<PAGE>
As filed with the Securities and Exchange Commission on August 28, 2000
Registration No. 333-_______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE _______
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(972) 699-4000
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
------------------
EDWARD D. DOHERTY
KANEB PIPE LINE COMPANY
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(972) 699-4000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------
Copy to:
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TX 77010
(713) 651-5151
ATTENTION: JOHN A. WATSON
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective, as determined by
market conditions.
------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================ ============================================== =======================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF REGISTRATION
SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED PRICE(1) FEE
============================================ ============================================== =======================
<S> <C> <C> <C>
Debt Securities............................. $500,000,000 100% $132,000
============================================ ============================================== =======================
</TABLE>
(1) We are registering an indeterminate principal amount of debt securities.
If any debt securities are issued at an original issue discount, then the
offering price shall be in such greater principal amount as shall result
in an aggregate initial offering price not to exceed $500,000,000 less
the dollar amount of any securities previously issued.
------------------
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.
===============================================================================
<PAGE>
---------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE, AND WE MAY CHANGE IT.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
---------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED AUGUST 28, 2000
PROSPECTUS
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
DEBT SECURITIES
------------------
We, Kaneb Pipe Line Operating Partnership, L.P., may from time to
time offer and sell debt securities. This prospectus describes the general
terms of these securities and the general manner in which we will offer the
securities. The specific terms of any securities we offer will be included in
a supplement to this prospectus. The prospectus supplement will also describe
the specific manner in which we will offer the securities.
We are owned 99% by Kaneb Pipe Line Partners, L.P., our parent
partnership. Our parent partnership's limited partner units are traded on the
New York Stock Exchange under the symbol "KPP".
Our address is 2435 North Central Expressway, Richardson, Texas
75080, and our telephone number is (972) 699-4055.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ABOUT US..........................................................................................................3
ABOUT THIS PROSPECTUS.............................................................................................3
WHERE YOU CAN FIND MORE INFORMATION...............................................................................3
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS...................................................................4
RISK FACTORS......................................................................................................5
Risks Inherent in Our Business.................................................................................5
Risks Related to Litigation....................................................................................6
WHO WE ARE........................................................................................................8
USE OF PROCEEDS...................................................................................................9
RATIO OF EARNINGS TO FIXED CHARGES................................................................................9
DESCRIPTION OF DEBT SECURITIES...................................................................................10
Specific Terms of Each Series of Debt Securities in the Prospectus Supplement.................................10
No Indenture Limitation on Amount of Debt Securities..........................................................11
Registration of Debt Securities...............................................................................11
No Personal Liability of General Partner......................................................................11
Consolidation, Merger or Sale.................................................................................11
Modification of Indentures....................................................................................11
Events of Default.............................................................................................12
Payment and Transfer..........................................................................................12
Discharging Our Obligations...................................................................................12
Provisions Only in the Senior Indenture.......................................................................13
Provisions Only in Subordinated Indenture.....................................................................18
Book Entry, Delivery and Form.................................................................................18
The Trustee...................................................................................................20
PLAN OF DISTRIBUTION.............................................................................................20
LEGAL............................................................................................................21
EXPERTS..........................................................................................................21
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>
------------------
You should rely only on the information contained in this prospectus,
any prospectus supplement and the documents we have incorporated by reference.
We have not authorized anyone else to give you different information. We are
not offering these securities in any state where they do not permit the offer.
We will disclose any material changes in our affairs in an amendment to this
prospectus, a prospectus supplement or a future filing with the SEC
incorporated by reference in this prospectus .
2
<PAGE>
ABOUT US
We are a Delaware limited partnership engaged in the refined
petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids. Kaneb Pipe Line Company, a wholly owned
subsidiary of Kaneb Services, Inc., serves as our general partner.
As used in this prospectus, "we," "us," "our" and "Kaneb Partners"
mean Kaneb Pipe Line Operating Partnership, L.P. and, where the context
requires, include our subsidiary operating companies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission using a "shelf"
registration process. Under this shelf registration process, we may sell up
to $500 million in principal amount of the debt securities described in this
prospectus in one or more offerings. This prospectus generally describes us
and the debt securities. Each time we sell debt securities with this
prospectus, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus
supplement may also add to, update or change information in this prospectus.
The information in this prospectus is accurate as of August 28, 2000. You
should carefully read both this prospectus and any prospectus supplement and
the additional information described under the heading "Where You Can Find
More Information."
WHERE YOU CAN FIND MORE INFORMATION
Our parent partnership, Kaneb Pipe Line Partners, L.P., files
annual, quarterly and other reports and other information with the SEC. You
may read and copy any document we or our parent partnership files at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the SEC's regional offices at Seven World Trade Center, New York, New
York 10048, and at 500 West Madison Street, Chicago, Illinois 60661. Please
call the SEC at 1-800-732-0330 for further information on their public
reference room. These SEC filings are also available at the SEC's web site at
http://www.sec.gov. You can also obtain information about our parent
partnership at the offices of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
The SEC allows us to "incorporate by reference" information filed
with the SEC. This means that we can disclose important information to you
without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference
is an important part of this prospectus. Information that we or our parent
partnership files later with the SEC will automatically update and may
replace information in this prospectus and information previously filed with
the SEC. The documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934 are incorporated by reference in this prospectus until we sell all of
the debt securities offered by this prospectus.
- Annual Report on Form 10-K of Kaneb Pipe Line Partners, L.P.
for the fiscal year ended December 31, 1999.
- Quarterly Report on Form 10-Q of Kaneb Pipe Line Partners,
L.P. for the quarterly period ended March 31, 2000.
- Quarterly Report on Form 10-Q of Kaneb Pipe Line Partners,
L.P. for the quarterly period ended June 30, 2000.
3
<PAGE>
You may request a copy of these filings, at no cost, by writing or
calling us at the following address:
Investor Relations Department
Kaneb Pipe Line Partners, L.P.
2435 North Central Expressway
Richardson, Texas 75080
(972) 699-4055.
NO SEPARATE FINANCIAL INFORMATION FOR US HAS BEEN PROVIDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS BECAUSE: (I) OUR PARENT
PARTNERSHIP DOES NOT ITSELF CONDUCT ANY OPERATIONS, BUT RATHER ALL OPERATIONS
OF OUR PARENT PARTNERSHIP AND ITS SUBSIDIARIES ARE CONDUCTED BY US; (II) OUR
PARENT PARTNERSHIP HAS NO MATERIAL ASSETS OTHER THAN SUBSTANTIALLY ALL OF THE
OWNERSHIP INTEREST IN US; AND (III) WE OWN ALL OF THE ASSETS AND LIABILITIES
SHOWN IN THE CONSOLIDATED FINANCIAL STATEMENTS FOR OUR PARENT PARTNERSHIP.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the
documents we have incorporated by reference contain forward-looking
statements. The words "believe," "expect," "estimate" and "anticipate" and
similar expressions identify forward-looking statements. Forward-looking
statements include those that address activities, events or developments that
we expect or anticipate will or may occur in the future. These include the
following:
- the amount and nature of future capital expenditures,
- business strategy and measures to carry out strategy,
- competitive strengths,
- goals and plans,
- expansion and growth of our business and operations,
- references to intentions as to future matters and
- other similar matters.
A forward-looking statement may include a statement of the
assumptions or bases underlying the forward-looking statement. We believe we
have chosen these assumptions or bases in good faith and that they are
reasonable. However, we caution you that assumed facts or bases almost always
vary from actual results, and the differences between assumed facts or bases
and actual results can be material, depending on the circumstances. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this prospectus, any prospectus
supplement and the documents we have incorporated by reference. We will not
update these statements unless the securities laws require us to do so.
4
<PAGE>
RISK FACTORS
RISKS INHERENT IN OUR BUSINESS
OUR RATES MAY BE LIMITED BY FERC REGULATIONS.
The Federal Energy Regulatory Commission, pursuant to the Interstate
Commerce Act, regulates the tariff rates for our interstate common carrier
pipeline operations. To be lawful under that Act, tariff rates must be just
and reasonable and not unduly discriminatory. Shippers may protest, and the
FERC may investigate, the lawfulness of new or changed tariff rates. The FERC
can suspend those tariff rates for up to seven months. It can also require
refunds of amounts collected under rates ultimately found unlawful. The FERC
may also challenge tariff rates that have become final and effective. Because
of the complexity of rate making, the lawfulness of any rate is never assured.
The FERC's primary rate making methodology is price indexing. We use
this methodology in approximately half of our markets. With FERC approval, we
use market based rates in our other markets. The indexing method allows a
pipeline to increase its rates by a percentage equal to the Producer Price
Index for Finished Goods minus 1%. If the index rises by less than 1% or
falls, we will be required to reduce our rates that are based on the FERC's
price indexing methodology if they exceed the new maximum allowable rate. In
addition, changes in the index might not be large enough to fully reflect
actual increases in our costs. The FERC's rate making methodologies may limit
our ability to set rates based on our true costs or may delay the use of
rates that reflect increased costs. If this occurs, it could adversely affect
us. Competition constrains our rates in all of our markets. As a result we
may from time to time be forced to reduce some of our rates to remain
competitive.
UNCERTAINTIES IN CALCULATING COST OF SERVICE FOR RATE-MAKING
PURPOSES.
In a 1995 decision involving an unrelated oil pipeline limited
partnership, the FERC partially disallowed the inclusion of income taxes in
that partnership's cost of service. In another FERC proceeding involving a
different oil pipeline limited partnership, the FERC held that the oil
pipeline limited partnership may not claim an income tax allowance for income
attributable to non-corporate limited partners, both individuals and other
entities. If we were to become involved in a contested rate proceeding, this
issue could be raised by an adverse party in that proceeding. Disallowance of
the income tax allowance in the cost of service of our pipelines would
adversely affect our cash flow and could reduce cash distributions to our
unitholders.
COMPETITION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Competitive conditions sometimes require that our pipelines file
individual rates that are less than the maximum permitted by law to avoid
losing business to competitors. Our east pipeline's major competitor is an
independent regulated common carrier pipeline system owned by The Williams
Companies, Inc. Williams' pipeline operates approximately 100 miles east of
and parallel to our east pipeline. This competing pipeline system is
substantially more extensive than our east pipeline. Fifteen of our sixteen
delivery terminals on our east pipeline directly compete with Williams'
terminals. Williams and its affiliates have capital and financial resources
substantially greater than ours.
Our west pipeline competes with the truck loading facilities of
refineries in Denver, Colorado, and Cheyenne, Wyoming and the Denver
terminals of the Chase Pipeline Company and Phillips Petroleum Company. The
Ultramar Diamond Shamrock terminals in Denver and Colorado Springs that
connect to an Ultramar Diamond Shamrock pipeline from their Texas Panhandle
refinery are major competitors to our west pipeline's Denver and Fountain
terminals.
The independent liquids terminaling industry is fragmented and
includes both large, well-financed companies that own many terminal locations
and small companies that may own a single terminal location. Several
companies that offer liquids terminaling facilities have significantly more
capacity than ours, particularly
5
<PAGE>
those used primarily for petroleum-related products. We also face competition
from prospective customers that have their own terminal facilities.
REDUCED DEMAND COULD AFFECT SHIPMENTS ON THE PIPELINES.
Our pipeline business depends in large part on the demand for
refined petroleum products in the markets served by our pipelines. Reductions
in that demand adversely affect our pipeline business. Most of the refined
petroleum products delivered through our east pipeline are ultimately used as
fuel for railroads or in agricultural operations. Agricultural operations
include fuel for farm equipment, irrigation systems, trucks transporting
crops and crop drying facilities. Weather conditions in the geographic areas
served by our east pipeline affect the demand for refined petroleum products
for agricultural use and the relative mix of products required. Periods of
drought suppress agricultural demand for some refined petroleum products,
particularly those used for fueling farm equipment. Although the demand for
fuel for irrigation systems often increases during those times, the increase
may not be sufficient to offset the reduced demand for refined petroleum
products for agricultural use. Governmental agricultural policies and crop
prices also affect the agricultural sector. Governmental policies or crop
prices that result in reduced farming operations in the markets we serve
could indirectly reduce the demand for refined petroleum products in those
markets.
Governmental regulation, technological advances in fuel economy,
energy generation devices and future fuel conservation measures could reduce
the demand for refined petroleum products in the market areas our pipelines
serve.
RISK OF ENVIRONMENTAL COSTS AND LIABILITIES.
Our operations are subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe
that our operations comply with applicable environmental regulations, risks
of substantial costs and liabilities are inherent in pipeline operations and
terminaling operations. We cannot assure you that we will not incur
substantial costs and liabilities. We currently own or lease, and have in the
past owned or leased, many properties that have been used for many years to
terminal or store petroleum products or other chemicals. Owners, tenants or
users of these properties have disposed of or released hydrocarbons or solid
wastes on or under them. Additionally, some sites we operate are located near
current or former refining and terminaling operations. There is a risk that
contamination has migrated from those sites to ours. Increasingly strict
environmental laws, regulations and enforcement policies and claims for
damages and other similar developments could result in substantial costs and
liabilities.
RISKS RELATED TO LITIGATION
Certain of our subsidiaries were sued in a Texas state court in 1997
by Grace Energy Corporation ("Grace"), the entity from which we acquired ST
Services in 1993. The lawsuit involves environmental response and remediation
allegedly resulting from jet fuel leaks in the early 1970's from a pipeline.
The pipeline, which connected a former Grace terminal with Otis Air Force
Base in Massachusetts, was abandoned in 1976, when the connecting terminal
was sold to an unrelated entity.
The lawsuit involves environmental response and remediation required
by the State of Massachusetts. Grace alleged our subsidiaries acquired the
abandoned pipeline, as part of the acquisition of ST Services in 1993, and
assumed responsibility for environmental damages allegedly caused by the jet
fuel leaks. Grace sought a ruling that these subsidiaries are responsible for
all present and future remediation and expenses for these leaks and that
Grace has no obligation to indemnify these subsidiaries for these expenses.
In the lawsuit, Grace also sought indemnification for expenses that
it has incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional
expenses that it expects to incur in the future. The consistent position of
our subsidiaries is that they did not acquire the abandoned pipeline as part
of the 1993 ST transaction, and therefore did not assume any responsibility
for the environmental damage nor any liability to Grace for the pipeline.
6
<PAGE>
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993
acquisition agreement and that the pipeline was abandoned prior to 1978. On
July 17, 2000, the Judge entered judgment, which is not yet final, in the
case that Grace take nothing from the subsidiaries on its claims, including
claims for future expenses. Although our subsidiaries have not incurred any
expenses in connection with the remediation, the court also ruled, in effect,
that the subsidiaries would not be entitled to an indemnification from Grace
if any such expenses were incurred in the future. However, the Judge let
stand a prior summary judgment ruling that the pipeline was an asset of the
company acquired as part of the 1993 ST transaction. The Judge also awarded
attorney fees to Grace.
While the judgment means that our subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as
required by the State of Massachusetts, the subsidiaries intend to appeal the
judgment finding that the Otis Pipeline was transferred to them and the award
of attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of Defense
and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, have been responding to the Government remediation demand for most
of the contamination problems at the MMR Site. Grace and others have also
received and responded to formal inquiries from the United States Government
in connection with the environmental damages allegedly resulting from the jet
fuel leaks. Our subsidiaries have voluntarily responded to an invitation from
the Government to provide information indicating that they do not own the
pipeline. In connection with a court-ordered mediation between Grace and the
subsidiaries, the Government advised the parties in April 1999 that it has
identified the two spill areas that it believes to be related to the pipeline
that is the subject of the Grace suit. The Government advised the parties
that it believes it has incurred costs of approximately $34 million, and
expects in the future to incur costs of approximately $55 million, for
remediation of one of the spill areas. This amount was not intended to be a
final accounting of costs or to include all categories of costs. The
Government also advised the parties that it could not at that time allocate
its costs attributable to the second spill area. We believe that the ultimate
cost of the remediation, while substantial, will be considerably less than
the Government has indicated.
7
<PAGE>
WHO WE ARE
We are a Delaware limited partnership engaged through operating
subsidiaries in the refined petroleum products pipeline business and the
terminaling of petroleum products and specialty liquids. The following chart
shows our organization and ownership structure as of the date of this
prospectus. Except in the following chart, the ownership percentages referred
to in this prospectus reflect the approximate effective ownership interest in
us and our subsidiary companies on a combined basis.
[organizational chart]
8
<PAGE>
Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska,
South Dakota, North Dakota, Wyoming and Colorado. We own a 2,125-mile
pipeline system that extends through Kansas, Iowa, Nebraska, South Dakota and
North Dakota and a 550-mile pipeline system that extends through Wyoming,
South Dakota and Colorado. Our east pipeline serves the agricultural markets
of the midwestern United States and transports a broad range of refined
petroleum products and propane. Our west pipeline serves Eastern Wyoming,
Western South Dakota, and the urban areas of Colorado and transports
principally gasoline. These products are transported from refineries
connected to our pipelines, directly or through other pipelines, to
agricultural users, railroads and wholesale customers . During 1999, we
shipped approximately 85.4 million barrels of refined petroleum products on
our pipeline system. Substantially all of our pipeline operations constitute
common carrier operations that are subject to federal and state tariff
regulation. By authority of the Federal Energy Regulatory Commission we have
adopted market-based rates in approximately one-half of our markets.
We are also the third largest independent liquids terminaling
company in the United States. Our terminaling business is conducted under the
name ST Services. ST Services and its predecessors have been in the
terminaling business for more than 40 years. Our total worldwide tankage
capacity is approximately 28.8 million barrels. Since 1994, we have acquired
14 domestic terminal facilities with an aggregate storage capacity of 16.9
million barrels. In the United States, we operate 34 facilities in 19 states
and the District of Columbia. Our five largest wholly owned terminal
facilities in the U.S. are located in Piney Point, Maryland; Jacksonville,
Florida; Texas City, Texas; Philadelphia, Pennsylvania; and Westwego,
Louisiana. We also own a 50% interest in and manage a 3.9 million barrel
petroleum terminal in Linden, New Jersey. In February 1999, we acquired six
terminals in the United Kingdom with an aggregate capacity of approximately
5.5 million barrels for approximately $37.2 million and the assumption of
certain liabilities. Three of the U.K. terminals are located in England, two
in Scotland and one in Northern Ireland. Our U.S. and U.K. terminals provide
storage on a fee basis for a wide variety of products from petroleum products
to specialty chemicals to edible liquids.
USE OF PROCEEDS
Except as otherwise provided in the applicable prospectus
supplement, we will use the net proceeds we receive from the sale of the debt
securities to acquire properties as suitable opportunities arise and to pay
indebtedness outstanding at the time.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges of our parent partnership for
each of the periods indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------------- ENDED JUNE
1995 1996 1997 1998 1999 30, 2000
--------- -------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges....... 6.50x 4.60x 4.63x 4.77x 4.56x 4.52x
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges:
- "fixed charges" represent interest expense and the
portion of rental expense representative of the
interest factor
- "earnings" represent income before minority interest
and income taxes, plus fixed charges, less
undistributed earnings of equity affiliates.
9
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The debt securities will be:
- our direct unsecured general obligations;
- either senior debt securities or subordinated debt
securities; and
- issued under one or more separate indentures between us and
a trustee to be named in the prospectus supplement.
Senior debt securities will be issued under a Senior Indenture and
subordinated debt securities will be issued under a Subordinated Indenture.
Together the Senior Indentures and the Subordinated Indentures are called
Indentures.
We have summarized selected provisions of the Indentures below. The
form of the Senior Indenture has been filed as an exhibit to the registration
statement. The form of the subordinated indenture will be filed as an exhibit
to this Registration Statement before any subordinated debt securities are
offered pursuant to this prospectus. You should read the Indentures for
provisions that may be important to you, because the Indentures, and not this
description, govern your rights as a holder of debt securities. Capitalized
terms used in the summary have the meanings specified in the Indentures.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement and a supplemental indenture relating to any
series of debt securities being offered will include specific terms relating
to the offering. These terms will include some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the date or dates on which the debt securities may be issued;
- the portion of the principal amount which will be payable if
the maturity of the debt securities is accelerated;
- any right we may have to defer payments of interest by
extending the dates payments are due and whether interest on
those deferred amounts will be payable as well;
- the dates on which the principal and premium, if any, of the
debt securities will be payable;
- the interest rate which the debt securities will bear and the
interest payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us
to repurchase or otherwise redeem the debt securities;
- whether the debt securities will be issued in amounts other
than $1,000 each or multiples thereof;
- any changes to or additional Events of Default or covenants;
and
- any other terms of the debt securities.
10
<PAGE>
NO INDENTURE LIMITATION ON AMOUNT OF DEBT SECURITIES
Neither of the Indentures limits the amount of debt securities that
may be issued under it. Each Indenture allows debt securities to be issued up
to the principal amount that may be authorized by us and may be in any
currency or currency unit designated by us.
REGISTRATION OF DEBT SECURITIES
Debt securities of a series may be issued in certificated or global
form.
NO PERSONAL LIABILITY OF GENERAL PARTNER
Our general partner and its directors, officers, employees and
stockholder will not have any liability for our obligations under the
Indentures or the debt securities. Each holder of debt securities by
accepting a debt security waives and releases our general partner and its
directors, officers, employees and stockholder from all such liability. The
waiver and release are part of the consideration for the issuance of the debt
securities.
CONSOLIDATION, MERGER OR SALE
We will only consolidate or merge with or into any other
partnership, limited liability company or corporation or sell, lease or
transfer all or substantially all of our assets according to the terms and
conditions of the Indentures, which include the following requirements:
- the remaining or acquiring partnership, limited liability
company or corporation is organized under the laws of the
United States, any state or the District of Columbia;
- the remaining or acquiring partnership, limited liability
company or corporation assumes our obligations under the
Indentures; and
- immediately after giving effect to the transaction no Default
or Event of Default exists.
The remaining or acquiring partnership, limited liability company or
corporation will be substituted for us in the Indentures with the same effect
as if it had been an original party to the Indentures. Thereafter, the
successor may exercise our rights and powers under any Indenture, in our name
or in its own name. Any act or proceeding required or permitted to be done by
the general partner's Board of Directors or any of the general partner's
officers may be done by the board of directors or officers of the successor.
If we sell or transfer all or substantially all of our assets, we will be
released from all of our liabilities and obligations under any Indenture and
under the debt securities. If we lease all or substantially all of our
assets, we will not be released from our obligations under the Indentures.
MODIFICATION OF INDENTURES
Under each Indenture, generally our rights and obligations and the
rights of the holders may be modified with the consent of the holders of a
majority in aggregate principal amount of the outstanding debt securities of
each series affected by the modification. No modification of the principal or
interest payment terms, and no modification reducing the percentage required
for modifications, is effective against any holder without its consent. We
and the Trustee may amend the Indentures without the consent of any holder of
the debt securities to make changes such as:
- correcting errors;
- providing for a successor trustee;
- providing security for any series of senior debt securities;
11
<PAGE>
- adding covenants for the benefit of holders of debt
securities;
- qualifying the Indentures under the Trust Indenture Act; or
- establishing form and provisions relating to a particular
series of debt securities.
EVENTS OF DEFAULT
"Event of Default" when used in an Indenture, will mean any of the
following:
- failure to pay the principal of or any premium on any debt
security when due;
- failure to pay interest on any debt security when due, which
failure continues for 30 days;
- failure to perform any other covenant in the Indentures that
continues for 60 days after being given written notice by the
Trustee or at the holders of at least 25% and a series
outstanding under the Indenture;
- specific events in bankruptcy, insolvency or reorganization
of us or our material subsidiaries; or
- any other Event of Default included in any Indenture or
supplemental indenture.
An Event of Default for a particular series of debt securities does
not necessarily constitute an Event of Default for any other series of debt
securities issued under an Indenture. The Trustee may withhold notice to the
holders of debt securities of any default (except in the payment of principal
or interest) if it considers such withholding of notice to be in the
interests of the holders.
If an Event of Default for any series of debt securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of that series may declare the entire principal
of all the debt securities of that series to be due and payable immediately.
If this happens, subject to specific conditions, the holders of a majority of
the aggregate principal amount of the debt securities of that series can void
the declaration.
Other than its duties in case of a default, a Trustee is not
obligated to exercise any of its rights or powers under any Indenture at the
request, order or direction of any holders, unless the holders offer the
Trustee reasonable indemnity. If they provide this reasonable
indemnification, the holders of a majority in principal amount of any series
of debt securities may direct the time, method and place of conducting any
proceeding or any remedy available to the Trustee, or exercising any power
conferred upon the Trustee, for any series of debt securities.
PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered debt
securities will be paid at designated places. Payment will be made by check
mailed to the persons in whose names the debt securities are registered on
days specified in the Indentures or any prospectus supplement. Other forms of
payment relating to the debt securities will be paid at a place designated by
us and specified in a prospectus supplement.
Fully registered securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency
maintained by us for such purposes, without the payment of any service charge
except for any tax or governmental charge.
12
<PAGE>
DISCHARGING OUR OBLIGATIONS
We may choose to either discharge our obligations on the debt
securities of any series in a legal defeasance, or to release ourselves from
our covenant restrictions on the debt securities of any series in a covenant
defeasance. We may do so at any time on the 91st day after we deposit with
the Trustee sufficient cash or government securities to pay the principal,
interest, any premium and any other sums due to the stated maturity date or a
redemption date of the debt securities of the series. If we choose the legal
defeasance option, the holders of the debt securities of the series will not
be entitled to the benefits of the related Indenture except for registration
of transfer and exchange of debt securities, replacement of lost, stolen,
destroyed or mutilated debt securities, conversion or exchange of debt
securities, sinking fund payments and receipt of principal and interest on
the original stated due dates or specified redemption dates.
We may discharge our obligations under the Indentures or release
ourselves from covenant restrictions only if, in addition to making the
deposit with the Trustee, we meet some specific requirements. Among other
things:
- we must deliver an opinion of our legal counsel that the
discharge will not result in holders having to recognize gain
or loss for federal income tax purposes and will be subject to
federal income tax on the same amount, in the same manner and
at the same time as if defeasance has not occurred, and in the
case of legal defeasance, this opinion must be based on either
any published or private IRS letter ruling or a change in
federal tax law;
- we may not have a default on the debt securities discharged on
the date of deposit; and
- the discharge may not result in our becoming an investment
company in violation of the Investment Company Act of 1940.
PROVISIONS ONLY IN THE SENIOR INDENTURE
GENERAL. The Senior Indenture contains provisions that limit our
ability to:
- put liens on our principal assets, and
- sell or transfer our principal assets and then lease back
those assets.
We describe below these provisions and some of the defined terms
used in them. In this section, references to us relate only to Kaneb Pipe
Line Operating Partnership, L.P., the issuer of the debt securities, and not
to our parent partnership or operating subsidiaries.
LIMITATIONS ON LIENS. The Senior Indenture provides that we will
not, nor will we permit any of our Subsidiaries to, create, assume or incur
any lien upon any Principal Property (as defined below) or upon any shares of
capital stock of any Subsidiary (as defined below) of us owning or leasing
any Principal Property, whether owned or leased on the date of the Senior
Indenture or thereafter acquired, to secure any Debt (as defined below) of us
or any other Person (as defined below) (other than the senior debt securities
issued thereunder), without in any such case making effective provision
whereby all the senior debt securities (together with, if we shall so
determine, any other Debt or obligations of us) shall be secured equally and
ratably with, or prior to, such Debt so long as such debt shall be so
secured. The following are excluded from this restriction, and in the
following list, the phrase "property or assets" also includes shares of
capital stock and other equity interests in any of our Subsidiaries:
(1) Permitted Liens (as defined below);
(2) any lien upon any property or assets created at the time of
acquisition of such property or assets by us or any of our
Subsidiaries or within one year after such time to secure all or
a portion of the
13
<PAGE>
purchase price for such property or assets or Debt incurred to
finance such purchase price, whether such Debt was incurred
prior to, at the time of or within one year after the date of
such acquisition;
(3) any lien upon any property or assets to secure all or part of
the cost of construction, development, repair or improvements
thereon or to secure Debt incurred prior to, at the time of, or
within one year after, completion of such construction,
development, repair or improvements or the commencement of full
operations thereof (whichever is later), to provide funds for
any such purpose;
(4) any lien upon any current assets to secure Debt of us or our
Subsidiaries;
(5) any lien upon any property or assets existing thereon at the
time of the acquisition thereof by us or any of our Subsidiaries
(whether or not the obligations secured thereby are assumed by
us or any of our Subsidiaries);
(6) any lien upon any property or assets of a Person existing
thereon at the time such Person becomes a Subsidiary of us by
acquisition, merger or otherwise;
(7) any lien upon any property or assets of ours or any of our
Subsidiaries in existence on the Issue Date or provided for
pursuant to agreements existing on the Issue Date;
(8) liens imposed by law or order as a result of any proceeding
before any court or regulatory body that is being contested in
good faith, and liens which secure a judgment or other
court-ordered award or settlement as to which we or our
applicable Subsidiary has not exhausted its appellate rights;
(9) liens on capital stock of any of our Subsidiaries which owns an
equity interest in a joint venture to secure Debt, provided that
the proceeds of such Debt which are received are contributed or
advanced to such joint venture;
(10) any extension, renewal, refinancing, refunding or replacement,
or successive extensions, renewals, refinancings, refundings or
replacements, of liens, in whole or in part, referred to in
clauses (1) through (9) above, or any Debt secured thereby;
(11) any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing Debt of us or
any of our Subsidiaries; or
(12) any lien upon any property or assets to secure Debt incurred by
us or any of our Subsidiaries, the proceeds of which, in whole
or part, were used to defease, in a legal defeasance or a
covenant defeasance, or obligations on any series of senior debt
securities.
Notwithstanding the foregoing, under the Senior Indenture, we may,
and may permit any of our Subsidiaries to, create, assume or incur, any lien
upon any Principal Property or upon any shares of capital stock of any of our
Subsidiaries owning or leasing any Principal Property to secure Debt of us or
any person other than the senior debt securities, that is not excepted by
clauses (1) through (12), inclusive, above without securing the senior debt
securities issued under the Senior Indenture, provided that the aggregate
principal amount of all Debt then outstanding secured by such lien and all
similar liens, together with all net sale proceeds from Sale-Leaseback
Transactions, excluding Sale-Leaseback Transactions permitted by clauses (1)
through (4), inclusive, of the first paragraph of the restriction on
sale-leasebacks covenant described below, do not exceed [10%] of Consolidated
Net Tangible Assets (as defined below).
14
<PAGE>
"Consolidated Net Tangible Assets" means, at any date of
determination, the total amount of assets after deducting therefrom:
(1) all current liabilities excluding:
- any current liabilities that by their terms are extendable
or renewable at the option of the obligor thereon to a time
more than 12 months after the time as of which the amount
thereof is being computed; and
- current maturities of long-term Debt;
and
(2) the value, net of any applicable reserves, of all goodwill,
trade names, trademarks, patents and other like intangible
assets,
all as set forth, or on a pro-forma basis would be set forth, on the
consolidated balance sheet of us and our consolidated Subsidiaries for our
most recently completed fiscal quarter, prepared in accordance with generally
accepted accounting principles.
"Debt" means an obligation of a Person to repay money borrowed and,
without duplication, any guaranty therefor,
"Issue Date" means with respect to any series of debt securities
issued under either Indenture the date on which debt securities of that
series are initially issued under that Indenture.
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by
operation of law, or any mechanics', repairmen's,
materialmen's, suppliers', carriers', landlords',
warehousemen's or similar lien incurred in the ordinary course
of business which is not yet due or which is being contested
in good faith by appropriate proceedings and any undetermined
lien which is incidental to construction, development,
improvement or repair;
(3) the right reserved to, or vested in, any municipality or
public authority by the terms of any right, power, franchise,
grant, license, permit or by any provision of law, to purchase
or recapture or to designate a purchaser of, any property;
(4) liens of taxes and assessments which are:
- for the then current year,
- not at the time delinquent, or
- delinquent but the validity of which is being contested
at the time by us or any of our Subsidiaries in good
faith;
(5) liens of, or to secure performance of, leases;
(6) any lien upon, or deposits of, any assets in favor of any
surety company or clerk of court for the purpose of obtaining
indemnity or stay of judicial proceedings;
15
<PAGE>
(7) any lien upon property or assets acquired or sold by us or any
of our Subsidiaries resulting from the exercise of any rights
arising out of defaults on receivables;
(8) any lien incurred in the ordinary course of business in
connection with workmen's compensation, unemployment
insurance, temporary disability, social security, retiree
health or similar laws or regulations or to secure obligations
imposed by statute or governmental regulations;
(9) any lien in favor of us or any of our Subsidiaries;
(10) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or
political subdivision of the United States of America or any
state thereof, to secure partial, progress, advance, or other
payments pursuant to any contract or statute, or any debt
incurred by us or any of our Subsidiaries for the purpose of
financing all or any part of the purchase price of, or the
cost of constructing, developing, repairing or improving, the
property or assets subject to such lien;
(11) any lien securing industrial development, pollution control or
similar revenue bonds;
(12) any lien securing debt of us or any of our Subsidiaries, all
or a portion of the net proceeds of which are used,
substantially concurrent with the funding thereof (and for
purposes of determining such "substantial concurrence," taking
into consideration, among other things, required notices to be
given to holders of outstanding securities under the Senior
Indenture (including the senior debt securities) in connection
with such refunding, refinancing or repurchase, and the
required corresponding durations thereof), to refinance,
refund or repurchase all outstanding securities under the
Senior Indenture (including the senior debt securities),
including the amount of all accrued interest thereon and
reasonable fees and expenses and premium, if any, incurred by
us or any of our Subsidiaries in connection therewith;
(13) liens in favor of any Person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or
surety obligations required or requested by any governmental
authority in connection with any contract or statute; or
(14) any lien upon or deposits of any assets to secure performance
of bids, trade contracts, leases or statutory obligations.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
other entity, unincorporated organization or government or any agency or
political subdivision thereof.
"Principal Property" means, whether owned or leased on the Issue
Date or thereafter acquired:
(1) any pipeline assets of us or any of our Subsidiaries,
including any related facilities employed in the
transportation, distribution, storage or marketing of refined
petroleum products, that are located in the United States of
America or any territory or political subdivision thereof; and
(2) any processing or manufacturing plant or terminal owned or
leased by us or any of our Subsidiaries that is located in the
United States or any territory or political subdivision
thereof, except, in the case of either of the foregoing
clauses (1) or (2):
- any such assets consisting of inventories, furniture,
office fixtures vehicles and equipment used on, or useful
with, vehicles, and equipment, including data processing
equipment, and
16
<PAGE>
- any such assets, plant or terminal which, in the good
faith opinion of the Board of Directors of our general
partner, is not material in relation to the activities of
us or of us and our Subsidiaries, taken as a whole.
"Subsidiary" means:
- any corporation, association or other business entity of which
more than 50% of the total voting power of shares of equity
interests entitled, without regard to the occurrence of any
contingency, to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly
or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or combination thereof; or
- in the case of a partnership, more than 50% of the partners'
equity interests, considering all partners' equity interests
as a single class is at the time owned or controlled, directly
or indirectly, by such Person or one or more of the other
Subsidiaries of such Person or combination thereof.
LIMITATIONS ON SALE-LEASEBACKS. The Senior Indenture provides that
we will not, and will not permit any of our Subsidiaries to, engage in a
Sale-Leaseback Transaction (defined below), unless:
(1) such Sale-Leaseback Transaction occurs within one year from
the date of completion of the acquisition of the Principal
Property subject thereto or the date of the completion of
construction, or development of, or substantial repair or
improvement on, or commencement of full operations of, such
Principal Property, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than three years;
(3) the Attributable Indebtedness from that Sale-Leaseback
transaction is an amount equal to or less than the amount we
or our Subsidiary would be allowed to incur as debt secured by
a lien on the Principal Property subject thereto without
equally and ratably securing the senior debt securities; or
(4) we or our Subsidiary, within a one-year period after such
Sale-Leaseback Transaction, applies or causes to be applied an
amount not less than the net sale proceeds from such
Sale-Leaseback Transaction to (A) the prepayment, repayment,
redemption, reduction or retirement of any Pari Passu Debt of
us or any of our Subsidiaries, or (B) the expenditure or
expenditures for
- Principal Property used or to be used in the ordinary
course of business of us or any of our Subsidiaries
or
- capital stock or other equity interests in (1) a
Person that is or with such expenditure becomes a
Subsidiary of the Partnership or (2) in a joint
venture, and, in each case, as its principal assets
owns property that otherwise consists of Principal
Property.
Notwithstanding the foregoing, under the Senior Indenture we may, and may
permit any of our Subsidiaries to, effect any Sale-Leaseback Transaction that
is not excepted by clauses (1) through (4), inclusive, of the above
paragraph, provided that the Attributable Indebtedness from such
Sale-Leaseback Transaction, together with the aggregate principal amount of
then outstanding Debt (other than the senior debt securities) secured by
liens upon Principal Properties not excepted by clauses (1) through (12),
inclusive, of the first paragraph of the limitation on liens covenant
described above, do not exceed [10%] of the Consolidated Net Tangible Assets.
"Attributable Indebtedness," when used with respect to any
Sale-Leaseback Transaction, means, as at the time of determination, the
present value, discounted at the rate set forth or implicit in the terms of
the lease
17
<PAGE>
included in such transaction, of the total obligations of the lessee for
rental payments, other than amounts required to be paid on account of taxes,
maintenance, repairs, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights,
during the remaining term of the lease included in such Sale-Leaseback
Transaction, including any period for which such lease has been extended. In
the case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of the
amount determined assuming termination upon the first date such lease may be
terminated, in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required
to be paid under such lease subsequent to the first date upon which it may be
so terminated, or the amount determined assuming no such termination.
"Funded Debt" means all Debt maturing one year or more from the date
of the creation thereof, all Debt directly or indirectly renewable or
extendible, at the option of the debtor, by its terms or by the terms of any
instrument or agreement relating thereto, to a date one year or more from the
date of the creation thereof, and all Debt under a revolving credit or
similar agreement obligating the lender or lenders to extend credit over a
period of one year or more.
"Pari Passu Debt" means any Funded Debt of us or any of our
Subsidiaries, whether outstanding on the Issue Date or thereafter created,
incurred or assumed, unless, in the case of any particular Funded Debt, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Funded Debt shall be subordinated in
right of payment to the senior debt securities.
"Sale-Leaseback Transaction" means the sale or transfer by us or any
of our Subsidiaries of any Principal Property to a Person (other than us or
any of our Subsidiaries) and the taking back by us or any of our
Subsidiaries, as the case may be, of a lease of such Principal Property.
PROVISIONS ONLY IN SUBORDINATED INDENTURE
SUBORDINATION TO SENIOR DEBT. The subordinated debt securities will
rank junior in right of payment to all our Senior Debt. "Senior Debt" is
defined as all our Debt not expressly subordinate or junior in right of
payment to any other of our Debt.
PAYMENT BLOCKAGES. The Subordinated Indenture will provide that no
payment of principal, interest and any premium on the subordinated debt
securities may be made in the event:
- we or our property are involved in any voluntary or
involuntary liquidation or bankruptcy; or
- we fail to pay the principal, interest, any premium or any
other amounts on any Senior Debt when due; or
- we have a nonpayment default on any Senior Debt that imposes
a payment blockage on the subordinated debt securities for a
maximum of 179 days at any one time.
BOOK ENTRY, DELIVERY AND FORM
The debt securities of a series may be issued in whole or in part in
the form of one or more global certificates that will be deposited with a
depositary identified in a prospectus supplement. Unless otherwise stated in
any prospectus supplement, The Depository Trust Company, New York, New York
("DTC") will act as depositary. Book-entry notes of a series will be issued
in the form of a global note that will be deposited with DTC. This means that
we will not issue certificates to each holder. One global note will be issued
to DTC who will keep a computerized record of its participants (for example,
your broker) whose clients have purchased the notes. The participant will
then keep a record of its clients who purchased the notes. Unless it is
exchanged in whole or in part for a certificate note, a global note may not
be transferred; except that DTC, its nominees and their successors may
transfer a global note as a whole to one another.
18
<PAGE>
Beneficial interests in global notes will be shown on, and transfers
of global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a
member of the United States Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered under the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC holds securities that its participants ("Direct
Participants") deposit with DTC. DTC also records the settlement among Direct
Participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for Direct Participant's
accounts. This eliminates the need to exchange certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other organizations.
DTC's ability to perform its services properly dependent upon other
parties, including but not limited to:
- issuers and their agents;
- third party vendors from whom DTC licenses software and
hardware; and
- third party vendors on whom DTC relies for information or the
provisions of services, including telecommunication and
electrical utility service providers.
According to DTC, the foregoing information with respect to DTC has
been provided to the financial community for informational purposes only and
is not intended to serve as a representation, warranty or contract
modification of any kind.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on
file with the SEC.
DTC is owned by a number of its Direct Participants and by the New
York Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and
the Trustee will treat DTC or its nominee as the owner of the global notes for
all purposes. Accordingly, we, the Trustee and any paying agent will have no
direct responsibility or liability to pay amounts due on the global notes to
owners of beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of
principal or interest, to credit Direct Participants' accounts on the payment
date according to their respective holdings of beneficial interests in the
global notes as shown on DTC's records. In addition, it is DTC's current
practice to assign any consenting or voting rights to Direct Participants
whose accounts are credited with notes on a record date, by using an omnibus
proxy. Payments by Direct Participants to owners of beneficial interests in
the global notes, and voting by Direct Participants, will be governed by the
customary practices between the Direct Participants and owners of beneficial
interests, as is the case with notes held for the account of customers
registered in "street name." However, payments will be the responsibility of
the Direct Participants and not of DTC, the Trustee or us.
Debt securities represented by a global note will be exchangeable for
certificated notes with the same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not
appointed by us within 90 days; or
19
<PAGE>
- we determine not to require all of the debt securities of a
series to be represented by a global note and notify the
Trustee of our decision.
THE TRUSTEE
We will name the trustee for each Indenture in the applicable
prospectus supplement. We anticipate that the same person initially will act
as trustee under the Senior Indenture and the Subordinated Indenture.
RESIGNATION OR REMOVAL OF TRUSTEE. Under the Indentures and the Trust
Indenture Act of 1939, as amended, governing trustee conflicts of interest,
any uncured Event of Default with respect to any series of senior debt
securities will force the trustee to resign as trustee under either the
Subordinated Indenture or the Senior Indenture. Likewise, any uncured Event of
Default with respect to any series of subordinated debt securities will force
the trustee to resign as trustee under either the Senior Indenture or the
Subordinated Indenture. Any resignation will require the appointment of a
successor trustee under the applicable Indenture in accordance with its terms
and conditions.
The trustee may resign or be removed by us with respect to one or
more series of debt securities and a successor trustee may be appointed to act
with respect to any such series. The holders of a majority in aggregate
principal amount of the debt securities of any series may remove the trustee
with respect to the debt securities of such series.
LIMITATIONS ON TRUSTEE IF IT IS OUR CREDITOR. Each Indenture contains
limitations on the right of the trustee thereunder, in the event that it
becomes a creditor of us, to obtain payment of claims in some cases, or to
realize on property received in respect of any such claim as security or
otherwise.
CERTIFICATES AND OPINIONS TO BE FURNISHED TO TRUSTEE. Each Indenture
provides that, in addition to other certificates or opinions that may be
specifically required by other provisions of an Indenture, every application
by us for action by the Trustee shall be accompanied by an officers'
certificate and an opinion of counsel stating that, in the opinion of the
signers, all conditions precedent to such action have been complied with.
REPORT TO HOLDERS OF DEBT SECURITIES. The Trustee is required to
submit an annual report to the holders of the debt securities regarding, among
other things, the Trustee's eligibility to serve as such, the priority of the
Trustee's claims regarding advances made by it, and any action taken by the
Trustee materially affecting the debt securities.
PLAN OF DISTRIBUTION
We may sell the securities being offered hereby:
- directly to purchasers,
- through agents,
- through underwriters, and
- through dealers.
We, or agents designated by us, may directly solicit, from time to
time, offers to purchase the securities. Any such agent may be deemed to be an
underwriter as that term is defined in the Securities Act of 1933, as amended.
We will name the agents involved in the offer or sale of the securities and
describe any commissions payable by us to these agents in the prospectus
supplement. Unless otherwise indicated in the prospectus supplement, these
agents will be acting on a best efforts basis for the period of their
appointment. The agents may be entitled under agreements which may be entered
into with us to indemnification by us against specific civil
20
<PAGE>
liabilities, including liabilities under the Securities Act. The agents may
also be our customers or may engage in transactions with or perform services
for us in the ordinary course of business.
If any underwriters are utilized in the sale of the securities in
respect of which this prospectus is delivered, we will enter into an
underwriting agreement with those underwriters at the time of sale to them.
The names of these underwriters and the terms of the transaction will be set
forth in the prospectus supplement, which will be used by the underwriters to
make resales of the securities in respect of which this prospectus is
delivered to the public. The underwriters may be entitled, under the relevant
underwriting agreement, to indemnification by us against specific liabilities,
including liabilities under the Securities Act. The underwriters may also be
our customers or may engage in transactions with or perform services for us in
the ordinary course of business.
If a dealer is utilized in the sale of the securities in respect of
which this prospectus is delivered, we will sell those securities to the
dealer, as principal. The dealer may then resell those securities to the
public at varying prices to be determined by the dealer at the time of resale.
Dealers may be entitled to indemnification by us against specific liabilities,
including liabilities under the Securities Act. The dealers may also be our
customers or may engage in transactions with, or perform services for us in
the ordinary course of business.
The place and time of delivery for the securities in respect of which
this prospectus is delivered are set forth in the accompanying prospectus
supplement.
LEGAL
Certain legal matters in connection with the debt securities will be
passed upon by Fulbright & Jaworski L.L.P., Houston, Texas, as our counsel.
Any underwriter will be advised about other issues relating to the offering by
their own legal counsel.
EXPERTS
The consolidated financial statements of Kaneb Pipe Line Partners,
L.P. and subsidiaries as of December 31, 1999 and 1998 and for each of the
years in the two year period ended December 31, 1999, and the consolidated
balance sheet of Kaneb Pipe Line Company and subsidiaries as of December 31,
1999, have been incorporated by reference and included herein, respectively,
in reliance upon the reports of KPMG LLP, independent certified public
accountants, incorporated by reference and included herein, and upon the
authority of said firm as experts in auditing and accounting.
The consolidated statements of income, cash flows and changes in
partners' capital as of and for the year ended December 31, 1997 incorporated
in this prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 1999 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KANEB PIPE LINE COMPANY
<TABLE>
<S> <C>
Independent Auditors' Report................................................................F-2
Consolidated Balance Sheets ................................................................F-3
Notes to Consolidated Balance Sheets .......................................................F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kaneb Pipe Line Company:
We have audited the accompanying consolidated balance sheet of Kaneb Pipe Line
Company and subsidiaries (the "Company") as of December 31, 1999. This
consolidated balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of the Company as of
December 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 25, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 JUNE 30, 2000
---------------- ----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 6,250,000 $ 8,526,000
Accounts receivable..................................................... 33,657,000 45,178,000
Inventories............................................................. 9,476,000 9,422,000
Prepaid expenses........................................................ 5,284,000 4,528,000
---------------- ----------------
Total current assets........................................... 54,667,000 67,654,000
---------------- ----------------
Receivable from affiliates, net.............................................. 27,215,000 4,881,000
Property and equipment....................................................... 439,634,000 442,482,000
Less accumulated depreciation ............................................... 122,678,000 130,106,000
---------------- ----------------
Net property and equipment.............................................. 316,956,000 312,376,000
Investment in affiliate ..................................................... 21,978,000 21,008,000
Deferred tax asset .......................................................... 1,204,000 942,000
Excess of cost over fair value of net assets of acquired business............ 1,435,000 1,521,000
---------------- ----------------
$ 423,455,000 $ 408,382,000
================ ================
Liabilities and Stockholder's Equity
Current liabilities:
Current portion of long-term debt ...................................... $ -- $ 39,500,000
Accounts payable........................................................ 13,315,000 19,104,000
Accrued expenses........................................................ 13,018,000 16,301,000
Accrued distributions payable........................................... 9,600,000 9,600,000
Deferred terminaling fees............................................... 3,075,000 3,386,000
---------------- ----------------
Total current liabilities...................................... 39,008,000 87,891,000
---------------- ----------------
Long-term debt, less current portion ........................................ 167,028,000 129,679,000
Other liabilities............................................................ 5,822,000 4,880,000
Interest of outside non-controlling partners in KPP.......................... 128,543,000 124,568,000
Stockholder's equity:
Common stock, $1 par value, authorized and issued 10,000 shares......... 10,000 10,000
Additional paid-in capital.............................................. 29,573,000 29,573,000
Notes receivable from affiliate......................................... (14,500,000) (14,500,000)
Retained earnings....................................................... 68,175,000 46,731,000
Accumulated other comprehensive income
(loss) - foreign currency translation adjustment ................... (204,000) (450,000)
---------------- ----------------
Total stockholder's equity.......................................... 83,054,000 61,364,000
---------------- ----------------
$ 423,455,000 $ 408,382,000
================ ================
</TABLE>
See accompanying notes to consolidated balance sheets.
F-3
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
(Information as of June 30, 2000 and subsequent to February 25, 2000
is unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Kaneb Pipe
Line Company and subsidiaries (the "Company") in the preparation of the
consolidated balance sheets. The Company is a wholly-owned subsidiary of
Kaneb Services, Inc. (the "Parent Company").
(a) PRINCIPLES OF CONSOLIDATION
The consolidated balance sheets include the accounts of the Company and
its subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP"). The
Company controls the operations of KPP through its two percent general
partner interest and a 25% limited partner interest. All significant
intercompany transactions and balances are eliminated in consolidation.
KPP owns and operates a refined petroleum products pipeline business
and a petroleum products and specialty liquids storage and terminaling
business. KPP's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). KPP
operates the refined petroleum products pipeline business through Kaneb
Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership
in which KPP holds a 99% interest as limited partner. The Company's
products marketing business provides wholesale motor fuel marketing
services in the Great Lakes and Rocky Mountain regions, as well as
California.
(b) CASH AND CASH EQUIVALENTS
The Company's policy is to invest cash in highly liquid investments
with original maturities of three months or less. Such investments are
valued at cost, which approximates market, and are classified as cash
equivalents.
(c) INVENTORIES
Inventories consist of petroleum products purchased for resale in the
products marketing business and are valued at the lower of cost or
market. Cost is determined using the weighted average cost method.
(d) PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Certain leases
have been capitalized and the leased assets have been included in
property and equipment. Additions of new equipment and major renewals
and replacements of existing equipment are capitalized. Repairs and
minor replacements that do not materially increase values or extend
useful lives are expensed. Depreciation of property and equipment is
provide on a straight-line basis at rates based upon expected useful
lives of various classes of assets, as disclosed in Note 6. The rates
used for pipeline and storage facilities of KPOP are the same as those
which have been promulgated by the Federal Energy Regulatory
Commission.
The carrying value of property and equipment is periodically evaluated
using undiscounted future cash flows as the basis for determining if
impairment exists under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". To
the extent impairment is indicated to exist, an impairment loss will be
recognized under SFAS 121 based on fair value.
F-4
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
(e) REVENUE RECOGNITION
Revenues from the products marketing business are recognized when
product is sold and title and risk pass to the customer. Pipeline
transportation revenues are recognized upon receipt of the products
into the pipeline system. Storage fees are billed one month in advance
and are reported as deferred income. Revenue is recognized in the month
services are provided.
(f) FOREIGN CURRENCY TRANSLATION
The Company translates the balance sheet of its foreign subsidiary
using year-end exchange rates and translates income statement amounts
using the average exchange rates in effect during the period. The gains
and losses resulting from the change in exchange rates from period to
period have been reported separately as a component of accumulated
other comprehensive income (loss) in stockholder's equity. Gains and
losses resulting from foreign currency transactions are included in the
statements of income.
(g) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF ACQUIRED BUSINESS
The excess of the cost of the products marketing business over the fair
value of net assets acquired is being amortized on a straight-line
basis over a period of 40 years. Accumulated amortization was $66,000
at December 31, 1999.
The Company periodically evaluates the propriety of the carrying amount
of the excess of cost over fair value of net assets of acquired
business, as well as the amortization period, to determine whether
current events or circumstances warrant adjustments to the carrying
value and/or revised estimates of useful lives. The Company believes
that no such impairment has occurred and that no reduction in estimated
useful lives is warranted.
(h) COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income", which established standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. SFAS No. 130 only requires
additional disclosure and does not affect the Company's financial
position or results of operations.
(i) ENVIRONMENTAL MATTERS
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not
contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the costs can be reasonably estimated.
Generally, the timing of these accruals coincides with the completion
of a feasibility study or the Company's commitment to a formal plan of
action.
(j) KPP CASH DISTRIBUTIONS
KPP makes quarterly distributions of 100% of its Available Cash, as
defined in its partnership agreement, to holders of limited partnership
units and the Company. Available Cash consists generally of all the
cash receipts of KPP plus the beginning cash balance less all of its
cash disbursement and reserves. The assets, other than Available Cash,
cannot be distributed without a majority vote of the non-affiliate
unitholders.
F-5
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
(k) SALES OF SECURITIES BY SUBSIDIARIES
The Company recognizes gains and losses in the consolidated statements
of income resulting from subsidiary sales of additional equity
interests, including KPP limited partnership units, to unrelated
parties.
(l) USE OF ESTIMATES
The preparation of the Company's balance sheet in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the balance sheet. Actual results could differ from those
estimates.
(m) INTERIM UNAUDITED FINANCIAL INFORMATION
In the opinion of the Company's management, the accompanying unaudited
consolidated balance sheet at June 30, 2000 contains the adjustments,
consisting of normal recurring accruals, necessary to present fairly
the consolidated financial position of the Company as of such date.
(2) SALE OF KPP UNITS
In December 1997, the Company, through a wholly-owned subsidiary, sold
500,000 Units in KPP to a wholly-owned subsidiary of the Parent Company in
exchange for two 8.75% notes receivable aggregating $14.5 million. One
note, for $9.5 million, is due in 2003. The other note, for $5.0 million,
is due upon demand. These notes are classified as a reduction to
stockholder's equity.
(3) PUBLIC OFFERING OF KPP UNITS
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per unit, generating approximately $65.6 million in net
proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans (including $13.3 million in term loans
resulting from the United Kingdom terminal acquisition referred to in note
4). As a result of KPP issuing additional units to unrelated parties, the
Company's pro-rate share of the net assets of KPP increased by $13.8
million. Accordingly, the Company recognized a $13.8 million gain before
deferred income taxes of $5.2 million.
(4) ASSET ACQUISITION
On February 1, 1999, KPP, through two wholly-owned subsidiaries, acquired
six terminals in the United Kingdom from GATX Terminal Limited for L22.6
million (approximately $37.2 million) plus transaction costs and the
assumption of certain liabilities. The acquisition, which was financed by
KPP's term loans from a bank, has been accounted for using the purchase
method of accounting. $13.3 million of the term loans were paid in July
1999 with the proceeds from a public offering of KPP units (see notes 3 and
7).
(5) INCOME TAXES
The Company participates with the Parent Company in filing a consolidated
Federal income tax return, except for certain ST operations which are
conducted through separate taxable wholly-owned corporate subsidiaries. The
income taxes for the Company are reported as if it had filed on a separate
return basis. Amounts payable or receivable for income taxes are included
in receivable from affiliates.
F-6
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
Deferred income tax assets and liabilities result from temporary
differences between the tax basis of assets and liabilities, and their
reported amounts in the financial statements that will result in
differences between income for tax purposes and income for financial
statement purposes in future years.
The Company has recorded a deferred tax asset of approximately $23.9
million at December 31, 1999, relating to domestic net operating loss
carryforwards. The deferred tax asset is reduced by a valuation allowance
of $7.0 million. The Company has recorded a deferred tax liability of $10.7
million as of December 31, 1999, primarily relating to differences between
the financial and tax basis in KPP's assets. The Company has also recorded
a deferred tax liability of $5.0 million at December 31, 1999, which is
associated with certain subsidiaries not included in the Parent Company's
consolidated Federal income tax return. In 1999, the Company reduced the
valuation allowance by $6.2 million as a result of its reevaluation of the
realizability of income tax benefits from future operations.
(6) PROPERTY AND EQUIPMENT
The cost of property and equipment as of December 31, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
(YEARS)
--------------------
<S> <C> <C>
Land - $ 21,585,000
Buildings 35 8,583,000
Furniture and fixtures 16 3,029,000
Transportation equipment 6 4,469,000
Machinery and equipment 20 - 40 32,939,000
Pipeline and terminaling equipment 20 - 40 364,396,000
Construction work-in-progress - 4,633,000
-------------------
Total property and equipment 439,634,000
Accumulated depreciation (122,678,000)
-------------------
Net property and equipment $ 316,956,000
===================
</TABLE>
F-7
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
(7) DEBT
Long-term debt as of December 31, 1999 is summarized as follows:
<TABLE>
<S> <C>
First mortgage notes due 2001 and 2002 $ 60,000,000
First mortgage notes due 2001 through 2016 68,000,000
Term loan due 2002 25,787,000
Revolving credit facility due January 2001 2,200,000
Revolving credit facility due March 2001 11,041,000
-------------------
Total long-term debt 167,028,000
Less current portion --
-------------------
Long-term debt $ 167,028,000
===================
</TABLE>
In 1994, KPP, through a wholly-owned subsidiary, entered into a restated
credit agreement with a group of banks that, as subsequently amended,
provides a $25 million revolving credit facility through January 31, 2001.
The credit facility bears interest at variable interest rates and has a
commitment fee of 0.15% per annum of the unused credit facility. At
December 31, 1999, $2.2 million was drawn under the credit facility.
Also in 1994, another wholly-owned subsidiary of KPP issued $33 million of
first mortgage notes ("Notes") to a group of insurance companies. The Notes
bear interest at the rate of 8.05% per annum and are due on December 22,
2001. In 1995, KPP issued $27 million of additional Notes due February 24,
2002 which bear interest at the rate of 8.37% per annum. The Notes and the
credit facility are secured by a mortgage on our east pipeline and contain
certain financial and operational covenants.
In June 1996, KPP issued $68.0 million of new first mortgage notes bearing
interest at rates ranging from 7.08% to 7.98%. $35 million of these notes
is due June 2001, $8.0 million is due June 2003, $10.0 million is due June
2006 and $15.0 million is due June 2016. The loan is secured, pari passu
with the existing Notes and credit facility, by a mortgage on our east
pipeline.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $15 million
revolving credit facility through March 2001. The credit facility bears
interest at variable rates, has a commitment fee of 0.25% per annum on
unutilized amounts and contains certain financial and operational
covenants. The credit facility is secured by essentially all of the assets
of the products marketing business, and by 500,000 KPP limited partnership
units. At December 31, 1999, $11.0 million was drawn on the facility.
In January 1999, KPP, through two wholly-owned subsidiaries, entered into a
credit agreement with a bank that provides for the issuance of $39.2
million in term loans in connection with the United Kingdom terminal
acquisition and $5.0 million for general purposes. The term loans, $18.3
million of which bore interest in varying amounts, are secured by the
capital stock of the subsidiaries that acquired the United Kingdom
terminals and by a mortgage on our east pipeline and, are pari passu with
existing mortgage notes and credit facility. The term loans also contain
certain financial and operational covenants. $18.3 million of the term
loans were repaid in July 1999 with the proceeds from the public unit
offering. The remaining portion ($25.8 million) with a fixed rate of 7.14%
is due in January 2002.
F-8
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
(8) COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under
operating leases as of December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31:
2000 $ 1,508,000
2001 1,086,000
2002 705,000
2003 575,000
2004 264,000
Thereafter --
----------------
$ 4,138,000
================
</TABLE>
The operations of KPP are subject to Federal, state and local laws and
regulations relating to protection of the environment. Although KPP
believes its operations are in general compliance with applicable
environmental regulations, risks of additional costs and liabilities are
inherent in pipeline and terminal operations, and there can be no assurance
significant costs and liabilities will not be incurred by KPP. Moreover, it
is possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operation of
KPP, could result in substantial costs and liabilities to KPP. KPP has
recorded an undiscounted reserve for environmental claims in the amount of
$8.2 million in December 31, 1999, including $7.6 million related to
acquisitions of pipelines and terminals. During 1999, KPP incurred $0.9
million of costs related to such acquisition reserves and reduced the
liability accordingly.
Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace Energy Corporation ("Grace"), the entity from which KPP acquired ST
Services in 1993. The lawsuit involves environmental response and
remediation allegedly resulting from jet fuel leaks in the early 1970's
from a pipeline. The pipeline, which connected a former Grace terminal with
Otis Air Force Base in Massachusetts, was abandoned in 1976, when the
connecting terminal was sold to an unrelated entity.
The lawsuit involves environmental response and remediation required by the
State of Massachusetts. Grace alleged that subsidiaries of KPP acquired the
abandoned pipeline, as part of the acquisition of ST Services in 1993, and
assumed responsibility for environmental damages allegedly caused by the
jet fuel leaks. Grace sought a ruling that these subsidiaries are
responsible for all present and future remediation and expenses for these
leaks and that Grace has no obligation to indemnify these subsidiaries for
these expenses.
In the lawsuit, Grace also sought indemnification for expenses that it has
incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional
expenses that it expects to incur in the future. The consistent position of
KPP's subsidiaries is that they did not acquire the abandoned pipeline as
part of the 1993 ST transaction, and therefore did not assume any
responsibility for the environmental damage nor any liability to Grace for
the pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993
acquisition agreement and that the pipeline was abandoned prior to 1978. On
July 17, 2000, the Judge entered judgment, which is not yet final, in the
case that Grace take nothing from the subsidiaries on its claims, including
claims for future expenses. Although KPP's subsidiaries have not incurred
any expenses in connection with the remediation, the court also ruled, in
effect, that the subsidiaries would not be entitled to
F-9
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
an indemnification from Grace if any such expenses were incurred in the
future. However, the Judge let stand a prior summary judgment ruling that
the pipeline was an asset of the company acquired as part of the 1993 ST
transaction. The Judge also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as
required by the State of Massachusetts, KPP's subsidiaries intend to appeal
the judgment finding that the Otis Pipeline was transferred to them and the
award of attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, have been responding to the Government remediation demand for
most of the contamination problems at the MMR Site. Grace and others have
also received and responded to formal inquiries from the United States
Government in connection with the environmental damages allegedly resulting
from the jet fuel leaks. KPP's subsidiaries have voluntarily responded to
an invitation from the Government to provide information indicating that
they do not own the pipeline. In connection with a court-ordered mediation
between Grace and the subsidiaries, the Government advised the parties in
April 1999 that it has identified the two spill areas that it believes to
be related to the pipeline that is the subject of the Grace suit. The
Government advised the parties that it believes it has incurred costs of
approximately $34 million, and expects in the future to incur costs of
approximately $55 million, for remediation of one of the spill areas. This
amount was not intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties that it could
not at that time allocate its costs attributable to the second spill area.
KPP believes that the ultimate cost of the remediation, while substantial,
will be considerably less than the Government has indicated.
The Government has made no claims against KPP or any other person on
account of this matter. KPP believes that if any such claims were made, its
subsidiaries would have substantial defenses to such claims. Under
Massachusetts law, the party responsible for remediation of a facility is
the last owner before the abandonment, which was a Grace company. KPP does
not believe that either the Grace litigation or any claims that may be made
by the Government will adversely affect its ability to make cash
distributions to its unitholders, but there can be no assurances in that
regard.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect
on the financial position of the Company.
(9) RELATED PARTY TRANSACTIONS
The Parent Company is entitled to reimbursement of all direct and indirect
costs related to the business activities of the Company. These costs, which
totaled $5.9 million for the year ended December 31, 1999, include
compensation and benefits for officers and employees of the Company and the
Parent Company, insurance premiums, general and administrative costs, tax
information and reporting costs, legal and audit fees. In addition, the
Company paid $0.2 million during 1999 for an allocable portion of the
Parent Company's overhead expenses.
The Company participates in the Parent Company's defined contribution
benefit plan which covers substantially all domestic employees and provides
for varying levels of employer matching. Included in the costs above are
Company contributions to this plan of $0.8 million for 1999.
F-10
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheets
Receivable from affiliate, net primarily represents cash advances by the
Company to the Parent Company. This receivable is non-interest bearing and
has no fixed term for repayment. In April 2000, the Company declared a
dividend of $30 million and reduced the receivable in satisfaction thereof.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amount due to the relatively
short period to maturity of these instruments. The estimated fair value of
all debt as of December 31, 1999 was approximately $174 million as compared
to the carrying value of $167 million. These fair values were estimated
using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The estimates presented above are not necessarily indicative of the amounts
that would be realized in a current market exchange.
The Company markets and sells its services to a broad base of customers and
performs ongoing credit evaluations of its customers. The Company does not
believe it has a significant concentration of credit risk at December 31,
1999. No customer constituted 10 percent or more of revenue in 1999.
F-11
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................ $ 132,000
New York Stock Exchange listing fees........................................... *
Printing and engraving costs................................................... *
Legal fees and expenses........................................................ *
Accounting fees and expenses................................................... *
----------------
Miscellaneous.................................................................. *
================
Total.......................................................................
*To be filed by amendment.
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The partnership agreements of the Registrant and its subsidiary
partnerships provide that they will, to the fullest extent permitted by law,
indemnify and advance expenses to the general partner, any Departing Partner
(as defined therein), any person who is or was an affiliate of the general
partner or any Departing Partner, any person who is or was an officer,
director, employee, partner, agent or trustee of the general partner or any
Departing Partner or any affiliate of the general partner or any Departing
Partner, or any person who is or was serving at the request of the general
partner or any affiliate of the general partner or any Departing Partner or
any affiliate of any Departing Partner as an officer, director, employee,
partner, agent or trustee of another person ("Indemnitees") from and against
any and all losses, claims, damages, liabilities (joint or several), expenses
(including legal fees and expenses), judgments, fines, settlements and other
amounts arising from any and all claims, demands, actions, suits or
proceedings, 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 the general partner, Departing Partner
or an affiliate of either, an officer, director, employee, partner, agent or
trustee of the general partner, any Departing Partner or affiliate of either
or a person serving at the request of the Registrant in another entity in a
similar capacity, provided that in each case the Indemnitee acted in good
faith and in a manner which such Indemnitee reasonably believed to be in or
not opposed to the best interests of the Registrant and such action did not
constitute gross negligence or willful misconduct on the part of the
Indemnitee, and, with respect to any criminal proceeding, the Indemnitee had
no reasonable cause to believe its conduct was unlawful. This indemnification
would under certain circumstances include indemnification for liabilities
under the Securities Act. In addition, each Indemnitee would automatically be
entitled to the advancement of expenses in connection with the foregoing
indemnification. Any indemnification under these provisions will be only out
of the assets of the Registrant. The Registrant is authorized to purchase
insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Registrant's activities, whether or not the
Registrant would have the power to indemnify such person against such
liabilities under the provisions described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS*
<TABLE>
<S> <C>
*1.1 -- Form of Underwriting Agreement.
*4.1 -- Form of Senior Indenture.
*4.2 -- Form of Subordinated Indenture.
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
12.1 -- Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of KPMG LLP.
II-1
<PAGE>
23.2 -- Consent of PricewaterhouseCoopers LLP.
*23.3 -- Consent of Counsel (the consent of Fulbright &
Jaworski L.L.P. to the use of their opinion filed as
Exhibit 5.1 to the Registration Statement and the
reference to their firm in this Registration
Statement is contained in such opinion).
24.1 -- Powers of Attorney (included on page II-4 of this
Registration Statement as originally filed).
*26.1 -- Form T-1Statement of Eligibility and Qualification.
</TABLE>
-------------
* To be filed by amendment or as an exhibit to a current report on Form
8-K of the registrant.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
I. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement.
i. To include any prospectus required by
Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or
events arising after the effective date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the Registration
Statement; and
iii. To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in this Registration Statement;
provided, however, that paragraphs i and ii above do not apply
if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(b) That, for the purpose of determining any liability
under the Securities Act, each such post-effective
amendment 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.
(c) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
II. The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
III. 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
provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the
Commission
II-2
<PAGE>
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 of
expenses incurred or paid by a director, officer, or
controlling person of 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.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richardson, State of
Texas, on the 28th day of August, 2000.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P., by
Kaneb Pipe Line Company, as General Partner
By: EDWARD D. DOHERTY
Edward D. Doherty, Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Edward D. Doherty and Howard C.
Wadsworth, and each of them, either one of whom may act without joinder of the
other, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all pre- and post-effective amendments
to this Registration Statement, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, and each
of them, or the substitute or substitutes of any or all of them, may lawfully
do or cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons, in the capacities and on the date indicated.
<TABLE>
<CAPTION>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Chairman of the Board and
EDWARD D. DOHERTY Director
Edward D. Doherty (Principal Executive Officer) August 28, 2000
Controller
JIMMY L. HARRISON (Principal Financial and Ac
Jimmy L. Harrison counting Officer) August 28, 2000
SANGWOO AHN
Sangwoo Ahn Director August 28, 2000
JOHN R. BARNES
John R. Barnes Director August 28, 2000
MURRAY R. BILES
Murray R. Biles Director August 28, 2000
II-4
<PAGE>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
---------------------------------------------------------------------------------------------------
FRANK M. BURKE, JR.
Frank M. Burke, Jr. Director August 28, 2000
CHARLES R. COX
Charles R. Cox Director August 28, 2000
HANS KESSLER
Hans Kessler Director August 28, 2000
............................
James R. Whatley Director
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
*1.1 -- Form of Underwriting Agreement.
*4.1 -- Form of Senior Indenture.
*4.2 -- Form of Subordinated Indenture.
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
12.1 -- Statement of Computation of Ratio of Earnings to Fixed
Charges.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
*23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion filed as Exhibit 5.1 to
the Registration Statement and the reference to their firm
in this Registration Statement is contained in such
opinion).
24.1 -- Powers of Attorney (included on page II-4 of this
Registration Statement as originally filed).
*26.2 -- Form T-1 Statement of Eligibility and Qualification.
</TABLE>
-------------
* To be filed by amendment or as an exhibit to a current report on Form
8-K of the registrant.
