pro rata, and 10% to the
general partner for each quarter of our existence;
- Fifth, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, and 2% to the general partner, until there
has been allocated under this paragraph an amount per unit equal to:
(1) the sum of the excess of the second target distribution per unit over
the first target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the second target distribution per
unit that was distributed 75% to the units, pro rata, 23% to the
holders of the incentive distribution rights, and 2% to the general
partner for each quarter of our existence; and
- Thereafter, 50% to all unitholders, pro rata, 48% to the holders of the
incentive distribution rights and 2% to the general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.
Manner of Adjustments for Losses. Upon our liquidation, we will generally
allocate any loss to the general partner and the unitholders in the following
manner:
- First, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to the general partner, until
the capital accounts of the holders of the subordinated units have been
reduced to zero;
- Second, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to the general partner, until
the capital accounts of the common unitholders have been reduced to zero;
and
- Thereafter, 100% to the general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first bullet point above will no longer be applicable.
Interim Adjustments to Capital Accounts. We will make interim adjustments
to capital accounts at the time we issue additional interests in Shamrock
Logistics or make distributions of property. These adjustments will be based on
the fair market value of the interests or the property distributed. We will
allocate any gain or loss resulting from the adjustments to the unitholders and
the general partner in the same manner as gain or loss is allocated upon
liquidation. If positive interim adjustments are made to the capital accounts,
we will allocate any later negative adjustments to the capital accounts
resulting from the issuance of additional Shamrock Logistics' interests, our
distributions of property or upon our liquidation, in a manner which results, to
the extent possible, in the capital account balances of the general partner
equaling the amount that would have been the general partner's capital account
balances if earlier positive adjustments to the capital accounts had not been
made.
37
<PAGE> 44
CASH AVAILABLE FOR DISTRIBUTION
We believe that based on the amount of working capital that we expect to
have at the time we commence operations and our ability to borrow working
capital funds under the revolving credit facility, we will have sufficient
available cash from operating surplus to allow us to make the full minimum
quarterly distribution on all the outstanding units for each quarter through
December 31, 2001.
Assumptions. Our belief is based on the following assumptions:
- The tariff rates we charge will not decline from the tariff rates in
effect on January 1, 2000.
- The average daily throughput in our pipelines and terminals will increase
at least 1% annually based on increasing consumer demand for refined
products. In addition, we expect to transport, on behalf of Ultramar
Diamond Shamrock, a higher percentage of refined products over longer,
higher tariff pipelines as a result of expected increasing demand for
refined products in growing market areas such as Denver, Colorado,
Laredo, Texas, and Tucson and Phoenix, Arizona (through the McKee to El
Paso refined product pipeline).
- General and administrative expenses, which include the annual
administrative fee of $5.2 million to be paid to Ultramar Diamond
Shamrock and its affiliates for reimbursement of the overhead and
administrative expenses incurred by them on our behalf, will increase by
approximately 1.5% annually. In addition, we will incur additional
general and administrative expenses of approximately $1.5 million
annually as a result of being a publicly held entity. These additional
expenses include the cost of tax return preparation, annual and quarterly
reports to unitholders, audit fees, investor relations and registrar and
transfer agent fees.
- We will incur additional interest expenses of approximately $5.2 million
annually as a result of our borrowings under the revolving credit
facility at closing, assuming that the underwriters' over-allotment
option is not exercised. This interest expense will be in addition to the
interest expense of approximately $700,000 incurred on the $10.8 million
indebtedness owed to the Port of Corpus Christi Authority.
- Operating expenses, such as payroll, utilities, maintenance and
insurance, including the direct expenses to be reimbursed to Ultramar
Diamond Shamrock and its affiliates which totaled $9.7 million in 1999 on
a pro forma basis, will increase in the aggregate by approximately 3%
annually.
- Ad valorem taxes and depreciation and amortization expense will not
change significantly from the annualized levels incurred in the first
nine months of 2000.
- No material accidents or other events will occur that disrupt our
pipelines, terminalling, or storage facilities or pipelines with which
they have significant interconnections.
- Market, regulatory, and overall economic conditions will not change
substantially. Although we are not directly exposed to any risks
associated with fluctuating commodities prices, these risks will
indirectly influence our results of operations.
Our assumptions above do not include the exercise of the options to purchase the
Wichita Falls to McKee crude oil pipeline and storage facility, the Ringgold
crude oil storage facility or the Laredo to Nuevo Laredo refined products
pipeline, which we do not intend to exercise until late 2001 and early 2002.
Furthermore, incremental cash flow from these expansion projects is expected to
increase our ability to make the minimum quarterly distributions, even after
consideration of additional debt service costs.
38
<PAGE> 45
Although we believe our assumptions are within a range of reasonableness,
whether the assumptions are realized is not within our control or the control of
our general partner and cannot be predicted with any degree of certainty. If our
assumptions are not realized, the actual available cash from operating surplus
that we generate could be substantially less than that currently expected and
could, therefore, be insufficient to permit us to make cash distributions at the
levels described above. Accordingly, we may not be able to make distributions of
the minimum quarterly distribution or any other amounts.
Shamrock Logistics' Pro Forma Available Cash. The amount of available cash
from operating surplus we need to pay the minimum quarterly distribution for one
quarter and for four quarters on the common units, the subordinated units, and
the general partner interest to be outstanding immediately after the
transactions is approximately:
<TABLE>
<CAPTION>
ONE FOUR
QUARTER QUARTERS
------- --------
(in thousands)
<S> <C> <C>
Common Units................................................ $ 5,039 $20,158
Related General Partner Distributions..................... 103 412
Subordinated Units.......................................... 5,400 21,598
Related General Partner Distributions..................... 110 441
------- -------
Total............................................. $10,652 $42,609
======= =======
</TABLE>
The amount of available cash needed to pay the minimum quarterly
distribution for four quarters on the common units, the subordinated units, and
the general partner interests to be outstanding immediately after the offering
is approximately $42.6 million. If we had completed the transactions
contemplated in this prospectus on January 1, 1999, pro forma available cash
from operating surplus generated during 1999, as adjusted to reflect our current
tariff rates, would have been approximately $50.8 million, as shown on Appendix
D. If we had completed the transactions on October 1, 1999, the amount of pro
forma available cash from operating surplus generated for the twelve months
ended September 30, 2000, as adjusted to reflect our current tariff rates, would
have been $51.5 million. If we had completed the transactions on January 1,
2000, the amount of pro forma available cash from operating surplus generated
for the nine months ended September 30, 2000, as adjusted to reflect our current
tariff rates, would have been $37.9 million. These amounts would have been
sufficient in each case to allow us to pay the full minimum quarterly
distribution on the common units, the subordinated units, and the related
distribution on the general partner interest during all these periods. These
amounts do not include approximately $1.5 million of incremental general and
administrative expenses that we expect to incur annually as a result of being a
public entity.
We derived the amounts of pro forma available cash from operating surplus
shown above from our pro forma financial statements in the manner described in
Appendix D. The pro forma adjustments are based upon currently available
information and specific estimates and assumptions. The pro forma financial
statements do not purport to present our results of operations had the
transactions contemplated in this prospectus actually been completed as of the
dates indicated. Furthermore, available cash from operating surplus as defined
in the partnership agreement is a cash accounting concept, while our pro forma
financial statements have been prepared on an accrual basis. As a result, the
amount of pro forma available cash from operating surplus should only be viewed
as a general indication of the amount of available cash from operating surplus
that we might have generated had Shamrock Logistics been formed in earlier
periods. For definitions of available cash and operating surplus, please read
the glossary.
39
<PAGE> 46
SELECTED HISTORICAL AND OPERATING DATA OF
THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
AND SHAMROCK LOGISTICS OPERATIONS,
AND PRO FORMA FINANCIAL AND OPERATING DATA OF SHAMROCK LOGISTICS
The following tables set forth selected historical financial and operating
data of the Ultramar Diamond Shamrock logistics business and Shamrock Logistics
Operations, and pro forma financial and operating data of Shamrock Logistics, in
each case for the periods and as of the dates indicated. The selected historical
financial data set forth below for the Ultramar Diamond Shamrock logistics
business as of and for the years ended December 31, 1996, 1997, 1998, and 1999
is derived from the audited financial statements of the Ultramar Diamond
Shamrock logistics business. The selected historical financial data below as of
and for the year ended December 31, 1995 and as of and for the nine months ended
September 30, 1999 and 2000 is derived from the unaudited financial statements
of the Ultramar Diamond Shamrock logistics business and Shamrock Logistics
Operations.
The pro forma financial statements of Shamrock Logistics give pro forma
effect to the transfer of Shamrock Logistics Operations to Shamrock Logistics
and the related transactions in connection with the closing of this offering as
described more fully in the notes to the pro forma financial statements. The
summary pro forma financial and operating data presented below as of and for the
year ended December 31, 1999 and as of and for the nine months ended September
30, 2000 is derived from the unaudited pro forma financial statements. The pro
forma balance sheet data assumes that the offering and the related transactions
occurred as of September 30, 2000 and the pro forma statement of income data
assumes the offering and the related transactions occurred on January 1, 1999
and 2000, respectively.
The historical and pro forma financial statements, prior to 2000, included
in the prospectus have been prepared utilizing the historical pipeline tariff
rates and terminalling fees in effect during the periods presented. The
historical tariff rates were based on initial pipeline cost and were not revised
upon subsequent expansions or increases or decreases in throughput levels. As a
result, the Ultramar Diamond Shamrock logistics business filed revised tariff
rates on many of its crude oil and refined product pipelines to reflect the
total cost of the pipeline, the current throughput capacity, the current
throughput utilization, and other market conditions. The revised tariff rates
were implemented effective January 1, 2000 and resulted in lower revenues. Prior
to 1999, the Ultramar Diamond Shamrock logistics business did not charge a
separate terminalling fee for terminalling services at its refined product
terminals. Terminalling revenues were recognized based on total costs incurred
at the terminals. These costs were charged back to the related refinery.
Beginning January 1, 1999, the Ultramar Diamond Shamrock logistics business
began to charge a separate terminalling fee at its refined product terminals.
The historical and pro forma financial statements included in this
prospectus for periods prior to January 1, 2000 do not reflect the revised
tariff rates, and the historical financial statements for periods prior to
January 1, 1999 do not reflect the establishment of terminalling fees effective
January 1, 1999. However, in the tables below we have included a pro forma as
adjusted column presenting information for the year ended December 31, 1999
giving effect to the formation of Shamrock Logistics and the consummation of
this offering and related transactions, adjusted to reflect the revised tariff
rates, and an as adjusted column for the nine months ended September 30, 1999 to
give effect to the revised tariff rates.
We define Adjusted EBITDA as operating income, less gain on sale of
property, plant, and equipment, plus depreciation and amortization, plus
distributions from Skelly-Belvieu Pipeline Company, of which we own 50%, and
excluding the impact of volumetric expansions, contractions, and measurement
discrepancies in our pipelines. Beginning July 1, 2000, the impact of these
exclusions is borne by the shippers in our pipelines and is therefore not
reflected in operating income. Adjusted EBITDA provides additional information
for evaluating our ability to
40
<PAGE> 47
make the minimum quarterly distribution and is presented solely as a
supplemental measure. You should not consider Adjusted EBITDA as an alternative
to net income, income before income taxes, cash flows from operations, or any
other measure of financial performance presented in accordance with generally
accepted accounting principles. Our Adjusted EBITDA may not be comparable to
EBITDA or similarly titled measures of other entities as other entities may not
calculate EBITDA in the same manner as we do. Excluded from Adjusted EBITDA is
the impact of volumetric expansions, contractions, measurement discrepancies in
our pipelines of a $250,000 loss in 1995, a $838,000 loss in 1996, a $1,647,000
loss in 1997, a $555,000 loss in 1998, a $378,000 loss in 1999, a $62,000 gain
in the first nine months of 1999 and a $916,000 loss in the first nine months of
2000.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets to maintain the existing operating
capacity of existing assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand our operating capacity of
existing assets, whether through construction or acquisition. Repair and
maintenance expenses associated with existing assets that are minor in nature
and do not extend the useful life of existing assets are charged to operating
expenses as incurred. The capital expenditure amounts in the following table
exclude the capital expenditures relating to our interest in the Skelly-Belvieu
Pipeline Company, which have totaled approximately $275,000 for the past five
years.
Use of the term throughput in this prospectus generally refers to the crude
oil or refined product barrels, as applicable, that pass through each pipeline,
even if those barrels also are transported in another of our pipelines for which
we received a separate tariff. In the case of four pipelines, the pipeline
transports barrels relating to two tariff rates, one of which begins at this
pipeline's origin and ends at this pipeline's destination, and one of which is a
longer tariff route with an origin or destination in another pipeline of ours
which connects to this pipeline. Throughput for those pipelines reflect only the
barrels subject to the tariff route beginning at the pipeline's origin and
ending at the pipeline's destination. To accurately determine the actual
capacity utilization of those pipelines, as well as aggregate capacity
utilization, all barrels passing through the pipelines have been taken into
account for purposes of calculating capacity utilization.
The pro forma financial information adjusts the historical financial
information to give effect to the formation of Shamrock Logistics and the
completion of this offering and related transactions. The pro forma as adjusted
financial information further adjusts the pro forma information to give effect
to the revised tariff rates. The as adjusted financial information adjusts the
historical financial information to give effect to the revised tariff rates.
41
<PAGE> 48
The following tables are derived from, should be read together with, and
are qualified in their entirety by reference to the historical and pro forma
financial statements and the accompanying notes included elsewhere in this
prospectus. This table should also be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
amounts in the tables below, except for the operating data, the per unit data,
and barrel information, are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
YEAR ENDED DECEMBER 31, -----------------------
---------------------------------------------------- PRO FORMA
1995 1996 1997(1) 1998 1999 PRO FORMA AS ADJUSTED
---- ---- ------- ---- ---- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues............................. $ 46,375 $ 71,421 $ 84,881 $ 97,883 $109,773 $109,773 $ 87,881
Operating costs and expenses:
Operating expenses................. 18,066 26,743 24,042 28,027 24,248 24,248 24,248
General and administrative
expenses......................... 4,358 4,724 4,761 4,552 4,698 4,698 4,698
Depreciation and amortization...... 6,573 9,879 11,328 12,451 12,318 12,318 12,318
Taxes other than income taxes...... 1,963 3,530 4,235 4,152 4,765 4,765 4,765
-------- -------- -------- -------- -------- -------- --------
Total operating costs and
expenses................... 30,960 44,876 44,366 49,182 46,029 46,029 46,029
Gain on sale of property, plant and
equipment(2)....................... -- -- -- 7,005 2,478 2,478 2,478
-------- -------- -------- -------- -------- -------- --------
Operating income..................... 15,415 26,545 40,515 55,706 66,222 66,222 44,330
Interest expense................... -- -- (158) (796) (777) (5,930) (5,930)
Equity income from
Skelly-Belvieu................... 3,184 2,990 3,025 3,896 3,874 3,874 3,874
-------- -------- -------- -------- -------- -------- --------
Income before income taxes........... 18,599 29,535 43,382 58,806 69,319 64,166 42,274
Provision for income taxes......... (7,086) (11,253) (16,559) (22,517) (26,521) -- --
-------- -------- -------- -------- -------- -------- --------
Net income........................... $ 11,513 $ 18,282 $ 26,823 $ 36,289 $ 42,798 $ 64,166 $ 42,274
======== ======== ======== ======== ======== ======== ========
Pro forma net income per unit........ $ 3.61 $ 2.38
======== ========
Pro forma weighted average limited
partners' units outstanding........ 17,399 17,399
======== ========
OTHER FINANCIAL DATA:
Adjusted EBITDA...................... $ 26,344 $ 40,413 $ 57,499 $ 65,399 $ 80,678 $ 80,678 $ 58,786
Distributions from Skelly-Belvieu.... 4,106 3,151 4,009 3,692 4,238 4,238 4,238
Net cash provided by operating
activities......................... 19,355 28,652 44,731 44,950 49,977
Net cash provided by (used in)
investing activities............... (74,775) (42,409) (52,141) 18,395 6,865
Net cash provided by (used in)
financing activities............... 55,420 13,757 7,410 (63,345) (56,842)
Maintenance capital expenditures..... 3,407 3,745 633 2,345 2,060 2,060 2,060
Expansion capital expenditures....... 75,474 41,815 12,359 9,952 7,313 7,313 7,313
Total capital expenditures... 78,881 45,560 12,992 12,297 9,373 9,373 9,373
OPERATING DATA:
Crude oil pipeline throughput
(barrels/day)...................... 140,103 157,963 282,736 265,243 280,041 280,041 280,041
Refined product pipeline throughput
(barrels/day)...................... 184,637 210,548 257,183 268,064 297,397 297,397 297,397
Refined product terminal throughput
(barrels/day)...................... 109,506 131,504 136,454 144,093 161,340 161,340 161,340
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997(1) 1998 1999
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net property, plant, and equipment.......................... $243,076 $280,084 $319,169 $297,121 $284,954
Total assets................................................ 262,032 300,011 346,082 321,002 308,213
Long-term debt, including current portion................... 12,000 12,000 11,738 11,455 11,102
Net parent investment/partners' equity...................... 227,364 260,731 295,403 268,497 254,806
</TABLE>
---------------
(1) On September 25, 1997, Ultramar Diamond Shamrock acquired Total Petroleum
(North America) Ltd. in a purchase business combination. The purchase price
was allocated to the various assets (including three refineries, 550
42
<PAGE> 49
convenience stores and various crude oil and refined product pipeline and
storage assets) and liabilities acquired based on their fair value. The
acquired assets included in the Ultramar Diamond Shamrock logistics business
consist of pipelines and a crude oil storage facility serving the Ardmore
refinery, which were allocated $43,158,000 of the purchase price, including
$5,994,000 of goodwill. The results of operations of the crude oil and
refined product pipelines and the crude oil storage facility serving the
Ardmore refinery have been included from the date of acquisition.
(2) In March 1998, the Ultramar Diamond Shamrock logistics business recognized a
gain on the sale of a 25% interest in the McKee to El Paso refined product
pipeline and the El Paso refined product terminal to Phillips Petroleum
Company. In August 1999, the Ultramar Diamond Shamrock logistics business
recognized a gain on the sale of an additional 8.33% interest in the McKee
to El Paso refined product pipeline and terminal to Phillips Petroleum
Company.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, -----------------------
------------------- 1999 2000
1999 2000 AS ADJUSTED PRO FORMA
---- ---- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................... $ 81,535 $ 69,406 $ 65,397 $ 69,406
Operating costs and expenses:
Operating expenses........................................ 17,183 22,465 17,183 22,465
General and administrative expenses....................... 3,523 3,771 3,523 3,771
Depreciation and amortization............................. 9,162 9,889 9,162 9,889
Taxes other than income taxes............................. 3,624 3,318 3,624 3,318
-------- -------- -------- --------
Total operating costs and expenses.................. 33,492 39,443 33,492 39,443
-------- -------- -------- --------
Gain on sale of property, plant and equipment............. 2,478 -- 2,478 --
Operating income............................................ 50,521 29,963 34,383 29,963
Interest expense.......................................... (669) (2,808) (669) (4,519)
Equity income from Skelly-Belvieu......................... 2,370 3,044 2,370 3,044
-------- -------- -------- --------
Income before income taxes.................................. 52,222 30,199 36,084 28,488
Benefit (provision) for income taxes...................... (19,980) 30,812 (13,806) --
-------- -------- -------- --------
Net income.................................................. $ 32,242 $ 61,011 $ 22,278 $ 28,488
======== ======== ======== ========
Pro forma net income per unit............................... $ 1.60
========
Pro forma weighted average limited partners' units
outstanding............................................... 17,399
========
OTHER FINANCIAL DATA:
Adjusted EBITDA............................................. $ 59,751 44,256 43,613 44,256
Distributions from Skelly-Belvieu........................... 2,608 3,488 2,608 3,488
Net cash provided by operating activities................... 40,420 18,140
Net cash provided by (used in) investing activities......... 8,178 (2,398)
Net cash used in financing activities....................... (48,598) (15,741)
Maintenance capital expenditures............................ 1,842 1,804 1,842 1,804
Expansion capital expenditures.............................. 4,588 4,082 4,588 4,082
Total capital expenditures.......................... 6,430 5,886 6,430 5,886
OPERATING DATA:
Crude oil pipeline throughput (barrels/day)................. 277,930 296,413 277,930 296,413
Refined product pipeline throughput (barrels/day)........... 294,799 315,807 294,799 315,807
Refined product terminal throughput (barrels/day)........... 159,367 167,650 159,367 167,650
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------
1999 2000 2000
---- ---- ----
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net property, plant and equipment........................... 285,092 281,176 281,176
Total assets................................................ 308,683 319,035 313,419
Long-term debt, including current portion................... 11,149 118,494 74,536
Net parent investment/partners' equity...................... 252,447 195,191 233,533
</TABLE>
43
<PAGE> 50
IMPACT OF TARIFF RATE AND TERMINALLING REVENUE CHANGES
TARIFF RATE CHANGES
The following tables reflect the overall impact, if any, to revenues of the
revised tariff rates using historical throughput barrels, including the impact,
if any, on each of our principal crude oil and refined product pipelines. The
amounts in the tables below are in thousands. As adjusted revenue amounts are
unaudited.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
HISTORICAL AS ADJUSTED (DECREASE)
REVENUES REVENUES OR INCREASE
---------- ----------- -----------
<S> <C> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers............................ $ 7,479 $10,884 $ 3,405
Wasson to Ardmore(1) (both pipelines)..................... -- 2,534 2,534
Ringgold to Wasson(1)..................................... -- 3,591 3,591
Dixon to McKee............................................ 3,243 2,244 (999)
Other crude oil pipelines(1).............................. 2,209 3,348 1,139
-------- ------- --------
Total crude oil pipelines.......................... 12,931 22,601 9,670
-------- ------- --------
Refined Product Pipelines(2):
McKee to Colorado Springs to Denver....................... 12,796 12,580 (216)
McKee to El Paso.......................................... 42,563 13,855 (28,708)
Amarillo to Albuquerque................................... 3,811 3,811 --
Ardmore to Wynnewood...................................... 4,882 4,882 --
Three Rivers to Laredo.................................... 7,293 2,762 (4,531)
Three Rivers to San Antonio............................... 2,121 2,730 609
McKee to Amarillo (both pipelines) to Abernathy........... 2,989 2,989 --
McKee to Denver (Phillips)................................ 2,769 2,769 --
Other refined product pipelines........................... 2,380 3,664 1,284
-------- ------- --------
Total refined product pipelines.................... 81,604 50,042 (31,562)
Refined Product Terminals................................... 15,238 15,238 --
-------- ------- --------
Total pipelines and terminals...................... $109,773 $87,881 $(21,892)
======== ======= ========
</TABLE>
44
<PAGE> 51
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------
HISTORICAL AS ADJUSTED (DECREASE)
REVENUES REVENUES OR INCREASE
---------- ----------- -----------
<S> <C> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers............................ $ 5,620 $ 8,076 $ 2,456
Wasson to Ardmore(1) (both pipelines)..................... -- 1,850 1,850
Ringgold to Wasson(1)..................................... -- 2,914 2,914
Dixon to McKee............................................ 2,418 1,696 (722)
Other crude oil pipelines(1).............................. 1,576 2,403 827
------- ------- --------
Total crude oil pipelines.......................... 9,614 16,939 7,325
------- ------- --------
Refined Product Pipelines(2):
McKee to Colorado Springs to Denver....................... 10,135 9,840 (295)
McKee to El Paso.......................................... 31,523 10,234 (21,289)
Amarillo to Albuquerque................................... 2,896 2,896 --
Ardmore to Wynnewood...................................... 3,499 3,499 --
Three Rivers to Laredo.................................... 5,291 2,004 (3,287)
Three Rivers to San Antonio............................... 1,587 2,044 457
McKee to Amarillo (both pipelines) to Abernathy........... 2,170 2,170 --
McKee to Denver (Phillips)................................ 2,083 2,083 --
Other refined product pipelines........................... 1,763 2,714 951
------- ------- --------
Total refined product pipelines.................... 60,947 37,484 (23,463)
Refined Product Terminals................................... 10,974 10,974 --
------- ------- --------
Total pipelines and terminals...................... $81,535 $65,397 $(16,138)
======= ======= ========
</TABLE>
---------------
(1) Tariff revenues were not recognized for the Ardmore crude oil pipelines
prior to 2000, because the Ultramar Diamond Shamrock logistics business did
not charge Ultramar Diamond Shamrock for the transportation of crude oil to
the Ardmore refinery. Had the Ultramar Diamond Shamrock logistics business
charged for these services, revenues would have increased $6,377,000 for the
year ended December 31, 1999 and $4,853,000 for the nine months ended
September 30, 1999, using revised tariff rates multiplied by the historical
throughput barrels.
(2) The tariff rates for the Skellytown to Mont Belvieu refined product
pipeline, which is owned by Skelly-Belvieu Pipeline Company, of which we own
50% and account for under the equity method, were not revised.
TERMINALLING REVENUE CHANGES
Prior to 1999, the Ultramar Diamond Shamrock logistics business did not
charge a separate terminalling fee for terminalling services at its refined
product terminals. Terminalling revenues were recognized based on total costs
incurred at the terminals, which costs were charged back to the related
refinery. Beginning January 1, 1999, the Ultramar Diamond Shamrock logistics
business began to charge a separate terminalling fee at its refined product
terminals.
The terminalling fee was established at a rate that the Ultramar Diamond
Shamrock logistics business believes is competitive with the rate charged by
other companies for terminalling similar refined products. Because the newly
established terminalling fee includes a profit margin, terminalling revenues
have increased as reflected in the table below. The increase in terminalling
revenue in the table below is determined using the historical throughput barrels
for all the refined product terminals multiplied by the terminalling fee, less
the historical terminalling revenue recognized.
SUMMARY OF REVENUE CHANGES
If the revised tariff rates and the terminalling fee had been implemented
effective January 1, 1997, historical revenues, operating income, net income and
Adjusted EBITDA would have been as follows for the periods presented. The
revised tariff rates and terminalling fee were in effect
45
<PAGE> 52
during 2000. Therefore, no adjustment was necessary for the nine months ended
September 30, 2000. The pro forma net income as adjusted and the pro forma net
income as adjusted per limited partner unit is based on the pro forma ownership
interest expected to be outstanding at the closing of the offering. The general
partner interest is expected to be 2% and limited partners' interest is expected
to be 98%, consisting of the 17,398,644 outstanding common and subordinated
units. The amounts in the table below are unaudited and, except for per unit
data, are in thousands.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------
1997 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues -- historical............................. $ 84,881 $ 97,883 $109,773 $ 81,535
Decrease in tariff revenues...................... (16,197) (17,067) (21,892) (16,138)
Increase in terminalling revenues................ 1,778 1,649 -- --
-------- -------- -------- --------
Net decrease................................... (14,419) (15,418) (21,892) (16,138)
-------- -------- -------- --------
Revenues -- as adjusted............................ $ 70,462 $ 82,465 $ 87,881 $ 65,397
======== ======== ======== ========
Operating income -- historical..................... $ 40,515 $ 55,706 $ 66,222 $ 50,521
Net decrease..................................... (14,419) (15,418) (21,892) (16,138)
-------- -------- -------- --------
Operating income -- as adjusted.................... $ 26,096 $ 40,288 $ 44,330 $ 34,383
======== ======== ======== ========
Net income -- historical........................... $ 26,823 $ 36,289 $ 42,798 $ 32,242
Net decrease, net of income taxes................ (8,914) (9,514) (13,516) (9,964)
-------- -------- -------- --------
Net income -- as adjusted.......................... $ 17,909 $ 26,775 $ 29,282 $ 22,278
======== ======== ======== ========
Adjusted EBITDA -- historical...................... $ 57,499 $ 65,399 $ 80,678 $ 59,751
Net decrease..................................... (14,419) (15,418) (21,892) (16,138)
-------- -------- -------- --------
Adjusted EBITDA -- as adjusted(1).................. $ 43,080 $ 49,981 $ 58,786 $ 43,613
======== ======== ======== ========
Pro forma minimum quarterly distributions.......... $ 42,609 $ 42,609 $ 42,609 $ 31,956
======== ======== ======== ========
Pro forma net income as adjusted
Limited partners................................. $ 23,334 $ 37,470 $ 41,429 $ 31,575
General partner.................................. 476 765 845 644
-------- -------- -------- --------
Total(2).................................. $ 23,810 $ 38,235 $ 42,274 $ 32,219
======== ======== ======== ========
Pro forma net income as adjusted per limited
partner units.................................... $ 1.34 $ 2.15 $ 2.38 $ 1.81
======== ======== ======== ========
</TABLE>
---------------
(1) Adjusted EBITDA as adjusted is greater than the pro forma minimum quarterly
distributions for the year ended December 31, 1998 which is due to the
additional earnings generated from the Ardmore pipelines acquired on
September 25, 1997 and the additional earnings generated from the Colorado
Springs to Denver refined product pipeline completed in 1997. Adjusted
EBITDA as adjusted over the pro forma minimum quarterly distributions for
the year ended December 31, 1999 and the nine months ended September 30,
1999 as compared to the year ended December 31, 1998 is due to increased
throughput in the pipelines and terminals in 1999 as compared to 1998.
(2)Pro forma net income as adjusted is greater than net income as adjusted
because pro forma net income as adjusted excludes federal and state income
taxes, which are the responsibility of the unitholders and not Shamrock
Logistics, the effect of which is offset in part by an increase in interest
expense which is higher, on a pro forma basis, due to the additional
borrowings under the revolving credit facility at the closing of the
offering.
46
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations for the Ultramar Diamond Shamrock logistics business and Shamrock
Logistics Operations should be read in conjunction with the historical financial
statements of the Ultramar Diamond Shamrock logistics business, and Shamrock
Logistics Operations and the pro forma financial statements of Shamrock
Logistics included elsewhere in this prospectus. For more detailed information
regarding the basis of presentation for the following information, see the notes
to the historical and pro forma financial statements.
INTRODUCTION
Shamrock Logistics owns and operates crude oil and refined product
pipeline, terminalling, and storage assets that support Ultramar Diamond
Shamrock's refining and marketing operations located in Texas, Oklahoma,
Colorado, New Mexico, and Arizona.
Historically, these pipeline, terminalling, and storage assets have been
owned by several wholly-owned subsidiaries, partnerships, and joint ventures of
Ultramar Diamond Shamrock. Effective July 1, 2000, Ultramar Diamond Shamrock
transferred the assets and liabilities of the Ultramar Diamond Shamrock
logistics business to Shamrock Logistics Operations by asset conveyances and
mergers.
The assets and liabilities and related operations transferred to us are
referred to as the Ultramar Diamond Shamrock logistics business. The historical
financial statements included in this prospectus reflect the assets and
liabilities and related operations of the Ultramar Diamond Shamrock logistics
business. Ultramar Diamond Shamrock retained selected assets described in more
detail under "Business -- Assets Retained by Ultramar Diamond Shamrock"
including refined product pipelines and terminals which have experienced
declining profitability over the last several years, crude oil gathering
pipelines originating in older crude oil producing fields, and several assets we
have the option to buy when their construction or expansion is completed. Please
read "Business -- Recently Completed and Planned Expansion Projects -- Planned
Expansion Projects" for a description of these assets and our options to buy
them. These retained assets have been excluded from the Ultramar Diamond
Shamrock logistics business.
OVERVIEW
The pipeline, terminalling, and storage operations of the Ultramar Diamond
Shamrock logistics business have historically supported the refining and
marketing operations of Ultramar Diamond Shamrock and its affiliates. The
operations of the Ultramar Diamond Shamrock logistics business provide crude oil
storage and transportation services and refined product transportation and
terminalling services for three of Ultramar Diamond Shamrock's refineries. These
refineries are the McKee refinery near Amarillo, Texas, the Three Rivers
refinery near San Antonio, Texas, and the Ardmore refinery near Ardmore,
Oklahoma. The McKee, Three Rivers, and Ardmore refineries have total throughput
capacities of 170,000, 98,000, and 85,000 barrels per day, respectively. These
refineries transport their refined product primarily to markets in Texas,
Colorado, Oklahoma, New Mexico, and Arizona and the refined products are
distributed primarily through the extensive retail system of Ultramar Diamond
Shamrock in the southwestern and Rocky Mountain regions of the United States.
For the year ended December 31, 1999 and the nine months ended September 30,
2000, the Ultramar Diamond Shamrock logistics business derived approximately 99%
of its revenue from Ultramar Diamond Shamrock and its affiliates. The remaining
portion of revenue is derived from our transportation of refined products for
third parties over our Amarillo to Albuquerque and Amarillo to Abernathy refined
product pipelines.
The Ultramar Diamond Shamrock logistics business historically has derived,
and Shamrock Logistics will derive, substantially all of its revenue from
pipeline tariff revenue and fees for
47
<PAGE> 54
terminalling services received for the transportation of crude oil and refined
products, and terminalling revenue as refined products are moved into the
refined product terminals. The Ultramar Diamond Shamrock logistics business does
not, and Shamrock Logistics will not, receive any separate revenues for the
crude oil storage facility operations, as the cost of these services is
incorporated in the crude oil pipeline tariff rate. Assuming the revised tariff
rates had been in effect on January 1, 1999, revenues for both the year ended
December 31, 1999 and the nine months ended September 30, 2000 were generated
26% from the crude oil pipelines and storage assets, 57% from the refined
product pipelines and 17% from our terminalling assets.
A separate pipeline tariff rate is established for each pipeline or, in the
case of pipelines with multiple origination or destination points, tariff rates
are established for transportation to and from multiple origination or
destination points. The customer is charged the tariff rate for each barrel
transported through the pipeline, or in the case of pipelines with multiple
tariffs, for the barrels transported on the applicable tariff route for a
customer. For example, on the McKee to Colorado Springs to Denver pipeline,
separate tariffs have been established depending upon whether the ultimate
destination of the refined products transported from the McKee refinery is
Colorado Springs or Denver.
Except for the discussion related to revenues for the nine-month period
ended September 30, 2000, which reflect the revised tariff rates, the following
discussion is based on the historical operating results of the Ultramar Diamond
Shamrock logistics business and, accordingly, the operating results reflect the
historical tariff rates and terminalling fees in effect during the periods
discussed. We have revised our pipeline tariff rates on many of our pipelines
effective January 1, 2000 to reflect the total cost of the pipeline, the current
throughput capacity, the current throughput utilization, and other market
conditions. We also began charging a terminalling fee for terminalling services
at our refined product terminals effective January 1, 1999. Prior to 1999, the
Ultramar Diamond Shamrock logistics business did not charge a separate
terminalling fee at its refined product terminals. Terminalling revenues were
recognized based on total costs incurred at the terminals, which costs were
charged back to the related refinery.
Aside from the implementation of tariff rates on new pipelines and the
revisions to tariff rates effective January 1, 2000, the only changes to tariff
rates since January 1, 1995 have been annual decreases or increases related to
inflation factor indexing, which decreases or increases were in each instance
less than 2% annually.
Operating costs and expenses we incur in the transportation and
terminalling operations are typically fixed costs related to maintenance,
insurance, control rooms, telecommunications, and pipeline field and support
personnel. Some operating costs, such as fuel and power costs and utilities to
run the various pump stations along the pipelines, fluctuate with throughput.
Ultramar Diamond Shamrock allocates approximately 5% of its general and
administrative expenses incurred in the United States to its pipeline,
terminalling, and storage operations to cover costs of functions such as legal,
accounting, treasury, engineering, information technology, and other corporate
services. The 5% allocation has approximated $5 million annually for the past
five years. A portion of the allocated general and administrative costs are
passed on to partners, which jointly own some of the pipelines and terminals
with the Ultramar Diamond Shamrock logistics business.
Under an eight-year services agreement effective as of July 1, 2000,
between Shamrock Logistics Operations and Ultramar Diamond Shamrock, Ultramar
Diamond Shamrock will continue to provide general and administrative services
discussed above for an annual administrative fee of $5,200,000. Our general
partner, with approval and consent of the conflicts committee of its general
partner, will have the right to increase the annual administrative fee by up to
1.5% each year, as further adjusted for inflation, and may agree to further
increases in connection with expansions of our operations through the
acquisition or construction of new logistics assets that
48
<PAGE> 55
require additional management personnel. In addition, Shamrock Logistics
anticipates incurring additional general and administrative costs for tax return
preparation, annual and quarterly reports to unitholders, investor relations,
registrar and transfer agent fees, and other costs related to maintaining a
separate publicly-held entity. These incremental costs are estimated at
approximately $1,500,000 per year.
The operating results of the Ultramar Diamond Shamrock logistics business
are affected by factors affecting the business of Ultramar Diamond Shamrock,
including refinery utilization rates, crude oil prices, the demand for and
prices of refined products, and industry refining capacity. Please read "Risk
Factors."
The throughput of the refined products we transport is directly affected by
the level of, and user demand for, refined products in the markets served
directly or indirectly by our pipelines. Demand for gasoline in most markets
peaks during the summer driving season, which extends from April to September,
and declines during the fall and winter months. Demand for gasoline in the
Arizona market, however, generally is higher in the winter months than summer
months due to greater tourist activity and second home usage in the winter
months. Historically, the Ultramar Diamond Shamrock logistics business has not
experienced significant seasonal fluctuations in throughput due to the stable
demand for refined products and the growing population base in the southwestern
and Rocky Mountain regions of the United States.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2000
The following table reflects throughput for each of our principal crude oil
and refined product pipelines and the total throughput for all of our refined
product terminals for the nine months ended September 30, 1999 and 2000. The
barrel volumes presented in the table below reflect only our ownership interest
and are in thousands.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1999 2000
---- ----
(barrels)
<S> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers............................ 21,827 23,853
Wasson to Ardmore (both pipelines)........................ 19,236 20,978
Ringgold to Wasson........................................ 8,911 7,707
Dixon to McKee............................................ 16,861 17,076
Refined Product Pipelines:
McKee to Colorado Springs to Denver....................... 7,022 6,710
McKee to El Paso.......................................... 14,645 17,428
Amarillo to Albuquerque................................... 3,470 3,515
Ardmore to Wynnewood...................................... 14,571 15,347
Three Rivers to Laredo.................................... 3,905 4,430
Three Rivers to San Antonio............................... 7,602 7,385
McKee to Amarillo (both pipelines) to Abernathy........... 10,753 10,117
McKee to Denver (Phillips)................................ 2,965 3,266
Refined Product Terminals................................... 43,507 45,936
</TABLE>
The following table reflects the overall impact to revenues of the revised
tariff rates using historical throughput barrels, including the impact on each
of our principal crude oil and refined
49
<PAGE> 56
product pipelines, if any, for the nine months ended September 30, 1999. The
amounts in the table below are in thousands and are unaudited.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------
HISTORICAL AS ADJUSTED (DECREASE)
REVENUES REVENUES OR INCREASE
---------- ----------- -------------
<S> <C> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers........................... $ 5,620 $ 8,076 $ 2,456
Wasson to Ardmore (1)(both pipelines).................... -- 1,850 1,850
Ringgold to Wasson(1).................................... -- 2,914 2,914
Dixon to McKee........................................... 2,418 1,696 (722)
Other crude oil pipelines(1)............................. 1,576 2,403 827
------- ------- --------
Total crude oil pipelines......................... 9,614 16,939 7,325
------- ------- --------
Refined Product Pipelines:(2)
McKee to Colorado Springs to Denver...................... 10,135 9,840 (295)
McKee to El Paso......................................... 31,523 10,234 (21,289)
McKee to Amarillo (both pipelines) to Abernathy.......... 2,170 2,170 --
McKee to Denver (Phillips)............................... 2,083 2,083 --
Amarillo to Albuquerque.................................. 2,896 2,896 --
Ardmore to Wynnewood..................................... 3,499 3,499 --
Three Rivers to Laredo................................... 5,291 2,004 (3,287)
Three Rivers to San Antonio.............................. 1,587 2,044 457
Other refined product pipelines.......................... 1,763 2,714 951
------- ------- --------
Total refined product pipelines................... 60,947 37,484 (23,463)
Refined Product Terminals.................................. 10,974 10,974 --
------- ------- --------
Total pipelines and terminals..................... $81,535 $65,397 $(16,138)
======= ======= ========
</TABLE>
---------------
(1) Tariff revenues were not recognized for the Ardmore refinery crude oil
pipelines prior to 2000, because the Ultramar Diamond Shamrock logistics
business did not charge Ultramar Diamond Shamrock for the transportation of
crude oil to the Ardmore refinery.
(2) The tariff rates for the Skellytown to Mont Belvieu refined product
pipeline, which is owned by Skelly-Belvieu Pipeline Company, of which we own
50% and account for under the equity method, were not revised.
Revenues for the nine months ended September 30, 2000 were $69,406,000 as
compared to $81,535,000 for the nine months ended September 30, 1999, a decrease
of 15% or $12,129,000. Effective January 1, 2000, we implemented revised tariff
rates on many of our pipelines, which resulted in the lower revenues being
recognized in the first nine months of 2000 as compared to the first nine months
of 1999. Adjusting the revenues for the nine months ended September 30, 1999
using the newly established tariff rates and the historical throughput barrels
results in revised revenues of $65,397,000. On a comparative basis, revenues
increased $4,009,000 or 6%. The following discussion is based on a comparison of
the adjusted revenues for the nine months ended September 30, 1999 and the
actual revenues for the nine months ended September 30, 2000:
- revenues generated from the refined product terminals were $11,690,000
for the nine months ended September 30, 2000 as compared to $10,974,000
for the nine months ended September 30, 1999 due to a combined 6%
increase in throughput at the various terminals;
- revenues for the McKee to El Paso refined product pipeline increased
$1,781,000 due to a 19% increase in throughput barrels, resulting from
higher refined product demand in El Paso and the Arizona market and
temporary refinery disruptions on the West Coast;
- revenues for McKee to Colorado Springs to Denver refined product pipeline
decreased $419,000 in the first nine months of 2000 as compared to the
first nine months of 1999 due to a 4% decline in throughput barrels. A
temporary decline in demand in the Colorado Springs market resulted in
Ultramar Diamond Shamrock transporting fewer barrels to the Colorado
Springs market and instead transporting greater quantities through the
McKee to
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<PAGE> 57
El Paso refined product pipeline. In addition, due to varying demands for
different refined products in Colorado Springs and Denver, production and
scheduling requirements at the McKee refinery resulted in Ultramar
Diamond Shamrock transporting greater quantities of refined products to
Denver by way of the McKee to Denver (Phillips) refined product pipeline;
- revenues increased $908,000 for the Corpus Christi to Three Rivers crude
oil pipeline due to a 9% increase in throughput barrels. During the first
nine months of 2000, Ultramar Diamond Shamrock increased production at
the Three Rivers refinery to meet the growing demand in south Texas;
- revenues generated from the McKee to Denver (Phillips) refined product
pipeline increased $219,000 in the first nine months of 2000 as compared
to the first nine months of 1999 as throughput increased 10% due to
increasing demand in Denver, Colorado;
- revenues generated from the Three River to Pettus (Corpus Christi
segment) refined product pipeline increased $346,000 in the first nine
months of 2000 as compared to the first nine months of 1999 as throughput
increased 129% due to rising refined product demand in South Texas; and
- revenues for the Three Rivers to Laredo refined product pipeline
increased $270,000 for the first nine months of 2000 as compared to the
first nine months of 1999 due to a 13% increase in throughput barrels,
resulting from increased refined product demand in Laredo, Texas and its
sister city of Nuevo Laredo, Mexico. Laredo, Texas is one of the fastest
growing cities in the United States and Ultramar Diamond Shamrock is the
major supplier of refined products to this area of Texas.
Operating expenses increased $5,282,000 or 31% in the first nine months of
2000 from the first nine months of 1999 primarily due to the following items:
- higher operating expenses of $978,000 resulting from a loss of $916,000
in the first six months of 2000 as compared to a gain of $62,000 in the
first nine months of 1999 due to the impact of volumetric expansions and
contractions and discrepancies in the measurement of throughput.
Effective July 1, 2000, the impact of these items is borne by the
shippers in our pipelines and is therefore not reflected in operating
income.
- higher maintenance expenses of $1,148,000 primarily related to
discretionary environmental expenditures on terminal operations;
- utility expenses increasing $1,232,000 in the first nine months of 2000
as compared to 1999 as a result of higher throughput barrels in most
pipelines and terminals; and
- higher salary and employee benefit expenses of $1,122,000 in the first
nine months of 2000 as compared to the first nine months of 1999 due to
increased benefit accruals and rising salary costs.
Depreciation and amortization expense increased $727,000 or 8% in the first
nine months of 2000 as compared to the comparable period in 1999 due to the
additional depreciation related to the recently completed capital projects,
including the expansion of the McKee to Colorado Springs and the Amarillo to
Albuquerque refined product pipelines. Partially offsetting the increase was
lower depreciation related to the sale of an additional 8.33% interest in the
McKee to El Paso refined product pipeline and terminal in August 1999.
General and administrative expenses increased 7% in the first nine months
of 2000 as compared to the 1999 period due to increased general and
administrative costs at Ultramar Diamond Shamrock, and the fact that the net
amount reimbursed by partners on jointly owned pipelines in the first nine
months of 2000 remained comparable to 1999. General and administrative expense
of $3,771,000 for the first nine months of 2000 was comprised of $4,142,000 of
allocations from Ultramar Diamond Shamrock less $371,000 reimbursed by partners
on jointly owned pipelines. General and administrative expense of $3,523,000 for
the
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<PAGE> 58
first nine months of 1999 was comprised of $3,901,000 of allocations from
Ultramar Diamond Shamrock less $378,000 reimbursed by partners on jointly owned
pipelines.
Interest expense of $2,808,000 for the first nine months of 2000 was higher
than the $669,000 recognized in the same period in 1999 due to the additional
interest expense recognized in the third quarter of 2000 related to the
$107,676,000 of debt due to parent.
Equity income from affiliate represents the Ultramar Diamond Shamrock
logistics business' 50% interest in the net income of Skelly-Belvieu Pipeline
Company, which operates the Skellytown to Mont Belvieu refined product pipeline.
Equity income from affiliate for the first nine months of 2000 was $3,044,000 as
compared to $2,370,000 for the comparable period in 1999 as throughput increased
17% due to rising demand for petrochemical raw materials along the Texas Gulf
Coast.
Effective July 1, 2000, Ultramar Diamond Shamrock transferred the assets
and certain liabilities of the Ultramar Diamond Shamrock logistics business to
Shamrock Logistics Operations. As a limited partnership, Shamrock Logistics
Operations is not subject to federal or state income taxes. Due to this change
in tax status, the deferred income tax liability of $38,217,000 as of June 30,
2000 was written off in the statement of income for the nine months ended
September 30, 2000. The resulting net benefit for income taxes of $30,812,000
for the nine months ended September 30, 2000, includes the write off of the
deferred income tax liability less the provision for income taxes of $7,405,000
for the first six months of 2000. The income tax provision for the first nine
months of 1999 was based upon the effective income tax rate for the Ultramar
Diamond Shamrock logistics business of 38.3%. The effective income tax rate
exceeds the U.S. federal statutory income tax rate due to state income taxes.
Net income in the first nine months of 2000 was $61,011,000 as compared to
$32,242,000 in 1999. The increase of $28,769,000, or 89%, is primarily due to
the write off of the $38,217,000 deferred income tax liability as of July 1,
2000 partially offset by decreased tariff revenues as a result of the revised
tariff rates that went into effect January 1, 2000, the impact of which was
$9,964,000 after income taxes.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1999
The following table reflects throughput for each of our principal crude oil
and refined product pipelines and the total throughput for all of our refined
product terminals for the year ended December 31, 1998 and 1999. The barrel
volumes presented in the table below reflect only our ownership interest and are
in thousands.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1998 1999
---- ----
(barrels)
<S> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers............................ 29,431 29,417
Wasson to Ardmore(1) (both pipelines)..................... 21,435 26,339
Ringgold to Wasson(1)..................................... 10,013 10,982
Dixon to McKee............................................ 21,167 22,305
Refined Product Pipelines:
McKee to Colorado Springs to Denver....................... 8,744 9,064
McKee to El Paso.......................................... 14,502 19,767
Amarillo to Albuquerque................................... 5,185 4,584
Ardmore to Wynnewood...................................... 11,675 20,014
Three Rivers to Laredo.................................... 4,557 5,381
Three Rivers to San Antonio............................... 9,616 10,154
McKee to Amarillo (both pipelines) to Abernathy........... 16,866 14,995
McKee to Denver (Phillips)................................ 4,108 3,924
Refined Product Terminals................................... 52,594 58,889
</TABLE>
52
<PAGE> 59
---------------
(1) Since the acquisition of the Ardmore pipelines on September 25, 1997 through
December 31, 1999, the Ultramar Diamond Shamrock logistics business did not
charge Ultramar Diamond Shamrock for transportation of crude oil through the
Ardmore refinery crude oil pipelines. Had the Ultramar Diamond Shamrock
logistics business charged for these services, revenues would have increased
by $5,348,000 and $6,377,000 for the years ended December 31, 1998 and 1999,
respectively, using the revised tariff rates multiplied by the historical
throughput barrels.
Revenues for the year ended December 31, 1999 were $109,773,000 as compared
to $97,883,000 for the year ended December 31, 1998, an increase of 12% or
$11,890,000. This increase in revenues is primarily due to the following items:
- revenues for the McKee to El Paso refined product pipeline increased
$8,591,000 due to a 36% increase in throughput barrels, resulting from
higher refined product demand in El Paso and the Arizona market and
temporary refinery disruptions on the West Coast;
- revenues generated from the refined product terminals were $15,238,000
for the year ended December 31, 1999 as compared to $11,604,000 for the
year ended December 31, 1998 due to a combined 12% increase in throughput
at the various terminals and the establishment, effective January 1,
1999, of a separate terminalling fee ($1,649,000 of the increase in
1999). Prior to 1999, terminalling revenues were based on total costs
incurred at the terminal;
- revenues for the Three Rivers to Laredo refined product pipeline
increased $1,119,000 due to an 18% increase in throughput barrels,
resulting from increased refined product demand in Laredo, Texas and its
sister city of Nuevo Laredo, Mexico; and
- revenues for the McKee to Amarillo to Abernathy refined product pipelines
decreased $808,000 or 21% due to a 11% decrease in throughput barrels and
revenues for the Amarillo to Albuquerque refined product pipeline
decreased $322,000 or 8% due to a 12% decrease in throughput barrels.
These decreases in throughput resulted from Ultramar Diamond Shamrock
transporting more refined products through the McKee to El Paso refined
product pipeline to more profitable retail markets in Arizona.
Operating expenses decreased $3,779,000 or 13% in 1999 from 1998 primarily
due to the following items:
- in 1998, a $2,100,000 impairment charge related to the Harlingen refined
product terminal was recorded;
- lower operating expenses in 1999 on the McKee to El Paso refined product
pipeline and terminal due to the sale of a 25% interest to Phillips
Petroleum Company in March 1998 and an additional 8.33% interest in
August 1999; and
- cost reductions initiated in 1998 and early 1999, including centralizing
pipeline control rooms into two locations, one in San Antonio and the
other at the McKee refinery, negotiating lower utility rates with
suppliers and lower personnel costs due to fewer operating employees.
The above expense reductions were partially offset by higher utility costs
to operate the various pump stations along the pipelines to move the higher
overall throughput.
Depreciation and amortization expense decreased $133,000 or 1%, in 1999 due
to the sale of an additional 8.33% interest in the McKee to El Paso refined
product pipeline and terminal in August 1999. Partially offsetting the decrease
was additional depreciation related to the Amarillo to Albuquerque refined
product pipeline and other capital projects completed in 1998.
General and administrative expenses increased 3% in 1999 as compared to
1998 due to increased general and administrative costs at Ultramar Diamond
Shamrock, and the fact that the net amount reimbursed by partners on jointly
owned pipelines in 1999 remained comparable to 1998. General and administrative
expense of $4,698,000 for 1999 was comprised of $5,201,000 of allocations from
Ultramar Diamond Shamrock less $503,000 reimbursed by partners on jointly
53
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owned pipelines. General and administrative expense of $4,552,000 for 1998 was
comprised of $5,067,000 of allocations from Ultramar Diamond Shamrock less
$515,000 reimbursed by partners on jointly owned pipelines. Offsetting the
allocations to partners were additional amounts allocated from the McKee to
Denver refined product pipeline due to higher maintenance costs.
Interest expense of $777,000 for 1999 was slightly lower than the $796,000
recognized in 1998 due to lower outstanding debt during 1999 as compared to 1998
as $353,000 of debt was repaid in early 1999.
Equity income from affiliate for 1999 was $3,874,000 as compared to
$3,896,000 for 1998. Excluding a state income tax refund received by
Skelly-Belvieu Pipeline Company in 1998, equity income increased 16% due to
lower expenses.
The income tax provision for 1999 and 1998 was based upon the effective
income tax rate for the Ultramar Diamond Shamrock logistics business for those
periods of 38.3%. The effective income tax rate exceeds the U.S. federal
statutory income tax rate due to state income taxes.
Net income in 1999 was $42,798,000 as compared to $36,289,000 in 1998. The
increase of $6,509,000, or 18%, is due to increased revenues and lower operating
costs and expenses, partially offset by a lower gain on sale of property, plant,
and equipment. In August 1999, the Ultramar Diamond Shamrock logistics business
recognized a $2,478,000 pre-tax gain on sale of an 8.33% interest in the McKee
to El Paso refined product pipeline and terminal to Phillips Petroleum Company
upon the completion of the 20,000 barrel per day expansion project. In March
1998, the Ultramar Diamond Shamrock logistics business recognized a pre-tax gain
of $7,005,000 from the sale of a 25% interest to Phillips Petroleum Company in
this pipeline and terminal. The sales of ownership interest in the McKee to El
Paso refined product pipeline and terminal represent sales of excess throughput
capacity that was not being utilized by the Ultramar Diamond Shamrock logistics
business, thus revenues did not decline as a result of the sales. As a result of
the August 1999 sale, the Ultramar Diamond Shamrock logistics business'
available capacity in the pipeline was reduced to 66.67% or 40,000 barrels per
day.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1998
The following table reflects throughput for each of our principal crude oil
and refined product pipelines and the total throughput for all of our refined
product terminals for the years ended December 31, 1997 and 1998. The barrel
volumes presented in the table below reflect only our ownership interest and are
in thousands.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
(barrels)
<S> <C> <C>
Crude Oil Pipelines:
Corpus Christi to Three Rivers............................ 27,612 29,431
Wasson to Ardmore(1)(2) (both pipelines).................. 6,842 21,435
Ringgold to Wasson(1)(2).................................. 3,415 10,013
Dixon to McKee............................................ 17,385 21,167
Refined Product Pipelines:
McKee to Colorado Springs to Denver....................... 7,597 8,744
McKee to El Paso.......................................... 13,143 14,502
Amarillo to Albuquerque................................... 5,152 5,185
Ardmore to Wynnewood(1)................................... 2,866 11,675
Three Rivers to Laredo.................................... 3,952 4,557
Three Rivers to San Antonio............................... 9,615 9,616
McKee to Amarillo (both pipelines) to Abernathy........... 16,483 16,866
McKee to Denver (Phillips)................................ 4,173 4,108
Refined Product Terminals................................... 49,806 52,594
</TABLE>
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---------------
(1) The Ardmore pipelines were acquired on September 25, 1997, when Ultramar
Diamond Shamrock acquired Total Petroleum (North America) Ltd. in a purchase
business combination. Throughput for 1997 in the table above represents the
quantities transported since the acquisition. Throughput for all of 1997 was
26,465,000 barrels for the Wasson to Ardmore crude oil pipeline, 13,803,000
barrels for the Ringgold to Wasson crude oil pipeline, and 10,379,000
barrels for the Ardmore to Wynnewood refined product pipeline.
(2) Since the acquisition of the Ardmore pipelines on September 25, 1997 through
December 31, 1999, the Ultramar Diamond Shamrock logistics business did not
charge Ultramar Diamond Shamrock for transportation of crude oil through the
Ardmore refinery crude oil pipelines. Had the Ultramar Diamond Shamrock
logistics business charged for these services, revenues would have increased
by $1,783,000 and $5,348,000 for the years ended December 31, 1997 and 1998,
respectively, using revised tariff rates multiplied by the historical
throughput barrels.
Revenues for the year ended December 31, 1998 were $97,883,000 as compared
to $84,881,000 for the year ended December 31, 1997, an increase of 15%, or
$13,002,000. This increase in revenues is due to the following items:
- revenues generated from the Ardmore to Wynnewood refined product pipeline
increased $2,694,000 from 1997 to 1998 as the Ultramar Diamond Shamrock
logistics business owned this pipeline for all of 1998 versus only the
last three months of 1997;
- revenues for the McKee to El Paso refined product pipeline increased
$2,940,000 due to a 10% increase in throughput barrels, resulting from
higher refined product demand in El Paso and the Arizona markets. This
increase occurred even though in March 1998, a 25% interest in the
pipeline and the related terminal was sold, reducing the Ultramar Diamond
Shamrock logistics business' available capacity by 25%;
- revenues for the Dixon to McKee crude oil pipeline increased $657,000,
and revenues for the Corpus Christi to Three Rivers crude oil pipeline
increased $499,000 due to a combined 12% increase in throughput barrels
as the McKee and Three Rivers refineries were operated at full capacity
in 1998 due to the low cost of and demand for crude oil;
- revenues for the McKee to Colorado Springs to Denver refined product
pipeline increased $4,241,000 due to a 2,891,000 barrel increase in
throughput in the Colorado Springs to Denver segment of the pipeline.
Prior to the completion of the Colorado Springs to Denver segment of the
pipeline in late 1997, Ultramar Diamond Shamrock transported refined
product by truck from Colorado Springs to Denver to supply the growing
demand in Denver. The Total Petroleum retail stores acquired by Ultramar
Diamond Shamrock in 1997 and the newly constructed Ultramar Diamond
Shamrock retail stores experienced increased gasoline demand in 1998;
- revenues for the Three Rivers to Laredo refined product pipeline
increased $818,000 due to a 15% increase in throughput barrels resulting
from increased refined product demand in Laredo, Texas and its sister
city of Nuevo Laredo, Mexico; and
- revenues generated from the refined product terminals were $11,604,000
for the year ended December 31, 1998 as compared to $10,771,000 for the
year ended December 31, 1997, an increase of $833,000. This 8% increase
is due to a 6% increase in throughput at the refined product terminals
which resulted in increased operating costs.
Operating expenses increased $3,985,000, or 17%, in 1998 from 1997
primarily due to:
- higher utility costs to operate the pump stations along the pipelines to
transport the higher throughput; and
- a $2,100,000 impairment charge recognized in 1998 related to the
Harlingen refined product terminal.
Partially offsetting the above increases were lower operating expenses on
the McKee to El Paso refined product pipeline and terminal as a result of the
sale of a 25% interest in the pipeline and terminal in March 1998 to Phillips
Petroleum Company.
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Over the past several years, the refined product volume delivered by
Ultramar Diamond Shamrock to the south Texas market of Harlingen has declined
due to increased competition. In light of these competitive conditions, in June
1998, the Ultramar Diamond Shamrock logistics business recorded an impairment
charge of $2,100,000 to reduce the carrying value ($4,100,000 prior to the
write-down) of the Harlingen refined product terminal to its estimated
realizable value. The Ultramar Diamond Shamrock logistics business has and will
continue to operate the terminal because it is strategic to servicing the south
Texas region.
Depreciation and amortization expense increased 10% in 1998 as compared to
1997 due to the additional depreciation related to the Ardmore refinery crude
oil pipelines and refined product pipeline acquired in September 1997. Partially
offsetting the increase is decreased depreciation on the McKee to El Paso
refined product pipeline and terminal as a result of the sale of a 25% interest
in the assets in March 1998.
General and administrative expenses decreased 4% in 1998 as compared to
1997 due to increased costs being allocated to jointly owned pipeline partners,
including amounts allocated to Phillips Petroleum Company for the McKee to El
Paso refined product pipeline and terminal, while the allocated costs from
Ultramar Diamond Shamrock remained constant. In 1998, the amount allocated to
the Ultramar Diamond Shamrock logistics business from Ultramar Diamond Shamrock
was $5,067,000 as compared to $5,100,000 in 1997. Reimbursements by partners in
jointly owned pipelines were $515,000 in 1998 as compared to $339,000 in 1997.
Interest expense was $796,000 for 1998 as compared to $158,000 for 1997 due
to only $121,000 of interest being capitalized in 1998 as compared to $782,000
being capitalized for 1997. Also during the year ended December 31, 1998,
$283,000 of debt was repaid as compared to repayments of $262,000 during 1997.
Equity income from affiliate for 1998 was $3,896,000 as compared to
$3,025,000 for 1997 due to lower operating expenses in 1998 for the Skellytown
to Mont Belvieu refined product pipeline and a state income tax refund realized
in 1998 by Skelly-Belvieu Pipeline Company.
The income tax provision for 1998 and 1997 was based upon the effective
income tax rate for the Ultramar Diamond Shamrock logistics business for those
periods of 38.3% and 38.2%, respectively. The effective income tax rate exceeds
the U.S. federal statutory income tax rate due to state income taxes.
Net income for the year ended December 31, 1998 was $36,289,000 as compared
to $26,823,000 for the year ended December 31, 1997. The increase of $9,466,000
or 35% is due to increased revenues, a gain on sale of property, plant, and
equipment, and increased equity income from Skelly-Belvieu Pipeline Company. In
March 1998, the Ultramar Diamond Shamrock logistics business recognized a
$7,005,000 pre-tax gain on sale of a 25% interest in the McKee to El Paso
refined product pipeline and terminal to Phillips Petroleum Company. The sale of
a 25% ownership interest in the McKee to El Paso refined product pipeline and
terminal represents the sale of excess throughput capacity that was not being
utilized by the Ultramar Diamond Shamrock logistics business, thus revenues did
not decline as a result of the sale.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
Net cash provided by operating activities was $18,140,000 for the nine
months ended September 30, 2000, as compared to $40,420,000 for the nine months
ended September 30, 1999. The decrease is primarily due to the overall decrease
in tariff revenues, as a result of the revised tariff rates implemented
effective January 1, 2000. Capital expenditures for the first nine months of
2000 were $5,886,000, including expenditures related to the completion of the
McKee to Colorado Springs expansion from 32,000 barrels per day to 52,000
barrels per day.
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Effective June 30, 2000, in conjunction with the transfer of the assets and
liabilities to Shamrock Logistics Operations on July 1, 2000, Ultramar Diamond
Shamrock formalized the terms under which intercompany accounts and working
capital loans will be settled by executing promissory notes with the various
subsidiaries included in the Ultramar Diamond Shamrock logistics business,
resulting in the recognition of $107,676,000 of debt due to the parent and its
affiliates. The promissory notes require that the principal be repaid no later
than June 30, 2005 and bear interest at a rate of 8.0% per annum on the unpaid
balance. In conjunction with the initial public offering, Shamrock Logistics
intends to fully repay the promissory notes.
Net cash provided by operating activities was $44,731,000, $44,950,000, and
$49,977,000 for the years ended December 31, 1997, 1998, and 1999, respectively.
The increase in net cash provided by operating activities is due to an increase
in operating income of 37% in 1998 over 1997 and an increase of 19% in 1999 over
1998. Operating income has increased as higher throughput barrels have been
transported through the Ultramar Diamond Shamrock logistics business' pipelines
and through the refined product terminals.
Net cash provided by investing activities of $6,865,000 for 1999 resulted
from the sale of an 8.33% interest in the McKee to El Paso refined product
pipeline and terminal to Phillips Petroleum Company for total proceeds of
$12,000,000 and the distributions received from Skelly-Belvieu Pipeline Company
of $4,238,000. Partially offsetting the proceeds and distributions in 1999 were
capital expenditures of $9,373,000, including $1,565,000 relating to the
expansion of the total capacity of the McKee to El Paso refined product pipeline
from 40,000 barrels per day to 60,000 barrels per day.
Net cash provided by investing activities of $18,395,000 for the year ended
December 31, 1998 resulted from the sale of a 25% interest in the McKee to El
Paso refined product pipeline and terminal to Phillips Petroleum Company for
total proceeds of $27,000,000 and the distributions received from Skelly-Belvieu
Pipeline Company of $3,692,000. Partially offsetting the proceeds and
distributions in 1998 were capital expenditures of $12,297,000, including the
following:
- $6,625,000 relating to the expansion of the McKee to El Paso refined
product pipeline from 40,000 barrels per day to 60,000 barrels per day;
and
- $2,060,000 to complete the expansion of the Amarillo to Albuquerque
refined product pipeline by 5,500 barrels per day.
Net cash used in investing activities of $52,141,000 during the year ended
December 31, 1997, included expenditures of $43,158,000 for the acquisition of
the Ardmore pipelines acquired on September 25, 1997, when Ultramar Diamond
Shamrock acquired Total Petroleum (North America) Ltd. in a purchase business
combination. Distributions received from Skelly-Belvieu Pipeline Company during
1997 totaled $4,009,000. Capital expenditures of $12,992,000 included the
following:
- $4,849,000 to complete the Colorado Springs to Denver refined product
pipeline;
- $3,297,000 to complete the expansion of the McKee to El Paso refined
product pipeline to increase the total capacity of the pipeline from
27,000 barrels per day to 40,000 barrels per day; and
- $2,423,000 to expand the Amarillo to Albuquerque refined product pipeline
by 5,500 barrels per day.
Cash flows from financing activities relate primarily to the centralized
cash management program utilized by Ultramar Diamond Shamrock and all its
affiliates. During the years ended December 31, 1998 and 1999, the Ultramar
Diamond Shamrock logistics business distributed $63,062,000 and $56,489,000,
respectively, of net cash back to Ultramar Diamond Shamrock. The
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large distributions in 1998 and 1999 were due to increased net income and the
cash received from Phillips Petroleum Company for the sales of the 33.33%
interest in the McKee to El Paso refined product pipeline and terminal. During
the year ended December 31, 1997, Ultramar Diamond Shamrock advanced $7,672,000
to the Ultramar Diamond Shamrock logistics business to partially fund the
pipelines acquired from Total Petroleum. Also included in cash flows from
financing activities are repayments of debt related to the Corpus Christi crude
oil storage facility of $262,000 in 1997, $283,000 in 1998, and $353,000 in
1999.
CAPITAL REQUIREMENTS
The pipeline, terminalling and storage business is capital-intensive,
requiring significant investment to upgrade or enhance existing operations and
to meet environmental regulations. The capital requirements of the Ultramar
Diamond Shamrock logistics business have consisted primarily of, and for the
Shamrock Logistics operations will consist primarily of:
- maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental
regulations; and
- expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals, and storage
facilities to meet Ultramar Diamond Shamrock's logistics needs.
Shamrock Logistics expects to fund its capital expenditures from cash
provided by operations and, to the extent necessary, from the proceeds of:
- borrowings under the revolving credit facility discussed below; and
- the issuance of additional common units.
Expansion capital expenditures for the next three years will include the
following three projects which we expect to exercise options to purchase from
Ultramar Diamond Shamrock by the end of the first quarter of 2002:
- $64 million for a 271.7-mile crude oil pipeline which runs from Wichita
Falls, Texas to the McKee refinery and a 360,000 barrel storage facility
in Wichita Falls. Ultramar Diamond Shamrock is currently expanding the
capacity of the crude oil pipeline from 85,000 barrels per day to 110,000
barrels per day;
- $6.5 million for a 600,000 barrel storage facility in Ringgold, Texas
that Ultramar Diamond Shamrock is constructing. This facility will
enhance the crude oil supply system for the Ardmore and McKee refineries;
and
- $5.7 million for a 19-mile refined product pipeline that Ultramar Diamond
Shamrock is constructing from our Laredo, Texas refined product terminal
to a refined product terminal owned by Pemex in Nuevo Laredo, Mexico.
Shamrock Logistics expects to fund the purchase of these expansion capital
projects with proceeds from the revolving credit facility. We expect that the
additional revenues generated from operating these pipelines will more than
offset the additional interest expense to be incurred and will increase the cash
flows and our ability to pay the minimum quarterly distributions. For a more
detailed description please read "Business -- Recently Completed and Planned
Expansion Projects."
Maintenance capital expenditures, including environmental capital
expenditures, are expected to approximate $0.5 million for the last three months
of 2000 and $4.6 million for the year ending December 31, 2001.
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RELATED PARTY TRANSACTIONS
Effective July 1, 2000, Shamrock Logistics Operations entered into a
Service Agreement with Ultramar Diamond Shamrock and its affiliates to provide
general and administrative services to Shamrock Logistics Operations for an
annual fee of $5.2 million, payable monthly. The services to be provided under
this agreement include the corporate functions of legal, accounting, treasury,
information technology and other corporate services.
In addition to the administrative fee paid to Ultramar Diamond Shamrock,
Shamrock Logistics will incur incremental costs to third parties as a
publicly-traded entity (e.g., cost of tax return preparation, annual and
quarterly reports to unitholders, investor relations, and registrar and transfer
agent fees) of approximately $1.5 million per year.
Since Shamrock Logistics will not have any employees, Shamrock Logistics
will reimburse Ultramar Diamond Shamrock and its affiliates for the various
costs of the employees who work within the pipeline, storage and terminalling
operations, which salary, wages and benefit costs approximated $9.7 million in
1999.
The payment of the incremental costs to third parties, and the
administrative fee and the reimbursement of expenses to Ultramar Diamond
Shamrock could adversely affect our ability to make cash distributions to our
unitholders.
DEBT ASSUMED BY SHAMROCK LOGISTICS OPERATIONS
Effective July 1, 2000, the assets and liabilities of the Ultramar Diamond
Shamrock logistics business were contributed to Shamrock Logistics Operations in
exchange for the ownership interest in Shamrock Logistics Operations. In
conjunction with this transfer, Shamrock Logistics Operations assumed from an
affiliate of Ultramar Diamond Shamrock the $10.8 million outstanding
indebtedness owed to the Port of Corpus Christi Authority. This amount of debt
is payable in annual installments and matures on December 31, 2015. Interest
accrues on the unpaid principal balance at the rate of 8% per annum.
DESCRIPTION OF REVOLVING CREDIT FACILITY
We expect that at closing of the offering, Shamrock Logistics Operations
will borrow approximately $63.7 million under our five year $120 million
revolving credit facility with The Chase Manhattan Bank and other lenders. The
following is a summary of the material terms of the revolving credit facility.
Shamrock Logistics Operations will use approximately $58.7 million borrowed
under the revolving credit facility at closing to repay intercompany
indebtedness and working capital loans and to reimburse Ultramar Diamond
Shamrock and its affiliates for capital expenditures. In addition, we expect
Shamrock Logistics Operations will borrow approximately $5 million of working
capital under the revolving credit facility at closing. We may use up to $25
million of the total amount available under the revolving credit facility to
provide working capital and, if necessary, to fund distributions to unitholders.
The remainder of the borrowings under the revolving credit facility may be used
for working capital and general partnership purposes, but borrowings in excess
of the $25 million sublimit may not be used to fund distributions to
unitholders. The obligations under the revolving credit facility will be
unsecured. The indebtedness under the revolving credit facility will rank
equally with all the outstanding unsecured and unsubordinated debt of Shamrock
Logistics Operations and will be non-recourse to Shamrock Logistics and the
general partner.
All loans may be prepaid at any time without penalty. All borrowings
designated as borrowings subject to the $25 million sublimit must be reduced to
zero for a period of at least 15 consecutive days during each fiscal year.
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The revolving credit facility also has a $25 million sublimit for letters
of credit which may be used for general business purposes in the ordinary course
of business or any other purpose approved by The Chase Manhattan Bank.
Indebtedness under the revolving credit facility will bear interest at the
option of Shamrock Logistics Operations at either the alternative base rate or
the LIBOR rate (preadjusted for reserves), as those terms are defined in the
revolving credit facility, plus, in the case of loans bearing interest at the
LIBOR rate, an applicable margin. Shamrock Logistics Operations will incur a
facility fee on the aggregate commitments of the lenders under the revolving
credit facility, whether used or unused. From December 15, 2000, the date of the
execution of the credit facility, to February 28, 2001, when the lenders'
commitment expires, we will incur a facility fee of 0.10% per year.
The revolving credit facility contains a prohibition on distributions by
Shamrock Logistics Operations if any default, as defined in the revolving credit
facility, is continuing or would result from the distribution.
In addition, the revolving credit facility contains various covenants
limiting the ability of Shamrock Logistics Operations and the ability of its
subsidiaries to:
- incur indebtedness;
- grant liens;
- engage in transactions with affiliates;
- make investments, loans and acquisitions;
- enter into a merger, consolidation or sale of assets or liquidate;
- engage to a material extent in another type of business;
- enter into interest or currency exchange rate or commodity price hedging
agreements;
- incur restrictions affecting the ability to grant liens;
- in the case of Shamrock Logistics Operations, create or acquire any
subsidiary that does not guarantee the obligations under the revolving
credit facility; or
- incur restrictions affecting subsidiaries' ability to make dividends or
distributions or to make or repay loans or advances to, or guarantee
indebtedness of, Shamrock Logistics Operations or any other subsidiary.
In addition, the revolving credit facility contains the following financial
covenants:
- the ratio of Consolidated EBITDA (as defined in the revolving credit
facility), pro forma for any dispositions or acquisitions of assets, to
Consolidated Interest Expense (as defined in the revolving credit
facility) must be at least 3.5 to 1.0 for any period of four consecutive
fiscal quarters; and
- the ratio of consolidated indebtedness to Consolidated EBITDA, pro forma
for any dispositions or acquisitions of assets, may not exceed 3.0 to 1.0
for any period of four consecutive fiscal quarters.
If an event of default exists under the revolving credit facility, the
lenders may accelerate the maturity of the revolving credit facility and
exercise other rights and remedies. Each of the following is an event of
default:
- failure to pay any principal when due, or any interest or other amount
within five business days of when due;
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- failure of any representation or warranty to be true and correct;
- failure to perform or otherwise comply with the covenants in the
revolving credit facility;
- default by Shamrock Logistics Operations or any of its subsidiaries on
the payment of any indebtedness in excess of $10,000,000, or any default
in the performance of any obligation or condition with respect to
indebtedness in excess of $10,000,000 if the effect of the default is to
accelerate the indebtedness or to permit the holder of the indebtedness
to accelerate its maturity;
- bankruptcy or insolvency events involving Shamrock Logistics Operations
or its subsidiaries;
- one or more satisfied judgments in excess of $10,000,000 in the aggregate
that is not covered by insurance is rendered against Shamrock Logistics
Operations and/or its subsidiaries;
- various events occur in connection with employee benefit plans involving
expected liability in excess of $10,000,000;
- the incurrence by Shamrock Logistics Operations or any subsidiary of
environmental liabilities requiring payment in excess of $5,000,000 in
any four consecutive fiscal quarters;
- the incurrence of indebtedness by Shamrock Logistics;
- Shamrock Logistics
- engages in any business or operation other than those incidental to
its ownership of the limited partner interests of Shamrock Logistics
Operations;
- incurs or permits to exist any liabilities or other obligations other
than nonconsentual obligations imposed by law, obligations with
respect to the units of Shamrock Logistics and guarantees with respect
to indebtedness permitted by law; and
- owns, leases or operates any assets (including cash or cash
equivalents) other than the limited partner interest in Shamrock
Logistics Operations, ownership interests (not to exceed 1%) in a
subsidiary of Shamrock Logistics Operations and cash received as
distributions from Shamrock Logistics Operations in accordance with
the revolving credit facility;
- the occurrence of a change of control, which is defined to include any of
the following events:
- Ultramar Diamond Shamrock ceases to own, directly or indirectly
either 100% of the general partner of Shamrock Logistics or of
Shamrock Logistics Operations, or at least 20% of the units of
Shamrock Logistics;
- any person or group of persons other than Ultramar Diamond Shamrock
and its wholly-owned subsidiaries becomes the owner, directly or
indirectly, of a greater percentage of the units than those owned,
directly or indirectly, by Ultramar Diamond Shamrock; or
- 100% of the limited partnership interests in Shamrock Logistics
Operations ceases to be owned directly or indirectly by Shamrock
Logistics or Ultramar Diamond Shamrock; and
- the sale by Ultramar Diamond Shamrock of a material portion of the McKee,
Three Rivers, and Ardmore refineries, on an aggregate basis unless the
long-term indebtedness of the purchaser has an investment grade rating
and the purchaser assumes the rights and obligations of Ultramar Diamond
Shamrock and its affiliates under the pipelines and terminals usage
agreement with respect to the purchased refineries.
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ENVIRONMENTAL
The operations of the Ultramar Diamond Shamrock logistics business have
been subject to environmental laws and regulations adopted by various
governmental authorities in the jurisdictions in which these operations have
been conducted. The Ultramar Diamond Shamrock logistics business has accrued
liabilities for estimated site restoration costs to be incurred in the future at
its facilities and properties, including liabilities for environmental
remediation obligations at various sites where it has been identified as a
potentially responsible party. Under the accounting policies of the Ultramar
Diamond Shamrock logistics business, liabilities are recorded when site
restoration and environmental remediation and cleanup obligations are either
known or considered probable and can be reasonably estimated. In connection with
this offering and related transactions, Ultramar Diamond Shamrock has agreed to
indemnify Shamrock Logistics and Shamrock Logistics Operations for environmental
liabilities related to the assets transferred to Shamrock Logistics Operations
that arose prior to closing and are discovered within 10 years after closing
(excluding liabilities resulting from the change in law after closing).
Accordingly, the existing environmental liabilities at the date of closing will
remain an obligation of Ultramar Diamond Shamrock and will not be transferred to
Shamrock Logistics.
Shamrock Logistics does expect to incur capital expenditures in the future
for environmental costs, including but not limited to, air pollution control
equipment, enhanced pipeline risk assessment programs, tank environmental
control upgrades and upgrades of certain wastewater systems. For 2000, we
estimate we will incur environmental maintenance capital expenditures of
$1,350,000 and environmental operating expenses of $750,000.
As of June 30, 2000, accruals for environmental matters amounted to
$2,507,000 including $100,000 accrued during the first six months of 2000.
Effective July 1, 2000, the $2,507,000 accrual for existing environmental
liabilities was not transferred to Shamrock Logistics Operations in the transfer
of the Ultramar Diamond Shamrock Logistics business to Shamrock Logistics
Operations effective July 1, 2000, but rather was retained by Ultramar Diamond
Shamrock.
As of December 31, 1997, 1998, and 1999, accruals for environmental matters
amounted to $4,547,000, $4,319,000, and $2,757,000, respectively. Additions to
accrual for environmental matters during the year ended December 31, 1997
amounted to $1,802,000. There were no additions to the accrual for environmental
matters during the year ended December 31, 1998. During 1999, based on Ultramar
Diamond Shamrock's annual review of environmental liabilities, Ultramar Diamond
Shamrock determined that it had overstated certain liabilities as the required
cleanup obligations were less than originally estimated. Accordingly,
environmental liabilities were reduced by $1,114,000.
IMPACT OF INFLATION
The impact of inflation has slowed in recent years. However, it is still a
factor in the United States economy and may increase the cost to acquire or
replace property, plant and equipment and/or increase the costs of supplies and
labor. To the extent permitted by competition and regulation and the pipelines
and terminals usage agreement, the Ultramar Diamond Shamrock logistics business
has and Shamrock Logistics will continue to pass along increased costs to its
customers in the form of higher tariff rates.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Startup
Activities." This Statement of Position requires startup activity costs and
organization costs to be expensed as incurred. Statement of Position 98-5 is
effective for financial statements for fiscal years beginning after December 15,
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1998. We adopted the Statement of Position effective January 1, 1999. The impact
of implementation of Statement of Position 98-5 was not material.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. Statement of Financial Accounting Standards No. 133
establishes new and revises several existing standards for derivative
instruments, including some derivative instruments embedded in other contracts,
and hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If some conditions are met, a derivative may be designated as a
cash flow hedge, a fair value hedge or a foreign currency hedge. An entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedge
and the measurement method to be used. Changes in the fair value of derivatives
are either recognized in earnings in the period of change or as a component of
other comprehensive income in the case of some hedges. Statement of Financial
Accounting Standards No. 133 should not be applied retroactively to financial
statements of prior periods. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of Statement of
Financial Accounting Standards No. 133 for one year to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
In June, 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133." FASB No. 133 addresses a number of issues causing
implementation difficulties for entities that apply FASB Statement No. 138. FASB
Statement No. 138 amends the accounting and reporting requirements of FASB
Statement No. 133 for certain derivative instruments and certain hedging
activities. We expect to adopt Statement of Financial Accounting Standards No.
133 and No. 138 as of January 1, 2001. Management believes that there will be no
material effect to the financial position or results of operation of the
Ultramar Diamond Shamrock logistics business as a result of implementing
Statements No. 133 and No. 138.
In August 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 99,
"Materiality," which provides guidance in applying materiality thresholds to the
preparation of financial statements filed with the SEC and the performance of
audits of those financial statements. In November 1999, the SEC issued SAB No.
100, "Restructuring and Impairment Charges," which provides guidance regarding
the accounting for and disclosure of certain expenses commonly reported in
connection with exit activities and business combinations. In December 1999, the
SEC issued SAB No. 101, "Revenue Recognition in Financial Statements," which
provides the SEC's views in applying generally accepted accounting principles to
selected revenue recognition issues. We have reviewed the guidance of these SABs
and related amendments and believe that the accounting policies of the Ultramar
Diamond Shamrock logistics business and the disclosures in the financial
statements and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are appropriate and adequately address the
requirements of these SABs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e. the risk of loss arising from the adverse
changes in market rates and prices) to which we are exposed is interest rate
risk on our debt. We manage our debt considering various financing alternatives
available in the market. Since the current debt is fixed rate debt with an 8%
interest rate and the total of this debt is not material to the financial
position or performance of the Ultramar Diamond Shamrock logistics business,
there is currently minimal impact to market interest rate risk.
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BUSINESS
We are a Delaware limited partnership formed in December 1999 to acquire,
own, and operate most of Ultramar Diamond Shamrock's crude oil and refined
product pipeline, terminalling, and storage assets that support the McKee, Three
Rivers, and Ardmore refineries and its marketing operations located in Texas,
Oklahoma, Colorado, New Mexico, and Arizona. Effective July 1, 2000, Ultramar
Diamond Shamrock transferred assets to Shamrock Logistics Operations
representing 72% of the book value of its pipeline, terminalling and storage
assets supporting those refining and marketing operations.
We generate revenues from our pipeline operations by charging tariffs for
transporting crude oil and refined products through our pipelines. We also
generate revenue through our terminalling operations by charging a terminalling
fee to our customers, including Ultramar Diamond Shamrock and its affiliates.
The terminalling fee is earned when the refined products enter the terminal and
includes the cost of transferring the refined products from the terminal to
trucks. At our El Paso terminal effective January 1, 2000, we began receiving an
additional fee for delivering refined products to a third-party pipeline. We do
not generate any separate revenue from our crude oil storage facilities.
Instead, the costs associated with these facilities were considered in
establishing the tariff rates charged for transporting crude oil from the
storage facilities to the refineries.
Effective January 1, 2000 we filed revised tariff rates on many of our
crude oil and refined product pipelines to reflect the total cost of the
pipelines, the current throughput capacity and utilization of the pipelines, and
other market conditions. Assuming the revised tariff rates had been effective on
January 1, 1999, the revised tariff rates would have resulted in an aggregate
$21.9 million, or 20%, decrease in our revenues for the year ended December 31,
1999. In addition, beginning January 1, 1999, the Ultramar Diamond Shamrock
logistics business began charging a separate terminalling fee at its refined
product terminals.
The following table sets forth our principal pipelines, the revenues for
the nine months ended September 30, 2000 and the revenues for the year ended
December 31, 1999 and the nine months ended September 30, 1999, as adjusted to
apply our current tariff rates to historical volumes. In instances where we do
not own 100% of a pipeline, the capacity, the throughput, capacity utilization,
and as adjusted revenue information generally relate only to our percentage
ownership in the pipeline. Pipeline length is not adjusted for ownership
percentage. We have also presented aggregate information in the table below
regarding our other pipelines and all of our refined product terminals.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31,
--------------------------- 1999
------------
CAPACITY AS ADJUSTED
ORIGIN AND DESTINATION LENGTH OWNERSHIP CAPACITY THROUGHPUT(1) UTILIZATION REVENUES
---------------------- ------ --------- -------- ------------- ----------- ------------
(miles) (barrels/day) (barrels/day) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
CRUDE OIL PIPELINES:
Corpus Christi, TX to Three
Rivers....................... 69.7 100% 120,000 80,594 67% $10,884
Wasson, OK to Ardmore......... 24.5(3) 100% 90,000 72,161 80% 2,534
Ringgold, TX to Wasson,
OK(2)........................ 44.2 100% 90,000 30,086 40% 3,591
Dixon, TX to McKee............ 44.2 100% 85,000 61,110 72% 2,244
Other Crude Oil Pipelines..... 327.2 (4) 127,500 36,090 35% 3,348
------- --------- ------- -------
TOTAL CRUDE OIL
PIPELINES............. 509.8 512,500 280,041 57% 22,601
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999
AS ADJUSTED 2000
ORIGIN AND DESTINATION REVENUES REVENUES
---------------------- ----------- --------
(in thousands)
<S> <C> <C>
CRUDE OIL PIPELINES:
Corpus Christi, TX to Three
Rivers....................... $ 8,076 $ 8,984
Wasson, OK to Ardmore......... 1,850 2,021
Ringgold, TX to Wasson,
OK(2)........................ 2,914 2,492
Dixon, TX to McKee............ 1,696 1,723
Other Crude Oil Pipelines..... 2,403 2,670
------- -------
TOTAL CRUDE OIL
PIPELINES............. 16,939 17,890
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31,
--------------------------- 1999
------------
CAPACITY AS ADJUSTED
ORIGIN AND DESTINATION LENGTH OWNERSHIP CAPACITY THROUGHPUT(1) UTILIZATION REVENUES
---------------------- ------ --------- -------- ------------- ----------- ------------
(miles) (barrels/day) (barrels/day) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
REFINED PRODUCT PIPELINES:
McKee to Colorado Springs,
CO(2)........................ 256.4 100% 32,000(5) 15,061 73%(5) 7,414
McKee to El Paso, TX.......... 407.7 67% 40,000 33,688 84% 13,108
Amarillo, TX to Albuquerque,
NM........................... 292.7 50% 16,083 12,558 78% 3,811
Ardmore to Wynnewood, OK...... 31.1 100% 90,000 54,833 61% 4,882
McKee to Denver, CO
(Phillips)................... 321.1 30% 12,450 10,752 86% 2,769
Three Rivers to Laredo, TX.... 98.1 100% 16,800 14,743 88% 2,762
Three Rivers to San Antonio,
TX........................... 81.1 100% 33,600 27,819 83% 2,730
McKee to Amarillo, TX
(6")(2)...................... 49.1 100% 51,000 33,548 76% 1,958
McKee to Amarillo, TX
(8")(2)...................... 49.1 100% (6) (6) (6) (6)
Colorado Springs, CO to
Denver, CO................... 100.6 100% 32,000 8,283 26% 5,079
Skellytown, TX to Mont
Belvieu, TX(7)............... 571.2 50% 26,000 16,486 63% (7)
Other Refined Product
Pipelines.................... 561.5(8) (4) 167,288 69,626 42%(8) 5,529
------- --------- ------- -------
TOTAL REFINED PRODUCT
PIPELINES............. 2,819.7 517,221 297,397 60% 50,042
------- --------- ------- -------
TOTAL FOR ALL
PIPELINES............. 3,329.5 1,029,721 577,438 59% 72,643
-------
REFINED PRODUCT TERMINALS..... 15,238
-------
TOTAL.................. $87,881
=======
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999
AS ADJUSTED 2000
ORIGIN AND DESTINATION REVENUES REVENUES
---------------------- ----------- --------
(in thousands)
<S> <C> <C>
REFINED PRODUCT PIPELINES:
McKee to Colorado Springs,
CO(2)........................ 5,453 5,134
McKee to El Paso, TX.......... 9,677 11,332
Amarillo, TX to Albuquerque,
NM........................... 2,896 2,920
Ardmore to Wynnewood, OK...... 3,499 3,543
McKee to Denver, CO
(Phillips)................... 2,083 2,302
Three Rivers to Laredo, TX.... 2,004 2,274
Three Rivers to San Antonio,
TX........................... 2,044 1,986
McKee to Amarillo, TX
(6")(2)...................... 1,451 1,623
McKee to Amarillo, TX
(8")(2)...................... (6) (6)
Colorado Springs, CO to
Denver, CO................... 4,322 4,221
Skellytown, TX to Mont
Belvieu, TX(7)............... (7) (7)
Other Refined Product
Pipelines.................... 4,055 4,491
------- -------
TOTAL REFINED PRODUCT
PIPELINES............. 37,484 39,826
------- -------
TOTAL FOR ALL
PIPELINES............. 54,423 57,716
------- -------
REFINED PRODUCT TERMINALS..... 10,974 11,690
------- -------
TOTAL.................. $65,397 $69,406
======= =======
</TABLE>
---------------
(1) Average daily throughput for the year ended December 31, 1999, measured in
barrels. Please read "-- Pipeline Operations."
(2) This pipeline transports barrels relating to two tariff routes, one of which
begins at this pipeline's origin and ends at this pipeline's destination and
one of which is a larger tariff route with an origin or destination on
another pipeline of ours which connects to this pipeline. Throughput
disclosed above for this pipeline reflects only the barrels subject to the
tariff route beginning at this pipeline's origin and ending at this
pipeline's destination. To accurately determine the actual capacity
utilization of the pipeline, as well as aggregate capacity utilization, all
barrels passing through the pipelines have been taken into account for
purposes of calculating capacity utilization.
(3) Represents combined length of two pipelines.
(4) We own less than a 100% interest in some of the pipelines which are included
in the aggregate amounts opposite the line items "Other Crude Oil Pipelines"
and "Other Refined Product Pipelines."
(5) Effective March 31, 2000, the McKee to Colorado Springs refined product
pipeline expansion was completed, increasing the capacity to 52,000 barrels
per day. The 1999 capacity utilization is based on a capacity of 32,000
barrels per day.
(6) The throughput, capacity, capacity utilization and as adjusted revenue
information listed opposite the McKee to Amarillo 6-inch pipeline includes
both McKee to Amarillo pipelines on a combined basis.
(7) We own a 50% interest in Skelly-Belvieu Pipeline Company, LLC, which owns
the Skellytown to Mont Belvieu refined product pipeline. The throughput and
capacity information represent 50% of the total amounts for the pipeline. In
1999, we received $4.2 million in distributions as a result of our 50% share
of Skelly-Belvieu Pipeline Company.
(8) Includes 263.6 miles of idle looped 6-inch sections of the Amarillo to
Albuquerque refined product pipeline. The capacity utilization calculation
excludes idle pipe.
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OUR RELATIONSHIP WITH ULTRAMAR DIAMOND SHAMROCK
Ultramar Diamond Shamrock is an independent refiner and marketer of refined
products in North America. Ultramar Diamond Shamrock owns and operates seven
refineries, three of which are served by our pipelines and terminals:
- the McKee refinery, which has a current total capacity to process 170,000
barrels of crude oil and other raw materials per day, making it the
largest refinery located between the Texas Gulf Coast and the West Coast;
- the Three Rivers refinery, which has a current total capacity to process
98,000 barrels of crude oil and other raw materials per day; and
- the Ardmore refinery, which has a current total capacity to process
85,000 barrels of crude oil and other raw materials per day.
Ultramar Diamond Shamrock markets the refined products produced by these
refineries primarily in Texas, Oklahoma, Colorado, New Mexico, and Arizona
through approximately 1,362 company-operated retail convenience stores and
approximately 1,660 independently owned and operated retail and convenience
stores and outlets under Ultramar Diamond Shamrock brands, as well as through
other wholesale and spot market sales and exchange agreements.
Our operations are strategically located within Ultramar Diamond Shamrock's
refining and marketing supply chain, but we do not own or operate any refining
or marketing assets. Ultramar Diamond Shamrock is dependent upon us to provide
transportation services that support its refining and marketing operations. In
1999 and the first nine months of 2000, the McKee, Three Rivers, and Ardmore
refineries obtained approximately 75% of their crude oil and other feedstocks
through our crude oil pipelines. During the same periods, Ultramar Diamond
Shamrock transported through our refined product pipelines approximately 75% of
the production from its McKee, Three Rivers, and Ardmore refineries. The three
refineries received the remaining 25% of their crude oil and other raw materials
and transported the remaining 25% of their refined products over pipelines
retained by Ultramar Diamond Shamrock and by truck and rail.
In 1999, assuming we had realized our revised tariff rates on historical
throughput barrels, we would have generated revenues of $87.9 million. Ultramar
Diamond Shamrock and its affiliates would have accounted for 99% of this amount.
Although we intend to pursue strategic acquisitions of logistics assets as
opportunities may arise, we expect to continue to derive substantially all of
our revenues from Ultramar Diamond Shamrock and its affiliates for the
foreseeable future.
Pipelines and Terminals Usage Agreement with Ultramar Diamond
Shamrock. Under a pipelines and terminals usage agreement, Ultramar Diamond
Shamrock has agreed for seven years:
- to transport in our crude oil pipelines at least 75% of the aggregate
volumes of the crude oil shipped to the McKee, Three Rivers and Ardmore
refineries;
- to transport in our refined product pipelines at least 75% of the
aggregate volumes of the refined products (excluding residual oils,
primarily asphalt and fuel oil) shipped from these refineries; and
- to use our refined product terminals for terminalling services for at
least 50% of the refined products (excluding residual oils, primarily
asphalt and fuel oil) shipped from these refineries.
Ultramar Diamond Shamrock's obligation to use our crude oil and refined
product pipelines and terminals will be suspended if material changes occur in
the market conditions for the
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transportation of crude oil and refined products, or in the markets served by
these refineries at the closing of this offering that have a material adverse
effect on Ultramar Diamond Shamrock or if we are unable to handle the volumes
Ultramar Diamond Shamrock requests that we transport due to operational
difficulties with the pipelines or terminals.
In addition, Ultramar Diamond Shamrock has agreed to remain the shipper for
crude oil or refined products owned by it transported through our pipelines, and
neither challenge, nor cause others to challenge, our interstate or intrastate
tariff rates for the transportation of crude oil and refined products for seven
years.
Ultramar Diamond Shamrock owns and controls our general partner. We will
not have any employees. Employees of Ultramar Diamond Shamrock and its
affiliates will perform services on our behalf, and those entities will be
reimbursed for the services rendered by their employees. In addition, we will
pay Ultramar Diamond Shamrock and its affiliates an annual administrative fee of
$5.2 million. UDS Logistics, LLC, the limited partner of our general partner,
will also own a total of 4,399,322 common units and 8,999,322 subordinated units
representing an aggregate 75.5% limited partner interest in us and Shamrock
Logistics Operations. Our general partner will also own incentive distribution
rights giving it higher percentages of our cash distributions as various target
distribution levels are met. In addition, we have entered into an omnibus
agreement with Ultramar Diamond Shamrock which, among other things, governs
potential competition between us and our subsidiaries, on the one hand, and
Ultramar Diamond Shamrock and its affiliates, on the other. Please read
"Management -- Administrative Fee and Reimbursement of Expenses" and "Certain
Relationships and Related Transactions -- Omnibus Agreement."
BUSINESS STRATEGIES
The primary objective of our business strategies is to increase
distributable cash flow per unit. Our business strategies include:
SUSTAINING HIGH LEVELS OF THROUGHPUT AND CASH FLOW. Our base strategy is to
sustain our current levels of throughput and cash flow, which will provide a
strong platform for the future growth of our transportation, terminalling, and
storage business. Accordingly, we intend to continue to invest in our existing
pipeline, terminalling, and storage assets in order to maintain and increase the
current capacity and throughput of our pipelines. In order to ensure stable
throughput of crude oil and refined products for our pipelines, we have
established what we believe are competitive tariff rates for our pipelines, and
we have also entered into a seven-year agreement with Ultramar Diamond Shamrock
governing the transportation of the crude oil supplied to and refined products
transported from its McKee, Three Rivers, and Ardmore refineries.
INCREASING THROUGHPUT IN OUR EXISTING PIPELINES AND SHIFTING VOLUMES TO
HIGHER TARIFF PIPELINES. We have available capacity in all of our existing
pipelines. In 1999, we averaged 57% capacity utilization in our crude oil
pipelines and 60% capacity utilization in our refined product pipelines. Over
time, we believe the strong refined product demand growth in the southwestern
and Rocky Mountain regions of the United States will allow us to shift some
refined product throughput to our higher tariff, long-distance refined product
pipelines from some of our lower tariff refined product pipelines. In addition,
we expect Ultramar Diamond Shamrock to increase the capacity and throughput at
the McKee refinery to supply a part of this growing refined product demand and
to transport the resulting increased volumes of crude oil and other raw
materials and refined products through our pipelines. In the future, depending
on market conditions, we may also have the opportunity to transport through our
pipelines crude oil and refined products that are currently transported through
pipelines retained by Ultramar Diamond Shamrock and to transport additional
third-party volumes.
INCREASING OUR PIPELINE CAPACITY THROUGH EXPANSIONS AND NEW
CONSTRUCTION. We are continually evaluating opportunities to increase capacity
in our existing pipelines by adding
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<PAGE> 74
pumping stations or horsepower to existing pumping stations or increasing
pipeline diameter to keep pace with increases in crude oil and refined product
demand. Since 1990, we have increased our aggregate crude oil pipeline capacity
by 90,000 barrels per day and our aggregate refined product pipeline capacity by
over 220,000 barrels per day through an acquisition, expansion projects, and the
construction of new pipelines. Recently we completed an expansion project to
increase the capacity of our McKee to Colorado Springs refined product pipeline
by 20,000 barrels per day. Ultramar Diamond Shamrock plans to construct a new
pipeline from our Laredo Terminal to Nuevo Laredo, Mexico to supply refined
product to the market in Nuevo Laredo and the surrounding area. At our option,
Ultramar Diamond Shamrock has agreed to transfer this pipeline to us for
approximately $5.7 million upon completion, which is expected to occur during
the fourth quarter of 2001. In addition, by the end of the first quarter of
2002, we intend to exercise our option to purchase a crude oil pipeline that
runs from Wichita Falls, Texas to the McKee refinery and related storage
facility at Wichita Falls, Texas for $64 million that supply a significant
portion of the crude oil processed at Ultramar Diamond Shamrock's McKee refinery
and to purchase newly constructed crude oil tankage for approximately $6.5
million at Ringgold, Texas, which is part of the system supplying crude oil to
Ultramar Diamond Shamrock's Ardmore and McKee refineries. We will also consider
extending existing refined product pipelines or constructing new refined product
pipelines to meet rising refined product demand that Ultramar Diamond Shamrock
intends to supply in high growth areas in the southwestern and Rocky Mountain
regions of the United States.
PURSUING SELECTIVE STRATEGIC AND ACCRETIVE ACQUISITIONS THAT COMPLEMENT OUR
EXISTING ASSET BASE. We plan to actively pursue opportunities that may arise to
purchase logistics assets that can increase our cash flow per unit. In September
1997, as part of Ultramar Diamond Shamrock's acquisition of Total Petroleum
(North America) Ltd., we acquired the pipelines supplying crude oil to and
transporting refined products from the Ardmore refinery. As a result, the
aggregate average daily throughput in our crude oil pipelines increased 71% for
the fourth quarter of 1997 over 1996's average daily throughput and the
aggregate average daily throughput in our refined product pipelines increased
15% for the fourth quarter of 1997 over 1996's average daily throughput. We
believe future acquisition opportunities may include assets acquired by Ultramar
Diamond Shamrock after the offering and some of the pipeline assets retained by
Ultramar Diamond Shamrock at closing as well as assets owned by third parties.
We expect that the assets to be acquired may include pipeline assets, terminal
and storage facilities, and other logistics assets that we believe will
contribute to the successful execution of our business strategies.
CONTINUING TO IMPROVE OUR OPERATING EFFICIENCY. We aggressively monitor and
control our cost structure. We have been able to implement cost saving
initiatives such as utilizing chemical additives to reduce friction in some of
our pipelines and by aggressively negotiating more favorable rate structures
with our power providers. Over the last five years, these cost-saving
initiatives have resulted in savings in excess of $5 million. We intend to
continue to make investments to improve our operations and pursue cost saving
initiatives.
COMPETITIVE STRENGTHS
We believe we are well positioned to successfully execute our business
strategies due to the following competitive strengths:
WE HAVE A UNIQUE STRATEGIC RELATIONSHIP WITH ULTRAMAR DIAMOND SHAMROCK'S
REFINING AND MARKETING OPERATIONS. Our pipelines, terminals, and storage
facilities were built by Ultramar Diamond Shamrock to provide the most efficient
and cost-effective transportation and logistics services to the refining and
marketing operations they serve in the southwestern and Rocky Mountain regions
of the United States. Pipeline transportation is the most efficient and cost
effective mode of transportation of petroleum commodities over long and
intermediate distances to inland markets. Truck and rail are traditionally more
competitive only on short-haul transport.
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Our pipelines, which are directly connected to Ultramar Diamond Shamrock's
McKee, Three Rivers and Ardmore refineries, provide the most competitive access
to crude oil and other raw materials for these refineries, and for distribution
of the refined products produced at these refineries to Ultramar Diamond
Shamrock's markets in Texas, Oklahoma, Colorado, New Mexico, and Arizona because
there are no other significant pipelines that directly connect these refineries
to sources of crude oil, markets for refined products and third party pipelines,
other than the pipelines being retained by Ultramar Diamond Shamrock and with
respect to which we have an option to purchase as described under "Business --
Recently Completed and Planned Expansion Projections -- Planned Expansion
Projects." Further, our pipelines are most competitive because they are already
connected to these refineries. New pipelines would require extensive capital
investments and would most likely not be competitive if they were also required
to produce a fair return to the investor. In 1999, the McKee, Three Rivers, and
Ardmore refineries obtained approximately 75% of their crude oil and other raw
materials through our crude oil pipelines and transported approximately 75% of
their refined products through our refined product pipelines.
In addition, Ultramar Diamond Shamrock has committed to use our pipelines
to transport 75% of the crude oil shipped to and 75% of the refined product
shipped from the McKee, Three Rivers, and Ardmore refineries and to use our
refined product terminals for 50% of the refined products shipped from these
refineries. Further, Ultramar Diamond Shamrock has a significant economic
incentive to see that our pipeline, terminalling, and storage assets are managed
in the best interests of unitholders because, as the ultimate parent of our
general partner and other affiliates, it will indirectly own an aggregate 75.5%
limited partner interest in us and Shamrock Logistics Operations.
WE PROVIDE ULTRAMAR DIAMOND SHAMROCK WITH STRATEGIC LINKS TO GROWING
MARKETS. Our refined product pipelines serve Ultramar Diamond Shamrock's
marketing operations in the southwestern and Rocky Mountain regions of the
United States. These operations are concentrated in metropolitan areas in the
states of Texas, Colorado, New Mexico, and Arizona that are expected to exceed
the national average of projected cumulative population growth for the years
2000 through 2010. In addition, we expect the projected above-average population
growth in these markets, which are directly or, in the case of Arizona,
indirectly linked to our operations, to result in increased demand for gasoline
and diesel. In 1999, gasoline and distillates (which includes diesel and jet
fuel) represented, in the aggregate, approximately 83% of the throughput we
transported through our refined product pipelines. We believe that any increase
of refined products sold by Ultramar Diamond Shamrock into these markets will
directly result in increased throughput for our refined product pipelines.
WE BELIEVE OUR PIPELINE, TERMINALLING, AND STORAGE ASSETS ARE MODERN,
EFFICIENT, AND WELL MAINTAINED. Approximately 50% of our total pipeline
ownership mileage has been built since 1990. The remainder of our pipeline,
terminalling, and storage assets have been built at various times since 1954,
but have been continually upgraded and are kept in excellent operating
condition. We have spent approximately $14 million since 1995 to maintain our
pipeline, terminalling, and storage assets. All of our crude oil and refined
product pipelines are operated via satellite communications systems from one of
our two control centers. The control centers operate with state-of-the-art
computer systems designed to automatically detect leaks and to continuously
monitor real time operational data, including crude oil and refined product
quantities, flow rates, and pressures.
OUR PIPELINES HAVE AVAILABLE CAPACITY WHICH PROVIDES US THE OPPORTUNITY TO
INCREASE THROUGHPUT AND DISTRIBUTABLE CASH FLOW FROM EXISTING ASSETS. We have
available capacity in all of our existing pipelines; in 1999, we averaged 57%
capacity utilization in our crude oil pipelines and 60% capacity utilization in
our refined product pipelines. Any increased throughput that utilizes available
capacity or any shift of throughput to higher tariff, long-haul pipelines will
have a
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positive effect on our net income and distributable cash flow because a major
portion of the operating costs associated with our pipelines are fixed.
WE HAVE THE FINANCIAL FLEXIBILITY TO PURSUE EXPANSION AND ACQUISITION
OPPORTUNITIES. Concurrently with the closing of this offering, we will enter
into a $120 million revolving credit facility under which we expect to have
borrowing capacity of approximately $56.3 million immediately after the closing
of this offering. In addition, we believe we have additional debt capacity
beyond that available under the revolving credit facility. In combination with
our ability to issue new partnership units, we have significant resources to
finance strategic expansion and acquisition opportunities.
OUR GENERAL PARTNER HAS AN EXPERIENCED MANAGEMENT TEAM. Our general
partner's senior management team has an average of approximately 20 years of
industry experience. In order to provide incentives to management and to align
their economic interests with those of common unitholders, the general partner
intends to adopt short-, intermediate- and long-term incentive plans under which
common units will be awarded to executive officers of the general partner and
employees of Ultramar Diamond Shamrock performing key functions for our
operations. In addition, we expect that Ultramar Diamond Shamrock will pay
bonuses to the general partner's executive officers based on our financial
performance.
PIPELINE OPERATIONS
We have an ownership interest in eight crude oil pipelines with an
aggregate length of 509.8 miles and 18 refined product pipelines with an
aggregate length of 2,819.7 miles. We currently operate all of these pipelines
except for:
- the McKee to Denver (Phillips) refined product pipeline in which we have
a minority ownership interest and which is operated by the Phillips
Petroleum Company; and
- the Hooker to Clawson segment of the Hooker to McKee crude oil pipeline
in which segment we have a 50% ownership interest and which is operated
by the Jayhawk Pipeline Company.
On each of the pipelines, only Ultramar Diamond Shamrock transports crude
oil and refined products on the capacity attributable to our ownership interest
except for:
- the Amarillo to Albuquerque refined product pipeline, on which Equiva
Trading Company also transports refined products through our share of the
pipeline's capacity; and
- the Amarillo to Abernathy refined product pipeline, on which Phillips
Texas Pipeline Company also transports refined products through our share
of the pipeline's capacity.
On the pipelines where we own less than a 100% ownership interest, we fund
capital expenditures in proportion to our respective ownership percentages.
The term throughput as used in this prospectus generally refers to the
crude oil or refined product barrels, as applicable, that pass through each
pipeline, even if those barrels also are transported in another of our pipelines
for which we received a separate tariff. In the case of each of the Clawson to
McKee, Ringgold to Wasson, McKee to Colorado Springs and McKee to Amarillo
pipelines, the pipeline transports barrels relating to two tariff rates, one of
which begins at this pipeline's origin and ends at this pipeline's destination
and one of which is a longer tariff route with an origin or destination in
another pipeline of ours which connects to this pipeline. Throughput for those
pipelines reflect only the barrels subject to the tariff route beginning at the
pipeline's origin and ending at the pipeline's destination. To accurately
determine the actual capacity utilization of those pipelines, as well as
aggregate capacity utilization, all barrels passing through the pipelines have
been taken into account for purposes of calculating capacity utilization.
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CRUDE OIL PIPELINES
Our crude oil pipelines deliver crude oil and other raw materials, such as
gas oil and normal butane, from various points in Texas, Oklahoma, Kansas, and
Colorado to Ultramar Diamond Shamrock's McKee, Three Rivers, and Ardmore
refineries. Since 1995, throughput on our crude oil pipelines, including the
effect of acquisitions, has increased at an average annual rate of 19% per year.
The table below sets forth the average daily number of barrels of crude oil we
transported through our crude oil pipelines, in the aggregate, in each of the
periods presented. The increase in throughput for the year 1997 is primarily
attributable to the acquisition of the Ringgold to Wasson, the Healdton to
Ringling, and the Wasson to Ardmore crude oil pipelines in September 1997. The
throughput set forth below for 1997 reflects the average daily throughput in
those crude oil pipelines from the date of the acquisition through the end of
the year.
<TABLE>
<CAPTION>
AGGREGATE THROUGHPUT
------------------------------------------------------------------
(barrels/day)
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Crude oil................................... 140,103 157,963 282,736 265,243 280,041 296,413
</TABLE>
The following table sets forth, for each of our crude oil pipelines, the
origin and destination, length in miles (not adjusted for ownership percentage),
ownership percentage, capacity, throughput, and capacity utilization for the
year ended December 31, 1999 and for the nine months ended September 30, 1999
and 2000. Additional information regarding each crude oil pipeline is contained
in the text following the table.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
---------------------------
CAPACITY
ORIGIN AND DESTINATION LENGTH OWNERSHIP CAPACITY THROUGHPUT UTILIZATION
---------------------- ------ --------- -------- ---------- -----------
(miles) (barrels/day) (barrels/day)
<S> <C> <C> <C> <C> <C>
Cheyenne Wells, CO to
McKee................ 252.2 100% 17,500 11,045 63%
Dixon, TX to McKee.... 44.2 100% 85,000 61,110 72%
Hooker, OK to Clawson,
TX(1)................ 30.8 50% 22,000 8,012 36%
Clawson, TX to
McKee(2)............. 40.7 100% 36,000 11,140 53%
Corpus Christi, TX to
Three Rivers......... 69.7 100% 120,000 80,594 67%
Ringgold, TX to
Wasson, OK(2)........ 44.2 100% 90,000 30,086 40%
Healdton, OK to
Ringling, OK......... 3.5 100% 52,000 5,893 11%
Wasson, OK to
Ardmore.............. 24.5(3) 100% 90,000 72,161 80%
------ ------- -------
509.8 512,500 280,041 57%
====== ======= =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1999 2000
--------------------------- ---------------------------
CAPACITY CAPACITY
ORIGIN AND DESTINATION THROUGHPUT UTILIZATION THROUGHPUT UTILIZATION
---------------------- ---------- ----------- ---------- -----------
(barrels/day) (barrels/day)
<S> <C> <C> <C> <C>
Cheyenne Wells, CO to
McKee................ 11,029 63% 12,069 69%
Dixon, TX to McKee.... 61,761 73% 62,322 73%
Hooker, OK to Clawson,
TX(1)................ 7,922 36% 5,507 25%
Clawson, TX to
McKee(2)............. 11,383 54% 10,409 44%
Corpus Christi, TX to
Three Rivers......... 79,954 67% 87,053 73%
Ringgold, TX to
Wasson, OK(2)........ 32,641 39% 28,128 47%
Healdton, OK to
Ringling, OK......... 2,778 5% 14,361 28%
Wasson, OK to
Ardmore.............. 70,462 78% 76,564 85%
------- -------
277,930 56% 296,413 62%
======= =======
</TABLE>
---------------
(1) We receive a split tariff with respect to 100% of the barrels transported in
the Hooker to Clawson segment, notwithstanding our 50% ownership interest.
Accordingly, the capacity, throughput and capacity utilization are given
with respect to 100% of the pipeline.
(2) This pipeline transports barrels relating to two tariff routes, one of which
begins at this pipeline's origin and ends at this pipeline's destination and
one of which is a longer tariff route with an origin or destination on
another pipeline of ours which connects to this pipeline. Throughput
disclosed above for this pipeline reflects only the barrels subject to the
tariff route beginning at this pipeline's origin and ending at this
pipeline's destination. To accurately determine the actual capacity
utilization of the pipeline, as well as aggregate capacity utilization, all
barrels passing through the pipelines have been taken into account for
purposes of calculating capacity utilization.
(3) Represents combined length of two pipelines.
Cheyenne Wells to McKee. The Cheyenne Wells to McKee crude oil pipeline is
a 252.2-mile, 6-inch diameter pipeline with 17,500 barrels per day of total
capacity. The pipeline originates in
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Cheyenne Wells, Colorado and transports crude oil to the McKee refinery from
gathering systems owned by Ultramar Diamond Shamrock and third party pipelines
in eastern Colorado and southwestern Kansas. The pipeline has an additional
5.5-mile section which originates in southwestern Kansas and intersects with the
pipeline just north of Sturgis, Oklahoma. We are the sole owner of this
pipeline. Ultramar Diamond Shamrock is currently the only shipper. The pipeline
is subject to the regulatory jurisdiction of the FERC. The pipeline was
constructed in 1969.
Dixon to McKee. The Dixon to McKee crude oil pipeline is a 44.2-mile
pipeline, which consists of 28.4 miles of 14-inch diameter pipe and 15.8 miles
of 16-inch diameter pipe. The pipeline has a total capacity of 85,000 barrels
per day. The pipeline originates at the Dixon Pump Station in Borger, Texas and
transports crude oil to the McKee refinery from third party crude oil pipelines
and gathering systems in the Texas panhandle. We are the sole owner of this
pipeline. Ultramar Diamond Shamrock is currently the only shipper. The pipeline
is subject to the regulatory jurisdiction of the Texas Railroad Commission. The
pipeline was constructed in 1979.
Hooker to Clawson to McKee. The Hooker to Clawson to McKee crude oil
pipeline is a 71.5-mile, 8-inch diameter, pipeline originating in Hooker,
Oklahoma, passing through Clawson, Texas, and terminating at the McKee refinery.
The pipeline has two segments: the 30.8-mile Hooker to Clawson segment and the
40.7-mile Clawson to McKee segment. We have a 50% interest in the Hooker to
Clawson segment, with the remaining 50% owned by Jayhawk Pipeline Company, which
operates that segment. We are the sole owner of the Clawson to McKee segment.
The Hooker to Clawson segment has a total capacity of 22,000 barrels per day.
The Clawson to McKee segment has a total capacity of 36,000 barrels per day. The
pipeline transports crude oil to the McKee refinery from third party gathering
systems in Oklahoma, Kansas, and the Texas panhandle. We receive two different
tariffs for crude oil transported over this pipeline: one for crude oil
transported from Hooker to McKee and one for crude oil transported from Clawson
to McKee. The Hooker to McKee tariff is a "joint" tariff which we split with
Jayhawk Pipeline Company with respect to all barrels transported in the Hooker
to Clawson segment. Ultramar Diamond Shamrock has access to Jayhawk's unused
capacity in the Hooker to Clawson segment at the established tariff rate.
Ultramar Diamond Shamrock is currently the only shipper in each segment. The
pipeline is subject to the regulatory jurisdiction of the FERC. The Clawson to
McKee segment was constructed in 1957 and the Hooker to Clawson segment was
constructed in 1990.
Corpus Christi to Three Rivers. The Corpus Christi to Three Rivers crude
oil pipeline is a 69.7-mile, 16-inch diameter pipeline with 120,000 barrels per
day of total capacity. The pipeline originates at our Corpus Christi crude oil
storage facility and transports primarily foreign crude oil offloaded from
ocean-going vessels at the crude oil storage facility to the Three Rivers
refinery. We are the sole owner of the pipeline. Ultramar Diamond Shamrock is
currently the only shipper. The pipeline is subject to the regulatory
jurisdiction of the Texas Railroad Commission. The pipeline was constructed in
1994.
Ringgold to Wasson. The Ringgold to Wasson crude oil pipeline is a
44.2-mile, 16-inch diameter pipeline with 90,000 barrels per day of total
capacity. The pipeline originates in Ringgold, Texas and passes through the
Ringling junction in Ringling, Oklahoma before terminating at our crude oil
storage facility in Wasson, Oklahoma. The pipeline transports crude oil to
Wasson from Ringgold, where it connects a common carrier pipeline that delivers
crude oil from the Permian Basin in western Texas and the Texas Gulf Coast. We
are the sole owner of this pipeline. Ultramar Diamond Shamrock is currently the
only shipper. The pipeline is subject to the regulatory jurisdiction of the
FERC. The pipeline segment from Ringling junction to Wasson was built in 1993
and extended from Ringling junction to Ringgold in 1995.
Healdton to Ringling. The Healdton to Ringling crude oil pipeline is a
3.5-mile, 12-inch diameter pipeline with 52,000 barrels per day of total
capacity. The pipeline originates at the
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<PAGE> 79
Amoco Station in Healdton, Oklahoma and transports crude oil from a common
carrier crude oil pipeline in southern Oklahoma to the Ringling junction where
it connects to the Ringgold to Wasson crude oil pipeline. However, the tariff we
receive on this pipeline covers the transportation of crude oil all the way from
Healdton to Wasson. We are the sole owner of this pipeline. Ultramar Diamond
Shamrock is currently the only shipper. The pipeline is subject to the
regulatory jurisdiction of the FERC. The pipeline was constructed in 1996.
Wasson to Ardmore. The Wasson to Ardmore crude oil pipelines consist of a
15-mile, 8- and 10-inch diameter pipeline and a 9.5-mile, 8-inch diameter
pipeline. The longer pipeline runs the entire distance from Wasson to the
Ardmore refinery, while the shorter pipeline runs parallel to it for 9.5 miles
from Wasson to an interconnection with the longer pipeline, where the crude oil
shipped on the shorter pipeline feeds into the longer pipeline for transport
over the remaining distance to the refinery. The pipelines have a combined total
capacity of 90,000 barrels per day. The pipelines originate at our crude oil
storage facility in Wasson, Oklahoma and transport crude oil from Wasson to the
Ardmore refinery in Ardmore, Oklahoma. We are the sole owner of these pipelines.
Ultramar Diamond Shamrock is currently the only shipper. The pipelines are
subject to the regulatory jurisdiction of the FERC. The 15-mile pipeline was
constructed in 1984 and the 9.5-mile pipeline was constructed in 1991.
REFINED PRODUCT PIPELINES
Our refined product pipelines transport refined products from Ultramar
Diamond Shamrock's McKee, Three Rivers, and Ardmore refineries, directly or
indirectly, to markets in Texas, Oklahoma, Colorado, New Mexico, and Arizona.
The refined products transported in these pipelines include conventional
gasoline, federal specification reformulated gasoline, other oxygenated
gasolines, distillates (including high- and low-sulfur diesel and jet fuel),
natural gas liquids (such as propane and butane), blendstocks, and petrochemical
raw materials such as toluene, xylene, and raffinate. Blendstocks are
intermediate products in the refining process that are used as raw materials by
other refineries. Toluene, xylene, and raffinate are raw materials used by
petrochemical plants in the manufacture of diverse products such as styrofoam,
nylon, plastic bottles, and foam cushions. In 1999, gasoline and distillates
represented approximately 55% and 28%, respectively, of the total throughput in
our refined product pipelines.
Since 1995, throughput for our refined product pipelines, including
acquisitions, has increased at an average annual rate of 12% per year. The table
below sets forth the average daily number of barrels of refined products we
transported through our refined product pipelines, in the aggregate, in each of
the periods presented. We acquired the Ardmore to Wynnewood refined product
pipeline in September 1997. In the case of that pipeline, the throughput set
forth below for 1997 reflects the average daily throughput from the date of the
acquisition through the end of the year.
<TABLE>
<CAPTION>
AGGREGATE THROUGHPUT
-------------------------------------------------------------------
(BARRELS/DAY)
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Refined products...................... 184,637 210,548 257,183 268,064 297,397 315,807
</TABLE>
73
<PAGE> 80
The following table sets forth, for each of our refined product pipelines,
the origin and destination, length in miles (not adjusted for ownership
percentage), ownership percentage, throughput, capacity, and capacity
utilization for the year ended December 31, 1999 and the nine months ended
September 30, 1999 and 2000. Additional information regarding each refined
product pipeline is contained in the text following the table. In instances
where we own less than 100% of a pipeline, our ownership percentage is
indicated, and the capacity, throughput, and capacity utilization information
reflect only our ownership interest in these pipelines.
<TABLE>
<CAPTION>
DECEMBER 31,
1999
---------------------------
CAPACITY
ORIGIN AND DESTINATION LENGTH OWNERSHIP CAPACITY THROUGHPUT UTILIZATION
---------------------- ------ --------- -------- ---------- -----------
(miles) (barrels/day) (barrels/day)
<S> <C> <C> <C> <C> <C>
McKee to El Paso, TX......................... 407.7 67% 40,000 33,688 84%
McKee to Colorado Springs, CO(1)............. 256.4 100% 32,000(4) 15,061 73%(4)
Colorado Springs, CO to Airport.............. 1.7 100% 12,000 1,488 12%
Colorado Springs, CO to Denver, CO........... 100.6 100% 32,000 8,283 26%
McKee to Denver, CO (Phillips)............... 321.1 30% 12,450 10,752 86%
McKee to Amarillo, TX (6")(1)(2)............. 49.1 100% 51,000 33,548 76%
McKee to Amarillo, TX (8")(1)(2)............. 49.1 100%
Amarillo, TX to Abernathy, TX................ 102.1 39% 9,288 7,533 81%
Amarillo, TX to Albuquerque, NM.............. 292.7 50% 16,083 12,558 78%
McKee to Skellytown, TX...................... 52.8 100% 52,000 9,169 18%
Skellytown, TX to Mont Belvieu, TX (Skelly-
Belvieu).................................... 571.2 50% 26,000 16,486 63%
Three Rivers to San Antonio, TX.............. 81.1 100% 33,600 27,819 83%
Three Rivers to Laredo, TX................... 98.1 100% 16,800 14,743 88%
Three Rivers to Corpus Christi, TX........... 71.6 100% 15,000 6,061 40%
Three Rivers to Pettus, TX (12")............. 28.8 100% 24,000 18,859 79%
Three Rivers to Pettus, TX (8").............. 28.8 100% 15,000 6,047 40%
Ardmore to Wynnewood, OK..................... 31.1 100% 90,000 54,833 61%
El Paso, TX to Kinder Morgan................. 12.1 67% 40,000 20,469 51%
Other refined product pipelines(3)........... 263.6 50% N/A N/A N/A
------- ------- -------
2,819.7 517,221 297,397 60%
======= ======= =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1999 2000
--------------------------- ---------------------------
CAPACITY CAPACITY
ORIGIN AND DESTINATION THROUGHPUT UTILIZATION THROUGHPUT UTILIZATION
---------------------- ---------- ----------- ---------- -----------
(barrels/day) (barrels/day)
<S> <C> <C> <C> <C>
McKee to El Paso, TX......................... 33,251 83% 38,706 97%
McKee to Colorado Springs, CO(1)............. 14,812 76% 13,858 72%
Colorado Springs, CO to Airport.............. 1,485 12% 1,493 12%
Colorado Springs, CO to Denver, CO........... 9,423 29% 9,136 29%
McKee to Denver, CO (Phillips)............... 10,859 87% 11,919 96%
McKee to Amarillo, TX (6")(1)(2)............. 31,660 71% 30,869 70%
McKee to Amarillo, TX (8")(1)(2).............
Amarillo, TX to Abernathy, TX................ 7,730 83% 6,053 65%
Amarillo, TX to Albuquerque, NM.............. 12,710 79% 12,827 80%
McKee to Skellytown, TX...................... 10,176 20% 9,893 19%
Skellytown, TX to Mont Belvieu, TX (Skelly-
Belvieu).................................... 16,079 62% 18,877 73%
Three Rivers to San Antonio, TX.............. 27,848 83% 26,953 80%
Three Rivers to Laredo, TX................... 14,303 85% 16,168 96%
Three Rivers to Corpus Christi, TX........... 5,477 37% 5,992 40%
Three Rivers to Pettus, TX (12")............. 19,389 81% 18,810 78%
Three Rivers to Pettus, TX (8").............. 5,830 39% 13,343 89%
Ardmore to Wynnewood, OK..................... 53,374 59% 56,011 62%
El Paso, TX to Kinder Morgan................. 20,393 51% 24,899 62%
Other refined product pipelines(3)........... N/A N/A N/A N/A
------- -------
294,799 60% 315,807 64%
======= =======
</TABLE>
---------------
(1) This pipeline transports barrels relating to two tariff rates, one of which
begins at this pipeline's origin and ends at this pipeline's destination and
one of which is a longer tariff route with an origin or destination on
another pipeline of ours which connects to this pipeline. Throughput
disclosed above for this pipeline reflects only the barrels subject to the
tariff route beginning at this pipeline's origin and ending at this
pipeline's destination. To accurately determine the actual capacity
utilization of the pipeline, as well as aggregate capacity utilization, all
barrels passing through the pipelines have been taken into account for
purposes of calculating capacity utilization.
(2) The throughput, capacity, and capacity utilization information listed
opposite the McKee to Amarillo 6-inch pipeline includes both McKee to
Amarillo pipelines on a combined basis.
(3) Represents the idle looped 6-inch sections of the Amarillo to Albuquerque
refined product pipeline.
(4) Effective March 31, 2000, the McKee to Colorado Springs refined product
pipeline expansion was completed, increasing the capacity to 52,000 barrels
per day. The 1999 capacity utilization is based on a capacity of 32,000
barrels per day.
McKee to El Paso. The McKee to El Paso refined product pipeline is a
407.7-mile, 10-inch diameter pipeline with 60,000 barrels per day of total
capacity. The pipeline transports refined products from the McKee refinery to
the El Paso terminal. We own a 66.67% interest in the pipeline, with the
remaining 33.33% interest owned by Phillips Petroleum Company. Our share of the
pipeline's capacity is 40,000 barrels per day. Approximately 60% of throughput
in 1999 was transported on to the Arizona markets via the Kinder Morgan pipeline
and approximately 40% was distributed from the El Paso terminal. Ultramar
Diamond Shamrock is currently the only shipper on our share of the capacity. The
pipeline is subject to the regulatory jurisdiction of the FERC. The pipeline was
constructed in 1995, and was expanded in 1997 and again in 1999.
We also own a 6-mile refined product pipeline connection from our El Paso
terminal to the east line of Kinder Morgan's pipeline. The connection consists
of two parallel pipelines, one 16 inches in diameter and the other 8 inches in
diameter, which transport refined products from the El Paso terminal to Kinder
Morgan's Santa Fe Pacific east pipeline for further transport to the
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<PAGE> 81
Arizona markets. We own a 66.67% interest in this connection, with the remaining
33.33% interest owned by Phillips Petroleum Company. Only the 16-inch line was
used in 1999. The 8-inch line is used only to return product for staging batches
into Kinder Morgan's Santa Fe Pacific east pipeline. Ultramar Diamond Shamrock
is currently the only shipper on our share of the capacity of the connection.
This connection was constructed in 1995.
McKee to Colorado Springs to Denver. The McKee to Colorado Springs to
Denver refined product pipeline is a 357.0-mile, 10-inch pipeline. The pipeline
has two segments: a 256.4-mile segment from the McKee refinery to our Colorado
Springs terminal with 52,000 barrels per day total capacity and a 100.6-mile
segment from our Colorado Springs terminal to our Denver terminal with 32,000
barrels per day total capacity. The pipeline transports refined products from
the McKee refinery to the two terminals. We are the sole owner of the pipeline.
We also own a 1.7-mile intrastate pipeline connection with 12,000 barrels per
day of total capacity that carries jet fuel from the Colorado Springs terminal
to the Colorado Springs airport. Approximately 60% of throughput in 1999 was
distributed from our Colorado Springs terminal and the balance was transported
through to our Denver terminal over the Colorado Springs to Denver segment. We
receive two different tariffs for refined products transported on this pipeline:
one for refined products transported from McKee to Colorado Springs and one for
refined products transported from McKee to Denver. Ultramar Diamond Shamrock is
currently the only shipper on both segments. The pipeline is subject to the
regulatory jurisdiction of the FERC. The McKee to Colorado Springs segment of
the pipeline was constructed beginning in 1994 and was recently expanded by
20,000 barrels per day to its current capacity of 52,000 barrels per day. The
Colorado Springs to Denver segment was constructed in 1996.
McKee to Denver (Phillips). The McKee to Denver (Phillips) refined product
pipeline is a 321.1-mile pipeline, which consists of 266.1 miles of 8-inch
diameter pipe and 55.0 miles of 12-inch diameter pipe. The pipeline transports
refined products from Phillips' refinery in Borger, Texas and the McKee refinery
to our and Phillips Petroleum Company's Denver terminals, which are adjacent to
one another. The pipeline has a total capacity of 41,500 barrels per day. There
is an initial segment of the pipeline which runs 45.0 miles from Borger to the
McKee refinery in which we do not have an ownership interest. The first segment
in which we have an interest runs 167.6 miles from the McKee refinery to La
Junta, Colorado and the second segment runs 153.5 miles from La Junta, Colorado
to the Denver terminals. We have a 35.44% interest in the McKee to La Junta
segment and a 30% interest in the La Junta to Denver segment. Phillips Petroleum
Company owns the remaining interests in these segments and operates the
pipeline. Our share of the pipeline's capacity is effectively 12,450 barrels per
day for both segments because we do not offload any refined products in La
Junta. Ultramar Diamond Shamrock is currently the only shipper on our share of
the pipeline's capacity. The pipeline is subject to the regulatory jurisdiction
of the FERC. The pipeline was constructed in 1955.
McKee to Amarillo. The McKee to Amarillo refined product pipelines consist
of one 6-inch and one 8-inch diameter pipeline that run parallel 49.1 miles from
the McKee refinery to our Amarillo terminal, with 51,000 barrels per day of
combined total capacity. We are the sole owner of these pipelines. Throughput is
distributed from our Amarillo terminal, transported on to Albuquerque, New
Mexico and Abernathy, Texas via our Amarillo to Albuquerque and Amarillo to
Abernathy refined product pipelines, and transported over a short refined
product pipeline connection, in which we do not have an ownership interest, to a
third-party end user. Ultramar Diamond Shamrock is currently the only shipper.
The pipelines are subject to the regulatory jurisdiction of the Texas Railroad
Commission. The 6-inch and 8-inch pipelines were constructed in 1954 and 1984,
respectively.
Amarillo to Abernathy. The Amarillo to Abernathy refined product pipeline
is a 102.1-mile, 6-inch diameter pipeline with 24,000 barrels per day of total
capacity. The pipeline transports refined products from our Amarillo terminal to
our Abernathy terminal. We own 38.7% of the pipeline and operate the pipeline.
Phillips Petroleum Company owns 33.3% of the pipeline and
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<PAGE> 82
Texaco owns the remaining 28.0%. Our share of the pipeline's capacity is 9,288
barrels per day. Throughput attributable to our ownership interest is
distributed from our Abernathy terminal. We receive two different tariffs for
refined products transported over this pipeline in our share of the pipeline's
capacity: one for refined products transported from McKee to Abernathy and one
for refined products transported from Amarillo to Abernathy. Ultramar Diamond
Shamrock and Phillips Petroleum Company both currently transport refined
products on our share of the pipeline's capacity. The Texaco Pipeline Company
transported refined products in our share of the pipeline's capacity in 1998.
The pipeline is subject to the regulatory jurisdiction of the Texas Railroad
Commission. The pipeline was constructed in 1955 and expanded in 1984.
Amarillo to Albuquerque. The Amarillo to Albuquerque refined product
pipeline is a 292.7-mile pipeline, which consists of 263.8 miles of 10-inch
diameter pipe and 28.9 miles of 6-inch diameter pipe. The pipeline transports
refined products from our Amarillo terminal to our Albuquerque terminal and has
a total capacity of 32,166 barrels per day. We own a 50% interest in the
pipeline, with the remaining 50% owned by Phillips Petroleum Company. Our share
of the pipeline's capacity is 16,083 barrels per day. Throughput attributable to
our ownership interest is ultimately distributed to end-users in the Albuquerque
market area. This throughput was distributed from our Albuquerque terminal,
delivered to Phillips Petroleum Company, and transported to the Navajo/Conoco
terminal. Ultramar Diamond Shamrock and the Texaco Pipeline Company both
currently transport refined products in our share of the pipeline's capacity.
The pipeline is subject to the regulatory jurisdiction of the FERC. The pipeline
was built in 1958 as a 6-inch diameter pipeline. We have been laying 10-inch
diameter pipe along side the 6-inch diameter pipe in several expansions in 1991,
1995 and 1998.
McKee to Skellytown. The McKee to Skellytown refined product pipeline is a
52.8-mile, 6-inch diameter pipeline with 52,000 barrels per day of total
capacity. The pipeline transports natural gas liquids from the McKee refinery to
Skellytown, Texas where it connects to the Skellytown to Mont Belvieu refined
product pipeline. We are the sole owner of this pipeline. Throughput is
transported to Mont Belvieu, Texas over the Skellytown to Mont Belvieu refined
product pipeline. Ultramar Diamond Shamrock is currently the only shipper. The
pipeline is subject to the regulatory jurisdiction of the FERC. The pipeline was
constructed in 1969.
Skellytown to Mont Belvieu. The Skellytown to Mont Belvieu refined product
pipeline is a 571.2-mile, 8-inch diameter pipeline. The pipeline transports
natural gas liquids from Skellytown, where it connects to the McKee to
Skellytown refined product pipeline, to Mont Belvieu. The pipeline is owned by
Skelly-Belvieu Pipeline Company, LLC, a Delaware limited liability company, in
which we have a 50% ownership interest. The remaining 50% interest in the
limited liability company is owned by Phillips Petroleum Company. Although we
share the pipeline capacity evenly with Phillips Petroleum Company, either party
may transport up to the total capacity of the pipeline. The pipeline has a total
capacity of 52,000 barrels per day. Due to our 50% ownership of the
Skelly-Belvieu Pipeline Company, our effective share of the pipelines' total
capacity is 26,000 barrels per day. The Skelly-Belvieu Pipeline Company has
established separate tariffs for each type of product transported through the
pipeline. Throughput is transported to the Diamond-Koch terminal in Mont
Belvieu, which is jointly owned by Koch Industries and Ultramar Diamond
Shamrock, for storage prior to transportation to petrochemical plants on the
Texas Gulf Coast. The pipeline is subject to the regulatory jurisdiction of the
FERC. The pipeline was originally constructed in 1969 and 258 miles were
replaced in 1992.
Three Rivers to San Antonio. The Three Rivers to San Antonio refined
product pipeline is an 81.1-mile, 8-inch diameter pipeline with 33,600 barrels
per day of total capacity. The pipeline transports refined products from the
Three Rivers refinery to our San Antonio terminal. We are the sole owner of this
pipeline. Throughput is sold at our San Antonio terminal or transported through
our connection to Koch Industries' San Antonio terminal. Ultramar Diamond
Shamrock is the only shipper. The pipeline is subject to the regulatory
jurisdiction of the Texas Railroad Commission. The pipeline was constructed in
1979.
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<PAGE> 83
We have a connecting 12.1-mile, 8-inch refined product pipeline, which
extends from our terminal in San Antonio to Koch Industries' San Antonio
terminal. We are the sole owner of the pipeline. The pipeline has a capacity of
33,600 barrels per day. Ultramar Diamond Shamrock is currently the only shipper.
The pipeline is subject to the regulatory jurisdiction of the Texas Railroad
Commission. The pipeline was constructed in 1990.
Three Rivers to Laredo. The Three Rivers to Laredo refined product pipeline
is a 98.1-mile, 8-inch diameter pipeline with 16,800 barrels per day of total
capacity. The pipeline transports refined products from the Three Rivers
refinery to our Laredo terminal. We are the sole owner of this pipeline.
Throughput is transported to our Laredo terminal. A portion of the throughput is
subsequently transported by truck from the Laredo terminal across the Mexican
border to the Nuevo Laredo and northern Mexico markets. Ultramar Diamond
Shamrock is currently the only shipper. The pipeline is subject to the
regulatory jurisdiction of the Texas Railroad Commission. The pipeline was
constructed in 1992.
Three Rivers to Corpus Christi. The Three Rivers to Corpus Christi refined
product pipeline is a 71.6-mile, 6-inch diameter pipeline with 15,000 barrels
per day of total capacity. The pipeline transports toluene and xylene from the
Three Rivers refinery to our Corpus Christi refined product terminal. We are the
sole owner of the pipeline. Throughput is transported to our Corpus Christi
refined product terminal for further shipment by boat to domestic and foreign
chemical manufacturers. Ultramar Diamond Shamrock is currently the only shipper.
The pipeline is subject to the regulatory jurisdiction of the Texas Railroad
Commission. The pipeline was constructed in 1957 and expanded in 1980.
Three Rivers to Pettus. The Three Rivers to Pettus refined product
pipelines consist of one 8-inch and one 12-inch diameter pipeline which run
parallel 28.8 miles from the Three Rivers refinery to Pettus Station at Pettus,
Texas. The 12-inch pipeline transports gasoline and distillates and the 8-inch
pipeline transports raffinate, distillates, and natural gas liquids (such as
propane and butane) from the Three Rivers refinery to Pettus Station at Pettus,
Texas where both pipelines connect to a common carrier pipeline. We are the sole
owner of these pipelines. The total capacity of the 12-inch pipeline is 24,000
barrels per day, and the total capacity of the 8-inch pipeline is 15,000 barrels
per day. Gasoline and distillate throughput in the 12-inch pipeline is
transported over a common carrier pipeline to Coastal's San Antonio terminal and
all of the throughput in the 8-inch pipeline is transported to various Corpus
Christi destinations over common carrier pipelines. Ultramar Diamond Shamrock is
currently the only shipper on both pipelines. The pipelines are subject to the
regulatory jurisdiction of the Texas Railroad Commission. The 8-inch pipeline
was constructed in 1976 and expanded in 1984 and the 12-inch pipeline was
constructed in 1982.
Ardmore to Wynnewood. The Ardmore to Wynnewood refined product pipeline is
a 31.1-mile, 12-inch diameter pipeline with 90,000 barrels per day of total
capacity. The pipeline transports refined products from the Ardmore refinery to
Wynnewood, Oklahoma where it connects to a common carrier pipeline. We are the
sole owner of this pipeline. Throughput is transported to markets in the Rocky
Mountain region of the United States over a common carrier pipeline. We receive
a "split" tariff for transportation of refined products from the Ardmore
refinery to Wynnewood. The full tariff depends upon the ultimate destination to
which the refined products are shipped over the common carrier pipeline.
Ultramar Diamond Shamrock is currently the only shipper. The pipeline is subject
to the regulatory jurisdiction of the FERC. The pipeline was constructed in 1975
and expanded in 1998.
RECENTLY COMPLETED AND PLANNED EXPANSION PROJECTS
We believe that our pipeline systems are modern, efficient, and
well-maintained. Approximately 50% of our total pipeline mileage has been
constructed since 1990. In addition, the
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<PAGE> 84
remaining pipelines have, in many cases, been expanded and upgraded since
installation. Set forth below is a list of our recently completed and planned
expansion projects.
RECENTLY COMPLETED EXPANSION PROJECTS
- McKee to El Paso. In 1997, we were the sole owner of this refined product
pipeline, and at that time, it had a total capacity of 27,000 barrels per
day. We increased horsepower in 1997 by adding new pump stations,
expanding the pipeline's total capacity to 40,000 barrels per day. We
subsequently sold a 25% interest in the pipeline and terminal to Phillips
Petroleum Company. In 1999, we added more pump stations to further
increase horsepower which expanded the pipeline's total capacity to
60,000 barrels per day. In August 1999, we sold an additional 8.33%
interest in the pipeline and terminal to Phillips Petroleum Company,
reducing our share of the total capacity on the pipeline to 66.67%, or
40,000 barrels per day. Our share of the cost of these expansions was
approximately $13.2 million.
- McKee to Colorado Springs to Denver. We recently added new pump stations
and tanks along this refined product pipeline at the Colorado Springs
terminal that will increase scheduling efficiency. Total capacity of the
pipeline was increased from 32,000 barrels per day to 52,000 barrels per
day on the McKee to Colorado Springs segment which will ultimately
increase utilization of the Colorado Springs to Denver segment. As the
sole owner, we bore the entire $6.2 million cost of the expansion.
- Amarillo to Albuquerque. We and Phillips Petroleum Company each have a
50% ownership interest in this refined product pipeline. In 1995, the
pipeline's total capacity was expanded from 17,000 barrels per day to
23,000 barrels per day by constructing a second, parallel 10-inch
diameter pipeline along several segments of the 6-inch diameter pipeline.
Our share of the cost of this expansion was $6.1 million. The pipeline
was expanded again in 1998 by adding 10-inch diameter pipe along
additional segments of the 6-inch diameter pipeline. The second expansion
increased the pipeline's total capacity to 32,166 barrels per day. Our
share of the cost of the second expansion was $7.4 million.
- Ardmore to Wynnewood. In 1998, we increased the capacity on this refined
product pipeline from 75,000 barrels per day to 90,000 barrels per day by
adding pumps to an existing pump station to increase horsepower. As the
sole owner, we bore the entire $0.8 million cost of the expansion.
PLANNED EXPANSION PROJECTS
- Wichita Falls to McKee Crude Oil Pipeline and Storage Facility. By the
end of the first quarter of 2002, we intend to exercise our option to
purchase for $64 million the crude oil pipeline from Wichita Falls, Texas
to the Ultramar Diamond Shamrock refinery at McKee, Texas, along with
related crude oil storage facilities. The McKee refinery receives 40%-
50% of its crude oil supply through the Wichita Falls line, the capacity
of which is being expanded from 85,000 barrels per day to 110,000 barrels
per day. We expect the throughput in the pipeline to increase as the
McKee refinery's other inland sources of crude oil supply continue to
decline.
- Ringgold, Texas Storage Facility Expansion. By the end of the first
quarter of 2002, we intend to purchase from Ultramar Diamond Shamrock for
approximately $6.5 million crude oil storage facilities at Ringgold,
Texas. These facilities are currently under construction and will enhance
the crude oil supply system for the Ardmore and McKee refineries.
- Nuevo Laredo, Mexico Pipeline. Ultramar Diamond Shamrock plans to
construct a 19-mile refined product pipeline from our Laredo, Texas
refined products terminal to the refined products terminal operated by
Pemex in Nuevo Laredo, Mexico. The new pipeline will
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<PAGE> 85
supply refined products to the rapidly growing market in the Nuevo Laredo
area, and will have a capacity to deliver 12,000 barrels per day. We
intend to purchase this pipeline upon completion for approximately $5.7
million and expect to be operating it by the end of 2001. Ultramar
Diamond Shamrock is currently negotiating a transportation agreement with
an affiliate of Pemex and a refined product sales agreement with Pemex.
TERMINALLING AND STORAGE OPERATIONS
CRUDE OIL STORAGE FACILITIES
We do not generate separate revenue through our crude oil storage
facilities. Instead, the costs associated with these facilities were considered
in establishing the tariffs charged for transporting crude oil from the storage
facilities to the refineries.
Our crude oil storage facilities are designed to serve the needs of the
McKee, Three Rivers, and Ardmore refineries. Our storage facilities have been
designed to handle increasing throughput and varieties of foreign and domestic
crude oil. These design attributes include:
- multiple tanks to facilitate simultaneous handling of multiple crude oil
varieties in accordance with normal pipeline batch sizes;
- electronic switching systems connecting each tank to the main crude oil
pipelines to facilitate efficient switching and, in some cases, blending
between crude oil grades with minimal contamination.
Our most significant crude oil storage asset is the marine-based Corpus
Christi crude oil storage facility. It has a storage capacity of 1.6 million
barrels of crude oil, which allows our customer, Ultramar Diamond Shamrock, to
accept larger quantities delivered by tankers and more varieties of crude oil.
The four tanks in this storage facility provide us with added flexibility in
blending crude oil to achieve the optimal crude oil slate for the Three Rivers
refinery.
The following table outlines our crude oil storage facilities' location,
capacity, average throughput for the year ended December 31, 1999 and nine
months ended September 30, 1999 and 2000, number of tanks, and mode of receipt
and delivery:
<TABLE>
<CAPTION>
AVERAGE THROUGHPUT
---------------------------------
NINE MONTHS
ENDED
MODE MODE YEAR ENDED SEPTEMBER 30,
NUMBER OF OF DECEMBER 31, ------------------
CAPACITY OF TANKS RECEIPT DELIVERY 1999 1999 2000
-------- -------- ------- -------- ------------ ---- ----
(barrels) (barrels/day)
<S> <C> <C> <C> <C> <C> <C> <C>
Corpus Christi, TX..................... 1,600,000 4 Marine Pipeline 80,594 79,954 87,053
Dixon, TX.............................. 240,000 3 Pipeline Pipeline 61,110 61,761 62,322
Wasson, OK............................. 226,000 2 Pipeline Pipeline 72,161 70,462 76,564
--------- -- ------- ------- -------
Total.......................... 2,066,000 9 213,865 212,177 225,939
========= == ======= ======= =======
</TABLE>
Eighty-eight percent of our major crude oil storage facility assets, by
shell capacity, have been built since 1990. The average throughput for our crude
oil storage operations increased at an annual rate of 24% from 91,393 barrels
per day in 1995 to 213,865 barrels per day in 1999.
REFINED PRODUCT TERMINALS
Our refined product terminalling operations generate revenue through a
terminalling fee paid by customers, primarily Ultramar Diamond Shamrock and its
affiliates. The fee is incurred when the refined products enter the terminal and
includes the cost of transferring the refined products from the terminal to
trucks. In addition, at the El Paso terminal effective January 1, 2000, we also
began receiving an additional fee for transporting refined products through the
connecting pipeline for injection into a third-party pipeline.
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<PAGE> 86
Our terminals are modern and efficient. They have automated loading
facilities available 24 hours a day. Billing of customers is electronically
accomplished by our Fuels Automation and Nomination System (FANS). This
automatic system provides for control of allocations, credit, and carrier
certification by remote input of data by our customers. All terminals have an
electronic monitoring and control system that monitors the effectiveness of the
ground protection and vapor control and will cause an automated shut down of the
terminal operations if necessary. For environmental and safety protection, all
terminals (except our Abernathy terminal which is currently being modified) have
primary vapor control systems consisting of flares, vapor combustors, or carbon
absorption vapor recovery units.
All terminal tanks and underground terminal piping are protected against
corrosion. See "-- Safety and Maintenance." Tanks designed for gasoline are
equipped with either internal or external floating roofs which minimize
emissions and prevent potentially flammable vapor accumulation between fluid
levels and the roof of the tank. All terminal facilities have facility response
plans, spill prevention and control measures plans and other plans and programs
to respond to emergencies.
Many of our terminal loading racks are protected with water deluge systems
activated by vapor sensors, heat sensors, or an emergency switch. Our Colorado
Springs, El Paso and San Antonio terminals are also protected by foam systems to
be activated in case of fire. The only terminal that stores and loads propane is
El Paso. Our propane tanks are protected against fire hazards with a deluge
system. This system automatically activates with heat sensors in the event of a
fire. All terminals are subject to participation in a comprehensive
environmental management plan to assure compliance with air, solid wastes, and
wastewater regulations.
Our Harlingen, Texas terminal does not directly connect to any of our
pipelines; it handles refined products delivered by Ultramar Diamond Shamrock by
barge.
We own the property on which our terminals are located, except in Colorado
Springs, Corpus Christi, and Harlingen, where the underlying real estate is
subject to long-term operating leases.
The following table outlines our refined product terminals' location,
capacity, average throughput for the year ended December 31, 1999 and nine
months ended September 30, 2000, number of tanks, and mode of receipt and
delivery:
<TABLE>
<CAPTION>
AVERAGE THROUGHPUT
------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
NUMBER MODE OF MODE OF ------------ ---------------------
LOCATION CAPACITY OF TANKS RECEIPT DELIVERY 1999 1999 2000
-------- -------- -------- ------- -------- ---- ---- ----
(barrels) (barrels/day)
<S> <C> <C> <C> <C> <C> <C> <C>
Abernathy, TX............ 172,000 13 Pipeline Truck 5,094 4,851 5,103
Amarillo, TX............. 271,000 15 Pipeline Truck/Pipeline 21,792 21,944 21,469
Albuquerque, NM.......... 193,000 10 Pipeline Truck/Pipeline 10,646 10,570 11,045
Denver, CO............... 111,000 10 Pipeline Truck 17,233 16,807 17,232
Colorado Springs, CO..... 324,000 8 Pipeline Truck/Pipeline 15,321 15,100 14,342
El Paso, TX (1).......... 346,684 22 Pipeline Truck/Pipeline 35,661 35,205 41,601
Corpus Christi, TX....... 372,000 16 Pipeline Marine/Pipeline 8,044 7,424 12,073
San Antonio, TX.......... 221,000 10 Pipeline Truck 20,081 20,173 19,482
Laredo, TX............... 203,000 6 Pipeline Truck 14,687 14,423 16,174
Harlingen, TX............ 314,000 7 Marine Truck 12,781 12,870 9,129
--------- --- ------- ------- -------
Total............ 2,527,684 117 161,340 159,367 167,650
========= === ======= ======= =======
</TABLE>
---------------
(1) We have a 66.67% ownership interest in the El Paso refined product terminal.
The capacity and throughput amounts represent the proportionate share of
capacity and throughput attributable to our ownership interest. The
throughput represents barrels distributed from the El Paso refined product
terminal and deliveries to a third-party refined product pipeline.
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<PAGE> 87
Thirty-five percent of our refined product terminalling assets, by
capacity, have been built since 1990. The average throughput for our refined
product terminalling operations increased at an annual rate of 10% from 109,506
barrels per day in 1995 to 161,340 barrels per day in 1999.
PIPELINE, STORAGE FACILITY, AND TERMINAL CONTROL OPERATIONS
All of our crude oil and refined product pipelines are operated via
satellite communication systems from one of two central control rooms located in
San Antonio and McKee, Texas. The San Antonio control center primarily monitors
and controls our refined product pipelines, and the McKee control center
primarily monitors and controls our crude oil pipelines. Each control center can
provide backup capability for the other, and each center is capable of
monitoring and controlling all of our pipelines. There is also a backup control
center located at our San Antonio refined product terminal approximately 25
miles from our primary control center in San Antonio.
The control centers operate with modern, state-of-the-art System Control
and Data Acquisition systems (SCADA). Both control centers are equipped with
computer systems designed to continuously monitor real time operational data,
including crude oil and refined product throughput, flow rates, and pressures.
In addition, the control centers monitor alarms and throughput balances. The
control centers operate remote pumps, motors, engines, and valves associated
with the delivery of crude oil and refined products. The computer systems are
designed to enhance leak-detection capabilities, sound automatic alarms if
operational conditions outside of pre-established parameters occur, and provide
for remote-controlled shutdown of pump stations on the pipelines. Pump stations,
crude oil storage facilities, and meter-measurement points along the pipelines
are linked by satellite or telephone communication systems for remote monitoring
and control, which reduces our requirement for full-time on-site personnel at
most of these locations.
A number of our crude oil storage facilities and refined product terminals
are also operated through our central control centers. Other crude oil storage
facilities and refined product terminals are modern, automated facilities but
are locally controlled.
SAFETY AND MAINTENANCE
We perform scheduled maintenance on all of our pipelines and make repairs
and replacements when necessary or appropriate. We attempt to control internal
corrosion of the mainlines through the use of corrosion-inhibiting chemicals
injected into the crude oil and refined products. External coatings and
impressed-current cathodic protection systems are used to protect against
external corrosion. We continuously monitor the effectiveness of our corrosion
control programs. In addition, we monitor the structural integrity of selected
segments of the pipelines through a program of periodic internal inspections
using electronic "smart pig" instruments. Maintenance facilities containing
equipment for pipe repairs, spare parts, and trained response personnel are
strategically located along the pipelines and in concentrated operating areas.
We believe that all of our pipelines have been constructed and are maintained in
all material respects in accordance with applicable federal, state, and local
laws and the regulations and standards prescribed by the American Petroleum
Institute, the Department of Transportation, and accepted industry practice.
COMPETITION
As a result of our physical integration with Ultramar Diamond Shamrock's
refineries and our contractual relationship with Ultramar Diamond Shamrock, we
believe that we will not face significant competition for barrels of crude oil
transported to, and barrels of refined products transported from, the McKee,
Three Rivers, and Ardmore refineries, particularly during the term of our
pipelines and terminals usage agreement with Ultramar Diamond Shamrock. However,
we face competition from other pipelines who may be able to supply our end-user
markets with
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<PAGE> 88
refined products on a more competitive basis. If Ultramar Diamond Shamrock
reduced its retail sales of refined products or its wholesale customers reduced
their purchases of refined products, the volumes transported through our
pipelines would be reduced, which would cause a decrease in cash and revenues
generated from our operations.
We do not expect any competition from Ultramar Diamond Shamrock based on
the retained assets described below under "-- Assets Retained by Ultramar
Diamond Shamrock" since these assets are either in a different business, such as
crude oil gathering, serve different markets or are currently idle or under
construction and may be acquired by us within the next two years.
The Texas and Oklahoma markets served by the refined product pipelines
originating at the Three Rivers and Ardmore refineries are accessible by Texas
Gulf Coast refiners through common carrier pipelines, with the exception of the
Laredo, Texas and Nuevo Laredo, Mexico markets. In addition, the markets served
by the refined product pipelines originating at the McKee refinery are also
accessible by Texas Gulf Coast and Midwestern refiners through common carrier
pipelines.
We believe that high capital requirements, environmental considerations,
and the difficulty in acquiring rights-of-way and related permits make it
difficult for other companies to build competing pipelines in areas served by
our pipelines. As a result, competing pipelines are likely to be built only in
those cases in which strong market demand and attractive tariff rates support
additional capacity in an area. Two additional refined product pipelines may
serve our market areas:
- The Longhorn Pipeline is a common carrier refined product pipeline with
70,000 barrels per day of initial capacity capable of delivering refined
products from the Texas Gulf Coast to El Paso, Texas. Most of the
pipeline has been constructed and it has obtained regulatory approval but
is awaiting the resolution of litigation to commence operations. It is
uncertain if and when this pipeline will commence operations. The
pipeline is jointly owned by ExxonMobil, Williams Pipeline, BP Amoco, and
several other minority participants. We expect that a portion of the
refined products transported into the El Paso area in this pipeline will
ultimately be transported into the Phoenix and Tucson, Arizona markets.
As a result, Ultramar Diamond Shamrock's allocated capacity on Kinder
Morgan's Santa Fe Pacific East pipeline, which transports refined
products from El Paso to the Arizona markets, may be reduced. In
addition, the increased supply of refined products entering the El Paso
and Arizona markets through the Longhorn Pipeline may cause a decline in
the demand for refined products from Ultramar Diamond Shamrock. These
factors, in turn, might reduce the demand for transportation of refined
products through the pipeline from McKee to El Paso.
- The Aspen Pipeline, with an initial capacity of 65,000 barrels per day,
was a joint venture project between Williams Pipeline and Equilon
Pipeline Company LLC. Williams and Equilon have recently announced that
the joint venture will be discontinued. The original project was planned
to connect to Equilon's pipeline in West Texas to Salt Lake City, Utah.
Refined products from the Texas Gulf Coast are transported in an existing
Equilon pipeline to the point of origin in West Texas. Equilon announced
that it would continue the southern portion of the Aspen project. The
southern section would connect the Equilon pipeline in West Texas to
Bloomfield, New Mexico with a new terminal near Albuquerque, New Mexico.
We believe the southern section is scheduled to begin service in 2001. If
completed, the southern section of the Aspen pipeline could cause a
reduction in demand for the transportation of refined products through
our Amarillo to Albuquerque refined product pipeline. The southern
section of the Aspen Pipeline would cross two of our refined product
pipelines, the McKee to El Paso pipeline and the Amarillo to Albuquerque
pipeline.
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<PAGE> 89
Given the expected increase in demand for refined products in the
southwestern and Rocky Mountain market regions, we do not believe that these new
pipelines, when fully operational, will have a material adverse effect on our
financial condition or results of operations.
ULTRAMAR DIAMOND SHAMROCK'S REFINING AND MARKETING OPERATIONS
Although we do not own or operate any refining or marketing assets, our
pipelines systems are located within Ultramar Diamond Shamrock's refining and
marketing supply chain. Accordingly, we have included the following discussion
of Ultramar Diamond Shamrock's refining and marketing operations.
Ultramar Diamond Shamrock is an independent refiner and marketer of
high-quality refined products and convenience store merchandise in the central,
southwest, and northeast regions of the United States, and eastern Canada. Its
operations consist of refineries, convenience stores, pipelines and terminals, a
home heating oil business, and related petrochemical and natural gas liquids
operations. Ultramar Diamond Shamrock currently employs approximately 20,000
people. Ultramar Diamond Shamrock owns and operates seven refineries
strategically located near its key markets:
- McKee refinery located near Amarillo in north Texas;
- Three Rivers refinery located near San Antonio in south Texas;
- Ardmore refinery located near the Oklahoma/Texas border in south central
Oklahoma;
- Wilmington refinery located near Los Angeles in southern California;
- Denver refinery located near Denver in eastern Colorado;
- Quebec refinery located near Quebec City in Quebec, Canada; and
- Golden Eagle refinery located in the San Francisco bay area of
California.
In the United States, Ultramar Diamond Shamrock markets refined products
and a broad range of convenience store merchandise under the Diamond
Shamrock(R), Beacon(R), Ultramar(R), and Total(R) brand names through a network
of approximately 3,800 convenience stores across 17 central and southwest
states. In the Northeast, Ultramar Diamond Shamrock markets refined products
through approximately 1,200 convenience stores and 82 cardlocks. The Northeast
operations include one of the largest retail home heating oil businesses in the
northeastern region of North America, selling heating oil to approximately
250,000 households.
REFINERIES
Our pipelines deliver crude oil to and transport refined products from the
McKee, Three Rivers, and Ardmore refineries owned by Ultramar Diamond Shamrock.
McKee Refinery. The McKee refinery has a total capacity to process 170,000
barrels of crude oil and other raw materials per day, making it the largest
refinery located between the Texas Gulf Coast and the West Coast. In 1999, its
total throughput was 157,740 barrels per day, of which 58% was supplied by our
crude oil pipelines. The refinery relies primarily on a varying blend of
domestically produced sweet crude oil and gas oil for its raw material. The
refinery produces primarily conventional gasoline, federal specification
reformulated gasoline, other oxygenated gasolines, low-sulfur diesel meeting
governmental specifications for on-road use, high-sulfur diesel, jet fuel,
liquified petroleum gas and asphalt. In 1999, 73% of the refined products
produced from the refinery were transported from the refinery through our
refined product pipelines.
The McKee refinery is a modern and efficient refinery. Since 1997, Ultramar
Diamond Shamrock completed a number of upgrades, modifications, and expansion
projects.
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<PAGE> 90
As shown below, the refinery's total throughput, which includes crude oil
and other raw materials, has increased since 1995 by an aggregate throughput of
22,044 barrels per day.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -------------
(barrels per day)
<S> <C> <C> <C> <C> <C> <C>
THROUGHPUT....................... 141,551 149,310 145,633 156,507 157,740 163,595
</TABLE>
The McKee refinery has access to crude oil from a number of sources,
including the Texas panhandle, Oklahoma, southwestern Kansas and eastern
Colorado through our crude oil pipelines and additional crude oil lines owned by
subsidiaries of Ultramar Diamond Shamrock. The refinery is also connected by
common carrier pipelines to a major crude oil center in Midland, Texas. It also
has access through Ultramar Diamond Shamrock's Wichita Falls to McKee crude oil
pipeline at the Wichita Falls crude oil storage facility to major common carrier
pipelines that transport crude oil from the Texas Gulf Coast and major West
Texas oil fields into the mid-continent region. Total storage capacity for crude
oil and other raw materials at the McKee refinery is approximately 655,000
barrels.
Three Rivers Refinery. The Three Rivers refinery has a total capacity to
process 98,000 barrels of crude oil and other raw materials per day. In 1999,
its total throughput was 88,234 barrels per day, of which 91% was supplied by
our Corpus Christi to Three Rivers crude oil pipeline. The refinery relies
primarily on blends of predominantly sweet foreign crude oils as its raw
materials. The refinery produces primarily conventional gasoline, high and low
sulfur diesel, fuel oil, petrochemical products, LPG propane and jet fuel. In
1999, 83% of the refined products produced at the refinery were distributed from
the refinery through our refined product pipelines.
Since 1995 Ultramar Diamond Shamrock has completed a number of expansion
projects at the Three Rivers refinery which increased the refinery's total
throughput by an aggregate throughput of 16,350 barrels per day.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------ NINE MONTHS ENDED
1995 1996 1997 1998 1999 SEPTEMBER 30, 2000
---- ---- ---- ---- ---- ------------------
(barrels per day)
<S> <C> <C> <C> <C> <C> <C>
THROUGHPUT................................. 77,029 87,223 85,884 91,996 88,234 93,379
</TABLE>
The Three Rivers refinery has access to crude oil from foreign sources
delivered to the Texas Gulf Coast at the Corpus Christi crude oil storage
facility, as well as crude oil from domestic sources. Our crude oil storage
facility in Corpus Christi has a total storage capacity of 1.6 million barrels,
and allows us to accept delivery of larger crude oil cargoes, decreasing the
number of deliveries and related dockage expense. The Corpus Christi crude oil
storage facility is connected to the Three Rivers refinery by our 69.7-mile
crude oil pipeline which has a capacity of 120,000 barrels per day. The Three
Rivers refinery also has access to South Texas crude oils through common carrier
pipelines.
Ardmore Refinery. The Ardmore refinery has a total capacity to process
85,000 barrels of crude oil and other raw materials per day. In 1999, its total
throughput was 81,263 barrels per day, of which 89% was supplied by our crude
oil pipelines. The refinery relies primarily on a variety of domestic and
imported sweet and sour crude oils for its raw material. The refinery produces
primarily conventional gasolines, high and low sulfur diesel fuels, LPGs and
asphalt. In 1999, 67% of the refined products produced at the refinery were
transported from the refinery through our Ardmore to Wynnewood refined product
pipeline.
Ultramar Diamond Shamrock purchased the Ardmore refinery from Total
Petroleum (North America), Ltd. in September 1997.
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As shown below, the refinery's throughput has increased since 1995 by an
aggregate throughput of 10,504 barrels per day.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------ NINE MONTHS ENDED
1995 1996 1997 1998 1999 SEPTEMBER 30, 2000
---- ---- ---- ---- ---- ------------------
(barrels per day)
<S> <C> <C> <C> <C> <C> <C>
THROUGHPUT................................. 72,481 66,837 78,032 67,405 81,263 82,985
</TABLE>
The Ardmore refinery can also be supplied with crude oil by common carrier
pipelines and trucking operations.
MARKETING
We believe that our pipeline, terminalling, and storage assets are
well-positioned for future growth because these assets are located in attractive
market regions and are associated with a significant participant in those market
regions. We believe that the population growth and the growth in demand for
refined products in the southwestern and Rocky Mountain regions of the United
States will lead to increased throughput for our refined product and crude oil
pipelines as Ultramar Diamond Shamrock's sales volumes of refined products in
those markets continue to grow.
The following table sets forth cumulative projected population growth for
the years 2000 through 2010 in the indicated states and metropolitan areas as
compared to the national average of 8.4%.
<TABLE>
<CAPTION>
PROJECTED
POPULATION
STATE OR METROPOLITAN AREA GROWTH
-------------------------- ----------
<S> <C>
ARIZONA(1).................................................. 15.1%
Phoenix(2)................................................ 25.5%
Tucson(2)................................................. 20.8%
COLORADO(1)................................................. 11.8%
Colorado Springs(3)....................................... 17.6%
Denver(3)................................................. 16.3%
NEW MEXICO(1)............................................... 15.9%
Albuquerque(4)............................................ 16.6%
OKLAHOMA(1)................................................. 7.9%
TEXAS(1).................................................... 13.6%
El Paso(5)................................................ 21.1%
Laredo(5)................................................. 34.1%
San Antonio(5)............................................ 13.4%
National Average(1)......................................... 8.4%
</TABLE>
---------------
(1) Source: U.S. Department of Commerce, Economics and Statistics
Administration, Bureau of the Census.
(2) Source: Arizona Department of Economic Security, Research Administration,
Population Statistics Unit.
(3) Source: Colorado Department of Local Affairs.
(4) Source: Bureau of Business and Economic Research, University of New Mexico.
(5) Source: Texas State Data Center.
Ultramar Diamond Shamrock is a retailer of gasoline, through branded and
unbranded sales in each of Colorado, Texas, Oklahoma, New Mexico, and Arizona.
The following table sets forth
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the sales rank and market share of Ultramar Diamond Shamrock's total gasoline
sales in each of these states:
<TABLE>
<CAPTION>
MARKET
SALES RANK SHARE (%)
STATE GASOLINE(1) GASOLINE(1) DATE OF SURVEY
----- ----------- ----------- --------------
<S> <C> <C> <C>
Colorado...................................... 2nd 18.07% May 2000
Texas......................................... 2nd 15.18% May 2000
Oklahoma...................................... 5th 9.08% June 2000
New Mexico.................................... 6th 10.51% July 2000
Arizona....................................... 6th 7.09 June 2000
</TABLE>
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(1) Source: Lundberg Survey, Inc.
ASSETS RETAINED BY ULTRAMAR DIAMOND SHAMROCK
Effective July 1, 2000, Ultramar Diamond Shamrock transferred to Shamrock
Logistics Operations assets representing 72% of the book value of its pipeline,
terminalling, and storage assets that support the McKee, Three Rivers, and
Ardmore refineries and its marketing operations located in Texas, Oklahoma,
Colorado, New Mexico, and Arizona. Ultramar Diamond Shamrock retained the
pipelines and other assets described below. These assets are either utilized in
a different business, such as crude oil gathering, serve different markets or
are currently idle or under construction and may be acquired by us within the
next two years.
- A crude oil pipeline from Wichita Falls, Texas to the McKee refinery with
a capacity of 110,000 barrels per day and crude oil storage facilities at
Ringgold, Texas which we have options to acquire before the end of the
first quarter of 2002.
- A refined product pipeline from the Three Rivers refinery to Odem, near
Corpus Christi, Texas, which was built to transport natural gas liquids,
is not included because it is currently idle.
- The crude oil gathering pipelines that connect into a number of our
pipelines are not included because they are subject to inherent
short-term volatility in throughput caused by fluctuations in the price
of crude oil and long-term declining throughput. We believe that
excluding the gathering pipelines allows us to lessen indirect exposure
to fluctuating volumes. These gathering systems are also not included as
they are expected to experience long-term declining throughput because
they transport crude oil from areas that are characterized by declining
crude oil production.
- A 357.5-mile, 8-inch diameter refined product pipeline from the McKee
refinery to the Southlake terminal in the Dallas/Fort Worth area and the
Southlake refined product terminal are not included because the pipeline
has been experiencing declining throughput. The Dallas/Ft. Worth market
is more competitive than other southwestern and Rocky Mountain markets.
Ultramar Diamond Shamrock prefers to transport its refined products to
those markets over our long-haul refined product pipelines and uses the
Southlake refined product pipeline to transport incremental barrels to
Dallas/Ft. Worth that it cannot sell in the southwestern and Rocky
Mountain markets. As demand in the southwestern and Rocky Mountain
markets grows, we expect throughput in the McKee to Southlake pipeline to
continue to decline. The McKee to Southlake refined product pipeline is
also strongly affected by seasonality as throughput declines in the
summer when demand in the more attractive Rocky Mountain market
increases.
- A refined product pipeline from the McKee refinery to Turpin, Oklahoma
and the Turpin refined product terminal are not included because of
relatively low throughput. In addition, the pipeline and terminal serve a
rural market that is not expected to show any increase in demand in the
near future.
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- A low capacity refined product terminal in Grand Junction, Colorado is
not included because it is not accessible by pipeline and is currently
supplied by railcar only.
- A 2.1-mile refined product pipeline from the McKee refinery to a carbon
black processing plant in the Texas panhandle is not included because it
transports a low volume of heavy gas oil, a byproduct of refining
operations.
- Various other pipelines are not included because they are currently idle.
REGULATION
RATE REGULATION
Prior to this offering and the related transactions, affiliates of Ultramar
Diamond Shamrock owned and operated our pipelines. These affiliates were the
only shippers in Ultramar Diamond Shamrock's ownership capacity on most of the
pipelines, including the common carrier pipelines. In preparation for this
offering, we filed with the appropriate regulatory commissions changes to adjust
the tariffs on many of our pipelines to better reflect current throughput
volumes and market conditions or cost-based pricing. We have filed the
appropriate notices of the changed tariffs with the FERC for our interstate
pipelines. For our intrastate pipelines, we have made tariff filings with the
Texas Railroad Commission. All of these tariff filings became effective in the
first quarter of 2000. We have obtained the agreement of Ultramar Diamond
Shamrock and its affiliates, which are the only shippers on most of our
pipelines, not to challenge the validity of our tariff rates for a period of
seven years.
General Interstate Regulation. Our interstate common carrier pipeline
operations are subject to rate regulation by the FERC under the Interstate
Commerce Act. The Interstate Commerce Act requires that tariff rates for crude
oil pipelines, which includes petroleum products and petrochemical pipelines
(crude oil, petroleum product, and petrochemical pipelines are referred to
collectively as "petroleum pipelines" in this prospectus), be just and
reasonable and non-discriminatory. The Interstate Commerce Act permits
challenges to proposed new or changed rates by protest, and challenges to rates
that are already on file and in effect by complaint. Upon the appropriate
showing, a successful complainant may obtain damages or reparations for
generally up to two years prior to the filing of a complaint. Ultramar Diamond
Shamrock has agreed to be responsible for any Interstate Commerce Act
liabilities with respect to activities or conduct occurring during periods prior
to the closing of this offering, and we will be responsible for Interstate
Commerce Act liabilities with respect to activities or conduct occurring during
periods following the closing of this offering.
The FERC is authorized to suspend the effectiveness of a new or changed
tariff rate for a period of up to seven months and to investigate the rate. The
FERC may also place into effect a new or changed tariff rate on at least one
days notice, subject to refund and investigation. If upon the completion of an
investigation the FERC finds that the rate is unlawful, it may require the
pipeline operator to refund to shippers, with interest, any difference between
the rates the FERC determines to be lawful and the rates under investigation. In
addition, the FERC will order the pipeline to change its rates prospectively to
the lawful level. In general, petroleum pipeline rates must be cost-based,
although settlement rates, which are rates that have been agreed to by all
shippers, are permitted, and market-based rates may be permitted in certain
circumstances.
From 1906 until 1978, the Interstate Commerce Commission, rather than the
FERC, was charged with exercising regulatory authority over petroleum pipeline
rates. During the latter years of this period, the Interstate Commerce
Commission determined pipeline rates on a "valuation" methodology under which
pipeline rate base was calculated on "fair value" rather than on depreciated
original cost. The valuation rate base approach was applied by the Interstate
Commerce Commission until 1978, when its oversight authority for petroleum
pipeline rates was
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transferred to the FERC. The FERC was then required by judicial review to
reevaluate its petroleum pipeline ratemaking methods.
In 1985, the FERC issued an opinion in the Williams case (Opinion No.
154-B) which adopted the trended original cost methodology for determining the
justness and reasonableness of petroleum pipeline tariff rates. The trended
original cost methodology provides that in calculating a petroleum pipeline's
rate base, after a starting rate base has been determined, the pipeline's rate
base is to be:
- increased by property additions at cost plus an amount equal to the
equity portion of the rate base multiplied or "trended" by an inflation
factor; and
- decreased by property retirements and depreciation and amortization of
the rate base write-ups reflecting inflation and amortization of the
starting rate base write-up.
The starting rate base must be determined for pipelines that previously
were regulated under the Interstate Commerce Commission valuation methodology in
order to provide a transition from the valuation methodology to the trended
original cost methodology. For these pipelines, a portion of the starting rate
base will continue to reflect reproduction costs in excess of the depreciated
original cost of the pipeline's assets. The Williams opinion provides that the
starting rate base is to be the sum of the following components:
- the depreciated original cost of the carrier's property, multiplied by
the ratio of debt to total capitalization;
- the net depreciated reproduction cost based on the FERC reproduction cost
rate base (as of 1983) derived under the Interstate Commerce Commission
valuation methodology, multiplied by the ratio of equity to total
capitalization; and
- the original cost of land, the net book value of rights-of-way and
allowed working capital.
The difference between the starting rate base and the depreciated original
cost rate base is referred to as the starting rate base write-up. This write-up
is amortized over the useful life of the facilities. The Williams opinion
expressly provides that the use of a starting rate base in excess of the
original cost of the assets is subject to challenge by showing that the
investors in the carrier had not relied on the Interstate Commerce Commission
valuation rate base methodology. Some of our rates involve rate base components
built or acquired prior to 1983, and if the rates were challenged, defending
these rates on a cost-of-service basis may require technical rate base
calculations.
Energy Policy Act of 1992 and Subsequent Developments. In October 1992,
Congress passed the Energy Policy Act of 1992. The Energy Policy Act deemed
interstate petroleum pipeline rates in effect for the 365-day period ending on
the date of enactment of the Energy Policy Act, or that were in effect on the
365th day preceding enactment and had not been subject to complaint, protest, or
investigation during the 365-day period, to be just and reasonable under the
Interstate Commerce Act. Some of our pipeline rates are deemed just and
reasonable and therefore are grandfathered under the Energy Policy Act. The
Energy Policy Act provides that the FERC may change grandfathered rates upon
complaints only under the following limited circumstances:
- a substantial change has occurred since enactment in either the economic
circumstances or the nature of the services which were a basis for the
rate;
- the complainant was contractually barred from challenging the rate prior
to enactment of the Energy Policy Act and filed the complaint within 30
days of the expiration of the contractual bar; or
- a provision of the tariff is unduly discriminatory or preferential.
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The Energy Policy Act further required the FERC to issue rules establishing
a simplified and generally applicable ratemaking methodology for interstate
petroleum pipelines and to streamline procedures in petroleum pipeline
proceedings. On October 22, 1993, the FERC responded to the Energy Policy Act
directive by issuing Order No. 561, which adopts a new indexing rate methodology
for interstate petroleum pipelines. Under the new regulations, effective January
1, 1995, petroleum pipelines are able to change their rates within prescribed
ceiling levels that are tied to changes in the Producer Price Index for Finished
Goods, minus one percent. Rate increases made under the index will be subject to
protest, but the scope of the protest proceeding will be limited to an inquiry
into whether the portion of the rate increase resulting from application of the
index is substantially in excess of the pipeline's increase in costs. The new
indexing methodology is applicable to any existing rate, whether grandfathered
or whether established after enactment of the Energy Policy Act.
In Order No. 561, the FERC said that as a general rule pipelines must
utilize the indexing methodology to change their rates. Indexing includes the
requirement that, in any year in which the index is negative, pipelines must
file to lower their rates provided, however, that the pipeline is not required
to reduce its rates below the level deemed just and reasonable under the Energy
Policy Act. The FERC further indicated in Order No. 561, however, that it is
retaining cost-of-service ratemaking, market-based rates, and settlement rates
as alternatives to the indexing approach. A pipeline can follow a
cost-of-service approach when seeking to increase its rates above index levels
(or when seeking to avoid lowering rates to index levels) provided that the
pipeline can establish that there is a substantial divergence between the actual
costs experienced by the pipeline and the rate resulting from application of the
index. A pipeline can seek to charge market-based rates if it establishes that
it lacks significant market power. In addition, a pipeline can establish rates
under settlement if agreed upon by all current shippers. A pipeline can seek to
establish initial rates for new services through a cost-of-service proceeding, a
market-based rate proceeding, or through an agreement between the pipeline and
at least one shipper not affiliated with the pipeline.
The Court of Appeals for the District of Columbia Circuit affirmed Order
No. 561, concluding that the general indexing methodology, along with the
limited exceptions to indexed rates, reasonably balances the FERC's dual
responsibilities of ensuring just and reasonable rates and streamlining
ratemaking through generally applicable procedures. The FERC indicated in Order
No. 561 that it will assess in 2000 how the rate-indexing method is operating.
The FERC issued a Notice of Inquiry on July 27, 2000 seeking comments on whether
to retain or to change the existing index.
Another development affecting petroleum pipeline ratemaking arose in
Opinion No. 397, involving a partnership operating a crude oil pipeline. In
Opinion No. 397, the FERC concluded that there should not be a corporate income
tax allowance built into a petroleum pipeline's rates for income attributable to
noncorporate partners because those partners, unlike corporate partners, do not
pay a corporate income tax on partnership distributions. Opinion No. 397 was
affirmed by the FERC on rehearing in May 1996. The parties subsequently settled
the case, so no judicial review of the tax ruling took place.
A current proceeding, however, is pending at the FERC that could result in
changes to the FERC's income tax method announced in Opinion No. 397 as well as
to other elements of the FERC's rate methods for petroleum pipelines. This
proceeding involves another publicly traded limited partnership engaged in crude
oil pipeline transportation. In this proceeding, the FERC or the appellate
courts could modify FERC's current policy related to the income tax allowance
permitted in the rates of publicly traded partnerships and/or revise other
aspects of the FERC's petroleum pipeline ratemaking methodology. More
specifically, on January 13, 1999, the FERC issued Opinion No. 435 in this
proceeding, which, among other things, affirmed Opinion No. 397's determination
that there should not be a corporate income tax allowance built into a petroleum
pipeline's rates for income attributable to noncorporate partners. Requests for
rehearing of
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Opinion No. 435 were filed with the FERC on the tax issue and on other aspects
of the FERC's crude oil pipeline ratemaking methodology. Petitions for review of
Opinion No. 435 are before the Court of Appeals for the District of Columbia
Circuit. On May 17, 2000, the FERC issued Opinion No. 435-A which, as it
respects the income tax allowance issue, denied rehearing requests. Petitions
for Review of Opinion No. 435-A are before the Court of Appeals for the District
of Columbia. No assurances regarding the income tax allowance issue and other
issues subject to judicial review can be provided at this time.
Market-Based Rates. In a proceeding involving Buckeye Pipeline Company,
L.P., the FERC found that a petroleum pipeline able to demonstrate a lack of
market power may be allowed a lighter standard of regulation than that imposed
by the trended original cost methodology. In such a case, the pipeline company
has the opportunity to establish that it faces sufficient competition to justify
relief from the strict application of the cost-based principles. In Buckeye, the
FERC determined, based on the existing level of market concentration in the
pipeline's market areas, that Buckeye exercised significant market power in only
five of its twenty-one market areas and therefore was entitled to charge
market-based rates in the other sixteen market areas. The opportunity to charge
market-based rates means that the pipeline may charge what the market will bear.
Order No. 572, a companion order to Order No. 561, was issued by the FERC on
October 25, 1994 and established procedural rules governing petroleum pipelines'
applications for a finding that the pipeline lacks significant market power in
the relevant market.
Settlement Rates. In Order No. 561, the FERC specifically held that it
would also permit changes in rates that are the product of unanimous agreement
between the pipeline and all the shippers using the service to which the rate
applies. In the case of pipelines where we filed new rates in preparation for
the offering, those rates have been agreed to by affiliates of Ultramar Diamond
Shamrock, who are the only current shippers on the pipelines where we have filed
new rates. The rationale behind allowing this type of rate change is to further
the FERC's policy of favoring settlements among parties and to lessen the
regulatory burdens on all concerned. The FERC, however, also will entertain a
challenge to settlement rates, in response to a protest or a complaint which
alleges the same circumstances required to challenge an indexed rate. An example
of this type of challenge is that there is a discrepancy between the rate and
the pipeline's cost of service that is so substantial as to render the
settlement (or indexed) rate unjust and unreasonable.
Intrastate Regulation. Some of our pipeline operations are subject to
regulation by the Texas Railroad Commission or the Colorado Public Utility
Commission. The applicable state statutes require that pipeline rates be
non-discriminatory and provide a fair return on the aggregate value of the
pipeline property used to render services. State commissions have generally not
been aggressive in regulating common carrier pipelines and have generally not
investigated the rates or practices of petroleum pipelines in the absence of
shipper complaints. Complaints to state agencies have been infrequent and are
usually resolved informally. Although no assurance can be given that our
intrastate rates would ultimately be upheld if challenged, we believe that,
given this history, the tariffs now in effect are not likely to be challenged.
Our pipelines. The FERC generally has not investigated interstate rates on
its own initiative when those rates, like ours, have been mutually agreed to by
the pipeline and the shippers. In addition, as discussed above, intrastate
pipelines generally are subject to "light-handed" regulation by state
commissions and we do not believe the intrastate tariffs now in effect are
likely to be challenged. However, the FERC or a state regulatory commission
could investigate our rates at the urging of a third party if the third party is
either a current shipper or is able to show that it has a substantial economic
interest in our tariff rate level. If an interstate rate were challenged, we
would seek to either rely on a cost of service justification or to establish
that, due
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to the presence of competing alternatives to our pipeline, the tariff rate
should be a market-based rate. If the FERC investigated our rate levels, it
could inquire into our costs, including:
- the overall cost of service, including operating costs and overhead;
- the allocation of overhead and other administrative and general expenses
to the rate;
- the appropriate capital structure to be utilized in calculating rates;
- the appropriate rate of return on equity;
- the rate base, including the proper starting rate base;
- the throughput underlying the rate; and
- the proper allowance for federal and state income taxes.
If our rates were successfully challenged, the amount of cash available for
distribution to holders of units could be materially reduced.
We do not believe that it is likely that there will be a challenge to our
rates by a current shipper that would materially affect our revenues or cash
flows. Ultramar Diamond Shamrock is the only current shipper shipping in our
ownership capacity on substantially all of our pipelines. Ultramar Diamond
Shamrock has committed not to challenge our rates for a period of seven years.
Under the pipelines and terminals usage agreement, in which Ultramar Diamond
Shamrock has committed not to challenge our rates, Ultramar Diamond Shamrock
also has committed to continue its historical practice of:
- buying crude oil before it enters our crude oil pipelines, and
- owning the refined products at least until the refined products exit the
refined products terminal.
Ultramar Diamond Shamrock has agreed further to retain its status as
shipper in our pipelines and will not transfer that status to third parties who
otherwise could become shippers of
- crude oil purchased by Ultramar Diamond Shamrock at the refineries, or
- refined products sold by Ultramar Diamond Shamrock at the refineries.
We also do not anticipate challenges from new shippers because we believe
that it is unlikely we will have new shippers in any of our existing pipelines.
In the case of crude oil pipelines, Ultramar Diamond Shamrock in almost all
cases would be the shipper and would therefore not challenge our own tariffs for
a period of seven years. In the case of refined product pipelines, we do not
anticipate new shippers because Ultramar Diamond Shamrock will be the owner of
substantially all of the refined products produced at the refineries and the
refineries are the only current origin points for shipments in our refined
product pipelines. Therefore, Ultramar Diamond Shamrock will be the principal
shipper on our refined product pipelines, and it has agreed not to challenge our
rates for a period of seven years.
Because our pipelines are common carrier pipelines, we may be required to
accept new shippers who wish to transport in our pipelines. It is possible that
any new shippers, or current shippers or other interested parties, may decide to
challenge our tariff rates. If any rate challenge or challenges were successful,
cash available for distribution could be materially reduced.
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ENVIRONMENTAL REGULATION
GENERAL
Various federal, state, and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, affect our operations and costs. In particular,
our activities in connection with storage and transportation of crude oil,
refined products and other liquid hydrocarbons are subject to stringent
environmental regulation. As with the industry generally, compliance with
existing and anticipated regulations increases our overall cost of business.
Areas affected include capital costs to construct, maintain, and upgrade
equipment and facilities. While these regulations affect our maintenance capital
expenditures and net income, we believe that these regulations do not affect our
competitive position in that the operations of our competitors that comply with
these regulations are similarly affected. Environmental regulations have
historically been subject to frequent change by regulatory authorities, and we
are unable to predict the ongoing cost to us of complying with these laws and
regulations or the future impact of these regulations on our operations.
Violation of federal or state environmental laws, regulations, and permits can
result in the imposition of significant civil and criminal penalties,
injunctions, and construction bans or delays. A discharge of hydrocarbons or
hazardous substances into the environment could, to the extent the event is not
insured, subject us to substantial expense, including both the cost to comply
with applicable regulations and claims by neighboring landowners and other third
parties for personal injury and property damage. In connection with our
acquisition of crude oil and refined product pipeline, terminalling and storage
assets from Ultramar Diamond Shamrock, Ultramar Diamond Shamrock has agreed to
indemnify us from environmental liabilities related to the assets transferred to
us that arose prior to closing and are discovered within 10 years after closing
(excluding liabilities resulting from a change in law after closing).
WATER
The Oil Pollution Act was enacted in 1990 and amends provisions of the
Federal Water Pollution Control Act of 1972 and other statutes as they pertain
to prevention and response to petroleum spills. The Oil Pollution Act subjects
owners of facilities to strict, joint, and potentially unlimited liability for
removal costs and other consequences of a petroleum spill, where the spill is
into navigable waters, along shorelines or in the exclusive economic zone of the
U.S. In the event of a petroleum spill into navigable waters, substantial
liabilities could be imposed upon us. States in which we operate have also
enacted similar laws. Regulations are currently being developed under the Oil
Pollution Act and state laws that may also impose additional regulatory burdens
on our operations. Spill prevention control and countermeasure requirements of
federal laws and some state laws require diking and similar structures to help
prevent contamination of navigable waters in the event of a petroleum overflow,
rupture or leak. We are in substantial compliance with these laws. Additionally,
the Office of Pipeline Safety of the U.S. Department of Transportation has
approved our petroleum spill emergency response plans.
The Federal Water Pollution Control Act of 1972 imposes restrictions and
strict controls regarding the discharge of pollutants into navigable waters.
Permits must be obtained to discharge pollutants into state and federal waters.
The Federal Water Pollution Control Act of 1972 imposes substantial potential
liability for the costs of removal, remediation and damages. In addition, some
states maintain groundwater protection programs that require permits for
discharges or operations that may impact groundwater conditions. We believe that
compliance with existing permits and compliance with foreseeable new permit
requirements will not have a material adverse effect on our financial condition
or results of operations.
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AIR EMISSIONS
Our operations are subject to the Federal Clean Air Act and comparable
state and local statutes. Amendments to the Federal Clean Air Act enacted in
late 1990 require or will require most industrial operations in the U.S. to
incur capital expenditures in order to meet air emission control standards
developed by the Environmental Protection Agency and state environmental
agencies. In addition, the 1990 Federal Clean Air Act Amendments include a new
operating permit for major sources, which applies to some of our facilities. We
will be required to incur certain capital expenditures in the next several years
for air pollution control equipment in connection with maintaining or obtaining
permits and approvals addressing air emission related issues. Although we can
give no assurances, we believe implementation of the 1990 Federal Clean Air Act
Amendments will not have a material adverse effect on our financial condition or
results of operations.
An affiliate of Ultramar Diamond Shamrock, Diamond Shamrock Refining and
Marketing Company, received a Notice of Violation under the Clean Air Act dated
December 30, 1998 from the U.S. Environmental Protection Agency, Region VI,
alleging that the company failed to abide by certain regulatory requirements at
its Albuquerque, New Mexico terminal. Ultramar Diamond Shamrock is investigating
the allegations of the Notice of Violation and expects to reach a voluntary
resolution of the allegations with the Environmental Protection Agency. No
penalty demand has yet been made by the Environmental Protection Agency, and
Ultramar Diamond Shamrock has no basis to predict a penalty amount at this time.
However, it is not anticipated that any penalty will have a material impact on
our financial condition.
Under the Clean Air Act, the Environmental Protection Agency and state
agencies acting with authority delegated by the Environmental Protection Agency,
have announced new rules or their intent to strengthen other rules, all
affecting the composition of motor vehicle fuels and automobile emissions.
Beginning in 2006, a recent Environmental Protection Agency rule limits the
sulfur content of motor vehicle gasoline to 80 parts per million, and limits
corporate average sulfur content to 30 parts per million. Moreover, the
Environmental Protection Agency and various states, including the state of
Texas, are reportedly considering further restricting the sulfur content of
motor vehicle gasoline below the limitations taking effect in 2006, and a
further proposal being considered by the Environmental Protection Agency rule
would limit the sulfur content of diesel fuel. The Environmental Protection
Agency is also reportedly considering limiting the level of benzene and other
toxic substances in gasoline, as well as a ban on methyl tert-butyl ether, MTBE,
in gasoline, which may require the use of other chemical additives to serve as
oxygenates instead of MTBE. We have no control over Ultramar Diamond Shamrock's
responses to these emerging requirements, and we cannot be assured that those
responses will not reduce the throughput on our pipelines, and therefore, our
cash flow and ability to make distributions to unitholders.
SOLID WASTE
We generate non-hazardous solid wastes that are subject to the requirements
of the Federal Resource Conservation and Recovery Act and comparable state
statutes. The Environmental Protection Agency is considering the adoption of
stricter disposal standards for non-hazardous wastes, including crude oil and
gas wastes. The Federal Resource Conservation and Recovery Act also governs the
disposal of hazardous wastes. We are not currently required to comply with a
substantial portion of the Federal Resource Conservation and Recovery Act
requirements because our operations generate minimal quantities of hazardous
wastes. However, it is possible that additional wastes, which could include
wastes currently generated during operations, will in the future be designated
as "hazardous wastes." Hazardous wastes are subject to more rigorous and costly
disposal requirements than are non-hazardous wastes. These changes in the
regulations could result in additional maintenance capital expenditures or
operating expenses.
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Following an industrial solid waste inspection of the Corpus Christi, Texas
terminal on December 12, 1997, the Texas Natural Resource Conservation
Commission issued an Enforcement Order Pursuing Administrative Penalties,
seeking penalties of $115,200 from Ultramar Diamond Shamrock Corporation for
violations concerning emergency containment sumps. Ultramar Diamond Shamrock has
remedied the issues identified by the Texas National Resource Conservation
Commission and reached a voluntary resolution of this matter for less than
$50,000.
HAZARDOUS SUBSTANCES
The Comprehensive Environmental Response, Compensation and Liability Act,
referred to as CERCLA, also known as Superfund, imposes liability, without
regard to fault or the legality of the original act, on some classes of persons
that contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the Environmental Protection Agency and, in some
instances, third parties to act in response to threats to the public health or
the environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of our ordinary operations, we may generate
waste that falls within CERCLA's definition of a "hazardous substance." We may
be jointly and severally liable under CERCLA for all or part of the costs
required to clean up sites at which these hazardous substances have been
disposed of or released into the environment.
We currently own or lease, and have in the past owned or leased, properties
where hydrocarbons are being or have been handled. Although we have utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other waste may have been disposed of or released on or under
the properties owned or leased by us or on or under other locations where these
wastes have been taken for disposal. In addition, many of these properties have
been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under our control. These properties and
wastes disposed thereon may be subject to CERCLA, the Federal Resource
Conservation and Recovery Act, and analogous state laws. Under these laws, we
could be required to remove or remediate previously disposed wastes (including
wastes disposed of or released by prior owners or operators), to clean up
contaminated property (including contaminated groundwater) or to perform
remedial operations to prevent future contamination.
We are obligated to perform remedial activities at the Albuquerque, New
Mexico South Valley Superfund Site. Although we are not named as a potentially
responsible party, we are performing remediation under a Non-Interference Order
issued by the Environmental Protection Agency under CERCLA to insure that
historical petroleum product contamination from our pipeline system does not
interfere with the cleanup being performed by potentially responsible parties at
this Superfund site. We have a soil vapor extraction system in place and closure
levels have almost been achieved. We expect to close our remediation efforts at
this site in the near future. We do not expect remedial obligations at this site
to have a material impact on our financial position or results of operations.
Ultramar Diamond Shamrock has agreed to indemnify us for these remedial
obligations.
In October, 1999 the State of New Mexico filed a CERCLA Natural Resource
Damage claim naming certain subsidiaries of Ultramar Diamond Shamrock as
defendants in a lawsuit seeking $2 billion for natural resource damages
associated with the Albuquerque South Valley Superfund Site. Our subsidiaries'
involvement with this site is minimal compared to other defendants named in this
lawsuit. We expect this matter to be resolved by the main parties. Although we
are unable to estimate with certainty our ultimate liability in this case, we
believe that it will not have a material adverse impact on our financial
condition or results of operations. Ultramar Diamond Shamrock has agreed to
indemnify us for these remedial obligations.
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OSHA
We are subject to the requirements of the Federal Occupational Safety and
Health Act and comparable state statutes that regulate the protection of the
health and safety of workers. In addition, the Federal Occupational Safety and
Health Act hazard communication standard requires that information be maintained
about hazardous materials used or produced in operations and that this
information be provided to employees, state and local government authorities and
citizens. We believe that our operations are in substantial compliance with the
Federal Occupational Safety and Health Act requirements, including general
industry standards, record keeping requirements, and monitoring of occupational
exposure to regulated substances.
ENDANGERED SPECIES ACT
The Endangered Species Act restricts activities that may affect endangered
species or their habitats. While some of our facilities are in areas that may be
designated as habitat for endangered species, we believe that we are in
substantial compliance with the Endangered Species Act. However, the discovery
of previously unidentified endangered species could cause us to incur additional
costs or operation restrictions or bans in the affected area.
HAZARDOUS MATERIALS TRANSPORTATION REQUIREMENTS
The Department of Transportation regulations affecting pipeline safety
require pipeline operators to implement measures designed to reduce the
environmental impact of crude oil discharge from onshore crude oil pipelines.
These regulations require operators to maintain comprehensive spill response
plans, including extensive spill response training for pipeline personnel. In
addition, the Department of Transportation regulations contain detailed
specifications for pipeline operation and maintenance. We believe our operations
are in substantial compliance with these regulations.
ENVIRONMENTAL REMEDIATION
Contamination resulting from spills of crude oil and refined products is
not unusual within the petroleum pipeline industry. Historic spills along our
pipeline and storage operations as a result of past operations have resulted in
soil and groundwater contamination. Ultramar Diamond Shamrock is currently
addressing soil or groundwater contamination at 17 sites through assessment,
monitoring and remediation programs with oversight by the applicable state
agencies. Adequate accruals have been established to address all known remedial
obligations. The following is a summary of the significant current remediation
projects. In the aggregate, Ultramar Diamond Shamrock has estimated that the
total liability for remediating these 17 sites to be $2,507,000 although there
can be no guarantee that the actual remedial costs or associated liabilities
will not exceed this amount.
AMARILLO, TEXAS
At our Amarillo, Texas terminal, historical surface releases have resulted
in soil and on-site and off-site groundwater contamination. We are in the
process of performing refined product recovery operations and are continuing
delineation of the extent of groundwater contamination. Remediation efforts at
the Amarillo, Texas terminal are expected to continue for the next 10 years.
CUERVO, NEW MEXICO
A pump failure at the Cuervo, New Mexico pump station recently caused the
release of 494 barrels of turbine fuel. The release was immediately addressed
and all affected on-site and off-site soils were excavated and are being
remediated on-site on a bermed area. We are in the
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process of investigating whether groundwater was affected. Remediation and
monitoring efforts at this site are expected to continue for the next five
years.
CURRY RANCH SITE, NEW MEXICO
A gasoline leak was discovered in 1995 on a pipeline right of way on the
Curry Ranch in New Mexico. Contaminated soils were excavated to five feet and an
air venting system was installed to address any remaining contamination.
However, further investigation may be required to determine whether groundwater
contamination exists. Remediation efforts are expected to continue for the next
three years and monitoring and soil sampling will be performed for the next five
years.
ENDEE, NEW MEXICO
A release of 2,496 barrels of turbine fuel occurred in 1992 on a pipeline
right of way near Endee, New Mexico. Both soil and groundwater were affected and
refined product recovery efforts are still being performed. Additional
assessments are required to fully delineate the extent of the contamination.
Clay soils in the area have inhibited recovery efforts. A high vacuum recovery
system may be required to properly remediate the site. Remediation and
monitoring efforts at this site are expected to continue for the next ten years.
HARLINGEN, TEXAS
Historic refined product contamination of soil and groundwater was
discovered at the Harlingen, Texas terminal site in the early 1990s. Product
recovery has been completed, and we are in the process of installing an air
sparging and soil venting remediation system. There is some potential that the
contamination has migrated offsite; however, the impact from offsite migration,
if any, is believed to be immaterial. Remediation efforts at the Harlingen,
Texas terminal are expected to continue for the next seven years.
MATHIS, TEXAS
A historical gasoline release was discovered on a pipeline right of way
near Mathis, Texas in 1995. Affected soils have been removed down to a depth of
six feet and a soil vent system has been installed. However, full delineation of
the contamination has not occurred and there is some evidence that groundwater
has been impacted which may require the installation of a vapor extraction or
other remedial system. Remediation and monitoring efforts are expected to
continue for the next five to ten years.
PALO DURO, TEXAS
A diesel fuel release was discovered in 1997 at the Palo Duro, Texas pump
station. Contaminated soils were excavated and a vent system was installed. The
full lateral and vertical extent of the contamination has not yet been
completed. There is some possibility of off-site migration near the facility
boundary. The depth of groundwater in this area minimizes the likelihood of any
major groundwater impacts from this release. Tight clay soils may require the
installation of a vapor extraction system. Remediation and monitoring efforts
are expected to continue for the next six years.
Similar remedial efforts are ongoing at other sites including Abernathy,
Texas; Albuquerque, New Mexico; Corpus Christi, Texas; Denver, Colorado; Dixon,
Texas; El Paso, Texas; Laredo, Texas; T-4 Cattle Ranch, New Mexico; Tucumcari,
New Mexico; and Wynnewood, Oklahoma. However, based upon the extent of known or
suspected contamination and current remedial standards, we do not believe that
these remedial obligations will have a material impact on our financial position
or results of operations.
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We may experience future releases of crude oil or refined products into the
environment from our pipeline, terminalling and storage operations, or discover
releases that were previously unidentified. While we maintain an extensive
inspection program designed to prevent and, as applicable, to detect and address
these releases promptly, damages, and liabilities incurred due to any future
environmental releases from our assets may substantially affect our business.
TITLE TO PROPERTIES
Substantially all of our pipelines are constructed on rights-of-way granted
by the apparent record owners of the property and in some instances these
rights-of-way are revocable at the election of the grantor. In many instances,
lands over which rights-of-way have been obtained are subject to prior liens
that have not been subordinated to the right-of-way grants. In some cases, not
all of the apparent record owners have joined in the right-of-way grants, but in
substantially all of these cases, signatures of the owners of majority interests
have been obtained. We have obtained permits from public authorities to cross
over or under, or to lay facilities in or along watercourses, county roads,
municipal streets, and state highways, and in some instances, these permits are
revocable at the election of the grantor. We have also obtained permits from
railroad companies to cross over or under lands or rights-of-way, many of which
are also revocable at the grantor's election. In some cases, property for
pipeline purposes was purchased in fee. All of the pump stations are located on
property owned in fee or property under long-term leases. In some states and
under some circumstances, we have the right of eminent domain to acquire
rights-of-way and lands necessary for our common carrier pipelines.
Some of the leases, easements, rights-of-way, permits, and licenses
transferred to Shamrock Logistics Operations effective July 1, 2000 required the
consent of the grantor to transfer these rights, which in some instances is a
governmental entity. The general partner believes that it has obtained
sufficient third-party consents, permits, and authorizations for the transfer of
the assets necessary for us to operate our business in all material respects as
described in this prospectus. With respect to any consents, permits, or
authorizations that have not been obtained, the general partner believes that
these consents, permits, or authorizations will be obtained within a reasonable
period, or that the failure to obtain these consents, permits, or authorizations
will have no material adverse effect on the operation of our business.
Our general partner believes that we have satisfactory title to all of our
assets. Although title to these properties is subject to encumbrances in some
cases, such as customary interests generally retained in connection with
acquisition of real property, liens related to environmental liabilities
associated with historical operations, liens for current taxes and other
burdens, and minor easements, restrictions, and other encumbrances to which the
underlying properties were subject at the time of acquisition by our predecessor
or us, our general partner believes that none of these burdens will materially
detract from the value of these properties or from our interest in these
properties or will materially interfere with their use in the operation of our
business.
EMPLOYEES
To carry out our operations, Ultramar Diamond Shamrock employs
approximately 150 employees. The vast majority of these employees are not
represented by a union. There are employees that support Ultramar Diamond
Shamrock's crude oil gathering systems who are represented by unions. These
employees primarily support the crude gathering operations, but on some
occasions support crude trunkline operations associated with Shamrock Logistics
Operations.
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LEGAL PROCEEDINGS
We are a party to various legal actions that have arisen in the ordinary
course of our business. We do not believe that the resolution of these matters
will, in the aggregate, have a material adverse effect on our financial
condition or results of operations.
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MANAGEMENT
MANAGEMENT OF SHAMROCK LOGISTICS
Shamrock Logistics GP, LLC, as the general partner of our general partner,
will manage our operations and activities on behalf of our general partner.
Unitholders will not directly or indirectly participate in our management or
operation. The general partner owes a fiduciary duty to the unitholders. The
general partner will be liable, as general partner, for all of our debts (to the
extent not paid from our assets), except for indebtedness or other obligations
that are made specifically non-recourse to it. However, whenever possible, the
general partner intends to incur indebtedness or other obligations that are
non-recourse.
At least three members of the board of directors of Shamrock Logistics GP,
LLC, will serve on a conflicts committee to review specific matters that the
board believes may involve conflicts of interest. The conflicts committee will
determine if the resolution of the conflict of interest is fair and reasonable
to Shamrock Logistics. The members of the conflicts committee may not be
officers or employees of the general partner or directors, officers, or
employees of their affiliates. Any matters approved by the conflicts committee
will be conclusively deemed to be fair and reasonable to us, approved by all of
our partners, and not a breach by the general partner of any duties it may owe
Shamrock Logistics or our unitholders. In addition, the members of the conflicts
committee will also serve on an audit committee that will review our external
financial reporting, recommend engagement of our independent auditors and review
procedures for internal auditing and the adequacy of our internal accounting
controls. The members of the conflicts committee will also serve on the
compensation committee, which will oversee compensation decisions for the
officers of Shamrock Logistics GP, LLC as well as the compensation plans
described below.
We are managed and operated by the directors and officers of Shamrock
Logistics GP, LLC on behalf of our general partner. Most of our operational
personnel will be employees of Ultramar Diamond Shamrock or its affiliates.
Some officers of Shamrock Logistics GP, LLC may spend a substantial amount
of time managing the business and affairs of Ultramar Diamond Shamrock and its
other affiliates. These officers may face a conflict regarding the allocation of
their time between our business and the other business interests of Ultramar
Diamond Shamrock. Shamrock Logistics GP, LLC intends to cause its officers to
devote as much time to the management of our business and affairs as is
necessary for the proper conduct of our business and affairs. We expect that
Rodney Reese will devote at least 75% of his time to Shamrock Logistics and
Steven Blank will devote approximately half of his time to our operations. As
Director, Pipelines and Terminals of Ultramar Diamond Shamrock, Mr. Reese will
continue to oversee the operations of the logistics assets retained by Ultramar
Diamond Shamrock. Mr. Blank will continue to serve as Vice President and
Treasurer of Ultramar Diamond Shamrock. Curtis Anastasio, as our President, will
devote all of his time to our operations.
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DIRECTORS AND EXECUTIVE OFFICERS OF SHAMROCK LOGISTICS GP, LLC
The following table shows information for the directors and executive
officers of Shamrock Logistics GP, LLC. Executive officers and directors are
elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
---- --- ---------------------------------
<S> <C> <C>
William R. Klesse......................... 53 Chairman of the Board
Curtis V. Anastasio....................... 44 President, Chief Executive Officer and
Director
Steven Blank.............................. 45 Chief Accounting and Financial Officer,
Director
Rodney L. Reese........................... 50 Vice President -- Operations
Timothy J. Fretthold...................... 50 Director
Robert S. Shapard......................... 45 Director
</TABLE>
William R. Klesse has been the Chairman of the Board of Shamrock Logistics
GP, LLC since December 7, 1999. He was named Executive Vice President,
Operations of Ultramar Diamond Shamrock in January 1999. From the December 1996
merger of Ultramar Corporation and Diamond Shamrock, forming Ultramar Diamond
Shamrock, through December 1998, he served as Executive Vice President,
Refining, Product Supply and Logistics of Ultramar Diamond Shamrock. He served
as Executive Vice President of Diamond Shamrock from February 1995 through
November 1996. From June 1989 through January 1995, he was Senior Vice
President/Group Executive for Diamond Shamrock.
Curtis V. Anastasio has been the President and a director of Shamrock
Logistics GP, LLC since December 7, 1999. On June 27, 2000, he was appointed
President and Chief Executive Officer. He served as Vice President, General
Counsel and Corporate Secretary of Ultramar Diamond Shamrock from July 31, 1997
until July 1, 2000. Mr. Anastasio also serves as Vice President of Ultramar
Diamond Shamrock. From December 1996 through July 1997, he was Vice President
and Deputy General Counsel of Ultramar Diamond Shamrock. During 1996, he was
Vice President-Marketing, Distribution and Development for Ultramar Energy Ltd.,
a subsidiary of Ultramar, with responsibility for wholesale marketing, product
supply and logistics, and development of Ultramar's business in New England.
From 1994 to 1996, he was Vice President -- Supply, Shipping & Trading for
Ultramar Canada, Inc., a subsidiary of Ultramar, with responsibility for
refinery production planning, raw materials supply, worldwide shipping, product
distribution and derivatives trading. He was General Counsel and Secretary of
Ultramar Canada 1992 to 1994, and served as Corporate Counsel of American
Ultramar Limited from 1988 until 1992.
Steven Blank has been the Chief Accounting and Financial Officer and a
director of Shamrock Logistics GP, LLC since December 7, 1999. He has served as
Vice President and Treasurer of Ultramar Diamond Shamrock since December 1996.
Prior to that he was Vice President-Information Technology and Investor
Relations for Ultramar Corporation from March 1996 to December 1996, and before
that Director of Investor Relations for Ultramar Corporation from July 1992 to
March 1996.
Rodney L. Reese has been the Vice President-Operations of Shamrock
Logistics GP, LLC since December 7, 1999. He has been employed for 19 years in
various pipeline engineering and operations positions by Ultramar Diamond
Shamrock and its predecessors, and has served as Director, Pipelines and
Terminals for Ultramar Diamond Shamrock since October 1999. Prior to that, among
other things, he was Director, Product Pipelines Operations from October 1997 to
October 1999; Regional Manager, Southern Division from May 1996 to October 1997;
and Manager of Operations, Northern Division prior to May 1996.
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Timothy J. Fretthold has served as a director of Shamrock Logistics GP, LLC
since December 7, 1999. He is the Executive Vice President and Chief
Administrative and Legal Officer of Ultramar Diamond Shamrock, Mr. Fretthold has
served as Executive Vice President and Chief Administrative Officer for Ultramar
Diamond Shamrock since the merger between Ultramar and Diamond Shamrock in
December 1996. Since August 1997, he has also served as Chief Legal Officer.
From June 1989 through November 1996, he served as Senior Vice President/Group
Executive and General Counsel of Diamond Shamrock.
Robert S. Shapard has served as a director of Shamrock Logistics GP, LLC
since August 1, 2000. Mr. Shapard was appointed Executive Vice President and
Chief Financial Officer of Ultramar Diamond Shamrock on August 1, 2000. Prior to
that he was Chief Executive Officer of TXU Australia from September 1998 to
August 2000. Mr. Shapard has held various positions at subsidiaries of TXU
Corporation from June 1994 to September 1998. TXU is an electricity and natural
gas company with significant operations in the United States, Europe and
Australia.
ADMINISTRATIVE FEE AND REIMBURSEMENT OF EXPENSES
We will pay Ultramar Diamond Shamrock and its affiliates an annual
administrative fee that will initially equal $5.2 million as a reimbursement of
the overhead and administrative expenses incurred by them on our behalf. Our
general partner, with approval and consent of the conflicts committee of its
general partner, will have the right to increase the annual administrative fee
by up to 1.5% each year, as further adjusted for inflation, during the initial
eight-year term of the services agreement between Shamrock Logistics Operations
and the general partner and may agree to further increases in connection with
expansions of our operations through the acquisition or construction of new
logistics assets that require additional management personnel. The
administrative services agreement will automatically renew for successive
two-year terms unless terminated by either party by giving one year prior
notice. We currently do not intend to establish administrative functions
independently of Ultramar Diamond Shamrock. Additionally, we will reimburse
Ultramar Diamond Shamrock and its affiliates for direct expenses they incur on
our behalf (for example, salaries). On a pro forma basis for 1999, we estimate
that the direct expenses to be reimbursed to Ultramar Diamond Shamrock and its
affiliates would have been $9.7 million. The payment of the annual
administrative fee and the reimbursement of other expenses could adversely
affect our ability to make cash distributions to our unitholders.
EXECUTIVE COMPENSATION
Shamrock Logistics was formed in December 1999, and Shamrock Logistics GP,
LLC, the general partner of the General Partner, was formed in December 1999.
Accordingly, Shamrock Logistics GP, LLC paid no compensation to its directors
and officers with respect to the 1999 fiscal year. No obligations were accrued
in respect of management incentive or retirement benefits for the directors and
officers with respect to the 1999 fiscal year. Officers and employees of
Shamrock Logistics GP, LLC may participate in employee benefit plans and
arrangements sponsored by Shamrock Logistics GP, LLC, including plans which may
be established by the general partner or its affiliates in the future.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to officers of Shamrock Logistics
GP, LLC or employees of Ultramar Diamond Shamrock or its affiliates who also
serve as directors. Shamrock Logistics GP, LLC anticipates that each independent
director will receive cash compensation for attending meetings of the board of
directors as well as committee meetings. In addition, each independent director
will be reimbursed for his out-of-pocket expenses in connection with attending
meetings of the board of directors or committees. Each director will be fully
indemnified by Shamrock Logistics for his actions associated with being a
director to the extent permitted under Delaware law.
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EMPLOYMENT AGREEMENT
Pursuant to his employment agreement with Ultramar Diamond Shamrock, Mr.
Anastasio serves as the President and Chief Executive Officer of Shamrock
Logistics GP, LLC as well as a Vice President of Ultramar Diamond Shamrock. Mr.
Anastasio is responsible for the overall operations of Shamrock Logistics. Under
the administrative services agreement, we have agreed to reimburse Ultramar
Diamond Shamrock for the compensation and benefits to be paid under this
agreement. The agreement with Mr. Anastasio, as entered into in 1996 and amended
in May and August of 2000, is filed as an exhibit to the registration statement
of which this prospectus is a part.
The employment agreement automatically renews for a one-year term each
November unless Mr. Anastasio or Ultramar Diamond Shamrock gives notice of
termination three months prior to the annual renewal date. In addition, Mr.
Anastasio may terminate the agreement at any time. The employment agreement
includes confidentiality and nonsolicitation provisions. The employment
agreement also contains non-competition provisions with respect to Mr.
Anastasio's participation in the refining and marketing business during the term
of the agreement and for one year thereafter.
The agreement, as amended, provides for an annual base salary of $255,400,
which the board of directors of Ultramar Diamond Shamrock may increase from time
to time. In addition, Mr. Anastasio is eligible to participate in any cash
incentive compensation or management incentive program or arrangement authorized
by the board of directors of Ultramar Diamond Shamrock.
If Mr. Anastasio's employment is terminated by him for good reason, as that
term is defined in the agreement, which includes notice of non-renewal by
Ultramar Diamond Shamrock in accordance with the agreement, or by Ultramar
Diamond Shamrock other than for death, disability or cause, as defined in the
agreement, he will be entitled to a lump sum payment equal to three times the
sum of:
- his highest annual base salary in effect during the preceding three
years, and
- the highest annual incentive compensation paid during the preceding three
years.
In addition, Mr. Anastasio will be entitled to:
- a lump sum payment equal to three times the maximum contribution which
could have been made on his behalf to any defined contribution retirement
plans in which he participated during the three years prior to
termination,
- the continuation for three years of his employee welfare benefits or the
present value of such benefits, and
- three additional years of age and service credit under all employee
benefit plans and in the case of any qualified defined benefit pension
plan, a lump sum payment of the present value of the incremental benefit
that would have resulted from the additional years of credit.
Upon a change in control of Ultramar Diamond Shamrock, as defined in the
agreement, all cash benefits due under the agreement must be secured by an
irrevocable trust for the benefit of Mr. Anastasio and the definition of good
reason is also expanded, among other things, to include Mr. Anastasio's
termination of employment during the 30-day window period following the first
anniversary of the change in control. In addition, following a change in
control, if Mr. Anastasio terminates employment for good reason or he is
terminated by Ultramar Diamond Shamrock without cause, the non-competition
provision does not apply following termination and the confidentiality provision
applies only for three years following termination.
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Mr. Anastasio will also participate in the intermediate-term, long-term,
and short-term incentive plans described below with other members of management.
He will also be entitled to participate in the other employee benefit plans and
programs that Ultramar Diamond Shamrock or its affiliates provide for their
employees.
INTERMEDIATE-TERM INCENTIVE PLAN
Shamrock Logistics GP, LLC intends to establish an intermediate-term
incentive plan for its officers and designated key employees of its affiliates
who perform services for us.
The intermediate-term incentive plan will be administered by the
compensation committee of Shamrock Logistics GP, LLC's board of directors. The
intermediate-term incentive plan will be a performance unit plan extending over
a three-year performance cycle. A new three-year performance cycle begins each
year. Subject to the review and approval of the compensation committee, the
number of performance units granted to participants for each performance cycle
will be established at the beginning of each cycle and will be based on a target
compensation value and anticipated distribution payout. We will reimburse the
general partner for all payments made under the plan described below. Grants may
be made annually of performance units that entitle the recipient to receive an
equivalent amount of cash upon the vesting of the unit.
The value of the payout of the performance units granted depends upon the
distributions paid to the common unitholders: fifty percent of the grant will be
paid out in cash after year two of the performance cycle, and the remaining
fifty percent will be paid out in cash after year three. However, if a grantee's
employment is terminated for any reason prior to the date of payment of any
performance units, those performance units will be automatically forfeited,
unless the compensation committee, in its sole discretion, provides otherwise.
The grant of performance units under the intermediate-term incentive plan
is designed to serve as a means of incentive compensation for performance.
Shamrock Logistics GP, LLC's board of directors, in its discretion, may
terminate the intermediate-term incentive plan at any time. Shamrock Logistics
GP, LLC's board of directors will also have the right to alter or amend the
intermediate-term incentive plan or any part of it from time to time, provided,
however, that no change in any outstanding grant may be made that would
materially impair the rights of the participant without the consent of the
affected participant. In addition, the general partner may, in its discretion,
establish additional compensation and incentive arrangements as it deems
appropriate to motivate and reward its employees. Shamrock Logistics GP, LLC
will be reimbursed for all compensation expenses incurred on our behalf.
LONG-TERM INCENTIVE PLAN
Shamrock Logistics GP, LLC intends to adopt the long-term incentive plan
for directors of Shamrock Logistics GP, LLC and employees of affiliates of
Shamrock Logistics GP, LLC who perform services for us. The following summary of
the long-term incentive plan outlines its material provisions.
The long-term incentive plan will be administered by the compensation
committee of Shamrock Logistics GP, LLC's board of directors. Annual grant
levels for designated employees will be recommended by the Chief Executive
Officer of Shamrock Logistics GP, LLC, subject to the review and approval of the
compensation committee. We will reimburse Shamrock Logistics GP, LLC for all
payments made under the programs described below. Grants may be made either of
restricted units, which are "phantom" units that entitle the grantee to receive
a common unit or an equivalent amount of cash upon the vesting of a phantom unit
or options to purchase common units. Common units to be delivered upon the
vesting of restricted units or to be issued upon exercise of a unit option will
be acquired by the general partner in the open market at a
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price equal to the then-prevailing price on the principal national securities
exchange upon which the common units are then traded, or directly from Shamrock
Logistics, any affiliate or any other third party, including units newly issued
by us, or units already owned by the general partner, or any combination of the
foregoing. Shamrock Logistics GP, LLC will be entitled to reimbursement by us
for the cost incurred in acquiring these common units or in paying cash in lieu
of common units upon vesting of the restricted units. If we issue new common
units upon payment of the restricted units or unit options instead of purchasing
them, the total number of common units outstanding will increase. The aggregate
number of phantom units reserved for issuance under the long-term incentive plan
is 250,000. We anticipate making initial grants of up to 75,000 restricted
phantom units following the closing of the offering of the common units to the
members of senior management.
Restricted Phantom Units. The compensation committee will determine the
conditions under which the restricted phantom units will vest. However, if a
grantee's employment is terminated for any reason prior to the vesting of any
restricted phantom units, those restricted units will be automatically
forfeited, unless otherwise provided in a written employment agreement or the
compensation committee, in its sole discretion, provides otherwise.
The issuance of the common units under the restricted unit plan is designed
to serve as a means of incentive compensation for performance and not primarily
as an opportunity to participate in the equity appreciation in respect of the
common units. Therefore, no consideration will be payable by the plan
participants upon receipt of the common units, and we will receive no
remuneration for these units. The compensation committee, in its discretion, may
grant distribution equivalent rights with respect to restricted units.
Unit Options. Initially, we will not make any grants of unit options. The
compensation committee may, in the future, determine to make option grants to
employees and directors containing the specific terms that they determine. When
granted, unit options will have an exercise price set by the compensation
committee that may be above, below or equal to the fair market value of a common
unit on the date of grant.
Shamrock Logistics GP, LLC's board of directors, in its discretion, may
terminate the long-term incentive plan at any time with respect to any common
units for which a grant has not been made under the plan. Shamrock Logistics GP,
LLC's board of directors will also have the right to alter or amend the
long-term incentive plan or any part of it from time to time, subject to
unitholder approval as required by the exchange upon which the common units may
be listed at that time; provided, however, that no change in any outstanding
grant may be made that would materially impair the rights of the participant
without the consent of the affected participant. In addition, Shamrock Logistics
GP, LLC may, in its discretion, establish additional compensation and incentive
arrangements as it deems appropriate to motivate and reward its employees.
Shamrock Logistics GP, LLC will be reimbursed for all compensation expenses
incurred on our behalf.
SHORT-TERM INCENTIVE PLAN
Shamrock Logistics GP, LLC also intends to adopt a short-term incentive
plan for management and other salaried employees of its affiliates who provide
services for us. The short-term incentive plan is designed to enhance our
financial or operational performance by rewarding management and salaried
employees with cash awards for achieving an annual financial performance
objective and operational performance objectives, such as safety and
environmental goals. The annual financial performance objective for each year
will be recommended by the president of Shamrock Logistics GP, LLC and approved
by the compensation committee of its board of directors prior to January 1 of
that year. The short-term incentive plan will be administered by the
compensation committee. Individual participants and payments each year will be
determined by and in the discretion of the compensation committee,
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and Shamrock Logistics GP, LLC will be able to amend the plan at any time.
Shamrock Logistics GP, LLC will be entitled to reimbursement by us for payments
and costs incurred under the short-term incentive plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units of
Shamrock Logistics that will be issued upon the consummation of this offering
and the related transactions and held by beneficial owners of 5% or more of the
units. The general partner and Shamrock Logistics GP, LLC are owned through
Diamond Shamrock Refining and Marketing by Ultramar Diamond Shamrock. The
general partner and Shamrock Logistics GP, LLC are indirect wholly owned
subsidiaries of Ultramar Diamond Shamrock. We anticipate making initial grants
of up to a total of 75,000 restricted phantom units following the closing of the
offering to members of senior management, including the named executive
officers. Please read "Management -- Long-Term Incentive Plan." The address for
UDS Logistics, LLC is 6000 North Loop 1604 West, San Antonio, Texas 78249.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
COMMON COMMON SUBORDINATED SUBORDINATED TOTAL UNITS
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
------------------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Ultramar Diamond Shamrock.... 4,399,322 52.4% 8,999,322 100% 76.2%
</TABLE>
Ultramar Diamond Shamrock may be deemed to beneficially own the common
units and the subordinated units held by UDS Logistics, LLC as a result of
Ultramar Diamond Shamrock's indirect ownership of all of the member interests in
UDS Logistics, LLC.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After this offering, UDS Logistics, LLC will own 4,399,322 common units and
8,999,322 subordinated units representing an aggregate 75.5% limited partner
interest in us and Shamrock Logistics Operations. In addition, the general
partner will own an aggregate 2% general partner interest in us and Shamrock
Logistics Operations. The general partner's ability, as general partner, to
manage and operate Shamrock Logistics and UDS Logistics, LLC's ownership of an
aggregate 75.5% limited partner interest in us and Shamrock Logistics
Operations, effectively gives the general partner the ability to veto some
actions of Shamrock Logistics and to control the management of Shamrock
Logistics.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the formation,
ongoing operation, and liquidation of Shamrock Logistics. These distributions
and payments were determined by and among affiliated entities and, consequently,
are not the result of arm's length negotiations.
FORMATION STAGE
The consideration received by
our general partner and its
affiliates for the transfer
of the Ultramar Diamond
Shamrock logistics
business................... - 4,399,322 common units;
- 8,999,322 subordinated units;
- an aggregate 2% general partner interest in
Shamrock Logistics and Shamrock Logistics
Operations on a combined basis;
- the incentive distribution rights; and
- $128.2 million of the net proceeds of the
offering of the common units and the borrowings
under the credit facility.
OPERATIONAL STAGE
Distributions of available
cash to our general
partner.................... We will generally make cash distributions 98% to
the unitholders, including to UDS Logistics, LLC
as holder of 4,399,322 common units and all of
the subordinated units, and 2% to the general
partner. In addition, if distributions exceed the
minimum quarterly distribution and other higher
target levels, our general partner will be
entitled to increasing percentages of the
distributions, up to 50% of the distributions
above the highest target level.
Assuming we have sufficient available cash to pay
the full minimum quarterly distribution on all of
our outstanding units for four quarters, our
general partner would receive distributions of
approximately $0.9 million on the combined 2%
general partner interest. UDS Logistics, LLC
would receive an aggregate annual distribution of
approximately $32.2 million on its common units
and the subordinated units.
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Payments to our general
partner and its affiliates... We will pay Ultramar Diamond Shamrock and its
affiliates an annual administrative fee that will
initially equal $5.2 million as a reimbursement
of the overhead and administrative expenses
incurred by them on our behalf, including legal,
accounting, treasury, information technology and
other centralized corporate functions.
Additionally, we will reimburse Ultramar Diamond
Shamrock and its affiliates for direct expenses
they incur on our behalf such as salaries, wages
and employee benefit costs, including health
insurance, pension and retiree medical. On a pro
forma basis for 1999, we estimate that the direct
expenses to be reimbursed to Ultramar Diamond
Shamrock and its affiliates would have been
approximately $9.7 million.
Withdrawal or removal of our
general partner............ If the general partner withdraws or is removed,
its general partner interest and its incentive
distribution rights will either be sold to the
new general partner for cash or converted into
common units, in each case for an amount equal to
the fair market value of those interests. Please
read "The Partnership Agreement -- Withdrawal or
Removal of the General Partner."
LIQUIDATION STAGE
Liquidation.................. Upon our liquidation, the partners, including our
general partner, will be entitled to receive
liquidating distributions according to their
particular capital account balances.
AGREEMENTS GOVERNING THE TRANSACTIONS
Shamrock Logistics, the general partner, Shamrock Logistics GP, LLC,
Shamrock Logistics Operations and other parties have entered into or will enter
into the various documents and agreements that will effect transactions,
including the vesting of assets in, and the assumption of liabilities by, the
subsidiaries, and the application of the proceeds of this offering. These
agreements will not be the result of arm's-length negotiations, and they, or any
of the transactions which they provide for, may be effected on terms at least as
favorable to the parties to these agreements as they could have been obtained
from unaffiliated third parties. All of the transaction expenses incurred in
connection with these transactions, including the expenses associated with
vesting assets into our subsidiaries, will be paid from the proceeds of this
offering. For a detailed description of the expenses payable to Ultramar Diamond
Shamrock by Shamrock Logistics, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Related Party Transactions."
OMNIBUS AGREEMENT
Concurrent with the closing of the offering of the common units, we will
enter into an agreement with Ultramar Diamond Shamrock and the general partner,
which will govern potential competition among us and the other parties to the
agreement. Ultramar Diamond Shamrock will agree, and will cause its controlled
affiliates to agree, for so long as Ultramar Diamond Shamrock or its affiliates
control the general partner, not to engage in, whether by acquisition or
otherwise, the business of transporting crude oil or refined products including
petrochemicals or operating
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crude oil storage or refined products terminalling assets in the United States.
This restriction will not apply to:
- any business retained by Ultramar Diamond Shamrock at the closing of this
offering;
- any further development of the Diamond-Koch Joint Venture petrochemicals
business;
- any business with a fair market value of less than $10 million;
- any business acquired by Ultramar Diamond Shamrock that constitutes less
than 50% of the fair market value of a larger acquisition; provided we
have been offered and declined (with the concurrence of the conflicts
committee) the opportunity to purchase this business;
- the Wichita Falls crude oil pipeline, the Nuevo Laredo refined product
pipeline and the Ringgold crude oil storage facility should we decline to
exercise our option to purchase them; or
- any newly constructed logistics assets that we have not offered to
purchase within one year of construction at fair market value, not to
exceed 105% of the cost to Ultramar Diamond Shamrock.
The omnibus agreement will also provide for a ten-year environmental
indemnity by Ultramar Diamond Shamrock as described under
"Business -- Environmental Regulation -- General."
In addition, effective July 1, 2000 the general partner and Ultramar
Diamond Shamrock will enter into an eight-year administrative services agreement
under which Ultramar Diamond Shamrock and its affiliates agree to provide
general and administrative services to the general partner. We will pay Ultramar
Diamond Shamrock and its affiliates an annual administrative fee that will
initially equal $5.2 million. See "Management -- Administrative Fee and
Reimbursement of Expenses."
Further, concurrently with the closing of this offering, we will enter into
a seven-year pipelines and terminal usage agreement with Ultramar Diamond
Shamrock, as described under "Business -- Our Relationship with Ultramar Diamond
Shamrock."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between the general partner and its affiliates, on the one hand,
and Shamrock Logistics and its limited partners, on the other hand. The
directors and officers of the general partner's general partner, Shamrock
Logistics GP, LLC, have fiduciary duties to manage the general partner in a
manner beneficial to its partners. At the same time, the general partner has a
fiduciary duty to manage Shamrock Logistics in a manner beneficial to Shamrock
Logistics and the unitholders.
The partnership agreement contains provisions that allow the general
partner to take into account the interests of parties in addition to Shamrock
Logistics in resolving conflicts of interest. In effect, these provisions limit
the general partner's fiduciary duties to the unitholders. The partnership
agreement also restricts the remedies available to unitholders for actions taken
that might, without those limitations, constitute breaches of fiduciary duty.
Whenever a conflict arises between the general partner or its affiliates, on the
one hand, and Shamrock Logistics or any other partner, on the other hand, the
general partner will resolve that conflict. A conflicts committee of the board
of directors of Shamrock Logistics GP, LLC will, at the request of the general
partner, review conflicts of interest. The general partner will not be in breach
of its obligations under the partnership agreement or its duties to Shamrock
Logistics or the unitholders if the resolution of the conflict is considered to
be fair and reasonable to Shamrock Logistics. Any resolution is considered to be
fair and reasonable to Shamrock Logistics if that resolution is:
- approved by the conflicts committee, although no party is obligated to
seek approval and the general partner may adopt a resolution or course of
action that has not received approval;
- on terms no less favorable to Shamrock Logistics than those generally
being provided to or available from unrelated third parties; or
- fair to Shamrock Logistics, taking into account the totality of the
relationships between the parties involved, including other transactions
that may be particularly favorable or advantageous to Shamrock Logistics.
In resolving a conflict, the general partner may, unless the resolution is
specifically provided for in the partnership agreement, consider:
- the relative interests of the parties involved in the conflict or
affected by the action;
- any customary or accepted industry practices or historical dealings with
a particular person or entity; and
- generally accepted accounting practices or principles and other factors
it considers relevant, if applicable.
Conflicts of interest could arise in the situations described below, among
others.
ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE
FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT
SUBORDINATED UNITS.
The amount of cash that is available for distribution to unitholders is
affected by decisions of the general partner regarding:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
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- issuance of additional units; and
- the creation, decrease or increase of reserves in any quarter.
In addition, borrowings by Shamrock Logistics do not constitute a breach of
any duty owed by the general partner to the unitholders, including borrowings
that have the purpose or effect of:
- enabling UDS Logistics, LLC to receive distributions on any subordinated
units held by it or enabling the general partner to receive distributions
or the incentive distribution rights; or
- accelerating the expiration of the subordination period.
The partnership agreement provides that Shamrock Logistics may borrow funds
from the general partner and its affiliates. The general partner and its
affiliates may not borrow funds from Shamrock Logistics.
WE WILL NOT HAVE ANY EMPLOYEES AND WILL RELY ON THE EMPLOYEES OF THE GENERAL
PARTNER AND ITS AFFILIATES.
We will not have any officers or employees and will rely solely on officers
and employees of Shamrock Logistics GP, LLC, and its affiliates. Affiliates of
the general partner will conduct businesses and activities of their own in which
we will have no economic interest. If these separate activities are
significantly greater than our activities, there could be material competition
for the time and effort of the officers and employees who provide services to
the general partner and Shamrock Logistics GP, LLC. The officers of Shamrock
Logistics GP, LLC, with the exception of its president and chief executive
officer, will not be required to work full time on our affairs. These officers
may devote significant time to the affairs of Ultramar Diamond Shamrock or its
affiliates and will be compensated by these affiliates for the services rendered
to them.
SHAMROCK LOGISTICS WILL REIMBURSE ULTRAMAR DIAMOND SHAMROCK AND ITS AFFILIATES
FOR EXPENSES AND COSTS INCURRED ON OUR BEHALF.
Shamrock Logistics will reimburse Ultramar Diamond Shamrock and its
affiliates for costs incurred in managing and operating Shamrock Logistics. The
partnership agreement provides that the general partner will determine the
expenses that are allocable to Shamrock Logistics in any reasonable manner
determined by the general partner in its sole discretion. For a more detailed
description of the administrative fees and expense reimbursements we will be
obligated to pay our general partner, please read "Management -- Administrative
Fee and Reimbursement of Expenses."
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING SHAMROCK
LOGISTICS' OBLIGATIONS.
The general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only to all or particular
assets of Shamrock Logistics, and not against the general partner or its assets.
The partnership agreement provides that any action taken by the general partner
to limit its liability is not a breach of the general partner's fiduciary
duties, even if we could have obtained more favorable terms without the
limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH SHAMROCK LOGISTICS.
Any agreements between Shamrock Logistics on the one hand, and the general
partner and its affiliates, on the other, will not grant to the unitholders,
separate and apart from Shamrock Logistics, the right to enforce the obligations
of the general partner and its affiliates in favor of Shamrock Logistics.
Therefore, the general partner, in its capacity as the general partner of
Shamrock Logistics, will be primarily responsible for enforcing these
obligations.
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CONTRACTS BETWEEN SHAMROCK LOGISTICS, ON THE ONE HAND, AND THE GENERAL PARTNER
AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS.
The partnership agreement allows the general partner to pay itself or its
affiliates for any services rendered, provided these services are rendered on
terms that are fair and reasonable to us. The general partner may also enter
into additional contractual arrangements with any of its affiliates on our
behalf. Neither the partnership agreement nor any of the other agreements,
contracts and arrangements between Shamrock Logistics, on the one hand, and the
general partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms which are fair and reasonable to
Shamrock Logistics.
The general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of the general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. The general partner and its affiliates will not have any obligation to
enter into any contracts of this kind.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT.
The general partner may exercise its right to call and purchase common
units as provided in the partnership agreement or assign this right to one of
its affiliates or to us. The general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
consequence, a common unitholder may have his common units purchased from him at
an undesirable time or price. For a description of this right, please read "The
Partnership Agreement -- Limited Call Right."
SHAMROCK LOGISTICS MAY CHOOSE NOT TO RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR
THE HOLDERS OF COMMON UNITS.
The attorneys, independent auditors and others who have performed services
for us regarding the offering have been retained by the general partner and may
continue to be retained by the general partner after the offering. Attorneys,
independent auditors and others who will perform services for us in the future
will be selected by the general partner or the conflicts committee and may also
perform services for the general partner and its affiliates. The general partner
may retain separate counsel for Shamrock Logistics or the holders of common
units in the event of a conflict of interest arising between the general partner
and its affiliates, on the one hand, and Shamrock Logistics or the holders of
common units, on the other, after the sale of the common units offered in this
prospectus, depending on the nature of the conflict. The general partner does
not intend to do so in most cases.
THE GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH SHAMROCK LOGISTICS.
Ultramar Diamond Shamrock will agree, and will cause its controlled
affiliates to agree, for so long as Ultramar Diamond Shamrock or its affiliates
control the general partner, not to engage in, whether by acquisition or
otherwise, the business of transporting crude oil or refined products including
operating crude oil storage or refined products terminalling assets in the
United States. The restriction will not apply to:
- any business retained by Ultramar Diamond Shamrock at the closing of this
offering;
- any further development of the Diamond-Koch Joint Venture petrochemicals
business;
- any business with a fair market value of less than $10 million;
- any business acquired by Ultramar Diamond Shamrock that constitutes less
than 50% of the fair market value of a larger acquisition; provided we
have been offered and declined
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(with the concurrence of the conflicts committee) the opportunity to
purchase this business;
- the Wichita Falls crude oil pipeline, the Nuevo Laredo refined product
pipeline and the Ringgold crude oil storage facility should we decline to
exercise our option to purchase them; or
- any newly constructed logistics assets that we have not offered to
purchase within one year of construction at fair market value, not to
exceed 105% of the cost to Ultramar Diamond Shamrock.
THE GENERAL PARTNER HAS THE AUTHORITY TO DECREASE OR INCREASE OUR TARIFF
RATES AND TERMINAL FEES.
Ultramar Diamond Shamrock, as the primary shipper in our pipelines, has an
economic incentive to seek lower tariff rates for our pipelines and lower
terminalling fees. Although Ultramar Diamond Shamrock has agreed not to
challenge our rates for a seven-year period, we may decrease our tariff rates
and terminal fees voluntarily at any time in instances where we need to respond
to competitive pressure or where increased volumes warrant a decrease of tariff
rates or terminalling fees. The general partner has the authority to determine
if and to what extent tariff rates and terminal fees will be decreased. The
general partner also has the authority to determine whether we seek an increase
in our tariff rates and terminal fees, and if so, the size of the increase.
However, any proposals by our general partner to reduce our tariff rates or
terminal fees will be submitted to our conflicts committee for their approval.
FIDUCIARY DUTIES OWED TO UNITHOLDERS BY THE GENERAL PARTNER ARE PRESCRIBED BY
LAW AND THE PARTNERSHIP AGREEMENT.
The general partner is accountable to us and our unitholders as a
fiduciary. Fiduciary duties are generally considered to include an obligation to
act with due care and loyalty. The duty of care, in the absence of a provision
in a partnership agreement providing otherwise, generally requires a general
partner to act for the partnership in the same manner as a prudent person would
act on his own behalf. The duty of loyalty, in the absence of a provision in a
partnership agreement providing otherwise, generally prohibits a general partner
from taking any action or engaging in any transaction where a conflict of
interest is present. The Delaware Act generally provides that a limited partner
may institute legal action on a partnership's behalf to recover damages from a
third party where a general partner has refused to institute the action or where
an effort to cause a general partner to do so is not likely to succeed. In
addition, the statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all other similarly
situated limited partners to recover damages from a general partner for
violations of its fiduciary duties to the limited partners.
The Delaware Act provides that Delaware limited partnerships may, in their
partnership agreements, restrict or expand the fiduciary duties owed by general
partner to limited partners and the partnership.
In order to induce the general partner to manage the business of Shamrock
Logistics, the partnership agreement contains various provisions restricting the
fiduciary duties that might otherwise be owed by the general partner. The
following is a summary of the material restrictions of the fiduciary duties owed
by the general partner to the limited partners:
The partnership agreement contains provisions that waive or consent to
conduct by the general partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law. For example,
the partnership agreement permits the general partner to make a number of
decisions in its "sole discretion," such as:
- the incurrence of indebtedness;
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- the acquisition or disposition of assets, except for the disposition of
all of the assets of the partnership which requires unitholder approval;
- the negotiation of any contracts;
- the disposition of partnership cash; and
- the purchase or disposition of partnership securities, other than
issuance of securities senior to the common units and the issuance of
additional common units in excess of 4,199,661 during the subordination
period without the approval of a majority of the unitholders if the
issuance is not in connection with a transaction resulting in the
increase in available cash per unit.
Sole discretion entitles the general partner to consider only the interests
and factors that it desires and it shall have no duty or obligation to give any
consideration to any interest of, or factors affecting, Shamrock Logistics, its
affiliates or any limited partner. Other provisions of the partnership agreement
provide that the general partner's actions must be made in its reasonable
discretion.
The partnership agreement generally provides that affiliated transactions
and resolutions of conflicts of interest not involving a required vote of
unitholders must be "fair and reasonable" to Shamrock Logistics under the
factors previously set forth. In determining whether a transaction or resolution
is "fair and reasonable" the general partner may consider interests of all
parties involved, including its own. Unless the general partner has acted in bad
faith, the action taken by the general partner shall not constitute a breach of
its fiduciary duty.
In addition to the other more specific provisions limiting the obligations
of the general partner, the partnership agreement further provides that the
general partner and the officers and directors of Shamrock Logistics GP, LLC
will not be liable for monetary damages to Shamrock Logistics, the limited
partners or assignees for errors of judgment or for any acts or omissions if the
general partner and those other persons acted in good faith.
In order to become a limited partner of Shamrock Logistics, a common
unitholder is required to agree to be bound by the provisions in the partnership
agreement, including the provisions discussed above. This is in accordance with
the policy of the Delaware Act favoring the principle of freedom of contract and
the enforceability of partnership agreements. The failure of a limited partner
or assignee to sign a partnership agreement does not render the partnership
agreement unenforceable against that person.
Shamrock Logistics is required to indemnify the general partner and
Shamrock Logistics GP, LLC and their officers, directors, employees, affiliates,
partners, members, agents and trustees, to the fullest extent permitted by law,
against liabilities, costs and expenses incurred by the general partner and
Shamrock Logistics GP, LLC or these other persons. This indemnification is
required if the general partner or these persons acted in good faith and in a
manner they reasonably believed to be in, or (in the case of a person other than
the general partner) not opposed to, the best interests of Shamrock Logistics.
Indemnification is required for criminal proceedings if the general partner and
Shamrock Logistics GP, LLC or these other persons had no reasonable cause to
believe their conduct was unlawful. Thus, the general partner and Shamrock
Logistics GP, LLC could be indemnified for their negligent acts if they met
these requirements concerning good faith and the best interests of Shamrock
Logistics. Please read "The Partnership Agreement -- Indemnification."
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DESCRIPTION OF THE COMMON UNITS
Once this offering is complete, the common units will be registered under
the Exchange Act and Shamrock Logistics will be subject to the reporting and
other requirements of the Exchange Act. Shamrock Logistics will be required to
file periodic reports containing financial and other information with the
Securities and Exchange Commission.
THE UNITS
The common units and the subordinated units represent limited partner
interests in Shamrock Logistics. The holders of units are entitled to
participate in partnership distributions and exercise the rights and privileges
available to limited partners under the Shamrock Logistics partnership
agreement. For a description of the relative rights and preferences of holders
of common units and subordinated units in and to partnership distributions,
please read "Cash Distribution Policy" and "Description of the Subordinated
Units." For a description of the rights and privileges of limited partners under
the Shamrock Logistics partnership agreement, please read "The Partnership
Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
Chase Mellon Shareholder Services LLC will serve as registrar and transfer
agent for the common units and will receive a fee from Shamrock Logistics. All
fees charged by the transfer agent for transfers of common units will be borne
by Shamrock Logistics, except for the following, which will be paid by
unitholders:
- surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
- special charges for services requested by a holder of a common unit; and
- other similar fees or charges.
There will be no charge to holders for disbursements of Shamrock Logistics
cash distributions. Shamrock Logistics will indemnify the transfer agent, its
agents and each of their shareholders, directors, officers and employees against
all claims and losses that may arise out of acts performed or omitted for its
activities in that capacity, except for any liability due to any gross
negligence or intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may at any time resign, by notice to Shamrock Logistics,
or be removed by Shamrock Logistics. The resignation or removal of the transfer
agent will become effective upon the appointment by Shamrock Logistics of a
successor transfer agent and registrar and its acceptance of the appointment. If
no successor has been appointed and has accepted the appointment within 30 days
after notice of the resignation or removal, the general partner is authorized to
act as the transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
The transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution, and
delivery of a transfer application by the investor. Any later transfers of a
common unit will not be recorded by the transfer agent or recognized by Shamrock
Logistics unless the transferee executes and delivers a transfer application.
The form of transfer application is set forth as Appendix B to this prospectus
and is
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also set forth on the reverse side of the certificates representing units. By
executing and delivering a transfer application, the transferee of common units:
(1) becomes the record holder of the common units and is an assignee
until admitted into Shamrock Logistics as a substituted limited partner;
(2) automatically requests admission as a substituted limited partner
in Shamrock Logistics;
(3) agrees to be bound by the terms and conditions of, and executes,
the Shamrock Logistics partnership agreement;
(4) represents that the transferee has the capacity, power and
authority to enter into the partnership agreement;
(5) grants powers of attorney to officers of Shamrock Logistics GP,
LLC and any liquidator of Shamrock Logistics as specified in the
partnership agreement; and
(6) makes the consents and waivers contained in the partnership
agreement.
An assignee will become a substituted limited partner of Shamrock Logistics
for the transferred common units upon the consent of the general partner and the
recording of the name of the assignee on the books and records of Shamrock
Logistics. The general partner may withhold its consent in its sole discretion.
Transfer applications may be completed, executed and delivered by a
transferee's broker, agent or nominee. Shamrock Logistics is entitled to treat
the nominee holder of a common unit as the absolute owner. In that case, the
beneficial owners' rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the beneficial owner and the
nominee holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in Shamrock Logistics for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or other transferee;
and
- the right to transfer the right to seek admission as a substituted
limited partner in Shamrock Logistics for the transferred common units.
Therefore, a purchaser or transferee of common units who does not execute
and deliver a transfer application:
- will not receive cash distributions or federal income tax allocations,
unless the common units are held in a nominee or "street name" account
and the nominee or broker has executed and delivered a transfer
application; and
- may not receive some federal income tax information or reports furnished
to record holders of common units.
The transferor of common units will have a duty to provide the transferee
with all information that may be necessary to transfer the common units. The
transferor will not have a duty to ensure the execution of the transfer
application by the transferee and will have no liability or responsibility if
the transferee neglects or chooses not to execute and forward the transfer
application to the transfer agent. Please read "The Partnership
Agreement -- Status as Limited Partner or Assignee."
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Until a common unit has been transferred on the books of Shamrock
Logistics, Shamrock Logistics and the transfer agent, notwithstanding any notice
to the contrary, may treat the record holder of the unit as the absolute owner
for all purposes, except as otherwise required by law or stock exchange
regulations.
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
Shamrock Logistics, and the rights of holders to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units. For any given quarter, any available cash will first be
distributed to the general partner and to the holders of common units, until the
holders of common units have received the minimum quarterly distribution plus
any arrearages, and then will be distributed to the general partner and holders
of subordinated units, until the holders of subordinated units have received the
minimum quarterly distribution. Please read "Cash Distribution Policy."
CONVERSION OF SUBORDINATED UNITS
As described in more detail under "Cash Distribution
Policy -- Subordination Period", the subordination period will generally extend
from the closing of this offering until the first day of any quarter beginning
after December 31, 2005 that we meet certain financial tests.
Upon expiration of the subordination period, all subordinated units will
convert into common units on a one-for-one basis and will then participate, pro
rata, with the other common units in distributions of available cash. In
addition, if the general partner is removed as general partner of Shamrock
Logistics under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common units or
to receive cash in exchange for those interests at fair market value as
determined by agreement between the general partner and its successor or by
an independent investment banking firm or other independent expert.
LIMITED VOTING RIGHTS
Holders of subordinated units will sometimes vote as a single class
together with the common units and sometimes vote as a class separate from the
holders of common units and, as in the case of holders of common units, will
have very limited voting rights. During the subordination period, common units
and subordinated units each vote separately as a class on the following matters:
(1) a sale or exchange of all or substantially all of our assets;
(2) the election of a successor general partner in connection with the
removal of the general partner;
(3) a dissolution or reconstitution of Shamrock Logistics;
(4) a merger of Shamrock Logistics;
(5) issuance of limited partner interests in some circumstances; and
(6) some amendments to the partnership agreement, including any
amendment that would cause Shamrock Logistics to be treated as an
association taxable as a corporation.
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The subordinated units are not entitled to vote on approval of the
withdrawal of the general partner or the transfer by the general partner of its
general partner interest or incentive distribution rights under some
circumstances. Removal of the general partner requires:
- a two-thirds vote of all outstanding units voting as a single class; and
- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as
separate classes.
Under the partnership agreement, the general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially adversely affect unitholders without the approval of any unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If Shamrock Logistics liquidates during the subordination period, in some
circumstances holders of outstanding common units will be entitled to receive
more per unit in liquidating distributions than holders of outstanding
subordinated units. The per unit difference will be dependent upon the amount of
gain or loss recognized by Shamrock Logistics in liquidating its assets.
Following conversion of the subordinated units into common units, all units will
be treated the same upon liquidation of Shamrock Logistics.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of the Shamrock
Logistics partnership agreement. The form of the partnership agreement is
included in this prospectus as Appendix A. The form of partnership agreement of
the operating partnership is included as an exhibit to the registration
statement of which this prospectus is a part. Shamrock Logistics will provide
prospective investors with a copy of the form of this agreement upon request at
no charge. Unless the context otherwise requires, references in this prospectus
to the "partnership agreement" constitute references to the partnership
agreement of Shamrock Logistics and the partnership agreement of the operating
partnership.
The following provisions of the partnership agreement are summarized
elsewhere in this prospectus.
- With regard to the transfer of common units, please read "Description of
the Common Units -- Transfer of Common Units."
- With regard to distributions of available cash, please read "Cash
Distribution Policy."
- With regard to allocations of taxable income and taxable loss, please
read "Tax Considerations."
ORGANIZATION AND DURATION
Shamrock Logistics was organized in December 1999, and will have a
perpetual existence.
PURPOSE
Our purpose under the partnership agreement is limited to serving as the
limited partner of the operating partnership and engaging in any business
activities that may be engaged in by the partnership or that are approved by the
general partner. The partnership agreement of Shamrock Logistics Operations
provides that Shamrock Logistics Operations may, directly or indirectly, engage
in:
(1) its operations as conducted immediately before this offering;
(2) any other activity approved by the general partner but only to the
extent that the general partner reasonably determines that, as of
the date of the acquisition or commencement of the activity, the
activity generates "qualifying income" as this term is defined in
Section 7704 of the Internal Revenue Code; or
(3) any activity that enhances the operations of an activity that is
described in (1) or (2) above.
Although the general partner has the ability to cause Shamrock Logistics
and Shamrock Logistics Operations to engage in activities other than the
transportation, terminalling and storage of crude oil and refined products, the
general partner has no current plans to do so. The general partner is authorized
in general to perform all acts deemed necessary to carry out our purposes and to
conduct our business.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to the general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for the qualification, continuance or
dissolution of Shamrock Logistics. The power of attorney also grants the general
partner and the liquidator the authority to amend the partnership agreement, and
to make consents and waivers under the partnership agreement.
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CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described below under "-- Limited Liability."
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Act and that he otherwise acts in
conformity with the provisions of the partnership agreement, his liability under
the Delaware Act will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common units plus his
share of any undistributed profits and assets. If it were determined, however,
that the right or exercise of the right by the limited partners as a group
- to remove or replace the general partner,
- to approve some amendments to the partnership agreement or
- to take other action under the partnership agreement
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner. Neither
the partnership agreement nor the Delaware Act specifically provides for legal
recourse against the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this does not mean
that a limited partner could not seek legal recourse, we have found no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner if, after the distribution, all liabilities of the limited
partnership, other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair value of the assets
of the limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds the nonrecourse liability. The
Delaware Act provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was in violation of
the Delaware Act shall be liable to the limited partnership for the amount of
the distribution for three years. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except the
assignee is not obligated for liabilities unknown to him at the time he became a
limited partner and that could not be ascertained from the partnership
agreement. The operating partnership will initially conduct business in Texas,
Colorado, New Mexico, Oklahoma, Kansas and Skelly-Belvieu Pipeline Company will
initially conduct business in Texas. Maintenance of limited liability for
Shamrock Logistics, as a limited partner of the operating partnership, may
require compliance with legal requirements in the jurisdictions in which the
operating partnership conducts business. Limitations on the liability of limited
partners for the obligations of a limited partner have not been clearly
established in many jurisdictions. If it were determined that we were, by virtue
of our limited partner interest in the operating partnership or otherwise,
conducting business in any state without compliance with the applicable limited
partnership or limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or replace the general
partners, to approve some amendments to the partnership agreement, or to take
other action under the partnership agreement constituted "participation in the
control" of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally liable for our
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obligations under the law of that jurisdiction to the same extent as the general
partner under the circumstances. We will operate in a manner as the general
partner considers reasonable and necessary or appropriate to preserve the
limited liability of the limited partners.
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities for the
consideration and on the terms and conditions established by the general partner
in its sole discretion without the approval of any limited partners. During the
subordination period, however, we may not issue equity securities ranking senior
to the common units or in aggregate of more than 4,199,661 additional common
units or units on a parity with the common units, in each case, without the
approval of the holders of a majority of the outstanding common units (excluding
those common units held by the general partner and its affiliates so long as the
general partner and its affiliates own 20% or more of the outstanding common
units) and subordinated units, voting as separate classes, except that we may
issue an unlimited number of common units as follows:
(1) upon exercise of the underwriters' over-allotment option;
(2) under employee benefit plans;
(3) upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of the general
partner;
(4) in the event of a combination or subdivision of common units; or
(5) to finance an acquisition or a capital improvement that would have
resulted, on a pro forma basis, in an increase in adjusted operating
surplus on a per unit basis for the preceding four-quarter period.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
After the subordination period, there will be no restriction under the
Partnership Agreement on the ability of the general partner to issue common
units or units junior or senior to the common units.
In accordance with Delaware law and the provisions of the partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of the general partner, may have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, the general partner
will be required to make additional capital contributions to the extent
necessary to maintain its combined 2% general partner interest in us and
Shamrock Logistics Operations. Moreover, the general partner will have the
right, which it may from time to time assign in whole or in part to any of its
affiliates, to purchase common units, subordinated units or other equity
securities whenever, and on the same terms that we issue those securities to
persons other than the general partner and its affiliates, to the extent
necessary to maintain its percentage interest, including its interest
represented by common units and subordinated units, that existed immediately
prior to each issuance. The holders of common units will not have preemptive
rights to acquire additional common units or other partnership interests.
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AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, other than the
amendments discussed below, the general partner is required to seek written
approval of the holders of the number of units required to approve the amendment
or call a meeting of the limited partners to consider and vote upon the proposed
amendment. Except as described below, an amendment must be approved by:
- during the subordination period, by a majority of the common units
(excluding those common units held by the general partner and its
affiliates so long as the general partner and its affiliates own 20% or
more of the outstanding common units), and a majority of the subordinated
units, voting as separate classes; and
- after the subordination period, by a majority of the common units.
We refer to the voting provision described above as a "unit majority."
Prohibited Amendments. No amendment may be made that would:
(1) enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected;
(2) enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by Shamrock Logistics to the
general partner or any of its affiliates without the consent of
the general partner, which may be given or withheld in its sole
discretion;
(3) change the term of Shamrock Logistics;
(4) provide that Shamrock Logistics is not dissolved upon an election
to dissolve Shamrock Logistics by the general partner that is
approved by the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes; or
(5) give any person the right to dissolve Shamrock Logistics other
than the general partner's right to dissolve Shamrock Logistics
with the approval of the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes.
The provision of the partnership agreement preventing the amendments having
the effects described in clauses (1) through (5) above can be amended upon the
approval of the holders of at least 90% of the outstanding units voting together
as a single class.
No Unitholder Approval. The general partner may generally make amendments
to the partnership agreement without the approval of any limited partner or
assignee to reflect:
(1) a change in the name of Shamrock Logistics, the location of the
principal place of business of Shamrock Logistics, the registered
agent or the registered office of Shamrock Logistics;
(2) the admission, substitution, withdrawal or removal of partners in
accordance with the partnership agreement;
(3) a change that, in the sole discretion of the general partner, is
necessary or advisable to qualify or continue the qualification of
Shamrock Logistics as a limited partnership or a partnership in
which the limited partners have limited liability under the laws
of any state or to ensure that neither Shamrock Logistics nor
Shamrock
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Logistics Operations will be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax
purposes;
(4) an amendment that is necessary, in the opinion of counsel to
Shamrock Logistics, to prevent Shamrock Logistics, the general
partner, Shamrock Logistics GP, LLC, or any of the directors,
officers, agents or trustees of Shamrock Logistics GP, LLC from in
any manner being subjected to the provisions of the Investment
Company Act of 1940, the Investment Advisors Act of 1940, or "plan
asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, whether or not substantially similar to plan
asset regulations currently applied or proposed;
(5) subject to the limitations on the issuance of additional common
units or other limited or general partner interests described
above, an amendment that in the discretion of the general partner
is necessary or advisable for the authorization of additional
limited or general partner interests;
(6) any amendment expressly permitted in the partnership agreement to
be made by the general partner acting alone;
(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of the
partnership agreement;
(8) any amendment that, in the discretion of the general partner, is
necessary or advisable for the formation by Shamrock Logistics of,
or its investment in, any corporation, partnership or other
entity, as otherwise permitted by the partnership agreement;
(9) a change in the fiscal year or taxable year of Shamrock Logistics
and related changes; and
(10) any other amendments substantially similar to any of the matters
described in (1) through (9) above.
In addition, the general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of the general partner:
(1) do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
(2) are necessary or advisable to satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling
or regulation of any federal or state agency or judicial authority
or contained in any federal or state statute;
(3) are necessary or advisable to facilitate the trading of limited
partner interests or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the
limited partner interests are or will be listed for trading,
compliance with any of which the general partner deems to be in
the best interests of Shamrock Logistics and the limited partners;
(4) are necessary or advisable for any action taken by the general
partner relating to splits or combinations of units under the
provisions of the partnership agreement; or
(5) are required to effect the intent expressed in this prospectus or
the intent of the provisions of the partnership agreement or are
otherwise contemplated by the partnership agreement.
Opinion of Counsel and Unitholder Approval. The general partner will not be
required to obtain an opinion of counsel that an amendment will not result in a
loss of limited liability to the
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limited partners or result in Shamrock Logistics being treated as an entity for
federal income tax purposes if one of the amendments described above under
"-- No Unitholder Approval" should occur. No other amendments to the partnership
agreement will become effective without the approval of holders of at least 90%
of the units unless Shamrock Logistics obtains an opinion of counsel to the
effect that the amendment will not affect the limited liability under applicable
law of any limited partner in Shamrock Logistics or cause Shamrock Logistics or
Shamrock Logistics Operations to be taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes (to the extent not previously
taxed as such).
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.
MERGER, SALE, OR OTHER DISPOSITION OF ASSETS
The general partner is generally prohibited, without the prior approval of
the holders of units representing a unit majority, from causing Shamrock
Logistics to, among other things, sell, exchange, or otherwise dispose of all or
substantially all of its assets in a single transaction or a series of related
transactions, including by way of merger, consolidation, or other combination,
or approving on behalf of Shamrock Logistics the sale, exchange, or other
disposition of all or substantially all of the assets of the subsidiaries;
provided that the general partner may mortgage, pledge, hypothecate, or grant a
security interest in all or substantially all of Shamrock Logistics' assets
without that approval. The general partner may also sell all or substantially
all of Shamrock Logistics' assets under a foreclosure or other realization upon
the encumbrances above without that approval. Furthermore, provided that
conditions specified in the partnership agreement are satisfied, the general
partner may merge Shamrock Logistics or any of its subsidiaries into, or convey
some or all of their assets to, a newly formed entity if the sole purpose of
that merger or conveyance is to effect a mere change in the legal form of
Shamrock Logistics into another limited liability entity. The unitholders are
not entitled to dissenters' rights of appraisal under the partnership agreement
or applicable Delaware law in the event of a merger or consolidation, a sale of
substantially all of Shamrock Logistics' assets, or any other transaction or
event.
TERMINATION AND DISSOLUTION
We will continue in existence as a limited partnership in perpetuity unless
terminated sooner under the partnership agreement. We will dissolve upon:
(1) the election of the general partner to dissolve us, if approved by
the holders of units representing a unit majority;
(2) the sale, exchange or other disposition of all or substantially
all of the assets and properties of Shamrock Logistics;
(3) the entry of a decree of judicial dissolution of Shamrock
Logistics; or
(4) the withdrawal or removal of the general partner or any other
event that results in its ceasing to be the general partner other
than by reason of a transfer of its general partner interest in
accordance with the partnership agreement or withdrawal or removal
following approval and admission of a successor.
Upon a dissolution under clause (4), the holders of units representing a
unit majority may also elect, within specific time limitations, to reconstitute
Shamrock Logistics and continue its
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business on the same terms and conditions described in the partnership agreement
by forming a new limited partnership on terms identical to those in the
partnership agreement and having as general partner an entity approved by the
holders of units representing a unit majority, subject to receipt by Shamrock
Logistics of an opinion of counsel to the effect that:
(1) the action would not result in the loss of limited liability of
any limited partner; and
(2) neither Shamrock Logistics, the reconstituted limited partnership,
nor Shamrock Logistics Operations would be treated as an
association taxable as a corporation or otherwise be taxable as an
entity for federal income tax purposes upon the exercise of that
right to continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of the general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution Policy --
Distributions of Cash upon Liquidation." The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or distribute assets
to partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as general partner of Shamrock Logistics or as the general partner
of Shamrock Logistics Operations prior to December 31, 2010 without obtaining
the approval of the holders of at least a majority of the outstanding common
units, excluding common units held by the general partner and its affiliates,
and furnishing an opinion of counsel regarding limited liability and tax
matters. On or after December 31, 2010, our general partner may withdraw as
general partner without first obtaining approval of any unitholder by giving 90
days' written notice, and that withdrawal will not constitute a violation of the
partnership agreement. Notwithstanding the information above, our general
partner may withdraw without unitholder approval upon 90 days' notice to the
limited partners if at least 50% of the outstanding common units are held or
controlled by one person and its affiliates other than the general partner and
its affiliates. In addition, the partnership agreement permits the general
partner in some instances to sell or otherwise transfer all of its general
partner interests in Shamrock Logistics without the approval of the unitholders.
Please read "-- Transfer of General Partner Interests and Incentive Distribution
Rights."
Upon the withdrawal of the general partner under any circumstances, other
than as a result of a transfer of all or a part of its general partner interest
in Shamrock Logistics, the holders of units representing a unit majority may
select a successor to that withdrawing general partner. If a successor is not
elected, or is elected but an opinion of counsel regarding limited liability and
tax matters cannot be obtained, Shamrock Logistics will be dissolved, wound up
and liquidated, unless within 180 days after that withdrawal, the holders of a
majority of the outstanding common units and subordinated units, voting as
separate classes, agree in writing to continue the business of Shamrock
Logistics and to appoint a successor general partner. Please read "--
Termination and Dissolution."
The general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by the general partner and its affiliates, and Shamrock
Logistics receives an opinion of counsel regarding limited liability and tax
matters. Any removal of the general partner is also subject to the approval of a
successor general partner by the vote of the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes. The
ownership of an aggregate of more than 33 1/3% of the outstanding units by the
general partner and its affiliates gives it the practical
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ability to prevent its removal. At the closing of this offering, the general
partner and its affiliates will own 75.5% of the outstanding units.
The partnership agreement also provides that if the general partner is
removed under circumstances where cause does not exist:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one
basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common
units or to receive cash in exchange for those interests.
Withdrawal or removal of the general partner of Shamrock Logistics also
constitutes withdrawal or removal of the general partner of Shamrock Logistics
Operations.
In the event of removal of a general partner under circumstances where
cause exists or withdrawal of a general partner where that withdrawal violates
the partnership agreement, a successor general partner will have the option to
purchase the general partner interests and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where a general partner withdraws
or is removed by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase the general
partner interests of the departing general partner and its incentive
distribution rights for the fair market value. In each case, this fair market
value will be determined by agreement between the departing general partner and
the successor general partner. If no agreement is reached, an independent
investment banking firm or other independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. Or, if the departing general partner and the successor general partner
cannot agree upon an expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the above-described option is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition, Shamrock Logistics will be required to reimburse the departing
general partner for all amounts due the departing general partner, including,
without limitation, all employee-related liabilities, including severance
liabilities, incurred for the termination of any employees employed by the
departing general partner for the benefit of Shamrock Logistics.
TRANSFER OF GENERAL PARTNER INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for transfer by the general partner of all, but not less than all,
of its general partner interests in Shamrock Logistics and the managing interest
in the operating partnership to:
(a) an affiliate of the general partner; or
(b) another person as part of the merger or consolidation of the
general partner with or into another person or the transfer by the
general partner of all or substantially all of its assets to
another person,
the general partner may not transfer all or any part of its general partner
interest in Shamrock Logistics and in the operating partnership to another
person prior to December 31, 2010, without
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the approval of the holders of at least a majority of the outstanding common
units, excluding common units held by the general partner and its affiliates. As
a condition of this transfer, the transferee must assume the rights and duties
of the general partner to whose interest that transferee has succeeded, agree to
be bound by the provisions of the partnership agreement, furnish an opinion of
counsel regarding limited liability and tax matters, agree to acquire the
general partner interest in Shamrock Logistics Operations and agree to be bound
by the provisions of the partnership agreement of Shamrock Logistics Operations.
The general partner and its affiliates may at any time, however, transfer
subordinated units to one or more persons, other than Shamrock Logistics,
without unitholder approval. At any time, the partner(s) of the general partner
may sell or transfer all or part of their partnership interests in the general
partner to an affiliate or a third party without the approval of the
unitholders. The general partner or its affiliates or a later holder may
transfer its incentive distribution rights to an affiliate or another person as
part of its merger or consolidation with or into, or sale of all or
substantially all of its assets to, that person without the prior approval of
the unitholders; provided that, in each case, the transferee agrees to be bound
by the provisions of the partnership agreement. Prior to December 31, 2010,
other transfers of the incentive distribution rights will require the
affirmative vote of holders of units representing a unit majority. On or after
December 31, 2010, the incentive distribution rights will be freely
transferable.
CHANGE OF MANAGEMENT PROVISIONS
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove Shamrock Logistics GP,
L.P. as general partner of Shamrock Logistics or otherwise change management. If
any person or group other than the general partner and its affiliates acquires
beneficial ownership of 20% or more of any class of units, that person or group
loses voting rights on all of its units. This loss of voting rights does not
apply to any person or group that acquires the units from our general partner or
its affiliates and any transferees of that person or group approved by our
general partner.
The partnership agreement also provides that if the general partner is
removed under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one
basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common
units or to receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the general
partner and its affiliates, the general partner will have the right, which it
may assign in whole or in part to any of its affiliates or to Shamrock
Logistics, to acquire all, but not less than all, of the remaining limited
partner interests of the class held by unaffiliated persons as of a record date
to be selected by the general partner, on at least 10 but not more than 60 days'
notice. The purchase price in the event of this purchase is the greater of:
(1) the highest cash price paid by the general partner or any of its
affiliates for any limited partner interests of the class
purchased within the 90 days preceding the
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date on which the general partner first mails notice of its election
to purchase those limited partner interests; and
(2) the current market price as of the date three days before the date
the notice is mailed.
As a result of the general partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased at an undesirable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market. Please read "Tax
Considerations -- Disposition of Common Units."
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of limited partners of Shamrock Logistics and to act upon matters
for which approvals may be solicited. Common units that are owned by an assignee
who is a record holder, but who has not yet been admitted as a limited partner,
shall be voted by the general partner at the written direction of the record
holder. Absent direction of this kind, the common units will not be voted,
except that, in the case of common units held by the general partner on behalf
of non-citizen assignees, the general partner shall distribute the votes on
those common units in the same ratios as the votes of limited partners on other
units are cast.
The general partner does not anticipate that any meeting of unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action so
taken are signed by holders of the number of units as would be necessary to
authorize or take that action at a meeting. Meetings of the unitholders may be
called by the general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum unless any action by
the unitholders requires approval by holders of a greater percentage of the
units, in which case the quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his percentage
interest in Shamrock Logistics, although additional limited partner interests
having special voting rights could be issued. Please read "-- Issuance of
Additional Securities." However, if at any time any person or group, other than
the general partner and its affiliates, or a direct or subsequently approved
transferee of the general partner or its affiliates, acquires, in the aggregate,
beneficial ownership of 20% or more of any class of units then outstanding, the
person or group will lose voting rights on all of its units and the units may
not be voted on any matter and will not be considered to be outstanding when
sending notices of a meeting of unitholders, calculating required votes,
determining the presence of a quorum or for other similar purposes. Common units
held in nominee or street name account will be voted by the broker or other
nominee in accordance with the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Except as otherwise provided in the partnership agreement, subordinated units
will vote together with common units as a single class.
Any notice, demand, request, report, or proxy material required or
permitted to be given or made to record holders of common units under the
partnership agreement will be delivered to the record holder by Shamrock
Logistics or by the transfer agent.
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STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right to
share in allocations and distributions from Shamrock Logistics, including
liquidating distributions. The general partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substituted limited partner at the written direction of the assignee. Please
read "-- Meetings; Voting." Transferees who do not execute and deliver a
transfer application will be treated neither as assignees nor as record holders
of common units, and will not receive cash distributions, federal income tax
allocations or reports furnished to holders of common units. Please read
"Description of the Common Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of the general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, the general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish information about this
nationality, citizenship or other related status within 30 days after a request
for the information or the general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee who is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions in kind upon
our liquidation.
INDEMNIFICATION
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
(1) the general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of the general partner or
any departing general partner;
(4) any person who is or was a partner, officer, director, employee,
agent, or trustee of the general partner, Shamrock Logistics GP,
LLC, or departing general partner or any affiliate of the general
partner, Shamrock Logistics GP, LLC, or departing general partner;
or
(5) any person who is or was serving at the request of the general
partner or departing general partner or any affiliate of the
general partner or departing general partner as an officer,
director, employee, member, partner, agent, or trustee of another
person.
Any indemnification under these provisions will only be out of our assets.
Unless it otherwise agrees in its sole discretion, the general partner shall not
be personally liable for any of our
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indemnification obligations, nor have any obligation to contribute or loan funds
or assets to us to enable us to effectuate indemnification. We are authorized to
purchase insurance against liabilities asserted against and expenses incurred by
persons for our activities, regardless of whether we would have the power to
indemnify the person against liabilities under the partnership agreement.
BOOKS AND REPORTS
The general partner is required to keep appropriate books of our business
at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and fiscal reporting
purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT SHAMROCK LOGISTICS' BOOKS AND RECORDS
The partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
(1) a current list of the name and last known address of each partner;
(2) a copy of our tax returns;
(3) information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner;
(4) copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of
attorney under which they have been executed;
(5) information regarding the status of our business and financial
condition; and
(6) any other information regarding our affairs as is just and
reasonable.
The general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which the general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Under the partnership agreement, we have agreed to register for resale
under the Securities Act and applicable state securities laws any common units,
subordinated units or other
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partnership securities proposed to be sold by the general partner or any of its
affiliates or their assignees if an exemption from the registration requirements
is not otherwise available. These registration rights continue for two years
following any withdrawal or removal of our general partner as the general
partner of Shamrock Logistics. We are obligated to pay all expenses incidental
to the registration, excluding underwriting discounts and commissions. Please
read "Units Eligible for Future Sale."
UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered under this prospectus, UDS
Logistics, LLC will hold 4,399,322 common units and 8,999,322 subordinated
units. All of these subordinated units will convert into common units at the end
of the subordination period. The sale of these common and subordinated units
could have an adverse impact on the price of the common units or on any trading
market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units owned by an "affiliate" of Shamrock Logistics may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or otherwise. Rule 144
permits securities acquired by an affiliate of the issuer to be sold into the
market in an amount that does not exceed, during any three-month period, the
greater of:
(1) 1% of the total number of the securities outstanding; or
(2) the average weekly reported trading volume of the common units for
the four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale
provisions, notice requirements and the availability of current public
information about Shamrock Logistics. A person who is not deemed to have been an
affiliate of Shamrock Logistics at any time during the three months preceding a
sale, and who has beneficially owned his or her common units for at least two
years, would be entitled to sell common units under Rule 144 without regard to
the public information requirements, volume limitations, manner of sale
provisions and notice requirements of Rule 144.
Prior to the end of the subordination period, Shamrock Logistics may not
issue equity securities of the partnership ranking prior or senior to the common
units or an aggregate of more than 4,199,661 additional common units or an
equivalent amount of securities ranking on a parity with the common units,
without the approval of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes. This number is subject
to adjustment in the event of a combination or subdivision of common units and
shall exclude common units issued in a number of circumstances. Please read "The
Partnership Agreement -- Issuance of Additional Securities."
The partnership agreement provides that, after the subordination period,
Shamrock Logistics may issue an unlimited number of limited partner interests of
any type without a vote of the unitholders. The partnership agreement does not
restrict Shamrock Logistics' ability to issue equity securities ranking junior
to the common units at any time. Any issuance of additional common units or
other equity securities would result in a corresponding decrease in the
proportionate ownership interest in Shamrock Logistics represented by, and could
adversely affect the cash distributions to and market price of, common units
then outstanding. Please read "The Partnership Agreement -- Issuance of
Additional Securities."
Under the partnership agreement, the general partner and its affiliates
have the right to cause Shamrock Logistics to register under the Securities Act
and state laws the offer and sale of any units that they hold. Subject to the
terms and conditions of the partnership agreement,
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these registration rights allow the general partner and its affiliates or its
assignees holding any units to require registration of any of these units and to
include any of these units in a registration by Shamrock Logistics of other
units, including units offered by Shamrock Logistics or by any unitholder. The
general partner will continue to have these registration rights for two years
following its withdrawal or removal as a general partner of Shamrock Logistics.
In connection with any registration of this kind, Shamrock Logistics will
indemnify each unitholder participating in the registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act or any state securities laws arising from the registration
statement or prospectus. Shamrock Logistics will bear all costs and expenses
incidental to any registration, excluding any underwriting discounts and
commissions. Except as described below, the general partner and its affiliates
may sell their units in private transactions at any time, subject to compliance
with applicable laws.
Ultramar Diamond Shamrock, Shamrock Logistics GP, LLC, UDS Logistics, LLC,
the general partner, Shamrock Logistics, Shamrock Logistics Operations and the
officers and directors of the general partner of the general partner have agreed
with the Underwriters not to dispose of or hedge any of their common units or
subordinated units or securities convertible into or exchangeable for, or that
represent the right to receive, common units or subordinated units or any
securities that are senior to or on a parity with common units during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing employee benefit
plans.
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TAX CONSIDERATIONS
This section is a summary of the material tax considerations that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion,
expresses the opinion of Andrews & Kurth L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal income
tax law and legal conclusions with respect to those matters. This section is
based upon current provisions of the Internal Revenue Code, existing and
proposed regulations and current administrative rulings and court decisions, all
of which are subject to change. Later changes in these authorities may cause the
tax consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to us are
references to both Shamrock Logistics and Shamrock Logistics Operations.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds. Accordingly, each prospective
unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences to him of the
ownership or disposition of common units.
All statements as to matters of law and legal conclusions contained in this
section, unless otherwise noted, are the opinion of counsel.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which the common units trade. In addition, the costs of any contest with the
IRS will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the treatment of us, or an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read
"-- Tax Treatment of Unitholders -- Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors
and Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Disposition of Common
Units -- Section 754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his allocable share of items of income, gain, loss, and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed is in excess of the
partner's adjusted basis in his partnership interest.
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No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our, or Shamrock Logistics Operations', status as a
partnership for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Code. Instead, we have relied on
the opinion of counsel that, based upon the Internal Revenue Code, its
regulations, published revenue rulings and court decisions and the
representations described below, we will be classified as a partnership and
Shamrock Logistics Operations will be classified as a partnership for federal
income tax purposes.
In rendering its opinion, counsel has relied on factual representations and
covenants made by us and the general partner. The representations and covenants
made by us and our general partner upon which counsel has relied are:
(a) Neither we nor Shamrock Logistics Operations will elect to be
treated as an association or corporation;
(b) We will be operated in accordance with
(1) all applicable partnership statutes,
(2) our partnership agreement and
(3) the description of us in this prospectus;
(c) Shamrock Logistics Operations will be operated in accordance with
(1) all applicable partnership statutes,
(2) the partnership agreement for Shamrock Logistics Operations and
(3) the description of Shamrock Logistics Operations in this
prospectus; and
(d) For each taxable year, more than 90% of our gross income will be
derived from
(1) the exploration, development, production, processing, refining,
transportation, storage or marketing of any mineral or natural
resource, including oil, gas, or products thereof which come
from either a crude oil refinery or a natural gas processing
facility, or
(2) other items of income as to which counsel has opined or will
opine are "qualifying income" within the meaning of Section
7704(d) of the Internal Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception (the "Qualifying Income Exception") exists with respect to
publicly-traded partnerships of which 90% or more of the gross income for every
taxable year consists of "qualifying income." Qualifying income includes income
and gains derived from the transportation and marketing of crude oil, natural
gas, and products thereof. Other types of qualifying income include interest
other than from a financial business, dividends, gains from the sale of real
property, and gains from the sale or other disposition of capital assets held
for the production of income that otherwise constitutes qualifying income. We
estimate that less than 4% of our current income is not qualifying income;
however, this estimate could change from time to time. Based upon and subject to
this estimate, the factual representations made by us and the general partner
and a review of the applicable legal authorities, counsel is of the opinion that
at least 90% of our gross income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
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in return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to us and the unitholders so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If Shamrock Logistics or Shamrock Logistics Operations were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on a separate tax
return rather than being passed through to the unitholders, and its net income
would be taxed at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
Shamrock Logistics' current or accumulated earnings and profits, or, in the
absence of earnings and profits, a nontaxable return of capital, to the extent
of the unitholder's tax basis in his common units, or taxable capital gain,
after the unitholder's tax basis in his common units is reduced to zero.
Accordingly, treatment of either Shamrock Logistics or Shamrock Logistics
Operations as an association taxable as a corporation would result in a material
reduction in a unitholder's cash flow and after-tax return and thus would likely
result in a substantial reduction of the value of the units.
The discussion below is based on the opinion that we will be classified as
a partnership for federal income tax purposes.
TAX TREATMENT OF UNITHOLDERS
Limited Partner Status. Unitholders who have become limited partners of
Shamrock Logistics will be treated as partners of Shamrock Logistics for federal
income tax purposes. Counsel is also of the opinion that
(a) assignees who have executed and delivered transfer applications,
and are awaiting admission as limited partners, and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
their common units,
will be treated as partners of Shamrock Logistics for federal income tax
purposes. As there is no direct authority addressing assignees of common units
who are entitled to execute and deliver transfer applications and become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to these units for federal income tax purposes. Please read
"-- Treatment of Short Sales."
Income, gain, deductions, or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
of Shamrock Logistics for federal income tax purposes.
Flow-Through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
allocable share of our income, gains, losses, and deductions without regard to
whether corresponding cash distributions are
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received by that unitholder. Consequently, a unitholder may be allocated income
from us even if he has not received a cash distribution. Each unitholder will be
required to include in income his allocable share of our income, gain, loss, and
deduction for our taxable year ending with or within the taxable year of the
unitholder.
Treatment of Distributions. Our distributions to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years. Please read "-- Limitations on
Deductibility of Our Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if the
distribution reduces the unitholder's share of our "unrealized receivables",
including depreciation recapture, and/or substantially appreciated "inventory
items", both as defined in Section 751 of the Internal Revenue Code, and
collectively, "Section 751 Assets." To that extent, a unitholder will be treated
as having been distributed his proportionate share of the Section 751 Assets and
having exchanged those assets with us in return for the non-pro rata portion of
the actual distribution made to him. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income under Section 751(b)
of the Internal Revenue Code. That income will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the unitholder's tax basis
for the share of the Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in this offering who holds those common units from the date of
closing of this offering through December 31, 2003, will be allocated an amount
of federal taxable income for that period that will be less than 20% of the cash
distributed with respect to that period. We anticipate that after the taxable
year ending December 31, 2003, the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates are based upon
the assumption that gross income from operations will approximate the amount
required to make the minimum quarterly distribution on all units and other
assumptions with respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive, and political
uncertainties beyond our control. Further, the estimates are based on current
tax law and specified tax reporting positions that we intend to adopt and with
which the IRS could disagree. Accordingly, these estimates may not prove to be
correct. The actual percentage of distributions that will constitute taxable
income could be higher or lower, and any differences could be material and could
materially affect the value of the common units.
Tax Rates. In general, the highest effective United States federal income
tax rate for individuals for 2000 is 39.6% and the maximum United States federal
income tax rate for net capital gains of an individual is generally 20% if the
asset was held for more than 12 months at the time of disposition.
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, deduction or
loss for purposes of the alternative minimum tax. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any
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additional alternative minimum taxable income. Prospective unitholders should
consult with their own tax advisors as to the impact of an investment in units
on their liability for the alternative minimum tax.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
limited partner will have no share of our debt which is recourse to the general
partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read "-- Disposition of Common
Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Our Losses. The deduction by a unitholder
of his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for which the
unitholder is considered to be "at risk" with respect to our activities, if that
is less than his tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a unitholder
or recaptured as a result of these limitations will carry forward and will be
allowable to the extent that his tax basis or at risk amount, whichever is the
limiting factor, is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by losses that were
previously suspended by the at risk limitation but may not be offset by losses
suspended by the basis limitation. Any excess loss above that gain previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally, activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including other
publicly-traded partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a unitholder's share of the
income we generate may be deducted in full when he disposes of his entire
investment in us in a fully taxable transaction with an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions, including the at risk rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships. The IRS has announced that Treasury Regulations
will be issued that characterize net passive income from a publicly-traded
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partnership as investment income for purposes of the limitations on the
deductibility of investment interest.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." As noted, a unitholder's share of our
net passive income will be treated as investment income for this purpose. In
addition, the unitholder's share of our portfolio income will be treated as
investment income. Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Allocation of Income, Gain, Loss, and Deduction. In general, if we have a
net profit, our items of income, gain, loss, and deduction will be allocated
among the general partner and the unitholders in accordance with their
particular percentage interests in us. At any time that distributions are made
to the common units and not to the subordinated units, or that incentive
distributions are made to the general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss, the
amount of that loss will be allocated first, to the general partner and the
unitholders in accordance with their particular percentage interests in us to
the extent of their positive capital accounts, and, second, to the general
partner.
Specified items of our income, deduction, gain, and loss will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and affiliates of the general
partner referred to in this discussion as "Contributed Property." The effect of
these allocations to a unitholder will be essentially the same as if the tax
basis of the Contributed Property were equal to its fair market value at the
time of contribution. In addition, specified items of recapture income will be
allocated to the extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss, or deduction, other than
an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity," will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in us, which will be determined by taking into account
all the facts and circumstances, including the partner's relative contributions
to us, the interests of the partners in economic profits and losses, the
interests of the partners in
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cash flow and other nonliquidating distributions and rights of the partners to
distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "-- Disposition of Common Units -- Section 754 Election" and "-- Disposition
of Common Units -- Allocations Between Transferors and Transferees," allocations
under our partnership agreement will be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or any
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner could file a claim for credit or
refund.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
ownership of those units. If so, he would no longer be a partner for those units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
- any of our income, gain, deduction or loss with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder for those units would
be fully taxable; and
- all of these distributions would appear to be treated as ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
whose common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition should modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their units. The IRS
has announced that it is actively studying issues relating to the tax treatment
of short sales of partnership interests. Please also read "-- Disposition of
Common Units -- Recognition of Gain or Loss."
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We will use the year ending December 31
as our taxable year and we will adopt the accrual method of accounting for
federal income tax purposes. Each unitholder will be required to include in
income his allocable share of our income, gain, loss and deduction for our
taxable year ending within or with his taxable year. In addition, a unitholder
who has a taxable year ending on a date other than December 31 and who disposes
of all of his units following the close of our taxable year but before the close
of his taxable year must include his allocable share of our income, gain, loss
and deduction in income for his taxable year, with the result that he will be
required to report income for his taxable year that includes his share of more
than one year of income, gain, loss and deduction. Please read "-- Disposition
of Common Units -- Allocations Between Transferors and Transferees."
Initial Tax Basis, Depreciation, and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on
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the disposition of these assets. The federal income tax burden associated with
the difference between the fair market value of property contributed and the tax
basis established for that property will be borne by the contributing partners.
Please read "-- Tax Treatment of Unitholders -- Allocation of Income, Gain, Loss
and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We will not be entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own may be required to recapture those deductions as
ordinary income upon a sale of his interest in us. Please read "-- Tax Treatment
of Unitholders -- Allocation of Income, Gain, Loss and Deduction" and
"-- Disposition of Common Units -- Recognition of Gain or Loss."
Costs incurred in our organization may be amortized over any period we
select not shorter than 60 months. The costs incurred in promoting the issuance
of units (i.e. syndication expenses) must be capitalized and cannot be deducted
currently, ratably or upon our termination. There are uncertainties regarding
the classification of costs as organization expenses, which may be amortized,
and as syndication expenses, which may not be amortized. Under recently adopted
regulations, underwriting discounts and commissions are treated as syndication
costs.
Uniformity of Units. Because we cannot match transferors and transferees of
units, uniformity of the economic and tax characteristics of the units to a
purchaser of these units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6). Any
non-uniformity could have a negative impact on the value of the units. Please
read "-- Disposition of Common Units -- Section 754 Election."
Consistent with the recently finalized regulations under Section 743, we
intend to depreciate the portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of contributed property or adjusted
property, to the extent of any unamortized Section 704(c) built-in gain, using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of that
property, or treat that portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable, consistent with the
regulations under Section 743, but despite its inconsistency with Treasury
Regulation Section 1.167(c)-1(a)(6). Please read "-- Disposition of Common
Units -- Section 754 Election." To the extent that the Section 743(b) adjustment
is attributable to appreciation in value in excess of the unamortized Section
704(c) built-in gain, we will apply the rules described in the Regulations and
legislative history. If we determine that this type of position cannot
reasonably be taken, we may adopt a depreciation and amortization convention
under which all purchasers acquiring units in the same month would receive
depreciation and amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our property. If this kind of an aggregate
approach is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to some unitholders and risk the
loss of depreciation and amortization deductions not taken in the year that
these deductions are otherwise allowable. This convention will not be adopted if
we determine that the loss of
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depreciation and amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate method, we may use
any other reasonable depreciation and amortization convention to preserve the
uniformity of the intrinsic tax characteristics of any units that would not have
a material adverse effect on the unitholders. The IRS may challenge any method
of depreciating the Section 743(b) adjustment described in this paragraph. If
this type of challenge were sustained, the uniformity of units might be
affected, and the gain from the sale of units might be increased without the
benefit of additional deductions. Please read "-- Disposition of Common
Units -- Recognition of Gain or Loss."
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and determinations of the
initial tax bases, of our assets. Although we may from time to time consult with
professional appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are later found to be incorrect, the character and amount of items of
income, gain, loss, or deductions previously reported by unitholders might
change, and unitholders might be required to adjust their tax liability for
prior years.
State and Local Tax Considerations. For a discussion of the state and local
tax considerations arising from an investment in common units, please read
"-- State, Local and Other Tax Considerations" at the end of this "Tax
Considerations."
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received plus his
share of our nonrecourse liabilities. Because the amount realized includes a
unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of units could result in a tax liability in excess of any cash received
from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price is less
than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of the unit and may be recognized even if there is a net taxable loss
realized on the sale of the unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a disposition of units. Net capital loss may
offset no more than $3,000 of ordinary income in the case of individuals and may
only be used to offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of those
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. Although the ruling is
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unclear as to how the holding period of these interests is determined once they
are combined, recently finalized regulations allow a selling unitholder who can
identify common units transferred with an ascertainable holding period to elect
to use the actual holding period of the units transferred. Thus, according to
the ruling, a unitholder will be unable to select high or low basis common units
to sell as would be the case with corporate stock, but, according to the
regulations, may designate specific common units sold for purposes of
determining the holding period of units transferred. A unitholder electing to
use the actual holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges of common
units. A unitholder considering the purchase of additional units or a sale of
common units purchased in separate transactions should consult his tax advisor
as to the possible consequences of the ruling and application of the final
regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the NYSE on
the first business day of the month (the "Allocation Date"). However, gain or
loss realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a unitholder transferring units in the open market may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests otherwise
vary during a taxable period, to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes
of these units prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
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Section 754 Election. We intend to make the election permitted by Section
754 of the Internal Revenue Code. That election is irrevocable without the
consent of the IRS. The election will generally permit us to adjust a common
unit purchaser's tax basis in our assets ("inside basis") under Section 743(b)
of the Internal Revenue Code to reflect his purchase price. This election does
not apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other partners. For
purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components, (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury Regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted (which we intend to do), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under Section
167 of the Internal Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our partnership
agreement, the general partner is authorized to adopt a convention to preserve
the uniformity of units even if that convention is not consistent with specified
Treasury Regulations. Please read "-- Tax Treatment of Operations -- Uniformity
of Units."
Although counsel is unable to opine as to the validity of this approach, we
intend to depreciate or amortize the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property, to
the extent of any unamortized Section 704(c) built-in gain, using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of the property, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable. This method is consistent with the
regulations under Section 743 but is arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6). To the extent this Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
Section 704(c) built-in gain, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation or amortization convention
under which all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common basis or Section
743(b) adjustment, based upon the same applicable rate as if they had purchased
a direct interest in our assets. This kind of aggregate approach may result in
lower annual depreciation or amortization deductions than would otherwise be
allowable to specified unitholders. Please read "-- Tax Treatment of
Operations -- Uniformity of Units."
The allocation of the Section 743(b) adjustment among our assets must be
made in accordance with the Internal Revenue Code. The IRS could seek to
reallocate some or all of any Section 743(b) adjustment to goodwill not so
allocated by us. Goodwill, as an intangible asset, is generally amortizable over
a longer period of time or under a less accelerated method than our tangible
assets.
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have a higher tax basis in his share of our assets for
purposes of calculating, among other items, his depreciation and depletion
deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in his units is lower than those units' share of the aggregate tax basis
of our assets immediately prior to the transfer. Thus, the fair market value of
the units may be affected either favorably or adversely by the election.
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The calculations involved in the Section 754 election are complex, and we
will make them on the basis of assumptions as to the value of our assets and
other matters. The determinations we make may be successfully challenged by the
IRS and the deductions resulting from them may be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in our opinion, the expense of compliance exceed the benefit of the
election, we may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the election not
been revoked.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction and
to furnish specified information to the transferor and transferee. However,
these reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount of
the consideration received for the unit that is allocated to our goodwill or
going concern value. Failure to satisfy these reporting obligations may lead to
the imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated for
tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. If we elect to be
treated as a large partnership, which we do not currently intend to do, we will
not terminate by reason of the sale or exchange of interests in us. Our
termination will cause a termination of Shamrock Logistics Operations. Our
termination will result in the closing of our taxable year for all unitholders.
In the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons,
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable income. Virtually all of our
taxable income allocated to a unitholder which is a tax-exempt organization will
be unrelated business taxable income and will be taxable to that unitholder.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts, or estates that own
units will be considered to be engaged in business in the United States on
account of ownership of units. As a consequence they will be required to file
federal tax returns for their share of our income, gain, loss, or deduction and
pay federal income tax at regular rates on any net income or gain.
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Generally, a partnership is required to pay a withholding tax on the portion of
the partnership's income that is effectively connected with the conduct of a
United States trade or business and which is allocable to the foreign partners,
regardless of whether any actual distributions have been made to these partners.
However, under rules applicable to publicly traded partnerships, we will
withhold (currently at the rate of 39.6%) on actual cash distributions made
quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 BEN or applicable substitute form in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures.
Because a foreign corporation that owns units will be treated as engaged in
a United States trade or business, that corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its share of our income and gain, as adjusted for changes in the
foreign corporation's "U.S. net equity," which are effectively connected with
the conduct of a United States trade or business. That tax may be reduced or
eliminated by an income tax treaty between the United States and the country in
which the foreign corporate unitholder is a "qualified resident." In addition,
this type of unitholder is subject to special information reporting requirements
under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
disposition of that unit to the extent that this gain is effectively connected
with a United States trade or business of the foreign unitholder. Apart from the
ruling, a foreign unitholder will not be taxed or subject to withholding upon
the disposition of a unit if he has owned less than 5% in value of the units
during the five-year period ending on the date of the disposition and if the
units are regularly traded on an established securities market at the time of
the disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes each unitholder's share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will generally not be reviewed by counsel, we
will use various accounting and reporting conventions, some of which have been
mentioned earlier, to determine the unitholder's share of income, gain, loss and
deduction. Any of those conventions may not yield a result that conforms to the
requirements of the Internal Revenue Code, regulations or administrative
interpretations of the IRS. The IRS may successfully contend in court that those
accounting and reporting conventions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of that
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "Tax Matters Partner" for these
purposes. The partnership agreement appoints the general partner as the Tax
Matters Partner of Shamrock Logistics.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters
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Partner may bind a unitholder with less than a 1% profits interest in us to a
settlement with the IRS unless that unitholder elects, by filing a statement
with the IRS, not to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all the unitholders are
bound, of a final partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, judicial review may be sought by any
unitholder having at least a 1% interest in profits and by the unitholders
having in the aggregate at least a 5% profits interest. However, only one action
for judicial review will go forward, and each unitholder with an interest in the
outcome may participate. However, if we elect to be treated as a large
partnership, a unitholder will not have the right to participate in settlement
conferences with the IRS or to seek a refund. We do not expect to elect to have
the large partnership provisions apply due to the cost of their application.
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
However, if we elect to be treated as a large partnership, the unitholders would
be required to treat all partnership items in a manner consistent with our
return.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the
foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, we have registered as a tax shelter with the Secretary
of Treasury in the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken.
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<PAGE> 153
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US
OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
Our tax shelter registration number is 00294000008. A unitholder who sells
or otherwise transfers a unit in a later transaction must furnish the
registration number to the transferee. The penalty for failure of the transferor
of a unit to furnish the registration number to the transferee is $100 for each
failure. The unitholders must disclose our tax shelter registration number on
Form 8271 to be attached to the tax return on which any deduction, loss or other
benefit we generate is claimed or on which any of our income is included. A
unitholder who fails to disclose the tax shelter registration number on his
return, without reasonable cause for that failure, will be subject to a $250
penalty for each failure. Any penalties discussed are not deductible for federal
income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority"; or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL, AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance, or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We will initially own
property or do business in Texas, Colorado, New Mexico, Kansas, and Oklahoma. Of
these states, Colorado, New Mexico, Kansas, and Oklahoma currently impose a
personal income tax. A unitholder will be required to file state income tax
returns and to pay state income taxes in some or all of these states in which we
do business or own property and may be subject to penalties for failure to
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<PAGE> 154
comply with those requirements. In some states, tax losses may not produce a tax
benefit in the year incurred and also may not be available to offset income in
subsequent taxable years. Some of the states may require us, or we may elect, to
withhold a percentage of income from amounts to be distributed to a unitholder
who is not a resident of the state. Withholding, the amount of which may be
greater or less than a particular unitholder's income tax liability to the
state, generally does not relieve a nonresident unitholder from the obligation
to file an income tax return. Amounts withheld may be treated as if distributed
to unitholders for purposes of determining the amounts distributed by us. Please
read "-- Tax Treatment of Unitholders -- Entity-Level Collections." Based on
current law and our estimate of our future operations, the general partner
anticipates that any amounts required to be withheld will not be material.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND
TAX CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES, OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS UNITED STATES FEDERAL TAX RETURNS THAT MAY BE REQUIRED OF
HIM. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX CONSEQUENCES
OF AN INVESTMENT IN US.
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INVESTMENT IN SHAMROCK LOGISTICS BY EMPLOYEE BENEFIT PLANS
An investment in Shamrock Logistics by an employee benefit plan is subject
to additional considerations because the investments of these plans are subject
to the fiduciary responsibility and prohibited transaction provisions of ERISA,
and restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:
(a) whether the investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in Shamrock Logistics is authorized by the appropriate governing
instrument and is a proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibits employee benefit plans, and also IRAs that are not considered part of
an employee benefit plan, from engaging in specified transactions involving
"plan assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in Shamrock Logistics, be deemed to own an
undivided interest in the assets of Shamrock Logistics, with the result that the
general partner would also be a fiduciary of the plan and the operations of
Shamrock Logistics would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,
(a) the equity interests acquired by employee benefit plans are
publicly offered securities -- i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and
each other, freely transferable and registered under some
provisions of the federal securities laws,
(b) the entity is an "operating company," -- i.e., it is primarily
engaged in the production or sale of a product or service other
than the investment of capital either directly or through a
majority-owned subsidiary or subsidiaries, or
(c) there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each
class of equity interest, disregarding some interests held by our
general partner, its affiliates, and some other persons, is held
by the employee benefit plans referred to above, IRAs and other
employee benefit plans not subject to ERISA, including
governmental plans.
Shamrock Logistics' assets should not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (a) above.
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<PAGE> 156
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
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<PAGE> 157
UNDERWRITING
Shamrock Logistics and the underwriters named below have entered into an
underwriting agreement with respect to the common units being offered. Subject
to specified conditions, each underwriter has severally agreed to purchase the
number of common units indicated in the following table. Goldman, Sachs & Co.,
Dain Rauscher Incorporated, A.G. Edwards & Sons, Inc., Lehman Brothers Inc., and
PaineWebber Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS COMMON UNITS
------------ ------------
<S> <C>
Goldman, Sachs & Co................................
Dain Rauscher Incorporated.........................
A.G. Edwards & Sons, Inc...........................
Lehman Brothers Inc................................
UBS Warburg LLC....................................
---------
Total.................................... 4,000,000
=========
</TABLE>
If the underwriters sell more common units than the total number set forth
in the table above, the underwriters have an option to buy up to an additional
600,000 common units from Shamrock Logistics to cover the sales. They may
exercise that option for 30 days. If any common units are purchased under this
option, the underwriters will severally purchase common units in approximately
the same proportion as set forth in the table above.
The following table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by Shamrock Logistics.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase 600,000 additional common units.
<TABLE>
<CAPTION>
PAID BY SHAMROCK LOGISTICS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per common unit........................................ $ $
Total........................................
</TABLE>
Common units sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any common units sold by the underwriters to securities dealers may
be sold at a discount of up to $ per common unit from the initial public
offering price. Any such securities dealers may resell any common units
purchased from the underwriters to various other brokers or dealers at a
discount of up to $ per common unit from the initial public offering price.
If all the common units are not sold at the initial public offering price, the
representatives may change the offering price and the other selling terms.
Ultramar Diamond Shamrock, Shamrock Logistics, GP, LLC, UDS Logistics, LLC,
Riverwalk Logistics, L.P., Shamrock Logistics, Shamrock Logistics Operations and
the officers and directors of the general partner of the general partner have
agreed with the underwriters not to dispose of or hedge any of their common
units or subordinated units or securities convertible into or exchangeable for,
or that represent the right to receive, common units or subordinated units or
any securities that are senior to or on a parity with common units during the
period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing employee
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<PAGE> 158
benefit plans. Please read "Units Eligible for Future Sale" for a discussion of
transfer restrictions.
Prior to the offering, there has been no public market for the common
units. The initial public offering price will be negotiated among the general
partner and the representatives. Principal factors to be considered in
determining the initial public offering price of the common units, in addition
to prevailing market conditions, will be Ultramar Diamond Shamrock Logistic
Business' historical performance, Shamrock Logistics' pro forma historical
performance, estimates of the business potential and earnings prospects of
Shamrock Logistics, an assessment of Shamrock Logistics' management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
The common units will be listed on the New York Stock Exchange under the
symbol "UDL". In order to meet one of the requirements for listing the common
units on the NYSE, the Underwriters have undertaken to sell lots of 100 or more
common units to a minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
units than they are required to purchase in the offering. "Covered" short sales
are sales made in an amount not greater than the underwriters' option to
purchase additional units from the issuer in the offering. The underwriters may
close out any covered short position by either exercising their option to
purchase additional units or purchasing units in the open market. In determining
the source of units to close out the covered short position, the underwriters
will consider, among other things, the price of units available for purchase in
the open market as compared to the price at which they may purchase units
through the overallotment option. "Naked" short sales are any sales in excess of
such option. The underwriters must close out any naked short position by
purchasing units in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of the units in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of units made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased units sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover short position and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of the units,
and together with the imposition of the penalty bid, may stabilize, maintain or
otherwise affect the market price of the units. As a result, the price of the
units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued at any time.
These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
At the request of Shamrock Logistics, the underwriters are reserving up to
300,000 common units for sale at the initial public offering price to directors,
officers, employees and friends through a directed share program. The number of
common units available for sale to the general public in the public offering
will be reduced to the extent these persons purchase these reserved units. Any
common units not so purchased will be offered by the underwriters to the general
public on the same basis as the other common units offered by this prospectus.
Employees, officers and directors of Shamrock Logistics or any of its affiliates
purchasing units in the directed share program have agreed not to pledge,
dispose of or enter into any swap or other
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<PAGE> 159
arrangement that transfers all or portion of the economic consequences
associated with the ownership of, any common units or any securities convertible
into or exercisable or exchangeable for common units during the period from the
date of this prospectus continuing through the date 180 days after the date of
this prospectus without the prior written consent of PaineWebber Incorporated,
an affiliate of UBS Warburg LLC.
Shamrock Logistics estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $4.5 million.
A prospectus in electronic format may be made available on the web sites
maintained by one or more underwriters or selected dealers. The underwriters may
agree to allocate a number of common units to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations.
Because the National Association of Securities Dealers, Inc. views the
common units offered under this prospectus as interests in a direct
participation program, the offering is being made in compliance with Rule 2810
of the NASD's Conduct Rules. Investor suitability with respect to the common
units should be judged similarly to the suitability with respect to other
securities that are listed for trading on the New York Stock Exchange or a
national securities exchange.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of common units offered.
Ultramar Diamond Shamrock, Shamrock Logistics GP, LLC, UDS Logistics, LLC,
the general partner, Shamrock Logistics and Shamrock Logistics Operations has
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act.
Some of the Underwriters engage in transactions with, and, from time to
time, have performed services for, Ultramar Diamond Shamrock and its
subsidiaries in the ordinary course of business and have received customary fees
for performing these services.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for Shamrock Logistics
by Andrews & Kurth L.L.P., Houston, Texas. Certain legal matters in connection
with the common units offered by this prospectus will be passed upon for the
Underwriters by Baker Botts L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of Shamrock Logistics, L.P., Riverwalk
Logistics, L.P. and the Ultramar Diamond Shamrock logistics business included in
this prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
153
<PAGE> 160
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 regarding
the common units offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement. For further
information with respect to Shamrock Logistics and the common units offered in
this prospectus, you may desire to review the registration statement, including
its exhibits and schedules. You may desire to review the full text of any
contracts, agreements or other documents filed as exhibits to the registration
statement for a more detailed description of the matter involved. The
registration statement, including the exhibits and schedules, may be inspected
and copied at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of
this material can also be obtained upon written request from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates or from the SEC's web site on the
Internet at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for
further information on public reference rooms.
As a result of the offering, we will file periodic reports and other
information with the SEC. These reports and other information may be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or obtained from the
SEC's web site on the Internet at http://www.sec.gov.
We intend to furnish our unitholders annual reports containing audited
financial statements and furnish or make available quarterly reports containing
unaudited interim financial information for the first three fiscal quarters of
each fiscal year of Shamrock Logistics.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. These statements can be identified by the use of forward-looking
terminology including "may," "believe," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. These forward-looking
statements involve risks and uncertainties. When considering these
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors and other factors
noted throughout this prospectus could cause our actual results to differ
materially from those contained in any forward-looking statement.
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<PAGE> 161
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SHAMROCK LOGISTICS, L.P.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction........................................... F-2
Pro Forma Balance Sheet as of September 30, 2000....... F-3
Pro Forma Statement of Income for the nine months ended
September 30, 2000.................................... F-4
Pro Forma Statement of Income for the year ended
December 31, 1999..................................... F-5
Notes to Pro Forma Financial Statements................ F-6
SHAMROCK LOGISTICS OPERATIONS, L.P.
(Successor to the Ultramar Diamond Shamrock Logistics
Business)
UNAUDITED FINANCIAL STATEMENTS
Balance Sheets as of September 30, 1999 and 2000....... F-11
Statements of Income for the nine months ended
September 30, 1999 and 2000........................... F-12
Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000........................... F-13
Notes to Financial Statements.......................... F-14
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants............... F-17
Balance Sheets as of December 31, 1998 and 1999........ F-18
Statements of Income for the years ended December 31,
1997, 1998 and 1999................................... F-19
Statements of Net Parent Investment for the years ended
December 31, 1997, 1998 and 1999...................... F-20
Statements of Cash Flows for the years ended December
31, 1997, 1998 and 1999............................... F-21
Notes to Financial Statements.......................... F-22
SHAMROCK LOGISTICS, L.P.
AUDITED BALANCE SHEET
Report of Independent Public Accountants............... F-35
Balance Sheet as of June 30, 2000...................... F-36
Note to Balance Sheet.................................. F-37
RIVERWALK LOGISTICS, L.P.
AUDITED BALANCE SHEET
Report of Independent Public Accountants............... F-38
Balance Sheet as of June 30, 2000...................... F-39
Note to Balance Sheet.................................. F-40
</TABLE>
F-1
<PAGE> 162
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION
The following are the pro forma financial statements of Shamrock Logistics,
L.P., a newly formed Delaware limited partnership, as of and for the nine months
ended September 30, 2000 and for the year ended December 31, 1999. The pro forma
balance sheet assumes that the offering and the related transactions occurred as
of September 30, 2000, and the pro forma statements of income assume that the
offering and the related transactions occurred on January 1, 2000 and 1999,
respectively. The related transactions include the following reorganization
transactions:
- Effective July 1, 2000, the assets and liabilities of the Ultramar
Diamond Shamrock logistics business were transferred to Shamrock
Logistics Operations; and
- Effective with the closing of the offering, Shamrock Logistics Operations
will be transferred to Shamrock Logistics.
Both of these transactions will be recorded at historical cost as they are
considered to be a reorganization of entities under common control. Please read
Note 1: Basis of Presentation and Note 2: Offering and Transactions on page F-6
for a more detailed explanation of all the related transactions.
The pro forma financial statements have been prepared utilizing the
historical pipeline tariff rates in effect during the periods presented.
Effective January 1, 2000, we have revised tariff rates on many of our pipelines
as described in Note 7 of Notes to Pro Forma Financial Statements. The pro forma
financial statements for the year ended December 31, 1999 do not reflect the
revised tariff rates. The pro forma financial statements and accompanying notes
should be read together with the historical financial statements and related
notes included elsewhere in this prospectus.
The pro forma balance sheet and the pro forma statements of income are
unaudited and were derived by adjusting the historical financial statements of
Shamrock Logistics Operations and the Ultramar Diamond Shamrock logistics
business. The adjustments are based on currently available information and
certain estimates and assumptions; and therefore, the actual adjustments may
differ from the pro forma adjustments. However, management believes that the
assumptions provide a reasonable basis for presenting the significant effects of
the offering and the transactions as contemplated and that the pro forma
adjustments give appropriate effect to those assumptions and are properly
applied in the pro forma financial statements. The unaudited pro forma financial
statements do not purport to present the financial position or results of
operations of Shamrock Logistics had the offering and the related transactions
to be effected at the closing actually been completed as of the dates indicated.
Moreover, they do not project Shamrock Logistics' financial position or results
of operations for any future date or period.
F-2
<PAGE> 163
SHAMROCK LOGISTICS, L.P.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
OFFERING AND
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 4 $ 80,000(A) $ 5,004
(10,525)(B)
63,718(C)
(128,193)(D)
Receivable from parent............................ 15,879 (11,041)(E) 4,838
Accounts and notes receivable..................... 362 362
--------- ---------
TOTAL CURRENT ASSETS...................... 16,245 10,204
--------- ---------
Property, plant and equipment....................... 387,401 387,401
Less accumulated depreciation and amortization...... (106,225) (106,225)
--------- ---------
Property, plant and equipment, net................ 281,176 281,176
Other assets, net................................... 5,090 425(B) 5,515
Investment in affiliate............................. 16,524 16,524
--------- ---------
TOTAL ASSETS.............................. $ 319,035 $ 313,419
========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................. $ 356 $ 5,000(C) $ 5,356
Accounts payable and accrued liabilities.......... 2,009 2,009
Taxes other than income taxes..................... 3,341 3,341
--------- ---------
TOTAL CURRENT LIABILITIES................. 5,706 10,706
Long-term debt, less current portion................ 10,462 58,718(C) 69,180
Debt due to parent.................................. 107,676 (107,676)(D) --
EQUITY:
Net partnership equity............................ 195,191 (20,517)(D) --
(163,633)(F)
(11,041)(E)
Common units held by public (4,000,000 common
units subject to a limited call right if less
than 20% of all outstanding common units are
held by the public)............................ -- 80,000(A) 69,900
(10,100)(B)
Common units held indirectly by Ultramar Diamond
Shamrock (4,399,322 common units subject to a
limited call right if less than 20% of all
outstanding common units are held by the
public)........................................ -- 52,653(F) 52,653
Subordinated units (8,999,322 subordinated units
generally subject to automatic conversion to
common units after December 31, 2005 if certain
financial tests are met)....................... -- 107,707(F) 107,707
General partner interest.......................... -- 3,273(F) 3,273
--------- ---------
TOTAL EQUITY.............................. 195,191 233,533
--------- ---------
TOTAL LIABILITIES AND EQUITY.............. $ 319,035 $ 313,419
========= =========
</TABLE>
See accompanying notes to pro forma financial statements.
F-3
<PAGE> 164
SHAMROCK LOGISTICS, L.P.
PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
OFFERING AND
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES.......................................... $69,406 $ 69,406
OPERATING COSTS AND EXPENSES:
Operating expenses.............................. 22,465 22,465
General and administrative expenses............. 3,771 3,771
Depreciation and amortization................... 9,889 9,889
Taxes other than income taxes................... 3,318 3,318
------- ----------
TOTAL OPERATING COSTS AND EXPENSES...... 39,443 39,443
------- ----------
OPERATING INCOME.................................. 29,963 29,963
Interest expense................................ (2,808) $(3,801)(G) (4,519)
2,154(H)
(64)(I)
Equity income from affiliate.................... 3,044 3,044
------- ----------
INCOME BEFORE INCOME TAXES........................ 30,199 28,488
Benefit (provision) for income taxes............ 30,812 (30,812)(J) --
------- ----------
NET INCOME........................................ $61,011 28,488
=======
GENERAL PARTNER'S INTEREST IN NET INCOME.......... (570)
----------
LIMITED PARTNERS' INTEREST IN NET INCOME.......... $ 27,918
==========
NET INCOME PER UNIT............................... $ 1.60
==========
WEIGHTED AVERAGE LIMITED PARTNERS' UNITS
OUTSTANDING..................................... 17,398,644(K)
==========
</TABLE>
See accompanying notes to pro forma financial statements
F-4
<PAGE> 165
SHAMROCK LOGISTICS, L.P.
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
OFFERING AND
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES......................................... $109,773 $ 109,773
OPERATING COSTS AND EXPENSES:
Operating expenses............................. 24,248 24,248
General and administrative expenses............ 4,698 4,698
Depreciation and amortization.................. 12,318 12,318
Taxes other than income taxes.................. 4,765 4,765
-------- ----------
TOTAL OPERATING COSTS AND EXPENSES..... 46,029 46,029
Gain on sale of property, plant and
equipment................................... 2,478 2,478
-------- ----------
OPERATING INCOME................................. 66,222 66,222
Interest expense............................... (777) $(5,068)(G) (5,930)
(85)(I)
Equity income from affiliate................... 3,874 3,874
-------- ----------
INCOME BEFORE INCOME TAXES....................... 69,319 64,166
Provision for income taxes..................... (26,521) 26,521(J) --
-------- ----------
NET INCOME....................................... $ 42,798 64,166
========
GENERAL PARTNER'S INTEREST IN NET INCOME......... (1,283)
----------
LIMITED PARTNERS' INTEREST IN NET INCOME......... $ 62,883
==========
NET INCOME PER UNIT.............................. $ 3.61
==========
WEIGHTED AVERAGE LIMITED PARTNERS' UNITS
OUTSTANDING.................................... 17,398,644(K)
</TABLE>
See accompanying notes to pro forma financial statements
F-5
<PAGE> 166
SHAMROCK LOGISTICS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The pro forma financial statements are based on the historical financial
position and results of operations of the pipeline, terminalling and storage
operations of the Ultramar Diamond Shamrock Logistics Business that were
transferred to Shamrock Logistics Operations, L.P., a newly formed Delaware
limited partnership effective July 1, 2000. The assets and liabilities related
to these operations were transferred at historical cost.
NOTE 2: OFFERING AND TRANSACTIONS
The pro forma financial statements reflect the closing of the following
transactions:
- The transfer of Shamrock Logistics Operations, L.P. to Shamrock Logistics
and its affiliates in exchange for the issuance by Shamrock Logistics of
4,399,322 common units, 8,999,322 subordinated units, the incentive
distribution rights and a 2% general partner interest in Shamrock
Logistics and Shamrock Logistics Operations, L.P.;
- The borrowing by Shamrock Logistics Operations, L.P. of $63,718,000 of
debt, including $5,000,000 under the working capital revolving facility;
- The public offering by Shamrock Logistics of 4,000,000 common units at an
assumed initial public offering price of $20.00 per common unit resulting
in aggregate gross proceeds to Shamrock Logistics of $80,000,000;
- The distribution to affiliates of Ultramar Diamond Shamrock of
approximately $128,193,000; and,
- The payment of underwriting fees and commissions, and other fees and
expenses associated with the offering and the related transactions,
expected to be approximately $10,100,000.
Upon completion of the offering, Shamrock Logistics anticipates incurring
incremental general and administrative costs (e.g., cost of tax return
preparation, annual and quarterly reports to unitholders, investor relations,
and registrar and transfer agent fees) at an annual rate of approximately
$1,500,000. The pro forma financial statements do not reflect any adjustment for
these estimated incremental costs.
NOTE 3: PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(A) Reflects the proceeds to Shamrock Logistics of $80,000,000 from the
issuance and sale of 4,000,000 common units at an assumed initial
public offering price of $20.00 per unit.
(B) Reflects the payment of debt financing fees and underwriting
commissions and expenses of $425,000 and $10,100,000, respectively. The
debt financing fees will be capitalized and amortized and the
underwriting commissions and expenses will be allocated to the common
units.
(C) Represents the borrowing by Shamrock Logistics Operations, L.P. of
$58,718,000 to repay intercompany indebtedness and working capital
loans and for capital expenditure reimbursements and $5,000,000 for
working capital purposes.
(D) Represents the distribution to affiliates of Ultramar Diamond Shamrock
of $128,193,000, of which $107,676,000 is repayment of debt due to
parent and $20,517,000 is reimbursement for capital expenditures.
F-6
<PAGE> 167
SHAMROCK LOGISTICS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(E) Represents the distribution to affiliates of Ultramar Diamond Shamrock
of $11,041,000, which represents the distributable net income of
Shamrock Logistics Operations, L.P. from July 1, 2000 to September 30,
2000.
(F) Represents the allocation of the net assets of the Ultramar Diamond
Shamrock Logistics Business of $163,633,000 of which $52,653,000 is
allocated to the 4,399,322 common units, $107,707,000 is allocated to
the subordinated units and $3,273,000 to the general partner interest.
(G) Reflects interest expense as if the debt was issued and drawn down on
January 1, 1999 and 2000. The pro forma adjustment to interest expense
applicable to Shamrock Logistics is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -----------------
(in thousands)
<S> <C> <C>
PRO FORMA ADJUSTMENT TO INTEREST EXPENSE
Bank debt ($58,718,000 principal balance), at
an assumed annual interest rate of 7.91%... $4,645 $3,483
Bank debt ($5,000,000 principal balance for
working capital purposes), at an assumed
annual interest rate of 6.50%.............. 325 244
Fee on unused portion of revolving credit
facility ($56,282,000 unused portion) at an
assumed annual rate of 0.175%.............. 98 74
------ ------
Pro forma adjustment to interest expense...... $5,068 $3,801
====== ======
</TABLE>
The interest rates in the above table are based on preliminary debt
negotiations with a bank group. Should the actual negotiated interest
rates increase or decrease by 1/2%, pro forma net income for the year
ended December 31, 1999 would decrease or increase by $319,000.
(H)Reflects the reduction of interest expense related to the repayment of
the $107,676,000 of debt due to parent, as if the repayment was
completed on January 1, 2000. Interest accrued at a rate of 8% per annum
effective with the execution of the promissory notes on June 30, 2000
through September 30, 2000.
(I) Reflects the amortization of deferred debt financing fees and expenses
for the year ended December 31, 1999 and the nine months ended
September 30, 2000, as if the debt was issued and drawn down on January
1, 1999 and 2000, respectively.
(J) Pro forma net income excludes federal and state income taxes as income
taxes will be the responsibility of the unitholders and not Shamrock
Logistics.
(K) The weighted average limited partners' units outstanding used in the
net income per unit calculation includes the limited partners' common
and subordinated units and excludes general partner interest.
NOTE 4: PRO FORMA NET INCOME PER UNIT
Pro forma net income per unit is determined by dividing the pro forma net
income per unit that would have been allocated to the common and subordinated
unitholders, which is 98% of
F-7
<PAGE> 168
SHAMROCK LOGISTICS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
pro forma net income, by the number of common and subordinated units expected to
be outstanding at the closing of the offering. For purposes of this calculation,
the number of common and subordinated units outstanding of 17,398,644 was
assumed to have been outstanding since January 1, 1999 and 2000. Basic and
diluted pro forma net income per unit are equal as there are no dilutive units.
NOTE 5: DESCRIPTION OF EQUITY INTEREST IN SHAMROCK LOGISTICS
The common units and the subordinated units represent limited partner
interest in Shamrock Logistics. The holders of units are entitled to participate
in partnership distributions and exercise the rights and privileges available to
limited partners under the Shamrock Logistics partnership agreement.
The common units will have the right to receive a minimum quarterly
distribution of $0.60 per unit, plus any arrearages on the common units before
any distribution is made to the holders of subordinated units. In addition, if
the aggregate ownership of common and subordinated units owned by persons other
than the general partner and its affiliates is less than 20%, the general
partner will have a right to call the common units at a price which approximates
fair market value.
The subordinated units generally receive quarterly cash distributions only
when the common units have received a minimum quarterly distribution of $0.60
per unit for each quarter since the commencement of operations. Subordinated
units will convert into common units on a one-for-one basis when the
subordination period ends. The subordination period will end when Shamrock
Logistics meets financial tests specified in the partnership agreement but
generally cannot end before December 31, 2005.
The general partner interest will have the right to receive a minimum
quarterly distribution based on its ownership interest (2% currently) in
Shamrock Logistics. In addition, the general partner holds incentive
distribution rights, which allow the general partner to receive a higher
percentage of quarterly distributions of Available Cash from Operating Surplus
after the minimum quarterly distributions have been achieved, and as additional
target levels are met. The higher percentages range from 10% up to 50%.
Based on the number of common and subordinated units and the general
partner interest to be outstanding immediately after the offering, the amount of
Available Cash from Operating Surplus needed to pay the minimum quarterly
distributions for four quarters will be $42,609,000. For both the year ended
December 31, 1999 and the nine months ended September 30, 2000, the amount of
Pro Forma Available Cash from Operating Surplus was sufficient to pay the
minimum quarter distributions.
NOTE 6: TRANSACTIONS WITH ULTRAMAR DIAMOND SHAMROCK
In conjunction with the offering and related transactions, Ultramar Diamond
Shamrock and Shamrock Logistics intend to enter into the following agreements.
PIPELINE AND TERMINALS USAGE AGREEMENT -- Under this agreement, Ultramar
Diamond Shamrock has agreed to use our pipelines to transport at least 75% of
the crude oil shipped to and at least 75% of the refined products shipped from
the McKee, Three Rivers and Ardmore refineries and to use our refined product
terminals for terminalling services for at least 50% of all refined products
shipped from these refineries for a period of seven years.
F-8
<PAGE> 169
SHAMROCK LOGISTICS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
If market conditions with respect to the transportation of crude oil or
refined products or with respect to the end markets in which Ultramar Diamond
Shamrock sells refined products change in a material manner such that Ultramar
Diamond Shamrock would suffer a material adverse effect if it were to continue
to use our pipelines and terminals at the required levels, Ultramar Diamond
Shamrock's obligation to us will be suspended during the period of the change in
market conditions to the extent required to avoid the material adverse effect.
The concepts of a material change in market conditions and material adverse
effect on Ultramar Diamond Shamrock are not defined in the agreement. However,
situations that might constitute a material change in market conditions having a
material adverse effect on Ultramar Diamond Shamrock include the cost of
transporting crude oil or refined products by our pipelines becoming materially
more expensive than transporting crude oil or refined products by other means or
a material change in refinery profit that makes it materially more advantageous
for Ultramar Diamond Shamrock to shift large volumes of refined products from
markets served by our pipelines to pipelines retained by Ultramar Diamond
Shamrock or owned by third parties. Ultramar Diamond Shamrock may suspend
obligations by presenting a certificate from its chief financial officer that
there has been a material change in market conditions having a material adverse
effect on Ultramar Diamond Shamrock. If we disagree with Ultramar Diamond
Shamrock, we have the right to refer the matter to an independent accounting
firm for resolution.
In addition, Ultramar Diamond Shamrock has agreed, for a period of seven
years, to remain the shipper for its crude oil and refined products transported
through our pipelines, and neither to challenge, nor cause others to challenge,
our interstate or intrastate tariff rates for the transportation of crude oil,
refined products or petrochemical feedstocks.
SERVICES AGREEMENT -- Effective July 1, 2000, Ultramar Diamond Shamrock and
its affiliates have agreed to provide general and administrative services to
Shamrock Logistics Operations, L.P. for an annual fee of $5,200,000, payable
monthly. The services to be provided under this agreement include the corporate
functions of legal, accounting, treasury, information technology and other
corporate services. This fee is in addition to the incremental general and
administrative costs of $1,500,000 to be incurred from third parties as a result
of becoming a public entity.
The services agreement also requires that Shamrock Logistics reimburse
Ultramar Diamond Shamrock and its affiliates for the various recurring costs of
the employees who work within the pipeline, terminalling and storage operations,
which salary, wages and benefits costs approximated $9,700,000 in 1999.
ENVIRONMENTAL INDEMNITY -- In connection with this offering and related
transactions, Ultramar Diamond Shamrock has agreed to indemnify Shamrock
Logistics for environmental liabilities related to the assets transferred to
Shamrock Logistics Operations, L.P. that arose prior to closing and are
discovered within 10 years after closing. Excluded from this indemnification are
liabilities, which result from a change in environmental law after closing. In
addition, as an operator or owner of the assets, Shamrock Logistics and Shamrock
Logistics Operations, L.P. could be held liable for pre-closing environmental
damage should Ultramar Diamond Shamrock be unable to fulfill its obligation.
However, Shamrock Logistics believes that such situation is remote given
Ultramar Diamond Shamrock's financial condition.
NOTE 7: IMPACT OF TARIFF RATE CHANGE
The historical statement of income for the year ended December 31, 1999 was
prepared utilizing the historical pipeline tariff rates in effect during 1999.
The historical tariff rates were
F-9
<PAGE> 170
SHAMROCK LOGISTICS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
based on initial pipeline cost and not revised upon subsequent expansion or for
increases and decreases in throughput levels.
As a result, the Ultramar Diamond Shamrock Logistics Business filed revised
tariff rates on many of its crude oil and refined product pipelines to reflect
the total cost of the pipeline, the current throughput capacity, the current
throughput utilization and other market conditions. The revised tariff rates
were implemented effective January 1, 2000 and the overall impact of the tariff
rate changes result in a decrease to revenues as reflected in the table below.
If the revised tariff rates had been implemented effective January 1, 1999,
the pro forma as adjusted revenues, operating income, net income and Adjusted
EBITDA would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
(in thousands)
<S> <C>
Historical revenues............................ $109,773
Pro forma adjustments........................ --
--------
Pro forma revenues............................. 109,773
Decrease in tariff revenues.................. (21,892)
--------
Pro forma as adjusted revenues................. $ 87,881
========
Historical operating income.................... $ 66,222
Pro forma adjustments........................ --
--------
Pro forma operating income..................... 66,222
Decrease due to tariff revenues.............. (21,892)
--------
Pro forma as adjusted operating income......... $ 44,330
========
Historical net income.......................... $ 42,798
Pro forma adjustments........................ 21,368
--------
Pro forma net income........................... 64,166
Decrease due to tariff revenues.............. (21,892)
--------
Pro forma as adjusted net income............... $ 42,274
========
Historical Adjusted EBITDA(1).................. $ 80,678
Pro forma adjustments........................ --
--------
Pro forma Adjusted EBITDA...................... 80,678
Decrease due to tariff revenues.............. (21,892)
--------
Pro forma Adjusted EBITDA as adjusted(1)....... $ 58,786
========
</TABLE>
---------------
(1) Adjusted EBITDA is defined as operating income, less gain on sale of
property, plant and equipment, plus depreciation and amortization, plus
distributions from Skelly-Belvieu Pipeline Company, of which the Ultramar
Diamond Shamrock Logistics Business owns 50% and excluding the impact of
volumetric expansions, contractions and measurement discrepancies in our
pipelines. Any future impact of these exclusions will be borne by the
shippers in our pipelines.
F-10
<PAGE> 171
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, PRO FORMA
-------------------- SEPTEMBER 30,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 3 $ 4 $ 4
Receivable from parent............................. -- 15,879 15,879
Accounts and notes receivable...................... 1,104 362 362
-------- --------- ---------
TOTAL CURRENT ASSETS....................... 1,107 16,245 16,245
-------- --------- ---------
Property, plant and equipment........................ 378,554 387,401 387,401
Less accumulated depreciation and amortization....... (93,462) (106,225) (106,225)
-------- --------- ---------
Property, plant and equipment, net................. 285,092 281,176 281,176
Goodwill, net........................................ 5,390 5,090 5,090
Investment in affiliate.............................. 17,094 16,524 16,524
-------- --------- ---------
TOTAL ASSETS............................... $308,683 $ 319,035 $ 319,035
======== ========= =========
LIABILITIES AND NET PARENT INVESTMENT/PARTNERSHIP EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................. $ 330 $ 356 $ 356
Accounts payable and accrued liabilities........... 2,170 2,009 2,009
Taxes other than income taxes...................... 3,747 3,341 3,341
-------- --------- ---------
TOTAL CURRENT LIABILITIES.................. 6,247 5,706 5,706
Long-term debt, less current portion................. 10,819 10,462 10,462
Debt due to parent................................... -- 107,676 107,676
Other long-term liabilities.......................... 3,578 -- --
Deferred income taxes................................ 35,592 -- --
Distributions due to parent.......................... -- -- 31,558
Commitments and contingencies
NET PARENT INVESTMENT/PARTNERSHIP EQUITY:
Net parent investment.............................. 252,447 -- --
Limited partner's equity........................... -- 193,239 --
General partner's equity........................... -- 1,952 --
Common units....................................... -- -- 52,653
Subordinated units (convertible to common units
after December 31, 2005 if certain financial
tests are met).................................. -- -- 107,707
General partner interest........................... -- -- 3,273
-------- --------- ---------
TOTAL NET PARENT INVESTMENT/PARTNERSHIP
EQUITY................................... 252,447 195,191 163,633
-------- --------- ---------
TOTAL LIABILITIES AND NET PARENT
INVESTMENT/PARTNERSHIP EQUITY............ $308,683 $ 319,035 $ 319,035
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE> 172
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 2000
---- ----
<S> <C> <C>
REVENUES.................................................... $ 81,535 $ 69,406
OPERATING COSTS AND EXPENSES:
Operating expenses........................................ 17,183 22,465
General and administrative expenses....................... 3,523 3,771
Depreciation and amortization............................. 9,162 9,889
Taxes other than income taxes............................. 3,624 3,318
-------- -----------
TOTAL OPERATING COSTS AND EXPENSES................ 33,492 39,443
-------- -----------
Gain on sale of property, plant and equipment............. 2,478 --
-------- -----------
OPERATING INCOME............................................ 50,521 29,963
Interest expense.......................................... (669) (2,808)
Equity income from affiliate.............................. 2,370 3,044
-------- -----------
INCOME BEFORE INCOME TAXES.................................. 52,222 30,199
Benefit (provision) for income taxes...................... (19,980) 30,812
-------- -----------
NET INCOME.................................................. $ 32,242 $ 61,011
======== ===========
PRO FORMA NET INCOME........................................ $ 61,011
General partner's interest in pro forma net income........ (1,220)
-----------
Limited partners' interest in pro forma net income........ $ 59,791
===========
Pro forma net income per unit............................. $ 3.44
===========
Pro forma weighted average limited partners' units
outstanding............................................ 17,398,644
===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE> 173
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $32,242 $ 61,011
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 9,162 9,889
Equity income from affiliate.............................. (2,370) (3,044)
Gain on sale of property, plant and equipment............. (2,478) --
Provision (benefit) for deferred income taxes............. 2,537 (36,677)
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes receivable... (173) 611
Increase in receivable from parent..................... -- (15,879)
Increase in accounts payable, accrued liabilities and
taxes other than income taxes......................... 1,664 2,366
Decrease in other long-term liabilities................... (164) (137)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 40,420 18,140
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maintenance capital expenditures.......................... (1,842) (1,804)
Expansion capital expenditures............................ (4,588) (4,082)
Distributions received from affiliate..................... 2,608 3,488
Proceeds from sale of property, plant and equipment....... 12,000 --
------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... 8,178 (2,398)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' contributions................................... -- 1
Net distributions to parent............................... (48,292) (15,458)
Repayment of long-term debt............................... (306) (284)
------- --------
NET CASH USED IN FINANCING ACTIVITIES............. (48,598) (15,741)
------- --------
NET INCREASE (DECREASE) IN CASH............................. -- 1
CASH AT BEGINNING OF THE PERIOD............................. 3 3
------- --------
CASH AT END OF THE PERIOD................................... $ 3 $ 4
======= ========
NON-CASH ACTIVITIES:
Debt due to parent........................................ $ -- $107,676
Other short-term and long-term liabilities
(environmental)........................................ -- 2,507
------- --------
Total non-cash activities.............................. $ -- $110,183
======= ========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE> 174
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
NOTE 1: ORGANIZATION
A. Reorganization
Effective July 1, 2000, the assets and liabilities (excluding environmental
liabilities and income tax liabilities) of the Ultramar Diamond Shamrock
Logistics Business were contributed to Shamrock Logistics Operations, L.P. by
the various subsidiaries of Ultramar Diamond Shamrock in exchange for the
ownership interest in Shamrock Logistics Operations. The general partner of
Shamrock Logistics Operations is Riverwalk Logistics, L.P. (an entity indirectly
owned by Ultramar Diamond Shamrock) and the limited partner is an affiliate of
Ultramar Diamond Shamrock. The general partner's ownership interest is 1% and
the limited partner's ownership interest is 99%.
The transfer of assets and liabilities to Shamrock Logistics Operations
represents a reorganization of entities under common control and was recorded at
historical cost. Accordingly, the statements of income and cash flows for the
nine months ended September 30, 2000, combine the results for the Ultramar
Diamond Shamrock Logistics Business for the six months ended June 30, 2000 with
the results of Shamrock Logistics Operations for the three months ended
September 30, 2000 as if the operations were combined on January 1, 2000. Since
Shamrock Logistics Operations is not subject to income taxes and the Ultramar
Diamond Shamrock Logistics Business is subject to income taxes, the transfer of
assets and liabilities among the entities is deemed a change in tax status.
Accordingly, the deferred income tax liability as of June 30, 2000 of
$38,217,000 was written off through the statement of income in the caption,
benefit for income taxes.
In conjunction with the July 1, 2000 transfer of assets and liabilities to
Shamrock Logistics Operations, the $10,818,000 outstanding indebtedness owed to
the Port of Corpus Christi Authority by an affiliate of Ultramar Diamond
Shamrock was assumed by Shamrock Logistics Operations. This debt is due in
annual installments of $1,222,000 through December 31, 2015. Interest accrues on
the unpaid principal balance at the rate of 8% per annum.
B. Basis of Presentation
The accompanying unaudited interim financial statements of Shamrock
Logistics Operations have been prepared in accordance with United States'
generally accepted accounting principles for interim financial reporting and
with Securities and Exchange Commission rules and regulations for interim
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These unaudited interim financial statements should be read in
conjunction with the audited historical financial statements and notes thereto
of the Ultramar Diamond Shamrock Logistics Business included elsewhere in this
prospectus.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The results of operations may be affected by seasonal
factors, such as the demand for refined products or industry factors that may be
specific to a particular period, such as movements in and the general level of
crude oil prices, the demand for and prices of refined products, refining
industry supply capacity, and refinery maintenance turnarounds. In addition, the
operations of
F-14
<PAGE> 175
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Shamrock Logistics Operations are directly impacted by Ultramar Diamond
Shamrock's refining and retail operations in the mid-continent region of the
United States.
NOTE 2: COMMITMENTS AND CONTINGENCIES
The Ultramar Diamond Shamrock Logistics Business is involved in various
lawsuits, claims and regulatory proceedings incidental to its business. In the
opinion of management, the outcome of such matters will not have a material
adverse effect on the Ultramar Diamond Shamrock Logistics Business' financial
position or results of operations.
NOTE 3: DEBT DUE TO PARENT
Ultramar Diamond Shamrock, through various subsidiaries has constructed or
acquired the various crude oil and refined product pipeline, terminalling and
storage assets of the Ultramar Diamond Shamrock Logistics Business. In
conjunction with the initial public offering of common units of Shamrock
Logistics, effective June 30, 2000, the subsidiaries which own the various
assets of the Ultramar Diamond Shamrock Logistics Business formalized the terms
under which certain intercompany accounts and working capital loans will be
settled by executing promissory notes with an aggregate principal balance of
$107,676,000. The promissory notes require that the principal be repaid no later
than June 30, 2005 and bear interest at a rate of 8.0% per annum on the unpaid
balance. Effective July 1, 2000, the $107,676,000 of debt due to parent was
assumed by Shamrock Logistics Operations.
Shamrock Logistics intends to repay these promissory notes using the entire
proceeds from the offering and borrowings under a new $120,000,000 revolving
credit facility entered into by Shamrock Logistics Operations in conjunction
with the initial public offering.
NOTE 4: IMPACT OF TARIFF RATE CHANGES
The statement of income for the nine months ended September 30, 1999 was
prepared utilizing the historical pipeline tariff rates in effect during 1999.
The historical tariff rates were based on initial pipeline cost and not revised
upon subsequent expansion or for increases and decreases in throughput levels.
As a result, the Ultramar Diamond Shamrock Logistics Business filed revised
tariff rates on many of its crude oil and refined product pipelines to reflect
the total cost of the pipeline, the current throughput capacity, the current
throughput utilization and other market conditions. The revised tariff rates
were implemented effective January 1, 2000 and the overall impact of the tariff
rate changes result in a decrease to revenues as reflected in the table below.
If the revised tariff rates had been implemented effective January 1, 1999,
the revenues, operating income, net income and Adjusted EBITDA would have been
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
(in thousands)
<S> <C>
Revenues -- historical...................................... $81,535
Decrease in tariff revenues............................... (16,138)
-------
Revenues -- as adjusted..................................... $65,397
=======
Operating income -- historical.............................. $50,521
Decrease due to tariff revenues........................... (16,138)
-------
Operating income -- as adjusted............................. $34,383
=======
</TABLE>
F-15
<PAGE> 176
SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
(in thousands)
<S> <C>
Net income -- historical.................................... $32,242
Decrease due to tariff revenues, net of income taxes...... (9,964)
-------
Net income -- as adjusted................................... $22,278
=======
Adjusted EBITDA(1) -- historical............................ $59,751
Decrease due to tariff revenues........................... (16,138)
-------
Adjusted EBITDA(1) -- as adjusted........................... $43,613
=======
</TABLE>
---------------
(1) Adjusted EBITDA is defined as operating income, less gain on sale of
property, plant and equipment, plus depreciation and amortization, plus
distributions from Skelly-Belvieu Pipeline Company, of which the Shamrock
Logistics Operations owns 50% and excluding the impact of volumetric
expansions, contractions and measurement discrepancies in our pipelines. Any
future impact of these exclusions will be borne by the shippers in our
pipelines.
NOTE 5: PRO FORMA INFORMATION
A. SUBSEQUENT REORGANIZATION
Effective with the closing of the initial public offering of common units
of Shamrock Logistics, Shamrock Logistics Operations will be transferred to
Shamrock Logistics. The transfer of Shamrock Logistics Operations to Shamrock
Logistics represents a reorganization of entities under common control and will
be recorded at historical cost.
B. PRO FORMA BALANCE SHEET INFORMATION
Pro forma amounts give effect to the following transactions as though these
transactions occurred as of September 30, 2000:
1. Effective prior to the closing of the offering, Shamrock Logistics Operations
will be transferred to Shamrock Logistics. The resulting ownership of
Shamrock Logistics prior to the initial public offering is that 4,399,322
common units are outstanding, 8,999,322 subordinated units are outstanding
and a 2% general partner interest is outstanding.
2. The distribution by Shamrock Logistics Operations of $11,041,000,
representing the distributable net income from July 1, 2000 to September 30,
2000.
3. The reclassification of $20,517,000 from net partnership equity to
distributions due to parent representing additional amounts to be distributed
to Ultramar Diamond Shamrock and affiliates upon completion of the initial
public offering.
C. PRO FORMA EARNINGS PER UNIT INFORMATION
The Ultramar Diamond Shamrock Logistics Business was a division within
Ultramar Diamond Shamrock and Shamrock Logistics Operations is a wholly-owned
partnership subsidiary of Ultramar Diamond Shamrock, thus these operations do
not have outstanding shares. Therefore, earnings per unit is calculated on a pro
forma basis for 2000 only. Unaudited pro forma net income per unit is determined
by dividing the pro forma net income per unit that would have been allocated to
the common and subordinated unitholders, which is 98% of pro forma net income,
by the number of common and subordinated units expected to be outstanding at the
closing of the offering. For purposes of this calculation, it was assumed that
17,398,644 common and subordinated units have been outstanding since January 1,
2000. Basic and diluted pro forma net income per unit are equal as there are no
dilutive units.
F-16
<PAGE> 177
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Ultramar Diamond Shamrock Corporation:
We have audited the accompanying balance sheets of the Ultramar Diamond
Shamrock Logistics Business as of December 31, 1998 and 1999, and the related
statements of income, net parent investment and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Ultramar Diamond
Shamrock Logistics Business as of December 31, 1998 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 19, 2000
F-17
<PAGE> 178
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 3 $ 3
Accounts and notes receivable............................. 931 973
-------- --------
TOTAL CURRENT ASSETS.............................. 934 976
-------- --------
Property, plant and equipment............................... 382,221 381,515
Less accumulated depreciation and amortization.............. (85,100) (96,561)
-------- --------
Property, plant and equipment, net........................ 297,121 284,954
Goodwill, net............................................... 5,615 5,315
Investment in affiliate..................................... 17,332 16,968
-------- --------
TOTAL ASSETS...................................... $321,002 $308,213
======== ========
LIABILITIES AND NET PARENT INVESTMENT
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 636 $ 640
Accrued liabilities....................................... 2,469 2,437
Taxes other than income taxes............................. 1,784 1,674
-------- --------
TOTAL CURRENT LIABILITIES......................... 4,889 4,751
Long-term debt, less current portion........................ 10,819 10,462
Other long-term liabilities................................. 3,742 1,517
Deferred income taxes....................................... 33,055 36,677
Commitments and contingencies
NET PARENT INVESTMENT:
Net parent investment..................................... 268,497 254,806
-------- --------
TOTAL LIABILITIES AND NET PARENT INVESTMENT....... $321,002 $308,213
======== ========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 179
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES.................................................. $ 84,881 $ 97,883 $109,773
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Operating expenses...................................... 24,042 28,027 24,248
General and administrative expenses..................... 4,761 4,552 4,698
Depreciation and amortization........................... 11,328 12,451 12,318
Taxes other than income taxes........................... 4,235 4,152 4,765
-------- -------- --------
TOTAL OPERATING COSTS AND EXPENSES.............. 44,366 49,182 46,029
Gain on sale of property, plant and equipment........... -- 7,005 2,478
-------- -------- --------
OPERATING INCOME.......................................... 40,515 55,706 66,222
Interest expense........................................ (158) (796) (777)
Equity income from affiliate............................ 3,025 3,896 3,874
-------- -------- --------
INCOME BEFORE INCOME TAXES................................ 43,382 58,806 69,319
Provision for income taxes.............................. (16,559) (22,517) (26,521)
-------- -------- --------
NET INCOME................................................ $ 26,823 $ 36,289 $ 42,798
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
---------
<S> <C>
Pro forma net income........................................ $ 42,798
General partner's interest in pro forma net income.......... (856)
-----------
Limited partner's interest in pro forma net income.......... $ 41,942
===========
Pro forma net income per unit............................... $ 2.41
===========
Pro forma weighted average limited partners' units
outstanding............................................... 17,398,644
===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 180
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
STATEMENTS OF NET PARENT INVESTMENT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1997.................................. $260,731
Net income................................................ 26,823
Net change in parent advances............................. 7,849
--------
BALANCE AT DECEMBER 31, 1997................................ 295,403
Net income................................................ 36,289
Net change in parent advances............................. (63,195)
--------
BALANCE AT DECEMBER 31, 1998................................ 268,497
Net income................................................ 42,798
Net change in parent advances............................. (56,489)
--------
BALANCE AT DECEMBER 31, 1999................................ $254,806
========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 181
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 26,823 $ 36,289 $ 42,798
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 11,328 12,451 12,318
Impairment charge -- write-down of property, plant and
equipment............................................ -- 2,100 --
Equity income from affiliate............................ (3,025) (3,896) (3,874)
Gain on sale of property, plant and equipment........... -- (7,005) (2,478)
Provision for deferred income taxes..................... 11,480 2,190 3,622
Changes in operating assets and liabilities:
Decrease (increase) in accounts and notes
receivable......................................... (2,055) 2,901 (42)
Increase (decrease) in accrued liabilities and taxes
other than income taxes............................ (1,507) 20 (142)
Increase (decrease) in other long-term liabilities... 1,687 (100) (2,225)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 44,731 44,950 49,977
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maintenance capital expenditures........................ (633) (2,345) (2,060)
Expansion capital expenditures.......................... (12,359) (9,952) (7,313)
Pipelines acquired in Total Petroleum acquisition....... (43,158) -- --
Distributions received from affiliate................... 4,009 3,692 4,238
Proceeds from sales of property, plant and equipment.... -- 27,000 12,000
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... (52,141) 18,395 6,865
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from (distributions to) parent............. 7,672 (63,062) (56,489)
Repayment of long-term debt............................. (262) (283) (353)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................... 7,410 (63,345) (56,842)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH........................... -- -- --
CASH AT BEGINNING OF YEAR................................. 3 3 3
-------- -------- --------
CASH AT END OF YEAR....................................... $ 3 $ 3 $ 3
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 182
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
NOTE 1: ORGANIZATION
Ultramar Diamond Shamrock Corporation (Ultramar Diamond Shamrock) through
several subsidiaries and affiliated entities, owns and operates various
interstate and intrastate crude oil and refined product pipelines, refined
product terminals, and crude oil storage facilities located in Texas, New
Mexico, Colorado, Oklahoma, and Kansas. In conjunction with the formation of
Shamrock Logistics, L.P. (Shamrock Logistics), Ultramar Diamond Shamrock intends
to transfer most of these assets and operations (the Ultramar Diamond Shamrock
Logistics Business) to Shamrock Logistics in connection with a public offering
of common units of Shamrock Logistics.
Ultramar Diamond Shamrock and its affiliates will retain certain assets,
including refined product pipelines and terminals which have experienced
declining profitability over the past several years, certain crude oil gathering
pipelines originating in older crude oil producing fields, and the Wichita Falls
to McKee crude oil pipeline and storage facility which is currently undergoing a
major expansion. These retained assets have been excluded from the Ultramar
Diamond Shamrock Logistics Business. These financial statements present the
Ultramar Diamond Shamrock Logistics Business as if it had existed as a single
separate entity from Ultramar Diamond Shamrock during the periods presented.
The Ultramar Diamond Shamrock Logistics Business includes interstate
pipelines, which are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and intrastate pipelines, which are subject to regulation by
either the Texas Railroad Commission, the Oklahoma Public Utility Commission or
the Colorado Public Utility Commission, depending on the location of the
pipeline. These regulations include rate regulations, which govern the tariff
rates charged to pipeline customers for transportation through a pipeline.
Tariff rates for each pipeline are required to be filed with the respective
commission upon completion of a pipeline and when a tariff rate is being
revised. In addition, the regulations include annual reporting requirements for
each pipeline.
The following is a listing of the principal assets and operations that
comprise the Ultramar Diamond Shamrock Logistics Business:
CRUDE OIL PIPELINES
Corpus Christi to Three Rivers
Wasson to Ardmore (both pipelines)
Ringgold to Wasson
Dixon to McKee
Various other crude oil pipelines
REFINED PRODUCT PIPELINES
McKee to El Paso
McKee to Denver (operated by Phillips Pipeline Company)
McKee to Colorado Springs to Denver
McKee to Amarillo (both pipelines) to Abernathy
Amarillo to Albuquerque
Three Rivers to San Antonio
Three Rivers to Laredo
Ardmore to Wynnewood
Various other refined product pipelines
F-22
<PAGE> 183
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CRUDE OIL STORAGE FACILITIES AND REFINED PRODUCT TERMINALS
Corpus Christi crude oil storage facility
El Paso refined product terminal
Amarillo refined product terminal
Denver refined product terminal
Colorado Springs refined product terminal
San Antonio refined product terminal
Laredo refined product terminal
Harlingen refined product terminal
Various other crude oil storage facilities and refined product terminals
INVESTMENT IN AFFILIATE -- SKELLY-BELVIEU PIPELINE COMPANY, LLC
Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC owns a natural gas
liquids pipeline that begins in Skellytown, Texas and extends to Mont Belvieu,
Texas near Houston. Skelly-Belvieu Pipeline Company is owned 50% by the Ultramar
Diamond Shamrock Logistics Business and 50% by Phillips Pipeline Company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The financial statements include the accounts and
operations of the Ultramar Diamond Shamrock Logistics Business listed above. All
intercompany transactions have been eliminated. The investment in affiliate is
accounted for under the equity method. The operations of certain of the refined
product pipelines that are jointly owned with other companies are
proportionately consolidated in the accompanying financial statements.
Use of Estimates: The preparation of financial statements in accordance
with United States' generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. On an ongoing basis, management reviews its estimates,
including those related to commitments, contingencies, and environmental
liabilities, based on currently available information. Changes in facts and
circumstances may result in revised estimates.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Additions to property, plant and equipment, including maintenance and
expansion capital expenditures and capitalized interest, are recorded at cost.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets to maintain the existing operating
capacity of existing assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand our operating capacity of
existing assets, whether through construction or acquisition. Repair and
maintenance expenses associated with existing assets that are minor in nature
and do not extend the useful life of existing assets are charged to operating
expenses as incurred.
Depreciation is provided principally using the straight-line method over
the estimated useful lives of the related assets. For certain interstate
pipelines, the depreciation rate used is based on FERC requirements and ranges
from 1% to 17% of the net asset value. When property, plant and equipment is
retired or otherwise disposed of, the cost less net proceeds is recognized as
gain or loss in the statement of income in the year retired.
Goodwill: The excess of cost (purchase price) over the fair value of net
assets acquired (goodwill) is being amortized using the straight-line method
over 20 years.
F-23
<PAGE> 184
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impairment: Long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The evaluation of recoverability is
performed using undiscounted estimated net cash flows generated by the related
asset. The amount of impairment is determined as the amount by which the net
carrying value exceeds discounted estimated net cash flows.
Environmental Remediation Costs: Environmental remediation costs are
expensed and the associated accrual established when site restoration and
environmental remediation and cleanup obligations are either known or considered
probable and can be reasonably estimated. Accrued liabilities are not discounted
to present value. Environmental costs include initial site surveys, costs for
remediation and restoration (including direct internal costs), and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable.
Adjustments to initial estimates are recorded, from time to time, to reflect
changing circumstances and estimates based upon additional information developed
in subsequent periods.
Federal and State Income Taxes: The Ultramar Diamond Shamrock Logistics
Business is included in the consolidated federal and state income tax returns of
Ultramar Diamond Shamrock. Deferred income taxes are computed based on
recognition of future tax expense or benefits, measured by enacted tax rates
that are attributable to taxable or deductible temporary differences between
financial statement and income tax reporting bases of assets and liabilities.
The current portion of income taxes payable is due to Ultramar Diamond Shamrock
and has been included in the net parent investment amount. Shamrock Logistics is
a limited partnership and is not subject to federal or state income taxes.
Accordingly, the taxable income or loss of Shamrock Logistics, which may vary
substantially from income or loss reported for financial reporting purposes, is
generally includable in the federal and state income tax returns of the
individual partners.
Revenue Recognition: The Ultramar Diamond Shamrock Logistics Business'
revenues are derived from interstate and intrastate pipeline transportation,
storage and terminalling of refined products and crude oil. Transportation
revenues (based on pipeline tariff rates) are recognized as refined product or
crude oil is transported through the pipelines. In the case of crude oil
pipelines, the cost of the storage operations are included in the crude oil
pipeline tariff rates. Prior to 1999, the Ultramar Diamond Shamrock Logistics
Business did not charge a separate terminalling fee for terminalling services at
the refined product terminals. Terminalling revenues for 1998 and prior years
were recognized based on the total costs incurred at the terminals, which costs
were charged back to the related refinery. Effective January 1, 1999, the
Ultramar Diamond Shamrock Logistics Business began charging a separate
terminalling fee at its refined product terminals and such fees are recognized
as refined products are moved into the terminal. The terminalling fee was
established at a rate that the Ultramar Diamond Shamrock Logistics Business
believes to be competitive with rates charged by other companies for
terminalling similar refined products.
Operating Expenses: Operating expenses consist primarily of fuel and power
costs, telecommunication costs, labor costs of pipeline field and support
personnel, maintenance, utilities, and insurance. Such expenses are recognized
as incurred.
Net Parent Investment: The net parent investment represents a net balance
as the result of various transactions between the Ultramar Diamond Shamrock
Logistics Business and Ultramar Diamond Shamrock. There are no terms of
settlement or interest charges associated with this balance. The balance is the
result of the Ultramar Diamond Shamrock Logistics Business' participation in
Ultramar Diamond Shamrock's central cash management program, wherein all of the
Ultramar Diamond Shamrock Logistics Business' cash receipts are remitted to
Ultramar
F-24
<PAGE> 185
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Diamond Shamrock and all cash disbursements are funded by Ultramar Diamond
Shamrock. Other transactions include intercompany transportation, storage and
terminalling revenues and related expenses, administrative and support expenses
incurred by Ultramar Diamond Shamrock and allocated to the Ultramar Diamond
Shamrock Logistics Business, and income taxes.
Segment Disclosures: Effective December 31, 1998, the Ultramar Diamond
Shamrock Logistics Business adopted Statement of Financial Accounting Standard
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement established new standards for reporting information
about operating segments in annual financial statements and selected information
about operating segments in interim financial statements issued to
securityholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Ultramar
Diamond Shamrock Logistics Business operates in only one segment, the pipeline
and terminal segment of the oil and gas industry.
Comprehensive Income: Effective March 31, 1998, the Ultramar Diamond
Shamrock Logistics Business adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting comprehensive income and its
components. The Ultramar Diamond Shamrock Logistics Business has not reported
comprehensive income due to the absence of items of other comprehensive income
in any period presented.
Derivative Instruments: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This standard will be effective for the
Ultramar Diamond Shamrock Logistics Business' financial statements beginning
January 1, 2001. The Ultramar Diamond Shamrock Logistics Business has not yet
assessed the impact of this new standard on its financial position or results of
operations.
NOTE 3: ACQUISITION OF TOTAL PETROLEUM (NORTH AMERICA) LTD.
On September 25, 1997, Ultramar Diamond Shamrock completed its acquisition
of Total Petroleum (North America) Ltd. in a purchase business combination.
Total Petroleum's operations consisted of three refineries (Ardmore, Alma and
Denver), 550 convenience stores and various crude oil and refined product
pipeline and storage assets. The total purchase price of $851,800,000,
representing both common stock issued by Ultramar Diamond Shamrock and debt
assumed, was allocated based on the fair values of the individual assets
acquired and the liabilities assumed. The excess of purchase price over the fair
value of net assets acquired of $123,500,000 is being amortized as goodwill on a
straight-line basis over 20 years.
Included in the Ultramar Diamond Shamrock Logistics Business are certain of
the acquired Ardmore refinery's pipelines and storage facilities, which were
allocated $43,158,000 of the purchase price including $5,994,000 of the
goodwill. Expenses associated with the Ardmore refinery's crude oil pipelines
and storage facilities and revenues and expenses associated with the Ardmore to
Wynnewood refined product pipeline are included in the statements of income
since their acquisition on September 25, 1997.
Revenues have not been recognized related to the Ardmore refinery's crude
oil pipelines because the Ultramar Diamond Shamrock Logistics Business had not
established a separate internal tariff rate for transportation on these
pipelines. Effective with the filing of revised tariff
F-25
<PAGE> 186
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
rates, as discussed in "Note 15: Subsequent Events," separate tariff rates have
been established and revenues will be recognized. Had the tariff rates been in
place since the acquisition, revenues for 1997, 1998 and 1999 would have
increased $1,783,000, $5,348,000 and $6,377,000, respectively, based on the
barrels transported through the various Ardmore refinery's crude oil pipelines.
NOTE 4: 1998 IMPAIRMENT CHARGE
Prior to 1998, the Ultramar Diamond Shamrock Logistics Business expanded
the throughput capacity and completed other improvements at the Harlingen
refined product terminal because Ultramar Diamond Shamrock believed its refined
product sales would continue to increase as the south Texas market grew.
However, due to new competitors entering the south Texas market, Ultramar
Diamond Shamrock has not been able to significantly increase its refined product
sales, thus throughput at the Harlingen refined product terminal has not
increased. In light of these competitive conditions, in June 1998, the Ultramar
Diamond Shamrock Logistics Business recorded an impairment charge of $2,100,000
to reduce the carrying value ($4,100,000 prior to write-down) of the Harlingen
refined product terminal to its estimated net realizable value. The estimated
net realizable value was based on the discounted cash flows of the terminal. The
Ultramar Diamond Shamrock Logistics Business has and will continue to operate
the terminal.
NOTE 5: ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Accounts receivable......................................... $872 $936
Notes receivable............................................ 59 37
---- ----
Accounts and notes receivable..................... $931 $973
==== ====
</TABLE>
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL -------------------
LIVES 1998 1999
--------- ---- ----
(years) (in thousands)
<S> <C> <C> <C>
Land and land improvements....................... -- $ 2,850 $ 2,818
Buildings........................................ 35 3,826 3,785
Pipeline and equipment........................... 8-40 338,453 339,481
Right of Ways.................................... 20-35 26,680 26,212
Construction in progress......................... -- 10,412 9,219
-------- --------
Total.................................. 382,221 381,515
Accumulated depreciation and amortization........ (85,100) (96,561)
-------- --------
Property, plant and equipment, net..... $297,121 $284,954
======== ========
</TABLE>
In March 1998, the Ultramar Diamond Shamrock Logistics Business sold a 25%
interest in the McKee to El Paso refined product pipeline and El Paso refined
product terminal to Phillips
F-26
<PAGE> 187
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Petroleum Company for $27,000,000, resulting in a pre-tax gain of $7,005,000. In
August 1999, upon the completion of the pipeline's expansion, an additional
8.33% interest in the McKee to El Paso refined product pipeline and terminal was
sold to Phillips Petroleum Company for $12,000,000, resulting in a pre-tax gain
of $2,478,000. The 33.33% ownership interest sold in the McKee to El Paso
refined product pipeline and terminal represented excess throughput capacity
that was not being utilized by the Ultramar Diamond Shamrock Logistics Business,
thus revenues did not decline as a result of the sales.
Capitalized interest costs included in property, plant and equipment were
$782,000, $121,000 and $115,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
NOTE 7: INVESTMENT IN AFFILIATE
The Ultramar Diamond Shamrock Logistics Business owns a 50% interest in the
Skelly-Belvieu Pipeline Company, which is accounted for under the equity method.
The following presents summarized unaudited financial information related to
Skelly-Belvieu Pipeline Company as of December 31, 1998 and 1999, and for the
years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Revenues.............................................. $12,235 $12,304 $12,133
Income before income taxes............................ 5,705 5,627 5,954
Ultramar Diamond Shamrock Logistics
Business' share of net income......................... 3,025 3,896 3,874
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
---- ----
(in thousands)
<S> <C> <C>
BALANCE SHEET INFORMATION:
Current assets.............................................. $ 1,575 $ 1,686
Property, plant and equipment, net.......................... 54,492 52,576
------- -------
Total assets...................................... $56,067 $54,262
======= =======
Current liabilities......................................... $ 397 $ 30
Members' equity............................................. 55,670 54,232
------- -------
Total liabilities and members' equity............. $56,067 $54,262
======= =======
</TABLE>
NOTE 8: ENVIRONMENTAL MATTERS
The operations of the Ultramar Diamond Shamrock Logistics Business are
subject to environmental laws and regulations adopted by various federal, state,
and local governmental authorities in the jurisdictions in which it operates.
Although the Ultramar Diamond Shamrock Logistics Business believes its
operations are in general compliance with applicable environmental regulations,
risks of additional costs and liabilities are inherent in pipeline, terminalling
and storage operations, and there can be no assurance that significant costs and
liabilities will not be incurred by the Ultramar Diamond Shamrock Logistics
Business. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, and enforcement policies thereunder,
and claims for damages to property or persons resulting from
F-27
<PAGE> 188
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the operations of the Ultramar Diamond Shamrock Logistics Business, could result
in substantial costs and liabilities. Accordingly, the Ultramar Diamond Shamrock
Logistics Business has adopted policies, practices and procedures in the areas
of pollution control, product safety, occupational health and the handling,
storage, use and disposal of hazardous materials to prevent material
environmental or other damage, and to limit the financial liability which could
result from such events. However, some risk of environmental or other damage is
inherent in the Ultramar Diamond Shamrock Logistics Business, as it is with
other entities engaged in similar businesses.
The balances of and changes in accruals for environmental matters which are
included in accrued liabilities and other long-term liabilities consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1997 1998 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year............................ $2,860 $4,547 $ 4,319
Additions to (deletions from) accrual................. 1,802 -- (1,114)
Payments.............................................. (115) (228) (448)
------ ------ -------
Balance at end of year.................................. $4,547 $4,319 $ 2,757
====== ====== =======
</TABLE>
During 1999, based on the annual review of environmental liabilities, it
was determined that certain liabilities were overstated as the required cleanup
obligations were less than originally estimated. Accordingly, environmental
liabilities were reduced by $1,114,000.
The accruals noted above represent the Ultramar Diamond Shamrock Logistics
Business' best estimate of the costs which will be incurred over an extended
period for restoration and environmental remediation at various sites. These
liabilities have not been reduced by possible recoveries from third parties and
projected cash expenditures have not been discounted. Environmental exposures
are difficult to assess and estimate due to unknown factors such as the
magnitude of possible contamination, the timing and extent of remediation, the
determination of the Ultramar Diamond Shamrock Logistics Business' liability in
proportion to other parties, improvements in cleanup technologies and the extent
to which environmental laws and regulations may change in the future. Although
environmental costs may have a significant impact on results of operations for
any single period, the Ultramar Diamond Shamrock Logistics Business believes
that such costs will not have a material adverse effect on its financial
position.
NOTE 9: LONG TERM DEBT
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into
a financing agreement with the Port of Corpus Christi Authority of Nueces
County, Texas (Port Authority of Corpus Christi) for the construction of a crude
oil storage facility. The original note totaled $12,000,000 and is due in annual
installments through December 31, 2015. Interest on the unpaid principal balance
accrues at a rate of 8% per annum. The land on which the crude oil storage
facility was constructed is leased from the Port Authority of Corpus Christi
(see Note 10: Commitments and Contingencies).
F-28
<PAGE> 189
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt repayments are due as follows (in thousands):
<TABLE>
<S> <C>
2000..................................................... $ 640
2001..................................................... 385
2002..................................................... 416
2003..................................................... 449
2004..................................................... 485
Thereafter............................................... 8,727
-------
Total repayments............................... $11,102
=======
</TABLE>
Interest payments totaled $931,000, $1,028,000 and $948,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
NOTE 10: COMMITMENTS AND CONTINGENCIES
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into
several agreements with the Port Authority of Corpus Christi including a crude
oil dock user agreement, a land lease agreement and a note agreement. The crude
oil dock user agreement allows the Ultramar Diamond Shamrock Logistics Business
to operate and manage a crude oil dock in Corpus Christi for a five-year period
beginning August 1, 1994 and the agreement is renewable yearly thereafter. The
Ultramar Diamond Shamrock Logistics Business shares use of the crude oil dock
with two other users and operating costs are split evenly among the three users.
The crude oil dock user agreement requires that the Ultramar Diamond Shamrock
Logistics Business collect wharfage fees, based on the quantity of barrels off
loaded from each vessel, and dockage fees, based on vessels berthing at the
dock. These fees are remitted to the Port Authority of Corpus Christi monthly.
The wharfage and one-half of the dockage fees paid by the Ultramar Diamond
Shamrock Logistics Business for its use of the crude oil dock reduce the annual
amount owed by the Ultramar Diamond Shamrock Logistics Business to the Port
Authority of Corpus Christi under the note agreement discussed in "Note 9: Long
Term Debt". The wharfage and dockage fees for the crude oil dock totaled
$1,194,000, $1,311,000 and $1,302,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
Effective April 1988, the Ultramar Diamond Shamrock Logistics Business and
five other users entered into a refined product dock user agreement with the
Port Authority of Corpus Christi to use a refined product dock for a two-year
period and renewable yearly thereafter. The Ultramar Diamond Shamrock Logistics
Business also operates the refined product dock and operating costs are split
evenly among the six users. The Ultramar Diamond Shamrock Logistics Business is
responsible for collecting and remitting the refined product wharfage and
dockage fees to the Port Authority of Corpus Christi. The wharfage and dockage
fees for the refined product dock totaled $127,000, $235,000 and $211,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
The crude oil and the refined product docks provide Ultramar Diamond
Shamrock's Three Rivers refinery access to marine facilities to receive crude
oil and deliver refined products. For the years ended December 31, 1997, 1998
and 1999, the Three Rivers refinery received 88%, 88% and 91%, respectively, of
its crude oil requirements from crude oil received at the crude oil dock. Also,
for the years ended December 31, 1997, 1998 and 1999, 8%, 7% and 7%,
respectively, of the refined products produced at the Three Rivers refinery were
transported via pipeline to the Corpus Christi refined product dock.
F-29
<PAGE> 190
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Ultramar Diamond Shamrock Logistics Business has the following land
leases related to refined product terminals and crude oil storage facilities:
- Corpus Christi crude oil storage facility: a 20-year noncancellable
operating lease on 31.35 acres of land through 2014, at which time the
lease is renewable every five years, for a total of 20 renewable years.
- Corpus Christi refined product terminal: two five-year noncancellable
operating lease agreements on 13.63 acres of land through 2002, at which
time the agreements are renewable for at least three five-year periods.
- Harlingen refined product terminal: a 13-year noncancellable operating
lease on 5.88 acres of land through 2008.
- Colorado Springs airport terminal: a 50-year noncancellable operating
lease on 46.26 acres of land through 2043, at which time the lease is
renewable for another 50-year period.
The above land leases require monthly payments totaling $15,000 and are
adjustable every five years based on changes in the Consumer Price Index.
In addition, the Ultramar Diamond Shamrock Logistics Business leases
certain equipment and vehicles under short-term operating lease agreements
expiring through 2002. Future minimum rental payments applicable to
noncancellable operating leases as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<S> <C>
2000....................................................... $ 184
2001....................................................... 177
2002....................................................... 159
2003....................................................... 142
2004....................................................... 141
Thereafter................................................. 1,685
------
Future minimum lease payments............................ $2,488
======
</TABLE>
Total rental expense for all operating leases during 1997, 1998 and 1999
was $218,000, $253,000 and $264,000, respectively.
The Ultramar Diamond Shamrock Logistics Business is involved in various
lawsuits, claims and regulatory proceedings incidental to its business. In the
opinion of management, the outcome of such matters will not have a material
adverse effect on the Ultramar Diamond Shamrock Logistics Business' financial
position or results of operations.
NOTE 11: INCOME TAXES
As discussed in "Note 2: Summary of Significant Accounting Policies," the
Ultramar Diamond Shamrock Logistics Business' results are included in Ultramar
Diamond Shamrock's consolidated federal and state income tax returns. The
amounts presented below were calculated as if the Ultramar Diamond Shamrock
Logistics Business filed separate federal and state tax returns.
F-30
<PAGE> 191
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................................. $11,281 $17,786 $20,036
State............................................... 1,612 2,541 2,863
Deferred:
Federal............................................. 3,368 2,012 3,327
State............................................... 298 178 295
------- ------- -------
Provision for income taxes............................ $16,559 $22,517 $26,521
======= ======= =======
</TABLE>
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The components of the Ultramar Diamond Shamrock Logistics Business'
net deferred tax liability consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Excess of book basis over tax basis of:
Property, plant and equipment.......................... $32,259 $34,983
Investment in affiliate................................ 2,442 2,744
------- -------
Total deferred tax liabilities.................... 34,701 37,727
Deferred tax assets --
Accrued liabilities and payables....................... (1,646) (1,050)
------- -------
Net deferred tax liability........................ $33,055 $36,677
======= =======
</TABLE>
The realization of net deferred tax assets is dependent on the Ultramar
Diamond Shamrock Logistics Business' ability to generate future taxable income.
Although realization is not assured, the Ultramar Diamond Shamrock Logistics
Business believes it is more likely than not that the net deferred tax assets
will be realized.
The differences between the Ultramar Diamond Shamrock Logistics Business'
effective income tax rate and the U.S. federal statutory rate is reconciled as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate................................. 35.0% 35.0% 35.0%
State income taxes, net of federal taxes.................... 3.1 3.1 3.1
Non-deductible goodwill..................................... 0.1 0.2 0.2
---- ---- ----
Effective income tax rate................................. 38.2% 38.3% 38.3%
==== ==== ====
</TABLE>
F-31
<PAGE> 192
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes paid to Ultramar Diamond Shamrock during 1997, 1998 and 1999
were $12,893,000, $20,327,000 and $22,899,000, respectively.
NOTE 12: FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of the Ultramar Diamond Shamrock Logistics
Business' debt as of December 31, 1998 and 1999 was $12,501,000 and $11,137,000
as compared to the carrying value of $11,455,000 and $11,102,000, respectively.
These fair values were estimated using discounted cash flow analysis, based on
the Ultramar Diamond Shamrock Logistics Business' current incremental borrowing
rates for similar types of borrowing arrangements. The Ultramar Diamond Shamrock
Logistics Business has no derivative financial instruments.
Substantially all of the Ultramar Diamond Shamrock Logistics Business
revenues are derived from Ultramar Diamond Shamrock and its various
subsidiaries. Ultramar Diamond Shamrock transports crude oil to three of its
refineries using various Ultramar Diamond Shamrock Logistics Business' crude oil
pipelines and storage facilities and transports refined products to Ultramar
Diamond Shamrock's company-owned retail operations or wholesale customers using
various Ultramar Diamond Shamrock Logistics Business' refined product pipelines
and terminals. Ultramar Diamond Shamrock and its subsidiaries are investment
grade customers; therefore, the Ultramar Diamond Shamrock Logistics Business
does not believe that the trade receivables from Ultramar Diamond Shamrock
represent a significant credit risk. However, the concentration of business with
Ultramar Diamond Shamrock, who is a large refining and retail marketing company,
has the potential to impact the Ultramar Diamond Shamrock Logistics Business'
overall exposure, both positively and negatively, to changes in the refining and
marketing industry.
NOTE 13: RELATED PARTY TRANSACTIONS
The Ultramar Diamond Shamrock Logistics Business has no employees and is
managed and controlled by Ultramar Diamond Shamrock, the parent company.
Employees who work in the pipeline, terminalling and storage operations are
charged directly to the Ultramar Diamond Shamrock Logistics Business' operations
and such charges include salary and employee benefit costs. Ultramar Diamond
Shamrock also allocates approximately 5% of its general and administrative
expenses incurred in the United States to its pipeline, terminalling and storage
operations to cover costs of centralized corporate functions such as legal,
accounting, treasury, engineering, information technology and other corporate
services. Management believes that 5% is a reasonable approximation of the
general and administrative costs related to the pipeline, terminalling and
storage operations. General and administrative costs allocated to the Ultramar
Diamond Shamrock Logistics Business totaled $5,100,000, $5,067,000 and
$5,201,000 for the years ended December 31, 1997, 1998 and 1999, respectively. A
portion of the allocated general and administrative costs is passed on to
partners, which jointly own certain pipelines and terminals with the Ultramar
Diamond Shamrock Logistics Business. The net amount of general and
administrative costs allocated to partners totaled $339,000, $515,000 and
$503,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
NOTE 14: EMPLOYEE BENEFIT PLANS
The employees who work in the Ultramar Diamond Shamrock Logistics Business
are included in the various employee benefit plans of Ultramar Diamond Shamrock.
These plans include qualified, non-contributory defined benefit retirement
plans, defined contribution 401(k) plans, employee and retiree medical, dental
and life insurance plans, long-term incentive plans (i.e. stock options and
bonuses) and other such benefits.
F-32
<PAGE> 193
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Ultramar Diamond Shamrock Logistics Business' share of allocated parent
company employee benefit plan expenses was $733,000, $1,153,000, and $1,197,000
for the years ended December 31, 1997, 1998 and 1999, respectively. These
employee benefit plan expenses are included in operating expenses with the
related payroll costs.
NOTE 15: SUBSEQUENT EVENTS (UNAUDITED)
A. IMPACT OF TARIFF RATE AND TERMINALLING REVENUE CHANGES
Over the past several years, the Ultramar Diamond Shamrock Logistics
Business has expanded the throughput capacity of several of its crude oil and
refined product pipelines. The historical tariff rates were based on initial
pipeline cost and were not revised upon subsequent expansions or increases or
decreases in throughput levels.
As a result, the Ultramar Diamond Shamrock Logistics Business filed revised
tariff rates on many of its crude oil and refined product pipelines to reflect
the total cost of the pipeline, the current throughput capacity, the current
throughput utilization and other market conditions. The revised tariff rates
were implemented January 1, 2000 and the overall impact of the tariff rate
changes result in a decrease to revenues as reflected in the table below.
As discussed in "Note 2: Summary of Significant Accounting Policies,"
effective January 1, 1999, the Ultramar Diamond Shamrock Logistics Business
began charging a terminalling fee for terminalling services at the refined
product terminals. Prior to 1999, terminalling revenues were recognized based on
total cost incurred at the terminal, which costs were charged back to the
related refineries. Since the terminalling fee now includes a margin of profit,
terminalling revenues increased as reflected in the table below.
If the revised tariff rates and the terminalling fee had been implemented
effective January 1, 1997, revenues, operating income and net income would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenues -- historical.................................... $ 84,881 $ 97,883 $109,773
Decrease in tariff revenues............................. (16,197) (17,067) (21,892)
Increase in terminalling revenues....................... 1,778 1,649 --
-------- -------- --------
Net decrease......................................... (14,419) (15,418) (21,892)
-------- -------- --------
Revenues -- as adjusted................................... $ 70,462 $ 82,465 $ 87,881
======== ======== ========
Operating income -- historical............................ $ 40,515 $ 55,706 $ 66,222
Net decrease......................................... (14,419) (15,418) (21,892)
-------- -------- --------
Operating income -- as adjusted........................... $ 26,096 $ 40,288 $ 44,330
======== ======== ========
Net income -- historical.................................. $ 26,823 $ 36,289 $ 42,798
Net decrease, net of income taxes.................... (8,914) (9,514) (13,516)
-------- -------- --------
Net income -- as adjusted................................. $ 17,909 $ 26,775 $ 29,282
======== ======== ========
</TABLE>
B. SUBSEQUENT REORGANIZATION
Effective July 1, 2000, the assets and liabilities of the Ultramar Diamond
Shamrock Logistics Business were contributed to Shamrock Logistics Operations,
L.P. by the various subsidiaries of Ultramar Diamond Shamrock in exchange for
the ownership interest in Shamrock Logistics
F-33
<PAGE> 194
ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operations. The general partner of Shamrock Logistics Operations is Riverwalk
Logistics, L.P. (an entity indirectly owned by Ultramar Diamond Shamrock) and
the limited partner is an affiliate of Ultramar Diamond Shamrock. Effective with
the closing of the initial public offering of common units of Shamrock
Logistics, Shamrock Logistics Operations will be transferred to Shamrock
Logistics. Both of these transfers will be recorded at historical cost.
Also in conjunction with the initial public offering of common units of
Shamrock Logistics, effective June 30, 2000, the subsidiaries which own the
various assets of the Ultramar Diamond Shamrock Logistics Business formalized
the terms under which certain intercompany accounts and working capital loans
will be settled by executing promissory notes with an aggregate principal
balance of $107,676,000. The promissory notes require that the principal be
repaid no later than June 30, 2005 and bear interest at a rate of 8.0% per annum
on the unpaid balance.
Shamrock Logistics intends to repay these promissory notes using the entire
proceeds from the offering and borrowings under a new $120,000,000 revolving
credit facility entered into by Shamrock Logistics Operations in conjunction
with the initial public offering. In addition to the repayment of the
$107,676,000 of promissory notes, Shamrock Logistics intends to make additional
distributions to affiliates of Ultramar Diamond Shamrock totaling $20,517,000
from borrowings under the revolving credit facility.
C. PRO FORMA EARNINGS PER UNIT INFORMATION
The Ultramar Diamond Shamrock Logistics Business is a division within
Ultramar Diamond Shamrock thus it did not have shares outstanding. Therefore,
earnings per unit is calculated on a pro forma basis for 1999 only. Unaudited
pro forma net income per unit is determined by dividing the pro forma net income
per unit that would have been allocated to the Common and Subordinated
Unitholders, which is 98% of pro forma net income, by the number of Common and
Subordinated units expected to be outstanding at the closing of the offering.
For purposes of this calculation, it was assumed that 17,398,644 Common and
Subordinated units have been outstanding since January 1, 1999. Basic and
diluted pro forma net income per unit are equal as there are no dilutive units.
F-34
<PAGE> 195
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Shamrock Logistics GP, LLC:
We have audited the accompanying balance sheet of Shamrock Logistics, L.P.
(a Delaware limited partnership) as of June 30, 2000. This financial statement
is the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Shamrock Logistics, L.P. as of
June 30, 2000 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
August 10, 2000
F-35
<PAGE> 196
SHAMROCK LOGISTICS, L.P.
BALANCE SHEET
JUNE 30, 2000
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Receivables from affiliates............................... $1,000
------
$1,000
======
LIABILITY AND EQUITY
LIABILITY
Payable to affiliate...................................... $ 100
------
EQUITY:
Limited partner's equity.................................. 891
General partner's equity.................................. 9
------
Total equity...................................... 900
------
$1,000
======
</TABLE>
See accompanying note to balance sheet.
F-36
<PAGE> 197
SHAMROCK LOGISTICS, L.P.
NOTE TO BALANCE SHEET
JUNE 30, 2000
NOTE 1: NATURE OF OPERATIONS
Shamrock Logistics, L.P., a Delaware limited partnership, was formed on
December 7, 1999 to ultimately acquire all of the crude oil and refined product
pipeline, terminalling and storage assets of the Ultramar Diamond Shamrock
Logistics Business. The Partnership's general partner is Riverwalk Logistics,
L.P. In conjunction with the offering contemplated by this prospectus, Shamrock
Logistics, L.P. intends to sell limited partnership units to the public
representing a 22.5% ownership interest in the Partnership (excluding the
underwriters' overallotment option).
Effective July 1, 2000, Ultramar Diamond Shamrock transferred the crude oil
and refined product pipeline, terminalling and storage assets and liabilities of
the Ultramar Diamond Shamrock Logistics Business to Shamrock Logistics
Operations, L.P., a Delaware limited partnership that was formed on December 7,
1999. Shamrock Logistics Operations' general partner is Riverwalk Logistics,
L.P. At the closing of the public offering and related transactions, Shamrock
Logistics Operations, L.P., will become a subsidiary of Shamrock Logistics, L.P.
F-37
<PAGE> 198
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Shamrock Logistics GP, LLC:
We have audited the accompanying balance sheet of Riverwalk Logistics, L.P.
(a Delaware limited partnership) as of June 30, 2000. This financial statement
is the responsibility of the Partnership's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Riverwalk Logistics, L.P. as of
June 30, 2000 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
August 10, 2000
F-38
<PAGE> 199
RIVERWALK LOGISTICS, L.P.
BALANCE SHEET
JUNE 30, 2000
<TABLE>
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 980
Investment in Shamrock Logistics, L.P....................... 10
Investment in Shamrock Logistics Operations, L.P............ 10
------
$1,000
======
EQUITY
Limited partner's equity.................................... $ 999
General partner's equity.................................... 1
------
$1,000
======
</TABLE>
See accompanying note to balance sheet.
F-39
<PAGE> 200
RIVERWALK LOGISTICS, L.P.
NOTE TO BALANCE SHEET
JUNE 30, 2000
NOTE 1: NATURE OF OPERATIONS
Riverwalk Logistics, L.P. is a Delaware limited partnership formed on June
5, 2000 to become the general partner of Shamrock Logistics, L.P. and Shamrock
Logistics Operations, L.P. The general partner of Riverwalk Logistics, L.P. is
Shamrock Logistics GP, LLC and the limited partner is UDS Logistics, LLC. Both
Shamrock Logistics GP, LLC and UDS Logistics, LLC are indirect wholly-owned
subsidiaries of Ultramar Diamond Shamrock. Effective July 1, 2000, Ultramar
Diamond Shamrock transferred the crude oil and refined product pipeline,
terminalling and storage assets of the Ultramar Diamond Shamrock Logistics
Business to Shamrock Logistics Operations, L.P. In conjunction with the initial
public offering and the related transactions, Shamrock Logistics Operations,
L.P. will become a subsidiary of Shamrock Logistics, L.P.
F-40
<PAGE> 201
APPENDIX A
FORM OF SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
<PAGE> 202
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
SHAMROCK LOGISTICS, L.P.
<PAGE> 203
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions.................................... A-1
SECTION 1.2 Construction................................... A-16
ARTICLE II
ORGANIZATION
SECTION 2.1 Formation...................................... A-16
SECTION 2.2 Name........................................... A-16
SECTION 2.3 Registered Office; Registered Agent; Principal
Office; Other Offices..................................... A-16
SECTION 2.4 Purpose and Business........................... A-16
SECTION 2.5 Powers......................................... A-17
SECTION 2.6 Power of Attorney.............................. A-17
SECTION 2.7 Term........................................... A-18
SECTION 2.8 Title to Partnership Assets.................... A-18
ARTICLE III
RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability........................ A-19
SECTION 3.2 Management of Business......................... A-19
SECTION 3.3 Outside Activities of the Limited Partners..... A-19
SECTION 3.4 Rights of Limited Partners..................... A-19
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
SECTION 4.1 Certificates................................... A-20
SECTION 4.2 Mutilated, Destroyed, Lost or Stolen
Certificates.............................................. A-21
SECTION 4.3 Record Holders................................. A-21
SECTION 4.4 Transfer Generally............................. A-22
SECTION 4.5 Registration and Transfer of Limited Partner
Interests................................................. A-22
SECTION 4.6 Transfer of the General Partner's General
Partner Interest.......................................... A-23
SECTION 4.7 Transfer of Incentive Distribution Rights...... A-23
SECTION 4.8 Restrictions on Transfers...................... A-24
SECTION 4.9 Citizenship Certificates; Non-citizen
Assignees................................................. A-24
SECTION 4.10 Redemption of Partnership Interests of
Non-citizen Assignees..................................... A-25
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions................... A-26
SECTION 5.2 Contributions by the General Partner and its
Affiliates................................................ A-26
SECTION 5.3 Contributions by Initial Limited Partners and
Reimbursement of the
General Partner.......................... A-27
SECTION 5.4 Interest and Withdrawal........................ A-27
SECTION 5.5 Capital Accounts............................... A-28
SECTION 5.6 Issuances of Additional Partnership
Securities................................................ A-30
</TABLE>
A-i
<PAGE> 204
<TABLE>
<S> <C>
SECTION 5.7 Limitations on Issuance of Additional
Partnership Securities.................................... A-31
SECTION 5.8 Conversion of Subordinated Units............... A-32
SECTION 5.9 Limited Preemptive Right....................... A-33
SECTION 5.10 Splits and Combination........................ A-33
SECTION 5.11 Fully Paid and Non-Assessable Nature of
Limited Partner Interests................................. A-33
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes....... A-34
SECTION 6.2 Allocations for Tax Purposes................... A-39
SECTION 6.3 Requirement and Characterization of
Distributions; Distributions to
Record Holders........................... A-41
SECTION 6.4 Distributions of Available Cash from Operating
Surplus................................................... A-42
SECTION 6.5 Distributions of Available Cash from Capital
Surplus................................................... A-43
SECTION 6.6 Adjustment of Minimum Quarterly Distribution
and Target Distribution
Levels................................... A-43
SECTION 6.7 Special Provisions Relating to the Holders of
Subordinated Units........................................ A-43
SECTION 6.8 Special Provisions Relating to the Holders of
Incentive Distribution
Rights................................... A-44
SECTION 6.9 Entity-Level Taxation.......................... A-44
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management..................................... A-45
SECTION 7.2 Certificate of Limited Partnership............. A-46
SECTION 7.3 Restrictions on General Partner's Authority.... A-47
SECTION 7.4 Reimbursement of the General Partner........... A-47
SECTION 7.5 Outside Activities............................. A-48
SECTION 7.6 Loans from the General Partner; Loans or
Contributions from the
Partnership; Contracts with Affiliates;
Certain Restrictions on the
General Partner.......................... A-49
SECTION 7.7 Indemnification................................ A-50
SECTION 7.8 Liability of Indemnitees....................... A-52
SECTION 7.9 Resolution of Conflicts of Interest............ A-52
SECTION 7.10 Other Matters Concerning the General
Partner................................................... A-53
SECTION 7.11 Purchase or Sale of Partnership Securities.... A-54
SECTION 7.12 Registration Rights of the General Partner and
its Affiliates............................................ A-54
SECTION 7.13 Reliance by Third Parties..................... A-56
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting......................... A-57
SECTION 8.2 Fiscal Year.................................... A-57
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SECTION 8.3 Reports........................................ A-57
ARTICLE IX
TAX MATTERS
SECTION 9.1 Tax Returns and Information.................... A-57
SECTION 9.2 Tax Elections.................................. A-58
SECTION 9.3 Tax Controversies.............................. A-58
SECTION 9.4 Withholding.................................... A-58
ARTICLE X
ADMISSION OF PARTNERS
SECTION 10.1 Admission of Initial Limited Partners......... A-58
SECTION 10.2 Admission of Substituted Limited Partner...... A-59
SECTION 10.3 Admission of Successor General Partner........ A-59
SECTION 10.4 Admission of Additional Limited Partners...... A-59
SECTION 10.5 Amendment of Agreement and Certificate of
Limited Partnership....................................... A-60
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1 Withdrawal of the General Partner............. A-60
SECTION 11.2 Removal of the General Partner................ A-61
SECTION 11.3 Interest of Departing Partner and Successor
General Partner........................................... A-62
SECTION 11.4 Termination of Subordination Period,
Conversion of Subordinated Units
and Extinguishment of Cumulative Common
Unit Arrearages............................................. A-63
SECTION 11.5 Withdrawal of Limited Partners................ A-63
ARTICLE XII
DISSOLUTION AND LIQUIDATION
SECTION 12.1 Dissolution................................... A-63
SECTION 12.2 Continuation of the Business of the
Partnership After Dissolution............................. A-64
SECTION 12.3 Liquidator.................................... A-64
SECTION 12.4 Liquidation................................... A-65
SECTION 12.5 Cancellation of Certificate of Limited
Partnership............................................... A-65
SECTION 12.6 Return of Contributions....................... A-66
SECTION 12.7 Waiver of Partition........................... A-66
SECTION 12.8 Capital Account Restoration................... A-66
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1 Amendment to be Adopted Solely by the General
Partner................................................... A-66
SECTION 13.2 Amendment Procedures.......................... A-67
SECTION 13.3 Amendment Requirements........................ A-67
SECTION 13.4 Special Meetings.............................. A-68
SECTION 13.5 Notice of a Meeting........................... A-68
SECTION 13.6 Record Date................................... A-69
SECTION 13.7 Adjournment................................... A-69
SECTION 13.8 Waiver of Notice; Approval of Meeting;
Approval of Minutes....................................... A-69
SECTION 13.9 Quorum........................................ A-69
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SECTION 13.10 Conduct of a Meeting......................... A-70
SECTION 13.11 Action Without a Meeting..................... A-70
SECTION 13.12 Voting and Other Rights...................... A-71
ARTICLE XIV
MERGER
SECTION 14.1 Authority..................................... A-71
SECTION 14.2 Procedure for Merger or Consolidation......... A-71
SECTION 14.3 Approval by Limited Partners of Merger or
Consolidation............................................. A-72
SECTION 14.4 Certificate of Merger......................... A-73
SECTION 14.5 Effect of Merger.............................. A-73
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 Right to Acquire Limited Partner Interests.... A-73
ARTICLE XVI
GENERAL PROVISIONS
SECTION 16.1 Addresses and Notices......................... A-75
SECTION 16.2 Further Action................................ A-75
SECTION 16.3 Binding Effect................................ A-75
SECTION 16.4 Integration................................... A-76
SECTION 16.5 Creditors..................................... A-76
SECTION 16.6 Waiver........................................ A-76
SECTION 16.7 Counterparts.................................. A-76
SECTION 16.8 Applicable Law................................ A-76
SECTION 16.9 Invalidity of Provisions...................... A-76
SECTION 16.10 Consent of Partners.......................... A-76
</TABLE>
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AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
SHAMROCK LOGISTICS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF SHAMROCK
LOGISTICS, L.P. dated as of , 2001, is entered into by and among
Riverwalk Logistics, L.P., a Delaware limited partnership, as the General
Partner, and Todd Walker, as the Organizational Limited Partner, together with
any other Persons who become Partners in the Partnership or parties hereto as
provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value
of an Adjusted Property that is attributable to positive adjustments made to
such Carrying Value as a result of Book-Up Events. For purposes of determining
the extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments after
such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
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"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by a Partner from and
after the date on which such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings with respect to such period and (ii) any net reduction in
cash reserves for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made with respect to such period, and (b)
plus (i) any net decrease in Working Capital Borrowings with respect to such
period and (ii) any net increase in cash reserves for Operating Expenditures
with respect to such period required by any debt instrument for the repayment of
principal, interest or premium. Adjusted Operating Surplus does not include that
portion of Operating Surplus included in clause (a)(i) of the definition of
Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such
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reasonable method of valuation as it may adopt. The General Partner shall, in
its discretion, use such method as it deems reasonable and appropriate to
allocate the aggregate Agreed Value of Contributed Properties contributed to the
Partnership in a single or integrated transaction among each separate property
on a basis proportional to the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics, L.P., as it may be amended, supplemented or
restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"Associate" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date, and without duplication:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that are necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such Quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such Quarter
if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
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"Book-Down Event" means an event which triggers a negative adjustment to
the Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States of
America or the states of New York or Texas shall not be regarded as a Business
Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution and Conveyance Agreement.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation, pipeline
systems, terminalling and storage facilities and related assets), in each case
made to increase the operating capacity or revenues of the Partnership Group
from the operating capacity or revenues of the Partnership Group existing
immediately prior to such addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
"Certificate" means a certificate (i) substantially in the form of Exhibit
A to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the
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Partnership evidencing ownership of one or more Common Units or a certificate,
in such form as may be adopted by the General Partner in its discretion, issued
by the Partnership evidencing ownership of one or more other Partnership
Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees and of the
General Partner and having the rights and obligations specified with respect to
Common Units in this Agreement. The term "Common Unit" does not refer to a
Subordinated Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section 6.4(a).
"Conflicts Committee" means a committee of the Board of Directors of
Shamrock GP composed entirely of up to three directors (or such greater number
as the Board of Directors of Shamrock GP determines to be appropriate) who meet
the independence standards required to serve on an audit committee of a board of
directors by the National Securities Exchange on which the Common Units are
listed for trading.
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Contribution Agreement" means that certain Contribution and Assumption
Agreement, dated as of the Closing Date, among the General Partner, the
Partnership, the Operating Partnership and certain other parties, together with
the additional conveyance documents and instruments contemplated or referenced
thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the
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Quarters within the Subordination Period ending on or before the last day of
such Quarter over (b) the sum of any distributions theretofore made pursuant to
Section 6.4(a)(ii) and the second sentence of Section 6.5 with respect to an
Initial Common Unit (including any distributions to be made in respect of the
last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
6 Del C. sec.17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Depositary" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.66 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on December 31,
2000, it means the product of $0.66 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"General Partner" means Riverwalk Logistics, L.P. and its successors and
permitted assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
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"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"Incentive Distribution Right" means a non-voting Limited Partner Interest
issued to the General Partner in connection with the transfer of substantially
all of its general partner interest in the Operating Partnership to the
Partnership pursuant to Section 5.2, which Partnership Interest will confer upon
the holder thereof only the rights and obligations specifically provided in this
Agreement with respect to Incentive Distribution Rights (and no other rights
otherwise available to or other obligations of a holder of a Partnership
Interest). Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution Right shall not be entitled to vote such
Incentive Distribution Right on any Partnership matter except as may otherwise
be required by law.
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(iv),
(v) and (vi) and 6.4(b)(ii), (iii) and (iv).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner and UDS Logistics, LLC
(with respect to the Common Units, Subordinated Units and the Incentive
Distribution Rights received by it pursuant to Section 5.2) and the
Underwriters, in each case upon being admitted to the Partnership in accordance
with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (other than the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, and (ii) sales or other dispositions of
assets as part of normal retirements or replacements.
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"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3 or (b) solely for purposes
of Articles V, VI, VII and IX and Sections 12.3 and 12.4, each Assignee;
provided, however, that when the term "Limited Partner" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Limited Partner Interest" means the ownership interest of a Limited
Partner or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.60 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on December 31,
2000, it means the product of $0.60 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net
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Termination Gain or Net Termination Loss) for such taxable year over the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net Income shall be
determined in accordance with Section 5.5(b) and shall not include any items
specially allocated under Section 6.1(d); provided that the determination of the
items that have been specially allocated under Section 6.1(d) shall be made as
if Section 6.1(d)(xii) were not in this Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (including, without limitation, any expenditures described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse
Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b).
"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing
Date, among Ultramar Diamond Shamrock, Inc., the General Partner, the
Partnership and the Operating Partnership.
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"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
repayment of Working Capital Borrowings, debt service payments, and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on
indebtedness other than Working Capital Borrowings shall not constitute
Operating Expenditures; and
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or Capital Improvements, (ii) payment of transaction
expenses relating to Interim Capital Transactions and (iii) distributions
to Partners. Where capital expenditures are made in part for Acquisitions
or for Capital Improvements and in part for other purposes, the General
Partner's good faith allocation between the amounts paid for each shall be
conclusive.
"Operating Partnership" means Shamrock Logistics Operations, L.P., a
Delaware limited partnership and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $10 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Organizational Limited Partner" means Todd Walker in his capacity as the
organizational limited partner of the Partnership pursuant to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all
Partnership Securities that are issued by the Partnership and reflected as
outstanding on the Partnership's books and records as of the date of
determination; provided, however, that if at any time any Person or Group (other
than the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to
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be Outstanding when sending notices of a meeting of Limited Partners to vote on
any matter (unless otherwise required by law), calculating required votes,
determining the presence of a quorum or for other similar purposes under this
Agreement, except that Common Units so owned shall be considered to be
Outstanding for purposes of Section 11.1(b)(iv) (such Common Units shall not,
however, be treated as a separate class of Partnership Securities for purposes
of this Agreement); provided, further, that the foregoing limitation shall not
apply (i) to any Person or Group who acquired 20% or more of any Outstanding
Partnership Securities of any class then Outstanding directly from the General
Partner or its Affiliates or (ii) to any Person or Group who acquired 20% or
more of any Outstanding Partnership Securities of any class then Outstanding
directly or indirectly from a Person or Group described in clause (i) provided
that the General Partner shall have notified such Person or Group in writing
that such limitation shall not apply.
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units of any other class or
series that have the right to (i) receive distributions of Available Cash from
Operating Surplus pro rata with distributions of the Minimum Quarterly
Distribution and Cumulative Common Unit Arrearages on the Common Units and (ii)
receive allocations of Net Termination Gain pro rata with allocations of Net
Termination Gain to the Common Units pursuant to Section 6.1(c)(i)(B), in each
case regardless of whether the amounts or value so distributed or allocated on
each Parity Unit equals the amount or value so distributed or allocated on each
Common Unit. Units whose participation in such (i) distributions of Available
Cash from Operating Surplus and (ii) allocations of Net Termination Gain are
subordinate in order of priority to such distributions and allocations on Common
Units shall not constitute Parity Units even if such Units are convertible under
certain circumstances into Common Units or Parity Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Shamrock Logistics, L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and
any Subsidiary of any such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of any date of determination (a) as to the
General Partner (with respect to its General Partner Interest), an aggregate
1.0%, (b) as to any Unitholder or
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Assignee holding Units, the product obtained by multiplying (i) 99% less the
percentage applicable to paragraph (c) by (ii) the quotient obtained by dividing
(A) the number of Units held by such Unitholder or Assignee by (B) the total
number of all Outstanding Units, and (c) as to the holders of additional
Partnership Securities issued by the Partnership in accordance with Section 5.6,
the percentage established as a part of such issuance. The Percentage Interest
with respect to an Incentive Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the
date for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-43668) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis
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Derivative Items for each prior taxable period, (ii) with respect to the General
Partner (as holder of the General Partner Interest), the excess of (a) the Net
Positive Adjustments of the General Partner as of the end of such period over
(b) the sum of the General Partner's Share of Additional Book Basis Derivative
Items with respect to the General Partner Interest for each prior taxable
period, and (iii) with respect to the holders of Incentive Distribution Rights,
the excess of (a) the Net Positive Adjustments of the holders of Incentive
Distribution Rights as of the end of such period over (b) the sum of the Share
of Additional Book Basis Derivative Items of the holders of the Incentive
Distribution Rights for each prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation
of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Restricted Business" has the meaning assigned to such term in the Omnibus
Agreement.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.90 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on December 31,
2000, it means the product of $0.90 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 92), subject to adjustment in accordance with Sections 6.6 and
6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Shamrock GP" means Shamrock Logistics GP, LLC, a Delaware limited
liability company and the general partner of the General Partner.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments
of the Partners holding the Incentive Distribution Rights as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee, provided that at the time of such approval all of the
material facts known to the General Partner or any of its Affiliates regarding
the proposed transaction in respect of which such approval is given were fully
disclosed to or otherwise known by the Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights),
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(i) otherwise having the rights and obligations specified with respect to
Subordinated Units in this Agreement or (ii) issued in accordance with Section
5.7(d). The term "Subordinated Unit" as used herein does not include a Common
Unit or a Parity Unit. A Subordinated Unit that is convertible into a Common or
Parity Unit shall not constitute a Common Unit or Parity Unit until such
conversion occurs.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after December 31, 2005 in
respect which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Common Units
and Subordinated Units that were Outstanding during such periods on a fully
diluted basis (i.e., taking into account for purposes of such determination
all Outstanding Common Units, all Outstanding Subordinated Units, all
Common Units and Subordinated Units issuable upon exercise of employee
options that have, as of the date of determination, already vested or are
scheduled to vest prior to the end of the Quarter immediately following the
Quarter with respect to which such determination is made, and all Common
Units and Subordinated Units that have as of the date of determination,
been earned by but not yet issued to management of the Partnership in
respect of incentive compensation), plus the related distribution on the
General Partner Interest in the Partnership and on the general partner
interest in the Operating Partnership, during such periods and (ii) there
are no Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of
such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2(b).
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
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"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated
, 2000 among the Underwriters, the Partnership and certain other
parties, providing for the purchase of Common Units by such Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and
shall include Common Units and Subordinated Units, but shall not include (i) a
General Partner Interest or (ii) Incentive Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units (excluding for purposes of such determination
Common Units held by the General Partner and its Affiliates so long as the
General Partner and its Affiliates own 20% or more of the Outstanding Common
Units) voting as a class and at least a majority of the Outstanding Subordinated
Units voting as a class, and thereafter, at least a majority of the Outstanding
Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 5.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the
Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Borrowings" means borrowings used solely for working
capital purposes or to pay distributions to partners made pursuant to a credit
facility or other arrangement requiring all such borrowings thereunder to be
reduced to a relatively small amount each year for an economically meaningful
period of time.
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SECTION 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
ARTICLE II
ORGANIZATION
SECTION 2.1 Formation.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the First Amended and Restated
Agreement of Limited Partnership of Shamrock Logistics, L.P. in its entirety.
This second amendment and restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this Agreement, the
rights, duties (including fiduciary duties), liabilities and obligations of the
Partners and the administration, dissolution and termination of the Partnership
shall be governed by the Delaware Act. All Partnership Interests shall
constitute personal property of the owner thereof for all purposes and a Partner
has no interest in specific Partnership property.
SECTION 2.2 Name.
The name of the Partnership shall be "Shamrock Logistics, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purpose of complying with the laws of
any jurisdiction that so requires. The General Partner in its discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
SECTION 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at Corporation Trust
Company, 1209 Orange Street, Wilmington, DE 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at 6000 North Loop 1604 West, San Antonio,
Texas 78249 or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems necessary or appropriate. The address of the General
Partner shall be 6000 North Loop 1604 West, San Antonio, Texas 78249 or such
other place as the General Partner may from time to time designate by notice to
the Limited Partners.
SECTION 2.4 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a partner of the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a partner of an Operating Partnership pursuant to the Operating
Partnership Agreement for such Operating Partnership or otherwise,
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(b) engage directly in, or enter into or form any corporation, partnership,
joint venture, limited liability company or other arrangement to engage
indirectly in, any business activity that the Operating Partnership is permitted
to engage in by the Operating Partnership Agreement and, in connection
therewith, to exercise all of the rights and powers conferred upon the
Partnership pursuant to the agreements relating to such business activity, (c)
engage directly in, or enter into or form any corporation, partnership, joint
venture, limited liability company or other arrangement to engage indirectly in,
any business activity that is approved by the General Partner and which lawfully
may be conducted by a limited partnership organized pursuant to the Delaware Act
and, in connection therewith, to exercise all of the rights and powers conferred
upon the Partnership pursuant to the agreements relating to such business
activity; provided, however, that the General Partner reasonably determines, as
of the date of the acquisition or commencement of such activity, that such
activity (i) generates "qualifying income" (as such term is defined pursuant to
Section 7704 of the Code) or (ii) enhances the operations of an activity of the
Operating Partnership or a Partnership activity that generates qualifying
income, and (d) do anything necessary or appropriate to the foregoing, including
the making of capital contributions or loans to a Group Member. The General
Partner has no obligation or duty to the Partnership, the Limited Partners or
the Assignees to propose or approve, and in its discretion may decline to
propose or approve, the conduct by the Partnership of any business.
SECTION 2.5 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
SECTION 2.6 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator (and any successor to the Liquidator by merger,
transfer, assignment, election or otherwise) and each of their authorized
officers and attorneys-in-fact, as the case may be, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full power
and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments
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(including agreements and a certificate of merger) relating to a merger or
consolidation of the Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each such Limited Partner or Assignee hereby agrees to be bound by any
representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and each such Limited Partner or
Assignee, to the maximum extent permitted by law, hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the request
therefor, such further designation, powers of attorney and other instruments as
the General Partner or the Liquidator deems necessary to effectuate this
Agreement and the purposes of the Partnership.
SECTION 2.7 Term.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall have a
perpetual existence unless dissolved in accordance with the provisions of
Article XII. The existence of the Partnership as a separate legal entity shall
continue until the cancellation of the Certificate of Limited Partnership as
provided in the Delaware Act.
SECTION 2.8 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such
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Affiliate or nominee for the use and benefit of the Partnership in accordance
with the provisions of this Agreement; provided, however, that the General
Partner shall use reasonable efforts to cause record title to such assets (other
than those assets in respect of which the General Partner determines that the
expense and difficulty of conveyancing makes transfer of record title to the
Partnership impracticable) to be vested in the Partnership as soon as reasonably
practicable; provided, further, that, prior to the withdrawal or removal of the
General Partner or as soon thereafter as practicable, the General Partner shall
use reasonable efforts to effect the transfer of record title to the Partnership
and, prior to any such transfer, will provide for the use of such assets in a
manner satisfactory to the General Partner. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which record title to such Partnership assets is
held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
SECTION 3.1 Limitation of Liability.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
SECTION 3.2 Management of Business.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, member, general partner, agent or trustee of the General Partner or
any of its Affiliates, or any officer, director, employee, member, general
partner, agent or trustee of a Group Member, in its capacity as such, shall not
be deemed to be participation in the control of the business of the Partnership
by a limited partner of the Partnership (within the meaning of Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate the limitations
on the liability of the Limited Partners or Assignees under this Agreement.
SECTION 3.3 Outside Activities of the Limited Partners.
Subject to the provisions of Section 7.5 and the Omnibus Agreement, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any Limited
Partner or Assignee shall be entitled to and may have business interests and
engage in business activities in addition to those relating to the Partnership,
including business interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
SECTION 3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
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(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
SECTION 4.1 Certificates.
Upon the Partnership's issuance of Common Units or Subordinated Units to
any Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the name of the General Partner evidencing its interests in
the Partnership and (b) upon the request of any Person owning Incentive
Distribution Rights or any other Partnership Securities other than Common Units
or Subordinated Units, the Partnership shall issue to such Person one or more
certificates evidencing such Incentive Distribution Rights or other Partnership
Securities other than Common Units or Subordinated Units. Certificates shall be
executed on behalf of the Partnership by the Chairman of the Board, President or
any Executive Vice President or Vice President and the Secretary or any
Assistant Secretary of Shamrock Logistics GP, LLC, a Delaware limited liability
company and the general partner of the General Partner ("Shamrock GP"). No
Common Unit Certificate shall be valid for any purpose until it has been
countersigned by the Transfer Agent; provided, however, that if the General
Partner elects to issue Common Units in global form, the Common Unit
Certificates shall be valid upon receipt of a certificate from the Transfer
Agent certifying that the Common Units have been duly registered in accordance
with the directions of the Partnership and the Underwriters. Subject to the
requirements of Section 6.7(b), the Partners holding Certificates evidencing
Subordinated Units may exchange such Certificates for Certificates evidencing
Common Units on or after the date on which such Subordinated Units are converted
into Common Units pursuant to the terms of Section 5.8.
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SECTION 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of Shamrock GP on behalf of the Partnership shall execute,
and the Transfer Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number and type of Partnership Securities as the
Certificate so surrendered.
(b) The appropriate officers of Shamrock GP on behalf of the Partnership
shall execute and deliver, and the Transfer Agent shall countersign a new
Certificate in place of any Certificate previously issued if the Record Holder
of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the General Partner and the Transfer Agent against any claim that may be
made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) reasonably connected therewith.
SECTION 4.3 Record Holders.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative capacity
for another Person in acquiring and/or holding Partnership Interests, as between
the Partnership on the one hand, and such other Persons on the other, such
representative Person (a) shall be the Partner or Assignee (as the case may be)
of record and beneficially, (b) must execute and deliver a Transfer Application
and (c) shall be bound by this Agreement and shall have the rights and
obligations of a Partner or Assignee (as the case may be) hereunder and as, and
to the extent, provided for herein.
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SECTION 4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the General Partner, by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is or becomes a
Limited Partner or an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent (i) a
disposition by any limited partner of the General Partner of any or all of the
issued and outstanding limited partner interests of the General Partner or (ii)
a disposition by any general partner of the General Partner of any or all of the
issued and outstanding capital stock or other equity interests of such general
partner.
SECTION 4.5 Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests. The
Transfer Agent is hereby appointed registrar and transfer agent for the purpose
of registering Common Units and transfers of such Common Units as herein
provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of Shamrock GP on behalf of the Partnership shall execute and deliver,
and in the case of Common Units, the Transfer Agent shall countersign and
deliver, in the name of the holder or the designated transferee or transferees,
as required pursuant to the holder's instructions, one or more new Certificates
evidencing the same aggregate number and type of Limited Partner Interests as
was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly authorized
in writing). No charge shall be imposed by the Partnership for such transfer;
provided, that as a condition to the issuance of any new Certificate under this
Section 4.5, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed with respect
thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests and
the admission of any new Limited Partner shall not constitute an amendment to
this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested admission
as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and
to have executed this Agreement,
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(iii) represented and warranted that such transferee has the right, power and
authority and, if an individual, the capacity to enter into this Agreement, (iv)
granted the powers of attorney set forth in this Agreement and (v) given the
consents and approvals and made the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
SECTION 4.6 Transfer of the General Partner's General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to December 31, 2010, the
General Partner shall not transfer all or any part of its General Partner
Interest to a Person unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of the Outstanding
Common Units (excluding Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of its General Partner
Interest to (A) an Affiliate of the General Partner or (B) another Person in
connection with the merger or consolidation of the General Partner with or into
another Person or the transfer by the General Partner of all or substantially
all of its assets to another Person.
(b) Subject to Section 4.6(c) below, on or after December 31, 2010, the
General Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and the Operating
Partnership Agreement and to be bound by the provisions of this Agreement and
the Operating Partnership Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the loss of limited liability of
any Limited Partner or of any limited partner of the Operating Partnership or
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not already so treated or taxed) and
(iii) such transferee also agrees to purchase all (or the appropriate portion
thereof, if applicable) of the partnership interest of the General Partner as
the general partner of each other Group Member. In the case of a transfer
pursuant to and in compliance with this Section 4.6, the transferee or successor
(as the case may be) shall, subject to compliance with the terms of Section
10.3, be admitted to the Partnership as a General Partner immediately prior to
the transfer of the Partnership Interest, and the business of the Partnership
shall continue without dissolution.
SECTION 4.7 Transfer of Incentive Distribution Rights.
Prior to December 31, 2010, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to
December 31, 2010, shall require the prior approval of holders at least a
majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates). On or after December 31, 2010, the General
Partner or any other holder of Incentive Distribution Rights may transfer any or
all of its Incentive Distribution Rights without Unitholder approval.
Notwithstanding anything herein to the contrary, no transfer of Incentive
Distribution Rights to another Person shall be permitted unless the transferee
agrees to be bound by the provisions of this Agreement. The General Partner
shall have the authority (but shall not be required) to adopt such reasonable
restrictions on the
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transfer of Incentive Distribution Rights and requirements for registering the
transfer of Incentive Distribution Rights as the General Partner, in its sole
discretion, shall determine are necessary or appropriate.
SECTION 4.8 Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction over
such transfer, (ii) terminate the existence or qualification of the Partnership
or the Operating Partnership under the laws of the jurisdiction of its
formation, or (iii) cause the Partnership or the Operating Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not already so treated
or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or the
Operating Partnership becoming taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes. The restrictions may be imposed by
making such amendments to this Agreement as the General Partner may determine to
be necessary or appropriate to impose such restrictions; provided, however, that
any amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of trading of
any class of Limited Partner Interests on the principal National Securities
Exchange on which such class of Limited Partner Interests is then traded must be
approved, prior to such amendment being effected, by the holders of at least a
majority of the Outstanding Limited Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
SECTION 4.9 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to the
General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or Assignee is a
nominee holding for the account of another Person, the nationality, citizenship
or other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be subject
to redemption in accordance with the provisions of Section 4.10. In addition,
the General Partner may require that the status of any such Partner or Assignee
be changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Limited Partner Interests.
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(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited Partner with respect to any
Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to
Section 4.10, and upon his admission pursuant to Section 10.2, the General
Partner shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's Limited Partner Interests.
SECTION 4.10 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the General Partner that such Limited Partner or Assignee
is an Eligible Citizen or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship Certification to the
General Partner prior to the date fixed for redemption as provided below, redeem
the Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner Interests
of the class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank or
accompanied by an assignment duly executed in blank, the Limited
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Partner or Assignee or his duly authorized representative shall be entitled
to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Limited Partner Interest certifies
to the satisfaction of the General Partner in a Citizenship Certification
delivered in connection with the Transfer Application that he is an Eligible
Citizen. If the transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1 Organizational Contributions.
In connection with the formation of the Partnership under the Delaware Act,
Shamrock GP, the former general partner, made an initial Capital Contribution to
the Partnership in the amount of $10.00, for an interest in the Partnership and
was admitted as the General Partner of the Partnership, and the Organizational
Limited Partner made an initial Capital Contribution to the Partnership in the
amount of $990.00 for an interest in the Partnership and has been admitted as a
Limited Partner of the Partnership. On August 10, 2000, the Certificate of
Limited Partnership of the Partnership was amended to reflect the substitution
of the General Partner as general partner of the Partnership and the removal of
Shamrock GP. As of the Closing Date, the interest of the Organizational Limited
Partner shall be redeemed as provided in the Contribution Agreement; the initial
Capital Contributions of each Partner shall thereupon be refunded; and the
Organizational Limited Partner shall cease to be a Limited Partner of the
Partnership. Ninety-nine percent of any interest or other profit that may have
resulted from the investment or other use of such initial Capital Contributions
shall be allocated and distributed to the Organizational Limited Partner, and
the balance thereof shall be allocated and distributed to the General Partner.
SECTION 5.2 Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution Agreement, (i) the
General Partner shall contribute to the Partnership, as a Capital Contribution,
all but its 1.0101% general partner interest in the Operating Partnership in
exchange for (A) a 1% general partner interest, and (B) the Incentive
Distribution Rights, and (ii) UDS Logistics, LLC, a Delaware limited liability
company ("UDS Logistics") shall contribute its limited partner interests in the
Operating Partnership to the Partnership in exchange for (A) 8,999,332
Subordinated Units and (B) 4,399,322 Common Units.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the Initial
Offering or pursuant to the Over-Allotment Option), the General Partner shall be
required to make additional Capital Contributions equal to 1/99th of any amount
contributed to the Partnership by the Limited Partners in exchange for such
additional Limited Partner Interests. Except as set forth in the immediately
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preceding sentence and Article XII, the General Partner shall not be obligated
to make any additional Capital Contributions to the Partnership.
SECTION 5.3 Contributions by Initial Limited Partners.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall pay to the Partnership cash in an amount equal to the Issue
Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. Each Underwriter's payment of cash to the Partnership pursuant
to the preceding sentence shall be regarded as representing (i) a contribution
by such Underwriter to the Partnership in an amount equal to the Initial Unit
Price per Initial Common Unit multiplied by the number of Common Units purchased
by such Underwriter at the Closing Date and (ii) a payment by the Partnership to
such Underwriter of the underwriting discount and commissions in an amount equal
to (A) the excess of the Initial Unit Price over the Issue Price multiplied by
(B) the number of Common Units purchased by such Underwriter at the Closing
Date. In exchange for such Capital Contributions by the Underwriters, the
Partnership shall issue Common Units to each Underwriter on whose behalf such
Capital Contribution is made in an amount equal to the quotient obtained by
dividing (i) the cash paid to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Notwithstanding anything else herein contained, all of the proceeds
received by the Partnership from the issuance of Common Units pursuant to
Section 5.3(a) will be contributed to the Operating Partnership.
(c) Upon the exercise of the Over-Allotment Option, each Underwriter shall
pay to the Partnership cash in an amount equal to the Issue Price per Initial
Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option Closing
Date. Each Underwriter's payment of cash to the Partnership pursuant to the
preceding sentence shall be regarded as representing (i) a contribution by such
Underwriter to the Partnership in an amount equal to the Initial Unit Price per
Initial Common Unit multiplied by the number of Common Units purchased by such
Underwriter at the Option Closing Date and (ii) a payment by the Partnership to
such Underwriter of the underwriting discount and commissions in an amount equal
to (A) the excess of the Initial Unit Price over the Issue Price multiplied by
(B) the number of Common Units purchased by such Underwriter at the Option
Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained by
dividing (i) the cash paid to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit. Upon receipt by the
Partnership of the Capital Contributions from the Underwriters as provided in
this Section 5.3(c), the Partnership shall use such cash to pay down debt of the
Partnership.
(d) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to subparagraph
(a) hereof in aggregate number equal to 4,000,000, (ii) the "Additional Units"
as such term is used in the Underwriting Agreement in an aggregate number up to
600,000 issuable upon exercise of the Over-Allotment Option pursuant to
subparagraph (c) hereof, (iii) the 4,399,322 Common Units issuable to UDS
Logistics or its Affiliates pursuant to Section 5.2 hereof, (iv) the 8,999,322
Subordinated Units issuable to UDS Logistics or its Affiliates pursuant to
Section 5.2 hereof, and (v) the Incentive Distribution Rights.
SECTION 5.4 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if
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any, that distributions made pursuant to this Agreement or upon termination of
the Partnership may be considered as such by law and then only to the extent
provided for in this Agreement. Except to the extent expressly provided in this
Agreement, no Partner or Assignee shall have priority over any other Partner or
Assignee either as to the return of Capital Contributions or as to profits,
losses or distributions. Any such return shall be a compromise to which all
Partners and Assignees agree within the meaning of 17-502(b) of the Delaware
Act.
SECTION 5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance with the rules
of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made to the Partnership
with respect to such Partnership Interest pursuant to this Agreement and (ii)
all items of Partnership income and gain (including, without limitation, income
and gain exempt from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such Partnership Interest
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership or any other
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
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(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the
Partnership Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section
5.8 by a holder thereof (other than a transfer to an Affiliate unless the
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the
Capital Account maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be allocated to the
Subordinated Units or converted Subordinated Units to be transferred in an
amount equal to the product of (x) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (y) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units or converted Subordinated Units.
Following any such allocation, the transferor's Capital Account, if any,
maintained with respect to the retained Subordinated Units or converted
Subordinated Units, if any, will have a balance equal to the amount
allocated under clause (B) hereinabove, and the transferee's Capital
Account established with respect to the transferred Subordinated Units or
converted Subordinated Units will have a balance equal to the amount
allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests
for cash or Contributed Property or the conversion of the General Partner's
Combined Interest to Common Units pursuant to Section 11.3(b), the Capital
Account of all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to such
Partnership property, as if such Unrealized Gain or Unrealized Loss had
been recognized on an actual sale of each such property immediately prior
to such issuance and had been allocated to the
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Partners at such time pursuant to Section 6.1(c) in the same manner as any
item of gain or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior
to the issuance of additional Partnership Interests shall be determined by
the General Partner using such reasonable method of valuation as it may
adopt; provided, however, that the General Partner, in arriving at such
valuation, must take fully into account the fair market value of the
Partnership Interests of all Partners at such time. The General Partner
shall allocate such aggregate value among the assets of the Partnership (in
such manner as it determines in its discretion to be reasonable) to arrive
at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as if such Unrealized Gain or Unrealized Loss
had been recognized in a sale of such property immediately prior to such
distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 6.1(c) in the
same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of
an actual distribution which is not made pursuant to Section 12.4 or in the
case of a deemed distribution, be determined and allocated in the same
manner as that provided in Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as it
may adopt.
SECTION 5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any time
and from time to time to such Persons for such consideration and on such terms
and conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be issued, evidenced by
certificates and assigned or transferred; and (vii) the right, if any, of each
such Partnership Security to vote on Partnership matters, including matters
relating to the relative rights, preferences and privileges of such Partnership
Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this
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Section 5.6, (ii) the conversion of the General Partner Interest and Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of Partnership Securities. The General Partner is further authorized and
directed to specify the relative rights, powers and duties of the holders of the
Units or other Partnership Securities being so issued. The General Partner shall
do all things necessary to comply with the Delaware Act and is authorized and
directed to do all things it deems to be necessary or advisable in connection
with any future issuance of Partnership Securities or in connection with the
conversion of the General Partner Interest and Incentive Distribution Rights
into Units pursuant to the terms of this Agreement, including compliance with
any statute, rule, regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which the Units or
other Partnership Securities are listed for trading.
SECTION 5.7 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) an aggregate of more than 4,199,661 additional Parity Units without the
prior approval of the holders of a Unit Majority. In applying this limitation,
there shall be excluded Common Units and other Parity Units (and options,
rights, warrants or appreciation rights relating thereto) issued (A) in
connection with the exercise of the Over-Allotment Option, (B) in accordance
with Sections 5.7(b) and 5.7(c), (C) upon conversion of the General Partner
Interest and Incentive Distribution Rights pursuant to Section 11.3(b), (D)
pursuant to the employee benefit plans of the General Partner, the Partnership
or any other Group Member and (E) in the event of a combination or subdivision
of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval of
the Unitholders, if such issuance occurs (i) in connection with an Acquisition
or a Capital Improvement or (ii) within 365 days of, and the net proceeds from
such issuance are used to repay debt incurred in connection with, an Acquisition
or a Capital Improvement, in each case where such Acquisition or Capital
Improvement involves assets that, if acquired by the Partnership as of the date
that is one year prior to the first day of the Quarter in which such Acquisition
is to be consummated or such Capital Improvement is to be completed, would have
resulted, on a pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect to
the most recently completed four-Quarter period (on a pro forma basis as
described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to such most recently completed four-Quarter
period.
If the issuance of Parity Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing Date,
then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter, if
any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such Quarter, and (ii) for each other
Quarter, on a pro forma basis consistent with the procedures, as applicable, set
forth in Appendix D to the Registration Statement. Furthermore, the amount in
clause (A) shall be determined on a pro forma basis
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assuming that (1) all of the Parity Units to be issued in connection with or
within 365 days of such Acquisition or Capital Improvement had been issued and
outstanding, (2) all indebtedness for borrowed money to be incurred or assumed
in connection with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such issuance of Parity
Units) had been incurred or assumed, in each case as of the commencement of such
four-Quarter period, (3) the personnel expenses that would have been incurred by
the Partnership in the operation of the acquired assets are the personnel
expenses for employees to be retained by the Partnership in the operation of the
acquired assets, and (4) the non-personnel costs and expenses are computed on
the same basis as those incurred by the Partnership in the operation of the
Partnership's business at similarly situated Partnership facilities.
(c) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership shall not issue any additional
Partnership Securities (or options, rights, warrants or appreciation rights
related thereto) (i) that are entitled in any Quarter to receive in respect of
the Subordination Period any distributions of Available Cash from Operating
Surplus before the Common Units and any Parity Units have received (or amounts
have been set aside for payment of) the Minimum Quarterly Distribution and any
Cumulative Common Unit Arrearage for such Quarter or (ii) that are entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and any Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B).
(d) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership may issue additional Partnership
Securities (or options, rights, warrants or appreciation rights related thereto)
(i) that are not entitled in any Quarter during the Subordination Period to
receive any distributions of Available Cash from Operating Surplus until after
the Common Units and any Parity Units have received (or amounts have been set
aside for payment of) the Minimum Quarterly Distribution and any Cumulative
Common Unit Arrearage for such Quarter and (ii) that are not entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and any Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B), even if (A) the amount of Available Cash
from Operating Surplus to which each such Partnership Security is entitled to
receive after the Minimum Quarterly Distribution and any Cumulative Common Unit
Arrearage have been paid or set aside for payment on the Common Units exceeds
the Minimum Quarterly Distribution, (B) the amount of Net Termination Gain to be
allocated to such Partnership Security after Net Termination Gain has been
allocated to any Common Units and Parity Units pursuant to Section 6.1(c)(i)(B)
exceeds the amount of such Net Termination Gain to be allocated to each Common
Unit or Parity Unit or (C) the holders of such additional Partnership Securities
have the right to require the Partnership or its Affiliates to repurchase such
Partnership Securities at a discount, par or a premium.
(e) No fractional Units shall be issued by the Partnership.
SECTION 5.8 Conversion of Subordinated Units.
(a) All Subordinated Units shall convert into Common Units on a one-for-one
basis on the first day following the Record Date for distributions in respect of
the final Quarter of the Subordination Period.
(b) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.
(c) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
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SECTION 5.9 Limited Preemptive Right.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
SECTION 5.10 Splits and Combination.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued pursuant to Section 5.7 without a Unitholder vote) are
proportionately adjusted retroactive to the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of a date not less than 10 days prior to the date of such notice. The
General Partner also may cause a firm of independent public accountants selected
by it to calculate the number of Partnership Securities to be held by each
Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the accuracy of such
calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
SECTION 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in accordance with
the requirements of, this Article V shall be fully paid and non-assessable
Limited Partner Interests in the Partnership, except as such non-assessability
may be affected by Section 17-607 of the Delaware Act.
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ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 1% to the General Partner and 99%
the Unitholders in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, Pro
Rata, until the aggregate Net Losses allocated pursuant to this Section
6.1(b)(i) for the current taxable year and all previous taxable years is
equal to the aggregate Net Income allocated to such Partners pursuant to
Section 6.1(a)(iii) for all previous taxable years, provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders, Pro
Rata; provided, that Net Losses shall not be allocated pursuant to this
Section 6.1(b)(ii) to the extent that such allocation would cause any
Unitholder to have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit balance in its
Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been
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adjusted by all other allocations provided under this Section 6.1 and after all
distributions of Available Cash provided under Sections 6.4 and 6.5 have been
made; provided, however, that solely for purposes of this Section 6.1(c),
Capital Accounts shall not be adjusted for distributions made pursuant to
Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD") plus (3) any
then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding Subordinated Units, Pro Rata, and 1% to
the General Partner until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, determined for the taxable year (or portion thereof) to which
this allocation of gain relates, plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with respect
to such Subordinated Unit for such Quarter;
(D) Fourth, 90.9184% to all Unitholders, Pro Rata, 8.0816% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) its Unrecovered Capital,
plus (2) the Unpaid MQD, plus (3) any then existing Cumulative Common
Unit Arrearage, plus (4) the excess of (aa) the First Target
Distribution less the Minimum Quarterly Distribution for each Quarter of
the Partnership's existence over (bb) the cumulative per Unit amount of
any distributions of Operating Surplus that was distributed pursuant to
Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus (2) plus (3)
plus (4) is hereinafter defined as the "First Liquidation Target
Amount");
(E) Fifth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections 6.4(a)(v)
and 6.4(b)(iii) (the sum of (1) plus (2) is hereinafter defined as the
"Second Liquidation Target Amount"); and
(F) Finally, any remaining amount 50.5102% to all Unitholders, Pro
Rata, 48.4898% to the holders of the Incentive Distribution Rights, Pro
Rata, and 1% to the General Partner.
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(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units,
Pro Rata, and 1% to the General Partner until the Capital Account in
respect of each Subordinated Unit then Outstanding has been reduced to
zero;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to
such taxable period. This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury Regulation
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to
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such Unitholder exceeds the distribution (on a per Unit basis) to the
Unitholders receiving the smallest distribution and (bb) the number of
Units owned by the Unitholder receiving the greater distribution; and
(2) the General Partner shall be allocated gross income in an aggregate
amount equal to 1/99th of the sum of the amounts allocated in clause (1)
above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 6.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Capital Account as adjusted
after all other allocations provided for in this Section 6.1 have been
tentatively made as if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner bears
the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
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(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Section 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying Final
Subordinated Units and the Capital Accounts underlying Common Units held by
Persons other than the General Partner and its Affiliates immediately prior
to the conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only be
available to the General Partner if the method for allocating the Capital
Account maintained with respect to the Subordinated Units between the
transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii)
does not otherwise provide such economic uniformity to the Final
Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations to
the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the
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Required Allocations, and (2) divide all allocations pursuant to Section
6.1(d)(xi)(A) among the Partners in a manner that is likely to minimize
such economic distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner shall
allocate additional items of gross income and gain away from the holders
of Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, to the extent that the Additional Book Basis
Derivative Items allocated to the Unitholders or the General Partner
exceed their Share of Additional Book Basis Derivative Items. For this
purpose, the Unitholders and the General Partner shall be treated as
being allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the Unitholders or
the General Partner under the Partnership Agreement (e.g., Additional
Book Basis Derivative Items taken into account in computing cost of
goods sold would reduce the amount of book income otherwise available
for allocation among the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A) shall be made after all of the other Agreed
Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the
reallocation of items that have been allocated pursuant to such other
Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events had occurred,
and (2) any negative adjustment in excess of the Aggregate Remaining Net
Positive Adjustments shall be allocated pursuant to Section 6.1(c)
hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
SECTION 6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
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(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury
Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise
to preserve or achieve uniformity of the Limited Partner Interests (or any class
or classes thereof). The General Partner may adopt such conventions, make such
allocations and make such amendments to this Agreement as provided in this
Section 6.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Limited Partner Interests issued and Outstanding or the Partnership,
and if such allocations are consistent with the principles of Section 704 of the
Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Treasury Regulation Section 1.167(c)-l(a)(6), or any successor
regulations thereto. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt depreciation
and amortization conventions under which all purchasers acquiring Limited
Partner Interests in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any Limited Partner Interests that would
not have a material adverse effect on the Limited Partners or the Record Holders
of any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be
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adjusted as necessary or appropriate to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest, shall for federal income tax purposes, be
determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of each month; provided, however, that (i) such items for
the period beginning on the Closing Date and ending on the last day of the month
in which the Option Closing Date or the expiration of the Over-allotment Option
occurs shall be allocated to the Partners as of the opening of the New York
Stock Exchange on the first Business Day of the next succeeding month; and
provided, further, that gain or loss on a sale or other disposition of any
assets of the Partnership other than in the ordinary course of business shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of the month in which such gain or loss is recognized for
federal income tax purposes. The General Partner may revise, alter or otherwise
modify such methods of allocation as it determines necessary, to the extent
permitted or required by Section 706 of the Code and the regulations or rulings
promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
SECTION 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of (i) the period beginning on the
Closing Date and ending on March 31, 2001 and (ii) each Quarter commencing with
the Quarter beginning on April 1, 2001, an amount equal to 100% of Available
Cash with respect to such Quarter shall, subject to Section 17-607 of the
Delaware Act, be distributed in accordance with this Article VI by the
Partnership to the Partners as of the Record Date selected by the General
Partner in its reasonable discretion. All amounts of Available Cash distributed
by the Partnership on any date from any source shall be deemed to be Operating
Surplus until the sum of all amounts of Available Cash theretofore distributed
by the Partnership to the Partners pursuant to Section 6.4 equals the amount of
the Partnership's Operating Surplus as calculated with respect to the Quarter in
respect of which such distribution of Available Cash is to be made through the
close of the Quarter. Any remaining amounts of Available Cash distributed by the
Partnership on such date shall, except as otherwise provided in Section 6.5, be
deemed to be "Capital Surplus." All distributions required to be made under this
Agreement shall be made subject to Section 17-607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of
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such payment, regardless of any claim of any Person who may have an interest in
such payment by reason of an assignment or otherwise.
SECTION 6.4 Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be Operating Surplus
pursuant to the provisions of Section 6.3 or 6.5 shall, subject to Section
17-607 of the Delaware Act, be distributed as follows, except as otherwise
required by Section 5.6(b) in respect of additional Partnership Securities
issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 90.9184% to all Unitholders, Pro Rata, 8.0816% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter; and
(vi) Thereafter, 50.5102% to all Unitholders, Pro Rata, 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution and the Second Target Distribution have been reduced to zero
pursuant to the second sentence of Section 6.6(a), the distribution of Available
Cash that is deemed to be Operating Surplus with respect to any Quarter will be
made solely in accordance with Section 6.4(a)(vi).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of the
Delaware Act, shall be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 90.9184% to all Unitholders, Pro Rata, and 8.0816% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 75.7653% to all Unitholders, Pro Rata, and 23.2347% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been
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distributed in respect of each Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target Distribution
for such Quarter; and
(iv) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 48.4898%
to the holders of the Incentive Distribution Rights, Pro Rata, and 1% to
the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution and the Second Target Distribution have been reduced to zero
pursuant to the second sentence of Section 6.6(a), the distribution of Available
Cash that is deemed to be Operating Surplus with respect to any Quarter will be
made solely in accordance with Section 6.4(b)(iv).
SECTION 6.5 Distributions of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 99%
to all Unitholders, Pro Rata, and 1% to the General Partner until a hypothetical
holder of a Common Unit acquired on the Closing Date has received with respect
to such Common Unit, during the period since the Closing Date through such date,
distributions of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash that is deemed
to be Capital Surplus shall then be distributed 99% to all Unitholders holding
Common Units, Pro Rata, and 1% to the General Partner until there has been
distributed in respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
SECTION 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Common Unit Arrearages and Cumulative Common Unit
Arrearages shall be proportionately adjusted in the event of any distribution,
combination or subdivision (whether effected by a distribution payable in Units
or otherwise) of Units or other Partnership Securities in accordance with
Section 5.10. In the event of a distribution of Available Cash that is deemed to
be from Capital Surplus, the then applicable Minimum Quarterly Distribution,
First Target Distribution and Second Target Distribution shall be adjusted
proportionately downward to equal the product obtained by multiplying the
otherwise applicable Minimum Quarterly Distribution, First Target Distribution
and Second Target Distribution, as the case may be, by a fraction of which the
numerator is the Unrecovered Capital of the Common Units immediately after
giving effect to such distribution and of which the denominator is the
Unrecovered Capital of the Common Units immediately prior to giving effect to
such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution and
Second Target Distribution shall also be subject to adjustment pursuant to
Section 6.9.
SECTION 6.7 Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain, loss
and deduction and distributions made with respect to Common Units, the holder of
a Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect
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to Common Units; provided, however, that such converted Subordinated Units shall
remain subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit that has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the holder
until such time as the General Partner determines, based on advice of counsel,
that a converted Subordinated Unit should have, as a substantive matter, like
intrinsic economic and federal income tax characteristics, in all material
respects, to the intrinsic economic and federal income tax characteristics of an
Initial Common Unit. In connection with the condition imposed by this Section
6.7(b), the General Partner may take whatever reasonable steps are required to
provide economic uniformity to the converted Subordinated Units in preparation
for a transfer of such converted Subordinated Units, including the application
of Sections 5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may
be taken that would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
SECTION 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(iv), (v) and (vi), 6.4(b)(ii), (iii) and (iv),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
SECTION 6.9 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal, state or local income tax purposes, the
then applicable Minimum Quarterly Distribution, First Target Distribution and
Second Target Distribution shall be adjusted to equal the product obtained by
multiplying (a) the amount thereof by (b) one minus the sum of (i) the highest
marginal federal corporate (or other entity, as applicable) income tax rate of
the Partnership or the Operating Partnership for the taxable year of the
Partnership or the Operating Partnership in which such Quarter occurs (expressed
as a percentage) plus (ii) the effective overall state and local income tax rate
(expressed as a percentage) applicable to the Partnership or the Operating
Partnership for the calendar year next preceding the calendar year in which such
Quarter occurs (after taking into account the benefit of any deduction allowable
for federal income tax purposes with respect to the payment of state and local
income taxes), but only to the extent of the increase in such rates resulting
from such legislation or interpretation. Such effective overall state and local
income tax rate shall be determined for the taxable year next preceding the
first taxable year during which the Partnership or the Operating Partnership is
taxable for federal income tax purposes as an association taxable as a
corporation or is otherwise subject to entity-level taxation by determining such
rate as if the Partnership or the Operating Partnership had been subject to such
state and local taxes during such preceding taxable year.
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ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group;
subject to Section 7.6(a), the lending of funds to other Persons (including
the Operating Partnership); the repayment of obligations of the Partnership
Group and the making of capital contributions to any member of the
Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the
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contributions of property to, the Operating Partnership from time to time)
subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership as a partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and the Assignees and each other Person who may
acquire an interest in Partnership Securities hereby (i) approves, ratifies and
confirms the execution, delivery and performance by the parties thereto of the
Operating Partnership Agreement, the Underwriting Agreement, the Omnibus
Agreement, the Contribution Agreement, and the other agreements described in or
filed as exhibits to the Registration Statement that are related to the
transactions contemplated by the Registration Statement; (ii) agrees that the
General Partner (on its own or through any officer of the Partnership) is
authorized to execute, deliver and perform the agreements referred to in clause
(i) of this sentence and the other agreements, acts, transactions and matters
described in or contemplated by the Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Partnership
Securities; and (iii) agrees that the execution, delivery or performance by the
General Partner, any Group Member or any Affiliate of any of them, of this
Agreement or any agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate of the General
Partner of the rights accorded pursuant to Article XV), shall not constitute a
breach by the General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
SECTION 7.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership and
the Certificate of Amendment to the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity
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in which the limited partners have limited liability) under the laws of the
State of Delaware or of any other state in which the Partnership may elect to do
business or own property. Subject to the terms of Section 3.4(a), the General
Partner shall not be required, before or after filing, to deliver or mail a copy
of the Certificate of Limited Partnership, any qualification document or any
amendment thereto to any Limited Partner.
SECTION 7.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it impossible
to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approve on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership, taken as a whole,
without the approval of holders of a Unit Majority; provided however that this
provision shall not preclude or limit the General Partner's ability to mortgage,
pledge, hypothecate or grant a security interest in all or substantially all of
the assets of the Partnership or the Operating Partnership and shall not apply
to any forced sale of any or all of the assets of the Partnership or the
Operating Partnership pursuant to the foreclosure of, or other realization upon,
any such encumbrance. Without the approval of holders of a Unit Majority, the
General Partner shall not, on behalf of the Partnership, (i) consent to any
amendment to the Operating Partnership Agreement or, except as expressly
permitted by Section 7.9(d), take any action permitted to be taken by a partner
of the Operating Partnership, in either case, that would have a material adverse
effect on the Partnership as a partner of the Operating Partnership or (ii)
except as permitted under Sections 4.6, 11.1 and 11.2, elect or cause the
Partnership to elect a successor general partner of the Partnership or the
Operating Partnership.
SECTION 7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
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(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote in
respect thereof), may propose and adopt on behalf of the Partnership employee
benefit plans, employee programs and employee practices (including plans,
programs and practices involving the issuance of Partnership Securities or
options to purchase Partnership Securities), or cause the Partnership to issue
Partnership Securities in connection with, or pursuant to, any employee benefit
plan, employee program or employee practice maintained or sponsored by the
General Partner or any of its Affiliates, in each case for the benefit of
employees of the General Partner, any Group Member or any Affiliate, or any of
them, in respect of services performed, directly or indirectly, for the benefit
of the Partnership Group. The Partnership agrees to issue and sell to the
General Partner or any of its Affiliates any Partnership Securities that the
General Partner or such Affiliate is obligated to provide to any employees
pursuant to any such employee benefit plans, employee programs or employee
practices. Expenses incurred by the General Partner in connection with any such
plans, programs and practices (including the net cost to the General Partner or
such Affiliate of Partnership Securities purchased by the General Partner or
such Affiliate from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted by the General
Partner as permitted by this Section 7.4(c) shall constitute obligations of the
General Partner hereunder and shall be assumed by any successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's General Partner Interest pursuant to Section 4.6.
SECTION 7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership (i) agrees that its sole business will be to
act as the general partner of the Partnership, the Operating Partnership, and
any other partnership or limited liability company of which the Partnership or
the Operating Partnership is, directly or indirectly, a partner and to undertake
activities that are ancillary or related thereto (including being a limited
partner in the Partnership), (ii) shall not engage in any business or activity
or incur any debts or liabilities except in connection with or incidental to (A)
its performance as general partner of one or more Group Members or as described
in or contemplated by the Registration Statement or (B) the acquiring, owning or
disposing of debt or equity securities in any Group Member and (iii) except to
the extent permitted in the Omnibus Agreement, shall not, and shall cause its
Affiliates not to, engage in any Restricted Business.
(b) UDS has entered into the Omnibus Agreement with the Partnership and the
Operating Partnership, which agreement sets forth certain restrictions on the
ability of UDS and its Affiliates to engage in Restricted Businesses.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the right
to engage in businesses of every type and description and other activities for
profit and to engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b), Section 7.5(c)
and the Omnibus Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the
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engaging in competitive activities by any Indemnitees (other than the General
Partner) in accordance with the provisions of this Section 7.5 is hereby
approved by the Partnership and all Partners, (ii) it shall be deemed not to be
a breach of the General Partner's fiduciary duty or any other obligation of any
type whatsoever of the General Partner for the Indemnitees (other than the
General Partner) to engage in such business interests and activities in
preference to or to the exclusion of the Partnership and (iii) except as set
forth in the Omnibus Agreement, the General Partner and the Indemnitees shall
have no obligation to present business opportunities to the Partnership.
(e) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing Date
and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of the General Partner or Limited Partner, as applicable,
relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and Section 7.5(e)
with respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited Partners
to any such restriction, such provisions shall be inapplicable and have no
effect in determining whether the General Partner has complied with its
fiduciary duties in connection with determinations made by it under this Section
7.5.
SECTION 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner.
(a) The General Partner or its Affiliates may lend to any Group Member, and
any Group Member may borrow from the General Partner or any of its Affiliates,
funds needed or desired by the Group Member for such periods of time and in such
amounts as the General Partner may determine; provided, however, that in any
such case the lending party may not charge the borrowing party interest at a
rate greater than the rate that would be charged the borrowing party or impose
terms less favorable to the borrowing party than would be charged or imposed on
the borrowing party by unrelated lenders on comparable loans made on an
arm's-length basis (without reference to the lending party's financial abilities
or guarantees). The borrowing party shall reimburse the lending party for any
costs (other than any additional interest costs) incurred by the lending party
in connection with the borrowing of such funds. For purposes of this Section
7.6(a) and Section 7.6(b), the term "Group Member" shall include any Affiliate
of a Group Member that is controlled by the Group Member. No Group Member may
lend funds to the General Partner or any of its Affiliates (other than another
Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
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provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third parties
or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply to
the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 7.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 5.2 and 5.3, the Contribution
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval, (iii)
any transaction, the terms of which are no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties, or (iv) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is equitable
to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Conflicts Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of the
assets, the liquidated and contingent liabilities assumed, the tax basis in the
assets, the extent to which tax-only allocations to the transferor will protect
the existing partners of the Partnership against a low tax basis, and such other
factors as the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partner
and its Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
SECTION 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee; provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee reasonably believed to be in, or
(in the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful; provided, further,
no indemnification pursuant to this Section 7.7 shall be available to the
General Partner with respect to its
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obligations incurred pursuant to the Underwriting Agreement or the Contribution
Agreement (other than obligations incurred by the General Partner on behalf of
the Partnership or the Operating Partnership). The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 7.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall not be
personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests, as
a matter of law or otherwise, both as to actions in the Indemnitee's capacity as
an Indemnitee and as to actions in any other capacity (including any capacity
under the Underwriting Agreement), and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of whether
the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be
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indemnified by the Partnership, nor the obligations of the Partnership to
indemnify any such Indemnitee under and in accordance with the provisions of
this Section 7.7 as in effect immediately prior to such amendment, modification
or repeal with respect to claims arising from or relating to matters occurring,
in whole or in part, prior to such amendment, modification or repeal, regardless
of when such claims may arise or be asserted.
SECTION 7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement,
no Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired interests
in the Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the Partnership
or to the Partners, the General Partner and any other Indemnitee acting in
connection with the Partnership's business or affairs shall not be liable to the
Partnership or to any Partner for its good faith reliance on the provisions of
this Agreement. The provisions of this Agreement, to the extent that they
restrict or otherwise modify the duties and liabilities of an Indemnitee
otherwise existing at law or in equity, are agreed by the Partners to replace
such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors, officers
and employees under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
SECTION 7.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other, any resolution or course of action by the General Partner or its
Affiliates in respect of such conflict of interest shall be permitted and deemed
approved by all Partners, and shall not constitute a breach of this Agreement,
of the Operating Partnership Agreement, of any agreement contemplated herein or
therein, or of any duty stated or implied by law or equity, if the resolution or
course of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with its resolution of such conflict of interest to seek
Special Approval of such resolution. Any conflict of interest and any resolution
of such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by
Special Approval, (ii) on terms no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
fair to the Partnership, taking into account the totality of the relationships
between the parties involved (including other transactions that may be
particularly favorable or advantageous to the Partnership). The General Partner
may also adopt a resolution or course of action that has not received Special
Approval. The General Partner (including the Conflicts Committee in connection
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with Special Approval) shall be authorized in connection with its determination
of what is "fair and reasonable" to the Partnership and in connection with its
resolution of any conflict of interest to consider (A) the relative interests of
any party to such conflict, agreement, transaction or situation and the benefits
and burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person; (C)
any applicable generally accepted accounting practices or principles; and (D)
such additional factors as the General Partner (including the Conflicts
Committee) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this Agreement,
however, is intended to nor shall it be construed to require the General Partner
(including the Conflicts Committee) to consider the interests of any Person
other than the Partnership. In the absence of bad faith by the General Partner,
the resolution, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any standard
of care or duty imposed herein or therein or, to the extent permitted by law,
under the Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise provided herein, the
General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, the
Operating Partnership, any Limited Partner or any Assignee, (ii) it may make
such decision in its sole discretion (regardless of whether there is a reference
to "sole discretion" or "discretion") unless another express standard is
provided for, or (iii) in "good faith" or under another express standard, the
General Partner or such Affiliate shall act under such express standard and
shall not be subject to any other or different standards imposed by this
Agreement, the Operating Partnership Agreement, any other agreement contemplated
hereby or under the Delaware Act or any other law, rule or regulation. In
addition, any actions taken by the General Partner or such Affiliate consistent
with the standards of "reasonable discretion" set forth in the definitions of
Available Cash or Operating Surplus shall not constitute a breach of any duty of
the General Partner to the Partnership or the Limited Partners. The General
Partner shall have no duty, express or implied, to sell or otherwise dispose of
any asset of the Partnership Group other than in the ordinary course of
business. No borrowing by any Group Member or the approval thereof by the
General Partner shall be deemed to constitute a breach of any duty of the
General Partner to the Partnership or the Limited Partners by reason of the fact
that the purpose or effect of such borrowing is directly or indirectly to (A)
enable distributions to the General Partner or its Affiliates (including in
their capacities as Limited Partners) to exceed 1% of the total amount
distributed to all partners or (B) hasten the expiration of the Subordination
Period or the conversion of any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner of a Group Member, to approve of actions by the general
partner of such Group Member similar to those actions permitted to be taken by
the General Partner pursuant to this Section 7.9.
SECTION 7.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent,
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order, bond, debenture or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including an Opinion of Counsel) of such Persons as to matters
that the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other agreement contemplated by this
Agreement and to make any decision pursuant to the authority prescribed in this
Agreement, so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, the best interests of the Partnership.
SECTION 7.11 Purchase or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
SECTION 7.12 Registration Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate of
the General Partner at the date hereof notwithstanding that it may later cease
to be an Affiliate of the General Partner) holds Partnership Securities that it
desires to sell and (ii) Rule 144 of the Securities Act (or any successor rule
or regulation to Rule 144) or another exemption from registration is not
available to enable such holder of Partnership Securities (the "Holder") to
dispose of the number of Partnership Securities it desires to sell at the time
it desires to do so without registration under the Securities Act, then upon the
request of the General Partner or any of its Affiliates, the Partnership shall
file with the Commission as promptly as practicable after receiving such
request, and use all reasonable efforts to cause to become effective and remain
effective for a period of not less than six months following its effective date
or such shorter period as shall terminate when all Partnership Securities
covered by such registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of the number of
Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a postponement of
the requested registration for up to six months would be in the best interests
of the Partnership and its Partners due to a pending transaction, investigation
or other event, the filing of such registration statement or the effectiveness
thereof may be deferred for up to six months, but not thereafter. In connection
with any registration pursuant to the immediately preceding sentence, the
Partnership shall promptly prepare and file (x) such
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documents as may be necessary to register or qualify the securities subject to
such registration under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and (y) such documents as
may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the Holder
shall reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a public
sale of such Partnership Securities in such states. Except as set forth in
Section 7.12(c), all costs and expenses of any such registration and offering
(other than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.12(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's Partnership Securities would adversely and materially affect the
success of the offering, the Partnership shall include in such offering only
that number or amount, if any, of securities held by the Holder which, in the
opinion of the managing underwriter or managing underwriters, will not so
adversely and materially affect the offering. Except as set forth in Section
7.12(c), all costs and expenses of any such registration and offering (other
than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.12(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such registration
statement), or in any summary or final prospectus or in any amendment or
supplement thereto (if used during the period the Partnership is required to
keep the registration statement current), or arising out of, based upon or
resulting from the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements made therein
not misleading; provided, however, that the Partnership shall not be liable to
any Indemnified Person to the extent that any such claim arises out of, is based
upon or results from an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
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(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General Partner's
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Partnership
Securities with respect to which it has requested during such two-year period
inclusion in a registration statement otherwise filed or that a registration
statement be filed; provided, however, that the Partnership shall not be
required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present intent
to offer such shares for distribution, (iii) describe the nature or method of
the proposed offer and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and materials and
take all action as may be required in order to permit the Partnership to comply
with all applicable requirements in connection with the registration of such
Partnership Securities.
SECTION 7.13 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of Shamrock GP authorized by Shamrock GP to act on
behalf of and in the name of the Partnership has full power and authority to
encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to contest,
negate or disaffirm any action of the General Partner or any such officer in
connection with any such dealing. In no event shall any Person dealing with the
General Partner or any such officer or its representatives be obligated to
ascertain that the terms of the Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
any such officer or its representatives. Each and every certificate, document or
other instrument executed on behalf of the Partnership by the General Partner or
its representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
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ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
SECTION 8.2 Fiscal Year.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
SECTION 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause to
be mailed or furnished to each Record Holder of a Unit as of a date selected by
the General Partner in its discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership, presented
in accordance with U.S. GAAP, including a balance sheet and statements of
operations, Partnership equity and cash flows, such statements to be audited by
a firm of independent public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or furnished to each Record Holder of a Unit,
as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
SECTION 9.1 Tax Returns and Information.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
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Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code
in accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the purposes
of computing the adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a convention whereby the
price paid by a transferee of a Limited Partner Interest will be deemed to be
the lowest quoted closing price of the Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are traded during
the calendar month in which such transfer is deemed to occur pursuant to Section
6.2(g) without regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted by
the Code.
SECTION 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
SECTION 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
SECTION 10.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of Common Units, Subordinated Units
and Incentive Distribution Rights to UDS Logistics and the General Partner as
described in Section 5.2, each of UDS Logistics and the General Partner shall be
deemed to have been admitted to the Partnership as a Limited Partner in respect
of the Common Units, Subordinated Units and Incentive Distribution Rights issued
to it. Upon the issuance by the Partnership of Common Units to the Underwriters
as described in Section 5.3 in connection with the Initial Offering and the
execution by each Underwriter of a Transfer Application, the General Partner
shall admit the Underwriters to the Partnership as Initial Limited Partners in
respect of the Common Units purchased by them.
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SECTION 10.2 Admission of Substituted Limited Partner.
By transfer of a Limited Partner Interest in accordance with Article IV,
the transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership. With
respect to voting rights attributable to Limited Partner Interests that are held
by Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the voting rights in respect of such
Limited Partner Interests on any matter, vote such Limited Partner Interests at
the written direction of the Assignee who is the Record Holder of such Limited
Partner Interests. If no such written direction is received, such Limited
Partner Interests will not be voted. An Assignee shall have no other rights of a
Limited Partner.
SECTION 10.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or
the transferee of or successor to all of the General Partner Interest pursuant
to Section 4.6 who is proposed to be admitted as a successor General Partner
shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the predecessor or
transferring General Partner pursuant to Section 11.1 or 11.2 or the transfer of
the General Partner Interest pursuant to Section 4.6, provided, however, that no
such successor shall be admitted to the Partnership until compliance with the
terms of Section 4.6 has occurred and such successor has executed and delivered
such other documents or instruments as may be required to effect such admission.
Any such successor shall, subject to the terms hereof, carry on the business of
the members of the Partnership Group without dissolution.
SECTION 10.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including the power of
attorney granted in Section 2.6, and (ii) such other documents or instruments as
may be required in the discretion of the General Partner to effect such Person's
admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any
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Person as an Additional Limited Partner shall become effective on the date upon
which the name of such Person is recorded as such in the books and records of
the Partnership, following the consent of the General Partner to such admission.
SECTION 10.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for relief
under Chapter 7 of the United States Bankruptcy Code; (C) files a petition
or answer seeking for itself a liquidation, dissolution or similar relief
(but not a reorganization) under any law; (D) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against the General Partner in a proceeding of the type
described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a
debtor-in-possession), receiver or liquidator of the General Partner or of
all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General Partner
of revocation of its charter without a reinstatement of its charter, under
the laws of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the dissolution
and commencement of winding up of the General Partner; (C) in the event the
General Partner is acting in such capacity by virtue of being a trustee of
a trust, the termination of the trust; (D) in the event the General Partner
is a natural person, his death or adjudication of incompetency; and (E)
otherwise in the event of the termination of the General Partner.
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If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2010, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner and
its Affiliates) and the General Partner delivers to the Partnership an Opinion
of Counsel ("Withdrawal Opinion of Counsel") that such withdrawal (following the
selection of the successor General Partner) would not result in the loss of the
limited liability of any Limited Partner or of a limited partner of the
Operating Partnership or cause the Partnership or the Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes (to the extent not previously
treated as such); (ii) at any time after 12:00 midnight, Eastern Standard Time,
on December 31, 2010, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice to the Unitholders, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General Partner
ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed
pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence,
at any time that the General Partner voluntarily withdraws by giving at least 90
days' advance notice of its intention to withdraw to the Limited Partners, such
withdrawal to take effect on the date specified in the notice, if at the time
such notice is given one Person and its Affiliates (other than the General
Partner and its Affiliates) own beneficially or of record or control at least
50% of the Outstanding Units. The withdrawal of the General Partner from the
Partnership upon the occurrence of an Event of Withdrawal shall also constitute
the withdrawal of the General Partner as general partner of the other Group
Members. If the General Partner gives a notice of withdrawal pursuant to Section
11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of
such withdrawal, elect a successor General Partner. The Person so elected as
successor General Partner shall automatically become the successor general
partner of the other Group Members of which the General Partner is a general
partner. If, prior to the effective date of the General Partner's withdrawal, a
successor is not selected by the Unitholders as provided herein or the
Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership
shall be dissolved in accordance with Section 12.1. Any successor General
Partner elected in accordance with the terms of this Section 11.1 shall be
subject to the provisions of Section 10.3.
SECTION 11.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a Unit Majority (including
Units held by the General Partner and its Affiliates). Such removal shall be
effective immediately following the admission of a successor General Partner
pursuant to Section 10.3. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as general partner
of the other Group Members of which the General Partner is a general partner. If
a Person is elected as a successor General Partner in accordance with the terms
of this Section 11.2, such Person shall, upon admission pursuant to Section
10.3, automatically become a successor general partner of the other Group
Members of which the General Partner
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is a general partner. The right of the holders of Outstanding Units to remove
the General Partner shall not exist or be exercised unless the Partnership has
received an opinion opining as to the matters covered by a Withdrawal Opinion of
Counsel. Any successor General Partner elected in accordance with the terms of
this Section 11.2 shall be subject to the provisions of Section 10.3.
SECTION 11.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option exercisable prior to the effective date of the
departure of such Departing Partner to require its successor to purchase its
General Partner Interest and its general partner interest (or equivalent
interest) in the other Group Members and all of its Incentive Distribution
Rights (collectively, the "Combined Interest") in exchange for an amount in cash
equal to the fair market value of such Combined Interest, such amount to be
determined and payable as of the effective date of its departure. If the General
Partner is removed by the Unitholders under circumstances where Cause exists or
if the General Partner withdraws under circumstances where such withdrawal
violates this Agreement or the Operating Partnership Agreement, and if a
successor General Partner is elected in accordance with the terms of Section
11.1 or 11.2, such successor shall have the option, exercisable prior to the
effective date of the departure of such Departing Partner, to purchase the
Combined Interest for such fair market value of such Combined Interest of the
Departing Partner. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section 7.4,
including any employee-related liabilities (including severance liabilities),
incurred in connection with the termination of any employees employed by the
Departing Partner for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of a Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which third independent investment banking firm or other
independent expert shall determine the fair market value of the Combined
Interest of the Departing Partner. In making its determination, such third
independent investment banking firm or other independent expert may consider the
then current trading price of Units on any National Securities Exchange on which
Units are then listed, the value of the Partnership's assets, the rights and
obligations of the Departing Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner (or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing Partner (or its
transferee) becomes a Limited Partner. For purposes of this
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Agreement, conversion of the Combined Interest of the Departing Partner to
Common Units will be characterized as if the Departing Partner (or its
transferee) contributed its Combined Interest to the Partnership in exchange for
the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to 1/99th of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General Partner
shall, subject to the following sentence, be entitled to the Percentage Interest
of all Partnership allocations and distributions to which the Departing Partner
was entitled. The successor General Partner shall cause this Agreement to be
amended to reflect that, from and after the date of such successor General
Partner's admission, the successor General Partner's interest in all Partnership
distributions and allocations shall be 1%.
SECTION 11.4 Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
SECTION 11.5 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
SECTION 12.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in
Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is
elected and an Opinion of Counsel is received as provided in Section
11.1(b) or 11.2 and such successor is admitted to the Partnership pursuant
to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner
that is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
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(e) the sale of all or substantially all of the assets and properties
of the Partnership Group.
SECTION 12.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders of a Unit Majority. Unless such an election is made
within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue until dissolved in
accordance with this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as necessary,
to file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
SECTION 12.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article XII,
the Liquidator approved in the manner provided herein shall have and may
exercise, without further
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authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers, other than the limitation on sale set forth in
Section 7.3(b)) to the extent necessary or desirable in the good faith judgment
of the Liquidator to carry out the duties and functions of the Liquidator
hereunder for and during such period of time as shall be reasonably required in
the good faith judgment of the Liquidator to complete the winding up and
liquidation of the Partnership as provided for herein.
SECTION 12.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall
be deemed for purposes of Section 12.4(c) to have received cash equal to
its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in
its absolute discretion, defer liquidation or distribution of the
Partnership's assets for a reasonable time if it determines that an
immediate sale or distribution of all or some of the Partnership's assets
would be impractical or would cause undue loss to the Partners. The
Liquidator may, in its absolute discretion, distribute the Partnership's
assets, in whole or in part, in kind if it determines that a sale would be
impractical or would cause undue loss to the Partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to the Liquidator as compensation for serving in such capacity
(subject to the terms of Section 12.3) and amounts owed to Partners
otherwise than in respect of their distribution rights under Article VI.
With respect to any liability that is contingent, conditional or unmatured
or is otherwise not yet due and payable, the Liquidator shall either settle
such claim for such amount as it thinks appropriate or establish a reserve
of cash or other assets to provide for its payment. When paid, any unused
portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of distributions pursuant to this Section 12.4(c)) for the
taxable year of the Partnership during which the liquidation of the
Partnership occurs (with such date of occurrence being determined pursuant
to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution
shall be made by the end of such taxable year (or, if later, within 90 days
after said date of such occurrence).
SECTION 12.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
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SECTION 12.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
SECTION 12.7 Waiver of Partition.
To the maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
SECTION 12.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative
balance in its Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance in its Capital
Account upon liquidation of its interest in the Partnership by the end of the
taxable year of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1 Amendment to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Partnership and the Operating Partnership will not be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does
not adversely affect the Limited Partners (including any particular class
of Partnership Interests as compared to other classes of Partnership
Interests) in any material respect, (ii) is necessary or advisable to (A)
satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or state statute
(including the Delaware Act) or (B) facilitate the trading of the Limited
Partner Interests (including the division of any class or classes of
Outstanding Limited Partner Interests into different classes to facilitate
uniformity of tax consequences within such classes of Limited Partner
Interests) or comply with any rule, regulation, guideline or requirement of
any National Securities Exchange on which the Limited Partner Interests are
or will be listed for trading, compliance with any of which the General
Partner determines in its discretion to be in the best interests of the
Partnership and the Limited Partners, (iii) is necessary or advisable in
connection with action taken by the General
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Partner pursuant to Section 5.10 or (iv) is required to effect the intent
expressed in the Registration Statement or the intent of the provisions of
this Agreement or is otherwise contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary
or advisable as a result of a change in the fiscal year or taxable year of
the Partnership including, if the General Partner shall so determine, a
change in the definition of "Quarter" and the dates on which distributions
are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by
the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
SECTION 13.2 Amendment Procedures.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner, which consent may be given or withheld in its sole discretion.
A proposed amendment shall be effective upon its approval by the holders of a
Unit Majority, unless a greater or different percentage is required under this
Agreement or by Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units shall be set forth
in a writing that contains the text of the proposed amendment. If such an
amendment is proposed, the General Partner shall seek the written approval of
the requisite percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The General Partner
shall notify all Record Holders upon final adoption of any such proposed
amendments.
SECTION 13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no
provision of this Agreement that establishes a percentage of Outstanding
Units (including Units deemed owned by the General Partner) required to
take any action shall be amended, altered, changed, repealed or rescinded
in any respect that would have the effect of reducing such
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voting percentage unless such amendment is approved by the written consent
or the affirmative vote of holders of Outstanding Units whose aggregate
Outstanding Units constitute not less than the voting requirement sought to
be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no
amendment to this Agreement may (i) enlarge the obligations of any Limited
Partner without its consent, unless such shall be deemed to have occurred
as a result of an amendment approved pursuant to Section 13.3(c), (ii)
enlarge the obligations of, restrict in any way any action by or rights of,
or reduce in any way the amounts distributable, reimbursable or otherwise
payable to, the General Partner or any of its Affiliates without its
consent, which consent may be given or withheld in its sole discretion,
(iii) change Section 12.1(a) or 12.1(c), or (iv) change the term of the
Partnership or, except as set forth in Section 12.1(c), give any Person the
right to dissolve the Partnership.
(c) Except as otherwise provided, and without limitation of the
General Partner's authority to adopt amendments to this Agreement without
the approval of any Partners or Assignee as contemplated in Section 13.1,
any amendment that would have a material adverse effect on the rights or
preferences of any class of Partnership Interests in relation to other
classes of Partnership Interests must be approved by the holders of not
less than a majority of the Outstanding Partnership Interests of the class
affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval
of the holders of at least 90% of the Outstanding Common Units and
Subordinated Units voting as a single class unless the Partnership obtains
an Opinion of Counsel to the effect that such amendment will not affect the
limited liability of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only
be amended with the approval of the holders of at least 90% of the
Outstanding Units.
SECTION 13.4 Special Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall
be taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Limited Partner Interests of the class or
classes for which a meeting is proposed. Limited Partners shall call a special
meeting by delivering to the General Partner one or more requests in writing
stating that the signing Limited Partners wish to call a special meeting and
indicating the general or specific purposes for which the special meeting is to
be called. Within 60 days after receipt of such a call from Limited Partners or
within such greater time as may be reasonably necessary for the Partnership to
comply with any statutes, rules, regulations, listing agreements or similar
requirements governing the holding of a meeting or the solicitation of proxies
for use at such a meeting, the General Partner shall send a notice of the
meeting to the Limited Partners either directly or indirectly through the
Transfer Agent. A meeting shall be held at a time and place determined by the
General Partner on a date not less than 10 days nor more than 60 days after the
mailing of notice of the meeting. Limited Partners shall not vote on matters
that would cause the Limited Partners to be deemed to be taking part in the
management and control of the business and affairs of the Partnership so as to
jeopardize the Limited Partners' limited liability under the Delaware Act or the
law of any other state in which the Partnership is qualified to do business.
SECTION 13.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Limited Partner Interests for which a
meeting is proposed in writing by
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mail or other means of written communication in accordance with Section 16.1.
The notice shall be deemed to have been given at the time when deposited in the
mail or sent by other means of written communication.
SECTION 13.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or
to vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Limited Partner
Interests are listed for trading, in which case the rule, regulation, guideline
or requirement of such exchange shall govern) or (b) in the event that approvals
are sought without a meeting, the date by which Limited Partners are requested
in writing by the General Partner to give such approvals.
SECTION 13.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
SECTION 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
SECTION 13.9 Quorum.
The holders of a majority of the Outstanding Limited Partner Interests of
the class or classes for which a meeting has been called (including Limited
Partner Interests deemed owned by the General Partner) represented in person or
by proxy shall constitute a quorum at a meeting of Limited Partners of such
class or classes unless any such action by the Limited Partners requires
approval by holders of a greater percentage of such Limited Partner Interests,
in which case the quorum shall be such greater percentage. At any meeting of the
Limited Partners duly called and held in accordance with this Agreement at which
a quorum is present, the act of Limited Partners holding Outstanding Limited
Partner Interests that in the aggregate represent a majority of the Outstanding
Limited Partner Interests entitled to vote and be present in person or by proxy
at such meeting shall be deemed to constitute the act of all Limited Partners,
unless a greater or different percentage is required with respect to such action
under the provisions of this Agreement, in which case the act of the Limited
Partners holding Outstanding Limited
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Partner Interests that in the aggregate represent at least such greater or
different percentage shall be required. The Limited Partners present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough Limited
Partners to leave less than a quorum, if any action taken (other than
adjournment) is approved by the required percentage of Outstanding Limited
Partner Interests specified in this Agreement (including Limited Partner
Interests deemed owned by the General Partner). In the absence of a quorum any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the Outstanding Limited
Partner Interests entitled to vote at such meeting (including Limited Partner
Interests deemed owned by the General Partner) represented either in person or
by proxy, but no other business may be transacted, except as provided in Section
13.7.
SECTION 13.10 Conduct of a Meeting.
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with applicable law and this Agreement as
it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals in writing.
SECTION 13.11 Action Without a Meeting.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Limited Partners owning
not less than the minimum percentage of the Outstanding Limited Partner
Interests (including Limited Partner Interests deemed owned by the General
Partner) that would be necessary to authorize or take such action at a meeting
at which all the Limited Partners were present and voted (unless such provision
conflicts with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the Limited Partner Interests are listed for
trading, in which case the rule, regulation, guideline or requirement of such
exchange shall govern). Prompt notice of the taking of action without a meeting
shall be given to the Limited Partners who have not approved in writing. The
General Partner may specify that any written ballot submitted to Limited
Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot returned to the
Partnership does not vote all of the Limited Partner Interests held by the
Limited Partners the Partnership shall be deemed to have failed to receive a
ballot for the Limited Partner Interests that were not voted. If approval of the
taking of any action by the Limited Partners is solicited by any Person other
than by or on behalf of the General Partner, the written approvals shall have no
force and effect unless and until (a) they are deposited with the Partnership in
care of the General Partner, (b) approvals sufficient to take the action
proposed are dated as of a date not more than 90 days prior to the date
sufficient approvals are deposited with the Partnership and (c) an Opinion of
Counsel is delivered to the General Partner to the effect that the exercise of
such right and the action proposed to be taken with respect to any particular
matter (i) will not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the Partnership so as
to jeopardize the Limited Partners' limited liability, and (ii) is otherwise
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permissible under the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners.
SECTION 13.12 Voting and Other Rights.
(a) Only those Record Holders of the Limited Partner Interests on the
Record Date set pursuant to Section 13.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to matters
as to which the holders of the Outstanding Limited Partner Interests have the
right to vote or to act. All references in this Agreement to votes of, or other
acts that may be taken by, the Outstanding Limited Partner Interests shall be
deemed to be references to the votes or acts of the Record Holders of such
Outstanding Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in exercising
the voting rights in respect of such Limited Partner Interests on any matter,
and unless the arrangement between such Persons provides otherwise, vote such
Limited Partner Interests in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV
MERGER
SECTION 14.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XIV.
SECTION 14.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to the merger or
consolidation, the General Partner shall approve the Merger Agreement, which
shall set forth:
(a) The names and jurisdictions of formation or organization of each
of the business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property
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or general or limited partner interests, rights, securities or obligations
of any limited partnership, corporation, trust or other entity (other than
the Surviving Business Entity) which the holders of such general or limited
partner interests, securities or rights are to receive in exchange for, or
upon conversion of their general or limited partner interests, securities
or rights, and (ii) in the case of securities represented by certificates,
upon the surrender of such certificates, which cash, property or general or
limited partner interests, rights, securities or obligations of the
Surviving Business Entity or any general or limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity), or evidences thereof, are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 14.4 or a later
date specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
SECTION 14.3 Approval by Limited Partners of Merger or Consolidation.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement contains any provision that, if contained
in an amendment to this Agreement, the provisions of this Agreement or the
Delaware Act would require for its approval the vote or consent of a greater
percentage of the Outstanding Limited Partner Interests or of any class of
Limited Partners, in which case such greater percentage vote or consent shall be
required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without Limited
Partner approval, to merge the Partnership or any Group Member into, or convey
all of the Partnership's assets to, another limited liability entity which shall
be newly formed and shall have no assets, liabilities or operations at the time
of such Merger other than those it receives from the Partnership or other Group
Member if (i) the General Partner has received an Opinion of Counsel that the
merger or conveyance, as the case may be, would not result in the loss of the
limited liability of any Limited Partner or any partner in the Operating
Partnership or cause the Partnership or Operating Partnership to be treated as
an association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously treated as such),
(ii) the
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sole purpose of such merger or conveyance is to effect a mere change in the
legal form of the Partnership into another limited liability entity and (iii)
the governing instruments of the new entity provide the Limited Partners and the
General Partner with the same rights and obligations as are herein contained.
SECTION 14.4 Certificate of Merger.
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
SECTION 14.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests
in property of any of those constituent business entities shall be
preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not
be deemed to result in a transfer or assignment of assets or liabilities from
one entity to another.
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1 Right to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15.1(b) is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "Current Market Price" as of any date of any class
of Limited Partner Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such
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day, regular way, or in case no such sale takes place on such day, the average
of the closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading on
any National Securities Exchange (other than the Nasdaq Stock Market), the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or, if on any such day
such Limited Partner Interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such Limited Partner
Interests of such class selected by the General Partner, or if on any such day
no market maker is making a market in such Limited Partner Interests of such
class, the fair value of such Limited Partner Interests on such day as
determined reasonably and in good faith by the General Partner; and (iii)
"Trading Day" means a day on which the principal National Securities Exchange on
which such Limited Partner Interests of any class are listed or admitted to
trading is open for the transaction of business or, if Limited Partner Interests
of a class are not listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City generally are
open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of such
class (as of a Record Date selected by the General Partner) at least 10, but not
more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive days
in at least two daily newspapers of general circulation printed in the English
language and published in the Borough of Manhattan, New York. The Notice of
Election to Purchase shall specify the Purchase Date and the price (determined
in accordance with Section 15.1(a)) at which Limited Partner Interests will be
purchased and state that the General Partner, its Affiliate or the Partnership,
as the case may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner Interests in
exchange for payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any National Securities
Exchange on which such Limited Partner Interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a Record Holder of
Limited Partner Interests at his address as reflected in the records of the
Transfer Agent shall be conclusively presumed to have been given regardless of
whether the owner receives such notice. On or prior to the Purchase Date, the
General Partner, its Affiliate or the Partnership, as the case may be, shall
deposit with the Transfer Agent cash in an amount sufficient to pay the
aggregate purchase price of all of such Limited Partner Interests to be
purchased in accordance with this Section 15.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least 10 days prior to the
Purchase Date, and if on or prior to the Purchase Date the deposit described in
the preceding sentence has been made for the benefit of the holders of Limited
Partner Interests subject to purchase as provided herein, then from and after
the Purchase Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such Limited Partner
Interests (including any rights pursuant to Articles IV, V, VI, and XII) shall
thereupon cease, except the right to receive the purchase price (determined in
accordance with Section 15.1(a)) for Limited Partner Interests therefor, without
interest, upon surrender to the Transfer Agent of the Certificates representing
such Limited Partner Interests, and such Limited Partner Interests shall
thereupon be deemed to be transferred to the General Partner, its Affiliate or
the Partnership, as the case may be, on the record books of the Transfer Agent
and the Partnership, and the
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General Partner or any Affiliate of the General Partner, or the Partnership, as
the case may be, shall be deemed to be the owner of all such Limited Partner
Interests from and after the Purchase Date and shall have all rights as the
owner of such Limited Partner Interests (including all rights as owner of such
Limited Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an
Outstanding Limited Partner Interest subject to purchase as provided in this
Section 15.1 may surrender his Certificate evidencing such Limited Partner
Interest to the Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
SECTION 16.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or
permitted to be given or made to a Partner or Assignee under this Agreement
shall be in writing and shall be deemed given or made when delivered in person
or when sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address described below. Any
notice, payment or report to be given or made to a Partner or Assignee hereunder
shall be deemed conclusively to have been given or made, and the obligation to
give such notice or report or to make such payment shall be deemed conclusively
to have been fully satisfied, upon sending of such notice, payment or report to
the Record Holder of such Partnership Securities at his address as shown on the
records of the Transfer Agent or as otherwise shown on the records of the
Partnership, regardless of any claim of any Person who may have an interest in
such Partnership Securities by reason of any assignment or otherwise. An
affidavit or certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1 executed by the General
Partner, the Transfer Agent or the mailing organization shall be prima facie
evidence of the giving or making of such notice, payment or report. If any
notice, payment or report addressed to a Record Holder at the address of such
Record Holder appearing on the books and records of the Transfer Agent or the
Partnership is returned by the United States Postal Service marked to indicate
that the United States Postal Service is unable to deliver it, such notice,
payment or report and any subsequent notices, payments and reports shall be
deemed to have been duly given or made without further mailing (until such time
as such Record Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) if they are available for the Partner or
Assignee at the principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership shall be deemed
given if received by the General Partner at the principal office of the
Partnership designated pursuant to Section 2.3. The General Partner may rely and
shall be protected in relying on any notice or other document from a Partner,
Assignee or other Person if believed by it to be genuine.
SECTION 16.2 Further Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
SECTION 16.3 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
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Section 16.4 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 16.5 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 16.6 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 16.7 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
Section 16.8 Applicable Law.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
Section 16.9 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 16.10 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
[Rest of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
RIVERWALK LOGISTICS, L.P.
By: Shamrock Logistics GP, LLC,
its General Partner
Name: --------------------------
Title: -------------------------
ORGANIZATIONAL LIMITED PARTNER:
------------------------------------
Todd Walker
LIMITED PARTNERS:
All Limited Partners now and
hereafter
admitted as Limited Partners of the
Partnership, pursuant to powers of
attorney
now and hereafter executed in favor
of, and
granted and delivered to the General
Partner.
RIVERWALK LOGISTICS, L.P.
By: Shamrock Logistics GP, LLC,
its General Partner
Name: --------------------------
Title: -------------------------
UDS LOGISTICS, LLC
By: Diamond Shamrock Refining and
Marketing Company, its Sole
Member
Name: --------------------------
Title: -------------------------
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EXHIBIT A
TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
SHAMROCK LOGISTICS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
SHAMROCK LOGISTICS, L.P.
No. Common Units
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of Shamrock Logistics, L.P., as amended, supplemented or
restated from time to time (the "Partnership Agreement"), Shamrock Logistics,
L.P., a Delaware limited partnership (the "Partnership"), hereby certifies
that (the "Holder") is the registered owner of Common
Units representing limited partner interests in the Partnership (the "Common
Units") transferable on the books of the Partnership, in person or by duly
authorized attorney, upon surrender of this Certificate properly endorsed and
accompanied by a properly executed application for transfer of the Common Units
represented by this Certificate. The rights, preferences and limitations of the
Common Units are set forth in, and this Certificate and the Common Units
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Partnership Agreement. Copies of the Partnership
Agreement are on file at, and will be furnished without charge on delivery of
written request to the Partnership at, the principal office of the Partnership
located at 6000 North Loop 1604 West, San Antonio, Texas 78249. Capitalized
terms used herein but not defined shall have the meanings given them in the
Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: SHAMROCK LOGISTICS, L.P.
By: Riverwalk Logistics, L.P.,
its General Partner
Countersigned and Registered by: By: Shamrock Logistics GP, LLC,
its General Partner
----------------------------------------------------- By: ----------------------------------------------
as Transfer Agent and Registrar
Name: --------------------------------------------
By: ------------------------------------------------- By: -------------------------------------------------
Authorized Signature Secretary
</TABLE>
[REVERSE OF CERTIFICATE]
A-78
<PAGE> 285
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN as tenants in common UNIF GIFT/TRANSFERS MIN ACT
COM --
TEN as tenants by the entireties Custodian
ENT --
(Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts/Transfers to
survivorship and not as tenants in Minors Act
common (State)
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
SHAMROCK LOGISTICS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF SHAMROCK LOGISTICS, L.P.
You have acquired an interest in Shamrock Logistics, L.P., 6000 North Loop
1604 West, San Antonio, Texas 78249, whose taxpayer identification number is
74-2958817. The Internal Revenue Service has issued Shamrock Logistics, L.P. the
following tax shelter registration number: .
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN SHAMROCK LOGISTICS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Shamrock Logistics, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN SHAMROCK
LOGISTICS, L.P.
If you transfer your interest in Shamrock Logistics, L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Shamrock Logistics, L.P. If you do not want
to keep such a list, you must (1) send the information specified above to the
Partnership, which will keep the list for this tax shelter, and (2) give a copy
of this notice to the person to whom you transfer your interest. Your failure to
comply with any of the above-described responsibilities could result in the
imposition of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue
Code of 1986, as amended, unless such failure is shown to be due to reasonable
cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, HEREBY ASSIGNS, CONVEYS, SELLS AND TRANSFERS
UNTO
------------------------------------------------------
------------------------------------------------------
<TABLE>
<S> <C>
(Please print or typewrite name (Please insert Social Security or other identifying
and address of Assignee) number of Assignee)
</TABLE>
A-79
<PAGE> 286
Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does hereby
irrevocably constitute and appoint as its attorney-in-fact with full
power of substitution to transfer the same on the books of Shamrock Logistics,
L.P.
<TABLE>
<S> <C> <C>
Date: NOTE: The signature to any endorsement hereon
must correspond with the name as written
upon the face of this Certificate in
every particular, without alteration,
SIGNATURE(S) MUST BE enlargement or change.
GUARANTEED BY A MEMBER FIRM OF THE
NATIONAL ASSOCIATION OF SECURITIES (Signature)
DEALERS, INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY (Signature)
</TABLE>
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-80
<PAGE> 287
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Shamrock Logistics, L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
<TABLE>
<S> <C>
Date: -----------------------------------------------
-----------------------------------------------------
Signature of Assignee
----------------------------------------------------- -----------------------------------------------------
Social Security or other identifying Name and Address of Assignee
number of Assignee
-----------------------------------------------------
Purchase Price including commissions, if any
</TABLE>
Type of Entity (check one):
<TABLE>
<S> <C> <C>
[ ] Individual [ ] Partnership [ ] Corporation
[ ] Trust [ ] Other (specify) ------------------------------
</TABLE>
Nationality (check one):
<TABLE>
<S> <C>
[ ] U.S. Citizen, Resident or Domestic Entity
[ ] Foreign Corporation [ ] Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
.
3. My home address is .
A-81
<PAGE> 288
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign
partnership, foreign trust
(Name of Interestholder)
or foreign estate (as those terms are defined in the Code and Treasury
Regulations).
2. The interestholder's U.S. employer identification number is
.
3. The interestholder's office address and place of incorporation (if
applicable) is .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
------------------------------------------------------
Name of Interestholder
------------------------------------------------------
Signature and Date
------------------------------------------------------
Title (if applicable)
NOTE: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-82
<PAGE> 289
APPENDIX B
FORM OF APPLICATION OF TRANSFER
OF COMMON UNITS
<PAGE> 290
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Shamrock Logistics, L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
<TABLE>
<S> <C>
Date: -----------------------------------------------
-----------------------------------------------------
Signature of Assignee
----------------------------------------------------- -----------------------------------------------------
Social Security or other identifying Name and Address of Assignee
number of Assignee
-----------------------------------------------------
Purchase Price including commissions, if any
</TABLE>
Type of Entity (check one):
<TABLE>
<S> <C> <C>
[ ] Individual [ ] Partnership [ ] Corporation
[ ] Trust [ ] Other (specify) ------------------------------
</TABLE>
Nationality (check one):
<TABLE>
<S> <C>
[ ] U.S. Citizen, Resident or Domestic Entity
[ ] Foreign Corporation [ ] Non-resident Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
.
3. My home address is .
B-1
<PAGE> 291
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign
partnership, foreign trust
(Name of Interestholder)
or foreign estate (as those terms are defined in the Code and Treasury
Regulations).
2. The interestholder's U.S. employer identification number is
.
3. The interestholder's office address and place of incorporation (if
applicable) is .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
------------------------------------------------------
Name of Interestholder
------------------------------------------------------
Signature and Date
------------------------------------------------------
Title (if applicable)
NOTE: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
B-2
<PAGE> 292
APPENDIX C
GLOSSARY OF TERMS
Adjusted Operating Surplus: For any period, Operating Surplus generated
during that period as adjusted to:
(a) decrease Operating Surplus by:
(1) any net increase in Working Capital Borrowings with respect to
that period, and
(2) any net reduction in cash reserves for Operating Expenditures
during that period not relating to an Operating Expenditure
made during that period; and
(b) increase Operating Surplus by:
(1) any net decrease in Working Capital Borrowings with respect to
that period; and
(2) any net increase in cash reserves for Operating Expenditures
with respect to that period required by any debt agreement for
the repayment of principal, interest or premium.
Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(1) of the definition of Operating Surplus.
Available Cash: For any quarter prior to liquidation:
(a) the sum of:
(1) all cash and cash equivalents of Shamrock Logistics and its
subsidiaries on hand at the end of that quarter; and
(2) all additional cash and cash equivalents of Shamrock Logistics
and its subsidiaries on hand on the date of determination of
Available Cash for that quarter resulting from Working Capital
Borrowings after the end of that quarter; less
(b) the amount of cash reserves that is necessary or appropriate in
the reasonable discretion of the general partner to:
(1) provide for the proper conduct of the business of Shamrock
Logistics and its subsidiaries (including reserves for future
capital expenditures) after that quarter;
(2) comply with applicable law or any debt agreement or other
agreement or obligation to which any member of Shamrock
Logistics and its subsidiaries is a party or its assets are
subject; and
(3) provide funds for minimum quarterly distributions and
cumulative common unit arrearages for any one or more of the
next four quarters;
provided, however, that the general partner may not establish cash reserves
for distributions to the subordinated units unless the general partner has
determined that, in its judgment, the establishment of reserves will not prevent
Shamrock Logistics from distributing the minimum quarterly distribution on all
common units and any common unit arrearages thereon for the next four quarters;
and
provided further, that disbursements made by Shamrock Logistics and its
subsidiaries or cash reserves established, increased or decreased after the end
of that quarter but on or before the date of determination of Available Cash for
that quarter shall be deemed to have been made,
C-1
<PAGE> 293
established, increased or reduced, for purposes of determining Available Cash,
within that quarter if the general partner so determines.
Capital Account: The capital account maintained for a partner under the
amended and restated partnership agreement. The capital account for a common
unit, a subordinated unit or any other specified interest in Shamrock Logistics
shall be the amount which that capital account will be if that common unit,
subordinated unit or other interest in Shamrock Logistics were the only interest
in Shamrock Logistics held by a partner.
Capital Surplus: All Available Cash distributed by Shamrock Logistics from
any source will be treated as distributed from Operating Surplus until the sum
of all Available Cash distributed since the commencement of Shamrock Logistics
equals the Operating Surplus as of the end of the quarter before that
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
Closing Price: The last sale price on a day, regular way, or in case no
sale takes place on that day, the average of the closing bid and asked prices on
that day, regular way. In either case, as reported in the principal consolidated
transaction reporting system for securities listed or admitted to trading on the
principal national securities exchange on which the units of that class are
listed or admitted to trading. If the units of that class are not listed or
admitted to trading on any national securities exchange, the last quoted price
on that day. If no quoted price exists, the average of the high bid and low
asked prices on that day in the over-the-counter market, as reported by the New
York Stock Exchange or any other system then in use. If on any day the units of
that class are not quoted by any organization of that type, the average of the
closing bid and asked prices on that day as furnished by a professional market
maker making a market in the units of the class selected by the board of
directors of the general partner. If on that day no market maker is making a
market in the units of that class, the fair value of the units on that day as
determined reasonably and in good faith by the board of directors of the general
partner.
Common Carrier Pipelines: A pipeline engaged in the transportation of
petroleum as a public utility and common carrier for hire.
Current Market Price: With respect to any class of units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices for the 20 consecutive trading days immediately prior
to the date.
Gathering Systems: The gathering lines, pumps, auxiliary tans (in the case
of oil), and other equipment used to move oil or gas from the well site to the
main pipeline for eventual delivery to the refinery or consumer, as the case may
be.
Interim Capital Transactions:
(a) borrowings, refinancings or refundings of indebtedness and sales
of debt securities (other than Working Capital Borrowings and
other than for items purchased on open account in the ordinary
course of business) by any member of Shamrock Logistics and its
subsidiaries;
(b) sales of equity interests (including the common units sold to the
Underwriters upon the exercise of their over-allotment option) by
any member of Shamrock Logistics and its subsidiaries; and
(c) sales or other voluntary or involuntary dispositions of any assets
by any member of Shamrock Logistics and its subsidiaries (other
than sales or other dispositions of inventory in the ordinary
course of business, sales or other dispositions of other current
assets, including, without limitation, receivables and accounts,
in the ordinary course of business and sales or other dispositions
of assets as a part of normal retirements or replacements), in
each case before the dissolution and liquidation of Shamrock
Logistics.
C-2
<PAGE> 294
Operating Expenditures: All expenditures of Shamrock Logistics and its
subsidiaries including, but not limited to, taxes, reimbursements of the general
partner, repayment of Working Capital Borrowings, debt service payments and
maintenance capital expenditures, subject to the following:
(a) payments (including prepayments) of principal of and premium on
indebtedness other than Working Capital Borrowings shall not
constitute Operating Expenditures;
(b) Operating Expenditures shall not include (1) expansion capital
expenditures made for acquisitions or capital improvements, (2)
payment of transaction expenses relating to Interim Capital
Transactions or (3) distributions to partners.
Operating Surplus: means, with respect to any period before liquidation, on
a cumulative basis and without duplication:
(a) the sum of:
(1) $10 million plus the net working capital of Shamrock Logistics
and its subsidiaries as of the close of business on the closing
date of the initial public offering;
(2) all the cash receipts of Shamrock Logistics and its
subsidiaries for the period beginning on the closing date of
the initial public offering and ending with the last day of
that period, other than cash receipts from Interim Capital
Transactions (except to the extent specified in the amended and
restated partnership agreement); and
(3) all cash receipts of Shamrock Logistics and its subsidiaries
after the end of that period but on or before the date of
determination of Operating Surplus for the period resulting
from Working Capital Borrowings; less
(b) the sum of:
(1) Operating Expenditures for the period beginning on the date of
the closing of the initial public offering and ending with the
last day of that period; and
(2) the amount of cash reserves that is necessary or advisable in
the reasonable discretion of the general partner to provide
funds for future Operating Expenditures; provided, however,
that disbursements made (including contribution to Shamrock
Logistics or any of its subsidiaries or disbursements on behalf
of Shamrock Logistics or any of its subsidiaries) or cash
reserves established, increased or decreased after the end of
the period but on or before the date of determination of
Available Cash with respect to the period shall be deemed to
have been made, established, increased or decreased for the
purposes of determining Operating Surplus within the period if
the general partner so determines.
Notwithstanding the foregoing, "Operating Surplus" for the quarter in which
the liquidation date occurs and any later quarter shall equal zero.
Subordination Period: the subordination period will extend from the date of
the closing of the initial public offering until the first to occur of the
following:
(a) the first day of any quarter beginning on or after December 31,
2005 for which:
(1) distributions of Available Cash from Operating Surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the sum of the minimum quarterly distribution on
all of the outstanding common
C-3
<PAGE> 295
units and subordinated units for each of the three
non-overlapping four-quarter periods immediately preceding that
date;
(2) the Adjusted Operating Surplus, generated during each of the
three immediately preceding, non-overlapping four-quarter
periods equaled or exceeded the sum of minimum quarterly
distribution on all of the common units and subordinated units
that were outstanding during those periods on a fully diluted
basis and the related distribution on the general partner
interest in Shamrock Logistics and the general partner interest
in Shamrock Logistics Operations during these periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
(b) the date on which the general partner is removed as general
partner of Shamrock Logistics upon the requisite vote by limited
partners under circumstances where cause does not exist and units
held by the general partner and its affiliates are not voted in
favor of removal.
Terminalling: the temporary storage of refined products in a facility
connected to a refined product pipeline.
Working Capital Borrowings: Borrowings under our revolving credit facility
or other arrangement requiring all of its borrowings to be reduced to a
relatively small amount each year for an economically meaningful period of time.
Borrowings that are not intended exclusively for working capital purposes shall
not be treated as Working Capital Borrowings.
C-4
<PAGE> 296
APPENDIX D
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of Pro Forma Available Cash from
Operating Surplus and should be read in conjunction with "Cash Available for
Distribution," Shamrock Logistics Operations Unaudited Financial Statements, the
Ultramar Diamond Shamrock Logistics Business Audited Financial Statements, and
Shamrock Logistics Unaudited Pro Forma Financial Statements. The amounts in the
tables below are in thousands and are unaudited.
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000
------------ ------------- -------------
<S> <C> <C> <C>
Pro forma operating income................................. $ 66,222 $45,664 $29,963]
Net decrease due to revised tariff rates................. (21,892) (5,754) --
-------- ------- -------
Pro forma operating income as adjusted..................... 44,330 39,910 29,963
Add: Pro forma depreciation and amortization............. 12,318 13,045 9,889
Pro forma distributions from Skelly-Belvieu........ 4,238 5,118 3,488
Pro forma volumetric expansion, contractions
and measurement discrepancy....................... 378 1,356 916
Less: Pro forma gain on sale of property, plant and
equipment......................................... (2,478) -- --
-------- ------- -------
Pro forma Adjusted EBITDA(a)............................... 58,786 59,429 44,256
Less: Pro forma interest expense.......................... (5,930) (5,915) (4,519)
Pro forma maintenance capital expenditures(b)....... (2,060) (2,022) (1,804)
-------- ------- -------
Pro forma Available Cash from Operating Surplus(c)(d)(e)... $ 50,796 $51,492 $37,933
======== ======= =======
</TABLE>
---------------
(a) We define Adjusted EBITDA as operating income, less gain on sale of
property, plant, and equipment, plus depreciation and amortization plus
distributions from Skelly-Belvieu Pipeline Company, of which we own 50%, and
excluding the impact of volumetric expansions, contractions and measurement
discrepancies in our pipelines.
(b) Shamrock Logistics estimates maintenance capital expenditures will average
approximately $4.0 million per year for as least the next two years. Please
read "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(c) The pro forma adjustments in the pro forma financial statements are based
upon currently available information and certain estimates and assumptions.
The pro forma financial statements do not purport to present the financial
position or results of operations of Shamrock Logistics had the transactions
to be effected at the closing of this Offering actually been completed as of
the date indicated. Furthermore, the pro forma financial statements are
based on accrual accounting concepts whereas Available Cash and Operating
Surplus are defined in the Partnership Agreement. As a consequence, the
amount of Pro Forma Cash Available from Operating Surplus shown above should
only be viewed as a general indication of the amounts of Available Cash from
Operating Surplus that may in fact have been generated by Shamrock Logistics
had it been formed in earlier periods.
(d) We estimate that we will incur incremental general and administrative
expenses as a result of being a separate public entity (e.g. costs of tax
return preparation, audit fees, annual and quarterly reports to Unitholders,
investor relations, and registrar and transfer agent fees) of approximately
$1.5 million per year. This amount is not included in the pro forma amounts
shown above.
(e) The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on
the 2% general partner interest is approximately $42.6 million. The pro
forma amounts reflected above would have been sufficient to cover the
Minimum Quarterly Distribution during 1999, the twelve months ended
September 30, 2000 and the nine months ended September 30, 2000 on all of
the Common Units, the Subordinated Units and the related distribution on the
general partner interest.
D-1
<PAGE> 297
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY FORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO
SELL ONLY THE COMMON UNITS OFFERED BY THIS PROSPECTUS, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 14
Use of Proceeds................................. 28
Capitalization.................................. 29
Dilution........................................ 30
Cash Distribution Policy........................ 31
Cash Available for Distribution................. 38
Selected Historical and Operating Data of the
Ultramar Diamond Shamrock Logistics Business
and Shamrock Logistics Operations, and Pro
Forma Financial and Operating Data of Shamrock
Logistics..................................... 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 47
Business........................................ 64
Management...................................... 99
Security Ownership of Certain Beneficial Owners
and Management................................ 105
Certain Relationships and Related
Transactions.................................. 106
Conflicts of Interest and Fiduciary
Responsibilities.............................. 109
Description of the Common Units................. 114
Description of the Subordinated Units........... 117
The Partnership Agreement....................... 119
Units Eligible for Future Sale.................. 131
Tax Considerations.............................. 133
Investment in Shamrock Logistics by Employee
Benefit Plans................................. 149
Underwriting.................................... 151
Validity of the Common Units.................... 153
Experts......................................... 153
Where You Can Find More Information............. 154
Forward-Looking Statements...................... 154
Index to Financial Statements................... F-1
Appendix A -- Form of Second Amended and
Restated Agreement of Limited Partnership..... A-1
Appendix B -- Form of Application of Transfer of
Common Units.................................. B-1
Appendix C -- Glossary of Terms................. C-1
Appendix D -- Pro Forma Available Cash from
Operating Surplus............................. D-1
</TABLE>
Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
4,000,000 Common Units
SHAMROCK LOGISTICS, LP
Representing Limited
Partner Interests
----------------------
[SHAMROCK LOGO]
----------------------
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
UBS WARBURG LLC
------------------------------------------------------
------------------------------------------------------
<PAGE> 298
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.... $ 25,502
NASD filing fee........................................ 10,160
NYSE listing fee....................................... 275,000
Printing and engraving expenses........................ 450,000
Legal fees and expenses................................ 1,530,000
Accounting fees and expenses........................... 1,680,000
Transfer agent and registrar fees...................... 4,000
Miscellaneous.......................................... 525,338
----------
TOTAL........................................ $4,500,000
==========
</TABLE>
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the Prospectus entitled "The Partnership
Agreement -- Indemnification" is incorporated herein by this reference.
Reference is made to Section 8 of the Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement. Subject to any terms, conditions or
restrictions set forth in the Partnership Agreement, Section 17-108 of the
Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited
partnership to indemnify and hold harmless any partner or other person from and
against all claims and demands whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Shamrock Logistics, L.P. issued to UDS Logistics, LLC limited partner
interests in the partnership and issued to Riverwalk Logistics, L.P. general
partner interests in the partnership in connection with the formation of the
partnership in December 1999 in an offering exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended. There have been no other
sales of unregistered securities within the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement
+3.1 -- Certificate of Limited Partnership of Shamrock Logistics,
L.P.
+3.2 -- Certificate of Amendment to Certificate of Limited
Partnership of Shamrock Logistics, L.P.
+3.3 -- Form of Second Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics, L.P. (included as
Appendix A to the Prospectus)
+3.4 -- Certificate of Limited Partnership of Shamrock Logistics
Operations, L.P.
</TABLE>
II-1
<PAGE> 299
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
+3.5 -- Certificate of Amendment to Certificate of Limited
Partnership of Shamrock Logistics Operations, L.P.
*3.6 -- Form of Second Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics Operations, L.P.
+3.7 -- Certificate of Limited Partnership of Riverwalk
Logistics, L.P.
+3.8 -- Agreement of Limited Partnership of Riverwalk Logistics,
L.P.
+3.9 -- Certificate of Formation of Shamrock Logistics GP, LLC
+3.10 -- Form of Amended and Restated Limited Liability Company
Agreement of Shamrock Logistics GP, LLC
*5.1 -- Form of Opinion of Andrews & Kurth L.L.P. as to the
legality of the securities being registered
+8.1 -- Form of Opinion of Andrews & Kurth L.L.P. relating to tax
matters
*10.1 -- Credit Agreement dated as of December 15, 2000 among
Shamrock Logistics Operations, L.P., the Lenders party
thereto, and The Chase Manhattan Bank, as Administrative
Agent, Royal Bank of Canada, as Syndication Agent,
Suntrust Bank, as Documentation Agent, Chase Securities
Inc., as Arranger
*10.2 -- Form of Contribution Agreement
*10.3 -- Form of Shamrock Logistics GP, LLC Long-Term Incentive
Plan
10.4 -- Form of Shamrock Logistics GP, LLC Short-Term Incentive
Plan
*10.5 -- Employment Agreement (Curtis V. Anastasio), as amended by
Amendment No. 1 and Amendment No. 2
*10.6 -- Form of Pipelines and Terminals Usage Agreement
*10.7 -- Form of Omnibus Agreement
*10.8 -- Form of Services Agreement
10.9 -- Form of Shamrock Logistics GP, LLC Intermediate-Term
Incentive Plan
+21.1 -- List of subsidiaries of Shamrock Logistics, L.P.
*23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Andrews & Kurth L.L.P. (contained in Exhibits
5.1 and 8.1)
+24.1 -- Powers of Attorney (included on the signature page)
+27.1 -- Financial Data Schedule.
</TABLE>
---------------
+ Previously filed.
* Filed herewith. All other exhibits will be filed by amendment.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-2
<PAGE> 300
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE> 301
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Antonio, State of
Texas, on December 19, 2000.
SHAMROCK LOGISTICS, L.P.
By: Riverwalk Logistics, L.P.
its general partner
By: Shamrock Logistics GP, LLC
By: /s/ CURTIS V. ANASTASIO
----------------------------------
Name: Curtis V. Anastasio
Title:President, Chief Executive
Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES
AND ON THE DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board
-----------------------------------------------------
William R. Klesse
/s/ CURTIS V. ANASTASIO President, Chief Executive Officer December 19, 2000
----------------------------------------------------- and Director (Principal
Curtis V. Anastasio Executive Officer)
* Chief Accounting and Financial
----------------------------------------------------- Officer and Director (Principal
Steven Blank Accounting and Financial
Officer)
* Director
-----------------------------------------------------
Timothy J. Fretthold
* Director
-----------------------------------------------------
Robert S. Shapard
*By: /s/ CURTIS V. ANASTASIO
------------------------------------------------
Curtis V. Anastasio
Attorney-in-fact
Dated: December 19, 2000
</TABLE>
II-4
<PAGE> 302
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1 -- Form of Underwriting Agreement
+3.1 -- Certificate of Limited Partnership of Shamrock Logistics,
L.P.
+3.2 -- Certificate of Amendment to Certificate of Limited
Partnership of Shamrock Logistics, L.P.
+3.3 -- Form of Second Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics, L.P. (included as
Appendix A to the Prospectus)
+3.4 -- Certificate of Limited Partnership of Shamrock Logistics
Operations, L.P.
+3.5 -- Certificate of Amendment to Certificate of Limited
Partnership of Shamrock Logistics Operations, L.P.
*3.6 -- Form of Second Amended and Restated Agreement of Limited
Partnership of Shamrock Logistics Operations L.P.
+3.7 -- Certificate of Limited Partnership of Riverwalk
Logistics, L.P.
+3.8 -- Agreement of Limited Partnership of Riverwalk Logistics,
L.P.
+3.9 -- Certificate of Formation of Shamrock Logistics GP, LLC
+3.10 -- Form of Amended and Restated Limited Liability Company
Agreement of Shamrock Logistics GP, LLC
*5.1 -- Form of Opinion of Andrews & Kurth L.L.P. as to the
legality of the securities being registered
+8.1 -- Form of Opinion of Andrews & Kurth L.L.P. relating to tax
matters
*10.1 -- Credit Agreement dated as of December 15, 2000 among
Shamrock Logistics Operations, L.P., the Lenders party
thereto, and The Chase Manhattan Bank, as Administrative
Agent, Royal Bank of Canada, as Syndication Agent,
Suntrust Bank, as Documentation Agent, Chase Securities
Inc., as Arranger
*10.2 -- Form of Contribution, Conveyance and Assumption Agreement
*10.3 -- Form of Shamrock Logistics GP, LLC Long-Term Incentive
Plan
10.4 -- Form of Shamrock Logistics GP, LLC Short-Term Incentive
Plan
*10.5 -- Employment Agreement (Curtis V. Anastasio), as amended by
Amendment No. 1 and Amendment No. 2
*10.6 -- Form of Pipelines and Terminals Usage Agreement
*10.7 -- Form of Omnibus Agreement
*10.8 -- Form of Services Agreement
10.9 -- Form of Shamrock Logistics GP, LLC Intermediate-Term
Incentive Plan
+21.1 -- List of subsidiaries of Shamrock Logistics, L.P.
*23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Andrews & Kurth L.L.P. (contained in Exhibits
5.1 and 8.1)
+24.1 -- Powers of Attorney (included on the signature page)
+27.1 -- Financial Data Schedule.
</TABLE>
---------------
+ Previously filed.
* Filed herewith. All other exhibits will be filed by amendment.
