<PAGE> 1
As filed with the Securities and Exchange Commission on May 16, 1995
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 75-2287571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(214) 699-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
EDWARD D. DOHERTY
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(214) 699-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 TEXAS COMMERCE TOWER
HOUSTON, TX 77010 HOUSTON, TX 77002
(713) 651-5151 (713) 220-4200
ATTENTION: JOHN A. WATSON ATTENTION: WILLIAM N. FINNEGAN, IV
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units representing Preference Limited
Partner Interests . . . . . . . . . 3,825,000 $22 $84,150,000 $29,018
=========================================================================================================================
</TABLE>
(1) Includes 325,000 Preference Units subject to the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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<PAGE> 2
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* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the Securities laws of any State. *
* *
***************************************************************************
PROSPECTUS
SUBJECT TO COMPLETION, DATED MAY 16, 1995
3,500,000 UNITS
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING PREFERENCE LIMITED PARTNER INTERESTS
-------------
All 3,500,000 units representing preference limited partner interests
("Preference Units") in Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership (the "Partnership"), offered hereby are being sold by Kaneb Pipe
Line Company, a Delaware corporation ("KPL" or the "General Partner"), a wholly
owned subsidiary of Kaneb Services, Inc., a Delaware corporation ("Kaneb"). KPL
serves as the general partner of the Partnership. The Partnership will not
receive any of the proceeds from the sale of the Preference Units by KPL. The
Preference Units offered hereby will represent an approximate 21.4% interest as
limited partner in the Partnership. After the offering, KPL and its affiliates
will own an aggregate 32.4% interest as limited partner in the Partnership. The
foregoing percentages assume that the Underwriters' over-allotment option is not
exercised.
Distributions of Available Cash by the Partnership generally will be
made 98% to the limited partners and 2% to the General Partner. During the
Preference Period, quarterly distributions of Available Cash from Partnership
operations in the amount of $0.55 per unit (the "Minimum Quarterly
Distribution") will be made to the holders of the Senior Preference Units before
any such distributions are made to the holders of Preference Units, Preference B
Units or Common Units. In addition, through June 30, 1997, the Minimum Quarterly
Distribution will be made to the holders of Preference Units before any such
distributions are made to the holders of Preference B Units. During the
Preference Period, such distributions to the holders of Common Units will be
subordinated to the extent necessary to permit payment of the Minimum Quarterly
Distribution to the holders of each of the other classes of LP Units. In
general, the Preference Period will continue indefinitely until the Minimum
Quarterly Distribution has been paid to holders of all LP Units for 12
consecutive quarters and certain other conditions are met. See "Cash
Distributions".
Prior to this offering there has been no public market for the
Preference Units. Application will be made to list the Preference Units on the
New York Stock Exchange. For the factors to be considered in determining the
initial public offering price, see "Underwriting".
-------------
PURCHASERS OF PREFERENCE UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "INVESTMENT CONSIDERATIONS" AND "CONFLICTS OF INTEREST" IN
EVALUATING AN INVESTMENT IN THE PARTNERSHIP. SUCH FACTORS INCLUDE BUT ARE NOT
LIMITED TO THE FOLLOWING:
o DISTRIBUTIONS OF AVAILABLE CASH TO THE HOLDERS OF THE PREFERENCE UNITS
DURING THE PREFERENCE PERIOD ARE SUBORDINATED TO THE RIGHT OF THE
HOLDERS OF THE SENIOR PREFERENCE UNITS TO RECEIVE THE MINIMUM QUARTERLY
DISTRIBUTION, PLUS ARREARAGES, IF ANY, IN SUCH DISTRIBUTIONS FOR PRIOR
QUARTERS.
o THE PARTNERSHIP'S INTERSTATE COMMON CARRIER PIPELINE OPERATIONS ARE
SUBJECT TO RATE REGULATION BY THE FERC.
o THE PARTNERSHIP'S PIPELINE BUSINESS DEPENDS ON DEMAND FOR REFINED
PETROLEUM PRODUCTS IN THE MARKETS IT SERVES AND THE ABILITY AND
WILLINGNESS OF SHIPPERS TO SUPPLY SUCH DEMAND THROUGH ITS PIPELINES.
o HOLDERS OF PREFERENCE UNITS HAVE LIMITED VOTING RIGHTS, AND KPL AND ITS
AFFILIATES WILL MANAGE AND CONTROL THE PARTNERSHIP.
o KPL AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH THE
PARTNERSHIP AND WITH HOLDERS OF PREFERENCE UNITS.
o THE PARTNERSHIP AGREEMENT LIMITS THE LIABILITY OF THE GENERAL PARTNER AND
RELIEVES IT OF CERTAIN FIDUCIARY AND OTHER DUTIES IT WOULD OTHERWISE
HAVE UNDER DELAWARE PARTNERSHIP LAW.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC-
URITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Price to Underwriting Discounts Proceeds to
Public and Commissions(1) KPL(2)
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<S> <C> <C> <C>
Per Preference Unit . . . . . . . . . . $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3) . . . . . . . . . . . . . . . $ $ $
==================================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting".
(2) Before deducting expenses estimated at $340,000 payable by KPL.
(3) KPL has granted to the Underwriters a 30-day option to purchase up to
325,000 additional Preference Units solely to cover over-allotments, if
any. See "Underwriting". If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
KPL will be $ , $ and $ , respectively.
The Preference Units are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the
Preference Units offered hereby will be available for delivery on or about
, 1995, at the offices of Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013.
SMITH BARNEY INC. PAINEWEBBER INCORPORATED
, 1995
<PAGE> 3
KANEB PIPE LINE PARTNERS, L.P.
PARTNERSHIP FACILITIES
[maps showing locations of pipeline systems and terminals]
Dallas, Texas is the headquarters for the Partnership and its
terminaling operations, and Wichita, Kansas is the headquarters for the
Partnership's pipeline operations.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
PREFERENCE UNITS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . 4 Status of LP Units at End of Preference
Period . . . . . . . . . . . . . . . 59
INCORPORATION OF CERTAIN DOCUMENTS . . . . . 4 Adjustment of Minimum Quarterly
Distribution and Target Distribution
PROSPECTUS SUMMARY . . . . . . . . . . . . . 5 Levels . . . . . . . . . . . . . . . 59
Kaneb Pipe Line Partners, L.P. . . . . . 5 Distributions of Cash Upon Liquidation . 60
The Offering . . . . . . . . . . . . . . 7
Partnership Structure . . . . . . . . . 9 CONFLICTS OF INTEREST AND FIDUCIARY
Summary Historical and Pro Forma RESPONSIBILITIES . . . . . . . . . . . . 62
Financial and Operating Data . . . . 10 Fiduciary Responsibility of the General
Cash Distributions . . . . . . . . . . . 12 Partner . . . . . . . . . . . . . . . 64
Investment Considerations . . . . . . . 13
Tax Considerations . . . . . . . . . . . 14 DESCRIPTION OF THE PREFERENCE UNITS . . . . . 66
General . . . . . . . . . . . . . . . . 66
INVESTMENT CONSIDERATIONS . . . . . . . . . . 15 Transfer of Preference Units . . . . . . 66
Considerations Relating to the
Partnership's Business . . . . . . . 15 DESCRIPTION OF THE PARTNERSHIP AGREEMENTS . . 67
Considerations Relating to Partnership Organization and Duration . . . . . . . 67
Structure . . . . . . . . . . . . . . 18 Purpose . . . . . . . . . . . . . . . . 67
Tax Considerations . . . . . . . . . . . 21 Power of Attorney . . . . . . . . . . . 68
Restrictions on Authority of the General
USE OF PROCEEDS . . . . . . . . . . . . . . . 23 Partner . . . . . . . . . . . . . . . 68
Withdrawal or Removal of the General
CAPITALIZATION . . . . . . . . . . . . . . . 24 Partner . . . . . . . . . . . . . . . 68
Status as Limited Partner or Assignee . 70
DISTRIBUTIONS . . . . . . . . . . . . . . . . 25 Non-citizen Assignees; Redemption . . . 70
Issuance of Additional LP Units and
SELECTED HISTORICAL AND PRO FORMA FINANCIAL Securities . . . . . . . . . . . . . 71
AND OPERATING DATA . . . . . . . . . . . 27 Limited Call Right . . . . . . . . . . . 71
Amendment of Partnership Agreements . . 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Meetings; Voting . . . . . . . . . . . . 73
FINANCIAL CONDITION AND RESULTS OF Indemnification . . . . . . . . . . . . 74
OPERATIONS . . . . . . . . . . . . . . . 29 Limited Liability . . . . . . . . . . . 74
General . . . . . . . . . . . . . . . . 29 Books and Reports . . . . . . . . . . . 75
Right to Inspect Partnership Books and
Pipeline Operations . . . . . . . . . . . . . 30 Records . . . . . . . . . . . . . . . 75
Terminaling Operations . . . . . . . . . 30 Termination, Dissolution and Liquidation 76
Liquidity and Capital Resources . . . . 31
FEDERAL INCOME TAX CONSIDERATIONS . . . . . . 76
BUSINESS AND PROPERTIES OF THE PARTNERSHIP . 33 Partnership Status . . . . . . . . . . . 77
Products Pipeline Business . . . . . . . 33 Partner Status . . . . . . . . . . . . . 80
Liquids Terminaling Business . . . . . . 41 Tax Consequences of Preference Unit
Capital Expenditures . . . . . . . . . . 45 Ownership . . . . . . . . . . . . . . 80
Regulation . . . . . . . . . . . . . . . 45 Allocation of Partnership Income, Gain,
Legal Proceedings . . . . . . . . . . . 49 Loss and Deduction . . . . . . . . . 82
Environmental Matters . . . . . . . . . 49 Tax Treatment of Operations . . . . . . 83
Safety Regulation . . . . . . . . . . . 53 Uniformity of Preference Units . . . . . 88
Employees . . . . . . . . . . . . . . . 54 Disposition of Preference Units . . . . 88
Administrative Matters . . . . . . . . . 90
CASH DISTRIBUTIONS . . . . . . . . . . . . . 54
General . . . . . . . . . . . . . . . . 54 STATE AND OTHER TAXES . . . . . . . . . . . . 93
Quarterly Distributions of Available Cash 56
Distributions of Cash from Interim INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE
Capital Transactions . . . . . . . . 57 BENEFIT PLANS . . . . . . . . . . . . . 93
Distribution Restriction on Preference
Units, Preference B Units and Common SELLING UNITHOLDER AND LP UNITS ELIGIBLE FOR
Units . . . . . . . . . . . . . . . . 58 FUTURE SALE . . . . . . . . . . . . . . 94
Exchange of Preference Units and
Preference B Units . . . . . . . . . 58 UNDERWRITING . . . . . . . . . . . . . . . . 96
Exchange of Preference Units and
Preference B Units for Senior LEGAL . . . . . . . . . . . . . . . . . . . . 98
Preference Units . . . . . . . . . . 58
EXPERTS . . . . . . . . . . . . . . . . . . . 98
GLOSSARY . . . . . . . . . . . . . . . . . . 98
</TABLE>
3
<PAGE> 5
AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission
(the "SEC") in Washington, D.C., a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits and schedules relating thereto for further information
with respect to the Partnership and the securities offered by this Prospectus.
The Partnership is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information are available for
inspection at, and copies of such materials may be obtained upon payment of the
fees prescribed therefor by the rules and regulations of the SEC from, the SEC
at its principal offices located at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Regional Offices of the SEC
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at 7 World Trade Center, New York, New York 10048. In
addition, the Senior Preference Units of the Partnership are traded on the New
York Stock Exchange, and such reports, proxy statements and other information
may be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS
The Partnership's Annual Report on Form 10-K (Commission file No.
1-10311) for the fiscal year ended December 31, 1994, Current Report on Form
8-K dated March 13, 1995, and Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1995, are hereby incorporated herein by reference.
All documents filed by the Partnership pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus and
prior to the termination of the offering of the securities offered by this
Prospectus, shall be deemed to be incorporated by reference in this Prospectus
and be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
in this Prospectus shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained in this Prospectus, or
in any other subsequently filed document that also is or is deemed to be
incorporated by reference, modifies or replaces such statement.
The Partnership undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon written or oral request
of any such person, a copy of any or all of the documents incorporated by
reference herein, other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates. Written or oral requests for such copies should be
directed to: Kaneb Pipe Line Partners, L.P., 2435 North Central Expressway,
Richardson, Texas 75080, Attention: Sheila Turner, telephone (214) 699-4000.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes appearing elsewhere in
this Prospectus. Unless the context otherwise requires, references herein to
the Partnership include the Partnership and its operating subsidiaries, and
descriptions herein of the interests of the partners in the Partnership and its
operating subsidiaries and in distributions by the Partnership are stated on a
combined basis. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option granted to the Underwriters is not
exercised. See "Underwriting". See "Glossary" for definitions of certain
terms used herein.
KANEB PIPE LINE PARTNERS, L.P.
GENERAL
Kaneb Pipe Line Partners, L.P. (the "Partnership") is a publicly held
Delaware limited partnership engaged through operating subsidiaries in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids. For the year ended December 31, 1994, the
Partnership's pipeline and terminaling businesses accounted for approximately
60% and 40%, respectively, of the Partnership's revenues and approximately 65%
and 35%, respectively, of the Partnership's operating income. For the year
ended December 31, 1994, on a pro forma basis giving effect to the acquisition
of the West Pipeline (as discussed below), the Partnership's pipeline and
terminaling businesses would have accounted for approximately 65% and 35%,
respectively, of the Partnership's revenues and approximately 70% and 30%,
respectively, of the Partnership's operating income.
The Partnership's 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. The
Partnership owns a 2,075 mile integrated pipeline system (the "East Pipeline")
that extends through Kansas, Iowa, Nebraska, South Dakota and North Dakota and
a 550 mile integrated pipeline system (the "West Pipeline"), acquired in
February 1995, that extends through Wyoming, South Dakota and Colorado. The
East Pipeline and the West Pipeline are collectively referred to as the
"Pipelines". The Pipelines primarily transport gasoline, diesel oil, fuel oil
and propane. The products are transported from refineries connected to the
Pipelines, directly or through other pipelines, to agricultural users,
railroads and wholesale customers in the states in which the Pipelines are
located and in portions of other states. During 1994 on a pro forma basis
giving effect to the acquisition of the West Pipeline, the Partnership shipped
over 74.3 million barrels of refined petroleum products. Substantially all of
the Pipelines' operations constitute common carrier operations that are subject
to federal or state tariff regulation.
The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). ST is one of
the largest independent terminaling companies in the United States. ST
operates 23 terminals in 16 states with an aggregate tankage capacity of
approximately 7.7 million barrels at strategic points in the United States.
ST's three largest terminal facilities are located in Texas City, Texas,
Westwego, Louisiana and Baltimore, Maryland. The Texas City terminal is a
deep-water facility primarily serving the Gulf Coast petrochemical industry.
The Westwego terminal, purchased in June 1994 and located on the West bank of
the Mississippi River across from New Orleans, handles molasses, animal and
vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore
terminal is the largest independent terminal facility in the Baltimore area and
handles asphalt, fructose, latex, caustic solutions and other liquids. ST also
operates 20 inland terminal facilities handling primarily petroleum products.
5
<PAGE> 7
BUSINESS STRATEGY
The Partnership's strategy is to continue its expansion through
acquisitions in its terminaling and refined petroleum products pipeline
businesses. The Partnership has increased revenues from $37.6 million in 1990
to $78.7 million in 1994 and has increased operating income from $18.4 million
in 1990 to $33.0 million in 1994. On a pro forma basis giving effect to the
acquisition of the West Pipeline, the Partnership would have had revenues and
operating income in 1994 of $92.4 million and $38.1 million, respectively. The
Partnership has successfully focused on cost reduction, increased utilization
and increased operating fees, primarily with respect to its acquired
businesses. The acquisition of ST from W.R. Grace & Co. in March 1993 for
approximately $65 million generated approximately $15 million in operating
income prior to depreciation and amortization in fiscal 1994, an approximate
24% increase over ST's results in 1992 under the operation of its previous
owner.
The Partnership is constantly evaluating new acquisition
opportunities, particularly in its terminaling business, although no assurance
can be given that the Partnership will succeed in implementing its business
strategy or that further acquisitions will be completed.
RECENT DEVELOPMENTS
The Partnership acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company, a company jointly owned by GATX Terminals Corporation and
Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the
sale of $27 million of first mortgage notes due February 24, 2002, which bear
interest at the rate of 8.37% per annum. The West Pipeline consists of
approximately 550 miles of refined petroleum product pipeline and four truck
loading terminals located in Wyoming, South Dakota and Colorado. On a pro
forma basis for the year ended December 31, 1994, revenues generated by the
West Pipeline would have accounted for approximately 15% of the Partnership's
revenue. Strategically, the West Pipeline gives the Partnership access to the
higher growth gasoline markets in Denver and northeastern Colorado.
The principal executive offices of the Partnership are located at 2435
North Central Expressway, Richardson, Texas 75080, and its telephone number is
(214) 699-4000.
6
<PAGE> 8
THE OFFERING
Securities offered . . . . . . . . . 3,500,000 Preference Units are being
offered by KPL (3,825,000 Preference
Units if the Underwriters' over-allotment
option is exercised in full). The
Preference Units offered by this
Prospectus will represent an approximate
21.4% interest as limited partner in the
Partnership (23.3% if the Underwriters'
over-allotment option is exercised in
full).
Preference Units to be Outstanding
after the Offering . . . . . . . . Upon the closing of the offering made by
this Prospectus, KPL will exchange with
the Partnership 1,000,000 Preference
Units for an equal number of Preference
B Units, resulting in an aggregate of
4,650,000 Preference Units outstanding.
After giving effect to the sale of the
Preference Units offered by this
Prospectus and such exchange, KPL and its
affiliates will own 1,150,000 Preference
Units (825,000 Preference Units if the
Underwriters' over-allotment option is
exercised in full) and 1,000,000
Preference B Units. After giving effect
to the sale of the Preference Units
offered by this Prospectus, KPL and its
affiliates will own an aggregate 34.4%
interest in the Partnership (32.4% if the
Underwriters' over-allotment option is
exercised in full).
Priority of Distributions . . . . . . During the Preference Period (see
"Glossary"), quarterly distributions of
Available Cash (see "Glossary") from
Partnership operations in the amount of
$0.55 per unit (the "Minimum Quarterly
Distribution") will be made to the
holders of the Senior Preference Units
(see "Glossary") before any such
distributions are made to the holders of
Preference Units, Preference B Units
or Common Units. In addition, through
June 30, 1997, the Minimum Quarterly
Distribution will be made to the holders
of Preference Units before any such
distributions are made to the holders of
Preference B Units. During the
Preference Period, such distributions to
the holders of Common Units will be
subordinated to the extent necessary to
permit payment of the Minimum Quarterly
Distribution to the holders of each of
the other classes of LP Units. In
general, the Preference Period will
continue indefinitely until the Minimum
Quarterly Distribution has been paid to
holders of all LP Units for 12
consecutive quarters and certain other
conditions are met. See "Cash
Distributions".
7
<PAGE> 9
Use of proceeds . . . . . . . . . . . All of the Preference Units offered by
this Prospectus are being sold by KPL.
The Partnership will not receive any of
the proceeds from the sale of the
Preference Units.
Proposed New York Stock Exchange
symbol . . . . . . . . . . . . . . KPU
8
<PAGE> 10
PARTNERSHIP STRUCTURE
The following chart shows the organizational structure of the
Partnership and its operating subsidiaries, after giving effect to the offering
made by this Prospectus and KPL's exchange of Preference Units for Preference B
Units:
[organizational chart of the Partnership]
The general partner of the Partnership is Kaneb Pipe Line Company, a
Delaware corporation ("KPL") and a wholly owned subsidiary of Kaneb Services,
Inc., a Delaware corporation ("Kaneb"). KPL owns a combined 2% interest as
general partner of the Partnership and of Kaneb Pipe Line Operating
Partnership, L.P., a Delaware limited partnership ("KPOP"). After giving
effect to the offering made by this Prospectus and KPL's exchange of 1,000,000
Preference Units for an equal number of Preference B Units, the Partnership
will have outstanding 7,250,000 Senior Preference Units, 4,650,000 Preference
Units, 1,000,000 Preference B Units and 3,160,000 Common Units, representing an
approximate 44.2%, 28.4%, 6.1% and 19.3%, respectively, limited partner
interest in the Partnership. KPL and its affiliates will own 1,150,000
Preference Units (825,000 if the Underwriters' over-allotment option is
exercised in full) and all of the outstanding Preference B Units and Common
Units.
The pipeline business of the Partnership is conducted through KPOP, of
which the Partnership is the sole limited partner and KPL is the sole general
partner. The terminaling business of the Partnership is conducted through (i)
Support Terminals Operating Partnership, L.P., a Delaware limited partnership
("STOP"), of which KPOP is the sole limited partner, (ii) Support Terminal
Services, Inc., a Delaware corporation and wholly owned subsidiary of KPOP
("STS"), and (iii) StanTrans, Inc., a Delaware corporation and wholly owned
subsidiary of STS ("STI"). STS is the sole general partner of STOP. KPOP and
STOP are collectively referred to as the "Operating Partnerships".
9
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates
indicated, summary (i) historical financial and operating data for the
Partnership and (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline. The data in the table is
derived from and should be read in conjunction with the historical financial
statements of the Partnership included elsewhere in this Prospectus. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The pro forma financial data is based on the combination of the
historical financial data of the Partnership and the West Pipeline assuming
certain adjustments to reflect the acquisition of the West Pipeline at the
balance sheet date and as of the beginning of the period for income statement
purposes and should be read in conjunction with the unaudited pro forma
financial statements of the Partnership included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------- ------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------------------------- ---------- ------------------- ----------
1992 1993(A) 1994 1994 1994 1995(B) 1995
--------- ---------- ---------- ---------- --------- --------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . $ 42,179 $ 69,235 $ 78,745 $ 92,439 $ 18,434 $ 20,382 $ 22,097
Costs and expenses:
Operating costs . . . . . . . . . . 14,507 29,012 33,586 40,721 8,180 8,558 9,716
Depreciation and amortization . . . 4,124 6,135 7,257 7,961 1,736 2,011 2,117
General and administrative expenses 2,752 4,673 4,924 5,705 1,300 1,187 1,470
--------- ---------- ---------- ---------- --------- --------- ----------
Total costs and expenses . . . . . 21,383 39,820 45,767 54,387 11,216 11,756 13,303
--------- ---------- ---------- ---------- --------- --------- ----------
Operating income . . . . . . . . . . 20,796 29,415 32,978 38,052 7,218 8,626 8,794
Interest income (expense), net . . . (617) (2,045) (2,407) (4,667) (526) (1,144) (1,309)
Minority interest . . . . . . . . . . (200) (266) (295) (322) (64) (73) (73)
--------- ---------- ---------- ---------- --------- --------- ----------
Income before income taxes . . . . . 19,979 27,104 30,276 33,063 6,628 7,409 7,412
Income taxes (c) . . . . . . . . . . -- (450) (818) (818) (249) (110) (110)
--------- ---------- ---------- ---------- --------- --------- ----------
Net income . . . . . . . . . . . . . $ 19,979 $ 26,654 $ 29,458 $ 32,245 $ 6,379 $ 7,299 $ 7,302
========= ========== ========== ========== ========= ========= ==========
Allocation of net income and cash
distributions per Senior Preference
Unit (d) . . . . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 0.55 $ 0.55 $ 0.55
========= ========== ========== ========== ========= ========= ==========
Allocation of net income and cash
distributions per Preference
Unit (d)(e) . . . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 0.55 $ 0.55 $ 0.55
========= ========== ========== ========== ========= ========= ==========
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net . . . . . $ 66,956 $ 133,436 $ 145,646 $ 173,807 $ 135,535 $ 172,915 $ 172,915
Total assets . . . . . . . . . . . . 86,409 162,407 163,105 193,313 159,169 191,120 191,120
Current portion of long-term debt . . 1,177 3,850 1,548 1,548 11,397 1,602 1,602
Long-term debt, less current portion 20,864 41,814 43,265 70,265 31,446 69,844 69,844
Partners' capital . . . . . . . . . . 55,657 100,598 99,754 99,754 99,933 98,927 98,927
OPERATING DATA:
Volumes (f) . . . . . . . . . . . . . 55,111 56,234 54,546 13,878 14,956
Barrel miles (g) . . . . . . . . . . 14,287 14,160 14,460 3,487 3,404
</TABLE>
_________
(a) Includes the operations of ST since its acquisition on March 2, 1993.
(b) Includes the operations of the West Pipeline since its acquisition on
February 24, 1995. Since such acquisition occurred prior to the end of the
period, the pro forma balance sheet data and the historical balance sheet
data are the same.
(c) Subsequent to the acquisition of ST in March 1993, certain operations are
conducted in a taxable entity.
10
<PAGE> 12
(d) Net income of the Partnership for each reporting period is allocated to the
Senior Preference Units and Preference Units in an amount equal to the cash
distributions to the holders thereof declared for that reporting period.
(e) Allocation of net income and cash distributions declared per Preference
Unit exclude $0.45 and $1.20 attributable to the payment of arrearages in
1992 and 1993, respectively.
(f) Volumes are expressed in thousands of barrels of refined petroleum product.
(g) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
11
<PAGE> 13
CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its Available
Cash to holders (the "Unitholders") of LP Units (see "Glossary") and the
General Partner. "Available Cash" (see "Glossary") consists generally of all
the cash receipts of the Partnership less all of its cash disbursements and
reserves.
Distributions by the Partnership of its Available Cash are made 98% to
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the General Partner if certain target levels of cash
distributions to the Unitholders are achieved. The distribution of Available
Cash for each quarter within the Preference Period (see "Glossary") is subject
to the preferential rights of the holders of the Senior Preference Units to
receive quarterly distributions of $0.55 per LP Unit (the "Minimum Quarterly
Distribution") for such quarter, plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters, before any distribution of
Available Cash is made to holders of Preference Units, Preference B Units or
Common Units for such quarter. In addition, for each quarter through the
quarter ending June 30, 1997, the holders of the Preference Units are entitled
to receive the Minimum Quarterly Distribution for such quarter, plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters, before any distribution of Available Cash is made to holders of
Preference B Units for such quarter. During the Preference Period, the
distribution of Available Cash to holders of Common Units is subject to the
preferential rights of the holders of the Senior Preference Units, Preference
Units and Preference B Units to receive the Minimum Quarterly Distribution for
each quarter within the Preference Period, plus any arrearages in the payment
of the Minimum Quarterly Distribution for prior quarters. The Common Units are
not entitled to arrearages in the payment of the Minimum Quarterly
Distribution.
In general, the Preference Period will continue indefinitely until the
Minimum Quarterly Distribution has been paid to the holders of the Senior
Preference Units, the Preference Units, the Preference B Units and the Common
Units for 12 consecutive quarters. Such condition has not yet been met in any
quarter.
The Partnership has paid the Minimum Quarterly Distribution on
outstanding Senior Preference Units for each quarter since the Partnership's
inception. The Partnership has also paid the Minimum Quarterly Distribution on
Preference Units with respect to all quarters since December 31, 1991. No
Preference B Units will have been issued prior to the closing of the offering
made by this Prospectus. See "Distributions".
Any distributions by the Partnership of Available Cash remaining for
any quarter after payment of the Minimum Quarterly Distribution on all
outstanding LP Units (subject to the distribution and arrearage recoupment
priorities described above), will be made in the manner specified under "Cash
Distributions--Quarterly Distributions of Available Cash".
The Amended and Restated Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement") generally prohibits distributions on
the Preference Units, Preference B Units and Common Units during the Preference
Period if the Partnership's consolidated indebtedness exceeds $45 million plus
80% of the aggregate Expansive Capital Expenditures (see "Glossary") of the
Partnership since October 2, 1989 greater than $45 million. At March 31, 1995,
the Partnership's consolidated indebtedness was $71.4 million, and its
aggregate Expansive Capital Expenditures since October 2, 1989 were
approximately $116.0 million. Therefore, at March 31, 1995, the Partnership
could have borrowed an additional $151.7 million (approximately) for Expansive
Capital Expenditures without being restricted in the payment of distributions
to the holders of Preference Units. The General
12
<PAGE> 14
Partner does not currently anticipate incurring debt that would prevent the
distribution of the Minimum Quarterly Distribution to the holders of Preference
Units. See "Cash Distributions".
The above percentages for Unitholder and General Partner distributions
describe the combined distribution percentages by the Partnership and KPOP.
Because the Partnership holds all of its assets and conducts all of its
operations through KPOP and subsidiaries of KPOP, all cash from operations is
generated by KPOP and such subsidiaries, and the distribution of such cash from
KPOP to the Partnership is the principal source of cash from which to make
distributions. Since the General Partner has a 1% interest in all
distributions of KPOP and a 1/99th interest in all distributions of the
Partnership, the holders of LP Units have a 98% interest in Partnership
distributions on a combined basis, subject to incentive distributions to the
General Partner if certain target levels of cash distributions to the
Unitholders are achieved. See "Cash Distributions -- Quarterly Distributions
of Available Cash".
Because past distributions have been, and future distributions are
anticipated to be, comprised solely of Cash from Operations (see "Glossary"),
the above paragraphs assume that Available Cash consists only of Cash from
Operations. The Partnership Agreement provides that Available Cash also can be
generated by Interim Capital Transactions (see "Glossary"), in which case
different distribution priorities would apply and the Minimum Quarterly
Distribution and target distribution levels would be reduced. Different
distribution priorities also would apply upon the dissolution and liquidation
of the Partnership. See "Cash Distributions".
The Minimum Quarterly Distribution and target distribution levels are
subject to adjustment as described under "Cash Distributions--Adjustment of
Minimum Quarterly Distribution and Target Distribution Levels".
The Partnership expects to make distributions of all Available Cash
within 45 days after the end of each calendar quarter to holders of record on
the applicable record date. The first distribution on the Preference Units to
which Unitholders acquiring Preference Units pursuant to this offering will be
entitled will be with respect to the quarter ending September 30, 1995. Such
distribution is expected to be made on or before November 14, 1995 to holders
of record of such LP Units as of October 31, 1995. All record holders of
Preference Units on such record date would be entitled to a full distribution.
The Partnership believes that it will be able to make distributions of
Available Cash on the Preference Units of not less than the Minimum Quarterly
Distribution for each quarter during at least the next two years, although no
assurance can be given with respect to such distributions. Distributions
totalling $2,686,000 were paid on the Common Units with respect to the final
three calendar quarters of 1994. The Partnership believes that, had the
acquisition of the West Pipeline been completed as of the beginning of 1994,
the Partnership could have distributed approximately $5.3 million to the
holders of Common Units with respect to such year.
INVESTMENT CONSIDERATIONS
See "Investment Considerations" for a discussion of certain
competitive and other factors that should be considered in evaluating an
investment in the Preference Units. Such considerations include, but are not
limited to, the following:
13
<PAGE> 15
o Distributions of Available Cash to the holders of the Preference Units
during the Preference Period are subordinated to the right of the
holders of the Senior Preference Units to receive the Minimum Quarterly
Distribution, plus arrearages, if any, in such distributions for prior
quarters.
o The Partnership's interstate common carrier pipeline operations are
subject to rate regulation by the FERC.
o The Partnership's pipeline business depends on demand for refined
petroleum products in the markets it serves and the ability and
willingness of shippers to supply such demand through its pipelines.
o Holders of Preference Units have limited voting rights, and KPL and its
affiliates will manage and control the Partnership.
o KPL and its affiliates may have conflicts of interest with the
Partnership and with holders of Preference Units.
o The Partnership Agreement limits the liability of the General Partner
and relieves it of certain fiduciary and other duties it would otherwise
have under Delaware partnership law.
TAX CONSIDERATIONS
For a summary of the principal federal income tax considerations
associated with the operations of the Partnership and the ownership of
Preference Units, see "Federal Income Tax Considerations".
Based upon the assumptions described below, KPL estimates that holders
acquiring their Preference Units pursuant to this offering will be allocated
federal taxable income for the two and one-half year period ending December 31,
1997, in an amount averaging approximately 38% of the cash distributions with
respect to such period. The General Partner anticipates that, after 1997, such
holders will be allocated federal taxable income that will increase from year
to year. The foregoing estimates are based upon numerous assumptions regarding
the business and operations of the Partnership (including assumptions about
capital expenditures, cash flow and anticipated cash distributions). Such
estimates and assumptions are subject to, among other things, many business,
economic and competitive uncertainties which are beyond the control of KPL or
the Partnership. Further, the estimates are based on certain tax reporting
positions that KPL has adopted and with which the Internal Revenue Service
("IRS") could disagree. Accordingly, no assurance can be given that the
estimates will prove to have been correct. The actual amount of federal
taxable income could be higher or lower than as described above and such
differences could be material.
14
<PAGE> 16
INVESTMENT CONSIDERATIONS
Prospective purchasers of the Preference Units should consider the
following matters in evaluating an investment in the Preference Units.
CONSIDERATIONS RELATING TO THE PARTNERSHIP'S BUSINESS
Rate Regulation. Rates for the Partnership's interstate common
carrier pipeline operations are regulated by the Federal Energy Regulatory
Commission (the "FERC") under the Interstate Commerce Act. To be lawful under
that Act, rates must be just and reasonable and not unduly discriminatory. The
lawfulness of new or changed rates may be protested by shippers and
investigated by the FERC, which can suspend such rates for a period of up to
seven months, and require refunds of amounts collected under rates ultimately
found to be unlawful. Rates that have become final and effective may also be
challenged by complaint in a court or before the FERC. If final and effective
rates are found to be unlawful, the complainant may be awarded reparations of
the unlawfully excessive rates paid in the two-year period before the complaint
was filed. Under Title XVIII of the Energy Policy Act of 1992, rates that were
in effect on October 24, 1991 that were not subject to a protest, investigation
or complaint are deemed to be just and reasonable. Such rates are subject to
challenge only for limited reasons, relating to (i) substantially changed
circumstances in either the economic circumstances of the subject pipeline or
the nature of the services, (ii) a contractual bar that prevented the
complainant from previously challenging the rates, or (iii) a claim that such
rates are unduly discriminatory or preferential. Any relief granted pursuant
to such challenges may be prospective only. The Partnership believes that its
current tariffs are also just and reasonable and would withstand challenge
under the FERC's cost-based rate standards. Because of the complexity of rate
making, however, the lawfulness of any rate is never assured.
In 1985, the FERC adopted a cost-based "trended original cost" ("TOC")
methodology to govern regulated pipeline rates. The TOC methodology "trends"
(i.e., adjusts) for inflation a portion of the original cost of the pipeline's
rate base. Though the TOC ratemaking methodology has never been reviewed by an
appellate court, the methodology may, in the future, be modified or abandoned
by the FERC. In fact, as a result of recent FERC orders, the applicability of
using the TOC methodology to future oil pipeline rate changes has been limited.
Specifically, Title XVIII of the Energy Policy Act of 1992 required the FERC to
issue a final rule establishing a simplified and generally applicable
ratemaking methodology for oil and product pipelines. Title XVIII also
required the FERC to issue a final rule streamlining oil pipeline rate
procedures "in order to avoid unnecessary regulatory costs and delays". This
final rule, known as Order No. 561, was issued on October 22, 1993.
Order No. 561 established a primary ratemaking methodology and offers
several alternative methodologies. The primary ratemaking methodology is a
rate indexing mechanism, tied to the Producer Price Index for Finished Goods.
The pipeline rates in effect at December 31, 1994, which are determined to be
just and reasonable, become the "Base Rates" for application of the indexing
mechanism. This indexing mechanism calculates a ceiling rate. The pipeline
may increase its rates to this calculated ceiling rate without filing a formal
cost-based justification and with limited risk of shipper protests. Shippers
may still be permitted to protest pipeline rates, even if the rate change does
not exceed the index ceiling, if the shipper can demonstrate that the "increase
is so substantially in excess of the actual cost increases incurred by the
pipeline" that the proposed rate would be unjust and unreasonable. The index
is cumulative, attaching to the applicable ceiling rate and not to the actual
rate charged. Thus, a rate that is not increased to the ceiling level in a
given year may still be increased to the ceiling level in the following year.
The pipeline may be required to decrease the current rate if the rate being
charged exceeds the ceiling level. Alternatives to the indexing mechanism are
(i) a TOC filing if the pipeline can demonstrate that its increased costs are
prudently incurred and that there is a substantial divergence between such
increased costs and the rate that would be
15
<PAGE> 17
produced by application of the index; (ii) a settlement between the pipeline
and all existing shippers setting forth a different rate; or (iii) market-based
rates, if the pipeline can show that it lacks significant market power. The
indexing mechanism does not apply to initial rates of a pipeline, which
generally will still be established using the traditional TOC methodology.
Order No. 561 provides, however, that a pipeline can file an initial rate based
upon the agreement of at least one non-affiliated shipper, without an
accompanying cost-of-service justification for such rate. Yet, if this
agreed-upon rate is protested by another shipper, the pipeline will be required
to justify the initial rate on a cost-of-service basis. The initial rate that
is established by the pipeline becomes the pipeline's "Base Rate", and the
indexing mechanism will be applicable to that rate in subsequent years.
Since the indexing mechanism is new, it is difficult to determine how
this will affect the Partnership's interstate pipeline operations. The intent
of Order No. 561 is to minimize the degree of rate scrutiny by the FERC, reduce
uncertainty to the carrier and promote uniformity in the rate making process.
However, it is uncertain if the use of indexing will always work in favor of
pipelines, and it is also unclear what exceptions to indexing will be
permitted.
These alternative ratemaking methodologies to the FERC's indexing
methodology were finalized on October 28, 1994, when the FERC issued Order Nos.
571 and 572. In Order No. 571, the FERC articulated cost-of-service filing and
reporting requirements to be applicable to pipeline initial rates and to
situations where indexing is determined to be inappropriate. Order No. 571
also adopted rules for the establishment of revised depreciation rates, and
revised the information required to be reported by pipelines in their FERC Form
No. 6, "Annual Report for Oil Pipelines". Order No. 572 establishes the
filing requirements and procedures that must be followed when a pipeline seeks
to charge market- based rates.
In a 1993 decision involving an unrelated oil pipeline limited
partnership, the presiding administrative law judge at the FERC held that such
partnership was entitled to include income taxes in its cost of service.
Briefs on exceptions to the decision of the administrative law judge have been
filed, and this decision is currently pending before the FERC. A decision by
the FERC that addresses this issue is expected in the near future. In another
FERC proceeding that has not yet reached the hearing stage involving a
different oil pipeline limited partnership, various shippers have challenged
such pipeline's inclusion of an income tax allowance in its cost of service.
The FERC Staff has also filed testimony that supports the disallowance of
income taxes. It is difficult to predict whether the FERC may ultimately
disallow income taxes for partnerships, or what position would be adopted by a
reviewing court should a FERC decision on this issue be appealed to a court.
Disallowance of the income tax allowance in the Pipelines' cost of service,
would, however, have a material adverse effect on the Partnership and its
ability to make distributions to the Preference Unitholders.
The intrastate operations of the East Pipeline in Kansas are subject
to regulation by the Kansas Corporation Commission. In addition, intrastate
operations of the West Pipeline in Colorado and Wyoming are subject to
regulation by the Colorado Public Utility Commission and the Wyoming Public
Service Commission. For a description of such regulation, see "Business and
Properties of the Partnership--Regulation--Intrastate Regulation".
Competition. While the FERC's current cost-based rate regulation caps
the Pipelines' maximum rates, competitive conditions sometimes require that the
Pipelines file individual rates that are less than the permissible maximum.
The East Pipeline's major competitor is an independent regulated common carrier
pipeline system owned by The Williams Companies ("Williams"), which operates
approximately 100 miles east of and parallel with the East Pipeline. This
competing pipeline system is a substantially more extensive system than the
East Pipeline. Furthermore, Williams and its affiliates have capital and
financial resources substantially greater than those of the Partnership.
Fifteen of the Partnership's 16 delivery terminals on the East Pipeline are in
direct competition with Williams' terminals located within
16
<PAGE> 18
2 to 145 miles. The West Pipeline competes with the truck loading racks of the
Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline
Company and Phillips Petroleum pipelines. A new Diamond Shamrock terminal in
Colorado Springs at the end of a Diamond Shamrock pipeline from their Texas
Panhandle refinery is a major competitor for the West Pipeline's Fountain
terminal near Colorado Springs. See "Business and Properties of the
Partnership--Products Pipeline Business--Competition and Business
Considerations".
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
offering liquids terminaling facilities have significantly more capacity than
ST, particularly those used primarily for petroleum related products. ST also
faces competition from prospective customers that have their own terminal
facilities.
Demand for and Sources of Refined Petroleum Products. The
Partnership's pipeline business depends in large part on (i) the level of
demand for refined petroleum products in the markets served by the Pipelines
and (ii) the ability and willingness of refiners and marketers having access to
the Pipelines to supply such demand by deliveries through the Pipelines.
Most of the refined petroleum products delivered through the East
Pipeline are ultimately used in agricultural operations, including fuel for
farm equipment, irrigation systems, trucks transporting crops and crop drying
facilities. Demand for refined petroleum products for agricultural use, and
the relative mix of products required, is affected by weather conditions in the
geographic areas served by the East Pipeline. Although periods of drought
suppress agricultural demand for some refined petroleum products, particularly
those used for fueling farm equipment, during such times the demand for fuel
for irrigation systems often increases. The agricultural sector is also
affected by government agricultural policies and crop prices.
Unlike the East Pipeline's service area, which is predominantly
agricultural, the West Pipeline serves the growing Denver and northeastern
Colorado markets. The West Pipeline also supplies the jet fuel for Ellsworth
Air Force Base at Rapid City, South Dakota. The West Pipeline has a relatively
small number of shippers, who, with only a few exceptions, are also shippers on
the East Pipeline.
The Partnership cannot predict the impact of future fuel conservation
measures. Governmental regulation, technological advances in fuel economy and
energy generation devices could reduce the demand for refined petroleum
products in the Pipelines' market areas.
Seven refineries (the "Regional Refineries") with aggregate crude oil
refining capacity of approximately 587,000 barrels per day have historically
produced most of the refined petroleum products transported through the East
Pipeline. The Regional Refineries, the production from which accounted for
approximately 85% of the East Pipeline's total volumes shipped in 1994, are
operated by both major integrated and independent petroleum companies and by
large farm cooperatives. Through connections between the East Pipeline and
other pipelines, shippers on the East Pipeline also have access to refined
petroleum products produced by Gulf Coast and other refineries. All such
refineries are dependent on adequate supplies of suitable grades of crude oil.
Historically, the product shipped on the East Pipeline has been refined from
crude oil from producing fields located primarily in Kansas, Oklahoma and
Texas, and, to a much lesser extent, from other domestic or foreign sources.
The West Pipeline is connected to Sinclair's Little America refinery
in Casper, Wyoming. It also receives product at the Strouds station, a short
distance from Casper, through a connection with the Seminoe Pipe Line, which
provides the West Pipeline with access to refineries in the Billings, Montana
area. The West Pipeline's Rapid City, South Dakota terminal also receives
product from Wyoming Refining's Newcastle, Wyoming refinery through their
pipeline that enters the West Pipeline near the
17
<PAGE> 19
Wyoming/South Dakota border near Mule Creek, Wyoming. The West Pipeline's
Cheyenne, Wyoming terminal also receives product from the Frontier Oil &
Refining Company refinery, and the Commerce City, Colorado station also
receives product from the Total Petroleum, Inc. ("Total Petroleum") and Conoco
Oil refineries.
Closings of U.S. Military Bases. The storage and transport of jet
fuel for the U.S. Department of Defense is an important part of ST's
business. Five of ST's 20 inland terminals are utilized solely by the
Department of Defense. Four additional inland terminals are utilized by the
Department of Defense and other users. Part of the storage at one of ST's
inland terminals served a base that was placed on the Department of Defense's
1993 base closure list. In addition, the third party pipeline serving ST's
Drumright, Oklahoma terminal reversed the direction of product flow in 1994
causing jet fuel to become unavailable at this location. Jet fuel was the only
product handled at Drumright, and ST is exploring alternative uses for this
terminal. In the absence of an alternative use, this terminal may be forced to
close. See "Business and Properties of the Partnership--Liquids Terminaling
Business--Description of Terminals". The Partnership cannot predict whether
additional bases served by ST will be closed or whether other customers will
replace any loss of business with the Department of Defense.
Environmental and Safety Regulation. The operations of the
Partnership are subject to federal, state and local laws and regulations
relating to protection of the environment. Although the Partnership believes
that the operations of the Pipelines and ST are in general compliance with
applicable environmental regulations, risks of substantial costs and
liabilities are inherent in pipeline operations and terminaling operations, and
there can be no assurance that substantial costs and liabilities will not be
incurred. The Partnership currently owns or leases, and has in the past owned
or leased, numerous properties that have been used for terminaling or storage
of petroleum products or other chemicals for many years. Hydrocarbons or other
solid wastes may have been disposed of or released on or under the properties
owned or leased by the Partnership. Additionally, some of the sites operated
by the Partnership that are located near current or historical refining and
terminal operations may be at risk of experiencing contamination that has
migrated from such sites. It is possible that developments, such as
increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons resulting from the
operations of the Partnership or previous owners or operators, could result in
substantial costs and liabilities to the Partnership. See "Business and
Properties of the Partnership--Environmental Matters". In general, the
Partnership expects to increase its expenditures during the next decade to
comply with higher industry and regulatory safety standards such as those
described under "Business and Properties of the Partnership--Safety
Regulation". Such expenditures cannot be accurately estimated at this time,
although they are not expected to have a material adverse effect on the
Partnership.
CONSIDERATIONS RELATING TO PARTNERSHIP STRUCTURE
Subordination of Preference Units. The distribution to Unitholders of
Available Cash that constitutes Cash from Operations (see "Glossary") with
respect to each quarter within the Preference Period is subject to the
preferential rights of the holders of the Senior Preference Units to receive
for such quarter the Minimum Quarterly Distribution, plus arrearages, if any,
in the payment of the Minimum Quarterly Distribution for prior quarters, prior
to any distribution of Available Cash that constitutes Cash from Operations to
holders of Preference Units with respect to such quarter. See "Cash
Distributions".
Restrictions on Distributions on Preference Units. The Partnership
Agreement prohibits the Partnership from distributing Available Cash on the
Preference Units, Preference B Units or Common Units or acquiring Preference
Units, Preference B Units or Common Units with Available Cash in respect of any
calendar quarter if (i) the Preference Period continues in effect during the
quarter in respect of
18
<PAGE> 20
which the distribution or acquisition would be made and (ii) after giving
effect to such distribution or acquisition, the sum of (A) plus (B) would
exceed an amount equal to $45 million plus 80% of the aggregate Expansive
Capital Expenditures since the inception of the Partnership greater than $45
million, where (A) is equal to the outstanding principal balance as of the
proposed distribution or acquisition date, as the case may be, of the
Partnership's consolidated indebtedness (excluding borrowings for working
capital purposes) and (B) is equal to the amount of revenues collected by the
Partnership that (x) are then subject to possible refund under a pending rate
case and (y) are not maintained by the Partnership in a separate reserve fund.
See "Cash Distributions--Distribution Restriction on Preference Units,
Preference B Units and Common Units".
Determination of Price for Preference Units. Prior to this offering,
there has been no public market for the Preference Units. The initial public
offering price has been negotiated among KPL and the Underwriters. For a
description of the factors to be considered in determining the initial public
offering price of the Preference Units, see "Underwriting".
Additional Issuances of LP Units. The Partnership Agreement
authorizes the General Partner to cause the Partnership to issue Additional LP
Units (additional limited partner interests and other equity securities of the
Partnership) for such consideration and on such terms and conditions as shall
be established by the General Partner including, without limitation, Preference
Units in addition to the Preference Units offered by this Prospectus and
Additional LP Units with rights to distributions or in liquidation ranking
prior or senior to or on a parity with Preference Units. During the Preference
Period, however, the Partnership may not issue (i) more than 7,750,000
additional Senior Preference Units (other than any Senior Preference Units
issuable upon exchange of Preference Units if certain conditions are met), (ii)
any other class of partnership interest of the Partnership on a parity with,
convertible into or exchangeable for Senior Preference Units or (iii) any other
classes of partnership interests of the Partnership ranking prior to or on a
parity with the Senior Preference Units, without the approval of the holders of
a majority of the outstanding Senior Preference Units (excluding for purposes
of such determination Senior Preference Units held by the General Partner and
its affiliates). After the Preference Period, there is no restriction on the
ability of the Partnership to issue Additional LP Units, including, without
limitation, Additional LP Units with rights to distributions or in liquidation
ranking prior or senior to any of the outstanding LP Units.
Limited Voting Rights; Management and Control. Unitholders will have
only limited voting rights on matters affecting the Partnership's business.
All amendments to the Partnership Agreement and major Partnership actions may
be proposed solely by, or otherwise require the consent of, the General
Partner. See "Description of the Partnership Agreements--Issuance of
Additional LP Units and Securities", "--Amendment of Partnership Agreements",
"--Meetings; Voting" and "--Termination, Dissolution and Liquidation".
The General Partner will manage and control the activities of the
Partnership. Holders of Preference Units will have no right to elect the
General Partner on an annual or other continuing basis. If the General Partner
withdraws or is removed, however, its successor may be elected by the holders
of a majority of the outstanding LP Units (including for purposes of such
determination LP Units owned by the departing General Partner and its
affiliates). The General Partner may not be removed as general partner of the
Partnership except upon approval by the affirmative vote of the holders of not
less than 85% of the outstanding LP Units and any other limited partner
interests, voting as a single class, and the affirmative vote of the holders of
not less than 85% of each class of LP Units and any other limited partner
interests outstanding, voting as separate classes, in each case including for
purposes of such determination LP Units and other limited partner interests
owned by the General Partner and its affiliates. KPL and its affiliates own
all of the outstanding Common Units and, following the completion of this
offering, will own all of the Preference B Units and approximately 25% of the
Preference Units (assuming the Underwriters' over-allotment option is not
exercised). Accordingly, the
19
<PAGE> 21
General Partner cannot be removed without its consent. Unitholders may not
remove the General Partner until after receipt of an opinion of counsel that
such action will not result in the loss of limited liability of the Unitholders
of any class or cause the Partnership to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes. The general partners of the Operating Partnerships may be removed
upon approval of the Partnership.
KPL has agreed not to withdraw voluntarily as general partner of the
Partnership or KPOP before January 1, 2000, unless such withdrawal is approved
by the vote of the holders of a majority of all of the outstanding LP Units,
including during the Preference Period the approval of the holders of a
majority of the Senior Preference Units (excluding for purposes of such
determination Senior Preference Units owned by KPL and its affiliates). The
withdrawal or removal of KPL as the general partner of the Partnership will
automatically result in the concurrent withdrawal or removal of KPL as the
general partner of KPOP. See "Description of the Partnership
Agreements--Withdrawal or Removal of the General Partner".
Conflicts of Interest. Certain conflicts of interest could arise as a
result of the General Partner's relationships with Kaneb, the parent company of
the General Partner, on the one hand, and the Partnership, on the other. Such
conflicts may include, among others, the following situations: (i) the General
Partner's determination of the timing and amount of cash expenditures,
borrowings and reserves; (ii) the General Partner's determination of which
portion of an expenditure constitutes a capital expenditure which increases the
throughput or deliverable capacity or terminaling capacity of the assets of the
Partnership; (iii) the issuance of additional LP Units or the purchase of
outstanding LP Units; (iv) the payment to Kaneb and its subsidiaries and
affiliates for any services rendered on behalf of the Partnership to KPL; (v)
the General Partner's determination of which direct and indirect costs are
reimbursable by the Partnership; (vi) the decision to liquidate the
Partnership; (vii) the decision to retain separate counsel, accountants or
others to perform services on behalf of the Partnership; and (viii) the General
Partner's and its affiliates' decision to engage in activities that might
compete with the Partnership. The Audit Committee of the Board of Directors of
the General Partner will review matters as to which such conflicts of interest
could arise. In addition, the General Partner will owe certain fiduciary
duties to the Unitholders and will be liable for all the debts other than
nonrecourse debt of the Partnership to the extent not paid by the Partnership.
See "Conflicts of Interest and Fiduciary Responsibilities".
Certain provisions of the Partnership Agreement contain exculpatory
language purporting to limit the liability of the General Partner to the
Partnership or the Unitholders. For example, the Partnership Agreement
provides that (i) borrowings by the Partnership or the approval thereof by the
General Partner shall not constitute a breach of any duty of the General
Partner to the Partnership or the Unitholders whether or not the purpose or
effect thereof is to avoid subordination of Preference Units, Preference B
Units or Common Units, (ii) any actions taken by the General Partner consistent
with the standards of reasonable discretion set forth in the definitions of
Available Cash or Cash from Operations will be deemed not to breach any duty of
the General Partner to the Partnership or the Unitholders and (iii) in the
absence of bad faith by the General Partner, the resolution of conflicts of
interest by the General Partner shall not constitute a breach of the
Partnership Agreement or a breach of any standard of care or duty. See
"Conflicts of Interest and Fiduciary Responsibilities". Provisions of the
Partnership Agreement that purport to limit the liability of the General
Partner to the Partnership or the Unitholders may not be enforceable under
Delaware law.
Potential Liability of Unitholders. Unitholders will not be liable
for assessments in addition to their initial capital investment in the LP
Units. Under certain circumstances, however, Unitholders may be required to
repay to the Partnership amounts wrongfully returned or distributed to them.
See "Description of the Partnership Agreements-- Limited Liability".
20
<PAGE> 22
If it were determined that the right of Unitholders as a group to
remove or replace the General Partner, or to take other action pursuant to the
Partnership Agreement, constituted "control" of the Partnership's business,
then Unitholders might be held liable for the Partnership's obligations to the
same extent as a general partner. See "Description of the Partnership
Agreements--Limited Liability".
Potential Reduction of the Minimum Quarterly Distribution and Target
Distribution Levels. Distributions of Cash from Interim Capital Transactions
result in an adjustment of the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution until
such distributions equal Unrecovered Capital, after which Available Cash is
distributed 70% to all Unitholders pro rata and 30% to KPL. See "Glossary" and
"Cash Distributions - Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels". In order to preserve the fungibility of the LP Units,
the holder of a Preference Unit is deemed to have unrecovered capital of $22
per Preference Unit, regardless of the amount actually paid by such holder for
such Preference Unit. The Partnership has no current plans to enter into any
transactions that would result in the distribution of Cash from Interim Capital
Transactions.
Limited Call Right. If at any time after the Preference Period less
than 750,000 of the outstanding LP Units are held by persons other than the
General Partner and its affiliates, the General Partner will have the right,
which it may assign and transfer to any of its affiliates or to the
Partnership, on at least 10 but not more than 60 days' notice, to purchase all,
but not less than all, of the outstanding LP Units held by such nonaffiliated
persons at specified prices. See "Description of the Partnership
Agreements--Limited Call Right".
TAX CONSIDERATIONS
For a discussion of the expected federal and state income tax
consequences of acquiring, owning and disposing of Preference Units, see
"Federal Income Tax Considerations" and "State and Other Taxes".
Partnership Status. The availability to a Preference Unitholder of
the federal income tax benefits of an investment in the Partnership depends in
large part on the classification of each of the Partnership and the Operating
Partnerships as a partnership for federal income tax purposes. Based upon
certain representations of KPL, Fulbright & Jaworski L.L.P., counsel to the
Partnership, has rendered its opinion that under current law and regulations,
each of the Partnership and the Operating Partnerships classified as a
partnership for federal income tax purposes. However, no advance ruling from
the IRS as to such status has been or will be requested and the opinion of
counsel is not binding on the IRS. If the IRS were to challenge the federal
income tax status of the Partnership or the Operating Partnerships or the
amount of a Preference Unitholder's allocable share of the Partnership's
taxable income, such challenge could result in an audit of the Preference
Unitholder's entire tax return and in adjustments to items on that return that
are unrelated to the ownership of Preference Units. In addition, each
Preference Unitholder would bear the cost of any expenses incurred in
connection with an examination of his personal tax return.
One of the criteria involved in determining whether the Partnership or
an Operating Partnership is treated as a partnership for federal income tax
purposes is whether its general partner will have and maintain substantial
assets. The opinion of Fulbright & Jaworski L.L.P. that the Partnership is
classified as a partnership for federal income tax purposes is based upon KPL's
and STS' representations that they have and will maintain at all times while
serving as general partner of their respective partnerships a net worth of at
least $5.0 million each, exclusive of their interests in, and accounts and
notes receivable from, the Partnership and any other limited partnership in
which they are a general partner. In addition, Fulbright & Jaworski L.L.P.'s
opinion is based on the assumption that at least 90% of the Partnership's and
the Operating Partnerships' aggregate gross income for each
21
<PAGE> 23
taxable year will constitute either (i) income from the exploration,
development, mining or production, processing, refining, transportation or
marketing of oil, gas or products thereof or (ii) other qualifying income
within the meaning of section 7704(d) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the further assumption that the General Partner will
act independently of the Unitholders.
STOP earns fees from its terminaling operations for petroleum
products, specialty chemicals and other liquids. Fees relating to terminaling
of liquids that are not oil, gas, other natural resources or products derived
from oil or gas will not be qualifying income for purposes of Section 7704(d)
of the Code. Such fees, which consist primarily of revenues from the Westwego
and Baltimore terminals, were less than 6% of Partnership revenues in 1994, and
the Partnership believes that such fees will be less than 6% of Partnership
revenues in 1995. STOP received a ruling from the IRS in 1993 to the effect
that fees earned from its terminaling operations for petroleum and other
qualifying products will be qualifying income for purposes of Section 7704(d)
of the Code. Although that ruling was based on the facts as they existed in
1993, the Partnership believes that current operations continue to be in
conformity with the facts disclosed and representations made in STOP's request
for the ruling.
If the Partnership or an Operating Partnership were taxable as a
corporation or treated as an association taxable as a corporation in any
taxable year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through to Preference
Unitholders, and its taxable income would be taxed at corporate rates. In
addition, distributions made to Preference Unitholders would be treated as
dividend income (to the extent of current and accumulated earnings and
profits), and, in the absence of earnings and profits, as a nontaxable return
of capital (to the extent of the Preference Unitholder's basis in his
Preference Units), or as capital gain (after the Preference Unitholder's basis
in his Preference Units is reduced to zero). Furthermore, losses realized by
such Partnership would not flow through to Preference Unitholders.
Deductibility of Losses. Losses generated by the Partnership, if any,
will be available to Preference Unitholders that are subject to the passive
activity loss limitations only to offset future income generated by the
Partnership and cannot be used to offset income to a Preference Unitholder from
other passive activities or investments or any other source. Losses from the
Partnership that are not deductible because of the passive loss limitations may
be deducted when the Preference Unitholder disposes of all his Preference Units
in a fully taxable transaction with an unrelated party. Net passive income
from the Partnership may only be offset by a Preference Unitholder's investment
interest expense and by unused Partnership losses carried over from prior
years.
Partnership Allocations. Investors should be aware that certain
aspects of the allocations contained in the Partnership Agreement may be
challenged by the IRS, and such challenges may be sustained. If an allocation
contained in the Partnership Agreement is not given effect for federal income
tax purposes, items of income, gain, loss, deduction or credit will be
reallocated to the Unitholders and the General Partner in accordance with their
respective interests in such items, based upon all the relevant facts and
circumstances. Such reallocation among the Unitholders and the General Partner
of such items of income, gain, loss, deduction or credit allocated under the
Partnership Agreement could result in additional taxable income to the
Preference Unitholders. Such reallocation of Partnership items also could
affect the uniformity of the intrinsic federal tax characteristics of the
Preference Units.
Section 754 Election. The Partnership has made the election permitted
by section 754 of the Code. Such election will generally permit a purchaser of
Preference Units to adjust his share of the basis in the Partnership's
properties pursuant to section 743(b) of the Code. The aggregate amount of the
adjustment computed under section 743(b) is then allocated among the various
assets of the Partnership pursuant to the rules of section 755. The section
743(b) adjustment acts in concert with the section 704(c) allocations
(including the curative allocations if respected) in providing the purchaser
22
<PAGE> 24
of Preference Units with the equivalent of an adjusted tax basis in his share
of the Partnership's properties equal to the fair market value of such share.
Ownership of Preference Units by Tax-Exempt Entities, Regulated
Investment Companies and Foreign Investors. All the gross income attributable
to an investment in the Partnership by tax-exempt entities (including
individual retirement accounts, Keogh and other retirement plans) will
constitute unrelated business taxable income ("UBTI") to such tax-exempt
entities. An investment in Preference Units, therefore, may not be suitable
for tax-exempt entities. An investment in Preference Units also may not be
suitable for regulated investment companies and foreign investors for the
reasons discussed in "Federal Income Tax Considerations--Tax Treatment of
Operations--Tax Exempt Entities, Regulated Investment Companies and Foreign
Investors".
Tax Liability Exceeding Cash Distributions or Proceeds from
Dispositions of Preference Units. A Preference Unitholder will be required to
pay federal income tax and, in certain cases, state and local income taxes on
his allocable share of the Partnership's income, whether or not he receives
cash distributions from the Partnership. No assurance is given that Preference
Unitholders will receive cash distributions equal to their allocable share of
taxable income from the Partnership. Further, upon the sale or other
disposition of Preference Units, a Unitholder may incur tax liability in excess
of the amount of cash received. To the extent that a Preference Unitholder's
tax liability exceeds the amount distributed to him or the amount he receives
on the sale or other disposition of his Preference Units, he will incur an
out-of-pocket expense.
USE OF PROCEEDS
The net proceeds from the sale of the Preference Units are estimated
to be approximately $72.8 million ($79.6 million if the Underwriters'
over-allotment option is exercised in full), assuming an offering price of
$22.00 per Preference Unit. All of the Preference Units offered by this
Prospectus are being sold by KPL. The Partnership will not receive any of the
proceeds from the sale of the Preference Units by KPL. After the offering, KPL
will own an aggregate 33% interest in the Partnership (31% if the Underwriters'
over-allotment option is exercised in full).
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Partnership
as of March 31, 1995 and as adjusted to give effect to the exchange by KPL of
1,000,000 Preference Units for an equal number of Preference B Units. The
table should be read in conjunction with the historical financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
---------------------------------------
HISTORICAL AS ADJUSTED
------------------ ------------------
(in thousands)
<S> <C> <C>
Current portion of long-term debt . . . . . . . . . . . . . . . . $ 1,602 $ 1,602
================== ==================
Long-term debt:
First mortgage notes . . . . . . . . . . . . . . . . . . . . . 60,000 60,000
Obligations under capitalized leases,
including current portion . . . . . . . . . . . . . . . . . 11,446 11,446
------------------ ------------------
Total long-term debt, including current portion . . . . . . . . . 71,446 71,446
Less current portion of long-term debt . . . . . . . . . . . . 1,602 1,602
------------------ ------------------
Total long-term debt, less current portion . . . . . . . . . . . $ 69,844 $ 69,844
================== ==================
Partners' capital:
Senior preference unitholders . . . . . . . . . . . . . . . . $ 47,288 $ 47,288
Preference unitholders . . . . . . . . . . . . . . . . . . . . 45,247 37,239
Preference B unitholders . . . . . . . . . . . . . . . . . . . -- 8,008
Common unitholders . . . . . . . . . . . . . . . . . . . . . . 5,409 5,409
General partner . . . . . . . . . . . . . . . . . . . . . . . 983 983
------------------ ------------------
Total partners' capital . . . . . . . . . . . . . . . . . . . . . $ 98,927 $ 98,927
================== ==================
Total capitalization . . . . . . . . . . . . . . . . . . . . . $ 170,373 $ 170,373
================== ==================
</TABLE>
In 1994, the Partnership entered into a restated credit agreement (the
"Credit Agreement") that provides for a $15 million revolving credit facility
for working capital and general partnership purposes. The Credit Agreement is
secured by a mortgage on the East Pipeline and all the outstanding common stock
of STS and is guaranteed by KPOP, STS, STI and STOP. The Credit Agreement does
not contain a cross-default provision with indebtedness of the General Partner
except in the event the General Partner fails to pay its debts generally as
they become due or in the event of a bankruptcy of the General Partner.
Borrowings under the Credit Agreement bear interest at variable rates and are
due and payable in November 1997. No borrowings under the Credit Agreement
were outstanding at March 31, 1995.
The Credit Agreement contains various restrictive covenants applicable
to the Partnership, including (i) the requirement that current liabilities may
not exceed current assets (excluding current maturities of long-term debt and
partner distributions payable), (ii) the requirement that net worth may never
be less than $45 million plus the net proceeds of issuance of partner interests
and (iii) certain limitations on the incurrence of debt. The Credit Agreement
prohibits the Partnership from distributing amounts in any quarter in excess of
100% of Available Cash for such quarter and from making any distributions to
Unitholders if an event of default exists or would exist upon making such
distribution. Should an event of default under the Credit Agreement occur, the
lenders may foreclose upon the mortgaged assets, following the expiration of
any cure periods. Events of default include failure to pay principal or
interest when due, failure to observe and perform any covenants, breaches of
representations and warranties, certain defaults by the Partnership on other
debt, failure of the General
24
<PAGE> 26
Partner to be the general partner of the Partnership and certain events of
bankruptcy (including that of the General Partner).
In 1994, pursuant to note purchase agreements (the "Note Purchase
Agreements"), STI sold $33 million of notes to a group of insurance companies.
The notes bear interest at the rate of 8.05% and are due on December 22, 2001.
In 1995, KPOP sold $27 million of additional first mortgage notes to the same
insurance companies pursuant to the Note Purchase Agreements, which bear
interest at the rate of 8.37% and are due on February 24, 2002. Both series of
the notes are secured by a mortgage on the East Pipeline and all the
outstanding common stock of STS and are guaranteed by KPOP, STS and STOP.
The Note Purchase Agreements contain various restrictive covenants
applicable to the Partnership, including certain limitations on the incurrence
of debt. The Note Purchase Agreements prohibit the Partnership from
distributing amounts in any quarter in excess of 100% of Available Cash for
such quarter and from making any distributions to Unitholders if an event of
default exists or would exist upon making such distribution. Should an event
of default under the Note Purchase Agreements occur, the lenders may foreclose
upon the mortgaged assets, following the expiration of any cure periods.
Events of default include failure to pay principal or interest when due,
failure to observe and perform any covenants, breaches of representations and
warranties, certain defaults by the Partnership on other debt and certain
events of bankruptcy (including that of the General Partner).
DISTRIBUTIONS
Prior to this offering there has been no public market for the
Preference Units. Application will be made to list the Preference Units on the
New York Stock Exchange (the "NYSE").
The Partnership has paid the Minimum Quarterly Distribution on
outstanding Senior Preference Units for each quarter since the Partnership's
inception. The Partnership has paid the Minimum Quarterly Distribution on all
Preference Units with respect to all quarters since inception of the
Partnership, except for deficiencies in the payment of distributions on the
Preference Units with respect to the second, third and fourth quarters of 1991
totalling $9,323,000. All such arrearages were satisfied in 1992 and 1993.
Had the operations of the West Pipeline, ST and the other terminals acquired by
the Partnership since its inception been included in the Partnership's
operations from such date, the General Partner believes that such arrearages
would not have been incurred. Until 1994, no distributions were paid on the
outstanding Common Units, which are not entitled to arrearages in the payment
of the Minimum Quarterly Distribution thereon.
The Partnership believes that it will be able to make distributions of
Available Cash on the Preference Units of not less than the Minimum Quarterly
Distribution for each quarter during at least the next two years, although no
assurance can be given with respect to such distributions. Distributions
totalling $2,686,000 were paid on the Common Units with respect to the final
three calendar quarters of 1994. The Partnership believes that had the
acquisition of the West Pipeline been completed as of the beginning of 1994,
the Partnership could have distributed approximately $5.3 million to the
holders of Common Units with respect to such year.
The Partnership Agreement generally prohibits distributions on the
Preference Units, Preference B Units and Common Units during the Preference
Period if the Partnership's consolidated indebtedness exceeds $45 million plus
80% of the aggregate Expansive Capital Expenditures of the Partnership since
October 2, 1989 greater than $45 million. At March 31, 1995, the Partnership's
consolidated indebtedness was $71.4 million, and its aggregate Expansive
Capital Expenditures since October 2, 1989 were approximately $116.0 million.
Therefore, at March 31, 1995, the Partnership could have borrowed an additional
$151.7 million (approximately) for Expansive Capital Expenditures
25
<PAGE> 27
without being restricted in the payment of distributions to the holders of
Preference Units. The General Partner does not currently anticipate incurring
debt that would prevent the distribution of the Minimum Quarterly Distribution
to the holders of Preference Units. See "Cash Distributions".
The Credit Agreement and Note Purchase Agreements prohibit the
Partnership from distributing amounts in any quarter in excess of 100% of
Available Cash for such quarter and from making any distributions to
Unitholders if an event of default exists or would exist upon making such
distribution. The General Partner does not believe that the terms, covenants
and restrictions contained in the Credit Agreement and the Note Purchase
Agreements will adversely affect the conduct of the Partnership's business or
its ability to make distributions of the Minimum Quarterly Distribution on the
Preference Units.
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<PAGE> 28
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates
indicated, selected (i) historical financial and operating data for the
Partnership and (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline. The data in the table is
derived from and should be read in conjunction with the historical financial
statements of the Partnership included elsewhere in this Prospectus. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The pro forma financial data is based on the combination of the
historical financial data of the Partnership and the West Pipeline assuming
certain adjustments to reflect the acquisition of the West Pipeline at the
balance sheet date and as of the beginning of the period for income statement
purposes and should be read in conjunction with the unaudited pro forma
financial statements of the Partnership included elsewhere in this Prospectus.
<TABLE>
<CAPTION> THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------------- ------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------------------------- --------- -------------------- ------------
1990 1991 1992 1993(A) 1994 1994 1994 1995(B) 1995
-------- ---------- -------- -------- --------- --------- --------- ---------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . $ 37,618 $ 39,415 $ 42,179 $ 69,235 $ 78,745 $ 92,439 $ 18,434 $ 20,382 $ 22,097
-------- ---------- -------- -------- --------- -------- --------- ---------- ---------
Costs and expenses:
Operating costs . . . . . . . . . 12,588 14,337 14,507 29,012 33,586 40,721 8,180 8,558 9,716
Depreciation and amortization . . 3,333 3,519 4,124 6,135 7,257 7,961 1,736 2,011 2,117
General and administrative . . . 2,916 2,861 2,752 4,673 4,924 5,705 1,300 1,187 1,470
Legal expenses for tariff
protest . . . . . . . . . . . . 400 2,172 -- -- -- -- -- -- --
-------- ---------- -------- -------- --------- -------- --------- ---------- ---------
Total costs and expenses . . . 19,237 22,889 21,383 39,820 45,767 54,387 11,216 11,756 13,303
-------- ---------- -------- -------- --------- -------- --------- ---------- ---------
Operating income . . . . . . . . 18,381 16,526 20,796 29,415 32,978 38,052 7,218 8,626 8,794
Interest and other income . . . . 2,093 1,751 1,721 1,331 1,299 1,299 345 231 416
Interest expense . . . . . . . . (2,321) (2,259) (2,338) (3,376) (3,706) (5,966) (871) (1,375) (1,725)
Minority interest . . . . . . . . (183) (159) (200) (266) (295) (322) (64) (73) (73)
-------- ---------- -------- -------- --------- -------- --------- ---------- ---------
Income before income taxes . . . 17,970 15,859 19,979 27,104 30,276 33,063 6,628 7,409 7,412
Income taxes (c) . . . . . . . . -- -- -- (450) (818) (818) (249) (110) (110)
-------- ---------- -------- -------- --------- -------- --------- ---------- ---------
Net income . . . . . . . . . . . $ 17,970 $ 15,859 $ 19,979 $ 26,654 $ 29,458 $ 32,245 $ 6,379 $ 7,299 $ 7,302
======== ========== ======== ======== ========= ======== ========= ========== =========
Allocation of net income and
cash distributions per Senior
Preference Unit (d) . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 0.55 $ 0.55 $ 0.55
======== ========== ======== ======== ========= ======== ========= ========== =========
Allocation of net income and
cash distributions per
Preference Unit(d) . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 0.55 $ 0.55 $ 0.55
======== ========== ======== ======== ========= ======== ========= ========== =========
Arrearages (created) paid per
Preference Unit . . . . . . . . $ -- $ (1.65) $ 0.45 $ 1.20 $ -- $ -- $ -- $ -- $ --
======== ========== ======== ======== ========= ======== ========= ========== =========
BALANCE SHEET DATA
(AT PERIOD END):
property and equipment, net . . . $ 67,045 $ 68,255 $ 66,956 $133,436 $ 145,646 $173,807 $ 135,525 $ 172,915 $ 172,915
Total assets . . . . . . . . . . 88,610 88,530 86,409 162,407 163,105 193,313 159,169 191,120 191,120
Current portion of long-term
debt . . . . . . . . . . . . . . 895 1,027 1,177 3,850 1,548 1,548 11,397 1,602 1,602
Long-term debt, less
current portion . . . . . . . . 15,368 16,941 20,864 41,814 43,265 70,265 31,446 69,844 69,844
Partners' capital . . . . . . . . 60,310 61,918 55,657 100,598 99,754 99,754 99,933 98,927 98,927
OPERATING DATA:
Volumes (e) . . . . . . . . . . . 53,087 51,635 55,111 56,234 54,546 13,878 14,956
Barrel miles (f) . . . . . . . . 13,165 13,245 14,287 14,160 14,460 3,487 3,404
</TABLE>
_________
(a) Includes the operations of ST since its acquisition on March 2, 1993.
27
<PAGE> 29
(b) Includes the operations of the West Pipeline since its acquisition on
February 24, 1995. Since such acquisition occurred prior to the end of
the period, the pro forma balance sheet data and the historical balance
sheet data are the same.
(c) Subsequent to the acquisition of ST in March 1993, certain operations are
conducted in a taxable entity.
(d) Net income of the Partnership for each reporting period is allocated to
the Senior Preference Units and Preference Units in an amount equal to the
cash distributions to the holders thereof declared for that reporting
period.
(e) Volumes are expressed in thousands of barrels of refined petroleum
product.
(f) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial
statements of the Partnership and notes thereto and the summary historical and
pro forma financial and operating data of the Partnership included elsewhere in
this Prospectus.
GENERAL
In September 1989, KPL, a wholly owned subsidiary of Kaneb, formed the
Partnership to own and operate its refined petroleum products pipeline
business. The Partnership operates through KPOP, a limited partnership in
which the Partnership holds a 99% interest as limited partner and KPL owns a 1%
interest as general partner. The Partnership is engaged through operating
subsidiaries in the refined petroleum products pipeline business and the
terminaling of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the
transportation through the East Pipeline and the West Pipeline, as common
carriers, of refined petroleum products. The Partnership acquired the West
Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned
by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million.
The acquisition was financed by the sale of $27 million of first mortgage notes
due February 24, 2002, which bear interest at the rate of 8.37% per annum. The
East Pipeline and the West Pipeline are collectively referred to as the
"Pipelines". The Pipelines primarily transport gasoline, diesel oil, fuel oil
and propane. The products are transported from refineries connected to the
Pipelines, directly or through other pipelines, to agricultural users,
railroads and wholesale customers in the states in which the Pipelines are
located and in portions of other states. Substantially all of the Pipelines'
operations constitute common carrier operations that are subject to federal or
state tariff regulation. The Partnership has not engaged, nor does it
currently intend to engage, in the merchant function of buying and selling
refined petroleum products.
The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). ST is one of
the largest independent terminaling companies in the United States. ST
operates 23 terminals in 16 states with an aggregate tankage capacity of
approximately 7.7 million barrels at strategic points in the United States.
ST's three largest terminal facilities are located in Texas City, Texas,
Westwego, Louisiana and Baltimore, Maryland. The Texas City terminal is a
deep-water facility primarily serving the Gulf Coast petrochemical industry.
The Westwego terminal, purchased in June 1994 and located on the West bank of
the Mississippi River across from New Orleans, handles molasses, animal and
vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore
terminal is the largest independent terminal facility in the Baltimore area and
handles asphalt, fructose, latex, caustic solutions and other liquids. ST also
operates 20 inland terminal facilities handling primarily petroleum products.
The Partnership acquired ST In March 1993 for approximately $65
million (including $2 million in acquisition costs). In connection with the
acquisition, the Partnership borrowed $65 million from a group of banks. In
April 1993, the Partnership completed a public offering of 2.25 million Senior
Preference Units at $25.25 per unit. The bank loan was partially repaid with
$50.8 million of the proceeds from the offering, and the balance was refinanced
in December 1994. The Partnership continually evaluates other potential
acquisitions.
29
<PAGE> 31
PIPELINE OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ 42,179 $ 44,107 $ 46,117 $ 10,920 $ 11,634
Operating costs . . . . . . . . 14,507 16,453 17,777 4,532 4,378
Depreciation and amortization . 4,124 4,055 4,276 1,062 1,181
General and administrative . . 2,752 3,132 2,908 813 672
------------ ----------- ------------ ----------- -----------
Operating income . . . . . . . $ 20,796 $ 20,467 $ 21,156 $ 4,513 $ 5,403
============ =========== ============ =========== ===========
</TABLE>
The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. Revenues increased 5% in both 1994
and 1993. KPOP implemented a tariff increase of approximately 5.5% in April
1994 and approximately 5.6% in July 1992. Barrel miles increased 2% to 14.5
billion barrel miles in 1994 from 14.2 billion barrel miles in 1993. The
increase in barrel miles was primarily due to increased long-haul shipments
related to product pricing advantages for shippers to western area terminals
served by the East Pipeline.
Operating costs increased 8% in 1994 and 13% in 1993. Property taxes
increased $300,000 and $900,000 in 1994 and 1993, respectively. The 1994
property tax increase was primarily due to tax rate adjustments in Kansas and
Nebraska and the 1993 property tax increase was primarily due to non-recurring
refunds received in 1992 and tax rate adjustments in Nebraska in 1993. Power
costs increased by $600,000 in 1994 due to increased barrel miles, utility
rates and increased usage of drag reducers to increase throughput on portions
of the East Pipeline. Material, supplies and outside services increased
$400,000 in 1994 primarily due to unusually high repair and maintenance
expenditures.
For the quarter ended March 31, 1995, revenues increased 6% and
operating income increased 20% over the comparable prior year period, as a
direct result of the West Pipeline acquisition.
TERMINALING OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
---------- ----------- ------------ ----------- -----------
PRO FORMA HISTORICAL
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ 26,852 $ 29,921 $ 32,628 $ 7,514 $ 8,748
Operating costs . . . . . . . . 13,500 15,064 15,809 3,648 4,180
Depreciation and amortization . 2,242 2,496 2,981 674 830
General and administrative . . 1,442 1,949 2,016 487 515
---------- ----------- ------------ ----------- -----------
Operating income . . . . . . . $ 9,688 $ 10,412 $ 11,822 $ 2,705 $ 3,223
========== =========== ============ =========== ===========
</TABLE>
The increases in revenues are attributable to increases in prices
charged for storage and tankage volumes utilized. Revenues increased 9% in
1994 and 11% in 1993. Average tankage utilized increased 200,000 barrels to
6.1 million barrels compared to 5.9 million barrels in 1993 as a direct result
of terminal acquisitions in 1994. Average annual revenues per barrel of
tankage utilized increased by $0.26 in 1994 to $5.33 per barrel.
For the quarter ended March 31, 1995, revenues increased 16% over the
same period of 1994 primarily as a result of the acquisition of the Westwego
terminal in June 1994. The average annual barrels of tankage utilized
increased 11% to 6.4 million barrels while the average annualized revenue
30
<PAGE> 32
per barrel stored increased to $5.40 in the first quarter of 1995 compared to
$5.16 per barrel in the first quarter of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities decreased to 0.8 to
1 at March 31, 1995 and December 31, 1994 from 1.29 to 1 at December 31, 1993.
The decrease is primarily the result of terminal acquisitions in 1994 funded
from the Partnership's cash balances. Cash provided by operating activities
was $37.9 million, $37.2 million and $26.6 million for the years 1994, 1993 and
1992, respectively. Cash provided by operating activities was $10.7 million
and $8.8 million for the three months ended March 31, 1995 and 1994,
respectively. The increase in cash flow from operating activities in 1993 was
due to the acquisition of ST, and the first quarter 1995 increase was a direct
result of the West Pipeline and Westwego terminal acquisitions.
Capital expenditures were $19.5 million, $8.1 million and $3.2 million
for the years 1994, 1993 and 1992, respectively, and $2.2 million and $3.9
million for the three months ended March 31, 1995 and 1994, respectively.
Included in capital expenditures for the year 1994 were three terminal
acquisitions by ST that totalled $12.3 million. During all periods, adequate
pipeline capacity existed to accommodate volume growth, and the expenditures
required for environmental and safety improvements were not material. Capital
expenditures of the Partnership (including ST but excluding the West Pipeline)
for maintenance of existing operations during 1995 are expected to be
approximately $7.0 million. Capital expenditures for expansionary purposes
during 1995 are expected to be approximately $1.0 million, excluding
acquisition costs of the West Pipeline. The Partnership expects capital
expenditures in 1995 on the West Pipeline to range from approximately $1.5
million to $2.0 million.
The Partnership makes distributions of 100% of its Available Cash to
Unitholders and the General Partner. Available Cash consists generally of all
the cash receipts less all cash disbursements and reserves. A distribution of
$2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and
1992. During 1994, 1993 and 1992, the Partnership paid distributions of $12.3
million, ($2.20 per unit), $19.3 million ($2.20 per unit and $1.20 per unit in
arrearages) and $15.0 million ($2.20 per unit and $0.45 per unit in arrearages)
to the holders of Preference Units. During 1994, the Partnership paid
distributions of $1.7 million ($0.55 per unit) to the holders of Common Units.
The Partnership expects to fund future cash distributions and
maintenance capital expenditures with existing cash and cash flows from
operating activities, and expansionary capital expenditures and some
environmental expenditures are expected to be funded through additional
Partnership borrowings.
In 1994, STI sold $33 million of notes to a group of insurance
companies. Proceeds from these sales were used to refinance existing debt of
the Partnership that was incurred in connection with the ST acquisition in 1993
and the terminal acquisitions in 1994. The notes bear interest at the rate of
8.05% per annum and are due on December 22, 2001. In 1994, the Partnership
entered into the Credit Agreement with a group of banks that provides a $15
million revolving credit facility for working capital and general partnership
purposes. Borrowings under the Credit Agreement bear interest at variable
rates and are due and payable in November 1997. The Credit Agreement has a
commitment fee of 0.2% per annum of the unused credit facility. No amounts
were drawn under this credit facility at March 31, 1995. The notes and credit
facility are secured by a mortgage on the East Pipeline and all the outstanding
common stock of STS and are guaranteed by KPOP, STS, STI and STOP.
The Partnership acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company, a company jointly owned by GATX Terminals Corporation and
Amoco Pipeline Company, for $27.1
31
<PAGE> 33
million. The acquisition was financed by the sale of $27 million of first
mortgage notes due February 24, 2002, which bear interest at the rate of 8.37%
per annum.
32
<PAGE> 34
BUSINESS AND PROPERTIES OF THE PARTNERSHIP
The Partnership is engaged, through its operating subsidiaries, in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids business.
PRODUCTS PIPELINE BUSINESS
Introduction
The Partnership's pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
acquisition of the West Pipeline in February 1995 increased the Partnership's
pipeline business in South Dakota and expanded it into Wyoming and Colorado.
None of the results for 1994 or prior years include the West Pipeline.
The East Pipeline is an integrated pipeline transporting refined
petroleum products, including propane, received from refineries in southeast
Kansas, or from other connecting pipelines, to terminals in Kansas, Nebraska,
Iowa, South Dakota and North Dakota and to receiving pipeline connections in
Kansas. Shippers on the East Pipeline obtain refined petroleum products from
refineries connected to the East Pipeline directly or through other pipelines.
Such refineries obtain crude oil primarily from producing areas in Kansas,
Oklahoma and Texas. Five connecting pipelines deliver propane from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas to the East
Pipeline for shipment.
The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. The following table reflects the
total volume and barrel miles of refined petroleum products shipped and total
operating revenues earned by the East Pipeline for each of the periods
indicated and by the West Pipeline since its acquisition on February 24, 1995.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------------- ----------------------
1990 1991 1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Volume (1) . . . . . . 53,087 51,635 55,111 56,234 54,546 13,878 14,956
Barrel miles(2) . . . . 13,165 13,245 14,287 14,160 14,460 3,487 3,404
Revenues (thousands) . $ 37,618 $ 39,415 $ 42,179 $ 44,107 $ 46,117 $ 10,920 $ 11,634
</TABLE>
_________
(1) Volumes are expressed in thousands of barrels of refined petroleum
product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
The mix of refined petroleum products delivered varies seasonally,
with gasoline demand peaking in early summer, diesel fuel demand peaking in
late summer and propane demand higher in the fall. In addition, weather
conditions in the geographic areas served by the East Pipeline affect the
demand for and the mix of the refined petroleum products delivered through the
East Pipeline, although historically any impact on the volumes shipped has been
short-term. Tariffs charged shippers for transportation do not vary according
to the type of products delivered.
33
<PAGE> 35
The following table sets forth, in thousands of barrels, the volumes of
gasoline, diesel and fuel oil, propane and other refined petroleum products
transported by the East Pipeline during the periods indicated and by the West
Pipeline since its acquisition on February 24, 1995.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, ----------------------
1990 1991 1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gasoline . . . . . . . 26,841 24,152 24,816 25,407 23,958 5,900 6,635
Diesel and fuel oil . . 18,991 20,047 23,374 25,308 26,340 6,477 7,269
Propane . . . . . . . . 4,703 4,441 4,676 4,153 4,204 1,473 1,047
Other . . . . . . . . . 2,552 2,995 2,245 1,366 44 28 5
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total . . . . . . . . 53,087 51,635 55,111 56,234 54,546 13,878 14,956
========== ========== ========== ========== ========== ========== =========
</TABLE>
In October 1991, two single-use pipelines were acquired from Calnev
Pipe Line Company for $2.65 million. Each system, one of which is located in
Umatilla, Oregon and the other in Rawlins, Wyoming, supplies diesel fuel to
Union Pacific Railroad Company's fueling facilities under contracts expiring in
October 1996. Such contracts are renewable thereafter for successive two year
terms unless canceled by either party. The Oregon line is fully automated and
the Wyoming line requires minimal start-up assistance, which is provided by the
railroad. In May 1993, KPOP began operating a newly constructed single-use
pipeline near Pasco, Washington. For the year ended December 31, 1994, the
three systems combined transported a total of 2.8 million barrels of diesel
fuel, representing an aggregate of $1.2 million in revenues.
West Pipeline Acquisition
Effective February 24, 1995, KPOP acquired the West Pipeline from Wyco
Pipe Line Company for $27.1 million in cash. The West Pipeline consists of
approximately 550 miles of pipeline and four truck loading terminals located in
Wyoming, South Dakota and Colorado. On a pro forma basis for the year ended
December 31, 1994, the West Pipeline would have accounted for approximately 15%
of the Partnership's revenues.
Unlike the East Pipeline's service area, which is largely
agricultural, the West Pipeline serves the growing Denver and northeastern
Colorado markets. The West Pipeline also supplies the jet fuel for Ellsworth
Air Force Base at Rapid City, South Dakota. The West Pipeline has a relatively
small number of shippers, who, with only a few exceptions, are also shippers on
the East Pipeline.
Pipeline Operations
The East Pipeline and the West Pipeline are integrated pipeline
systems of approximately 2,075 miles and 550 miles, respectively. The
Pipelines primarily transport gasoline, diesel oil, fuel oil and propane.
Products are transported primarily for refiners, marketers and distributors of
such products. The Pipelines have been constructed and are maintained
consistent with applicable federal, state and local laws and regulations,
standards prescribed by the American Petroleum Institute and accepted industry
practice.
Except for the three single-use lines and certain ethanol facilities,
all of the Partnership's pipeline operations constitute common carrier
operations and are subject to federal tariff regulation. Also, certain of its
intrastate common carrier operations are subject to state tariff regulation.
Common carrier activities are those under which transportation through the
Pipelines are available at published tariffs filed with the FERC in the case of
interstate shipments, or the relevant state authority in the case of intrastate
shipments in Kansas, Colorado and Wyoming, to any shipper of refined petroleum
products who requests such services and satisfies the conditions and
specifications for transportation.
34
<PAGE> 36
For a description of the federal and state tariff regulations applicable to the
common carrier transportation activities of the Partnership, see
"--Regulation".
The Partnership has not engaged, nor does it currently intend to
engage, in the merchant function of buying and selling refined petroleum
products.
In general, a shipper on one of the Pipelines acquires refined
petroleum products from refineries connected to such Pipeline, or, if such
shipper already owns the refined petroleum products, delivers such products to
such Pipeline from those refineries or through pipelines that connect with such
Pipeline. Tariffs for such transportation are charged to shippers based upon
transportation from the origination point on such Pipeline to the point of
delivery. Such tariffs also include charges for terminaling and storage of
product at such Pipeline's terminals. Pipelines are generally the lowest cost
method for intermediate and long-haul overland transportation of refined
petroleum products.
Each shipper is required to supply KPOP with a notice of shipment
indicating sources of products and destinations. All shipments are tested to
ensure compliance with KPOP's specifications. Shippers are usually invoiced by
sight draft by KPOP immediately upon the product entering one of the Pipelines.
The operations of the Pipelines also include 20 truck loading
terminals through which refined petroleum products are delivered to petroleum
transport trucks. The following table shows, with respect to each of such
terminals, its location, number of tanks owned by the Partnership, storage
capacity in barrels and truck capacity. Except as indicated in the notes to
the table, each terminal is owned by KPOP.
35
<PAGE> 37
<TABLE>
<CAPTION>
NO. OF STORAGE CAPACITY TRUCK
LOCATIONS OF TERMINALS TANKS (BARRELS) CAPACITY(1)
- -------------------------- ---------- ---------------------- --------------
<S> <C> <C> <C>
KANSAS:
Hutchinson. . . . . . 9 161,690 1
Concordia(2). . . . . 7 79,339 2
NEBRASKA:
Superior. . . . . . . 11 192,027 1
Geneva . . . . . . . 39 678,128 8
North Platte. . . . . 22 197,914 5
Osceola . . . . . . . 8 79,444 2
Columbus. . . . . . . 12 191,417 2
Norfolk . . . . . . . 16 186,981 4
IOWA:
LeMars . . . . . . . 9 102,914 2
Rock Rapids . . . . . 12 366,081 2
Milford(3). . . . . . 11 171,937 2
SOUTH DAKOTA:
Yankton . . . . . . . 25 245,473 4
Mitchell. . . . . . . 8 71,450 2
Wolsey . . . . . . . 21 148,499 4
Aberdeen. . . . . . . 12 181,450 2
Rapid City. . . . . . 13 256,352 2
NORTH DAKOTA:
Jamestown . . . . . . 13 188,178 2
WYOMING:
Cheyenne. . . . . . . 15 345,009 1
COLORADO:
DuPont. . . . . . . . 17 689,269 6
Fountain. . . . . . . 13 365,920 5
---------- -----------
Totals . . . 293 4,899,472
========== ===========
</TABLE>
_________
(1) Number of trucks that may be simultaneously loaded.
(2) The Concordia terminal is situated on land leased through the year 2060
for a total rental of $2,000.
(3) The Milford terminal is situated on land leased through August 7, 2007
at an annual rental rate of $2,400. KPOP has the right to renew such
lease upon its expiration for an additional term of 20 years at the same
annual rental rate.
The East Pipeline includes intermediate storage facilities consisting
of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas with aggregate capacities of 388,041 and 534,135 barrels, respectively.
During 1994, approximately 53% and 93% of the deliveries of the East Pipeline
and the West Pipeline, respectively, were made through their terminals, and
approximately 47% and 7% of the respective deliveries of such lines were made
to other pipelines and customer owned storage tanks. Storage of product at
terminals pending delivery is considered by the Partnership to be an integral
part of the product delivery service of the Pipelines. Shippers generally
store refined petroleum products for less than one week. Ancillary services,
including injection of shipper-furnished and generic additives, are available
at each terminal.
Demand for and Sources of Refined Petroleum Products
The Partnership's pipeline business depends in large part on (i) the
level of demand for refined petroleum products in the markets served by the
Pipelines and (ii) the ability and willingness of refiners
36
<PAGE> 38
and marketers having access to the Pipelines to supply such demand by
deliveries through the Pipelines.
Most of the refined petroleum products delivered through the East
Pipeline are ultimately used in agricultural operations, including fuel for
farm equipment, irrigation systems, trucks transporting crops and crop drying
facilities. Demand for refined petroleum products for agricultural use, and
the relative mix of products required, is affected by weather conditions in the
markets served by the East Pipeline. The agricultural sector is also affected
by government agricultural policies and crop prices. Although periods of
drought suppress agricultural demand for some refined petroleum products,
particularly those used for fueling farm equipment, during such times the
demand for fuel for irrigation systems often increases.
While there is some agricultural demand for the refined petroleum
products delivered through the West Pipeline, as well as military jet fuel
volumes, most of the demand is centered in the Denver and Colorado
Springs/Fountain areas. Because demand on the West Pipeline is significantly
weighted toward urban and suburban areas, the product mix on the West Pipeline
includes a substantially higher percentage of motor gasoline than the product
mix on the East Pipeline.
The Pipelines are dependent upon adequate levels of production of
refined petroleum products by refineries connected to the Pipelines, directly
or through connecting pipelines. The refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. The refineries connected
directly to the East Pipeline obtain crude oil from producing fields located
primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from
other domestic or foreign sources. The major refineries connected directly to
the West Pipeline are located in Casper and Cheyenne, Wyoming and Denver,
Colorado. Refineries in Billings and Laurel, Montana are connected to the West
Pipeline through other pipelines. These refineries obtain their supplies of
crude oil primarily from Rocky Mountain sources. If operations at any one
refinery were discontinued, the Partnership believes (assuming unchanged demand
for refined petroleum products in markets served by the Pipelines) that the
effects thereof would be short-term in nature, and the Partnership's business
would not be materially adversely affected over the long term because such
discontinued production could be replaced by other refineries or by other
sources. Three refineries connected directly to the East Pipeline, located at
El Dorado, Wichita and Augusta, Kansas, and operated by Coastal Refining and
Marketing, Inc., were closed during 1993.
The majority of the refined petroleum product transported through the
East Pipeline is produced at three refineries in southeast Kansas located at
McPherson, El Dorado and Arkansas City, Kansas and operated by National
Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco") and Total
Petroleum, respectively. These refineries, which are connected directly to
the East Pipeline, shipped an aggregate of 29.7 million barrels of refined
petroleum products through the East Pipeline in 1994. One of such refineries
accounted for approximately 54% of such amount.
The East Pipeline also has direct access by third party pipelines to
four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies
of products through a connecting pipeline that receives products from a
pipeline originating on the Gulf Coast. Five connecting pipelines deliver
propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to
the East Pipeline for shipment.
The majority of the refined petroleum products transported through the
West Pipeline is produced at the Frontier Oil & Refining Company refinery
located at Cheyenne, Wyoming, the Total Petroleum and Conoco Oil refineries
located at Denver, Colorado and Sinclair's Little America refinery located at
Casper, Wyoming. These refineries are connected directly to the West Pipeline.
37
<PAGE> 39
Competition and Business Considerations
The Partnership provides common carrier transportation services
through the Pipelines at posted tariffs. Demand for transportation services by
the Pipelines arises, ultimately, from demand for refined petroleum products in
the markets they serve. See "--Demand for and Sources of Refined Petroleum
Products". The Partnership's business will, therefore, be subject to many
factors beyond its control.
The East Pipeline's major competitor is an independent regulated
common carrier pipeline system owned by The Williams Companies ("Williams")
that operates approximately 100 miles east of and parallel with the East
Pipeline. This competing pipeline system is a substantially more extensive
system than the East Pipeline. Furthermore, Williams and its affiliates have
capital and financial resources substantially greater than those of the
Partnership. Competition with Williams is based primarily on transportation
charges, quality of customer service and proximity to end users although
refined product pricing at either the origin or terminal point on a pipeline
may outweigh transportation costs. Fifteen of the East Pipeline's 16 delivery
terminals are in direct competition with Williams' terminals located within two
to 145 miles.
Upon the expiration of a five year settlement agreement pursuant to
which its tariffs had been frozen, Williams filed a comprehensive new tariff on
January 16, 1990. The filing proposed a tariff design for the future that
would allow Williams substantial flexibility to raise or lower various rates
without regulatory review and specifically provided increases in rates to many
destinations, decreases in rates to other destinations, volume incentive rates
at some terminals and rebates for shipments into certain counties from
specified terminals. Some counties in which rebates would apply lie in the
traditional service area of the East Pipeline. The Partnership intervened in
the Williams tariff proceeding before the FERC and protested the rebates. Nine
shippers also intervened or protested the Williams filing.
On February 15, 1990, FERC suspended the Williams tariff for the
maximum statutory period of seven months. Williams chose a bifurcated
proceeding under the authority of the FERC's ruling in the Buckeye Pipeline
Company case (see "--Regulation"). Under the first phase of such a proceeding,
a determination was to be made whether Williams lacked significant market power
in its various markets. Discrimination issues were also scheduled to be
determined during the first phase. Ultimately Williams would be required to
prove that its tariff rates are just, reasonable and non-discriminatory. The
tariff became effective September 16, 1990 subject to refund depending on the
outcome of the FERC proceedings. A hearing was held before an administrative
law judge of the FERC from June 3 to August 9, 1991 on the first phase of the
proceeding. On January 24, 1992, the judge issued an initial decision which
determined that Williams had market power in 10 of 32 markets in which it
operated and deferred most of the other issues involved to the second phase of
the case on the grounds that they involved cost issues. All active parties
have filed briefs and exceptions to the judge's initial decision. On July 27,
1994, the FERC issued its Opinion and Order on the Initial Decision. The FERC
determined that Williams had market power in 19 of 32 markets. The FERC also
denied Williams' motion proposing rate standards to apply to Phase II of the
proceeding and directed the administrative law judge to proceed with Phase II
for the purpose of establishing base rates in the 19 markets where Williams had
market power. All discrimination issues were also to be decided in Phase II.
Williams filed its direct testimony in Phase II on January 23, 1995. The
discovery phase of the proceeding is just starting. During the pendency of the
proceeding, Williams has instituted other tariff changes, which have been
permitted to go into effect subsequent to their suspension, subject to refund
depending on the final outcome of the 1990 FERC tariff proceedings. The
Partnership has reached a tentative settlement with Williams, and assuming that
it is completed, will be withdrawing from the case.
38
<PAGE> 40
The West Pipeline competes with the truck loading racks of the
Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline
Company and Phillips Petroleum pipelines. A new Diamond Shamrock terminal in
Colorado Springs connected to a Diamond Shamrock pipeline from their Texas
Panhandle refinery is a major competitor for the West Pipeline's Fountain
terminal in Colorado Springs.
Because pipelines are generally the lowest cost method for
intermediate and long-haul movement of refined petroleum products, the
Pipelines' more significant competitors are common carrier and proprietary
pipelines owned and operated by major integrated and large independent oil
companies and other companies in the areas where the Pipelines deliver
products. Competition between common carrier pipelines is based primarily on
transportation charges, quality of customer service and proximity to end users.
The Partnership believes that high capital costs, tariff regulation,
environmental considerations and problems in acquiring rights-of-way make it
unlikely that other competing pipeline systems comparable in size and scope to
the Pipelines will be built in the near future, provided that the Pipelines
have available capacity to satisfy demand and its tariffs remain at reasonable
levels.
The costs associated with transporting products from a loading
terminal to end users limit the geographic size of the market that can be
served economically by any terminal. Transportation to end users from the
loading terminals of the Partnership is conducted principally by trucking
operations of unrelated third parties.
Trucks may competitively deliver products in some of the areas served
by the Pipelines. Trucking costs, however, render that mode of transportation
uncompetitive for longer hauls or larger volumes. The Partnership does not
believe that trucks are, or will be, over the long term effective competition
to its long-haul volumes.
Description of the Pipelines
East Pipeline
Construction of the East Pipeline commenced in the 1950's with lines
from southern Kansas to Geneva, Nebraska. During the 1960's, the East Pipeline
was expanded north to its present terminus at Jamestown, North Dakota. In
1981, the North Platte line was built and, in 1982, the 16" line from
McPherson, Kansas to Geneva, Nebraska was laid. In 1984, the Partnership
acquired a 6" pipeline from Champlin Oil Company. A portion of this 6" line is
the line running south through Superior, Nebraska, to Hutchinson, Kansas. The
other end of the line runs northeast approximately 175 miles crossing the main
pipeline at Osceola, Nebraska, through a terminal at Columbus, Nebraska, and
later crossing and interconnecting with the Yankton/Milford line to terminate
at Rock Rapids, Iowa.
KPOP owns the 2,075 mile East Pipeline except for the 203 mile North
Platte Line, which is held under a capitalized lease that expires at the end of
1998 and that provides rights to renew the lease for five years. KPOP has the
option to purchase the North Platte Line at the end of the lease term for
approximately $5 million. If such option is not exercised, the lessor can
require KPOP to purchase such line at a lower price. KPOP also owns 235
product distribution tanks with total storage capacity of approximately 3.2
million barrels located at 16 distribution terminals in Kansas, Nebraska, Iowa,
South Dakota and North Dakota and 23 product tanks with total storage capacity
of approximately 922,000 barrels at its tank farm installations at McPherson
and El Dorado, Kansas. The East Pipeline further consists of six origin pump
stations at refineries in Kansas and 38 booster pump stations along the system
in Kansas, Nebraska, Iowa, South Dakota and North Dakota. The system uses
distribution terminals, various office and warehouse facilities, and an
extensive quality control laboratory. KPOP leases office space for its
operating headquarters in Wichita, Kansas.
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West Pipeline
The West Pipeline originates at Casper, Wyoming where it is connected
to Sinclair's Little America refinery. It also receives product at the Strouds
station, a short distance from Casper, through a connection with the Seminoe
Pipe Line, which provides the West Pipeline with access to three refineries in
the Billings, Montana area. From the Strouds station, the 8" main line
continues easterly to Douglas Junction, Wyoming, where a 6" lateral line
branches off to the Rapid City, South Dakota terminal approximately 190 miles
away. The Rapid City terminal also receives product from Wyoming Refining's
Newcastle, Wyoming refinery through their pipeline that enters the West
Pipeline near the Wyoming/South Dakota border near Mule Creek, Wyoming.
From Douglas Junction the main 8" line continues southward to a truck
loading terminal at Cheyenne. At Cheyenne, the West Pipeline can receive
product from the Frontier refinery and can deliver product to the Cheyenne Pipe
Line. From Cheyenne, an 8" line extends south into Colorado to the West
Pipeline's Dupont terminal near Denver. At Denver, through its Commerce City
station, the West Pipeline can receive and transfer product to the Total
Petroleum and Conoco Oil refineries and the Phillips Petroleum terminal. From
Commerce City, a 6" line continues south 90 miles to the final terminal at
Fountain, Colorado.
The West Pipeline is the nearest pipeline parallelling the East
Pipeline to the west. The East Pipeline's North Platte line that terminates in
western Nebraska is approximately 200 miles east of the West Pipeline's
Cheyenne terminal. The small Cheyenne Pipe Line that moves from west to east
connects the West Pipeline at Cheyenne, Wyoming with North Platte, Nebraska,
although that line has been deactivated from Sidney, Nebraska (approximately
100 miles from Cheyenne) to North Platte.
Maintenance and Monitoring
To prolong the useful lives of the Pipelines, routine preventive
maintenance is performed. Such maintenance includes cathodic protection to
prevent external corrosion and inhibitors for internal corrosion, periodic
internal inspection of the Pipelines and frequent patrols of the Pipelines'
rights-of-way. The Pipelines are patrolled at regular intervals to identify
equipment or activities by third parties, that, if left unchecked, could result
in encroachment of the Pipelines and other problems. Supervisory Control and
Data Acquisition ("SCADA"), a remote supervisory control software program,
continuously monitors the East Pipeline for operational control from the
Wichita office. The program monitors quantities of refined petroleum products
injected in and delivered through the East Pipeline, except at two continuously
manned locations, as well as pressure and temperature variations through the
East Pipeline, and automatically signals any deviation from normal operations
that requires attention. Portions of the systems can be shut down by remote
control. The program is fully operational throughout the East Pipeline.
A new, improved SCADA system is in the process of being installed.
This system will be installed first on the West Pipeline, which is currently
being controlled by Amoco Pipe Line Company's SCADA system, and then on the
East Pipeline. The new system is estimated to be in operation on the West
Pipeline by July 1, 1995 and on the East Pipeline before the end of 1995.
In addition to the maintenance described above, routine maintenance is
also performed on the terminal and storage facilities associated with the
Pipelines. Such terminal and storage facilities also include automatic tank
alarm systems.
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LIQUIDS TERMINALING BUSINESS
Introduction
ST is one of the largest independent petroleum products and specialty
liquids terminaling companies in the United States. For the year ended
December 31, 1994, on a pro forma basis giving effect to the acquisition of the
West Pipeline, the Partnership's terminaling business would have accounted for
approximately 35% of the Partnership's revenues. ST operates 23 facilities in
16 states, with a total storage capacity of approximately 7.7 million barrels.
ST and its predecessors have been in the terminaling business for over 30 years
and handle a wide variety of products from petroleum products to specialty
chemicals to edible liquids.
ST's terminal facilities provide throughput and storage on a fee basis
for specialty chemicals, petroleum products and other liquids. ST's three
largest terminal facilities are located in Texas City, Texas, Westwego,
Louisiana and Baltimore, Maryland. These facilities accounted for
approximately 68% of ST's revenues and 48% of its tankage capacity in 1994.
The Texas City terminal is a deep-water facility primarily serving the
petrochemical industry along the Gulf Coast. The facility is the largest
independent terminal facility in Texas City and has the ability to handle a
wide range of specialty chemicals. The facility is located within 16 miles of
open water and has three deep-water loading docks with 36- to 40-foot drafts.
In 1994, the Texas City facility accounted for approximately 42% of ST's
revenues.
The Westwego terminal, purchased in June 1994, is a deep-water
facility on the Mississippi River at New Orleans that handles molasses,
fertilizer, animal and vegetable fats and oils, latex and caustic solutions.
In 1994, the Westwego facility accounted for approximately 5% of ST's revenues.
The Baltimore terminal is the largest independent terminal facility in
the Baltimore area and also has a deep- water loading dock with a 33-foot
draft. The Baltimore facility provides terminaling services for asphalt,
fructose, caustics, latex and other products. In 1994, the Baltimore facility
accounted for approximately 22% of ST's revenues.
In addition to the Texas City, Westwego and Baltimore terminaling
facilities, ST operates 20 other terminaling facilities in 14 states. These
inland terminaling facilities primarily handle petroleum products. Five of
these terminaling facilities are located on or near U.S. military bases and
have pipelines owned and operated by ST that deliver jet fuel directly to the
bases.
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The following table outlines ST's terminal locations, capacities,
tanks and primary products handled.
<TABLE>
<CAPTION>
TANKAGE NO. OF PRIMARY
FACILITY CAPACITY TANKS PRODUCTS HANDLED
- ------------------------- ---------- --------- --------------------------------------
(IN MBBLS)
<S> <C> <C> <C>
PRIMARY TERMINALS:
Texas City, TX . . . 1,987 123 Chemicals
Westwego, LA(a) . . . 858 54 Molasses, Fertilizer
Baltimore, MD . . . . 826 50 Chemicals, Asphalt
INLAND TERMINALS:
Stockton, CA . . . . 314 18 Petroleum Products
Indianapolis, IN . . 410 18 Petroleum Products
Macon, GA(b) . . . . 307 10 Petroleum Products, Jet Fuel
Imperial, CA . . . . 124 6 Petroleum Products
Columbus, GA . . . . 187 35 Petroleum Products, Chemicals
Salina, KS(c) . . . . 65 9 Petroleum Products
Chillicothe, IL . . . 270 6 Petroleum Products
Alamogordo, NM(b) . . 120 5 Jet Fuel
Virginia Beach, VA(b) 40 2 Jet Fuel
Drumright, OK . . . . 315 4 Jet Fuel
Moundville, AL . . . 310 6 Jet Fuel
San Antonio, TX . . . 207 4 Jet Fuel
Winona, MN . . . . . 229 7 Fertilizer
Montgomery, AL(b) . . 162 7 Jet Fuel
Tucson, AZ . . . . . 90(d) 7 Petroleum Products
Bremen, GA . . . . . 180 8 Petroleum Products, Jet Fuel
Peru, IL . . . . . 221 8 Petroleum Products, Jet Fuel
Homestead, FL(b) . . 72 2 Jet Fuel
Milwaukee, WI . . . . 308 7 Petroleum Products
Augusta, GA(e) . . . 110 8 Petroleum Products
---------- ---------
Totals . . . 7,712 404
========== =========
</TABLE>
_________
(a) Terminal purchased on June 8, 1994.
(b) Facility also includes pipelines to U.S. government military base
locations.
(c) Terminal purchased on January 18, 1994.
(d) Represents 50% interest in 181 MBbl terminal.
(e) Terminal purchased on July 7, 1994.
Description of Terminals
Texas City, Texas. The Texas City facility is situated on 39 acres of
land, leased from the Texas City Terminal Railway Company with long-term
renewal options. It is located in Galveston County near the mouth of the
Houston Ship Channel and is approximately 16 miles from open water. The eastern
end of the Texas City site is adjacent to three deep-water docking facilities,
which are also owned by Texas City Terminal Railway. The three deep-water docks
include two 36 foot draft docks and a 40 foot draft dock. ST is charged
dockage and wharfage fees on a per vessel and per unit basis, respectively, by
Texas City Terminal Railway, which it passes directly to the shipper or owner
of the incoming or outgoing products.
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ST handles and stores a wide range of specialty chemicals, including
petrochemicals, at the Texas City facility. The facilities are designed to
accommodate a diverse product mix, and include (i) tanks equipped for the
specific storage needs of the various products handled; (ii) piping and pumping
equipment for moving the product between the tanks and the transportation
modes; and (iii) an extensive infrastructure of support equipment. The tankage
at Texas City is constructed of either mild carbon steel, stainless steel or
aluminum. Certain of the tanks, piping and pumping equipment are equipped for
special product needs, including among other things, equipment that can control
temperature, air pressure, air mixture or moisture. ST receives or delivers
the majority of the specialty chemicals that it handles via ship or barge at
Texas City. ST also receives and delivers liquids via rail tank cars and
transport trucks. Additionally, the terminal has direct pipeline connections
to refineries in Texas City.
The Texas City tank facility consists of 123 tanks with a total
capacity of approximately 1,987 MBbls. All recently built tanks are equipped
with "double bottoms", which provide a leak detection system between the
primary and secondary bottom. ST's facility has been designed with several
preventative structural measures to minimize the occurrence and level of damage
in the event of a spill or fire. All loading areas, tanks, pipes and pumping
areas are "contained" to collect any spillage and water run-off.
Westwego, Louisiana. Acquired in June 1994, the Westwego facility is
situated on 27 acres of owned land adjacent to the West bank of the Mississippi
River across from New Orleans. A new dock built in 1992 is capable of handling
ocean going vessels and barges. The terminal has numerous handling facilities
for receiving and shipping by rail and tank truck as well as vessels and
barges.
The Westwego terminal historically has been primarily a terminal for
molasses, and animal and vegetable fats and oils. The former owner, PM Ag,
Products, Inc., has contracted with ST for five years for terminaling in five
large molasses tanks. In recent years, the terminal has broadened its product
mix to include fertilizer, latex and caustic solutions. The facility includes
a blending plant for the processing of certain molasses-based feeds and a
laboratory for quality control and analysis.
The facility consists of 54 large tanks with a total capacity of
approximately 858 MBbls. There are also approximately 30 smaller tanks for
manufacturing and processing.
Baltimore, Maryland. The Baltimore facility is situated on 18 acres
of owned land, located just south of Baltimore near the Harbor Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft
channel and berth. The dock gives ST the ability to receive and distribute
shipments of product by barge and ship.
Similar to the Texas City facility, Baltimore is a specialty liquids
terminal. The primary products handled at the Baltimore facility include
asphalt, fructose, latex, caustic solutions and chemicals. ST receives and
delivers a variety of products via ship, barge, rail, truck and a common
carrier pipeline.
The Baltimore tank facility consists of 50 tanks with a total capacity
of approximately 826 MBbls. All of the utilized tanks are dedicated to
specific products of customers under contract. Certain tanks are customized to
accommodate the requirements of different products.
Inland Terminals. In addition to ST's three major facilities, ST has
20 inland terminal facilities throughout the United States. These facilities
represented approximately 52% of ST's total tankage capacity and approximately
32% of its total revenue for 1994. Except for the facility in Columbus,
Georgia, which handles petroleum and specialty chemicals, and the facility in
Winona, Minnesota, which handles fertilizer solutions, these inland facilities
receive, store and deliver refined petroleum products for a variety of
customers.
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In 1994, terminaling and pipeline transportation of jet fuel for the
U.S. Department of Defense represented 11% of ST's business. Nine of ST's 20
inland terminal sites are involved in the terminaling or transport (via
pipeline) of jet fuel for the Department of Defense. Five of the nine
locations are utilized solely by the Department of Defense. Five of the nine
locations include pipelines that deliver jet fuel directly to nearby military
bases.
The base closing list released by the Department of Defense on March
12, 1993 included the closure of the Naval Air Station in Glenview, Illinois
which was served by ST's terminal in Peru, Illinois. Additionally, the ST
pipeline serving Homestead Air Force Base in Florida has been inactive due to
lack of fuel usage at the base since Hurricane Andrew in 1992. It is
anticipated that the operation of that pipeline will begin again in 1995. ST
does not believe that, in the aggregate, the inland terminals serving the
Department of Defense will experience a significant decrease in cash flows for
the foreseeable future as a result of Department of Defense changes in
activity. However, the third party pipeline serving the Drumright, Oklahoma
terminal reversed the direction of product flow in 1994 causing jet fuel to
become unavailable at this location. Jet fuel was the only product handled at
Drumright and ST is exploring alternative uses for this terminal. In the
absence of an alternative use, this terminal may be forced to close.
Competition and Business Considerations
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. ST is a member of
the Independent Liquid Terminals Association ("ILTA"), which, among other
functions, publishes a directory of terminal locations of its members
throughout the United States. Customers with specific location and facility
demands generally use the ILTA directory to identify the terminals in the
region available for specific needs, and then select the preferred providers on
the basis of service, specific terminal capabilities and environmental
compliance. Customers then seek competitive proposals to ultimately select the
terminal retained.
In addition to the terminals owned by independent terminal operators,
many major energy and chemical companies also own extensive terminal
facilities. Although such terminals often have the same capabilities as
terminals owned by independent operators, they generally do not provide
terminaling services to third parties. In many instances, major energy and
chemical companies that own storage and terminaling facilities are also
significant customers of independent terminal operators. Such companies
typically have strong demand for terminals owned by independent operators when
independent terminals have more cost effective locations near key
transportation links such as deep water ports. Major energy and chemical
companies also need independent terminal storage when their captive storage
facilities are inadequate, either because of size constraints, the nature of
the stored material or specialized handling requirements.
Independent terminal owners compete based on the location and
versatility of terminals, service and price. A favorably located terminal will
have access to various cost effective transportation modes both to and from the
terminal. Possible transportation modes include waterways, railroads, roadways
and pipelines. Terminals located near deep water port facilities are referred
to as "deep water terminals" and terminals without such facilities are referred
to as "inland terminals" (some inland facilities are served by barges on
navigable rivers).
Terminal versatility is a function of the operator's ability to offer
safe handling for a diverse group of products with complex handling
requirements. The service function typically provided by the terminal
includes, among other things, the safe storage of the product at specified
temperature, moisture and other conditions, as well as loading and unloading at
the terminal. An increasingly important aspect of versatility and the service
function is an operator's ability to offer product handling
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<PAGE> 46
and storage in compliance with environmental regulations. A terminal
operator's ability to offer competitive pricing is often dependent on the
quality, specifications and versatility of the facilities owned by the
operator. Although many products require modest terminal modification,
operators with a greater diversity of terminals with versatile storage
applications typically require less modification prior to usage, ultimately
reducing the storage cost.
Several companies offering liquid terminaling facilities have
significantly more capacity than ST. However, the majority of ST's tankage can
be described as "niche" facilities that are equipped to properly handle
"specialty" liquids or provide facilities or services where management believes
they enjoy an advantage over competitors. Most of the larger operators,
including GATX Terminals Corporation, Williams, Northville Industries,
Petroleum Fuel & Terminal and Steuart Petroleum, have facilities used primarily
for petroleum related products. Such specialty or "niche" tankage is less
abundant in the U.S., and "specialty" liquids typically command higher terminal
fees than lower-price bulk terminaling for petroleum products.
CAPITAL EXPENDITURES
Capital expenditures with respect to the East Pipeline were $3.2
million, $5.1 million and $2.2 million, respectively, for the years ended
December 31, 1992, 1993 and 1994, respectively. Approximately 66% of the
aggregate of these capital expenditures related primarily to maintenance of
existing operations and approximately 28% related to expansion projects. The
remaining 6% related primarily to environmental expenditures. During these
periods, adequate capacity on the East Pipeline existed to accommodate volume
growth.
Capital expenditures by ST were $6.0 million, $3.2 million and $17.3
million, respectively, for the years ended December 31, 1992, 1993 and 1994,
respectively. In 1994, capital expenditures related primarily to the
acquisition of terminals at Salina, Kansas, Westwego, Louisiana, and Augusta,
Georgia.
Capital expenditures of the Partnership (including ST but excluding
the West Pipeline) for maintenance of existing operations during 1995 are
expected to be approximately $7.0 million. Capital expenditures for
expansionary purposes during 1995 are expected to be approximately $1.0
million, excluding acquisition costs of the West Pipeline. Additional
expansionary capital expenditures will depend on future opportunities to expand
the Partnership's operations. The Partnership expects capital expenditures in
1995 on the West Pipeline to range from approximately $1.5 million to $2.0
million. Such future expenditures, however, will depend on many factors beyond
the Partnership's control, including, without limitation, demand for refined
petroleum products and terminaling services in the Partnership's market areas,
local, state and federal governmental regulations and fuel conservation efforts
and the availability of financing on acceptable terms. No assurance can be
given that required capital expenditures will not exceed anticipated amounts
during the year or thereafter or that the Partnership will be able to finance
such expenditures through borrowings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Resources
and Liquidity".
REGULATION
Interstate Regulation
General. The interstate common carrier pipeline operations of the
Partnership are subject to rate regulation by the FERC under the Interstate
Commerce Act. The Interstate Commerce Act provides, among other things, that
to be lawful the rates of common carrier petroleum pipelines must be "just and
reasonable" and not unduly discriminatory. New and changed rates must be filed
with
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<PAGE> 47
the FERC, which may investigate their lawfulness on protest or its own motion.
The FERC may suspend the effectiveness of such rates for up to seven months.
If the suspension expires before completion of the investigation, the rates go
into effect, but the pipeline can be required to refund to shippers, with
interest, any difference between the level the FERC determines to be lawful and
the filed rates under investigation. Rates that have become final and
effective may be challenged by complaint to a court or the FERC filed by a
shipper or on the FERC's own initiative, and reparations may be recovered by
the party filing the complaint for the two year period prior to the complaint
if the FERC finds the rate to be unlawful.
The Partnership's current rates became final and effective in April
1994. Under Title XVIII of the Energy Policy Act of 1992, rates that were in
effect on October 24, 1991 that were not subject to a protest, investigation or
complaint are deemed to be just and reasonable. Such rates are subject to
challenge only for limited reasons, relating to (i) substantially changed
circumstances in either the economic circumstances of the subject pipeline or
the nature of the services, (ii) a contractual bar that prevented the
complainant from previously challenging the rates or (iii) a claim that such
rates are unduly discriminatory or preferential. Any relief granted pursuant
to such challenges may be prospective only. The Partnership believes that its
currently effective tariffs are just and reasonable and would withstand
challenge under the FERC's cost-based rate standards. Because of the
complexity of rate making, however, the lawfulness of any rate is never
assured.
In general, petroleum product pipeline rates are cost-based. Such
rates are permitted to generate operating revenues, based on projected volumes,
not greater than the total of the following components: (i) operating
expenses, (ii) depreciation and amortization, (iii) federal and state income
taxes (determined on a separate company basis and adjusted or "normalized" to
avoid year to year variations in rates due to the effect of timing differences
between book and tax accounting for certain expenses, primarily depreciation)
and (iv) an overall allowed rate of return on the pipeline's "rate base".
Generally, rate base is a measurement of the investment in, or value of, the
common carrier assets of a petroleum products pipeline.
In 1985, the FERC began issuing a series of Opinions ("FERC Opinions")
providing that oil pipeline rates would continue to be cost-based. The FERC
Opinions required that the rate base be calculated by the net depreciated
trended original cost ("TOC") methodology. Under the TOC methodology, after a
starting rate base has been determined, a pipeline's rate base is to be (i)
increased by property additions at cost plus an amount equal to the equity
portion of the rate base multiplied or "trended" by an inflation factor and
(ii) decreased by property retirements, depreciation and amortization of rate
base write-ups reflecting inflation.
The FERC Opinions allow for a rate of return for petroleum products
pipelines determined by adding (i) the product of a rate of return equal to the
nominal cost of debt multiplied by the portion of the rate base that is deemed
to be financed with debt and (ii) the product of a rate of return equal to the
real (i.e., inflation-free) cost of equity multiplied by the portion of the
rate base that is deemed to be financed with equity. The appropriate rate of
return for a petroleum pipeline is determined on a case-by-case basis, taking
into account cost of capital, competitive factors and business and financial
risks associated with pipeline operations.
The Interstate Commerce Commission, which regulated oil pipelines
until 1978, had formerly determined rate base by using a current valuation
methodology. The FERC Opinions abandoned the valuation methodology and
required pipelines to establish a transition rate base for the pipeline's
existing plant. The transition rate base, called the "starting rate base", is
the sum of (i) the net depreciated original cost of the pipeline's property
multiplied by the ratio of debt to total capitalization and (ii) the net
depreciated reproduction portion of the valuation rate base as of 1983,
multiplied by the ratio of equity to total capitalization. The original cost
of land, rights of way less book
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<PAGE> 48
depreciation, allowed working capital and plant less book depreciation that
were not included in the 1983 valuation may be added to the starting rate base.
The actual capital structure as of June 28, 1985 of either the
pipeline or its parent is typically used to establish the starting rate base.
In general, the pipeline's structure is used if the pipeline issues long-term
debt to outside investors without any parent guarantee and the parent's
structure is used if the pipeline has no long-term debt, issues long-term debt
to its parent, or its long-term debt is guaranteed by its parent. In
individual cases, however, the FERC may determine that the actual capital
structure of the pipeline or its parent is inappropriate for rate regulation
purposes. The FERC may then impute to the pipeline the capital structure it
deems appropriate to the pipeline's risk.
In addition to the TOC methodology, the FERC has indicated a
willingness to consider departures from cost-of- service rates depending upon
whether a pipeline's individual markets are sufficiently competitive. In a
proceeding involving Buckeye Pipeline Company, the FERC invited jurisdictional
pipelines to demonstrate that they lack significant market power in all or some
of their markets. In Buckeye, the FERC accepted a three-year experimental
program of light- handed regulation of the pipeline's rates. Under the
program, the FERC permitted the use of the volume-weighted average of Buckeye's
actual rates in those markets where it lacked significant market power to
determine the price cap for rates in non-competitive markets.
The Partnership has not attempted to depart from cost-based rates.
Instead, it has continued to rely on the traditional, cost-based TOC
methodology. The TOC methodology has not been subject to judicial review.
Title XVIII of the Energy Policy Act of 1992 ("EP Act") required the
FERC to issue a ruling establishing a simplified and generally applicable rate
making methodology for oil pipelines no later than October 24, 1993. The FERC
was also required to issue a final rule to streamline procedures relating to
oil and product pipeline rates "in order to avoid unnecessary regulatory costs
and delays" no later than April 24, 1994.
On October 22, 1993, the FERC issued Order No. 561 implementing the EP
Act. Order No. 561, among other things, adopted a simplified and generally
acceptable rate making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates.
Rate increases up to the ceiling level are to be discretionary for the
pipeline, and, for such rate increases, there will be no need to file
cost-of-service or supporting data. Moreover, so long as the ceiling is not
exceeded, a pipeline may make a limitless number of rate change filings.
The pipeline rates in effect at December 31, 1994, which are
determined to be just and reasonable, become the "Base Rates" for application
of the indexing mechanism. This indexing mechanism calculates a ceiling rate.
The pipeline may increase its rates to this calculated ceiling rate without
filing a formal cost based justification and with limited risk of shipper
protests. Shippers may still be permitted to protest pipeline rates, even if
the rate change does not exceed the index ceiling, if the shipper can
demonstrate that the "increase is so substantially in excess of the actual cost
increases incurred by the pipeline" that the proposed rate would be unjust and
unreasonable. The index is cumulative, attaching to the applicable ceiling
rate and not to the actual rate charged. Thus, a rate that is not increased to
the ceiling level in a given year may still be increased to the ceiling level
in the following year. The pipeline may be required to decrease the current
rate if the rate being charged exceeds the ceiling level.
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The index underlying Order No. 561 is to serve as the principal basis
for the establishment of oil pipeline rate changes in the future. As explained
by the FERC in Order Nos. 561 and 561-A, however, there may be circumstances
where the indexing mechanism will not apply. Specifically, the FERC determined
that a pipeline may utilize any one of the following three alternative
methodologies to indexing:
(i) A cost-of-service methodology may be utilized by a
pipeline to justify a change in a rate if a pipeline can demonstrate
that its increased costs are prudently incurred and that there is a
substantial divergence between such increased costs and the rate that
would be produced by application of the index;
(ii) A pipeline may file a rate change as part of a
settlement when it secures the agreement of all of its existing
shippers; and
(iii) Consistent with the Buckeye precedent, a pipeline may
base its rates upon a "light-handed" market-based form of regulation
if it is able to demonstrate a lack of significant market power in the
relevant markets.
The indexing mechanism does not apply to initial rates of a pipeline,
which will still generally be established using the traditional TOC
methodology. Order No. 561 provides, however, that a pipeline can file an
initial rate based upon the agreement of at least one non-affiliated shipper,
without an accompanying cost-of-service justification for such rate. Yet, if
this agreed-upon rate is protested by another shipper, the pipeline will be
required to justify the initial rate on a cost-of-service basis. The initial
rate that is established by the pipeline becomes the pipeline's "Base Rate",
and the indexing mechanism will be applicable to that rate in subsequent years.
On October 28, 1994, after hearings and public comment period, the
FERC issued Order Nos. 571 and 572, intended as procedural follow-ups to Order
No. 561. In Order No. 571, the FERC (i) articulated cost-of-service and
reporting requirements to be applicable to pipeline initial rates and to
situations where indexing is determined to be inappropriate; (ii) adopted rules
for the establishment of revised depreciation rates; and (iii) revised the
information required to be reported by pipelines in their Form No. 6, "Annual
Report for Oil Pipelines". Order No. 572 establishes the filing requirements
and procedures that must be followed when a pipeline seeks to charge
market-based rates.
In a 1993 decision involving an unrelated oil pipeline limited
partnership, the presiding administrative law judge at the FERC held that such
partnership was entitled to include income taxes in its cost of service. In so
holding, the administrative law judge rejected the arguments of two shippers
that an income tax allowance was improper due to the fact that such pipeline,
as a partnership, did not itself pay any federal or state income taxes. The
administrative law judge's ruling on the income tax issue is consistent with
FERC precedent as it now stands. Briefs on exceptions to the decision of the
administrative law judge have been filed and this decision is currently pending
before the FERC. A decision by the FERC that addresses this issue is expected
in the near future. In another FERC proceeding that has not yet reached the
hearing stage involving a different oil pipeline limited partnership, various
shippers have also challenged such pipeline's inclusion of an income tax
allowance in its cost of service. The FERC Staff has also filed testimony that
supports the disallowance of income taxes. It is difficult to predict whether
the FERC may ultimately disallow income taxes for partnerships, or what
position would be adopted by a reviewing court should a FERC decision on this
issue be appealed to a court. Disallowance of the income tax allowance in the
Partnership's cost of service would, however, have a material adverse effect on
the Partnership and its ability to make distributions to the Preference
Unitholders.
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Intrastate Regulation
The intrastate operations of the East Pipeline in Kansas are subject
to regulation by the Kansas Corporation Commission, and the intrastate
operations of the West Pipeline in Colorado and Wyoming are subject to
regulation by the Colorado Public Utility Commission and the Wyoming Public
Service Commission, respectively. Like the FERC, the state regulatory
authorities require that shippers be notified of proposed intrastate tariff
increases and have an opportunity to protest such increases. KPOP also files
with such state authorities copies of interstate tariff changes filed with the
FERC. In addition to challenges to new or proposed rates, challenges to
intrastate rates that have already become effective are permitted by complaint
of an interested person or by independent action of the appropriate regulatory
authority.
LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary
course of business. Subject to certain deductibles and self-insurance
retentions, substantially all the claims made in these lawsuits are covered by
insurance policies.
ENVIRONMENTAL MATTERS
General
The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes that its operations are in general compliance with
applicable environmental regulations, risks of substantial costs and
liabilities are inherent in pipeline and terminal operations, and there can be
no assurance that significant costs and liabilities will not be incurred by the
Partnership. Moreover, it is possible that other developments, such as
increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons resulting from the
operations of the Partnership, could result in substantial costs and
liabilities to the Partnership.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and
other statutes as they pertain to prevention and response to oil spills. The
OPA subjects owners of facilities to strict, joint and potentially unlimited
liability for removal costs and certain other consequences of an oil spill,
where such spill is into navigable waters, along shorelines or in the exclusive
economic zone. In the event of an oil spill into such waters, substantial
liabilities could be imposed upon the Partnership. States in which the
Partnership operates have also enacted similar laws. Regulations are currently
being developed under OPA and state laws that may also impose additional
regulatory burdens on the Partnership.
The Pipelines cross several navigable rivers and streams. The FWPCA
imposes strict controls against the discharge of oil and its derivatives into
navigable waters. The FWPCA provides penalties for any discharges of petroleum
products in reportable quantities and imposes substantial potential liability
for the costs of removing an oil spill. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of a release of petroleum or its derivatives in surface waters or into
the groundwater.
Contamination resulting from spills or releases of refined petroleum
products are not unusual within the petroleum pipeline industry. The East
Pipeline has experienced limited groundwater
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contamination at four terminal sites (Milford, Iowa, Norfolk and Columbus,
Nebraska, and Yankton, South Dakota) resulting from spills of refined petroleum
products. Regulatory authorities have been notified of these findings and
cleanup is underway using extraction wells and air strippers. The Partnership
estimates that $540,000 has been expended to date for remediation at these four
sites and that ongoing remediation expenses at each site will be less than
$5,000 per year for the next several years. Groundwater contamination is also
known to exist at East Pipeline sites in Augusta, Kansas and in Potwin, Kansas,
but no remediation has been required. Although no assurances can be made, if
remediation is required, the Partnership believes that the resulting cost would
not be material.
The East Pipeline experienced a spill due to third party damage during
the first quarter of 1991. Remediation of the groundwater impacted by this
spill has been underway since the second quarter of 1991. The Partnership
estimates that on-going remediation expenses will be in the range of $10,000 to
$15,000 per year. Regulatory authorities have been notified. The Partnership
has filed suit against the third party seeking compensation for damages. The
case is currently scheduled for trial in October 1995.
During 1994, the East Pipeline experienced a seam rupture of its 8"
northbound line in Nebraska in January and another similar rupture on the same
line in April. As a result of these ruptures, KPOP reduced the maximum
operating pressure on this line to 60% of the Maximum Allowable Operating
Pressure ("MAOP") and, on May 24, commenced a hydrostatic test to determine the
integrity of over 80 miles of that line. The test was completed on the entire
80 miles on May 29, 1994, and the line was authorized to return to
approximately 80% of MAOP pending review by the Department of Transportation
("DOT") of the hydrostatic test results. On July 29, 1994, the DOT authorized
most of the line to return to the historical MAOP. Approximately 30 miles of
the line was authorized to return to slightly less than historical MAOP.
Although the Partnership has expended approximately $153,000 to date for
remediation at these rupture sites, the total amount of remediation expenses
that will be required has not yet been determined. These expenses are not
expected to have a material effect upon the results of the Partnership.
ST has experienced groundwater contamination at its terminal sites at
Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have
been notified of these findings and cleanup is underway using extraction wells
and air strippers. Groundwater contamination also exists at the ST terminal
site in Stockton, California and in the areas surrounding this site as a result
of the past operations of five of the facilities operating in this area. ST
has entered into an agreement with three of these other companies to allocate
responsibility for the clean up of the contaminated area. Under the initial
estimate of remedial costs, the parties (including ST) at Stockton would pay in
total approximately $752,000. However, the remediation costs have not been
finalized and could ultimately increase or decrease. In addition, ST is
responsible for up to two-thirds of the costs associated with existing
groundwater contamination at a formerly owned terminal at Marcy, New York,
which also is being remediated through extraction wells and air strippers. The
Partnership has expended approximately $350,000 to date for remediation at
these four sites and estimates that on-going remediation expenses will
aggregate approximately $300,000 to $450,000 over the next three years.
Groundwater contamination has been identified at ST terminal sites at
Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken
place. Shell Oil Company has indemnified ST for any contamination at the
Milwaukee site prior to ST's acquisition of such facility. Star Enterprises,
the former owner of the Montgomery terminal, has indemnified ST for
contamination at a portion of the Montgomery site where contamination has been
identified prior to ST's acquisition of the facility. A remediation system is
in place to address groundwater contamination at the ST terminal facility in
Augusta, Georgia. Star Enterprises, the former owner of the Augusta terminal,
has indemnified ST for this contamination and has retained responsibility for
the remediation system. There is also a possibility that groundwater
contamination may exist at other facilities. Although no assurance in this
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regard can be given, the Partnership believes that such contamination, if
present, could be remediated with extraction wells and air strippers similar to
those that are currently in use and that resulting costs would not be material.
In 1991, the Environmental Protection Agency (the "EPA") implemented
regulations expanding the definition of hazardous waste. The Toxicity
Characteristic Leaching Procedure ("TCLP") has broadened the definition of
hazardous waste by including 25 constituents that were not previously included
in determining that a waste is hazardous. Water that comes in contact with
petroleum may fail the "TCLP" procedure and require additional treatment prior
to its disposal. The Partnership plans to install totally enclosed wastewater
treatment systems at all East Pipeline terminal sites to treat such petroleum
contaminated water, especially tank bottom water. Previously, this waste water
was disposed of in evaporation ponds located at each site. The East Pipeline
has discontinued this practice and is installing onsite treatment systems.
These systems, the installation of which commenced in 1993, will be completed
in 1995.
The EPA has promulgated regulations that may require the Partnership to
apply for permits to discharge storm water runoff. Storm water discharge
permits also may be required in certain states in which the Partnership
operates. Where such requirements are applicable, the Partnership has applied
for such permits and, after the permits are received, will be required to
sample storm water effluent before releasing it. The Partnership believes that
effluent limitations could be met, if necessary, with minor modifications to
existing facilities and operations. Although no assurance in this regard can
be given, the Partnership believes that the changes will not have a material
effect on the Partnership's financial condition or results of operations.
Groundwater remediation efforts are ongoing at the West Pipeline's
Dupont, Colorado terminal and will be required at the three other West Pipeline
terminals and one pump station. Regulatory officials have been consulted in
the development of remediation plans. In the course of acquisition
negotiations, KPOP's regulatory group and its outside environmental consultants
agreed upon the extent and costs of these required remediations. In connection
with the purchase of the West Pipeline, KPOP agreed to implement the agreed
remediation plans at these specific sites over the next five years in return
for the payment by Wyco Pipe Line Company of the estimated costs thereof. At
the closing, Wyco Pipe Line Company paid $1,312,000 to KPOP to cover the
discounted future costs of these remediations.
Aboveground Storage Tank Acts
A number of the states in which the Partnership operates have passed
statutes regulating aboveground tanks containing liquid substances. Generally,
these statutes require that such tanks include secondary containment systems or
that the operators take certain alternative precautions to ensure that no
contamination results from any leaks in the tanks. Although there is not
currently a federal statute regulating these aboveground tanks, there is a
possibility that such a law will be passed within the next couple of years.
The Partnership is in substantial compliance with all aboveground storage tank
laws in the states with such laws. Although no assurance can be given, the
Partnership believes that the future implementation of aboveground storage tank
laws by either additional states or by the federal government will not have a
material adverse effect on the Partnership's financial condition or results of
operations.
Air Emissions
The operations of the Partnership are subject to the Federal Clean Air
Act and comparable state and local statutes. The Partnership believes that the
operations of the Pipelines are in substantial compliance with such statutes in
all states in which they operate.
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Amendments to the Federal Clean Air Act enacted in late 1990 will require
most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that are to be
developed and implemented by the EPA and state environmental agencies during
the next decade. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides and
are located in non-attainment areas will be subject to increasingly stringent
regulations, including requirements that certain sources install reasonably
available control technology. The EPA is also required to promulgate new
regulations governing the emissions of hazardous air pollutants. Some of the
Partnership's facilities are included within the categories of hazardous air
pollutant sources that will be affected by these regulations. Additionally,
new dockside loading facilities owned or operated by the Partnership will be
subject to the New Source Performance Standards that were proposed in May 1994.
These regulations will control VOC emissions from the loading and unloading of
tank vessels.
Although the Partnership is in substantial compliance with applicable air
pollution laws, in anticipation of the passage of stricter air control
regulations, the Partnership is taking actions to substantially reduce its air
emissions. The Partnership plans to install bottom loading and vapor recovery
equipment on the loading racks at almost all of the terminal sites that do not
already have such emissions control equipment. These modifications are
expected to reduce substantially the total air emissions from each of these
facilities. Having begun in 1993, this project is being phased in over a
period of years at an approximate cost of $5.0 million. Another project that
is underway is the installation of marine vapor collection equipment and a
large flare at the Texas City terminal site. This Texas City project is
estimated to cost approximately $2.0 million and to be completed by the end of
1995.
Solid Waste
The Partnership generates non-hazardous solid wastes that are subject to
the requirements of the Federal Resource Conservation and Recovery Act ("RCRA")
and comparable state statutes. The EPA is considering the adoption of stricter
disposal standards for non-hazardous wastes. RCRA also governs the disposal of
hazardous wastes. At present, the Partnership is not required to comply with a
substantial portion of the RCRA requirements because the Partnership's
operations generate minimal quantities of hazardous wastes. However, it is
anticipated that additional wastes, which could include wastes currently
generated during pipeline operations, will in the future be designated as
"hazardous wastes". Hazardous wastes are subject to more rigorous and costly
disposal requirements than are non-hazardous wastes. Such changes in the
regulations may result in additional capital expenditures or operating expenses
by the Partnership.
At the terminal sites at which groundwater contamination is present,
there is also limited soil contamination as a result of the aforementioned
spills. The Partnership is under no present requirements to remove these
contaminated soils, but the Partnership may be required to do so in the future.
Soil contamination also may be present at other Partnership facilities at which
spills or releases have occurred. Under certain circumstances, the Partnership
may be required to clean up such contaminated soils. Although these costs
should not have a material adverse effect on the Partnership, no assurance can
be given in this regard.
Superfund
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund", imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes
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the EPA and, in some instances, third parties to act in response to threats to
the public health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. In the course of its
ordinary operations, the Partnership may generate waste that may fall within
CERCLA's definition of a "hazardous substance". The Partnership may be
responsible under CERCLA for all or part of the costs required to clean up
sites at which such wastes have been disposed.
ST has been named a potentially responsible party for a site located at
Elkton, Maryland, operated by Spectron, Inc. until August 1988. This site is
presently under the oversight of the EPA and is listed as a federal "Superfund"
site. A small amount of material handled by Spectron was attributed to ST.
The Partnership believes that ST will be able to settle its potential
obligation in connection with this matter for an aggregate cost of
approximately $10,000. However, until a final settlement agreement is signed
with the EPA, there is a possibility that the EPA could bring additional claims
against ST.
Environmental Impact Statement
The National Environmental Policy Act of 1969 (the "NEPA") applies to
certain extensions or additions to a pipeline system. Under NEPA, if any
project that would significantly affect the quality of the environment requires
a permit or approval from any federal agency, a detailed environmental impact
statement must be prepared. The effect of the NEPA may be to delay or prevent
construction of new facilities or to alter their location, design or method of
construction.
Indemnification
Kaneb has agreed to indemnify the Partnership against liabilities for
damage to the environment resulting from operations of the East Pipeline prior
to October 3, 1989. Such indemnification does not extend to any liabilities
that arise after such date to the extent such liabilities result from changes
in environmental laws or regulations. Nevertheless, the Partnership will
remain liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and
storage site referred to under "--Water" to the standards that are in effect at
the time such remediation operations are concluded. In addition, ST's former
owner has agreed to indemnify the Partnership against liabilities for damages
to the environment from operations conducted by such former owner prior to
March 2, 1993. The indemnity, which expires March 1, 1998, is limited in
amount to 60% of any claim exceeding $100,000 until an aggregate amount of $10
million has been paid by ST's former owner. In addition, with respect to
unknown environmental expenses from operations conducted by Wyco Pipe Line
Company prior to the closing of the Partnership's acquisition of the West
Pipeline, KPOP has agreed to pay the first $150,000 of such expenses, KPOP and
Wyco Pipe Line Company will share, on an equal basis, the next $900,000 of such
expenses and Wyco Pipe Line Company will indemnify KPOP for up to $2,950,000 of
such expenses thereafter. The indemnity expires in August 1999. To the extent
environmental liabilities exceed the amount of such indemnity, KPOP has
affirmatively assumed the excess environmental liabilities.
SAFETY REGULATION
The Pipelines are subject to regulation by the Department of
Transportation under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA")
relating to the design, installation, testing, construction, operation,
replacement and management of their pipeline facilities. The HLPSA covers
petroleum and petroleum products and requires any entity that owns or operates
pipeline facilities to comply with such plan, to permit access to and copying
of records and to make certain reports and provide information as required by
the Secretary of Transportation.
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The Federal Pipeline Safety Act of 1992 amended the HLPSA to include
requirements for the future use of internal inspection devices. The
Partnership does not believe that it will be required to make any substantial
capital expenditures to comply with the requirements of HLPSA as so amended.
The Partnership is subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
Partnership believes that it is in general compliance with OSHA requirements,
including general industry standards, record keeping requirements and
monitoring of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize information about the hazardous materials used in its operations.
Certain parts of this information must be reported to employees, state and
local governmental authorities, and local citizens upon request. In general,
the Partnership expects to increase its expenditures during the next decade to
comply with higher industry and regulatory safety standards such as those
described above. Such expenditures cannot be accurately estimated at this
time, although they are not expected to have a material adverse impact on the
Partnership.
EMPLOYEES
The Partnership has no employees. The pipeline business of the
Partnership is conducted by the General Partner, KPL, which at March 31, 1995,
employed 160 persons, approximately 53 of whom were salaried and, approximately
107 of whom were hourly rate employees. Approximately 105 persons employed by
KPL were subject to representation by unions for collective bargaining
purposes; however, the last collective bargaining contract expired in 1967 and
the employees have not operated under a contract since that date.
The Partnership's liquids terminaling business is conducted through
subsidiaries of ST which at March 31, 1995, employed 173 persons, approximately
104 of whom were salaried and approximately 69 of whom were hourly rate
employees. Approximately 34 persons employed by ST were subject to
representation by the Oil, Chemical and Atomic Workers International Union
AFL-CIO ("OCAW"). ST has an agreement with OCAW regarding conditions of
employment for the above persons, which is in effect through June 28, 1996.
This agreement is subject to automatic renewal for successive one- year periods
unless ST or OCAW serves written notice to terminate or modify such agreement
in a timely manner.
CASH DISTRIBUTIONS
GENERAL
Because the Partnership holds all of its assets and conducts all of its
operations through the Operating Partnerships and STI, all Cash from Operations
will be generated by such subsidiaries, and the distribution of such cash from
such subsidiaries to the Partnership is expected to be the principal source of
Available Cash (see "Glossary") from which to make distributions. The
Operating Partnerships are required under their partnership agreements to
distribute 100% of their available cash. Available cash is defined in the
partnership agreements of the Operating Partnerships in substantially the same
manner as is Available Cash of the Partnership; and the board of directors of
STI has adopted a dividend policy under which all available cash (defined in
substantially the same manner as is Available Cash of the Partnership) is to be
distributed to KPOP as a dividend. Since KPL will have a 1% general partner's
interest in all distributions of KPOP and a 1/99th general partner's interest
in all distributions of the Partnership, the holders of LP Units will have a
98% interest in Partnership distributions on a combined basis (subject to
incentive distributions to the General Partner as described
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below). Accordingly, the following paragraphs describing distributions to
Unitholders and the General Partner, and the percentage interests in
distributions by the Partnership, are stated on the basis of cash available for
distribution by the Partnership, KPOP and KPOP's subsidiaries on a combined
basis.
The Partnership will make distributions to Unitholders and the General
Partner with respect to each calendar quarter in an amount equal to 100% of its
Available Cash for such quarter, except in connection with the dissolution and
liquidation of the Partnership. Distributions by the Partnership of its
Available Cash will be made 98% to Unitholders and 2% to the General Partner,
subject to the payment of incentive distributions to the General Partner if
certain target levels of cash distributions to the Unitholders are achieved.
The distribution to Unitholders of Available Cash that constitutes Cash from
Operations with respect to each quarter within the Preference Period is subject
to the preferential rights of the holders of the Senior Preference Units to
receive for such quarter $0.55 per Senior Preference Unit (the "Minimum
Quarterly Distribution"), plus any arrearages in the payment of the Minimum
Quarterly Distribution for prior quarters, prior to any distribution of
Available Cash that constitutes Cash from Operations to holders of Preference
Units, Preference B Units or Common Units with respect to such quarter. In
addition, for each quarter through the quarter ending June 30, 1997, the
distribution of Available Cash that constitutes Cash from Operations to holders
of Preference B Units is subject to the preferential rights of the holders of
the Preference Units to receive the Minimum Quarterly Distribution for such
quarter, plus any arrearages in the payment of the Minimum Quarterly
Distribution for prior quarters. During the Preference Period the distribution
of Available Cash that constitutes Cash from Operations to holders of Common
Units is subject to the preferential rights of the holders of the Senior
Preference Units, the Preference Units and the Preference B Units to receive
the Minimum Quarterly Distribution for such quarter, plus any arrearages in the
payment of the Minimum Quarterly Distribution for prior quarters. The Common
Units are not entitled to arrearages in the payment of the Minimum Quarterly
Distribution.
In general, the Preference Period will continue indefinitely until the
Minimum Quarterly Distribution has been paid to the holders of the Senior
Preference Units, the Preference Units, the Preference B Units and the Common
Units for 12 consecutive quarters. Such condition has not yet been met in any
quarter.
The Partnership has paid the Minimum Quarterly Distribution on
outstanding Senior Preference Units for each quarter since the Partnership's
inception. The Partnership has also paid the Minimum Quarterly Distribution on
Preference Units with respect to all quarters since inception of the
Partnership, except for deficiencies in the payment of distributions with
respect to the second, third and fourth quarters of 1991 totalling $9,323,000.
All such arrearages were satisfied in 1992 and 1993. Had the operations of the
West Pipeline, ST and the other terminals acquired by the Partnership since its
inception been included in the Partnership's operations from such date, the
General Partner believes that such arrearages would not have been incurred. No
Preference B Units will have been issued prior to the closing of the offering
made by this Prospectus.
The Partnership believes that it will be able to make distributions of
Available Cash on the Preference Units of not less than the Minimum Quarterly
Distribution for each quarter during at least the next two years, although no
assurance can be given with respect to such distributions. Distributions
totalling $2,686,000 were paid on the Common Units with respect to the final
three calendar quarters of 1994. The Partnership believes that had the
acquisition of the West Pipeline been completed as of the beginning of 1994,
the Partnership could have distributed approximately $5.3 million to the
holders of Common Units with respect to such year. See "Distributions".
The priorities of distributions of Available Cash are set forth below
under the captions "--Quarterly Distributions of Available Cash--Distributions
of Cash from Operations During Preference Period" and "--Distributions of Cash
from Operations After Preference Period" and "--Distributions of
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Cash from Interim Capital Transactions". Distributions of Available Cash will
be characterized as either distributions of Cash from Operations or Cash from
Interim Capital Transactions. Cash from Operations generally refers to all
cash generated by the Partnership's operations after deducting related expenses
and new reserves. Cash from Interim Capital Transactions will generally be
generated by (i) borrowings and sales of debt securities by the Partnership
(other than for working capital purposes), (ii) sales of equity interests in
the Partnership and (iii) sales or other dispositions of assets of the
Partnership. All Available Cash distributed by the Partnership on any date
from any source will be treated as if it were a distribution of Cash from
Operations until the sum of all Available Cash distributed as Cash from
Operations to the Unitholders and to the General Partner (including any
incentive distributions) equals the aggregate amount of all Cash from
Operations generated by the Partnership since the Partnership commenced
operations through the end of the prior calendar quarter; any remaining
Available Cash distributed on such date will be treated as if it were a
distribution of Cash from Interim Capital Transactions, except as otherwise set
forth below under the caption "--Distributions of Cash from Interim Capital
Transactions".
The Partnership expects to make distributions of all Available Cash
within 45 days after the end of each calendar quarter to holders of record on
the applicable record date. The first distribution on the Preference Units to
which Unitholders acquiring Preference Units pursuant to this offering will be
entitled will be with respect to the quarter ending September 30, 1995. Such
distribution is expected to be made on or before November 14, 1995 to holders
of record of such LP Units as of October 31, 1995. All record holders of
Preference Units on such record date would be entitled to a full distribution.
A more complete description of the manner in which distributions of cash
will be made prior to commencement of the dissolution and liquidation of the
Partnership is set forth below under "--Quarterly Distributions of Available
Cash". Distributions of cash in connection with the dissolution and
liquidation of the Partnership will be made as described below under
"--Distributions of Cash Upon Liquidation".
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
Distributions of Cash from Operations During Preference Period
Distributions by the Partnership of Available Cash that constitute Cash
from Operations in respect of any calendar quarter during the Preference Period
will be made in the following priorities:
first, 98% of such Available Cash to Unitholders holding
Senior Preference Units pro rata and 2% thereof to the General Partner
until there has been distributed in respect of each Senior Preference
Unit an amount equal to the sum of the Minimum Quarterly Distribution
for such quarter plus an amount equal to any cumulative arrearages in
the Minimum Quarterly Distribution on each Senior Preference Unit with
respect to any prior quarter;
second, 98% of any such Available Cash then remaining to
Unitholders holding Preference Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Preference Unit an amount equal to the sum of the Minimum Quarterly
Distribution for such quarter plus an amount equal to any cumulative
arrearages in the Minimum Quarterly Distribution on each Preference
Unit with respect to any prior quarter;
third, 98% of any such Available Cash then remaining to
Unitholders holding Preference B Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Preference B Unit an amount equal to the sum of the Minimum
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Quarterly Distribution for such quarter plus an amount equal to any
cumulative arrearages in the Minimum Quarterly Distribution on each
Preference B Unit with respect to any prior quarter;
fourth, 98% of any such Available Cash then remaining to
Unitholders holding Common Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Common Unit an amount equal to the Minimum Quarterly Distribution for
such quarter; and
thereafter, in the manner specified under "--Distributions of
Cash from Operations After Preference Period" below, commencing with
paragraph second.
Any holder of Preference B Units may, at its option exercisable from time to
time after the record date for distributions with respect to the quarter ending
June 30, 1997, exchange Preference B Units for an equal number of Preference
Units. See "--Exchange of Preference Units and Preference B Units".
Distributions of Cash from Operations After Preference Period
Distributions by the Partnership of Available Cash that constitute
Cash from Operations in respect of any calendar quarter after the Preference
Period will be made in the following priorities:
first, 98% of such Available Cash to all Unitholders pro rata
and 2% thereof to the General Partner until there has been distributed
in respect of each LP Unit an amount equal to the Minimum Quarterly
Distribution;
second, 98% of any such Available Cash then remaining to all
Unitholders pro rata and 2% thereof to the General Partner until there
has been distributed in respect of each LP Unit an amount equal to the
excess of (i) $0.60 per LP Unit (the "First Target Distribution") over
(ii) the Minimum Quarterly Distribution;
third, 90% of any such Available Cash then remaining to all
Unitholders pro rata and 10% (8% incentive distribution plus 2% normal
distribution) thereof to the General Partner until there has been
distributed in respect of each LP Unit an amount equal to the excess
of (i) $0.65 per LP Unit (the "Second Target Distribution") over (ii)
the First Target Distribution;
fourth, 80% of any such Available Cash then remaining to all
Unitholders pro rata and 20% (18% incentive distribution plus 2%
normal distribution) thereof to the General Partner until there has
been distributed in respect of each LP Unit an amount equal to the
excess of (i) $0.70 per LP Unit (the "Third Target Distribution") over
(ii) the Second Target Distribution; and
thereafter, 70% of any such Available Cash then remaining to
all Unitholders pro rata and 30% (28% incentive distribution plus 2%
normal distribution) thereof to the General Partner.
The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution are each subject to
adjustment as described below under "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels".
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions on any date by the Partnership of Available Cash that
constitute Cash from Interim Capital Transactions will be distributed 98% to
all Unitholders pro rata and 2% to the General Partner
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until the Partnership shall have made distributions of Available Cash
constituting Cash from Interim Capital Transactions in respect of each Senior
Preference Unit, Preference Unit and Preference B Unit in an aggregate amount
equal to $22 per unit. Thereafter, all distributions of Available Cash that
constitute Cash from Interim Capital Transactions will be distributed as if
they were Cash from Operations.
DISTRIBUTION RESTRICTION ON PREFERENCE UNITS, PREFERENCE B UNITS AND COMMON
UNITS
The Partnership Agreement prohibits the Partnership from distributing
Available Cash on the Preference Units, Preference B Units or Common Units or
acquiring Preference Units, Preference B Units or Common Units with Available
Cash in respect of any calendar quarter if (i) the Preference Period continues
in effect during the quarter in respect of which the distribution or
acquisition would be made and (ii) after giving effect to such distribution or
acquisition, the sum of (A) plus (B) would exceed an amount equal to $45
million plus 80% of the aggregate expansive capital expenditures since the
inception of the Partnership greater than $45 million, where (A) is equal to
the outstanding principal balance as of the proposed distribution or
acquisition date, as the case may be, of the Partnership's consolidated
indebtedness (excluding borrowings for working capital purposes) and (B) is
equal to the amount of revenues collected by the Partnership that (x) are then
subject to possible refund under a pending rate case and (y) are not maintained
by the Partnership in a separate reserve fund. At March 31, 1995, the
Partnership's consolidated indebtedness was $71.4 million, and its aggregate
Expansive Capital Expenditures since October 2, 1989 was approximately $116.0
million. Therefore, at March 31, 1995, the Partnership could have borrowed an
additional $151.7 million (approximately) for Expansive Capital Expenditures
without being restricted in the payment of distributions to the holders of
Preference Units. The General Partner does not currently anticipate that this
restriction will prevent the distribution of the Minimum Quarterly Distribution
to the holders of Preference Units.
EXCHANGE OF PREFERENCE UNITS AND PREFERENCE B UNITS
KPL may, at its option exercisable from time to time, exchange
Preference Units for an equal number of Preference B Units. KPL has agreed to
exchange, upon consummation of the offering made by this Prospectus, an
aggregate of 1,000,000 Preference Units for an equal number of Preference B
Units. Any holder of Preference B Units may, at its option exercisable from
time to time after the record date for distributions with respect to the
quarter ending June 30, 1997, exchange Preference B Units for an equal number
of Preference Units. Each such exchange shall be conditioned upon receipt by
the Partnership of an Opinion of Counsel that the intrinsic economic and
federal income tax characteristics of the Preference Units issuable upon such
exchange are identical to the intrinsic economic and federal income tax
characteristics of the Preference Units outstanding immediately prior to such
exchange. Pending receipt of such opinion, the Preference B Units to be
exchanged shall be treated as Preference Units for purposes of cash
distributions.
EXCHANGE OF PREFERENCE UNITS AND PREFERENCE B UNITS FOR SENIOR PREFERENCE UNITS
Of the Preference Units and Preference B Units to be held by KPL after
the offering made by this Prospectus, after the record date for distributions
to the holders of Senior Preference Units with respect to the quarter ending
June 30, 1997, up to 2,650,000 may be exchanged for an equal number of Senior
Preference Units upon the distribution by the Partnership of Available Cash
that constitutes Cash from Operations to all Unitholders in respect of each of
the four full consecutive preceding calendar quarters (including the calendar
quarter with respect to which such distribution is being made) in an amount at
least equal to the Third Target Distribution; provided, that, as of such date,
the sum of (A) plus (B) is less than an amount equal to $45 million, plus 80%
of the aggregate expansive capital expenditures since October 3, 1989, greater
than $45 million, where (A) is equal to the outstanding principal balance as of
such date of the Partnership's consolidated indebtedness (excluding
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borrowings for working capital purposes) and (B) is equal to the amount of
revenues collected by the Partnership that (x) are then subject to possible
refund under a pending rate case and (y) are not maintained by the Partnership
in a separate reserve fund. Each such exchange shall be conditioned upon
receipt by the Partnership of an Opinion of Counsel that the intrinsic economic
and federal income tax characteristics of the Senior Preference Units issuable
upon such exchange are identical to the intrinsic economic and federal income
tax characteristics of the Senior Preference Units outstanding immediately
prior to such exchange.
STATUS OF LP UNITS AT END OF PREFERENCE PERIOD
At such time as the Preference Period has ended, all differences and
distinctions between Senior Preference Units, Preference Units, Preference B
Units and Common Units for the purpose of distributions shall automatically
cease. The Senior Preference Units, Preference Units, Preference B Units and
Common Units shall remain separately identified until such time as the
Partnership has received an opinion of counsel that the intrinsic economic and
federal income tax characteristics of the Senior Preference Units are identical
to the intrinsic economic and federal income tax characteristics of the other
LP Units. Upon receipt of such an opinion of counsel, the Senior Preference
Units, Preference Units, Preference B Units and Common Units shall thereafter
be designated "Units".
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution will be proportionately
adjusted in the event of any combination or subdivision (whether effected by a
distribution payable in LP Units or otherwise) of LP Units. In addition, if a
distribution is made of Available Cash constituting Cash from Interim Capital
Transactions, the Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution will also be adjusted
proportionately downward to equal the product resulting from multiplying each
of the Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution by a fraction, of which the
numerator shall be the Unrecovered Capital (as defined below) immediately after
giving effect to such distribution and of which the denominator shall be the
Unrecovered Capital immediately prior to such distribution. For such purposes,
"Unrecovered Capital" means, at any time, an amount equal to the excess of (i)
$22 over (ii) the sum of all distributions theretofore made in respect of a
hypothetical Senior Preference Unit offered in the initial public offering of
the Partnership (expressed on a per Senior Preference Unit basis) out of
Available Cash constituting Cash from Interim Capital Transactions.
The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution also may be adjusted if
legislation is enacted that causes the Partnership to be taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes. In such event, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and Third
Target Distribution for each quarter thereafter would be reduced to an amount
equal to the product of (i) each of the Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution and Third Target Distribution
multiplied by (ii) 1 minus the sum of (x) the maximum marginal federal
corporate income tax rate (expressed as a fraction) plus (y) the effective
overall state and local income tax rate (expressed as a fraction) applicable to
the Partnership for the taxable year in which such quarter occurs (after taking
into account the benefit of any deduction allowable for federal income tax
purposes with respect to the payment of state and local income taxes).
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DISTRIBUTIONS OF CASH UPON LIQUIDATION
The Partnership and the Operating Partnerships will dissolve on
December 31, 2039, unless sooner dissolved pursuant to the terms of the
Partnership Agreement. In connection with the dissolution and liquidation of
the Partnership, the proceeds of such liquidation shall be applied, first, in
accordance with the provisions of the Partnership Agreement and applicable law
to the payment of creditors of the Partnership in the order of priority
provided by law and, thereafter, any remaining proceeds (or assets in kind)
will be distributed to Unitholders and the General Partner as set forth below.
Generally, the holders of Senior Preference Units, Preference Units
and Preference B Units will have no preference with respect to liquidation
proceeds available for distribution to Unitholders. In such event, the holders
of Senior Preference Units, Preference Units and Preference B Units would be
entitled to share with the holders of Common Units and the General Partner in
the remainder of the Partnership's assets in proportion to their capital
account balances in the Partnership, after giving effect to the following
allocations of any gain or loss realized from sales or other dispositions of
assets following commencement of the dissolution and liquidation of the
Partnership ("Terminating Capital Transactions"), including any unrealized gain
or loss attributable to assets distributed in kind. During the Preference
Period, any such gain will be allocated as follows:
first, to each partner having a deficit balance in such
partner's capital account to the extent of and in proportion to such
deficit balance;
second, any then remaining gain would be allocated 98% to the
holders of Senior Preference Units pro rata and 2% to the General
Partner, until the capital account of each Senior Preference Unit
equals the sum of the Remaining Capital (as defined below) in respect
of such Senior Preference Unit plus any cumulative arrearages then
existing in the payment of the Minimum Quarterly Distribution on such
Senior Preference Unit with respect to any quarter within the
Preference Period;
third, any then remaining gain would be allocated 98% to the
holders of Preference Units pro rata and 2% to the General Partner,
until the capital account of each Preference Unit equals the sum of
the Remaining Capital in respect of such Preference Unit plus any
cumulative arrearages then existing in the payment of the Minimum
Quarterly Distribution on such Preference Unit with respect to any
quarter within the Preference Period;
fourth, any then remaining gain would be allocated 98% to the
holders of Preference B Units pro rata and 2% to the General Partner,
until the capital account of each Preference B Unit equals the sum of
the Remaining Capital in respect of such Preference B Unit plus any
cumulative arrearages then existing in the payment of the Minimum
Quarterly Distribution on such Preference B Unit with respect to any
quarter within the Preference Period;
fifth, any then remaining gain would be allocated 98% to the
holders of Common Units pro rata and 2% to the General Partner, until
the capital account of each Common Unit equals the Remaining Capital
in respect of such Common Unit;
sixth, any then remaining gain would be allocated 98% to all
Unitholders pro rata and 2% to the General Partner until the capital
account of each outstanding LP Unit is equal to the sum of (a) the
Remaining Capital with respect to such LP Unit plus (b) any cumulative
arrearages then existing in the payment of the Minimum Quarterly
Distribution with respect to such LP Unit (in the case of a Senior
Preference Unit, a Preference Unit or a Preference B Unit) plus (c)
the excess of the First Target Distribution over the Minimum Quarterly
Distribution of
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each quarter of the Partnership's existence less (d) the amount of any
distributions of Cash from Operations in excess of the Minimum
Quarterly Distribution which were distributed 98% to the Unitholders
pro rata and 2% to the General Partner for each quarter of the
Partnership's existence ((b), if applicable, plus (c) less (d) being
the "Target Amount");
seventh, any then remaining gain would be allocated 90% to all
Unitholders pro rata and 10% (8% incentive allocation plus 2% normal
allocation) to the General Partner, until the capital account of each
outstanding LP Unit is equal to the sum of (a) the Remaining Capital
with respect to such LP Unit plus (b) the Target Amount plus (c) the
excess of the Second Target Distribution over the First Target
Distribution for each quarter of the Partnership's existence less (d)
the amount of any distributions of Cash from Operations in excess of
the First Target Distribution which were distributed 90% to the
Unitholders pro rata and 10% to the General Partner for each quarter
of the Partnership's existence (the respective Target Amount plus (c)
less (d) being referred to as the "Second Target Amount");
eighth, any then remaining gain would be allocated 80% to all
Unitholders pro rata and 20% (18% incentive allocation plus 2% normal
allocation) to the General Partner, until the capital account of each
outstanding LP Unit is equal to the sum of (a) the Remaining Capital
with respect to such LP Unit plus (b) the Second Target Amount plus
(c) the excess of the Third Target Distribution over the Second Target
Distribution for each quarter of the Partnership's existence less (d)
the amount of any distributions of Cash from Operations in excess of
the Second Target Distribution which were distributed 80% to the
Unitholders pro rata and 20% to the General Partner for each quarter
of the Partnership's existence; and
thereafter, any then remaining gain would be allocated 70% to
all Unitholders pro rata and 30% (28% incentive allocation plus 2%
normal allocation) to the General Partner.
For such purposes, "Remaining Capital" means, at any time with respect to any
class or series of LP Units, the price per LP Unit at which such class or
series of LP Units was initially sold by the Partnership, as determined by the
General Partner, less the sum of any distributions of Available Cash
constituting Cash from Interim Capital Transactions and any distributions of
cash (or the fair value of any assets distributed in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an LP Unit of such class or series that was sold in the initial offering of
such LP Units.
Any holder of Preference B Units may, at its option exercisable from
time to time after the record date for distributions with respect to the
quarter ending June 30, 1997, exchange Preference B Units for an equal number
of Preference Units. See "--Exchange of Preference Units and Preference B
Units".
After the Preference Period, any such gain will be allocated as above
described; provided that no allocations will be made under paragraphs second,
third and fourth and that the references to "Common Units" after the Preference
Period shall refer to "Units".
Holders of Senior Preference Units, Preference Units or Preference B
Units will have no preferential right in respect of any excess of the
cumulative arrearages in the Minimum Quarterly Distribution on such Senior
Preference Units, Preference Units or Preference B Units, as the case may be,
with respect to any quarter ending during the Preference Period over the amount
of such gain available for allocation to the holders of Senior Preference
Units, Preference Units or Preference B Units.
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Any loss or unrealized loss will be allocated to the General Partner
and the Unitholders: first, in proportion to the positive balances in such
partners' capital accounts until all such balances are reduced to zero; and
second, to the General Partner.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
The General Partner will make all decisions relating to the management
of the Partnership. In some cases the officers of KPL who make such decisions
also may be officers of Kaneb. In addition, Kaneb owns all the capital stock
of KPL and owns, either directly or through a subsidiary, all of the
outstanding Common Units. Certain conflicts of interest could arise as a
result of the relationships among the General Partner, Kaneb and the
Partnership. The directors and officers of Kaneb have fiduciary duties to
manage Kaneb, including its investments in its subsidiaries and affiliates, in
a manner beneficial to the stockholders of Kaneb. The General Partner has a
fiduciary duty to manage the Partnership in a manner beneficial to the
Unitholders. The duty of the directors of Kaneb to the stockholders of Kaneb
may, therefore, conflict with the duties of the General Partner to the
Unitholders. The Audit Committee of the Board of Directors of the General
Partner will review conflicts of interest that may arise between Kaneb or its
subsidiaries, on the one hand, and the Partnership or any partner thereof, on
the other hand. In resolving any conflict of interest that may arise, the
Audit Committee may consider (i) the relative interests of any party to such
conflict and the benefits and burdens relating to such interest, (ii) any
customary or accepted industry practices, (iii) any applicable generally
accepted accounting or engineering practices or principles and (iv) such
additional factors as the Audit Committee determines in its sole discretion to
be relevant, reasonable and appropriate under the circumstances. The Audit
Committee will have access to the management of KPL, and independent advisers
as appropriate, and will attempt to resolve any such conflict of interest
consistent with provisions of the Partnership Agreement and the General
Partner's fiduciary duties under Delaware law. While final authority with
respect to all decisions of the General Partner, including those involving
conflicts of interest, is vested in the General Partner's board of directors,
it is anticipated that the board would give considerable weight to the
recommendations of the Audit Committee as to matters involving conflicts of
interest.
Potential conflicts of interest could arise in the situations
described below, among others:
(a) Under the definitions of Available Cash and Cash from
Operations set forth elsewhere herein, the amount of cash
expenditures, borrowings and reserves in any quarter may affect the
extent to which there is sufficient Available Cash constituting Cash
from Operations to meet the Minimum Quarterly Distribution on all
Senior Preference Units and Preference Units without subordination of
distributions on the Preference B Units and the Common Units. In
addition, the General Partner's determination whether to make, or
which portion of an expenditure constitutes, an Expansive Capital
Expenditure may have the same effect. Borrowings and issuances of
additional LP Units also increase the amount of Available Cash and, in
the case of working capital borrowings, the amount of Cash from
Operations. By purchasing a Preference Unit, a Unitholder agrees that
borrowings by the Partnership or the approval thereof by the General
Partner shall not constitute a breach of any duty of the General
Partner to the Partnership or the Unitholders whether or not the
purpose or effect thereof is to avoid subordination of Preference
Units, Preference B Units or Common Units. Further, such purchaser
agrees that any actions taken by the General Partner consistent with
the standards of reasonable discretion set forth in the definitions of
Available Cash and Cash from Operations will be deemed not to breach
any duty of the General Partner to the Partnership or the Unitholders.
See "Cash Distributions". Such provisions purport to limit the
liability of the General Partner to the Partnership and the
Unitholders, are not supported by an opinion of counsel as to their
enforceability and may not be enforceable under Delaware law.
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(b) Under the terms of the Amended and Restated Agreement of
Limited Partnership of the Partnership (the "Partnership Agreement"),
the Amended and Restated Agreement of Limited Partnership of KPOP and
the Agreement of Limited Partnership of STOP (the "Operating
Partnership Agreements"; collectively with the Partnership Agreement,
the "Partnership Agreements"), the General Partner will exercise its
discretion in managing the business of the Partnership and, as a
result, the General Partner is not restricted from paying Kaneb and
its subsidiaries and affiliates for any services rendered on terms
fair and reasonable to the Partnership. In this connection, the
General Partner will determine which of its direct or indirect costs
(including costs allocated to the General Partner by its affiliates)
are reimbursable by the Partnership.
(c) The General Partner or any of its affiliates may lend to
the Partnership or its operating subsidiaries funds needed by such
entities for such periods of time as the General Partner may
determine; provided, however, that the General Partner or such
affiliate may not charge the Partnership or its operating subsidiaries
interest at a rate greater than the lesser of (i) the actual interest
cost (including points or other financing charges or fees) that the
General Partner or such affiliate is required to pay on funds borrowed
by it from commercial banks and (ii) the rate (including points or
other financing charges or fees) that would be charged the borrowing
entity (without reference to the General Partner's financial abilities
or guaranties) by unrelated lenders on comparable loans. The
borrowing entity will reimburse the General Partner or such affiliate,
as the case may be, for any costs incurred by it in connection with
the borrowing of funds obtained by the General Partner or such
affiliate and loaned to the borrowing entity. The Partnership may
lend or contribute to its operating subsidiaries and such operating
subsidiaries may borrow funds from the Partnership, on terms and
conditions established at the sole discretion of the General Partner.
(d) KPL (through its ownership of the Preference Units,
Preference B Units, Common Units and the general partner interest in
the Partnership and KPOP) has certain varying percentage interests and
priorities with respect to Available Cash and net proceeds of capital
transactions. See "Cash Distributions". The timing and amount of
cash receipts and proceeds of capital transactions received by or
allocated to KPL may be affected by various determinations made by KPL
as the general partner under the Partnership Agreements (including,
for example, those relating to the decision to liquidate the
Partnership, the timing of any capital transaction, the establishment
and maintenance of reserves, the timing of expenditures, the
incurrence of debt and other matters).
(e) Upon the request of the General Partner or any affiliate
thereof holding LP Units or other securities of the Partnership, the
Partnership shall be required to register the offer and sale of such
number of such securities (aggregating at least $2.0 million in value)
specified by the General Partner or such affiliate under the
Securities Act and the securities laws of any states reasonably
requested by the General Partner or such affiliate. All costs and
expenses of such registration will be paid by the General Partner or
such affiliate and none of such costs will be allocated to the
Partnership. Under certain circumstances, the General Partner or such
affiliate also will have the right to include such securities in a
registration statement under the Securities Act proposed by the
Partnership for an offering of securities of the Partnership for cash.
(f) Neither the Partnership Agreements nor any of the other
agreements, contracts and arrangements between the Partnership, on the
one hand, and the General Partner, Kaneb and its affiliates, on the
other hand, were or will be the result of arm's length negotiations.
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(g) As is customary in many types of public securities
offerings, the Preference Unitholders have not been represented by
separate counsel in connection with the preparation of the Partnership
Agreements or the other agreements referred to herein or in
establishing the terms of the offering made by this Prospectus. The
attorneys, accountants and others who have performed services for the
Partnership in connection with the offering have been employed by the
General Partner, Kaneb and their affiliates and may continue to
represent the General Partner, Kaneb and their affiliates. Attorneys,
accountants and others who will perform services for the Partnership
in the future will be selected by the General Partner and also may
perform services for the General Partner, Kaneb and their affiliates.
The General Partner may retain separate counsel for the Partnership or
the Unitholders after the sale of the Preference Units offered by this
Prospectus, depending on the nature of any conflict that might arise
in the future, but does not intend to do so in most cases.
(h) The decision whether to purchase outstanding LP Units at
any time may involve the General Partner or Kaneb in a conflict of
interest. See "Description of the Partnership Agreements--Limited
Call Right".
(i) Subject to their fiduciary duties to the Partnership and
the limited partners of the Partnership, KPL and its affiliates are
permitted to engage in activities in competition with the Partnership
and the Operating Partnerships.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner will be accountable to the Partnership as a
fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Partnership in addition to
such other obligations as the General Partner may assume under the Partnership
Agreement. The Partnership Agreement provides that whenever a conflict of
interest arises between the General Partner or its affiliates, on the one hand,
and the Partnership or any limited partner, on the other hand, the General
Partner will, in resolving such conflict or determining such action, consider
the relative interests of the parties involved in such conflict or affected by
such action, any customary or accepted industry practices and, if applicable,
generally accepted accounting practices or principles. The same considerations
shall apply whenever the Partnership Agreement provides that the General
Partner shall act in a manner that is fair and reasonable to the Partnership or
the limited partners. Thus, unlike the strict duty of a fiduciary who must act
solely in the best interests of his beneficiary, the Partnership Agreement
permits the General Partner to consider the interests of all parties to a
conflict of interest, including the interests of the General Partner, although
it is not clear under Delaware law that such provisions would be enforceable
because of a lack of judicial authority directly on point. Without modifying
the strict fiduciary standard that might otherwise apply, the Partnership's
ability to engage in transactions with the General Partner or its affiliates or
involving conflicts of interest, even if beneficial to the Partnership, would
be impaired. The Partnership Agreement also provides that in certain
circumstances the General Partner shall act in its sole discretion, in good
faith or pursuant to other appropriate standards.
The Delaware Revised Uniform Limited Partnership Act (the "Delaware
Act") provides that a limited partner may institute legal action on behalf of
the partnership (a partnership derivative action) to recover damages from a
third party where the general partner has failed to institute the action or
where an effort to cause the general partner to do so is not likely to succeed.
In addition, cases have been decided under the common law of partnerships in
Delaware and the common or statutory law of other jurisdictions to the effect
that a limited partner may institute legal action on behalf of himself or all
other similarly situated limited partners (a class action) to recover damages
from a general partner for violations of its fiduciary duties to the limited
partners. In addition, counsel has advised the General Partner that on the
basis of federal statutes and rules and decisions by federal courts, it appears
that
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limited partners have the right, subject to the provisions of the Federal Rules
of Civil Procedure, to bring partnership derivative actions or actions against
a general partner in the federal courts to enforce federal rights of the
limited partners, including, in each case, rights under certain Securities and
Exchange Commission rules.
The Partnership Agreement also provides that any standard of care and
duty imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited as required to permit the
General Partner to act under the Partnership Agreement or any other agreement
contemplated therein and to make any decision pursuant to the authority
prescribed in the Partnership Agreement so long as such action is not
inconsistent with the overall purposes of the Partnership. Further, the
Partnership Agreement provides that the General Partner will not be liable for
monetary damages to the Partnership, the Unitholders or assignees for any acts
or omissions if the General Partner acted in good faith. The extent to which
these provisions would be enforceable under Delaware law is not clear, however.
In addition, the Partnership is required, under the terms of the Partnership
Agreements, to indemnify the General Partner and its directors, officers,
employees and agents against liabilities, costs and expenses incurred by the
General Partner or other such persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and such action did not
constitute gross negligence or willful misconduct on the part of the General
Partner or other such persons and, with respect to any criminal proceeding, had
no reasonable cause to believe that their conduct was unlawful. See
"Description of the Partnership Agreements--Indemnification".
The fiduciary obligations of general partners is a rapidly developing
and changing area of the law, and Unitholders should consult their own legal
counsel concerning the fiduciary responsibilities of the General Partner and
the remedies available to Unitholders.
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DESCRIPTION OF THE PREFERENCE UNITS
GENERAL
The Preference Units have been registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and the Partnership is subject to the
reporting and proxy solicitation requirements of the Exchange Act. The
Partnership is required to file periodic reports containing financial and other
information with the Securities and Exchange Commission.
Upon the closing of the offering made by this Prospectus, the
Underwriters will offer the Preference Units directly to the public.
Purchasers of Preference Units in this offering and subsequent transferees of
Preference Units (or their brokers, agents or nominees on their behalf) will be
required to execute a transfer application.
Preference Units may be held in "street name" or by any other nominee
holder. As among the Partnership, the beneficial owner and the nominee holder,
the Partnership will be entitled to treat the nominee holder of a Preference
Unit as the absolute owner thereof.
Application has been made for listing the Preference Units on the NYSE.
TRANSFER OF PREFERENCE UNITS
Until a Preference Unit has been transferred on the books of the
Partnership, the Partnership, notwithstanding any notice to the contrary or any
notation or other writing on the certificate representing such Preference Unit,
may treat the record holder thereof as the absolute owner for all purposes. A
transfer of a Preference Unit (including a transfer from the Underwriters as a
part of the offering made by this Prospectus) will not be recorded or
recognized by the Partnership unless the transferee or his nominee holder
executes and delivers the transfer application. By executing and delivering
the transfer application, the transferee of Preference Units automatically
requests admission as a substituted limited partner in the Partnership, agrees
to be bound by the terms and conditions of, and executes, the Partnership
Agreement, represents that such transferee has capacity and authority to enter
into the Partnership Agreement, grants powers of attorney to the General
Partner and any liquidator of the Partnership and makes the consents and
waivers contained in the Partnership Agreement. An assignee will become a
limited partner of the Partnership in respect of the transferred Preference
Units upon the consent of the General Partner and the recordation of the name
of the assignee on the books and records of the Partnership. Such consent may
be withheld in the sole discretion of the General Partner. Preference Units
are securities and are transferable according to the laws governing transfers
of securities. In addition to other rights acquired upon transfer, the
transferor gives the transferee who executes and delivers a transfer
application the right to request admission as a substituted limited partner in
the Partnership in respect of the transferred Preference Units. A purchaser or
transferee of Preference Units who does not execute and deliver a transfer
application obtains only (i) the right to assign the Preference Units to a
purchaser or other transferee and (ii) the right to transfer the right to seek
admission as a substituted limited partner in the Partnership with respect to
the transferred Preference Units. Thus, a purchaser or transferee of
Preference Units who does not execute and deliver a transfer application will
not receive cash distributions unless the Preference Units are held in a
nominee or street name account and the nominee or broker has executed and
delivered a transfer application with respect to such Preference Units and may
not receive certain federal income tax information or reports furnished to
record holders of Preference Units. The transferor of Preference Units will
have a duty to provide such transferee with all information that may be
necessary to obtain registration of the transfer of the Preference Units, but a
transferee agrees, by acceptance of the certificate representing such
Preference Unit, that the transferor will not have a duty
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to see to the execution of the transfer application by the transferee and will
have no liability or responsibility if such transferee neglects or chooses not
to execute and forward the transfer application. See "Description of the
Partnership Agreements--Status as Limited Partner or Assignee".
In the event the Partnership is or becomes subject to federal, state
or local laws or regulations that create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest because of
the nationality, citizenship or other related status of any Preference
Unitholder or assignee, the General Partner may redeem the Preference Units
held by such Preference Unitholder or assignee. To avoid any such cancellation
or forfeiture, the General Partner may request a record holder of a Preference
Unit to furnish to the General Partner certain information about his
nationality, citizenship or other related status. If the record holder fails
to furnish such information or if the General Partner determines, on the basis
of the information furnished by such holder in response to the request, that
the cancellation or forfeiture of any property in which the Partnership has an
interest may occur, the General Partner may be substituted as the Preference
Unitholder for such record holder, who will then be treated as a non-citizen
assignee, and the General Partner will have the right to redeem the Preference
Units held by such record holder. See "Description of the Partnership
Agreements--Non-citizen Assignees; Redemption".
DESCRIPTION OF THE PARTNERSHIP AGREEMENTS
The following paragraphs are a summary of certain provisions of the
Partnership Agreements. A copy of the Partnership Agreements is available on
request (see "Incorporation of Certain Documents"). The following discussion
is qualified in its entirety by reference to the Partnership Agreements.
Certain provisions of the Partnership Agreements are summarized
elsewhere in this Prospectus under various headings. With regard to various
transactions and relationships of the Partnership with KPL and its affiliates,
see "Conflicts of Interest and Fiduciary Responsibilities"; with regard to the
transfer of Preference Units, see "Description of the Preference Units"; with
regard to distributions of Available Cash, see "Cash Distributions"; and with
regard to allocations of taxable income and taxable loss, see "Federal Income
Tax Considerations". Prospective investors are urged to review these sections
of this Prospectus carefully.
ORGANIZATION AND DURATION
The Partnership and KPOP were organized in 1989 as Delaware limited
partnerships. STOP was organized in 1993 as a Delaware limited partnership.
KPL is the general partner of both the Partnership and KPOP. A wholly owned
corporate subsidiary of KPOP is the sole general partner of STOP. KPL holds a
2% interest as general partner in the Partnership and KPOP on a combined basis.
The Unitholders (including Kaneb through its subsidiaries) hold a 98% interest
as limited partners in the Partnership and KPOP on a combined basis. The
Partnership and the Operating Partnerships will dissolve on December 31, 2039,
unless sooner dissolved pursuant to the terms of the Partnership Agreements.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is
limited to serving as the limited partner of KPOP and any other business
permitted under the Delaware Act. The Operating Partnership Agreements provide
that the Operating Partnerships may engage in the transportation of refined
petroleum products through the Pipelines, the specialty liquids storage
business and any other business permitted under the Delaware Act.
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The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Partnership.
POWER OF ATTORNEY
Each limited partner of the Partnership, and each person who acquires
an LP Unit from a prior holder and executes and delivers a transfer application
with respect thereto, grants to the General Partner and, if a liquidating
trustee has been appointed, the liquidating trustee a power of attorney to,
among other things, execute and file certain documents required in connection
with the qualification, continuance or dissolution of the Partnership or the
amendment of the Partnership Agreement and to make the consents and waivers
contained in the Partnership Agreement.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER
The authority of the General Partner is limited in certain respects
under the Partnership Agreement. The General Partner is prohibited, without
the prior approval of holders of record of a majority of the LP Units and,
during the Preference Period, the approval of the holders of a majority of the
Senior Preference Units (excluding for purposes of such determination Senior
Preference Units held by KPL and its affiliates), from, among other things,
selling or exchanging all or substantially all of the Partnership's assets in a
single transaction or a series of related transactions or approving on behalf
of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Partnership, provided that the
Partnership may mortgage, pledge, hypothecate or grant a security interest in
all or substantially all of its assets and may sell all or substantially all of
its assets pursuant to a foreclosure or other realization upon the foregoing
encumbrances without such approval. Except as provided in the Partnership
Agreement and generally described below under "--Amendment of Partnership
Agreements", any amendment to a provision of the Partnership Agreement
generally will require the approval of the holders of a majority of the LP
Units, and any amendment which would materially and adversely affect any class
of LP Units will require the approval of the holders of a majority of such
class of affected LP Units (excluding for purposes of such determination LP
Units held by KPL and its affiliates unless KPL and its affiliates own all of
the LP Units of such class). A merger or consolidation of the Partnership
requires the approval of the General Partner and the holders of a majority of
each class of LP Units, voting as separate classes (with the holders of
Preference Units and Preference B Units voting together as a single class);
provided that the Senior Preference Units held by the General Partner or its
affiliates will be excluded from such vote.
In general, the General Partner may not take any action, or refuse to
take any reasonable action, without the consent of the holders of a majority of
each class of LP Units, and, during the Preference Period, the vote of a
majority of Senior Preference Units other than Senior Preference Units owned by
KPL and its affiliates, the effect of which would be to cause the Partnership
or either of the Operating Partnerships to be taxable as corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to voluntarily withdraw as general
partner of the Partnership and KPOP prior to January 1, 2000 (with limited
exceptions described below) without the approval of a majority of the LP Units
and the approval of the holders of a majority of the Senior Preference Units
(excluding for purposes of such determination Senior Preference Units held by
KPL and its affiliates), after which time KPL may withdraw as such general
partner by giving 90 days' written notice. A majority of the holders of the LP
Units may elect a successor General Partner, subject to the receipt by the
Partnership of an opinion of counsel that the selection of a successor may be
taken without the approval of all of the limited partners of the Partnership,
such action would not
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result in the loss of limited liability of the Unitholders of any class or the
limited liability of the Partnership as the limited partner of the Operating
Partnerships or cause the Partnership to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes and that any required consents by any regulatory authorities have been
obtained. If such an opinion of counsel cannot be obtained, the Partnership
will be dissolved after such withdrawal. Notwithstanding the foregoing, prior
to January 1, 2000, KPL may withdraw without such Unitholder approval upon 90
days' notice to the limited partners of the Partnership if more than 50% of the
LP Units are held or controlled by one person and its affiliates other than the
withdrawing General Partner and its affiliates.
KPL may not be removed as general partner of the Partnership unless
such removal is approved by the affirmative vote of the holders of not less
than 85% of the LP Units and any other limited partner interests, voting as a
single class, and approved by the affirmative vote of holders of not less than
85% of each class of LP Units and any other limited partner interests
outstanding, voting as separate classes (with the holders of Preference Units
and Preference B Units voting together as a single class), in each case
including for purposes of such determination LP Units and any other limited
partner interests owned by KPL and its affiliates, provided that certain other
conditions are satisfied. Any such removal is subject to the approval of the
successor general partner by a majority of the LP Units then outstanding
(including LP Units held by the removed general partner and its affiliates) and
receipt of an opinion of counsel that such removal and the approval of a
successor may be effected without the approval of all Partners and that such
actions will not result in the loss of the limited liability of any limited
partner of the Partnership or of the limited partner of the Operating
Partnerships or cause the Partnership to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes and that any required consents by any regulatory authorities have been
obtained.
Removal or withdrawal of the General Partner of the Partnership also
constitutes removal or withdrawal, as the case may be, of KPL as the general
partner of KPOP.
In the event of withdrawal of KPL or removal of KPL by the limited
partners of the Partnership or by the limited partner of KPOP, a successor
general partner will have the option to acquire the general partner interests
of the departing general partner (the "Departing Partner") for a cash payment
equal to the fair market value of such interests. Such market value will be
determined by agreement between the Departing Partner and a successor general
partner, or if no agreement is reached, by an independent investment banking
firm or other independent expert selected by the Departing Partner and a
successor general partner (or if no expert can be agreed upon, by the expert
chosen by agreement of the expert selected by each of them). In addition, the
Partnership also would be required to reimburse the Departing Partner for all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of the employees employed by the Departing
Partner for the benefit of the Partnership.
If the above-described option is not exercised by the successor
general partner, the Departing Partner's general partner interest in the
Partnership will be converted into Common Units equal to the fair market value
of such interests.
KPL may transfer its general partner interests in the Partnership
without the approval of the limited partners of the Partnership (i) to an
affiliate of KPL or (ii) upon its merger or consolidation into another entity
or the transfer of all or substantially all of its assets to another entity
provided in either case that such entity assumes the rights and duties of the
General Partner and agrees to be bound by the provisions of the Partnership
Agreements. In addition KPL may (i) transfer part of its interest in items of
Partnership income, gain, losses, deductions, credits, distributions or
surplus, (ii) transfer all of its interest in items of Partnership income,
gain, losses, deductions, credits, distributions or surplus
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if KPL agrees to continue as general partner, (iii) mortgage, pledge,
hypothecate or grant a security interest in its partnership interest or (iv)
transfer its partnership interest pursuant to a forced sale upon the
foreclosure of any encumbrance created pursuant to clause (iii) above. In each
case described above in this paragraph the transfer, merger, assumption or sale
is subject to the requirement that the transferee furnish to the Partnership an
opinion of counsel that such transfer, merger, assumption or sale (i) may be
taken without the approval of all limited partners of the Partnership to such
specific act, (ii) would not cause the loss of limited liability of the limited
partners of the Partnership under the Partnership Agreements and (iii) would
not cause the Partnership to be taxable as a corporation or treated as an
association taxable as a corporation for federal income tax purposes. In the
case of any other transfer, in addition to the foregoing requirements, the vote
of the holders of a majority of the LP Units, including during the Preference
Period the approval of the holders of a majority of the Senior Preference Units
(excluding for purposes of such determination Senior Preference Units held by
KPL and its affiliates), is required.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described under "--Limited Liability", LP Units are fully
paid and Unitholders will not be required to make additional contributions to
the Partnership.
Each purchaser of Preference Units offered by this Prospectus must
execute a transfer application requesting admission as, and agreeing to become,
a substituted limited partner in the Partnership. If such action is not taken,
a purchaser will not be registered as a record holder of Preference Units on
the books of the transfer agent or issued a Preference Unit. Purchasers may
hold Preference Units in nominee accounts. See "Description of the Preference
Units-- Transfer of Preference Units" for a more complete description of the
requirements for the transfer of Preference Units.
An assignee, pending its admission as a substituted limited partner in
the Partnership, is entitled to an interest in the Partnership equivalent to
that of a limited partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
General Partner will vote, and exercise other powers attributable to Preference
Units owned by an assignee who has not become a substituted limited partner, at
the written direction of such assignee. See "--Meetings; Voting" below.
Transferees who do not execute and deliver a transfer application will be
treated neither as assignees nor as record holders of Preference Units, and
will not receive cash distributions, federal income tax allocations or reports
furnished to record holders of Preference Units. The only right such
transferees will have is the right to negotiate such Preference Units to a
purchaser or other transferee and the right to transfer the right to request
admission as a limited partner of the Partnership in respect of the transferred
Preference Units to a purchaser or other transferee who executes a transfer
application in respect of the Preference Units. A nominee or broker who has
executed a transfer application with respect to Preference Units held in street
name or nominee accounts will receive such distributions and reports pertaining
to such Preference Units.
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local
laws or regulations that create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest because of
the nationality, citizenship or other related status of any limited partner of
the Partnership or assignee, the Partnership may redeem the LP Units held by
such limited partner or assignee. To avoid any such cancellation or
forfeiture, the General Partner may require each limited partner of the
Partnership or assignee to furnish information about his nationality,
citizenship, residency or related status. If a limited partner of the
Partnership or assignee fails to furnish information about his nationality,
citizenship, residency or related status within 30 days after a request for
such information,
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such limited partner or assignee may be treated as a non-citizen assignee
("non-citizen assignee"). The Partnership Agreement sets forth the rights of
such a limited partner or assignee upon redemption. Pending such redemption or
in lieu thereof, the General Partner may change the status of any such limited
partner or assignee to that of a non-citizen assignee. In addition to other
limitations on the rights of an assignee who is not a substituted limited
partner, a non-citizen assignee does not have the right to direct the voting of
his LP Units and may not receive distributions in kind upon liquidation of the
Partnership. See "--Status as limited partner or Assignee".
ISSUANCE OF ADDITIONAL LP UNITS AND SECURITIES
The Partnership Agreement authorizes the General Partner to cause the
Partnership to issue Additional LP Units (additional limited partner interests
and other equity securities of the Partnership) for such consideration and on
such terms and conditions as shall be established by the General Partner
including, without limitation, Preference Units in addition to the Preference
Units offered by this Prospectus and Additional LP Units with rights to
distributions or in liquidation ranking prior or senior to or on a parity with
Preference Units. During the Preference Period, however, the Partnership may
not issue (i) more than 7,750,000 additional Senior Preference Units (other
than any Senior Preference Units issuable upon exchange of Preference Units if
certain conditions are met), (ii) any other class of partnership interest of
the Partnership on a parity with, convertible into or exchangeable for Senior
Preference Units or (iii) any other classes of partnership interests of the
Partnership ranking prior to or on a parity with the Senior Preference Units,
without the approval of the holders of a majority of the outstanding Senior
Preference Units (excluding for purposes of such determination Senior
Preference Units held by the General Partner and its affiliates). After the
Preference Period, there is no restriction on the ability of the Partnership to
issue Additional LP Units, including, without limitation, Additional LP Units
with rights to distributions or in liquidation ranking prior or senior to any
of the outstanding LP Units. The General Partner will take into account the
interests of the holders of each class of the LP Units in determining whether
to cause the Partnership to issue Additional LP Units.
LIMITED CALL RIGHT
If at any time after the Preference Period less than 750,000 of the LP
Units are held by persons other than the General Partner and its affiliates,
the General Partner will have the right, which it may assign and transfer to
any of its affiliates or to the Partnership, on a date to be selected by the
General Partner on at least 10 but not more than 60 days' notice, to purchase
all, but not less than all, of the LP Units held by such nonaffiliated persons.
In the event of any such purchase, the price payable for any LP Units of a
particular class shall be the greater of (i) the Current Market Price (as
defined below) as of the date the General Partner mails written notice of its
election to purchase LP Units or (ii) the highest cash price paid by the
General Partner or any of its affiliates for any LP Unit of such class
purchased within the 90 days preceding the date the General Partner mails
notice of its election to purchase such LP Units.
As used herein, (i) "Current Market Price" of an LP Unit as of any
date means the average of the daily Closing Prices (as hereinafter defined) per
LP Unit for the twenty consecutive Trading Days (as hereinafter defined)
immediately prior to such date; (ii) "Closing Price" for any day means the last
sale price on such day, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices on such day, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the NYSE or, if the LP Units are not listed or admitted to trading on the NYSE,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal National Securities Exchange on
which the LP Units are listed or admitted to trading or, if the LP Units are
not listed or admitted to trading on any National Securities Exchange, the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-
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counter market, as reported by NASDAQ or such other system then in use, or, if
on any such day the LP Units are not quoted by any such organization, the
average of the closing bid and asked prices on such day as furnished by a
professional market maker making a market in the LP Units selected by the
independent committee of the board of directors of the Partnership, or, if on
any such day no market maker is making a market in the LP Units, the fair value
of such LP Units on such day as determined reasonably and in good faith by the
independent committee of the board of directors of the Partnership, and (iii)
"Trading Day" means a day on which the principal National Securities Exchange
on which the LP Units are listed or admitted to trading is open for the
transaction of business or, if the LP Units are not listed or admitted to
trading on any National Securities Exchange, a day on which banking
institutions in New York City generally are open.
AMENDMENT OF PARTNERSHIP AGREEMENTS
Amendments to the Partnership Agreement may be proposed only by the
General Partner. If an amendment is proposed, the General Partner is required
to seek written approval of the holders of the number of LP Units required to
approve such amendment or call a meeting of the limited partners of the
Partnership to consider and vote upon the proposed amendment. Proposed
amendments (other than those described below) must be approved by holders of a
majority of the LP Units, except that any amendment which materially and
adversely affects a class of LP Units in relation to any other class of LP
Units or the general partner interest in the Partnership will require the
approval of at least a majority in interest of the LP Units of the class so
affected (excluding for purposes of such determination, LP Units of such class
owned by KPL and its affiliates, unless KPL and its affiliates own all of the
LP Units of such class).
Amendments to the Operating Partnership Agreements may be proposed
either by the general partner or by the limited partner of the respective
Operating Partnerships. Proposed amendments to the Operating Partnership
Agreement of KPOP (other than those described below) require the approval of
the Partnership, as the limited partner of KPOP, and the General Partner.
The General Partner may make amendments to the Partnership Agreements
without the approval of any limited partner of the Partnership or assignee of
the Partnership to reflect (i) a change in the name of the Partnership or the
location of the principal place of business of the Partnership, (ii) admission,
substitution, withdrawal or removal of Partners in accordance with the
Partnership Agreement, (iii) a change that, in the opinion of the General
Partner, is necessary or advisable to qualify or continue the qualification of
the Partnership as a partnership in which the limited partners have limited
liability under the laws of any state or to ensure that the Partnership will
not be taxable as a corporation or be treated as an association taxable as a
corporation for federal income tax purposes, (iv) a change that in the sole
discretion of the General Partner does not adversely affect the limited
partners of the Partnership in any material respect, (v) a change that is
necessary or desirable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or contained in any federal or state statute, (vi) a change
that is necessary or desirable to facilitate the trading of the LP Units or
comply with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the LP Units are or will be listed for trading,
compliance with any of which the General Partner deems to be in the best
interests of the Partnership and the limited partners of the Partnership, (vii)
a change that is required or contemplated by the Partnership Agreement or the
Registration Statement of which this Prospectus is a part, (viii) an amendment
that is necessary, as reflected in an opinion of counsel to the Partnership, to
prevent the Partnership or the General Partner or its respective directors or
officers from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Public Utility Holding Company Act of 1935, as amended, or "plan
asset" regulations adopted under the Employee Retirement Income Security Act of
1974, as amended, whether or not substantially similar to plan asset
regulations currently applied or proposed
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by the United States Department of Labor, (ix) a change in a provision of the
Partnership Agreement which requires any action to be taken by or on behalf of
the General Partner or the Partnership pursuant to the requirements of the
Delaware Act if the provisions of the Delaware Act are amended, modified or
revoked so that the taking of such action is no longer required, provided that
such changes are not materially adverse to the limited partners of the
Partnership, (x) an amendment that in the sole discretion of the General
Partner is necessary or desirable in connection with the authorization of
additional LP Units, (xi) an amendment insofar as is necessary to maintain or
establish the uniformity of intrinsic tax characteristics as to all LP Units or
the uniformity of capital accounts underlying all LP Units and to make
subsequent adjustments to distributions in a manner which, in the reasonable
judgment of the General Partner, will make as little alteration in the priority
and amount of distributions otherwise applicable under the Partnership
Agreement, and will not otherwise alter the distributions to which Partners and
assignees are entitled under the Partnership Agreement and (xii) any other
amendments similar to the foregoing.
Except for amendments described in the preceding paragraph, no
amendment will become effective without the approval of the holders of 90% of
the LP Units unless the Partnership obtains an opinion of counsel to the effect
that such amendment will not cause the Partnership or KPOP to be taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes and will not affect the limited liability of any LP
Unitholder or the limited partner of KPOP.
MEETINGS; VOTING
Unitholders or assignees who are record holders of LP Units on the
record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to LP Units that are owned by assignees
who have not yet been admitted as limited partners of the Partnership, the
General Partner shall be deemed to be the limited partner with respect thereto
and shall, in exercising the voting rights in respect of such LP Units on any
matter, vote such LP Units at the written direction of such record holder.
Absent such direction, the General Partner may exercise the voting rights with
respect to such LP Units.
The General Partner does not anticipate that any meeting of limited
partners of the Partnership will be called in the foreseeable future. Any
action that is required or permitted to be taken by the limited partners of the
Partnership may be taken either at a meeting of the limited partners of the
Partnership or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of LP Units as would be
necessary to authorize or take such action at a meeting of the limited partners
of the Partnership and consented to by the General Partner. Limited partners
of the Partnership may vote either in person or by proxy at meetings. A
majority of the LP Units of the class for which a meeting is to be held
represented in person or by proxy will constitute a quorum at a meeting of
limited partners of the Partnership of the Partnership.
Each record holder of an LP Unit has a vote according to his
Percentage Interest in the Partnership, although Additional LP Units having
special voting rights could, under certain circumstances, be issued by the
General Partner. The Partnership Agreement provides that LP Units held in
nominee or street name accounts will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy materials required or
permitted to be given or made to record holders of LP Units (whether or not
such record holder has been admitted as a limited partner of the Partnership)
under the terms of the Partnership Agreement will be delivered to the record
holder by the Partnership or by the transfer agent at the request of the
Partnership.
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INDEMNIFICATION
The Partnership Agreements provide that the Partnership will, to the
fullest extent permitted by law, indemnify and advance expenses to the General
Partner, any Departing Partner, 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 Partnership 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 Partnership 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
Partnership. The Partnership is authorized to purchase insurance against
liabilities asserted against and expenses incurred by such persons in
connection with the Partnership's activities, whether or not the Partnership
would have the power to indemnify such person against such liabilities under
the provisions described above.
LIMITED LIABILITY
Assuming that a limited partner of the Partnership does not take part
in the control of the business of the Partnership, within the meaning of the
Delaware Act, and that he otherwise acts in conformity with the provisions of
the Partnership Agreement, his liability under the Delaware Act will be
limited, subject to certain possible exceptions, generally to the amount of
capital he is obligated to contribute to the Partnership in respect of his LP
Units plus his share of any undistributed profits and assets of the
Partnership. Under the Delaware Act, a limited partnership may not make a
distribution to a partner to the extent that at the time of the distribution,
after giving effect to the distribution, all liabilities of the partnership,
other than liabilities to partners on account of their partnership interest and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds
that nonrecourse liability. The Delaware Act provides that a limited partner
who receives such a distribution and knew at the time of the distribution that
the distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years from the
date of the distribution. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
that the assignee is not obligated for liabilities unknown to him at the time
he became a limited partner and which liabilities could not be ascertained from
the Partnership Agreement.
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KPOP conducts business in Kansas, Nebraska, Iowa, Oregon, South
Dakota, North Dakota, Colorado, Washington and Wyoming and may, in the future,
conduct business in other states. STOP conducts business in 16 states.
Maintenance of limited liability will require compliance with legal
requirements in such jurisdictions in which the Operating Partnerships conduct
business. Limitations on the liability of limited partners for the obligations
of a limited partnership have not been clearly established in many
jurisdictions. If it were determined that the Partnership, by virtue of a
limited partner interest in the Operating Partnerships or otherwise, was
conducting business in any state without compliance with the applicable limited
partnership statute, or that the right or exercise of the right by the limited
partners of the Partnership as a group to remove or replace the General
Partner, to make certain amendments to the Partnership Agreement, or to take
other action pursuant to the Partnership Agreement constituted "control" of the
Partnership's business for the purposes of the statutes of any relevant
jurisdiction, then a limited partner of the Partnership could be held
personally liable for the Partnership's obligations under the law of such
jurisdiction to the same extent as the General Partner. The Partnership will
operate in such manner as the General Partner deems reasonable and necessary or
appropriate to preserve the limited liability of Unitholders.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the
business at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership is the calendar year.
As soon as practicable, but in no event later than 120 days after the
close of each calendar year, the General Partner is required to furnish each
record holder of an LP Unit (as of a record date selected by the General
Partner) with an annual report containing audited financial statements of the
Partnership for the past fiscal year, prepared on the accrual basis in
accordance with generally accepted accounting principles, and an opinion
thereon expressed by independent public accountants. As soon as practicable,
but in no event later than 60 days after the close of each calendar quarter
(except the fourth quarter), the General Partner is required to furnish each
record holder of an LP Unit (as of a record date selected by the General
Partner) with unaudited financial statements prepared in the same manner.
The General Partner is required to use all reasonable efforts to
furnish each record holder of an LP Unit information required for tax reporting
purposes within 75 days after the close of each taxable year. Such information
is furnished in a summary form so that certain complex calculations normally
required of partners can be avoided. The General Partner's ability to furnish
such summary information to Unitholders is dependent on the cooperation of such
Unitholders in supplying certain information to the General Partner. Every
Unitholder (without regard to whether he supplies such information to the
General Partner) will receive information to assist him in determining his
federal and state tax liability and filing his federal and state income tax
returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner of the
Partnership can for a purpose reasonably related to such limited partner's
interest as a limited partner, upon reasonable demand and at his own expense,
have furnished to him (i) a current list of the name and last known address of
each Partner, (ii) a copy of the Partnership's tax returns, (iii) information
as to the amount of cash, and a description and statement of the Net Agreed
Value (as defined in the Partnership Agreement) of any other property or
services, contributed or to be contributed by each Partner and the date on
which each became a Partner, (iv) copies of the Partnership Agreement, the
Certificate of Limited Partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Partnership's business and financial
condition, and
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(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The General Partner may, and intends to, keep confidential
from the limited partners of the Partnership trade secrets or other information
the disclosure of which the General Partner believes in good faith is not in
the best interests of the Partnership or which the Partnership is required by
law or by agreements with third parties to keep confidential.
TERMINATION, DISSOLUTION AND LIQUIDATION
The Partnership will continue until December 31, 2039, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election by the General Partner to dissolve the
Partnership, if approved by the holders of a majority of the LP Units,
including the approval of the holders of a majority of the Senior Preference
Units (excluding Senior Preference Units held by the General Partner and its
affiliates), (ii) the sale of all or substantially all of the assets and
properties of the Partnership or KPOP, (iii) the bankruptcy or dissolution of
the General Partner, (iv) withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer in accordance with the Partnership Agreement or
withdrawal or removal following approval of a successor), provided that the
Partnership shall not be dissolved upon an event described in clause (iv) if
upon such removal or within 90 days after such event of withdrawal the holders
of a majority of the LP Units agree in writing to the appointment, effective as
of the date of such event, of a successor General Partner, (v) a written
determination by the General Partner that projected future revenues of the
Partnership will be insufficient to enable payment of projected Partnership
costs and expenses or, if sufficient, will be such that continued operation of
the Partnership is not in the best interest of the Partners or (vi) any other
event that would cause the dissolution of the Partnership under the Delaware
Act. Upon a dissolution pursuant to clause (iii) or clause (iv) and a failure
to elect a successor General Partner, the holders of a majority of the LP Units
may elect, within 180 days after such event, to reconstitute the Partnership
and continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new limited partnership on terms identical
to those set forth in the Partnership Agreement and having as a general partner
an entity approved by the holders of a majority of the LP Units, subject to
receipt by the Partnership of an opinion of counsel that such approval may be
made without the approval of all Partners and that such reconstitution and
continuation will not result in the loss of the limited liability of
Unitholders or cause KPOP or the reconstituted limited partnership to be
taxable as a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes and that any required consents of
any regulatory authorities have been obtained.
Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the liquidating
trustee will liquidate the Partnership's assets and apply the proceeds of the
liquidation in the order of priority set forth in the Partnership Agreements.
The liquidating trustee may defer liquidation or distribution of the
Partnership's assets and/or distribute assets to Partners in kind if it
determines that an immediate sale would be unsuitable.
FEDERAL INCOME TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., counsel to
the Partnership ("Counsel") and addresses all material income tax consequences
to individuals who are citizens or residents of the United States. Unless
otherwise noted, this section reflects Counsel's opinion with respect to the
matters set forth except for statements of fact and the representations and
estimates of the results of future operations of the General Partner included
in such discussion as to which no opinion is expressed. Counsel bases its
opinions on its interpretation of the Internal Revenue Code of 1986, as amended
(the "Code") and Treasury Regulations issued thereunder, judicial decisions,
the facts set forth in this Prospectus and certain factual representations made
by the General Partner. Counsel's opinions are subject to both the accuracy of
such facts and the continued applicability of
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such legislative, administrative and judicial authorities, all of which
authorities are subject to changes and interpretations that may or may not be
retroactively applied.
No ruling has been requested from the IRS with respect to the
classification of the Partnership as a partnership for federal income tax
purposes or any other matter affecting the Partnership. Accordingly, the IRS
may adopt positions that differ from Counsel's conclusions expressed herein.
It may be necessary to resort to administrative or court proceedings in an
effort to sustain some or all of Counsel's conclusions, and some or all of
these conclusions ultimately may not be sustained. The costs of any contest
with the IRS will be borne directly or indirectly by some or all of the
Unitholders and the General Partner. Furthermore, no assurance can be given
that the tax consequences of investing in the Partnership will not be
significantly modified by future legislation or administrative changes or court
decisions. Any such modifications may or may not be retroactively applied.
It is impractical to comment on all aspects of federal, state, local
and foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of Preference Units made by this Prospectus and of an
investment in such Preference Units. Moreover, certain types of taxpayers such
as tax-exempt entities, regulated investment companies and insurance companies
may be subject to rules and regulations unique to their status or form of
organization in addition to those rules and regulations described herein. Each
prospective Preference Unitholder should consult his own tax advisor in
deciding to acquire Preference Units.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Each partner is required to take into account in computing his
federal income tax liability his allocable share of income, gains, losses,
deductions and credits of the Partnership, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the distribution is in excess of the partner's
adjusted basis in his partnership interest.
Counsel is of the opinion that under present law, and subject to the
conditions and qualifications set forth below, for federal income tax purposes
each of the Partnership and the Operating Partnerships will be treated as a
partnership. Counsel's opinion as to the partnership status of the Partnership
and the Operating Partnerships is based principally upon its interpretation of
the factors set forth in Treasury Regulations under section 7701 of the Code,
its interpretation of section 7704 of the Code, and upon certain
representations made by the General Partner.
The Treasury Regulations under section 7701 of the Code provide that,
for classification purposes, a corporation has six major characteristics: (i)
associates, (ii) an objective to carry on a business and divide the gains
therefrom, (iii) continuity of life, (iv) free transferability of interests,
(v) centralization of management and (vi) limited liability. Since the first
two characteristics, associates and an objective to carry on a business and
divide the gains therefrom, can be common to both partnerships and
corporations, the determination of whether a limited partnership will be
classified as a partnership or as an association taxable as a corporation for
federal income tax purposes depends upon the extent to which the partnership
has the corporate characteristics of continuity of life, free transferability
of interests, centralization of management and limited liability. A limited
partnership having no more than two of these four characteristics will
ordinarily be classified as a partnership for federal income tax purposes. In
Counsel's opinion, neither the Partnership, KPOP nor STOP have the corporate
characteristics of continuity of life or limited liability, the Partnership
does not have the corporate characteristic of centralization of management and
the Operating Partnerships do not have the corporate characteristic of free
transferability of interests. Based on this analysis, Counsel has concluded
that neither the Partnership, KPOP nor STOP will be classified as an
association taxable as a corporation under section 7701 of the Code.
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Section 7704 of the Code provides that publicly traded partnerships
shall, as a general rule, be taxed as corporations despite the fact that they
are not classified as associations taxable as corporations under section 7701.
Section 7704 of the Code provides an exception to this general rule (the
"Natural Resource Exception") for a publicly traded partnership if 90% or more
of its gross income for every taxable year consists of "qualifying income".
"Qualifying income" includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines transporting gas, oil or products thereof) or marketing of
any mineral or natural resource. Other types of "qualifying income" include
dividends, gains from the sale of real property (including real property held
by one considered to be a "dealer" in such property) and gains from the sale or
other disposition of capital assets held for the production of income that
otherwise constitutes "qualifying income".
The Pipelines, like other pipeline systems transporting petroleum
products, includes certain ancillary storage facilities which are an integral
component of the system and are necessary for efficient and competitive
operation. The General Partner has advised Counsel that the Partnership
provides storage of petroleum products prior to transportation through the
Pipelines or subsequent to transportation through the Pipelines while awaiting
delivery to the Partnership's customers. Based on these facts and statements
made by Congressman Rostenkowski and Senator Bentsen on the floors of the House
of Representatives and Senate, respectively, indicating that storage fees can
be "qualifying income" for purposes of qualifying for the Natural Resource
Exception, Counsel is of the opinion that any fees charged for such storage
facilities are "qualifying income".
STOP earns fees from its terminaling operations for petroleum
products, specialty chemicals and other liquids. Fees relating to terminaling
of liquids that are not oil, gas, other natural resources or products derived
from oil or gas will not be qualifying income for purposes of Section 7704(d)
of the Code. Such fees, which consist primarily of revenues from the Westwego
and Baltimore terminals, were less than 6% of Partnership revenues in 1994, and
the Partnership believes that such fees will be less than 6% of Partnership
revenues in 1995. STOP received a ruling from the IRS in 1993 to the effect
that fees earned from its terminaling operations for petroleum or other
qualifying products will be qualifying income for purposes of Section 7704(d)
of the Code. Although that ruling was based on the facts as they existed in
1993, the Partnership believes that current operations continue to be in
conformity with the facts disclosed and representations made in STOP's request
for the ruling.
If the Partnership fails to meet the Natural Resource Exception to the
general rule of section 7704 of the Code (other than a failure determined by
the IRS to be inadvertent which is cured within a reasonable time after
discovery), the Partnership will be treated as if it had transferred all of its
assets (subject to liabilities) to a newly-formed corporation (on the first day
of the year in which it fails to meet the Natural Resource Exception) in return
for stock in such corporation, and then distributed such stock to the Partners
in liquidation of their interest in the Partnership.
In rendering its opinion that the Partnership and the Operating
Partnerships will each be treated as a partnership for federal income tax
purposes, Counsel has relied on the following factual representations by the
General Partner as to the Partnership and the Operating Partnerships:
1. As to each of the Partnership and KPOP, the General
Partner at all times while acting as general partner will have a net
worth of at least $5.0 million computed by excluding any net worth
attributable to its interest in, and accounts and notes receivable
from, or payable to, the Partnership, KPOP, or any other limited
partnership in which it is a general partner. As to STOP, STS at all
times while acting as general partner will have a net worth of at
least $5.0 million computed by excluding any net worth attributable to
its interest in and the accounts and notes receivable from, or payable
to STOP or any other limited partnership in which it is a general
partner.
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2. Each such partnership will be operated in accordance
with applicable state partnership statutes, the Partnership Agreements
and the statements and representations made in this Prospectus.
3. Except as otherwise required by section 704(c) of the
Code, the general partner of each partnership will have at least a 1%
interest in each material item of income, gain, loss, deduction and
credit of its respective partnership.
4. For each taxable year, less than 10% of the
partnerships' aggregate gross income will be derived from sources
other than (i) the exploration, development, production, processing,
refining, transportation or marketing of oil, gas or products thereof
or (ii) other items of "qualifying income" within the meaning of
section 7704(d) of the Code.
5. The General Partner of the Partnership and the
general partners of each of the Operating Partnerships will act
independently of the limited partners of such partnerships.
Counsel's opinion as to the classification of the Partnership and the
Operating Partnerships is based on the assumption that if the General Partner
or STS cease to be a general partner, any successor general partner will make
and satisfy such representations. In this regard, if the General Partner or
STS were to withdraw as a general partner at a time when there is no successor
general partner, or if the successor general partner could not satisfy the
above representations, then the IRS might attempt to treat the Partnership or
an Operating Partnership as an association taxable as a corporation.
If the Partnership or an Operating Partnership were taxable as a
corporation or treated as an association taxable as a corporation in any
taxable year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through to its
partners and its net income would be taxed at corporate rates. Losses realized
by the Partnership would not flow through to the Unitholders. In addition, any
distribution made to a Unitholder would be treated as either dividend income
(to the extent of the Partnership's, KPOP's or STOP's current or accumulated
earnings and profits), in the absence of earnings and profits as a nontaxable
return of capital (to the extent of the Unitholder's basis in his LP Units) or
taxable capital gain (after the Unitholder's basis in the LP Units is reduced
to zero). Accordingly, treatment of either the Partnership or an Operating
Partnership as a corporation would probably result in a material reduction in a
Unitholder's cash flow and after-tax return.
If legislation is enacted which causes the Partnership to become
taxable as a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes, the Minimum Quarterly Distribution
and the Target Distributions for each quarter thereafter would be reduced to an
amount equal to the product of (i) the otherwise applicable Minimum Quarterly
Distribution and Target Distributions, multiplied by (ii) 1 minus the sum of
(x) the maximum marginal federal income tax rate (expressed as a fraction) and
(y) the effective overall state and local income tax rate (expressed as a
fraction) applicable to the Partnership for the taxable year in which such
quarter occurs.
The discussion below is based on the assumption that the Partnership
and the Operating Partnerships each will be classified as a partnership for
federal income tax purposes. If that assumption proves to be erroneous, most,
if not all, of the tax consequences described below would not be applicable to
Unitholders.
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PARTNER STATUS
Unitholders who have become limited partners of the Partnership
pursuant to the provisions of the Partnership Agreement will be treated as
partners of the Partnership for federal income tax purposes.
The IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of such ruling, except as otherwise described herein, (i) assignees who
have executed and delivered transfer applications, and are awaiting admission
as limited partners of the Partnership, and (ii) Preference Unitholders whose
Preference Units are held in street name or by another nominee will be treated
as partners for federal income tax purposes. As such ruling does not extend,
on its facts, to assignees of Preference Units who are entitled to execute and
deliver transfer applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver transfer
applications, the tax status of such Preference Unitholders is unclear and
Counsel expresses no opinion with respect to the status of such assignees.
Such Preference Unitholders should consult their own tax advisors with respect
to their status as partners in the Partnership for federal income tax purposes.
A purchaser or other transferee of Preference Units who does not execute and
deliver a transfer application may not receive certain federal income tax
information or reports furnished to record holders of Preference Units unless
the Preference Units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application with
respect to such Preference Units.
A beneficial owner of Preference Units whose Preference Units have
been transferred to a short seller to complete a short sale would appear to
lose his status as a partner with respect to such Preference Units for federal
income tax purposes. See "--Tax Treatment of Operations--Treatment of Short
Sales".
TAX CONSEQUENCES OF PREFERENCE UNIT OWNERSHIP
Flow-through of Taxable Income
The Partnership's income, gains, losses, deductions and credits will
consist of its allocable share of the income, gains, losses, deductions and
credits of the Operating Partnerships and dividends from its corporate
subsidiaries. Each Unitholder will be required to take into account his
allocable share of income, gain, loss and deductions of the Operating
Partnerships (through the Partnership) without regard to whether corresponding
cash distributions are received by Unitholders. Consequently, a Preference
Unitholder may be allocated income from the Partnership although he has not
received a cash distribution in respect of such income.
Treatment of Partnership Distributions
Distributions by the Partnership to a Preference Unitholder generally
will not be taxable to such Preference Unitholder for federal income tax
purposes to the extent of his basis in his Preference Units immediately before
the distribution. Cash distributions in excess of such basis generally will be
considered to be gain from the sale or exchange of the Preference Units,
taxable in accordance with the rules described under "--Disposition of
Preference Units". Any reduction in a Preference Unitholder's share of the
Partnership's liabilities included in his basis in his Preference Units will be
treated as a distribution of cash to such Unitholder. See "--Basis of
Preference Units". A decrease in a Preference Unitholder's percentage interest
in the Partnership because of a Partnership offering
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of additional LP Units will decrease such Preference Unitholder's share of
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash.
A non-pro rata distribution of money or property may result in
ordinary income to a Preference Unitholder, regardless of his basis in his
Preference Units, if such distribution reduces the Unitholder's share of the
Partnership's "unrealized receivables" (including depreciation recapture)
and/or substantially appreciated "inventory items" (both as defined in section
751 of the Code) (collectively, "Section 751 Assets"). To that extent, the
Preference Unitholder will be treated as having received his proportionate
share of the Section 751 Assets and having exchanged such assets with the
Partnership in return for the non-pro rata portion of the actual distribution
made to him. This latter deemed exchange will generally result in the
Preference Unitholder's realization of ordinary income under section 751(b) of
the Code. Such income will equal the excess of (i) the non-pro rata portion of
such distribution over (ii) the Preference Unitholder's basis for the share of
such Section 751 Assets deemed relinquished in the exchange.
Basis of Preference Units
In general, a Preference Unitholder's tax basis for his Preference
Units initially will be equal to the price of such Preference Units to him. A
Preference Unitholder's tax basis will generally be increased by (i) his share
of Partnership taxable income and (ii) his share of Partnership liabilities
that are without recourse to any Partner ("nonrecourse liabilities"), if any.
Generally, a Preference Unitholder's basis in his interest will be decreased
(but not below zero) by (i) his share of Partnership distributions, (ii) his
share of decreases in nonrecourse liabilities of the Partnership, (iii) his
share of losses of the Partnership and (iv) his share of nondeductible
expenditures of the Partnership that are not chargeable to capital. A
Preference Unitholder's share of nonrecourse liabilities will generally be
based on his share of the Partnership's profits. See "--Disposition of
Preference Units--Aggregate Tax Basis for Preference Units".
Limitations on Deductibility of Losses
The passive loss limitations generally provide that individuals,
estates, trusts and certain closely held corporations and personal service
corporations can only deduct losses from passive activities (generally,
activities in which the taxpayer does not materially participate) that are not
in excess of the taxpayer's income from such passive activities or investments.
The passive loss limitations are to be applied separately with respect to
publicly traded partnerships. Consequently, losses generated by the
Partnership, if any, will only be available to offset future income generated
by the Partnership and will not be available to offset income from other
passive activities or investments (including other publicly traded
partnerships) or salary or active business income. Passive losses that are not
deductible because they exceed the Preference Unitholder's income generated by
the Partnership may be deducted in full when the Preference Unitholder disposes
of his entire investment in the Partnership to an unrelated party in a fully
taxable transaction.
A Preference Unitholder's share of net income from the Partnership may
be offset by any suspended passive losses from the Partnership, but may not be
offset by any other current or carryover losses from other passive activities,
including those attributable to other publicly traded partnerships. According
to an IRS announcement, Treasury regulations will be issued which characterize
net passive income from a publicly traded partnership as investment income for
purposes of deducting investment interest.
In addition to the foregoing limitations, a Preference Unitholder may
not deduct from taxable income his share of Partnership losses, if any, to the
extent that such losses exceed the lesser of (i) the adjusted tax basis of his
Preference Units at the end of the Partnership's taxable year in which the loss
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occurs and (ii) the amount for which the Preference Unitholder is considered
"at risk" at the end of that year. In general, a Preference Unitholder will
initially be "at risk" to the extent of the purchase price of his Preference
Units. A Preference Unitholder's "at risk" amount increases or decreases as
his adjusted basis in his Preference Units increases or decreases, except that
nonrecourse liabilities (or increases or decreases in such liabilities) of the
Partnership generally do not affect his "at risk" amount. Losses disallowed to
a Preference Unitholder as a result of these rules can be carried forward and
will be allowable to the Preference Unitholder to the extent that his adjusted
basis or "at risk" amount (whichever was the limiting factor) is increased in a
subsequent year. The "at risk" rules apply to an individual Unitholder, a
shareholder of a corporate Unitholder that is an S corporation and a corporate
Unitholder if 50% or more of the value of such stock is owned directly or
indirectly by five or fewer individuals.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
The Partnership Agreement requires that a capital account be
maintained for each partner, that the capital accounts generally be maintained
in accordance with the tax accounting principles set forth in applicable
Treasury Regulations and that all allocations to a partner be reflected by
appropriate increases or decreases in his capital account. Distributions upon
liquidation of the Partnership generally are to be made in accordance with
positive capital account balances.
In general, if the Partnership has a net profit, items of income,
gain, loss and deduction will be allocated among the General Partner and the
Unitholders in accordance with their respective interests in the Partnership.
A class of Unitholders (such as Preference Unitholders) that receives more cash
than another class, on a per LP Unit basis, with respect to a year will be
allocated additional income equal to that excess. If the Partnership has a net
loss, items of income, gain, loss and deduction will generally be allocated (1)
first, to the General Partner and the Unitholders in accordance with their
respective interests in the Partnership to the extent of their positive capital
accounts; and (2) second, to the General Partner.
Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of Partnership income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
certain property held by the Partnership ("Contributed Property"). In
addition, certain items of recapture income will be allocated to the extent
possible to the partner allocated the deduction giving rise to the treatment of
such gain as recapture income in order to minimize the recognition of ordinary
income by some Unitholders, but these allocations may not be respected. If
these allocations of recapture income are not respected, the amount of the
income or gain allocated to a Unitholder will not change, but a change in the
character of the income allocated to a Unitholder would result. Finally,
although the Partnership does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts
nevertheless result, items of Partnership income and gain will be allocated in
an amount and manner sufficient to eliminate the negative balances as quickly
as possible.
Under the Code, the partners in a partnership cannot be allocated more
depreciation, gain or loss than the total amount of any such item recognized by
that partnership in a particular taxable period (the "ceiling limitation"). To
the extent the ceiling limitation is or becomes applicable, the Partnership
Agreement will require that certain items of income and deduction be allocated
in a way designed to effectively "cure" this problem and eliminate the impact
of the ceiling limitation. Such allocations will not have substantial economic
effect because they will not be reflected in the capital accounts of the
Unitholders. Recently released Temporary Regulations under Section 704(c) of
the Code permit a partnership to make reasonable curative allocations to reduce
or eliminate disparities between the tax basis and value attributable to
Contributed Properties.
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Counsel is of the opinion that, with the exception of the allocation
of recapture income discussed above, allocations under the Partnership
Agreement will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the Treasury Regulations relating to
allocations of partnership income, and investors should be aware that the
allocations of recapture income in the Partnership Agreement may be
successfully challenged by the IRS.
TAX TREATMENT OF OPERATIONS
Income and Deductions in General
No federal income tax will be paid by the Partnership. Instead, each
Preference Unitholder will be required to report on his income tax return his
allocable share of income, gains, losses and deductions of the Partnership.
Such items must be included on the Preference Unitholder's federal income tax
return without regard to whether the Partnership makes a distribution of cash
to the Preference Unitholder. A Preference Unitholder is generally entitled to
offset his allocable share of the Partnership's passive income with his
allocable share of losses generated by the Partnership, if any. See "--Tax
Consequences of Preference Unit Ownership--Limitations on Deductibility of
Losses".
A Preference Unitholder who owns Preference Units as of the first day
of each month during a quarter and who disposes of such Preference Units prior
to the record date for a distribution with respect to such quarter will be
allocated items of Partnership income and gain attributable to the months in
such quarter during which such Preference Units were owned but will not be
entitled to receive such cash distribution.
Accounting Method and Taxable Year
The Partnership utilizes the calendar year as its taxable year and
adopted the accrual method of accounting for federal income tax purposes.
Depreciation Method
The Partnership elected to use depreciation methods that resulted in
the largest depreciation deductions in the early years of the Partnership.
Property subsequently acquired or constructed by the Partnership may be
depreciated using accelerated depreciation methods permitted by the Code.
Section 754 Election
The Partnership and the Operating Partnerships have each make the
election permitted by section 754 of the Code. Such election will generally
permit a purchaser of Preference Units to adjust his share of the basis in the
Partnership's properties pursuant to section 743(b) of the Code. Such
elections are irrevocable without the consent of the IRS. The section 743(b)
adjustment is attributed solely to a purchaser of LP Units and is not added to
the basis of the Partnership's assets associated with all of the Unitholders
described above under the heading "--Initial Tax Basis of Partnership Assets"
(the "Common Bases"). The amount of the adjustment under section 743(b) is the
difference between the Preference Unitholder's adjusted federal income tax
basis in his Preference Units and the Unitholder's proportionate share of the
Common Bases attributable to the Preference Units pursuant to section 743. The
aggregate amount of the adjustment computed under section 743(b) is then
allocated among the various assets of the Partnership pursuant to the rules of
section 755. The section 743(b) adjustment acts in concert with the section
704(c) allocations (including the curative allocations, if respected) in
providing the purchaser of Preference Units with the equivalent of an adjusted
tax basis in his share of the Partnership's properties equal to the fair market
value of such
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share. See "--Allocation of Partnership Income, Gain, Loss and Deduction--The
Partnership Agreement" and "--Uniformity of Preference Units".
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the transfer occurs. The legislative
history of Section 197 of the Code indicates that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible should be similarly
treated. Under Treasury Regulation Section 1.167(c)-1(a)(6), a section 743(b)
adjustment attributable to property subject to depreciation under section 167
of the Code rather than cost recovery deductions under section 168 is generally
required to be depreciated using either the straight-line method or the 150
percent declining balance method. The Partnership utilizes the 150 percent
declining method on such property. The depreciation and amortization methods
and useful lives associated with the section 743(b) adjustment, therefore, may
differ from the methods and useful lives generally used to depreciate the
Common Bases in such properties. The General Partner is authorized to adopt a
convention to preserve the uniformity of LP Units despite its inconsistency
with Proposed Treasury Regulation Section 1.168-2(n) and Treasury Regulation
Section 1.167(c)-1(a)(6). See "Uniformity of Preference Units".
Although Counsel is unable to opine as to the validity of such an
approach, the Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property (to the extent of any unamortized disparity between the tax basis and
value attributable to Contributed Property) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Bases of such property, despite its inconsistency
with Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation
Section 1.167(c)-1(a)(6) or the legislative history of section 197 of the Code.
If the Partnership determines that such position cannot reasonably be taken,
the Partnership may adopt a depreciation or amortization convention under which
all purchasers acquiring LP Units in the same month would receive depreciation
or amortization, whether attributable to Common Bases or Section 743(b) basis,
based upon the same applicable rate as if they had purchased a direct interest
in the Partnership's property. Such an aggregate approach may result in lower
annual depreciation or amortization deductions than would otherwise be
allowable to certain Unitholders. See "-- Uniformity of Preference Units".
The allocation of the Section 743(b) adjustment must be made in
accordance with the principles of Section 1060 of the Code. Based on these
principles, the IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets. Alternatively, it is possible that the IRS
might seek to treat the portion of such Section 743(b) adjustment attributable
to the underwriters' discount as if it were allocable to a non-deductible
syndication cost.
A section 754 election is advantageous when the transferee's basis in
such Preference Units is higher than such Preference Units' share of the
aggregate basis in the Partnership's assets immediately prior to the transfer.
In such case, pursuant to the election, the transferee will take a new and
higher basis in his share of the Partnership's assets for purposes of
calculating, among other items, his depreciation deductions and his share of
any gain or loss on a sale of the Partnership's assets. Conversely, a section
754 election would be disadvantageous if the transferee's basis in such
Preference Units is lower than such Preference Units' share of the aggregate
basis in the Partnership's assets immediately prior to the transfer. Thus, the
amounts that a Unitholder would be able to obtain on a sale or other
disposition of his Preference Units may be affected favorably or adversely by
the elections under section 754.
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The calculations and adjustments in connection with the section 754
election depend, among other things, on the date on which a transfer occurs and
the price at which the transfer occurs. To help reduce the complexity of those
calculations and the resulting administrative cost to the Partnership, the
General Partner will apply the following method in making the necessary
adjustments pursuant to the section 754 election on transfers subsequent to the
transfers pursuant to this offering: the price paid by a transferee for his
Preference Units will be deemed to be the lowest quoted trading price for the
Preference Units during the calendar month in which the transfer was deemed to
occur, without regard to the actual price paid. The application of such
convention yields a less favorable tax result, as compared to adjustments based
on actual price, to a transferee who paid more than the "convention price" for
his Preference Units. The calculations under section 754 elections are highly
complex, and there is little legal authority concerning the mechanics of the
calculations, particularly in the context of publicly traded partnerships. It
is possible that the IRS will successfully assert that the adjustments made by
the General Partner do not meet the requirements of the Code or the applicable
regulations and require a different basis adjustment to be made.
Should the IRS require a different basis adjustment to be made, and
should, in the General Partner's opinion, the expense of compliance exceed the
benefit of the elections, the General Partner may seek permission from the IRS
to revoke the section 754 election previously made for the Partnership. Such a
revocation may increase the ratio of a Preference Unitholder's distributive
share of taxable income to cash distributions and adversely affect the amount
that a Preference Unitholder will receive from the sale of his Preference
Units.
Safe Harbor Leases
Certain of the assets previously acquired by the Partnership were
originally acquired by the General Partner in 1981 and 1982 pursuant to
transactions that were treated as leases for federal income tax purposes under
section 168(f)(8) of the Code as it existed in those years ("safe harbor
leases") even though the transactions were not treated as leases for financial
reporting and certain other purposes. Each such transaction included a
provision that will allow the General Partner to acquire complete ownership of
the assets at the end of the term of the safe harbor lease at a price
significantly less than the anticipated value of such assets. The Partnership
acquired these purchase options from the General Partner and will exercise such
options on the first available date. No depreciation or cost recovery
deductions may be claimed by the Partnership (or any Preference Unitholders as
a result of a section 743(b) adjustment) with respect to such assets until they
are acquired pursuant to the applicable purchase option. Rental deductions are
claimed by the Partnership with respect to such assets to the extent rent is
paid or deemed to be paid pursuant to applicable Treasury Regulations. A
significant portion of any section 743(b) adjustment attributable to the assets
subject to safe harbor leases must be allocated (based on relative fair market
values) between (i) the excess of the value of the Partnership's right to use
such property during the remaining terms of the safe harbor leases over the
amount paid (or deemed paid) for such use (the "leasehold value") and (ii) the
excess of the value of the option to purchase such assets over the price to be
paid to exercise the option (the "bargain purchase value"). The portion of any
section 743(b) adjustment attributable to the leasehold value may be amortized
over the remaining term of each lease. The portion attributable to the bargain
purchase value may not be amortized or depreciated; however, such amount will
be added to the option price to determine the depreciable basis attributable to
such asset when the purchase option is exercised. Section 743(b) adjustments
attributable to the assets subject to the safe harbor leases resulting upon a
subsequent sale of Preference Units by a Unitholder will be based on the
relative values of the leasehold and bargain purchase interests at the time of
the adjustment. The inability to claim current deductions with respect to that
portion of the section 743(b) adjustment attributable to the bargain purchase
value may adversely influence the market value of Preference Units at some time
in the future.
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Estimates of Relative Fair Market Values and Basis of Properties
The consequences of the acquisition, ownership and disposition of
Preference Units will depend in part on estimates by the General Partner of the
relative fair market values and determinations of the initial tax basis of the
assets of the Partnership. The federal income tax consequences of such
estimates and determinations of basis may be subject to challenge and will not
be binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis were found to be incorrect, the character and amount of
items of income, gain, loss, deduction or credit previously reported by
Preference Unitholders might change, and Preference Unitholders might be
required to amend their previously filed tax returns or to file claims for
refund. See "--Administrative Matters--Valuation Overstatements".
Treatment of Short Sales
It would appear that a Preference Unitholder whose Preference Units
are loaned to a "short seller" to cover a short sale of Preference Units would
be considered as having transferred beneficial ownership of such Preference
Units and would, thus, no longer be a partner with respect to such Preference
Units during the period of such loan. As a result, during such period any
Partnership income, gains, deductions, losses or credits with respect to such
Preference Units would appear not to be reportable by such Preference
Unitholder, any cash distributions received by the Preference Unitholder with
respect to such Preference Units would be fully taxable and all of such
distributions would appear to be treated as ordinary income. The IRS also may
contend that a loan of Preference Units to a "short seller" constitutes a
taxable exchange. If such a contention were successfully made, the lending
Preference Unitholder may be required to recognize gain or loss. Preference
Unitholders desiring to assure their status as partners should modify their
brokerage account agreements, if any, to prohibit their brokers from borrowing
their Preference Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of partnership interests.
Alternative Minimum Tax
Each Preference Unitholder will be required to take into account his
share of any items of Partnership income, gain or loss for purposes of the
alternative minimum tax. A portion of the Partnership's depreciation
deductions may be treated as an item of tax preference for this purpose. A
Preference Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use more accelerated methods of depreciation for purposes of
computing federal taxable income or loss. Prospective Preference Unitholders
should consult with their tax advisors as to the impact of an investment in
Preference Units on their liability for the alternative minimum tax.
The Partnership's assets will include all of the capital stock of two
corporations, STI and STS. As corporations, they will be subject to
entity-level taxation for federal and state income tax purposes. The
Partnership, as their stockholder, will include in its income any amounts
distributed to it by such corporations to the extent of such corporations'
current and accumulated earnings and profits. The General Partner estimates
that a significant portion of the cash distributions to the Partnership by such
corporations will be treated as taxable dividends.
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Tax-Exempt Entities, Regulated Investment Companies and Foreign
Investors
Employee benefit plans and most other organizations exempt from
federal income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Virtually all of the taxable income derived by such an
organization from the ownership of a Preference Unit will be unrelated business
taxable income and thus will be taxable to such a Unitholder.
Regulated investment companies are required to derive 90% or more of
their gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
be qualifying income.
Nonresident aliens and foreign corporations, trusts or estates that
acquire Preference Units will be considered to be engaged in business in the
United States on account of ownership of such Units and as a consequence will
be required to file federal tax returns in respect of their distributive shares
of Partnership income, gain, loss, deduction or credit and pay federal income
tax at regular rates (net of credits, including withholding) on such income.
Generally, a partnership is required to pay a withholding tax on the portion of
the partnership's income that is effectively connected with the conduct of a
United States trade or business and that is allocable to the foreign partners,
regardless of whether any actual distributions have been made to such partners.
However, under rules applicable to publicly-traded partnerships, the
Partnership will withhold (currently at the rate of 39.6%) on actual cash
distributions made quarterly to foreign Preference Unitholders. Each foreign
Preference Unitholder must obtain a taxpayer identification number from the IRS
and submit that number to the transfer agent of the Partnership on a Form W-8
in order to obtain credit for the taxes withheld. Subsequent adoption of the
Treasury Regulations or the issuance of other administrative pronouncements may
require the Partnership to change these procedures.
Because a foreign corporation that owns Preference Units will be
treated as engaged in a United States trade or business, such a Preference
Unitholder will be subject to United States branch profits tax at a rate of
30%, in addition to regular federal income tax, on its allocable share of the
Partnership's earnings and profits (as adjusted for changes in the foreign
corporation's "U.S. net equity") that are effectively connected with the
conduct of a United States trade or business. Such a tax may be reduced or
eliminated by an income tax treaty between the United States and the country
with respect to which the foreign corporate Preference Unitholder is a
"qualified resident". In addition, such a Preference Unitholder is subject to
special information reporting requirements under Section 6038C of the Code.
A foreign Preference Unitholder who sells or otherwise disposes of a
Preference Unit will be subject to federal income tax on gain realized on the
disposition of such Preference Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Preference
Unitholder. The IRS has issued a ruling under which all or a portion of any
gain that is recognized on a sale of a Preference Unit by a foreign Preference
Unitholder will be subject to tax under the rule of the preceding sentence.
The Partnership does not expect that any material portion of any such gain will
avoid United States taxation. If less than all of any such gain is so taxable,
then section 897 of the Code may increase the portion of any gain that is
recognized by a foreign Preference Unitholder that is subject to United States
income tax and withholding of 10% of the amount realized on the disposition of
a Preference Unit may apply if that foreign Unitholder has held more than 5% in
value of the LP Units during the five-year period ending on the date of the
disposition or if the LP Units are not regularly traded on an established
securities market at the time of the disposition.
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UNIFORMITY OF PREFERENCE UNITS
There can arise a lack of uniformity in the intrinsic tax
characteristics of Preference Units sold pursuant to this offering and LP Units
subsequently converted to Senior Preference Units or Senior Preference Units
issued by the Partnership prior or subsequent to this offering. Without such
uniformity, compliance with several federal income tax requirements, both
statutory and regulatory, could be substantially diminished. In addition, such
non-uniformity could have a negative impact on the ability of a Preference
Unitholder to dispose of his interest in the Partnership. Such lack of
uniformity can result from the application of Proposed Treasury Regulation
Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) or the
application of certain "ceiling" limitations on the Partnership's ability to
make allocations to eliminate disparities between the tax basis and value
attributable to Contributed Properties.
Depreciation conventions may be adopted or items of income and
deduction may be specially allocated in a manner that is intended to preserve
the uniformity of intrinsic tax characteristics among all Preference Units,
despite the application of either Proposed Treasury Regulation Section
1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) or the "ceiling"
limitations to Contributed Properties. Any such special allocation will be
made solely for federal income tax purposes. In the event the IRS disallows
the use of such conventions, some or all of the adverse consequences described
in the preceding paragraph could result. See "--Allocation of Partnership
Income, Gain, Loss and Deduction" and "--Tax Treatment of Operations--Section
754 Election".
DISPOSITION OF PREFERENCE UNITS
Gain or Loss in General
If a Preference Unit is sold or otherwise disposed of, the
determination of gain or loss from the sale or other disposition will be based
on the difference between the amount realized and the tax basis for such
Preference Unit. See "--Tax Consequences of Preference Unit Ownership--Basis
of Preference Units". Upon the sale of his Preference Units, a Preference
Unitholder's "amount realized" will be measured by the sum of the cash or other
property received plus the portion of the Partnership's nonrecourse liabilities
allocated to the Preference Units sold. Similarly, upon a gift of his
Preference Units, a Preference Unitholder will be deemed to have realized gain
with respect to the portion of the Partnership's nonrecourse liabilities
allocable to such Preference Units. To the extent that the amount of cash or
property received plus the allocable share of the Partnership's nonrecourse
liabilities exceeds the Preference Unitholder's basis for the Preference Units
disposed of (in the case of a charitable gift, only a portion of such basis may
be offset against the nonrecourse debt), the Preference Unitholder will
recognize gain. The tax liability resulting from such gain could exceed the
amount of cash received upon the disposition of such Preference Units.
The IRS has ruled that a partner must maintain an aggregate adjusted
tax basis for his interests in a single partnership (consisting of all
interests acquired in separate transactions). On a sale of a portion of such
aggregate interest, such partner would be required to allocate his aggregate
tax basis between the interest sold and the interest retained by some equitable
apportionment method. If applicable, the aggregation of tax basis of a
Preference Unitholder effectively prohibits a Unitholder from choosing among
Preference Units with varying amounts of inherent gain or loss to control the
timing of the recognition of such inherent gain or loss as would be possible in
a stock transaction. Thus, the IRS ruling may result in an acceleration of
gain or deferral of loss on a sale of a portion of a Preference Unitholder's
Preference Units. It is not clear whether such ruling applies to publicly
traded partnerships, such as the Partnership, the interests in which are
evidenced by separate registered certificates, providing a verifiable means of
identifying each separate interest and tracing the purchase price of such
interest. A Preference Unitholder considering the purchase of additional
Preference Units
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or a sale of Preference Units purchased at differing prices should consult his
tax advisor as to the possible consequences of that IRS ruling.
To the extent that a portion of the gain upon the sale of a Preference
Unit is attributable to a Preference Unitholder's share of "substantially
appreciated inventory items" and "unrealized receivables" of the Partnership,
as those terms are defined in section 751 of the Code, such portion will be
treated as ordinary income. Unrealized receivables include (i) to the extent
not previously includable in Partnership income, any rights to pay for services
rendered or to be rendered and (ii) amounts that would be subject to recapture
as ordinary income if the Partnership had sold its assets at their fair market
value at the time of the transfer of a Preference Unit.
Gain from the sale or other disposition of a Preference Unit may
constitute investment income under Section 163(d) of the Code. A Preference
Unitholder must report to the transfer agent of the Partnership (on behalf of
the Partnership) any transfer of Preference Units. See "--Information Return
Filing Requirements".
The treatment of distributions received after a Preference Unitholder
has disposed of his Preference Units is unclear. Such a distribution may be
fully taxable as ordinary income or may reduce a Preference Unitholder's basis
for the Preference Units disposed of, resulting in a larger gain or smaller
loss from such disposition.
Transferor/Transferee Allocations
In general, the Partnership's taxable income and losses are determined
annually and are prorated on a monthly basis and subsequently apportioned among
the Unitholders in proportion to the number of LP Units owned by them as of the
opening of the NYSE on the first business day of the month. However, gain or
loss realized on a sale or other disposition of Partnership assets other than
in the ordinary course of business is allocated among the Unitholders of record
as of the opening of the NYSE on the first business day of the month in which
such gain or loss is recognized. As a result of this monthly allocation, a
Preference Unitholder transferring Preference Units in the open market may be
allocated income, gain, loss, deduction and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be
permitted by existing Treasury Regulations and, accordingly, Counsel is unable
to opine on the validity of the method of allocating income and deductions
between the transferors and transferees of Preference Units. If the IRS treats
transfers of Preference Units as occurring throughout each month and a monthly
convention is not allowed by the regulations (or only applies to transfers of
less than all of a partner's interest), the IRS may contend that taxable income
or losses of the Partnership must be reallocated among the Partners. If any
such contention were sustained, certain Preference Unitholders' respective tax
liabilities would be adjusted to the possible detriment of other Preference
Unitholders. The General Partner is authorized to revise the Partnership's
method of allocation between transferors and transferees (as well as among
Partners whose interests otherwise vary during a taxable period) to comply with
any future regulations.
Constructive Termination or Dissolution of Partnership
Under section 708(b)(1)(B) of the Code, a partnership will be
considered to have been terminated if within a twelve-month period there is a
sale or exchange of 50% or more of the interests in partnership capital and
profits. A termination results in a closing of the partnership's taxable year
for all partners, and the partnership's assets are treated as having been
distributed to the partners and reconveyed to the partnership, which is then
treated as a new partnership. A constructive termination of the Partnership
will cause a termination of the Operating Partnerships. In the case of a
Preference
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Unitholder reporting on a fiscal year other than a calendar year, the closing
of a tax year of the Partnership may result in more than twelve months' taxable
income or loss of the Partnership being includable in his taxable income for
the year of termination. In addition, each Preference Unitholder will realize
taxable gain to the extent that any money distributed or deemed distributed to
him (including any net reduction in his share of the Partnership's nonrecourse
liabilities) exceeds the adjusted basis of his Preference Units.
A termination of the Partnership under section 708(b)(1)(B) could
result in adverse tax consequences to Unitholders since it could result in a
change in the tax basis for the Partnership's properties and would require that
new tax elections be made by the reconstituted partnerships. In addition, such
a termination could result in a deferral of Partnership depreciation
deductions. Further, such a termination may either accelerate the application
of (or subject the reconstituted partnerships to the application of) any change
in law effective as of a date after the termination.
The Partnership may not have the ability to determine when a
constructive termination occurs as a result of transfers of LP Units because
the LP Units will be freely transferable under "street name" ownership. Thus,
the Partnership may be subject to penalty for failure to file a tax return and
may fail to make certain Partnership elections in a timely manner, including
the section 754 elections.
ADMINISTRATIVE MATTERS
Entity-Level Collections
If the Partnership is required under applicable law or elects to pay
any federal, state or local income tax on behalf of any Unitholder or the
General Partner or any former Unitholder, the General Partner is authorized to
pay such taxes from Partnership funds. Such payments, if made, will be treated
as current distributions to the Unitholders for tax purposes, including the
calculation of capital accounts. However, such payments, if made on behalf of
all Unitholders, will not be treated as current distributions of Available Cash
for purposes of determining whether (i) distributed cash constitutes Cash from
Operations or Cash from Interim Capital Transactions or (ii) the Minimum
Quarterly Distribution, First Target Distribution, Second Target Distribution
or Third Target Distribution has been paid. If such payments are made on
behalf of some but not all Unitholders, the payments will be treated as
distributions of Available Cash for all purposes including the determination of
whether (i) distributed cash constitutes Cash from Operations or Cash from
Interim Capital Transactions and (ii) the Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution or Third Target Distribution
has been distributed on LP Units held by Unitholders on whose behalf such
payments are made. The General Partner is authorized (but not required) to
amend the Partnership Agreement in the manner necessary to maintain uniformity
of intrinsic tax characteristics of LP Units and to adjust subsequent
distributions so that, after giving effect to such deemed distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement are maintained as nearly as practicable. If the
Partnership is permitted (but not required) under applicable law to pay any
such taxes, the General Partner is authorized (but not required) to pay such
taxes from the Partnership funds and to amend the Partnership Agreement and
adjust subsequent distributions as described above. The Partnership Agreement
further provides that the General Partner is authorized (but not required) to
attempt to collect tax deficiencies from persons who were Unitholders at the
time such deficiencies arose and any amounts so collected will become
Partnership assets.
The amounts payable by the Partnership would be calculated based upon
the maximum rate of tax for individuals or corporations, whichever is higher.
Thus, such a payment by the Partnership could give rise to an overpayment of
tax on behalf of an individual Partner. In such event, the individual Partner
could file a claim for credit or refund with respect to the overpayment.
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Partnership Income Tax Information Returns and Partnership Audit
Procedures
The Partnership will use all reasonable efforts to furnish Unitholders
with tax information within 75 days after the close of each Partnership taxable
year. Specifically, the Partnership intends to furnish to each Unitholder a
Schedule K-1 which sets forth his allocable share of the Partnership's income,
gains, losses, deductions and credits, if any. In preparing such information,
the General Partner will necessarily use various accounting and reporting
conventions to determine each Unitholder's allocable share of income, gains,
losses, deductions and credits. There is no assurance that any such
conventions will yield a result that conforms to the requirements of the Code,
regulations thereunder or administrative pronouncements of the IRS. The
General Partner cannot assure prospective Preference Unitholders that the IRS
will not contend that such accounting and reporting conventions are
impermissible. Contesting any such allegations could result in substantial
expense to the Partnership. In addition, if the IRS were to prevail,
Preference Unitholders may incur substantial liabilities for taxes and
interest.
The federal income tax information returns filed by the Partnership
may be audited by the IRS. The Code contains partnership audit procedures that
significantly simplify the manner in which IRS audit adjustments of partnership
items are resolved. Adjustments (if any) resulting from such an audit may
require each Preference Unitholder to file an amended tax return, and possibly
may result in an audit of the Preference Unitholder's return. Any audit of a
Preference Unitholder's return could result in adjustments of non-Partnership
as well as Partnership items.
Partnerships generally are treated as separate entities for purposes
of federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit is determined at the partnership level
in a unified partnership proceeding rather than in separate proceedings with
the partners. The Code provides for one partner to be designated as the "Tax
Matters Partner" for these purposes. The Partnership Agreement appoints the
General Partner as the Tax Matters Partner for the Partnership.
The Tax Matters Partner is entitled to make certain elections on
behalf of the Partnership and Unitholders and can extend the statute of
limitations for assessment of tax deficiencies against Unitholders with respect
to Partnership items. In connection with adjustments to Partnership tax
returns proposed by the IRS, the Tax Matters Partner may bind any Unitholder
with less than a 1% profits interest in the Partnership to a settlement with
the IRS unless the Unitholder elects, by filing a statement with the IRS, not
to give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review (to which all the Unitholders are bound) of a final
Partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any Unitholder having at
least a 1% profit interest in the Partnership and by Unitholders having, in the
aggregate, at least a 5% profits interest. Only one judicial proceeding will
go forward, however, and each Unitholder with an interest in the outcome may
participate.
The Unitholders will generally be required to treat Partnership items
on their federal income tax returns in a manner consistent with the treatment
of the items on the Partnership information return. In general, that
consistency requirement is waived if the Unitholder files a statement with the
IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the Unitholder to the treatment on the Partnership
return. Even if the consistency requirement is waived, adjustments to the
Unitholder's tax liability with respect to Partnership items may result from an
audit of the Partnership's or the Unitholder's tax return. Intentional or
negligent disregard of the consistency requirement may subject a Unitholder to
substantial penalties.
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Information Return Filing Requirements
A Preference Unitholder who sells or exchanges Preference Units is
required to notify the Partnership in writing of such sale or exchange, and the
Partnership is required to notify the IRS of such transaction and to furnish
certain information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker. In
addition, a transferor and a transferee of a Preference Unit will be required
to furnish to the IRS the amount of the consideration received for such
Preference Unit that is allocated to goodwill or going concern value of the
Partnership. Failure to satisfy such reporting obligations may lead to the
imposition of substantial penalties.
Nominee Reporting
Persons who hold an interest in the Partnership as a nominee for
another person must report certain information to the Partnership. Temporary
Treasury Regulations provide that such information should include (i) the name,
address and taxpayer identification number of the beneficial owners and the
nominee; (ii) whether the beneficial owner is (a) a person that is not a United
States person, (b) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing, or (c) a
tax-exempt entity; (iii) the amount and description of Preference Units held,
acquired or transferred for the beneficial owners; and (iv) certain information
including the dates of acquisitions and transfers, means of acquisitions and
transfers, and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are required to
furnish additional information, including whether they are a United States
person and certain information on Preference Units they acquire, hold or
transfer for their own account. A penalty of $50 per failure (up to a maximum
of $100,000 per calendar year) is imposed for failure to report such
information to the Partnership. The nominee is required to supply the
beneficial owner of the Preference Units with the information furnished to the
Partnership.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary
of the Treasury. The temporary Treasury Regulations interpreting the tax
shelter registration provisions of the Code are extremely broad. Although it
is arguable that the Partnership will not be subject to the registration
requirement, the General Partner, as principal organizer of the Partnership,
has registered the Partnership as a tax shelter with the IRS in the absence of
assurance that the Partnership will not be subject to tax shelter registration
and in light of the substantial penalties which might be imposed if
registration is required and not undertaken. The Partnership has received a
tax shelter registration number from the IRS. ISSUANCE OF THE REGISTRATION
NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED
TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. The
Partnership must furnish the registration number to the Unitholders, and a
Unitholder who sells or otherwise transfers a Preference Unit in a subsequent
transaction must furnish the registration number to the transferee. The
penalty for failure of the transferor of a Preference Unit to furnish such
registration number to the transferee is $100 for each such failure. The
Unitholder must disclose the tax shelter registration number of the Partnership
on Form 8271 to be attached to the tax return on which any deduction, loss,
credit or other benefit generated by the Partnership is claimed or income of
the Partnership is included. A Unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for such
failure, will be subject to a $250 penalty for each such failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
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STATE AND OTHER TAXES
In addition to federal income taxes, Unitholders may be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Partners reside or in which the Partnership
or the Operating Partnerships do business or own property. Although an
analysis of those various taxes cannot be presented here, each prospective
Preference Unitholder should consider the potential impact of such taxes on his
investment in the Partnership. The Operating Partnerships own property and do
business in Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana,
Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, Nebraska, New Mexico,
North Dakota, Oklahoma, Oregon, South Dakota, Texas, Washington, Wisconsin,
Wyoming and Virginia. A Preference Unitholder will likely be required to file
state income tax returns in such states (other than Florida, South Dakota,
Texas and Wyoming) and may be subject to penalties for failure to comply with
such requirements. In addition, an obligation to file tax returns or to pay
taxes may arise in other states. Moreover, in certain states, tax losses may
not produce a tax benefit in the year incurred (if, for example, the Partner
has no income from sources within that state) and also may not be available to
offset income in subsequent taxable years. The General Partner is authorized
(but not required) to cause the Partnership to pay any state or local income
tax on behalf of all the Partners even though such payment may be greater than
the amount that would have been required to be paid if such payment had been
made directly by a particular Partner or assignee; provided, however, that such
tax payment shall be in the same amount with respect to each LP Unit and, in
the General Partner's sole discretion, payment of such tax on behalf of all the
Partners or assignees is in the best interests of the Partners or the assignees
as a whole. Any amount so paid on behalf of all Partners or assignees shall be
deducted as a cash operating expenditure of the Partnership in calculating
"Cash from Operations".
It is the responsibility of each prospective Preference Unitholder to
investigate the legal and tax consequences, under the laws of pertinent states
or localities, of his investment in the Partnership. Accordingly, each
prospective Preference Unitholder should consult, and must depend upon, his own
tax counsel or other advisor with regard to those matters. Further, it is the
responsibility of each Preference Unitholder to file all state and local, as
well as federal, tax returns that may be required of such Unitholder.
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is
subject to certain additional considerations because the investments of such
plans are subject to the fiduciary responsibility and prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and restrictions imposed by section 4975 of the Code. As used
herein, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
Simplified Employee Pension Plans, and tax deferred annuities or Individual
Retirement Accounts established or maintained by an employer or employee
organization. Among other things, consideration should be given to (a) whether
such investment is prudent under section 404(a)(1)(B) of ERISA; (b) whether in
making such investment such plan will satisfy the diversification requirement
of section 404(a)(1)(C) of ERISA; and (c) (i) the fact that such investment
could result in recognition of UBTI by such plan even if there is no net
income, (ii) the effect of an imposition of income taxes on the potential
investment return for an otherwise tax-exempt investor and (iii) whether, as a
result of the investment, the plan will be required to file an exempt
organization business income tax return with the IRS. See "Federal Income Tax
Considerations--Tax Treatment of Operations--Tax-Exempt Entities, Regulated
Investment Companies and Foreign Investors". The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary")
93
<PAGE> 95
should determine whether an investment in the Partnership is authorized by the
appropriate governing instrument and is a proper investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partner also would be a fiduciary of such plan and the Partnership
would be subject to the regulatory restrictions of ERISA, including its
prohibited transaction rules, as well as the prohibited transaction rules of
the Code.
Section 406 of ERISA and section 4975 of the Code (which also applies
to Individual Retirement Accounts which are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan. The Department of Labor issued final regulations on November 13,
1986, providing guidance with respect to whether the assets of an entity in
which employee benefit plans acquire equity interests would be deemed "plan
assets" under certain circumstances. Pursuant to these regulations, an
entity's assets would not be considered to be "plan assets" if, among other
things, (i) the equity interests acquired by employee benefit plans are
publicly offered securities, i.e., the equity interests are widely held by 100
or more investors independent of the issuer and each other, freely transferable
and registered pursuant to certain provisions of the federal securities laws,
(ii) the entity is an "operating company", i.e., it is primarily engaged in the
production or sale of a product or service other than the investment of capital
either directly or through a majority-owned subsidiary or subsidiaries, or
(iii) there is no significant investment by benefit plan investors, which is
defined to mean that less than 25% of the value of each class of equity
interest (disregarding certain interests held by the General Partner, its
affiliates and certain other persons) is held by employee benefit plans (as
defined in section 3(3) of ERISA), whether or not they are subject to the
provisions of Title I of ERISA, plans described in section 4975(3)(1) of the
Code, andy any entities whose underlying assets include plan assets by reason
of a plan's investments in the entity. The Partnership's assets would not be
considered "plan assets" under these regulations because it is expected that
the investment will satisfy the requirements in (i) above, and also may satisfy
requirements (ii) and (iii) above.
SELLING UNITHOLDER AND LP UNITS ELIGIBLE FOR FUTURE SALE
All of the Preference Units being offered by this Prospectus are being
offered for the account of KPL. After the sale of such Preference Units and
the exchange by KPL of 1,000,000 Preference Units for an equal number of
Preference B Units, KPL and its affiliates will hold, directly or indirectly,
1,150,000 Preference Units (assuming the Underwriters' over-allotment option is
not exercised), 1,000,000 Preference B Units and 3,160,000 Common Units in the
Partnership, representing all of the outstanding Preference B Units and Common
Units. KPL does not hold any Senior Preference Units.
The Preference Units sold in this offering will generally be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), except that any Preference
Units owned by an "affiliate" of the Partnership (as that term is defined in
the rules and regulations under the Securities Act) may not be resold publicly
except in compliance with the registration requirements of the Securities Act
or pursuant to an exemption therefrom under Rule 144 thereunder ("Rule 144") or
otherwise. Rule 144 permits securities acquired by an affiliate of the issuer
in an offering to be sold into the market in an amount that does not exceed,
during any three- month period, the greater of (i) 1% of the total number of
such securities outstanding and (ii) the average weekly trading volume for the
four calendar weeks prior to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Partnership.
94
<PAGE> 96
Kaneb and its affiliates have the right to cause the Partnership to
register under the Securities Act any LP Units that it or its affiliates own,
subject to certain limitations. Such right is assignable to purchasers of such
LP Units. Kaneb and any such assignee will pay the cost of any registration
that they request. In addition, Kaneb and its affiliates may sell their LP
Units in private transactions at any time.
The Partnership, the General Partner and Kaneb have agreed that, for a
period of 90 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any LP Units or any securities substantially similar to,
convertible into or exercisable or exchangeable for LP Units, or grant options
or warrants to purchase any LP Units or any securities substantially similar
to, convertible into or exercisable or exchangeable for LP Units, other than
the Preference Units offered by this Prospectus. Such agreement does not
include any such securities that may be issued by the Partnership to acquire
terminals or pipelines. See "Underwriting".
95
<PAGE> 97
UNDERWRITING
Upon the terms and subject to the conditions stated in the
Underwriting Agreement dated the date hereof, KPL has agreed to sell to each of
the Underwriters named below, and each of the Underwriters has severally agreed
to purchase from KPL, the number of Preference Units set forth opposite the
name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER PREFERENCE UNITS
- ----------- ----------------
<S> <C>
Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
several Underwriters to pay for and accept delivery of the Preference Units are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all Preference
Units offered by this Prospectus (other than those covered by the
over-allotment option described below) if any such Preference Units are taken.
The Underwriters propose to offer part of the Preference Units
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and part of such Preference Units to certain
dealers at such price less a concession not in excess of $ per Preference
Unit. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per Preference Unit to certain other dealers.
Prior to this offering, there has been no public market for the
Preference Units. The initial public offering price has been negotiated among
KPL and the Underwriters. Among the factors considered in determining the
initial public offering price of the Preference Units, in addition to
prevailing market conditions, were the historical performance of the
Partnership, the market price of the Senior Preference Units, the assets and
liabilities of the Partnership, the General Partner's estimates of the business
potential and earnings prospects of the Partnership, an assessment of the
Partnership's management and the consideration of the above factors in relation
to market valuation of companies and publicly traded limited partnerships in
related businesses.
The Partnership, the General Partner and Kaneb have agreed that, for a
period of 90 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any LP Units or any securities substantially similar to,
convertible into or exercisable or exchangeable for LP Units, or grant options
or warrants to purchase any LP Units or any securities substantially similar
to, convertible into or exercisable or exchangeable for LP Units, other than
the Preference Units offered by this Prospectus. Such agreement does not
include any such securities that may be issued by the Partnership to acquire
terminals or pipelines.
KPL has granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 325,000 additional
Preference Units at the price to public set forth on the cover page of this
Prospectus minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with the offering of the Preference Units offered by this
Prospectus. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Preference Units as the number of Preference
Units set forth opposite each Underwriter's name in the preceding table bears
to the total number of Preference Units listed in such table.
96
<PAGE> 98
An application for listing will be filed with the NYSE with respect to
the Preference Units. To meet one of the requirements for listing the
Preference Units on the NYSE, the Underwriters have undertaken to sell lots of
100 or more Preference Units to a minimum of 2,000 beneficial holders.
As the National Association of Securities Dealers, Inc. ("NASD") views
the Preference Units offered by this Prospectus as interest in a direct
participation program, the offering is being made in compliance with Article
III, Section 34 of the NASD's Rules of Fair Practice. Investor suitability
with respect to the Preference Units should be judged similarly to the
suitability of other securities that are listed for trading on a national
securities exchange. The Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority without the prior
written approval of the transaction by the customer.
Kaneb, the Partnership and KPL have agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act.
97
<PAGE> 99
LEGAL
Certain legal matters in connection with the Preference Units will be
passed upon by Fulbright & Jaworski L.L.P., Houston, Texas, as counsel for
Kaneb. Certain legal matters in connection with the Preference Units will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas, as
counsel for the Underwriters.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report on Form 10-K of Kaneb Pipe Line Partners, L.P. for the
year ended December 31, 1994 have been so incorporated, and the financial
statements as of December 31, 1994 and 1993 and for each of the three years in
the period ended December 31, 1994 included in this Prospectus have been so
included, in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The audited historical financial statements of Wyco Pipe Line Company
which appear in the Form 8-K of Kaneb Pipe Line Partners, L.P. dated March 13,
1995 have been so incorporated in this Prospectus by reference in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
GLOSSARY
"Available Cash" means with respect to any calendar quarter, (i) the
sum of (a) all cash receipts of the Partnership during such quarter from all
sources (including distributions of cash received from subsidiaries) and (b)
any reduction in reserves established in prior quarters, less (ii) the sum of
(aa) all cash disbursements of the Partnership during such quarter, including,
without limitation, disbursements for operating expenses, taxes on the
Partnership as an entity or paid by the Partnership on behalf of, or amounts
withheld with respect to, all but not less than all of the Unitholders, if any,
debt service (including the payment of principal, premium and interest),
capital expenditures and contributions, if any, to a subsidiary corporation or
partnership (but excluding cash distributions to Unitholders and to KPL), (bb)
any reserves established in such quarter in such amounts as the General Partner
shall determine to be necessary or appropriate in its reasonable discretion (x)
to provide for the proper conduct of the business of the Partnership (including
reserves for future capital expenditures) or (y) to provide funds for
distributions with respect to any of the next four calendar quarters and (cc)
any other reserves established in such quarter in such amounts as the General
Partner determines in its reasonable discretion to be necessary because the
distribution of such amounts would be prohibited by applicable law or by any
loan agreement, security agreement, mortgage, debt instrument or other
agreement or obligation to which the Partnership is a party or by which it is
bound or its assets are subject. Taxes paid by the Partnership on behalf of,
or amounts withheld with respect to, less than all of the Unitholders shall not
be considered cash disbursements of the Partnership that reduce "Available
Cash". Notwithstanding the foregoing, "Available Cash" shall not include any
cash receipts or reductions in reserves or take into account any disbursements
made or reserves established after commencement of the dissolution and
liquidation of the Partnership.
"Barrel Mile" means the movement of one barrel of refined petroleum
product one mile.
"Cash from Interim Capital Transactions" means cash receipts of the
Partnership determined by the General Partner to be from Interim Capital
Transactions in accordance with the terms of the Partnership Agreement.
98
<PAGE> 100
"Cash from Operations" means, at any date but prior to the
commencement of the dissolution and liquidation of the Partnership, on a
cumulative basis, all cash receipts of the Partnership plus $3,526,000
(excluding any cash proceeds from any Interim Capital Transactions (as defined
below) or Terminating Capital Transactions (as defined in "Distributions of
Cash Upon Liquidation")) during the period since the commencement of operations
by the Partnership through such date, less the sum of (a) all cash operating
expenditures of the Partnership during such period including, without
limitation, taxes imposed on the Partnership as an entity or taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all but not less
than all of the Unitholders, if any, (b) all cash debt service payments of the
Partnership during such period (other than payments or prepayments of principal
and premium required by reason of loan agreements (including covenants and
default provisions therein) or by lenders, in each case in connection with
sales or other dispositions of assets or made in connection with refinancings
or refundings of indebtedness, provided that any payment or prepayment of
principal, whether or not then due, shall be determined at the election and in
the discretion of the General Partner, to be refunded or refinanced by any
indebtedness incurred or to be incurred by the Partnership simultaneously with
or within 180 days prior to or after such payment or prepayment to the extent
of the principal amount of such indebtedness so incurred), (c) all cash capital
expenditures of the Partnership during such period (other than (i) cash capital
expenditures made to increase the throughput or deliverable capacity or
terminaling capacity (assuming normal operating conditions, including down-time
and maintenance) of the assets of the Partnership, taken as a whole, from the
throughput or deliverable capacity or terminaling capacity (assuming normal
operating conditions, including down-time and maintenance) existing immediately
prior to such capital expenditures and (ii) cash expenditures made in payment
of transaction expenses relating to Interim Capital Transactions), (d) an
amount equal to revenues collected pursuant to a rate increase that are subject
to possible refund, (e) any additional reserves outstanding as of such date
which the General Partner determines in its reasonable discretion to be
necessary or appropriate to provide for the future cash payment of items of the
type referred to in (a) through (c) above, and (f) any reserves that the
General Partner determines to be necessary or appropriate in its reasonable
discretion to provide funds for distributions with respect to any one or more
of the next four calendar quarters, all as determined on a consolidated basis
and after elimination of intercompany items and KPL's general partner interest
in KPOP. Where cash capital expenditures are made in part to increase the
throughput or deliverable capacity or terminaling capacity and in part for
other purposes, the General Partner's good faith allocation thereof between the
portion increasing capacity and the portion for other purposes shall be
conclusive. Taxes paid by the Partnership on behalf of, or amounts withheld
with respect to, less than all of the Unitholders shall not be considered cash
operating expenditures of the Partnership that reduce "Cash from Operations".
"Common Unit" means one of that certain class of LP Units with those
special rights and obligations specified in the Partnership Agreement as being
appurtenant to a "Common Unit".
"East Pipeline" means KPOP's 2,075 mile integrated pipeline system and
the 16 associated terminals.
"First Target Distribution" means $0.60 per LP Unit per calendar
quarter, subject to adjustment as described under "Cash
Distributions--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels".
"General Partner" means Kaneb Pipe Line Company, a Delaware
corporation.
"Interim Capital Transactions" means (a) borrowings and sales of debt
securities (other than for working capital purposes and other than for items
purchased on open account in the ordinary course of business) by the
Partnership, (b) sales of partnership interests by the Partnership and (c)
sales or other voluntary or involuntary dispositions of any assets of the
Partnership (other than
99
<PAGE> 101
(x) sales or other dispositions of inventory in the ordinary course of
business, (y) sales or other dispositions of other current assets including
receivables and accounts or (z) sales or other dispositions of assets as a part
of normal retirements or replacements), in each case prior to the commencement
of the dissolution and liquidation of the Partnership.
"Kaneb" means Kaneb Services, Inc., a Delaware corporation.
"KPL" means Kaneb Pipe Line Company, a Delaware corporation.
"KPOP" means Kaneb Pipe Line Operating Partnership, L.P., a Delaware
limited partnership.
"LP Units" means Senior Preference Units, Preference Units, Preference
B Units and Common Units.
"MBbl" means thousand barrels.
"Minimum Quarterly Distribution" means $0.55 per LP Unit per calendar
quarter, subject to adjustment as described under "Cash
Distributions--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels".
"Note Purchase Agreements" means the agreements among KPOP, the
Partnership, STOP, STI and STS and various insurance companies providing for
the purchase by such insurance companies of $33 million of notes of STI and $27
million of notes of KPOP.
"Operating Partnership Agreements" means the Agreements of Limited
Partnership of the Operating Partnerships.
"Operating Partnerships" means KPOP and STOP.
"Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Partnership.
"Partnership" means Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership.
"Pipelines" means the East Pipeline and the West Pipeline.
"Preference Period" means the period ending effective as of the end of
the calendar quarter as to which each of the following conditions is met: (i)
the Partnership shall have distributed to all Unitholders in respect of such
calendar quarter and each of the 11 full consecutive preceding calendar
quarters Available Cash that constitutes Cash from Operations in an amount at
least equal to the Minimum Quarterly Distribution, and (ii) as of such date,
the sum of (A) plus (B) is less than an amount equal to $45 million, plus 80%
of the aggregate expansive capital expenditures since the inception of the
Partnership greater than $45 million, where (A) is equal to the outstanding
principal balance as of such date of the Partnership's consolidated
indebtedness (excluding borrowings for working capital purposes) and (B) is
equal to the amount of revenues collected by the Partnership that (x) are then
subject to possible refund under a pending rate case and (y) are not maintained
by the Partnership in a separate reserve fund.
"Preference B Unit" means one of that certain class of LP Units with
those special rights and obligations specified in the Partnership Agreement as
being appurtenant to a "Preference B Unit".
100
<PAGE> 102
"Preference Unit" means one of that certain class of LP Units with
those special rights and obligations specified in the Partnership Agreement as
being appurtenant to a "Preference Unit".
"Second Target Distribution" means $0.65 per LP Unit, subject to
adjustment as described under "Cash Distributions--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels".
"Senior Preference Unit" means one of that certain class of LP Units
with those special rights and obligations specified in the Partnership
Agreement as being appurtenant to a "Senior Preference Unit".
"Single use pipelines" means the pipelines located in Umatilla, Oregon
and Rawlins, Wyoming, which supply diesel fuel to Union Pacific Railroad
facilities and were acquired by the Partnership from Calnev Pipe Line Company
in October 1991 and the pipeline located at Pasco, Washington, which supplies
diesel fuel to the Burlington Northern Railroad and which was constructed by
the Partnership in 1993.
"ST" means the terminal business of ST Terminals, Inc. formerly owned
by an affiliate of W.R. Grace, as continued by the Partnership through its
subsidiaries.
"STI" means StanTrans, Inc., a Delaware corporation.
"STOP" means Support Terminals Operating Partnership, L.P., a Delaware
limited partnership.
"STS" means Support Terminal Services, Inc., a Delaware corporation.
"Third Target Distribution" means $0.70 per LP Unit, subject to
adjustment as described under "Cash Distributions--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels".
"Unitholder" means a person who holds LP Units.
"West Pipeline" means the pipeline assets formerly owned by Wyco Pipe
Line Company, as continued by the Partnership through its subsidiaries.
101
<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets -- December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Statements of Income - Three Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . F-14
Condensed Consolidated Balance Sheets - March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . F-15
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Notes to Interim Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED):
Pro Forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
Pro Forma Consolidated Statements of Income - Three Months Ended March 31, 1995 . . . . . . . . . . . . . . . . F-19
Pro Forma Consolidated Statements of Income - Year Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . F-20
Notes to Pro Forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
</TABLE>
F-1
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kaneb Pipe Line Partners, L.P.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of partners' capital
present fairly, in all material respects, the financial position of Kaneb Pipe
Line Partners, L.P. and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 16, 1995
F-2
<PAGE> 105
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 78,745 $ 69,235 $ 42,179
----------------- ----------------- -----------------
Costs and expenses:
Operating costs . . . . . . . . . . . . 33,586 29,012 14,507
Depreciation and amortization . . . . . 7,257 6,135 4,124
General and administrative . . . . . . . 4,924 4,673 2,752
----------------- ----------------- -----------------
Total costs and expenses . . . . . . . 45,767 39,820 21,383
----------------- ----------------- -----------------
Operating income . . . . . . . . . . . . . 32,978 29,415 20,796
Interest and other income . . . . . . . . . 1,299 1,331 1,721
Interest expense . . . . . . . . . . . . . (3,706) (3,376) (2,338)
----------------- ----------------- -----------------
Income before minority
interest and income taxes . . . . . . . . 30,571 27,370 20,179
Minority interest in net income . . . . . . (295) (266) (200)
Income tax provision . . . . . . . . . . . (818) (450) -
----------------- ----------------- -----------------
Net income . . . . . . . . . . . . . . . . 29,458 26,654 19,979
General partner's interest
in net income . . . . . . . . . . . . . . (295) (266) (200)
----------------- ----------------- -----------------
Limited partners' interest
in net income . . . . . . . . . . . . . . $ 29,163 $ 26,388 $ 19,779
================= ================= =================
Allocation of net income per Senior
Preference Unit . . . . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 106
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1994 1993
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 4,145 $ 15,061
Accounts receivable . . . . . . . . . . . . . . . . . . . . 5,605 4,504
Current portion of receivable from general partner . . . . . 2,241 1,954
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 1,924 1,667
----------------- -----------------
Total current assets . . . . . . . . . . . . . . . . . . . 13,915 23,186
----------------- -----------------
Receivable from general partner, less current portion . . . . . 3,544 5,785
----------------- -----------------
Property and equipment . . . . . . . . . . . . . . . . . . . . 214,556 195,048
Less accumulated depreciation . . . . . . . . . . . . . . . . . 68,910 61,612
----------------- -----------------
Net property and equipment . . . . . . . . . . . . . . . . 145,646 133,436
----------------- -----------------
$ 163,105 $ 162,407
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . $ 1,548 $ 3,850
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 4,007 3,093
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 2,052 1,725
Accrued distributions payable . . . . . . . . . . . . . . . 7,240 7,240
Deferred terminaling fees . . . . . . . . . . . . . . . . . 1,641 1,600
Payable to general partner . . . . . . . . . . . . . . . . . 786 493
----------------- -----------------
Total current liabilities . . . . . . . . . . . . . . . . 17,274 18,001
----------------- -----------------
Long-term debt, less current portion . . . . . . . . . . . . . 43,265 41,814
----------------- -----------------
Other liabilities and deferred taxes . . . . . . . . . . . . . 1,820 991
----------------- -----------------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . 992 1,003
----------------- -----------------
Partners' capital:
Senior preference unitholders . . . . . . . . . . . . . . . 47,288 47,288
Preference unitholders . . . . . . . . . . . . . . . . . . . 45,247 45,247
Common unitholders . . . . . . . . . . . . . . . . . . . . . 6,227 7,060
General partner . . . . . . . . . . . . . . . . . . . . . . 992 1,003
----------------- -----------------
Total partners' capital . . . . . . . . . . . . . . . . . 99,754 100,598
----------------- -----------------
$ 163,105 $ 162,407
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 107
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1993 1992
------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 29,458 $ 26,654 $ 19,979
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 7,257 6,135 4,124
Minority interest in net income . . . . . . . . . . . . 295 266 200
Deferred income taxes . . . . . . . . . . . . . . . . . 626 414 -
Changes in working capital components:
Accounts receivable . . . . . . . . . . . . . . . . . (1,101) 2,873 2,282
Prepaid expenses . . . . . . . . . . . . . . . . . . . (257) (954) (125)
Accounts payable and accrued expenses . . . . . . . . 1,282 1,874 (302)
Payable to general partner . . . . . . . . . . . . . . 293 (78) 430
------------- -------------- --------------
Net cash provided by operating activities . . . . . 37,853 37,184 26,588
------------- -------------- --------------
Investing activities:
Terminal acquisitions . . . . . . . . . . . . . . . . . . (12,320) - -
Capital expenditures . . . . . . . . . . . . . . . . . . . (7,147) (8,132) (3,183)
Acquisition of Support Terminal Services, Inc. . . . . . . - (62,677) (2,500)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 242 365
------------- -------------- --------------
Net cash used by investing activities . . . . . . . (19,264) (70,567) (5,318)
------------- -------------- --------------
Financing activities:
Changes in receivable from general partner . . . . . . . . 1,954 1,704 1,486
Proceeds from issuance of partnership units . . . . . . . - 53,159 -
Issuance of long-term debt . . . . . . . . . . . . . . . . 41,350 86,300 5,100
Payments of long-term debt . . . . . . . . . . . . . . . . (42,201) (62,677) (1,027)
Distributions:
Senior preference unitholders . . . . . . . . . . . . . (15,950) (13,475) (11,000)
Preference unitholders . . . . . . . . . . . . . . . . . (12,308) (19,286) (14,978)
Common unitholders . . . . . . . . . . . . . . . . . . . (1,738) - -
General partner and minority interest . . . . . . . . . (612) (669) (530)
------------- -------------- --------------
Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . . . . . (29,505) 45,056 (20,949)
------------- -------------- --------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . (10,916) 11,673 321
Cash at beginning of period . . . . . . . . . . . . . . . . . 15,061 3,388 3,067
------------- -------------- --------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . $ 4,145 $ 15,061 $ 3,388
============= ============== ==============
Supplemental information - Cash paid for interest . . . . . . $ 3,470 $ 3,375 $ 2,338
============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 108
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
SENIOR
PREFERENCE PREFERENCE COMMON GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER TOTAL
----------- ----------- ----------- ------- -----
<S> <C> <C> <C> <C> <C>
Partners' capital of January 1, 1992 . . $ 23,934 $ 27,047 $ 10,319 $ 618 $ 61,918
1992 income allocation . . . . . . . . 11,000 14,978 (6,199) 200 19,979
Distributions declared . . . . . . . . (11,000) (14,978) - (262) (26,240)
----------- ----------- ----------- -------- -----------
Partners' capital at
December 31, 1992 . . . . . . . . . . 23,934 27,047 4,120 556 55,657
1993 income allocation . . . . . . . . 14,342 19,286 (7,240) 266 26,654
Allocation of proceeds from
issuance of partnership units . . . . 23,354 18,200 10,180 524 52,258
Distributions declared . . . . . . . . (14,342) (19,286) - (343) (33,971)
----------- ----------- ----------- -------- -----------
Partners' capital
at December 31, 1993 . . . . . . . . 47,288 45,247 7,060 1,003 100,598
1994 income allocation . . . . . . . . 15,950 12,308 905 295 29,458
Distributions declared . . . . . . . . (15,950) (12,308) (1,738) (306) (30,302)
----------- ----------- ----------- -------- -----------
Partners' capital at
December 31, 1994 . . . . . . . . . . $ 47,288 $ 45,247 $ 6,227 $ 992 $ 99,754
=========== =========== =========== ======== ===========
Limited Partnership Units
outstanding at December 31, 1992 . . . 5,000 5,650 3,160 (a) 13,810
Limited Partnership Units
issued in 1993 . . . . . . . . . . . . 2,250 - - - 2,250
----------- ----------- ----------- -------- -----------
Limited Partnerships Units
outstanding at December 31, 1994
and 1993 . . . . . . . . . . . . . . . 7,250(b) 5,650 3,160 (a) 16,060
=========== =========== =========== ======== ===========
</TABLE>
_________
(a) Kaneb Pipe Line Company owns a 1% interest in Kaneb Pipe Line Partners,
L.P. as General Partner.
(b) The partnership agreement allows for an additional issuance of up to 7.8
million Senior Preference Units.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 109
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("Partnership"), a master limited
partnership, owns and operates a refined petroleum products pipeline business.
The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P.
("KPOP"), a limited partnership in which the Partnership holds a 99% interest
as limited partner. Kaneb Pipe Line Company ("Company"), a wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1%
general partner interest in both the Partnership and KPOP. The Company's 1%
interest in KPOP is reflected as the minority interest in the financial
statements.
Effective March 1, 1993, the Partnership acquired Support Terminal
Services, Inc. ("ST"), a petroleum products and specialty liquids storage and
terminaling company headquartered in Dallas, Texas, for approximately $65
million. The acquisition was accounted for as a purchase, and, accordingly,
the Partnership's consolidated statement of income includes the results of
operations of ST since March 1, 1993. In connection with the acquisition, the
Partnership borrowed $65 million from a group of banks, which was partially
repaid with $50.8 million of the proceeds from a Senior Preference Unit ("SPU")
offering.
In April 1993, the Partnership completed a public offering of 2.25
million SPU at $25.25 per unit. The net proceeds from the offering of $52.8
million was allocated among the equity accounts of the unitholders, general
partner and minority interest based on the ownership percentages of the
partnership subsequent to the offering. The Partnership believes that this
allocation approximates the distribution of the net assets upon liquidation,
assuming the Partnership was liquidated at net book value. However, the actual
distribution of the net assets upon liquidation could be significantly
different as a result of the fair market value of the net assets being
substantially different than the net book value of the Partnership's assets in
the accompanying financial statements.
The SPUs represent an approximate 44% ownership interest in the
Partnership. The Company owns an approximate 52% interest as limited partner
in the form of Preference Units and Common Units, and as the general partner
owns a combined 2% interest. An approximate 2% ownership interest in the form
of 60,500 Preference Units and 154,000 Common Units is held by officers of
Kaneb.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the
Partnership in the preparation of the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Partnership's policy is to invest cash in highly liquid investments
with maturities of three months or less, upon purchase. Accordingly,
uninvested cash balances are kept at minimum levels. Such investments are
valued at cost, which approximates market, and are classified as cash
equivalents.
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
F-7
<PAGE> 110
of property and equipment is provided on a straight-line basis at rates based
upon expected useful lives of various classes of assets. The rates used for
pipeline and storage facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.
REVENUE AND INCOME RECOGNITION
KPOP provides pipeline transportation of refined petroleum products and
liquified petroleum gases. Revenue is recognized upon receipt of the products
into the pipeline system.
ST provides terminaling and other ancillary services. Fees are billed
one month in advance and are reported as deferred income. Revenue is
recognized in the month services are provided.
ENVIRONMENTAL MATTERS
The operations of the Partnership are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Partnership believes that its operations are in general compliance with
applicable environmental regulation, risks of additional costs and liabilities
are inherent in pipeline and terminal operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the Partnership.
Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations of
the Partnership, could result in substantial costs and liabilities to the
Partnership.
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. Generally, the timing of these accruals coincides
with the completion of a feasibility study or the Partnership's commitment to a
formal plan of action.
The Company has indemnified the Partnership against liabilities for
damage to the environment resulting from operations of the pipeline prior to
October 3, 1989 (date of formation of the Partnership). The indemnification
does not extend to any liabilities that arise after such date to the extent
that the liabilities result from changes in environmental laws and regulations.
In addition, ST's former owner has agreed to indemnify the Partnership against
liabilities for damages to the environment from operations conducted by
the former owner prior to March 2, 1993. The indemnity, which expires
March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000
until an aggregate amount of $10 million has been paid by ST's former owner.
The Partnership has recorded a reserve for environmental claims in the amount
of $1.0 million at December 31, 1994 in other liabilities on the accompanying
balance sheet.
INCOME TAX CONSIDERATIONS
Income before income tax expense is made up of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Partnership operations . . . . . . . . . $ 28,237,000 $ 26,088,000 $ 19,979,000
Corporation operations . . . . . . . . . 2,039,000 1,016,000 -
----------------- ----------------- -----------------
$ 30,276,000 $ 27,104,000 $ 19,979,000
================= ================= =================
</TABLE>
The Partnership is not subject to federal and state income taxes.
However, certain operations of ST are conducted through wholly-owned
subsidiaries which are taxable entities. The provision for income taxes for
the periods ended December 31, 1994 and 1993 consists of deferred U.S. federal
F-8
<PAGE> 111
income taxes of $.6 million and $.4 million, respectively, and current federal
income taxes of $.2 million in 1994.
Since the income or loss of the operations which are conducted through
limited partnerships will be included in the tax return of the individual
partners of the Partnership, no provision for income taxes has been recorded in
the accompanying financial statements on these earnings. The tax returns of
the Partnership are subject to examination by federal and state taxing
authorities. If such examination results in adjustments to distributive shares
of taxable income or loss, the tax liability of the partners would be adjusted
accordingly.
The tax attributes of the Partnership's net assets flow directly to
each individual partner. Individual partners will have different investment
bases depending upon the timing and prices of acquisition of partnership units.
Further, each partner's tax accounting, which is partially dependent upon their
individual tax position, may differ from the accounting followed in the
financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and their proportionate share of the
net assets reported in the financial statements. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," requires disclosure
by a publicly held partnership of the aggregate difference in the basis of its
net assets for financial and tax reporting purposes. Management does not
believe that, in the Partnership's circumstances, the aggregate difference would
be meaningful information.
ALLOCATION OF NET INCOME AND EARNINGS PER SENIOR PREFERENCE UNIT
Net income is allocated to the limited partnership units in an amount
equal to the cash distributions declared for each reporting period and any
remaining income or loss is allocated to the class of units that did not
receive full distributions. If full distributions are declared to all classes
of units, income will be allocated pro rata based on the aggregate amount of
distributions declared.
Earnings per SPU are calculated by dividing the amount of net income
allocated to the SPUs by the weighted average number of SPUs outstanding.
CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its Available
Cash, as defined in the Partnership Agreement, to holders of limited
partnership units ("Unitholders") and the Company. Available Cash consists
generally of all the cash receipts of the Partnership plus the beginning cash
balance less all of its cash disbursements and reserves. The Partnership
expects to make distributions of Available Cash for each quarter of not less
than $.55 per Senior Preference Unit (the "Minimum Quarterly Distribution"), or
$2.20 per Senior Preference Unit on an annualized basis, for the foreseeable
future, although no assurance is given regarding such distributions. The
Partnership expects to make distributions of all Available Cash within 45 days
after the end of each quarter to holders of record on the applicable record
date. A distribution of $2.20 per unit was paid to Senior Preference
Unitholders in 1994, 1993 and 1992. During 1994, 1993 and 1992, the
Partnership paid distributions of $2.20, $3.41 (includes $1.21 of arrearage
payments) and $2.65 (includes $.45 of arrearage payments), respectively, to the
Preference Unitholders. During 1994, the Partnership paid distributions of
$.55 per unit to the Common Unitholders. As of December 31, 1994, no
arrearages existed on any class of partnership interest.
Distributions by the Partnership of its Available Cash are made 99% to
Unitholders and 1% to the Company, subject to the payment of incentive
distributions to the General Partner if certain target levels of cash
distributions to the Unitholders are achieved. The distribution of Available
Cash for each quarter within the Preference Period, as defined, is subject to
the preferential rights of the holders of the Senior Preference Units to
receive the Minimum Quarterly Distribution for such quarter, plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters, before any
F-9
<PAGE> 112
distribution of Available Cash is made to holders of Preference Units or Common
Units for such quarter. In addition, for each quarter within the Preference
Period, the distribution of any amounts to holders of Common Units is subject to
the preferential rights of the holders of the Preference Units to receive the
Minimum Quarterly Distribution for such quarter, plus any arrearages in the
payment of the Minimum Quarterly Distribution for prior quarters. The Common
Units are not entitled to arrearages in the payment of the Minimum Quarterly
Distribution. In general, the Preference Period will continue indefinitely
until the Minimum Distribution has been paid to the holders of the Senior
Preference Units, the Preference Units and the Common Units for twelve
consecutive quarters. Prior to the end of the Preference Period, 2,650,000 of
the Preference Units shall be converted into Senior Preference Units on a
one-for-one basis if the Third Target Distribution, as defined, is paid to all
Unitholders for four full consecutive quarters. The Third Target distribution
is reached when distributions of Available Cash equals $2.80 per Limited Partner
("LP") Unit on an annualized basis. After the Preference Period ends all
differences and distinctions between the three classes of units for the purposes
of cash distributions will cease.
3. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE DECEMBER 31, DECEMBER 31,
(YEARS) 1994 1993
---------- ----------------- -----------------
<S> <C> <C> <C>
Land . . . . . . . . . . . . . . . . . . . - $ 4,442,000 $ 3,883,000
Buildings . . . . . . . . . . . . . . . . . 35 3,659,000 3,282,000
Furniture and fixtures . . . . . . . . . . 16 1,493,000 1,382,000
Transportation equipment . . . . . . . . . 6 1,193,000 1,928,000
Machinery and equipment . . . . . . . . . . 20 - 40 21,967,000 20,372,000
Pipeline and terminaling equipment . . . . 20 - 40 156,990,000 140,532,000
Pipeline equipment under
capitalized lease . . . . . . . . . . . . 20 - 40 21,901,000 21,632,000
Construction work-in-progress . . . . . . . - 2,911,000 2,037,000
----------------- -----------------
Total . . . . . . . . . . . . . . . . . . $ 214,556,000 $ 195,048,000
================= =================
</TABLE>
4. LONG-TERM DEBT AND LEASES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
----------------- -----------------
<S> <C> <C>
Term loan . . . . . . . . . . . . . . . . . $ 33,000,000 $ 32,500,000
Obligation under capital lease . . . . . . 11,813,000 13,164,000
----------------- -----------------
Total long-term debt . . . . . . . . . . 44,813,000 45,664,000
Less current portion . . . . . . . . . . 1,548,000 3,850,000
----------------- -----------------
Long-term debt, less current portion . . $ 43,265,000 $ 41,814,000
================= =================
</TABLE>
In 1994, a wholly-owned subsidiary of the Partnership issued $33
million of first mortgage notes ("Notes") to a group of insurance companies.
The Notes bear interest at the rate of 8.05% per annum and are due on December
22, 2001. In 1994, a wholly-owned subsidiary entered into a Restated Credit
Agreement with a group of banks that provides a $15 million revolving credit
facility through November 30, 1997. The credit facility bears interest at
variable interest rates and has a
F-10
<PAGE> 113
commitment fee of .2% per annum of the unused credit facility. No amounts were
drawn under the credit facility at December 31, 1994. The Notes and credit
facility are secured by a mortgage on substantially all of the pipeline assets
of the Partnership and contain certain financial and operational covenants.
The following is a schedule by years of future minimum lease payments
under capital and operating leases together with the present value of net
minimum lease payments for capital leases as of December 31, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE (A) LEASES
----------------- -----------------
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,080,000 $ 738,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 589,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 360,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198,000 332,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 319,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . - 2,171,000
----------------- -----------------
Total minimum lease payments . . . . . . . . . . . . . . . . $ 16,438,000 $ 4,509,000
=================
Less amount representing interest . . . . . . . . . . . . . . 4,625,000
-----------------
Present value of net minimum lease payments . . . . . . . . . 11,813,000
Less current portion . . . . . . . . . . . . . . . . . . . . 1,548,000
-----------------
Total obligation under capital lease,
less current portion . . . . . . . . . . . . . . . . . . . $ 10,265,000
=================
</TABLE>
_________
(a) The capital lease is secured by certain pipeline equipment and the
Partnership has accrued its option to purchase this equipment at the
termination of the lease.
Total rent expense under operating leases amounted to $.9 million, $.9
million and $.2 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
KPOP and the Company entered into a payment priority agreement related
to the capital lease obligation for pipeline equipment under which the Company
is primarily liable for rental payments of approximately $2.9 million per year
through April 1997 and KPOP is primarily liable for the remaining rental
payments. KPOP has recorded a receivable of $5.8 million at December 31, 1994
from the Company for the present value of these future lease payments. This
receivable bears interest at an annual rate of 13.8%, which reflects the
imputed interest rate on the capital lease. KPOP recorded interest income of
$.9 million, $1.2 million and $1.4 million from the Company on this receivable
balance for the periods ended December 31, 1994, 1993 and 1992, respectively.
The amount of the capital lease obligation that exceeds the receivable from the
Company ($6.0 million at December 31, 1994) represents the present value of the
lease obligation and purchase option due subsequent to April 1997.
The Partnership believes that the carrying value of the notes
represents their estimated fair value as the notes were issued in December 1994
and that it is not practicable to estimate the fair value of the capital lease
obligation and the associated receivable from the general partner.
F-11
<PAGE> 114
5. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by the
Company. The Company and Kaneb are entitled to reimbursement of all direct and
indirect costs related to the business activities of the Partnership. These
costs, which totaled $9.0 million, $8.7 million and $7.2 million for the years
ended December 31, 1994, 1993 and 1992, respectively, include compensation and
benefits paid to officers and employees of the Company and Kaneb, insurance
premiums, general and administrative costs, tax information and reporting
costs, legal and audit fees. Included in this amount is $7.0 million, $7.0
million and $6.3 million of compensation and benefits, including pension costs,
paid to officers and employees of the Company for the periods ended December
31, 1994, 1993 and 1992, respectively, which represent the actual amounts paid
by the Company or Kaneb. In addition, the Partnership paid $.2 million during
each of these respective periods for an allocable portion of the Company's
overhead expenses. At December 31, 1994 and 1993, the Partnership owed the
Company $.8 million and $.5 million, respectively, for these expenses which are
due under normal invoice terms.
6. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1994 and 1993 are summarized as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------- --------------- ---------------- --------------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
1994:
Revenues . . . . . . . . . . . . $ 18,434 $ 18,773 $ 20,718 $ 20,820
================ =============== ================ =============
Operating income . . . . . . . . $ 7,218 $ 8,107 $ 9,099 $ 8,554
================ =============== ================ =============
Net income . . . . . . . . . . . $ 6,379 $ 7,289 $ 8,067 $ 7,723
================ =============== ================ =============
Allocation of net income per
Senior Preference Unit . . . . $ .55 $ .55 $ .55 $ .55
================ =============== ================ =============
1993:
Revenues . . . . . . . . . . . . $ 12,094 $ 18,125 $ 18,515 $ 20,501
================ =============== ================ ==============
Operating income . . . . . . . . $ 4,817 $ 7,484 $ 7,438 $ 9,676
================ =============== ================ =============
Net income . . . . . . . . . . . $ 4,021 $ 6,671 $ 6,914 $ 9,048
================ =============== ================ =============
Allocation of net income per
Senior Preference Unit . . . . $ .55 $ .55 $ .55 $ .55
================ =============== ================ =============
</TABLE>
7. SUBSEQUENT EVENT
Effective February 24, 1995, the Partnership, through KPOP, acquired
the refined petroleum product pipeline assets of Wyco Pipe Line Company (the
"West Pipeline") for $27.1 million. The acquisition was financed by the
issuance of first mortgage notes to three insurance companies which are due
February 24, 2002 and bear interest at the rate of 8.37% per annum. The
acquisition will be accounted for as a purchase and, accordingly, the results
of operations of the West Pipeline will be included in the Partnership's
consolidated statement of income subsequent to the date of acquisition.
The following summarized unaudited pro forma consolidated results of operations
for years ended December 31, 1994 and 1993, assume the acquisition occurred as
of the beginning of the period
F-12
<PAGE> 115
presented. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
might have resulted had the combination been in effect at the dates indicated,
or which may occur in the future.
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,439,000 $ 80,831,000
================ ================
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,245,000 $ 28,932,000
================ ================
Allocation of net income per Senior Preference Unit . . . . . . . . . . $ 2.20 $ 2.20
================ ================
</TABLE>
F-13
<PAGE> 116
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,382 $ 18,434
----------- -----------
Costs and expenses:
Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,558 8,180
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 2,011 1,736
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . 1,187 1,300
----------- -----------
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . 11,756 11,216
----------- -----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,626 7,218
Other income, net (principally interest) . . . . . . . . . . . . . . . . . . 231 345
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,375) (871)
----------- -----------
Income before minority interest
and income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,482 6,692
Minority interest in net income . . . . . . . . . . . . . . . . . . . . . . . (73) (64)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110) (249)
----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,299 6,379
General partner's interest in net income . . . . . . . . . . . . . . . . . . (73) (64)
----------- -----------
Limited partners' interest in net income . . . . . . . . . . . . . . . . . . $ 7,226 $ 6,315
=========== ===========
Allocation of net income per Senior Preference Unit
and Preference Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .55 $ .55
=========== ===========
Weighted average number of units outstanding:
Senior Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . 7,250 7,250
=========== ===========
Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,650 5,650
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
F-14
<PAGE> 117
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,443 $ 4,145
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 6,404 5,605
Current portion of receivable from general partner . . . . . . 2,319 2,241
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 2,105 1,924
----------------- -----------------
Total current assets . . . . . . . . . . . . . . . . . . . . 15,271 13,915
----------------- -----------------
Receivable from general partner, less current portion . . . . . . 2,934 3,544
----------------- -----------------
Property and equipment . . . . . . . . . . . . . . . . . . . . . 243,833 214,556
Less accumulated depreciation and amortization . . . . . . . . . 70,918 68,910
----------------- -----------------
Net property and equipment . . . . . . . . . . . . . . . . . 172,915 145,646
----------------- -----------------
$ 191,120 $ 163,105
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . $ 1,602 $ 1,548
Accounts payable, accrued expenses and
distributions payable . . . . . . . . . . . . . . . . . . . . 15,544 13,299
Deferred terminaling fees . . . . . . . . . . . . . . . . . . . 1,668 1,641
Payable to general partner . . . . . . . . . . . . . . . . . . 665 786
----------------- -----------------
Total current liabilities . . . . . . . . . . . . . . . . . . 19,479 17,274
----------------- -----------------
Long-term debt, less current portion . . . . . . . . . . . . . . 69,844 43,265
----------------- -----------------
Other liabilities and deferred taxes . . . . . . . . . . . . . . 1,887 1,820
----------------- -----------------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 983 992
----------------- -----------------
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . 98,927 99,754
----------------- -----------------
$ 191,120 $ 163,105
================= =================
</TABLE>
See notes to interim consolidated financial statements.
F-15
<PAGE> 118
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,299 $ 6,379
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 2,011 1,736
Minority interest in net income . . . . . . . . . . . . . . . 73 64
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 107 244
Changes in working capital components . . . . . . . . . . . . 1,171 411
----------------- -----------------
Net cash provided by operating activities . . . . . . . . . . 10,661 8,834
----------------- -----------------
Investing activities:
Acquisition of Wyco pipeline assets . . . . . . . . . . . . . . (27,100) -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (2,177) (3,852)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (56)
----------------- -----------------
Net cash used by investing activities . . . . . . . . . . . . (29,320) (3,908)
----------------- ------------------
Financing activities:
Changes in receivable from general partner . . . . . . . . . . 532 464
Issuance of long-term debt . . . . . . . . . . . . . . . . . . 28,500 -
Payments of long-term debt . . . . . . . . . . . . . . . . . . (1,867) (2,821)
Distributions to partners . . . . . . . . . . . . . . . . . . . (8,208) (7,116)
----------------- -----------------
Net cash provided (used) by financing activities . . . . . . 18,957 (9,473)
----------------- -----------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . 298 (4,547)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 4,145 15,061
----------------- -----------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . $ 4,443 $ 10,514
================= =================
Supplemental information - cash paid for interest . . . . . . . . $ 497 $ 871
================= =================
</TABLE>
See notes to interim consolidated financial statements.
F-16
<PAGE> 119
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The unaudited financial statements of Kaneb Pipe Line Partners, L.P.
("KPP") for the periods ended March 31, 1995 and 1994 have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the Partnership
were disclosed in the notes to the financial statements included in the
Partnership's Annual Report on Form 10-K for the period ended December 31,
1994. In the opinion of the Partnership's management, the accompanying
financial statements contain the adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Partnership
at March 31, 1995 and the results of its operations and cash flows for the
period ended March 31, 1995. Operating results for the three month period
ended March 31, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995.
2. Acquisition
Effective February 24, 1995, the Partnership, through KPOP, acquired
the refined petroleum product pipeline assets of Wyco Pipe Line Company (the
"West Pipeline") for $27.1 million. The acquisition was financed by the
issuance of first mortgage notes to three insurance companies which are due
February 24, 2002 and bear interest at the rate of 8.37% per annum. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of the West Pipeline are included in the Partnership's
consolidated statement of income subsequent to the date of acquisition.
The following summarized unaudited pro forma consolidated results of
operations for the three months ended March 31, 1995 and 1994, assume the
acquisition occurred as of the beginning of the periods presented. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which might have resulted
had the combination been in effect at the dates indicated, or which may occur
in the future.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------------
1995 1994
------------------ -----------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,097,000 $ 23,392,000
================== =================
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,302,000 8,509,000
================== =================
Allocation of net income per Senior Preference Unit
and Preference Unit . . . . . . . . . . . . . . . . . . . . . . $ .55 $ .55
================== =================
</TABLE>
3. Cash Distributions to Senior Preference Unitholders
The cash distribution of $.55 per unit for the fourth quarter of 1994
was made on February 13, 1995. The distribution of $.55 for the first quarter
of 1995 was declared to holders of record as of April 28, 1995 and is payable
on May 15, 1995.
F-17
<PAGE> 120
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In February 1995, Kaneb Pipe Line Partners, L.P. (the "Partnership")
acquired, through its operating partnership, the refined petroleum product
pipeline assets of Wyco Pipe Line Company (the "West Pipeline") for $27.1
million. The West Pipeline was owned 60% by a subsidiary of GATX Terminals
Corporation and 40% by a subsidiary of Amoco Pipe Line Company. The
acquisition was financed by the sale of $27 million of first mortgage notes to
three insurance companies.
The following unaudited pro forma financial statements for the
Partnership have been derived from the historical financial statements of the
Partnership and the West Pipeline for the year ended December 31, 1994 and the
financial statements for the three-month period ended March 31, 1995. The
following unaudited pro forma financial statements have been compiled as if the
Partnership acquired the pipeline assets of the West Pipeline as of the
beginning of the period for income statement purposes. The unaudited pro forma
financial statements should be read in conjunction with the notes accompanying
such unaudited pro forma financial statements and with the historical financial
statements and related notes of the Partnership set forth elsewhere in this
Prospectus, and the historical financial statements and related notes of Wyco
Pipe Line Company which are incorporated by reference.
The unaudited pro forma financial statements may not be indicative of
the results that would have occurred if the Partnership had acquired the
pipeline assets of the West Pipeline on the dates indicated or which will be
obtained in the future.
F-18
<PAGE> 121
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARTNERSHIP WEST
HISTORICAL PIPELINE
THREE MONTHS HISTORICAL
ENDED PERIOD ENDED
MARCH 31, FEBRUARY 24, ACQUISITION PRO
1995 1995 ADJUSTMENTS FORMA
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 20,382 $ 1,715 $ - $ 22,097
Costs and expenses:
Operating costs . . . . . . . . . . 8,558 1,158 - 9,716
Depreciation and amortization . . . 2,011 128 (22)(a) 2,117
General and administrative . . . . 1,187 283 - 1,470
---------------- -------------- --------------- ----------------
Total costs and expenses . . . . 11,756 1,569 (22) 13,303
---------------- -------------- --------------- ----------------
Operating income . . . . . . . . . . 8,626 146 22 8,794
Interest and other income . . . . . . 231 17,111 (16,926)(b) 416
Interest expense . . . . . . . . . . (1,375) - (350)(c) (1,725)
Minority interest in net income . . . (73) - - (73)
Income taxes . . . . . . . . . . . . (110) (6,026) 6,026 (e) (110)
---------------- -------------- --------------- ---------------
Net income . . . . . . . . . . . . . $ 7,299 $ 11,231 $ (11,258) $ 7,302
================ ============== =============== ================
Allocation of net income per
Senior Preference Unit and
Preference Unit . . . . . . . . . . $ 0.55 $ 0.55
================ ================
</TABLE>
See notes to pro forma consolidated financial statements.
F-19
<PAGE> 122
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARTNERSHIP WEST PIPELINE ACQUISITION PRO
HISTORICAL HISTORICAL ADJUSTMENTS FORMA
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 78,745 $ 13,694 $ - $ 92,439
---------------- -------------- --------------- ----------------
Costs and expenses:
Operating costs . . . . . . . . . . 33,586 7,135 - 40,721
Depreciation and amortization . . . 7,257 1,042 (338)(a) 7,961
General and administrative . . . . 4,924 781 - 5,705
---------------- -------------- --------------- ----------------
Total costs and expenses . . . . 45,767 8,958 (338) 54,387
---------------- -------------- --------------- ----------------
Operating income . . . . . . . . . . 32,978 4,736 338 38,052
Interest and other income . . . . . . 1,299 - - 1,299
Interest expense . . . . . . . . . . (3,706) - (2,260)(c) (5,966)
Minority interest in net income . . . (295) - (27)(d) (322)
Income taxes . . . . . . . . . . . . (818) (1,850) 1,850 (e) (818)
---------------- -------------- --------------- ---------------
Net income . . . . . . . . . . . . . $ 29,458 $ 2,886 $ (99) $ 32,245
================ ============== =============== ================
Allocation of net income per
Senior Preference Unit
and Preference Unit . . . . . . . . $ 2.20 $ 2.20
================ ================
</TABLE>
See notes to pro forma consolidated financial statements.
F-20
<PAGE> 123
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Adjustments to the depreciation and amortization of the acquired
assets.
(b) Represents the gain on the sale of the pipeline assets that was
recorded by Wyco Pipe Line Company in February 1995.
(c) Represents interest expense on $27 million of acquisition debt at
8.37% per annum.
(d) Represents the General Partner's 1% general partner interest in Kaneb
Pipe Line Operating Partnership, L.P.
(e) Represents elimination of corporate income taxes as the acquired
operations will be taxed as a partnership.
F-21
<PAGE> 124
<TABLE>
<S> <C>
======================================================== ========================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF 3,500,000 Units
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
PARTNERSHIP OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY KANEB PIPE LINE PARTNERS, L.P.
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, REPRESENTING PREFERENCE
THOSETO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO LIMITED PARTNER INTERESTS
WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PAGE ------------
---- PROSPECTUS
Available Information . . . . . . . . . . . . . . . . 4 , 1995
Incorporation of Certain Documents . . . . . . . . . 4 ------------
Prospectus Summary . . . . . . . . . . . . . . . . . 5
Investment Considerations . . . . . . . . . . . . . 15
Use of Proceeds . . . . . . . . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . . . . . . . . 24
Distributions . . . . . . . . . . . . . . . . . . . 25
Selected Historical and Pro Forma Financial and
Operating Data . . . . . . . . . . . . . . . . 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 29 SMITH BARNEY INC.
Business and Properties of the Partnership . . . . 33
Cash Distributions . . . . . . . . . . . . . . . . 54 PAINEWEBBER INCORPORATED
Conflicts of Interest and Fiduciary
Responsibilities . . . . . . . . . . . . . . . 62
Description of the Preference Units . . . . . . . . 66
Description of the Partnership Agreements . . . . . 67
Federal Income Tax Considerations . . . . . . . . . 76
State and Other Taxes . . . . . . . . . . . . . . . 90
Investment in the Partnership by Employee Benefit
Plans . . . . . . . . . . . . . . . . . . . . 90
Underwriting . . . . . . . . . . . . . . . . . . . 92
Experts . . . . . . . . . . . . . . . . . . . . . . 93
Glossary . . . . . . . . . . . . . . . . . . . . . 93
Index to Financial Statements . . . . . . . . . . . F-1
======================================================== ========================================================
</TABLE>
<PAGE> 125
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 . . . . . . . . . . . . . . . . $ 29,018
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,915
New York Stock Exchange listing fees . . . . . . . . . . . . . . . . . . . . . . . 31,300
Printing and engraving costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Registrar and transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,233
---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,000
===============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the Prospectus entitled "Description of the Partnership
Agreements--Indemnification" is incorporated herein by reference.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
*1.1 -- Form of Underwriting Agreement.
*4.1 -- Form of Amended and Restated Agreement of Limited
Partnership of the Partnership.
4.2 -- Certificate of Limited Partnership of the Partnership
(filed as Exhibit 3.2 to the Partnership's Registration
Statement on Form S-1 (Reg. No. 33-30330) and
incorporated by reference herein).
4.3 -- Form of Amended and Restated Agreement of Limited
Partnership of KPOP filed as Exhibit 4.1 to the
Partnership's Registration Statement on Form S-1 (Reg.
No. 33-30370) and incorporated by reference herein).
4.4 -- Certificate of Limited Partnership of KPOP filed as
Exhibit 4.2 to the Partnership's Registration Statement
on Form S-1 (Reg. No. 33-30370) and incorporated by
reference herein).
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
**8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating to tax
matters.
*23.1 -- Consent of Independent Accountants.
*23.2 -- Consent of Independent Accountants.
**23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion as an exhibit to the
Registration Statement and the reference to their firm
in this Registration Statement is contained in their
opinion filed as Exhibit 8.1 hereto).
II-1
<PAGE> 126
24.1 -- Powers of Attorney (included on page II-4 of this
Registration Statement as originally filed).
_________
* Filed herewith
** To be filed by amendment.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) 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 the registration statement
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 deemed
to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC 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 policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-2
<PAGE> 127
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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richardson, State of Texas, on the 16th day of May,
1995.
KANEB PIPE LINE PARTNERS, L.P.,
by Kaneb Pipe Line Company,
as General Partner
By: EDWARD D. DOHERTY
Edward D. Doherty, Chairman
II-3
<PAGE> 128
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 Director
EDWARD D. DOHERTY (Principal Executive
Edward D. Doherty Officer) May 16, 1995
Controller
JIMMY L. HARRISON (Principal Financial and
Jimmy L. Harrison Accounting Officer) May 16, 1995
SANGWOO AHN
Sangwoo Ahn Director May 16, 1995
JOHN R. BARNES
John R. Barnes Director May 16, 1995
C. E. BENTLEY
C. E. Bentley Director May 16, 1995
MURRAY R. BILES
Murray R. Biles Director May 16, 1995
PRESTON A. PEAK
Preston A. Peak Director May 16, 1995
RALPH A. REHM
Ralph A. Rehm Director May 16, 1995
</TABLE>
II-4
<PAGE> 129
<TABLE>
<CAPTION>
Position with the
Signature General Partner Date
- -------------------------------------------------------- ------------------------ -----------------------------
<S> <C> <C>
JAMES R. WHATLEY
James R. Whatley Director May 16, 1995
</TABLE>
II-5
<PAGE> 130
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(a) Exhibits
*1.1 -- Form of Underwriting Agreement.
*4.1 -- Form of Amended and Restated Agreement of Limited Partnership of the Partnership.
4.2 -- Certificate of Limited Partnership of the Partnership (filed as Exhibit 3.2 to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-30330) and incorporated by reference herein).
4.3 -- Form of Amended and Restated Agreement of Limited Partnership of KPOP filed as Exhibit 4.1 to
the Partnership's Registration Statement on Form S-1 (Reg. No. 33-30370) and incorporated by
reference herein).
4.4 -- Certificate of Limited Partnership of KPOP filed as Exhibit 4.2 to the Partnership's
Registration Statement on Form S-1 (Reg. No. 33-30370) and incorporated by reference herein).
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
**8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating to tax matters.
*23.1 -- Consent of Independent Accountants.
*23.2 -- Consent of Independent Accountants.
**23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski L.L.P. to the use of their opinion as an
exhibit to the Registration Statement and the reference to their firm in this Registration
Statement is contained in their opinion filed as Exhibit 8.1 hereto).
24.1 -- Powers of Attorney (included on page II-4 of this Registration Statement as originally filed).
</TABLE>
_________
* Filed herewith
** To be filed by amendment.
<PAGE> 1
3,500,000 UNITS
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING PREFERENCE LIMITED PARTNER INTERESTS
UNDERWRITING AGREEMENT
__________, 1995
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street, 34th Floor
New York, New York 10013
Dear Sirs:
Kaneb Pipe Line Company, a Delaware corporation ("KPL" or the "General
Partner"), a wholly-owned subsidiary of Kaneb Services, Inc., a Delaware
corporation ("KSI"), proposes to issue and sell an aggregate of 3,500,000 units
(the "Firm Units") representing preference limited partner interests (the
"Preference Units") in Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership (the "Partnership") of which KPL is the general partner, to the
several Underwriters named in Schedule I hereto (the "Underwriters"). KPL also
proposes to sell to the Underwriters, upon the terms and conditions set forth
in Section 2 hereof, up to an additional 325,000 Preference Units (the
"Additional Units"). The Firm Units and the Additional Units are hereinafter
collectively referred to as the "Units".
Each of KSI, the General Partner and the Partnership wishes to confirm
as follows its agreement with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Units by the Underwriters. The Partnership, the General
Partner, Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership"), Support Terminals Operating
Partnership, L.P., a Delaware limited partnership ("STOP"), Support Terminal
Services, Inc., a Delaware corporation ("STS") and StanTrans, Inc., a Delaware
corporation ("STI") (the Operating Partnership, STOP, STS and STI are
collectively referred to herein as the "Operating Entities", and individually
referred to herein as an "Operating Entity"), are sometimes collectively
referred to herein as the "Companies".
1. Registration Statement and Prospectus. The Partnership has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-3 under
<PAGE> 2
the Act (the "registration statement"), including a prospectus subject to
completion relating to the Units. The term "Registration Statement" as used in
this Agreement means the registration statement (including all financial
schedules and exhibits), as amended at the time it becomes effective, or, if
the registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Units may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Act and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As
used herein, the term "Incorporated Documents" means the documents which at the
time are incorporated by reference in the registration statement, the
Registration Statement, any Prepricing Prospectus, the Prospectus, or any
amendment or supplement thereto.
2. Agreements to Sell and Purchase. KPL hereby agrees, subject to
all the terms and conditions set forth herein, to sell to each Underwriter and,
upon the basis of the representations, warranties and agreements of KSI, the
Partnership and the General Partner herein contained and subject to all the
terms and conditions set forth herein, each Underwriter, severally and not
jointly, agrees to purchase from KPL, at a purchase price of $___ per Unit (the
"Purchase Price Per Unit"), the number of Firm Units set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Units
increased as set forth in Section 12 hereof).
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<PAGE> 3
KPL also agrees, subject to all the terms and conditions set forth
herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Partnership, the General
Partner and KSI herein contained and subject to all the terms and conditions
set forth herein, the Underwriters shall have the right to purchase from KPL,
at the Purchase Price Per Unit, pursuant to an option (the "over-allotment
option") which may be exercised at any time and from time to time prior to 9:00
P.M., New York City time, on the 30th day after the date of the Prospectus (or,
if such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading),
up to an aggregate of 325,000 Additional Units. Additional Units may be
purchased only for the purpose of covering over allotments made in connection
with the offering of the Firm Units. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from
KPL the number of Additional Units (subject to such adjustments as you may
determine in order to avoid fractional units) which bears the same proportion
to the number of Additional Units to be purchased by the Underwriters as the
number of Firm Units set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Units increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Units.
3. Terms of Public Offering. KPL has been advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Units as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Units upon the terms set forth in the Prospectus.
4. Delivery of the Units and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Units shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M.,
New York City time, on ________, 1995 (the "Closing Date"). The place of
closing for the Firm Units and the Closing Date may be varied by agreement
between you and KPL.
Delivery to the Underwriters of and payment for any Additional Units to
be purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than three nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a
written notice from you on behalf of the Underwriters to KPL of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Units. The place of closing for any Additional Units and the Option
Closing Date for such Units may be varied by agreement between you and KPL.
Certificates for the Firm Units and for any Additional Units to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 P.M., New York City time, on the third
business day preceding the Closing Date or any Option Closing Date, as the case
may be; provided, however, that if registration of any
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<PAGE> 4
certificate shall be requested in a name other than that of an Underwriter,
there shall be delivered to American Stock Transfer & Trust Co., a Transfer
Application with respect to the person in whose name registration of such
certificate is so requested. Such certificates shall be made available to you
in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the Firm
Units and any Additional Units to be purchased hereunder shall be delivered to
you on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor by wire transfer payable in New York
Clearing House (next day) funds to a KPL account previously designated by KPL.
5. Agreements of the Partnership and the General Partner. Each of
the Partnership and the General Partner agrees with the several Underwriters as
follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Units may commence, the
Partnership will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Partnership will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of the Units
for offering or sale in any jurisdiction or the initiation of any proceeding
for such purpose; and (iii) within the period of time referred to in paragraph
(f) below, of any change in any of the Companies' financial condition,
business, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act, the Exchange Act or any other state
securities or Blue Sky laws. If at any time the Commission shall issue any
stop order suspending the effectiveness of the Registration Statement, the
Partnership will make every reasonable effort to obtain the withdrawal of such
order at the earliest possible time.
(c) The Partnership will furnish to you, without charge (i) three
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto,
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<PAGE> 5
including financial statements and all exhibits to the registration statement,
(ii) such number of conformed copies of the registration statement as
originally filed and of each amendment thereto, but without exhibits, as you
may reasonably request, (iii) such number of copies of the Incorporated
Documents, without exhibits, as you may reasonably request, and (iv) three
copies of the exhibits to the Incorporated Documents.
(d) The Partnership will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus or, prior to
the end of the period of time referred to in the first sentence in subsection
(f) below, file any document which, upon filing becomes an Incorporated
Document, of which you shall not previously have been advised or to which,
after you shall have received a copy of the document proposed to be filed, you
shall reasonably object.
(e) Prior to the execution and delivery of this Agreement, the
Partnership has delivered to you, without charge, in such quantities as you
have reasonably requested, copies of each form of the Prepricing Prospectus.
The Partnership consents to the use, so long as such use by the several
Underwriters and by dealers is in accordance with the provisions of the Act and
with the securities or Blue Sky laws of the jurisdictions in which the Units
are offered by the several Underwriters and by dealers, prior to the date of
the Prospectus, of each Prepricing Prospectus so furnished by the Partnership.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the
Partnership will expeditiously deliver to each Underwriter and each dealer,
without charge, as many copies of the Prospectus (and of any amendment or
supplement thereto) as you may reasonably request. The Partnership consents to
the use of the Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Units are offered by the several
Underwriters and by all dealers to whom Units may be sold, both in connection
with the offering and sale of the Units and for such period of time thereafter
as the Prospectus is required by the Act to be delivered in connection with
sales by any Underwriter or dealer. If during such period of time any event
shall occur that in the judgment of the Partnership or in the opinion of
counsel for the Underwriters is required to be set forth in the Prospectus (as
then amended or supplemented) or should be set forth therein in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary to supplement or amend the
Prospectus (or to file under the Exchange Act any document which, upon filing,
becomes an Incorporated Document) in order to comply with the Act or any other
law, the Partnership will forthwith prepare and, subject to the provisions of
paragraph (d) above, file with the Commission an appropriate supplement or
amendment thereto (or to such document), and will expeditiously furnish to the
Underwriters and dealers a reasonable number of copies thereof. In the event
that the Partnership and you, as Representatives of the several Underwriters,
agree that the Prospectus should be amended or
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<PAGE> 6
supplemented, the Partnership, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Partnership will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Units for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided
that in no event shall the Partnership be obligated to qualify to do business
in any jurisdiction where it is not now so qualified or to take any action
which would subject it to service of process in suits, other than those arising
out of the offering or sale of the Units, in any jurisdiction where it is not
now so subject.
(h) The Partnership will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering
a twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings statement
shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Partnership will
furnish to you (i) as soon as available, a copy of each report of the
Partnership mailed to Unitholders or filed with the Commission, and (ii) from
time to time such other information concerning the Partnership as you may
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Partnership or the General Partner to comply with
the terms or fulfill any of the conditions of this Agreement, the Partnership
and the General Partner, jointly and severally, agree to reimburse the
Representatives for all out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) If Rule 430A of the Act is employed, the Partnership will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will
advise you of the time and manner of such filing.
(l) Except as provided in this Agreement, neither the Partnership
nor KPL will sell, contract to sell or otherwise dispose of any senior
preference limited partner interests in the Partnership ("Senior Preference
Units"), any Preference Units, any preference B limited partner interests in
the Partnership ("Preference B Units"), any common limited partner interests in
the Partnership ("Common Units") or any securities substantially similar to,
convertible into or
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<PAGE> 7
exercisable or exchangeable for Senior Preference Units, Preference Units,
Preference B Units or Common Units, or grant any options or warrants to
purchase any securities substantially similar to, convertible into or
exercisable or exchangeable for Senior Preference Units, Preference Units,
Preference B Units or Common Units, for a period of 90 days after the date of
the Prospectus (the "Lock Up Period"), without the prior written consent of
Smith Barney Inc. Notwithstanding the foregoing, KPL may issue Senior
Preference Units, Preference B Units, Preference Units or Common Units to
sellers of terminalling facilities or pipelines in connection with acquisitions
from such sellers of such terminalling facilities or pipelines by the
Partnership; provided that KPL has received assurance from such sellers that
they will not sell or otherwise dispose of such units in contravention of this
paragraph (l) during the Lock Up Period.
(m) The Partnership has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of the
current officers and directors of the General Partner and by KSI.
(n) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Partnership and the General Partner have not
taken, nor will they take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Senior Preference Units or Preference Units to
facilitate the sale or resale of the Units.
(o) The Partnership and the General Partner will use their best
efforts to have the Preference Units listed, subject to notice of issuance, on
the New York Stock Exchange on or before the Closing Date.
6. Agreements of KPL. KPL agrees with the several Underwriters
as follows:
(a) KPL will cooperate to the extent necessary to cause the
registration statement or any post-effective amendment thereto to become
effective at the earliest possible time.
(b) KPL will pay all Federal and other taxes, if any on the
transfer or sale of the Units being sold by KPL to the Underwriters.
(c) KPL will do or perform all things required to be done or
performed by KPL prior to the Closing Date or any Option Closing Date, as the
case may be, to satisfy all conditions precedent to the delivery of the Units
pursuant to this Agreement.
7. Representations and Warranties of the Partnership, the General
Partner and KSI. Each of the Partnership, the General Partner and KSI
represents and warrants to each Underwriter that:
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<PAGE> 8
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in
all material respects with the provisions of the Act. The Commission has not
issued any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Partnership and the offering of the Units contemplated by
this Agreement meet the requirements for using Form S-3 under the Act. The
registration statement in the form in which it became or becomes effective and
also in such form as it may be when any post-effective amendment thereto shall
become effective and the prospectus and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, complied or
will comply in all material respects with the provisions of the Act and will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the statements made or to be made in
such documents within the coverage of Rule 175(b) under the Act were made or
will be made with a reasonable basis and in good faith, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Partnership in writing by or on behalf of any Underwriter through you expressly
for use therein.
(c) The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder, any
further Incorporated Documents so filed will, when they are filed, conform in
all material respects with the requirements of the Exchange Act and the rules
and regulations thereunder; no such document when it was filed (or, if an
amendment with respect to any such document was filed, when such amendment was
filed), contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and no such further document, when it is
filed, will contain an untrue statement of a material fact or will omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
(d) The capitalization of the Partnership is as set forth in the
Registration Statement and the Prospectus under "Capitalization". All the
outstanding Preference Units (including the Units) and other limited partner
interests of the Partnership have been duly authorized and validly issued, are
fully paid and non-assessable (except as such non-assessability may be
affected by matters described in the Prospectus under the caption "Description
of the Partnership Agreements - Limited Liability") and are free of any
preemptive or similar rights; the Units have been duly authorized (including
due authorization under the Partnership Agreement (as defined below)) and, when
issued and delivered to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and
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<PAGE> 9
non-assessable (except as such non-assessability may be affected by matters
described in the Prospectus under the caption "Description of the Partnership
Agreements - Limited Liability") and free of any preemptive or similar rights;
and the Units, the other limited partnership interests in the Partnership and
the Partnership Agreement of the Partnership conform to the descriptions
thereof in the registration statement and the prospectus.
(e) The Partnership has been duly formed and is validly existing as
a limited partnership under the Delaware Revised Uniform Limited Partnership
Act (the "Delaware Act"), with partnership power and authority to own or lease
its properties and conduct its business in each case as described in the
Prospectus, and has been qualified or registered as a foreign limited
partnership for the transaction of business under the laws of the State of
Texas, and there are no other jurisdictions in which the failure so to qualify
or register would subject it to any liability of disability which is material
to the financial condition, business, properties, net worth or results of
operations of the General Partner or the Partnership and the Operating Entities
considered as a whole or would subject the limited partners of the Partnership
to any material liability or disability.
(f) Each of the Operating Partnership and STOP has been duly formed
and is validly existing as a limited partnership under the Delaware Act, with
partnership power and authority to own or lease its properties and conduct its
business as described in the Prospectus, the Operating Partnership has been
duly qualified or registered as a foreign limited partnership for the
transaction of business under the laws of the States of Colorado, Iowa, Kansas,
Nebraska, North Dakota, Oregon, South Dakota, Texas, Washington and Wyoming and
STOP has been duly qualified or registered as a foreign limited partnership for
the transaction of business under the laws of the States of Alabama, Arizona,
California, Florida, Georgia, Illinois, Indiana, Maryland, Minnesota, New
Mexico, Oklahoma, Texas, Virginia and Wisconsin, which are the only
jurisdictions in which each owns or leases properties, or conducts any
business, so as to require such qualification or registration and there are no
jurisdictions in which the failure so to qualify or register would subject
either to any liability or disability which is material to the financial
condition, business, properties, net worth or results of operations of the
General Partner or the Partnership and the Operating Entities considered as a
whole or would subject the limited partners of the Partnership to any material
liability or disability.
(g) The General Partner is the sole general partner of the
Partnership with a general partner interest in the Partnership of 1/99th; such
general partner interest is duly authorized by the Amended and Restated
Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement"), and was validly issued to the General Partner and is fully paid;
the General Partner owns such general partner interest free and clear of any
lien, adverse claim, security interest, equity, or other encumbrance.
(h) The General Partner is the sole general partner of the
Operating Partnership with a general partner interest in the Operating
Partnership of 1%; such general partner interest is duly authorized by the
Amended and Restated Agreement of Limited Partnership of the
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<PAGE> 10
Operating Partnership (the "Operating Partnership Agreement"), by and between
the General Partner and the Partnership, and was validly issued to the General
Partner and is fully paid; and the General Partner owns such general partner
interest free and clear of any lien, adverse claim, security interest, equity,
or other encumbrance.
(i) STS is the sole general partner of STOP with a general partner
interest in STOP of 1%; such general partner interest is duly authorized by the
Agreement of Limited Partnership of STOP (the "STOP Partnership Agreement"), by
and between STS and the Operating Partnership, and was validly issued to STS
and is fully paid (the Operating Partnership Agreement, the STOP Partnership
Agreement and the Partnership Agreement being collectively referred to
hereinafter as the "Partnership Agreements"); and STS owns such general partner
interest free and clear of any lien, adverse claim, security interest, equity,
or other encumbrance.
(j) The Partnership is the sole limited partner of the Operating
Partnership, with a limited partner interest in the Operating Partnership of
99%; such limited partner interest is authorized by the Operating Partnership
Agreement, has been validly issued and is fully paid and non-assessable (except
as such non-assessability may be affected by matters described in the
Prospectus under the caption "Description of the Partnership Agreements -
Limited Liability"); and the Partnership owns such limited partner interest in
the Operating Partnership free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance.
(k) The Operating Partnership is the sole limited partner of STOP,
with a limited partner interest in STOP of 99%; such limited partner interest
is authorized by the STOP Partnership Agreement, has been validly issued and is
fully paid and non-assessable (except as such non-assessability may be affected
by matters described in the Prospectus under the caption "Description of the
Partnership Agreements - Limited Liability"); and the Operating Partnership
owns such limited partner interest in STOP free and clear of any lien, adverse
claim, security interest, equity, or other encumbrance.
(l) Each of the General Partner, STS and STI has been duly
organized and is validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and authority to own or
lease its properties, to conduct its business and (in the case of the General
Partner) to act as general partner of the Partnership and the Operating
Partnership and (in the case of STS) to act as general partner of STOP, in each
case as described in the Registration Statement and the Prospectus, and has
been duly qualified or registered as a foreign corporation for the transaction
of business and is in good standing under the laws of the States of Colorado,
Iowa, Kansas, Nebraska, North Dakota, Oregon, South Dakota, Texas, Washington
and Wyoming (in the case of the General Partner), the States of Alabama,
Arizona, California, Florida, Georgia, Illinois, Indiana, Maryland, Minnesota,
New Mexico, Oklahoma, Texas, Virginia and Wisconsin (in the case of STS) and
the State of Texas (in the case of STI), which are the only jurisdictions in
which each owns or leases properties, or conducts any business, so as to
require such qualification or registration, and there are no
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other jurisdictions in which the failure so to qualify or register would
subject any of them to any liability or disability which is material to the
financial condition, business, properties, net worth or results of operations
of the General Partner or the Partnership and the Operating Entities considered
as a whole or would subject the limited partners of the Partnership to any
material liability or disability.
(m) All of the issued and outstanding shares of capital stock of
each of the General Partner, STS and STI have been duly authorized and validly
issued and are fully paid and non-assessable and are free of any preemptive or
similar rights; all of the issued and outstanding shares of capital stock of
the General Partner are owned by KSI, free and clear of any lien, adverse
claim, security interest, equity, or other encumbrance; all of the issued and
outstanding shares of capital stock of STS and STI are owned by the Operating
Partnership, free and clear of any lien, adverse claim, security interest,
equity, or other encumbrance, except as described in the Prepricing Prospectus
and the Prospectus.
(n) The Partnership Agreement has been duly authorized, executed
and delivered by the General Partner and KSI and is a valid and legally binding
agreement of the General Partner and KSI, enforceable against the General
Partner and KSI in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles;
the Operating Partnership Agreement has been duly authorized, executed and
delivered by the General Partner and the Partnership and is a valid and legally
binding agreement of the General Partner and the Partnership, enforceable
against the General Partner and the Partnership in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization and other
laws of general applicability relating to or affecting creditors' rights and to
general equitable principles; the STOP Partnership Agreement has been duly
authorized, executed and delivered by STS and the Operating Partnership and is
a valid and legally binding agreement of STS and the Operating Partnership,
enforceable against STS and the Operating Partnership in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting creditors'
rights and to general equitable principles.
(o) All the Partnership's subsidiaries (collectively, the
"Subsidiaries") are listed in an exhibit to the Partnership's Annual Report on
Form 10-K which is incorporated by reference into the Registration Statement.
The Partnership has no Subsidiaries other than the Operating Entities.
(p) There are no legal or governmental proceedings pending or, to
the knowledge of the Partnership, the General Partner or KSI, threatened
against any of the Companies, or to which any of the Companies, or to which any
of their respective properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as required,
and there are no agreements, contracts, indentures, leases or other instruments
that are required to be described in the Registration Statement or the
Prospectus or to be filed as
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<PAGE> 12
an exhibit to the Registration Statement or any Incorporated Document that are
not described or filed as required by the Act or the Exchange Act.
(q) None of the Companies (i) is in violation of its partnership
agreement, certificate or articles of incorporation or bylaws, or other
organizational documents, as the case may be, or (ii) is in violation of any
law, ordinance, administrative or governmental rule or regulation applicable to
any of the Companies or of any decree of any court or governmental agency or
body having jurisdiction over any of the Companies, which violation would
subject any of them to any liability or disability which is material to the
financial condition, business, properties, net worth or results of operations
of the General Partner or the Partnership and the Operating Entities considered
as a whole or would subject the limited partners of the Partnership to any
material liability or disability, or in default in any respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any agreement,
indenture, lease or other instrument to which any of the Companies is a party
or by which any of them or any of their respective properties may be bound
which default would subject any of them to any liability or disability which is
material to the financial condition, business, properties, net worth or results
of operations of the General Partner or the Partnership and the Operating
Entities considered as a whole or would subject the limited partners of the
Partnership to any material liability or disability.
(r) Neither the sale of the Units, the execution, delivery or
performance of this Agreement by the Partnership, the General Partner or KSI
nor the consummation by the Partnership, the General Partner or KSI of the
transactions contemplated hereby (i) requires any consent, approval,
authorization or other order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required for the registration of the Units
under the Act and the Exchange Act, which have been or will be effected in
accordance with this Agreement and except as may be required for compliance
with the securities or Blue Sky laws of various jurisdictions) or conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, the partnership agreement, the certificate or articles of incorporation
or bylaws, or other organizational documents, as the case may be, of any of the
Companies or KSI or (ii) conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, any material agreement, indenture,
lease or other material instrument to which any of the Companies or KSI is a
party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to any of the Companies or KSI
or any of their respective properties, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
any of the Companies or KSI pursuant to the terms of any agreement or
instrument to which any of them is a party or by which any of them may be bound
or to which any of the property or assets of any of them is subject.
(s) The accountants, Price Waterhouse, who have certified or shall
certify the financial statements audited by it included or incorporated by
reference in the Registration
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<PAGE> 13
Statement and the Prospectus (or any amendment or supplement thereto) are
independent public accountants as required by the Act.
(t) The historical financial statements, together with related
schedules and notes, included or incorporated by reference in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), present
fairly the consolidated financial position, results of operations and changes
in financial position of the Partnership and the Operating Entities on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and data
included or incorporated by reference in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) are accurately presented
and prepared on a basis consistent with such financial statements and the books
and records of the Partnership and the Operating Entities. The pro forma
financial statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein on the basis stated in the Registration Statement for the respective
periods to which they apply, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma basis described
therein, and the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(u) The execution and delivery of, and the performance by each of
the Partnership, the General Partner and KSI of its obligations under this
Agreement have been duly and validly authorized by each of the Partnership, the
General Partner and KSI, as the case may be, and this Agreement has been duly
executed and delivered by each of the Partnership, the General Partner and KSI
and constitutes the valid and legally binding agreement of each of the
Partnership, the General Partner and KSI, enforceable against each of the
Partnership, the General Partner and KSI in accordance with its terms, except
(i) as rights to indemnification and contribution hereunder may be limited by
federal or state securities laws and (ii) as to enforcement generally may be
subject to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors rights and to general
equitable principles.
(v) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), none of
the Companies has incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that
is material to the limited partners of the Partnership, the General Partner or
the Partnership and the Operating Entities taken as a whole, and there has not
been any change in the capital stock or partner's capital, or material increase
in the short-term debt or long-term debt, of any of the
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<PAGE> 14
Companies, or any material adverse change, or any development involving or
which may reasonably be expected to involve, a prospective material adverse
change, in the financial condition, business, properties, net worth or results
of operations of the General Partner or the Partnership and the Operating
Entities taken as a whole or which is material to the limited partners of the
Partnership.
(w) Each of the Companies has good and marketable title to all
property (real and personal) described in the Prospectus as being owned by it,
free and clear of all liens, claims, security interests or other encumbrances
except such as are described or referred to in the Registration Statement and
the Prospectus or in a document filed as an exhibit to the Registration
Statement or except as do not materially interfere with the ownership or
benefits of ownership of such property, taken as a whole, provided that with
respect to the Transmission Assets (defined as all pipelines, easements, rights
of way, leases and appurtenant facilities for the transmission and distribution
of refined petroleum products), the Operating Partnership has sufficient title
to enable it to use the Transmission Assets in its business and that any lack
of title has not had, and to their best knowledge, will not have any material
adverse effect on the Operating Partnership's ability to use the Transmission
Assets and all the property described in the Prospectus as being held under
lease by each of the Companies is held by it under valid, subsisting and
enforceable leases.
(x) None of the Companies or KSI has distributed and, prior to the
later to occur of (i) the Closing Date and (ii) completion of the distribution
of the Units, will distribute any offering material in connection with the
offering and sale of the Units other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(y) Each of the Companies has such permits, licenses, franchises
and authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its respective properties and to conduct its business in the
manner described in the Prospectus, subject to such qualifications as may be
set forth in the Prospectus, the lack of which would subject any of them to any
liability or disability which is material to the financial condition, business,
properties, net worth or results of operations of the General Partner or the
Partnership and the Operating Entities considered as a whole or would subject
the limited partners of the Partnership to any material liability or
disability; each of the Companies has fulfilled and performed all its material
obligations with respect to such permits and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of the holder
of any such permit, subject in each case to such qualification as may be set
forth in the Prospectus, the revocation or termination of which would subject
any of them to any liability or disability which is material to the financial
condition, business, properties, net worth or results of operations of the
General Partner or the Partnership and the Operating Entities considered as a
whole or would subject the limited partners of the Partnership to any
material liability or disability; and,
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<PAGE> 15
except as described in the Prospectus, none of such permits contains any
restriction that is materially burdensome to any of the Companies.
(z) The Partnership maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
[(aa) No more than ten percent of the net proceeds from the sale of
the Units are intended to be or will be paid to members of the National
Association of Securities Dealers or associated or affiliated persons of such
members, or members of the immediate family of such members.]
(bb) Each of the Companies has filed all tax returns required to be
filed, the failure of which to file would subject any of them to any liability
or disability which is material to the financial condition, business,
properties, net worth or results of operations of the General Partner or the
Partnership and the Operating Entities considered as a whole or would subject
the limited partners of the Partnership to any material liability or
disability, which returns are complete and correct, and none of the Companies
or KSI is in default in the payment of any taxes which were due and payable
pursuant to said returns or any assessments with respect thereto, which default
would subject any of them to any liability or disability which is material to
the financial condition, business, properties, net worth or results of
operations of the General Partner or the Partnership and the Operating Entities
considered as a whole or would subject the limited partners of the Partnership
to any material liability or disability.
(cc) No holder of any interest in or security of the Partnership or
any other person has any right to require registration of Senior Preference
Units, Preference Units, Preference B Units, Common Units or any other
partnership interest in or other security of the Partnership because of the
filing of the registration statement or consummation of the transactions
contemplated by this Agreement.
(dd) Each of the Companies owns or possesses all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and none of the Partnership,
the General Partner or KSI is aware of any claim to the contrary or any
challenge by any other person to the rights of any of the Companies with
respect to the foregoing.
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<PAGE> 16
(ee) Neither the Partnership nor any person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with the Partnership does or conducts business in or
with the government of Cuba or with any person or affiliate located in Cuba. If
prior to the completion of the distribution of the Units, the Partnership
commences engaging in business in or with the government of Cuba or with any
person or affiliate located in Cuba, the Partnership will comply with all the
provisions of Florida Statutes, Section 517.075, relating to issuers doing
business with Cuba.
(ff) None of the Companies is, or as of the Closing Date will be, an
"Investment Company" as that term is defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"), or subject to regulation under
the Investment Company Act.
(gg) None of the Companies is a "public utility company" or a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," as such terms are defined in the Public Utility Company Act of 1935,
as amended; none of the Companies is subject to regulation under the Public
Utility Holding Company Act of 1935, as amended.
(hh) The General Partner has (excluding its interests in the
Partnership and the Operating Partnership) a net worth of at least $5 million.
(ii) STS has (excluding its interests in STOP) a net worth of at
least $5 million.
8. Representations and Warranties of KSI and KPL. Each of KSI and
KPL represents and warrants to each Underwriter that:
(a) KPL now has, and on the Closing Date and any Option Closing
Date will have, valid and marketable title to the Units to be sold by KPL, free
and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer.
(b) KPL now has, and on the Closing Date and any Option Closing
Date will have, full legal right, power and authorization, and any approval
required by law, to sell, assign transfer and deliver such Units in the manner
provided in this Agreement, and upon delivery of and payment for such Units
hereunder, the several Underwriters will acquire valid and marketable title to
such Units free and clear of any lien, claim, security interest, or other
encumbrance.
(c) Neither KPL nor KSI has taken, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Senior Preference Units or
the Preference Units to facilitate the sale or resale of the Units, except for
the lock-up arrangements described in the Prospectus.
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<PAGE> 17
9. Indemnification and Contribution. (a) Each of the Partnership,
the General Partner and KSI, jointly and severally, agrees to indemnify and
hold harmless each of you and each other Underwriter and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information relating to such Underwriter furnished in writing to the
Partnership by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any Prepricing Prospectus shall not inure to
the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) on account of any such loss, claim, damage, liability or
expense arising from the sale of the Units by such Underwriter to any person if
a copy of the Prospectus shall not have been delivered or sent to such person
within the time required by the Act and the regulations thereunder, and the
untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Partnership has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity agreement shall be in addition to
any liability which the Partnership, the General Partner or KSI may otherwise
have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnification may be sought against the Partnership, the General Partner or
KSI, such Underwriter or such controlling person shall promptly notify the
Partnership and the Partnership, the General Partner and KSI shall assume the
defense thereof, including the employment of counsel and payment of all fees
and expenses. Such Underwriter or any such controlling person shall have the
right to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the Partnership, the General Partner and KSI have agreed in writing to pay
such fees and expenses, (ii) the Partnership, the General Partner and KSI have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action, suit or proceeding (including any impleaded parties) include
both such Underwriter or such controlling person and the Partnership, the
General Partner or KSI and such Underwriter or such controlling person shall
have been advised by its counsel that representation of such indemnified party
and the Partnership, the General Partner or KSI by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such
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<PAGE> 18
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Partnership, the
General Partner and KSI shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Partnership, the General Partner
and KSI shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The Partnership, the General Partner
and KSI shall not be liable for any settlement of any such action, suit or
proceeding effected without its written consent, but if settled with such
written consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, each of the Partnership, the General Partner and
KSI, jointly and severally, agrees to indemnify and hold harmless any
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless each of the Partnership, the General Partner and
KSI, the directors of the General Partner, the officers of the General Partner
who sign the Registration Statement, and any person who controls the
Partnership, the General Partner or KSI within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, to the same extent as the foregoing
indemnity from the Partnership, the General Partner and KSI to each
Underwriter, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through you expressly
for use in the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto. If any action, suit or
proceeding shall be brought against the Partnership, the General Partner or
KSI, any of the directors of the General Partner, any such officer of the
General Partner, or any such controlling person based on the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnification may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Partnership, the General Partner and
KSI by paragraph (b) above (except that if the Partnership, the General Partner
or KSI shall have assumed the defense thereof such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Partnership, the General Partner and KSI, the
directors of the General Partner, any such officer of the General Partner, and
any such controlling person shall have the rights and duties given to the
Underwriters by paragraph (b) above. The foregoing indemnity agreement shall
be in addition to any liability which the Underwriters may otherwise have.
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<PAGE> 19
(d) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Partnership, the General Partner and KSI on the one hand and the
Underwriters on the other hand from the offering of the Units, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Partnership,
the General Partner and KSI on the one hand and the Underwriters on the other
in connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Partnership,
the General Partner and KSI on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by KPL bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Partnership, the General Partner and KSI on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Partnership, the General Partner and KSI
on the one hand or by the Underwriters on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, including, with respect to any Underwriter,
the extent to which any such loss, claim, damage or liability arises from the
sale of Units by such Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person within the time required
by the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained
in the Prepricing Prospectus was corrected in the Prospectus, provided that the
Partnership has delivered the Prospectus to the several Underwriters in
requisite quantity on a timely basis to permit such delivery or sending.
(e) The Partnership, the General Partner, KSI and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (d) above. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, liabilities and expenses referred
to in paragraph (d) above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price of the Units underwritten by it and
distributed to the public exceeds
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<PAGE> 20
the amount of any damages which such Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 9 are several in proportion
to the respective numbers of Firm Units set forth opposite their names in
Schedule I hereto (or such numbers of Firm Units increased as set forth in
Section 12 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Partnership, the General Partner and KSI
set forth in this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Partnership, the
General Partner or KSI, the directors of the General Partner or officers of the
General Partner, or any person controlling the Partnership, the General Partner
or KSI, (ii) acceptance of any Units and payment therefor hereunder, and (iii)
any termination of this Agreement. A successor to any Underwriter or any
person controlling any Underwriter, or to the Partnership, the General Partner
or KSI, directors or officers of the General Partner, or any person controlling
the Partnership, the General Partner or KSI, shall be entitled to the benefits
of the indemnity, contribution and reimbursement agreements contained in this
Section 9. The term "successor" as used in this Agreement shall not include a
purchaser from any Underwriter of any Units in his status as such purchaser.
10. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Units hereunder are
subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post effective amendment thereto
to be declared effective before the offering of the Units may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued
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<PAGE> 21
and no proceeding for that purpose shall have been instituted or, to the
knowledge of the Partnership, the General Partner, KSI or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the financial condition, business, properties, net
worth, or results of operations of the Companies not contemplated by the
Prospectus, which in your opinion, as Representatives of the several
Underwriters, would materially, adversely affect the market for the Units, or
(ii) any event or development relating to or involving any of the Companies or
any officer or director of the General Partner which makes any statement made
in the Prospectus untrue or which, in the opinion of the Partnership and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, adversely affect the market for
the Units.
(c) You shall have received on the Closing Date, an opinion of
Fulbright & Jaworski L.L.P., special counsel for the Partnership, the General
Partner and KSI, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, substantially in the form of
Exhibit A attached hereto.
In addition, such special counsel shall have furnished to you their
written opinion, dated such Closing Date, in form and substance satisfactory to
you in your reasonable judgment, with respect to the legal conclusions
described in the Prospectus under the caption "Federal Income Tax
Considerations."
In rendering such opinions, such counsel may (A) rely in respect of
matters of fact upon certificates of the Companies and KSI and the officers of
the General Partner and upon information obtained from public officials
(provided that copies of such certificates and documents must be provided to
you), and may assume that the signatures on all documents examined by such
counsel are genuine, (B) state that their opinion is limited to federal laws
and the laws of the States of Delaware, New York and Texas, excepting therefrom
municipal, local and county ordinances and regulations, (C) state that in
preparing the opinion set forth under paragraph (ii) such counsel has not
consulted local counsel in any jurisdiction and as members of the bar of the
States of Texas and New York, such counsel does not purport to be experts in
the partnership laws of any other jurisdiction; except for the State of Texas,
the opinion set forth in paragraph (ii) has been prepared based on such
counsel's examination of the revised limited partnership act, which has been
adopted in such states, (D) state that they express no opinion with respect to
state or local taxes or tax statutes to which any of the limited partners of
the Partnership or any of the Companies may be subject, and (E) state that
their opinion is furnished as special counsel for the Partnership, the General
Partner and KSI to you, as representatives of the several Underwriters, and is
solely for the benefit of the several Underwriters.
-21-
<PAGE> 22
(d) You shall have received on the Closing Date, an opinion of
Richard Spellman, general counsel for the Partnership, the General Partner and
KSI, dated the Closing Date and addressed to you, as Representatives of the
several underwriters, substantially in the form of Exhibit B attached hereto.
(e) You shall receive opinions of ______________, with respect to
the State of Colorado, Foulston, Siefkin, Powers & Eberhardt, with respect to
the State of Kansas, Woods & Aitken, [ _____________, with respect to the State
of Oregon,] with respect to the State of Nebraska, Richardson, Groseclose,
Kornmann & Wyly, with respect to the State of South Dakota, Vogel, Brantner,
Kelly, Knutson, Weir & Bye, Ltd., with respect to the State of North Dakota,
Gamble & Davis, with respect to the State of Iowa, [_____________, with respect
to the State of Washington,] and _______________, with respect to the State of
Wyoming, dated the Closing Date and addressed to you, as Representative of the
several Underwriters, substantially in the form of Exhibit C attached hereto.
(f) You shall have received on the Closing Date an opinion of
Andrews & Kurth L.L.P., counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (xii), (xiv), (xv), (xix) and
(xxvii) of Exhibit A and such other related matters as you may reasonably
request.
(g) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Price Waterhouse, independent certified public accountants,
substantially in the forms heretofore approved by you.
(h) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Companies, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any change in the partnership interests or capital stock of
the Companies nor any material increase in the short term or long term debt of
the Companies (other than in the ordinary course of business) from that set
forth or contemplated in the Registration Statement or the Prospectus (or any
amendment or Supplement thereto); (iii) there shall not have been, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus (or any amendment or supplement thereto), except as may
otherwise be stated in the Registration Statement and Prospectus (or any
amendment or supplement thereto), any material adverse change in the financial
condition, business, properties, net worth or results of operations of the
General Partner or the Partnership and the Operating Entities taken as a whole;
-22-
<PAGE> 23
(iv) none of the Companies shall have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the limited partners of the Partnership, or the General Partner or
the Partnership and the Operating Entities, taken as a whole, other than those
reflected in the Registration Statement or the Prospectus (or any amendment or
supplement thereto); and (v) all the representations and warranties of the
Partnership, the General Partner and KSI contained in this Agreement shall be
true and correct on and as of the date hereof and on and as of the Closing Date
as if made on and as of the Closing Date, and you shall have received
certificates, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of KSI, the General Partner and by the General
Partner on behalf of the Partnership (or such other officers as are acceptable
to you), to the effect set forth in this Section 10(h) and in Section 10(i)
hereof.
(i) None of the Partnership, the General Partner or KSI shall have
failed at or prior to the Closing Date to have performed or complied with any
of its agreements herein contained and required to be performed or complied
with by it hereunder at or prior to the Closing Date.
(j) Prior to commencement of the offering of the Units, the Units
shall have been listed, subject to notice of issuance, on the New York Stock
Exchange.
(k) Each of the Partnership, the General Partner and KSI shall have
furnished or caused to be furnished to you such further certificates and
documents as you shall have reasonably requested that are customary in closing
transactions of the nature contemplated by this Agreement.
(l) KPL shall have exchanged an aggregate of 1,000,000 Preference
Units owned by it for a like number of Preference B Units;
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the General
Partner, for its own account or on behalf of the Partnership, or KSI and
delivered to you pursuant to the terms or requirements of this Agreement, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty by the Partnership, the General Partner
and KSI to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Units hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (h) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d),
(e) and (f) shall be revised to reflect the sale of Additional Units.
-23-
<PAGE> 24
11. Expenses. Each of the General Partner and KSI, jointly
and severally, agrees to pay the following costs and expenses and all other
costs and expenses incident to the performance by the Partnership, the General
Partner and KSI of any of their obligations hereunder: (i) the preparation,
printing or reproduction, and filing with the Commission of the registration
statement (including financial statements and exhibits thereto), each
Prepricing Prospectus, the Prospectus, and each amendment or supplement to any
of them; (ii) the printing (or reproduction) and delivery (including postage,
air freight charges and charges for counting and packaging) of such copies of
the registration statement, each Prepricing Prospectus, the Prospectus, the
Incorporated Documents, and all amendments or supplements to any of them, as
may be reasonably requested for use in connection with the offering and sale of
the Units; (iii) the preparation, printing, authentication, issuance and
delivery of certificates for the Units, including any stamp taxes in connection
with the original issuance and sale of the Units; (iv) the reproduction and
delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda
and all other agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Units; (v) the registration of the Units
under the Exchange Act and the listing of the Units on the New York Stock
Exchange; (vi) the registration or qualification of the Units for offer and
sale under the securities or Blue Sky laws of the several states as provided in
Section 5(g) hereof (including the reasonable fees, expenses and disbursements
of counsel for the Underwriters relating to the preparation, reproduction, and
delivery of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the filing fees in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc.; (viii) the transportation and other expenses incurred by or on
behalf of the Partnership's, the General Partner's or any Operating Entities'
representatives in connection with presentations to prospective purchasers of
the Units; and (ix) the fees and expenses of the Partnership's and General
Partner's accountants and the fees and expenses of counsel (including local and
special counsel) for the Partnership, the General Partner and KSI. It is
understood, however, that, except as provided in Section 5(j), Section 9 and
this Section 11 hereof, the Underwriters will pay all of their own costs and
expenses associated with the offering of the Preference Units, including the
fees of their counsel, transfer taxes on resale of any of the Preference Units
by them, and any advertising expenses connected with any offers they may make.
12. Effective Date of Agreement. This Agreement shall
become effective: (i) upon the execution and delivery hereof by the parties
hereto; or (ii) if, at the time this Agreement is executed and delivered, it
is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Units may commence,
when notification of the effectiveness of the registration statement or such
post- effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Partnership, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Partnership.
-24-
<PAGE> 25
If any one or more of the Underwriters shall fail or refuse to
purchase Firm Units which it or they have agreed to purchase hereunder, and the
aggregate number of Firm Units which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Firm Units, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the number
of Firm Units set forth opposite its name in Schedule I hereto bears to the
aggregate number of Firm Units set forth opposite the names of all
non-defaulting Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Firm Units which such defaulting Underwriter or
Underwriters agreed, but failed or refused, to purchase. If any Underwriter or
Underwriters shall fail or refuse to purchase Firm Units and the aggregate
number of Firm Units with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Units and arrangements satisfactory
to you and KPL for the purchase of such Firm Units by one or more
non-defaulting Underwriters or other party or parties approved by you and KPL
are not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or KPL. In any
such case which does not result in termination of this Agreement, either you or
KPL shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any such
default of any such Underwriter under this Agreement. The term "Underwriter"
as used in this Agreement includes, for all purposes of this Agreement, any
party not listed in Schedule I hereto who, with your approval and the approval
of KPL, purchases Firm Units which a defaulting Underwriter agreed, but failed
or refused, to purchase.
Any notice under this Section 12 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be
subject to termination without liability on the part of any Underwriter to the
Partnership, the General Partner or KSI by notice to the Partnership, if prior
to the Closing Date or any Option Closing Date (if different from the Closing
Date and then only as to the Additional Units), as the case may be, (i) trading
in securities generally on the New York Stock Exchange, American Stock Exchange
or the Nasdaq National Market shall have been suspended or materially limited,
(ii) a general moratorium on commercial banking activities in New York or Texas
shall have been declared by either federal or state authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
commence or continue the offering of the Units at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts
for the resale of the Units by the Underwriters. Notice of such termination
may be given to the Partnership by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
-25-
<PAGE> 26
14. Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover, and the first, third and eighth paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Partnership, the General
Partner or KSI, at the office of the Partnership at 2435 N. Central Expressway,
Suite 700, Richardson, Texas 75080 c/o Kaneb Pipe Line Company, Attention:
Edward D. Doherty, Chairman of the Board; or (ii) if to you, as Representatives
of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013, Attention Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Partnership, the General Partner, KSI and the
directors and officers of the General Partner, and the other controlling
persons referred to in Section 9 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Units in his
status as such purchaser.
As the National Association of Securities Dealers, Inc. ("NASD") views
the Preference Units as interests in a direct participation program, each
Underwriter agrees that it will offer the Units in compliance with Article III,
Section 34 to the NASD Rules of Fair Practice ("Section 34"). In particular,
each Underwriter agrees not to execute any transaction in a discretionary
account without prior written approval of the transaction by the customer, and
to comply with the disclosure and due diligence requirements set forth in
subsections (A) and (B) of Section 4 of Section 34.
-26-
<PAGE> 27
16. Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
between the Partnership, the General Partner, KSI and the several Underwriters.
Very truly yours,
KANEB PIPE LINE PARTNERS, L.P.
BY: KANEB PIPE LINE COMPANY, ITS GENERAL
PARTNER
By:_____________________________________
Name:___________________________________
Title:__________________________________
KANEB PIPE LINE COMPANY
By:_____________________________________
Name:___________________________________
Title:__________________________________
KANEB SERVICES INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
-27-
<PAGE> 28
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By:________________________
Name:______________________
Title:_______________________
-28-
<PAGE> 29
SCHEDULE I
KANEB PIPE LINE PARTNERS, L.P.
Underwriter Number of
- ----------- Firm Units
----------
Smith Barney Inc. _______
PaineWebber Incorporated _______
Total 3,500,000
=========
-29-
<PAGE> 1
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
KANEB PIPE LINE PARTNERS, L.P.
MAY ____, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 -- DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Additional Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Adjusted Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Adjusted Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreed Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreed Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Assignment of Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Available Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Book-Tax Disparity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Capital Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Carrying Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cash from Interim Capital Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cash from Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Certificate of Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Citizenship Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Closing Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Combined Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Common Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contributed Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contributing Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contribution Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cumulative Preference Unit Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cumulative Senior Preference Unit Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Curative Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Delaware Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Departing Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Economic Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Eligible Citizen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exchange Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Expansive Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
First Liquidation Target Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
First Target Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
First Target Distribution Cumulative Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . 5
General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
General Partner Equity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Indemnitee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Independent Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Initial Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Interim Capital Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Kaneb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
KPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Limited Partner Equity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Liquidating Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
LP Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Majority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Minimum Gain Attributable to Partner Nonrecourse Debt . . . . . . . . . . . . . . . . . . . . . . . 6
Minimum Quarterly Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
National Securities Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Agreed Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Termination Sales Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Termination Sales Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Non-citizen Assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Nonrecourse Built-in Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Nonrecourse Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Nonrecourse Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Operating Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Operating Partnership Agreement: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partner Nonrecourse Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partner Nonrecourse Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership Minimum Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Partnership Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Partnership's Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Payment Priority Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Per Unit Capital Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Permitted Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pipeline System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Preference Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Preference Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Preference B Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Preference Unit Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Preference B Unit Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Purchase Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Recapture Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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Recaptured Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reconstituted Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Record Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Redeemable Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Remaining Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Required Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Residual Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Residual Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Second Liquidation Target Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Second Target Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Second Target Distribution Cumulative Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 754 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Senior Preference Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Senior Preference Unit Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Special Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Substituted Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsidiary Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Terminating Capital Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Third Liquidation Target Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Third Target Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Third Target Distribution Cumulative Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Trading Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Transfer Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Unit Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Unit Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Unrealized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Unrealized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Unrecovered Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 2 -- FORMATION AND CONTINUATION OF PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Formation and Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Names and Addresses of Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.4 Principal Office of the Partnership; Registered Office and Agent . . . . . . . . . . . . . . . 12
2.5 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.6 Possible Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 3 -- PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 4 -- CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1 Initial Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Contributions on the Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 Additional Issuances of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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4.4 Limitations on Issuances During the Preference Period. . . . . . . . . . . . . . . . . . . . . 14
4.5 Capital Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.7 No Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.8 Loans from Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.9 No Fractional LP Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.10 Record of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.11 Splits and Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.12 No Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 5 -- ALLOCATIONS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Allocations For Capital Account Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 Allocations for Tax Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.3 Requirement and Characterization of Distributions . . . . . . . . . . . . . . . . . . . . . . . 24
5.4 Distributions During Preference Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.5 Distributions After Preference Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.6 Distributions of Cash from Interim Capital Transactions . . . . . . . . . . . . . . . . . . . . 26
5.7 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.8 Adjustment of Distribution and Target Distribution Levels . . . . . . . . . . . . . . . . . . . 30
5.9 Exchange of LP Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.10 Restrictions on Distributions on, and Acquisitions of, Preference Units,
Preference B Units and Common Units during the Preference Period . . . . . . . . . . . . . . . 31
5.11 Reimbursements and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 6 -- MANAGEMENT AND OPERATION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.2 Reliance By Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.3 Purchase or Sale of LP Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.4 Compensation and Reimbursement of the General Partner . . . . . . . . . . . . . . . . . . . . . 34
6.5 Partnership Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.6 Loans from the General Partner; Contracts with Affiliates . . . . . . . . . . . . . . . . . . . 34
6.7 Liability of Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.9 Other Matters Concerning the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.10 Registration Rights of KPL and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 37
6.11 Title to Partnership Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.12 Resolution of Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.13 Restrictions on General Partner's Authority . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.14 Outside Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 7 -- RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.1 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.2 Management of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.3 Outside Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.4 Return of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7.5 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE 8 -- BOOKS, RECORDS, ACCOUNTING AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.1 Records and Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.2 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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ARTICLE 9 -- TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.1 Section 754 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.2 Preparation of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.3 Tax Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.4 Tax Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.5 Tax Basis and Value Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.6 Entity-Level Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.7 Entity-Level Deficiency Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.8 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.9 Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.10 General Partner Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE 10 -- POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE 11 -- ISSUANCE OF UNIT CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.1 Issuance of Unit Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.2 Registration, Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . 46
11.3 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.4 Registered Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE 12 -- TRANSFER OF PARTNERSHIP INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.1 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.2 Transfer of Interests of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.3 Transfer of LP Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12.4 Restrictions on Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
12.5 Citizenship Certificates; Non-citizen Assignees . . . . . . . . . . . . . . . . . . . . . . . 49
12.6 Redemption of Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE 13 -- ADMISSION OF PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
13.1 Admission of Substituted Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . 51
13.2 Admission of Additional Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
13.3 Admission of Successor or Additional General Partner . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 14 -- WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . . . 52
14.1 Withdrawal or Removal of the General Partner. . . . . . . . . . . . . . . . . . . . . . . . . 52
14.2 Withdrawal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
14.3 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
14.4 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
14.5 Amendment of Certificate of Limited Partnership . . . . . . . . . . . . . . . . . . . . . . . 54
14.6 Interest of Departing Partner and Successor . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE 15 -- DISSOLUTION AND LIQUIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.1 Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.2 Continuation of the Business of the Partnership . . . . . . . . . . . . . . . . . . . . . . . 56
15.3 Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
15.4 Distribution in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
15.5 Cancellation of Certificate of Limited Partnership . . . . . . . . . . . . . . . . . . . . . . 57
15.6 Reasonable Time for Winding Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
15.7 Return of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
15.8 No Capital Account Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
15.9 Waiver of Partition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
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ARTICLE 16 -- AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE . . . . . . . . . . . . . . . . . . . 58
16.1 Amendments to be Adopted Solely by the General Partner . . . . . . . . . . . . . . . . . . . . 58
16.2 Amendment Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
16.3 Special Amendment Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
16.4 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
16.5 Notice of a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.6 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.7 Adjournment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.8 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.9 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.10 Conduct of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
16.11 Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
16.12 Voting and Other Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
ARTICLE 17 -- MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
17.1 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
17.2 Procedure for Merger or Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
17.3 Approval by Limited Partners of Merger or Consolidation. . . . . . . . . . . . . . . . . . . . 62
17.4 Certificate of Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
17.5 Effect of Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE 18 -- RIGHT TO PURCHASE LP UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
18.1 Right to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
18.2 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE 19 -- GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
19.1 Addresses and Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
19.2 Consent of Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
19.3 Titles and Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.4 Pronouns and Plurals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.5 Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.6 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.7 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.8 Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.9 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.11 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
19.12 Invalidity of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
APPENDIX A-1
APPENDIX A-2
APPENDIX A-3
APPENDIX A-4
APPENDIX B
</TABLE>
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<PAGE> 8
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
KANEB PIPE LINE PARTNERS, L.P.
This Amended and Restated Agreement of Limited Partnership of Kaneb
Pipe Line Partners, L.P. (herein called this "Agreement") is entered into by and
among Kaneb Pipe Line Company, a Delaware corporation ("KPL"), as general
partner of the Partnership, and the limited partners of the Partnership, as
hereinafter provided.
WHEREAS, KPL and the other parties thereto entered into that certain
Amended and Restated Agreement of Limited Partnership of the Partnership dated
as of September 27, 1989; and
WHEREAS, such agreement was subsequently amended by Amendment No. 1
thereto dated ____, 1994; and
WHEREAS, KPL now desires to further amend and restate the agreement of
limited partnership of the Partnership, as heretofore amended, to provide for
the issuance of an additional class of partnership interests (identified herein
as Preference B Units), to set forth the rights of the holders of the Preference
B Units, to provide certain rights of exchange with respect to the Preference
Units and the Preference B Units and to effect certain other changes of an
administrative nature in such agreement of limited partnership; and
WHEREAS, Section 16.1 of such agreement of limited partnership permits
the General Partner to amend such agreement to reflect a change that, in the
sole discretion of the General Partner, does not adversely affect the Limited
Partners in any material respect or, subject to Section 4.4, a change that is
necessary or desirable in connection with the issuance of any class of LP Units
pursuant to Section 4.3; and
WHEREAS, the General Partner has determined that each of the changes
effected hereby is permitted by an amendment to the agreement of limited
partnership of the Partnership effected by the General Partner without the
consent of any Limited Partner or Assignee;
NOW, THEREFORE, the General Partner does hereby amend and restate the
agreement of limited partnership of the Partnership to provide, in its entirety,
as follows:
ARTICLE 1 -- DEFINITIONS
Unless clearly indicated to the contrary, the terms defined in this
Article 1 shall, for the purposes of this Agreement, have the meanings herein
specified.
Additional Limited Partner: A Person admitted to the Partnership as a
Limited Partner pursuant to Section 13.2 and who is shown as such on the books
and records of the Partnership.
Adjusted Capital Account: The Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership (a) increased by
any amounts which such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases pursuant to a minimum gain chargeback pursuant to Section 5.1.4.1 and
5.1.4.2). The foregoing definition of Adjusted Capital Account is
<PAGE> 9
intended to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
Adjusted Property: Any property the Carrying Value of which has been
adjusted pursuant to Section 4.5.4.1 or 4.5.4.2. Once an Adjusted Property is
deemed distributed by, and recontributed to, the Partnership for federal income
tax purposes pursuant to Section 708 of the Code, such property shall thereafter
constitute a Contributed Property until the Carrying Value of such property is
further adjusted pursuant to Section 4.5.4.1 or 4.5.4.2.
Affiliate: Any Person directly or indirectly controlling, controlled by
or under common control with the Person in question. As used in this definition
of "Affiliate", the term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
Agreed Allocation: Any allocation, other than a Required Allocation, of
an item of income, gain, deduction or loss pursuant to the provisions of Section
5.1, including a Curative Allocation (if appropriate to the context in which the
term "Agreed Allocation" is used).
Agreed Value: Of any Contributed Property means the fair market value
of such property or other consideration at the time of contribution as
determined by the General Partner using such reasonable method of valuation as
it may adopt; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 4.5.3. Subject to Section 4.5.3, the
General Partner shall, in its sole discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to their fair market
values.
Agreement: This Amended and Restated Agreement of Limited Partnership,
as it may be amended, supplemented or restated from time to time.
Assignee: A Non-citizen Assignee or Person to whom one or more LP Units
have been transferred in a manner permitted under this Agreement and who has
executed and delivered a Transfer Application as required by this Agreement, but
who has not become a Substituted Limited Partner.
Assignment of Leases: Collectively, those two certain Assignment of
Lease Agreements dated October 3, 1989, among KPL, Kaneb and the Partnership.
Available Cash: Has the meaning set forth in Section 5.7.1.
Book-Tax Disparity: With respect to any item of Contributed Property or
Adjusted Property, as of the date of any determination, the difference between
the Carrying Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
4.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
Business Day: Monday through Friday of each week, except that a legal
holiday recognized as such by the Government of the United States or the State
of New York shall not be regarded as a Business Day.
Capital Account: The capital account maintained for a Partner or
Assignee pursuant to Section 4.5.
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<PAGE> 10
Capital Asset: Any asset on the Partnership's balance sheet, other than
inventory, accounts receivable or any other current asset and assets disposed of
in connection with normal retirements or replacements.
Capital Contribution: Any cash, cash equivalents or the Net Agreed
Value of Contributed Property which a Partner contributes to the Partnership
pursuant to Section 4.1, 4.2, 4.3, 4.5 or 14.6.2.2.
Carrying Value: (a) With respect to a Contributed Property, the Agreed
Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partner's and
Assignee's Capital Accounts, and (b) with respect to any other Partnership
property, the adjusted basis of such property for federal income tax purposes,
all as of the time of determination. The Carrying Value of any property shall be
adjusted from time to time in accordance with Section 4.5.4.1 and 4.5.4.2, and
to reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership Assets, as deemed appropriate by
the General Partner.
Cash from Interim Capital Transactions: Has the meaning set forth in
Section 5.7.2.
Cash from Operations: Has the meaning set forth in Section 5.7.3.
Certificate: A certificate issued by the Partnership evidencing
ownership of one or more LP Units.
Certificate of Limited Partnership: The Certificate of Limited
Partnership, and any and all amendments thereto and restatements thereof, filed
on behalf of the Partnership as required under the Delaware Act.
Citizenship Certification: A properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to his best knowledge such other Person) is an
Eligible Citizen.
Closing Date: October 3, 1989.
Closing Price: With respect to any day means the last sale price on
such day, regular way, or in case no such sale takes place on such day, the
average of the closing bid and asked prices on such day, regular way, in either
case as reported on the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the LP Units are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the National Securities
Exchange on which the LP Units are listed or admitted or trading or, if the LP
Units are not listed or admitted to trading on any National Securities Exchange,
the last quoted price on such day or, if not so quoted, the average of the high
bid and low asked prices on such day in the over-the-counter market, as reported
by NASDAQ or such other system then in use, or, if on any such day the LP Units
are not quoted by any such organization, the average of the closing bid and
asked prices on such day as furnished by a professional market maker making a
market in the LP Units selected by the Independent Committee or, if on such day
no market maker is making a market in the LP Units, the fair market value of
such LP Units on such day as determined reasonably and in good faith by the
Independent Committee.
Code: The Internal Revenue Code of 1986, as amended and hereafter
amended, and applicable regulations thereunder. Any reference herein to a
specific section or sections of the Code or applicable regulations shall be
deemed to include a reference to any corresponding provision of future law or
regulation.
Combined Interest: Has the meaning set forth in Section 14.6.1.
Commission: The Securities and Exchange Commission.
3
<PAGE> 11
Common Unit: One of that certain class of LP Units with those special
rights and obligations specified in this Agreement as being appurtenant to a
"Common Unit".
Contributed Property: Each property or other asset, in such form as may
be permitted by the Delaware Act, but excluding cash and cash equivalents,
contributed to the Partnership (or deemed contributed to the Partnership on
termination and reconstitution thereof pursuant to Section 708 of the Code or
otherwise). Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 4.5.4.1, such property shall no longer constitute a
Contributed Property but shall be deemed an Adjusted Property for such purposes.
Contributing Partner: Any Partner contributing (or deemed to have
contributed on the termination and reconstitution of the Partnership pursuant to
Section 708 of the Code or otherwise) Contributed Property to the Partnership.
Contribution Agreement: That certain Contribution Agreement dated as of
October 3, 1989, among KPL, the Partnership, the Operating Partnership and Kaneb
wherein KPL agrees (i) to contribute to the Operating Partnership certain
designated assets and the Operating Partnership agrees to assume certain
designated liabilities and (ii) to contribute its limited partner interest in
the Operating Partnership to the Partnership in exchange for LP Units.
Cumulative Preference Unit Deficiency: Has the meaning set forth in
Section 5.7.4.
Cumulative Preference B Unit Deficiency: Has the meaning set forth in
Section 5.7.5.
Cumulative Senior Preference Unit Deficiency: Has the meaning set forth
in Section 5.7.6.
Curative Allocation: Any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1.4.11.
Current Market Price: With respect to an LP Unit as of any date means
the average of the daily Closing Price per LP Unit for the 20 consecutive
Trading Days immediately prior to such date.
Delaware Act: The Delaware Revised Uniform Limited Partnership Act (6
Del. C. Section 17-101, et seq.), as it may be amended from time to time, and
any successor to such statute.
Departing Partner: A former General Partner, as of the effective date
of any withdrawal or removal of such General Partner pursuant to Section 14.1.
Economic Risk of Loss: Has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
Eligible Citizen: A Person qualified to own interests in real property
in jurisdictions in which the Partnership or the Operating Partnership does
business or proposes to do business from time to time, and whose status as a
Limited Partner or Assignee does not or would not subject the Partnership or the
Operating Partnership to a substantial risk of cancellation or forfeiture of any
of their property or any interest therein.
Exchange Act: The Securities Exchange Act of 1934, as amended, and any
successor to such statute.
Exchange Date: Has the meaning set forth in Section 5.9.1.
Expansive Capital Expenditures: Cash capital expenditures made to
increase the throughput or deliverable capacity or terminaling capacity
(assuming normal operating conditions, including down-time and maintenance) of
the assets of the Partnership, the Operating Partnership and any Subsidiary,
taken as a whole, from the throughput
4
<PAGE> 12
or deliverable capacity or terminaling capacity (assuming normal operating
conditions, including down-time and maintenance) existing immediately prior to
such capital expenditures. Where cash capital expenditures are made in part to
increase the throughput or deliverable capacity or terminaling capacity of the
assets of the Partnership, taken as a whole, and in part for other purposes, the
General Partner's good faith allocation thereof between the portion increasing
capacity and the portion for other purposes shall be conclusive.
First Liquidation Target Amount: Has the meaning set forth in Section
5.7.7.
First Target Distribution: Has the meaning set forth in Section 5.7.8.
First Target Distribution Cumulative Deficiency: Has the meaning set
forth in Section 5.7.9.
General Partner: KPL or any successor or additional General Partner
admitted pursuant to Section 13.3.
General Partner Equity Value: As of any date of determination, the fair
market value of the General Partner's Partnership Interest (including any LP
Units owned by the General Partner), as determined by the General Partner using
whatever reasonable method of valuation it may adopt.
Indemnitee: The General Partner, any Departing Partner, 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 Departing Partner, or any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or the Departing Partner as a director, officer, employee, partner,
agent or trustee of another Person.
Independent Committee: A committee of the Board of Directors of the
General Partner composed entirely of directors who are neither officers nor
employees of Kaneb, the General Partner or any of their Affiliates.
Initial Offering: The initial public offering of Senior Preference
Units, as described in the Registration Statement.
Interim Capital Transaction: Has the meaning set forth in Section
5.7.10.
Kaneb: Kaneb Services, Inc., a Delaware corporation.
KPL: Kaneb Pipe Line Company, a Delaware corporation.
Limited Partner: Kaneb, each Additional Limited Partner, any Departing
Partner upon the change of its status from General Partner to Limited Partner
pursuant to Section 14.6.2, each Substituted Limited Partner and, solely for
purposes of Articles 4, 5 and 6 and Sections 15.3 and 15.4, each Assignee.
Limited Partner Equity Value: As of any date of determination, the
amount equal to the product of (a) the total number of LP Units outstanding
(immediately prior to an issuance of LP Units or distribution of cash or
Partnership property), other than LP Units held by the General Partner or an
Affiliate of the General Partner, multiplied by (b)(i) in the case of a
valuation required by Section 4.5.4.1 (other than valuations caused by sales of
a de minimis quantity of LP Units), the price at which an LP Unit is purchased
from the Partnership or (ii) in the case of a valuation required by Section
4.5.4.2 (or a valuation required by Section 4.5.4.1 caused by sales of a de
minimis quantity of LP Units) the Closing Price.
Liquidating Trustee: The General Partner, unless dissolution was caused
by an event described in Section 15.1.2 then the liquidator or liquidating
committee chosen pursuant to Section 15.3.
5
<PAGE> 13
LP Unit: A Partnership Interest of a Limited Partner or Assignee in the
Partnership representing such fractional part of the Partnership Interests of
all the Limited Partners and Assignees as shall be determined by the General
Partner pursuant to this Agreement in connection with the issuance of
Partnership Interests pursuant to Article 4 and the making of Capital
Contributions by Additional Limited Partners and shall include the Senior
Preference Units, Preference Units, Preference B Units and Common Units;
provided, however, that each LP Unit of any class at any time outstanding shall
represent the same fractional part of the Partnership Interests of such class of
all Limited Partners as each other LP Unit of such class.
Majority Interest: Limited Partners holding more than 50% of the issued
and Outstanding LP Units at any given time, voting as a single class.
Minimum Gain Attributable to Partner Nonrecourse Debt: That amount
determined in accordance with the principles of Treasury Regulation Section
1.704-2(i)(3).
Minimum Quarterly Distribution: Has the meaning set forth in Section
5.7.11.
NASDAQ: The National Association of Securities Dealers, Inc. Automated
Quotation System.
National Securities Exchange: An exchange registered with the
Commission under Section 6(a) of the Exchange Act.
Net Agreed Value: Means, (a) in the case of any Contributed Property,
the Agreed Value of such property reduced by any liabilities either assumed by
the Partnership upon such contribution or to which such property is subject when
contributed and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
at the time such property is distributed, reduced by any indebtedness either
assumed by such Partner or Assignee upon such distribution or to which such
property is subject at the time of distribution, in either case, as determined
under Section 752 of the Code.
Net Income: For any taxable period, the excess, if any, of the
Partnership's items of income and gain (other than those items attributable to
dispositions constituting Terminating Capital Transactions) for such taxable
period over the Partnership's items of loss and deduction (other than those
items attributable to dispositions constituting Terminating Capital
Transactions) for such taxable period. The items included in the calculation of
Net Income shall be determined in accordance with Section 4.5.2 and shall not
include any items specially allocated under Section 5.1.4. Once an item of
income, gain, loss or deduction that has been included in the initial
computation of Net Income is subjected to a Required Allocation or a Curative
Allocation, Net Income or the resulting Net Loss, whichever the case may be,
shall be recomputed without regard to such item.
Net Loss: For any taxable period, the excess, if any, of the
Partnership's items of loss and deduction (other than those items attributable
to dispositions constituting Terminating Capital Transactions) for such taxable
period over the Partnership's items of income and gain (other than those items
attributable to dispositions constituting Terminating Capital Transactions) for
such taxable period. The items included in the calculation of Net Loss shall be
determined in accordance with Section 4.5.2 and shall not include any items
specially allocated under Section 5.1.4. Once an item of income, gain, loss or
deduction that has been included in the initial computation of Net Loss is
subjected to a Required Allocation or a Curative Allocation, Net Loss or the
resulting Net Income, whichever the case may be, shall be recomputed without
regard to such item.
Net Termination Sales Gain: Has the meaning set forth in Section
5.7.12.
Net Termination Sales Loss: Has the meaning set forth in Section
5.7.13.
6
<PAGE> 14
Non-citizen Assignee: A Person who the General Partner has determined
in its sole discretion does not constitute an Eligible Citizen and as to whose
Partnership Interest the General Partner has become the Substituted Limited
Partner, pursuant to Section 12.5.
Nonrecourse Built-in Gain: With respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or negative pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 5.2.2.1(A), 5.2.2.2(A) or 5.2.2.4
if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
Nonrecourse Deductions: Any and all items of loss, deduction or
expenditure (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
Nonrecourse Liability: Has the meaning set forth in Treasury Regulation
Section 1.704-1(a)(2).
Operating Partnership: Kaneb Pipe Line Operating Partnership, L.P., a
Delaware limited partnership established pursuant to the Operating Partnership
Agreement.
Operating Partnership Agreement: The Amended and Restated Agreement of
Limited Partnership of the Operating Partnership as it may be amended,
supplemented or restated from time to time.
Opinion of Counsel: A written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner) acceptable to the General
Partner.
Outstanding: All LP Units or other Partnership Securities that are
issued by the Partnership and reflected as outstanding on the Partnership's
books and records as of the date of determination.
Partner: A General Partner or a Limited Partner and solely for purposes
of Articles 4, 5 and 6 and Sections 15.3 and 15.4 shall include an Assignee.
Partner Nonrecourse Debt: Has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(4).
Partner Nonrecourse Deductions: Any and all items of loss, deduction or
expenditure (described in Section 705(a)(2)(B) of the Code) that in accordance
with the principles of Treasury Regulation Section 1.704-2(i), are attributable
to a Partner Nonrecourse Debt.
Partnership: The limited partnership heretofore formed and continued
pursuant to this Agreement, and any successor thereto.
Partnership Assets: All assets, whether tangible or intangible and
whether real, personal or mixed, at any time owned by the Partnership.
Partnership Interest: As to any Partner, all of the interests of that
Partner in the Partnership, including, without limitation, his (i) right to a
distributive share of the profits and losses of the Partnership, (ii) right to a
distributive share of Partnership Assets and (iii) right, if the General
Partner, to participate in the management of the affairs of the Partnership.
Partnership Minimum Gain: That amount determined in accordance with the
principles of Treasury Regulation Section 1.704-2(d).
Partnership Securities: Has the meaning set forth in Section 4.3.1.
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<PAGE> 15
Partnership Year: Means the fiscal year of the Partnership, which shall
be the calendar year.
Partnership's Accountants: Such nationally recognized firm of
independent public accountants as is selected, from time to time, by the General
Partner.
Payment Priority Agreement: Means that certain Payment Priority
Agreement dated as of October 3, 1989, between KPL and the Operating
Partnership.
Per Unit Capital Amount: As of any date of determination, the Capital
Account, stated on a per LP Unit basis underlying any LP Unit held by a Person
other than the General Partner or any Affiliate of the General Partner who holds
LP Units.
Percentage Interest: Means, as of the date of determination, (a) as to
the General Partner in its capacity as such, 1/99th, (b) as to any Limited
Partner or Assignee holding LP Units, the product of (i) 98/99 multiplied by
(ii) the quotient of the number of LP Units held by such Limited Partner or
Assignee divided by the total number of all LP Units then Outstanding; provided,
however, that following any issuance of additional LP Units by the Partnership
pursuant to Section 4.3, proper adjustment shall be made to the Percentage
Interest represented by each LP Unit to reflect such issuance.
Permitted Indebtedness: $45 million, plus 80% of the aggregate
Expansive Capital Expenditures of the Partnership since the Closing Date greater
than $45 million. Permitted Indebtedness shall be determined on a consolidated
basis.
Person: Any individual, corporation, association, partnership, joint
venture, trust, estate or other entity or organization.
Pipeline System: shall mean the refined petroleum products pipeline
assets and related terminal facilities that was transferred to the Operating
Partnership by KPL on the Closing Date, as such facilities may be maintained or
improved from time to time.
Preference Period: Has the meaning set forth in Section 5.7.14.
Preference Unit: One of that certain class of LP Units with those
special rights and obligations specified in this Agreement as being appurtenant
to a "Preference Unit".
Preference B Unit: One of that certain class of LP Units with those
special rights and obligations specified in this Agreement as being appurtenant
to a "Preference B Unit".
Preference Unit Deficiency: Has the meaning set forth in Section
5.7.15.
Preference B Unit Deficiency: Has the meaning set forth in Section
5.7.16.
Purchase Date: The date determined by the General Partner as the date
for purchase of all Outstanding LP Units (other than LP Units owned by the
General Partner and its Affiliates) pursuant to Section 18.2.
Recapture Income: Any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
8
<PAGE> 16
Recaptured Credits: Credits previously taken against federal income tax
liability which are required to be recaptured upon the disposition of any
property by the Partnership prior to the end of such property's useful life in
determining the amount of the credit relating thereto.
Reconstituted Partnership: The new limited partnership formed in the
manner described in Section 15.2.
Record Date: The date established by the General Partner for
determining (i) the identity of Limited Partners or Assignees, if applicable,
entitled to (a) notice of or to vote at any meeting of Limited Partners, (b)
give consent in writing in lieu of or in connection with a meeting of Limited
Partners or (c) exercise rights in respect of any other lawful action of Limited
Partners or (ii) the identity of Record Holders entitled to receive any report,
distribution or notice.
Record Holder: As applied to an LP Unit, the Person in whose name the
Unit Certificate evidencing such LP Unit is issued and in whose name such LP
Unit is registered on the books of the Registrar as of the opening of business
on a particular Business Day.
Redeemable Units: Any LP Units for which a redemption notice has been
given and has not been withdrawn, under Section 12.6.
Registrar: American Stock Transfer & Trust Co., acting in its capacity
as a registered transfer agent of the LP Units, and any successor as registrar
of the LP Units.
Registration Statement: The Registration Statement on Form S-1
(Commission File No. 33-30330), as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of Senior Preference
Units in the Initial Offering.
Remaining Capital: Has the meaning set forth in Section 5.7.17.
Required Allocation: Any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a) the
proviso-clause of Section 5.1.2.2 and Sections 5.1.4.1, 5.1.4.2, 5.1.4.4,
5.1.4.5, 5.1.4.6, 5.1.4.7, and 5.1.4.9, such allocations (or limitations
thereon) being directly or indirectly required by the Treasury Regulations
promulgated under Section 704(b) of the Code.
Residual Gain or Residual Loss: Any item of gain or loss, as the case
may be, of the Partnership recognized for federal income tax purposes resulting
from a sale, exchange or other disposition of a Contributed Property or Adjusted
Property, to the extent such item of gain or loss is not allocated pursuant to
Sections 5.2.2.1(A) or 5.2.2.2(A) to eliminate Book-Tax Disparities.
Second Liquidation Target Amount: Has the meaning set forth in Section
5.7.18.
Second Target Distribution: Has the meaning provided in Section 5.7.19.
Second Target Distribution Cumulative Deficiency: Has the meaning set
forth in Section 5.7.20.
Section 754 Election: An election under Section 754 of the Code
relating to the adjustment of the adjusted basis of Partnership Assets as
provided in Sections 734 and 743 of the Code.
Securities Act: The Securities Act of 1933, as amended, and any
successor to such statute.
Senior Preference Unit: One of that certain class of LP Units with
those special rights and obligations specified in this Agreement as being
appurtenant to a "Senior Preference Unit".
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Senior Preference Unit Deficiency: Has the meaning set forth in Section
5.7.21.
Special Approval: Approval by a majority of the members of the Board of
Directors of the General Partner that includes approval by a majority of the
members of the Independent Committee.
Substituted Limited Partner: A Person who is admitted as a Limited
Partner in the Partnership pursuant to Section 13.1 and with all the rights of a
Limited Partner and who is shown as a Limited Partner on the books and records
of the Partnership.
Subsidiary of any Person: Either (i) a corporation a majority of whose
voting capital stock is at the time, directly or indirectly, owned by such
Person, by one or more subsidiaries of such person or by such Person and one or
more subsidiaries of such Person, (ii) a partnership in which such Person or
subsidiary of such person is, at the date of determination, a general or limited
partner of such partnership, but only if such Person or its subsidiary is
entitled to receive more than fifty percent of the assets of such partnership
upon its dissolution, or (iii) any other Person (other than a corporation or
partnership) in which such Person, a subsidiary of such Person or such Person
and one or more subsidiaries of such Person, directly or indirectly, at the date
of determination thereof, has (x) at least a majority ownership interest or (y)
the power to elect or direct the election of a majority of the directors or
other governing body of such Person.
Subsidiary: Any subsidiary of the Partnership.
Subsidiary Partnership Agreement: With respect to any Subsidiary that
is a partnership, the agreement of the partners thereof as to the affairs and
the conduct of the business of such partnership.
Terminating Capital Transaction: Has the meaning set forth in Section
5.7.22.
Third Liquidation Target Amount: Has the meaning set forth in Section
5.7.23.
Third Target Distribution: Has the meaning set forth in Sections
5.7.24.
Third Target Distribution Cumulative Deficiency: Has the meaning set
forth in Section 5.7.25.
Trading Day: Means a day on which the principal National Securities
Exchange on which such class or series of LP Units are listed or admitted to
trading is open for the transaction of business or, if no LP Units are listed or
admitted to trading on any National Securities Exchange, a day on which banking
institutions in New York City generally are open.
Transfer Agent: The Registrar or any bank, trust company or other
Person (including the General Partner or any of its Affiliates) appointed by the
Partnership to act as a transfer agent for the LP Units.
Transfer Application: An application and agreement for transfer of LP
Units for such class of LP Units in the form set forth on the back of the Unit
Certificate and attached to this Agreement as Appendix B by which a transferee
(i) requests admission to the Partnership as a Substituted Limited Partner, (ii)
agrees to be bound by the terms and conditions of this Agreement, (iii)
represents that he has authority to enter into this Agreement, (iv) grants a
power of attorney to the General Partner and the Liquidating Trustee, and (v)
makes the consents and waivers contained in this Agreement.
Underwriting Agreement: The agreement dated as of September 25, 1989,
among the Partnership, KPL, the Operating Partnership, Kaneb and the
underwriters named therein with respect to the Initial Offering.
Unit Certificate: Has the meaning set forth in Section 11.1.
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Unit Price: Of an LP Unit of a given class, as of any date of
determination, (i) if the LP Units of such class are listed or admitted to
trading on one or more National Securities Exchanges, the average of the last
reported sales prices per LP Unit of such class regular way or, in case no such
reported sale takes place on any such day, the average of the last reported bid
and asked prices per LP Units of such class regular way, in either case on the
principal National Securities Exchange on which the LP Units of such class are
listed or admitted to trading, for the five trading days immediately preceding
the date of determination; (ii) if the LP Units of such class are not listed or
admitted to trading on a National Securities Exchange but are quoted by NASDAQ,
the average of the last reported sales prices per LP Unit of such class regular
way or, in case no reported sale takes place on any such day or the last
reported sales prices are not then quoted, the average of the closing bid prices
per LP Unit of such class for the five trading days immediately preceding such
date of determination, as furnished by the National Quotation Bureau
Incorporated or such other nationally recognized quotation service as may be
selected by the General Partner for such purpose, if such Bureau is not at the
time furnishing quotations; or (iii) if the LP Units of such class are not
listed or admitted to trading on a National Securities Exchange or quoted by
NASDAQ, an amount equal to the fair market value of an LP Unit of such class as
of such date of determination, as determined by the Independent Committee using
any reasonable method of valuation.
Unrealized Gain: Attributable to a Partnership property means, as of
any date of determination, the excess, if any, of the fair market value of such
property as of such date of determination over the Carrying Value of such
property as of such date of determination (prior to any adjustment to be made
pursuant to Section 4.5.4 as of such date).
Unrealized Loss: Attributable to a Partnership property means, as of
any date of determination, the excess, if any, of the Carrying Value of such
property as of such date of determination (prior to any adjustment to be made
pursuant to Section 4.5.4 as of such date) over the fair market value of such
property as of such date of determination.
Unrecovered Capital: Has the meaning set forth in Section 5.8.1.
ARTICLE 2 -- FORMATION AND CONTINUATION OF PARTNERSHIP
2.1 Formation and Continuation. Subject to the provisions of this
Agreement, the General Partner and each Limited Partner hereby continue the
Partnership as a limited partnership pursuant to the provisions of the Delaware
Act. Except as expressly provided herein to the contrary, the rights and
obligations of the Partners and the administration, dissolution and termination
of the Partnership shall be governed by the Delaware Act. The Partnership
Interest of each Partner shall be personal property for all purposes.
2.2 Name. The name of the Partnership shall be "Kaneb Pipe Line
Partners, L.P." The business of the Partnership shall be conducted under the
name of "Kaneb Pipe Line Partners, L.P." or such other name, including the name
of the General Partner or any Affiliate, as the General Partner may from time to
time determine. The words "L.P." or "Limited Partnership" or similar words or
letters shall be included in the Partnership's name where necessary for the
purpose of complying with the laws of any jurisdiction that so requires. The
General Partner in its sole discretion may change the name of the Partnership at
any time and from time to time and shall notify the Limited Partners of such
change in the next regular communication to Limited Partners. Notwithstanding
the foregoing, unless otherwise permitted by Kaneb, in the event that neither
KPL nor any Affiliate of Kaneb is the general partner of the Partnership, the
Partnership shall change its name to a name not including "Kaneb" and shall
cease using the name "Kaneb" or other names or symbols associated therewith.
2.3 Names and Addresses of Partners. The General Partner of the
Partnership is KPL. The business address of the General Partner is 2435 North
Central Expressway, Richardson, Texas 75080. The General Partner may change its
address at any time and from time to time. The date upon which the General
Partner became a Partner in the Partnership is as set forth in the books and
records of the Partnership. The names and business,
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residence or mailing addresses of the Limited Partners and the date on which
each such Person became a Limited Partner are as set forth from time to time in
the books and records of the Partnership.
2.4 Principal Office of the Partnership; Registered Office and Agent.
The principal office of the Partnership shall be located at 2435 North Central
Expressway, Richardson, Texas 75080. The General Partner may, at any time and
from time to time, change the location of the Partnership's principal office and
may establish such additional offices of the Partnership as the General Partner
may from time to time determine. The General Partner shall provide the Limited
Partners with written notice of any change in the Partnership's principal office
within 90 days after such change. The name of the registered agent for service
of process on the Partnership in Delaware is The Corporation Trust Company. The
address of the registered agent and the address of the registered office of the
Partnership in Delaware is Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801.
2.5 Term. The Partnership commenced upon the filing of the Certificate
of Limited Partnership in accordance with the Delaware Act on August 14, 1989,
and shall continue in existence until December 31, 2039, unless earlier
terminated in accordance with any provisions of this Agreement.
2.6 Possible Restrictions on Transfer. Notwithstanding anything to the
contrary herein, in the event of (i) the enactment (or imminent enactment) of
any legislation, (ii) the publication of any temporary or final regulation by
the Treasury Department, (iii) any ruling by the Internal Revenue Service or
(iv) any judicial decision, that, in any such case, in the Opinion of Counsel,
would result in the taxation of the Partnership for federal income tax purposes
as a corporation or as an association taxable as a corporation, then, either (a)
the General Partner may impose such restrictions on the transfer of LP Units or
Partnership Interests as may be required, in the Opinion of Counsel, to prevent
the taxation of the Partnership for federal income tax purposes as a corporation
or as an association taxable as a corporation, including making any amendments
to this Agreement as the General Partner in its sole discretion may determine to
be necessary or appropriate in order to impose such restrictions, provided, that
any such amendment to this Agreement which would result in the delisting or
suspension of trading of any class of LP Units on any National Securities
Exchange on which such class of LP Units is then traded must be approved by the
Record Holders of at least a majority in interest of the Outstanding LP Units of
such class of LP Units (excluding for purposes of such determination LP Units of
such class owned by the General Partner and its Affiliates unless the General
Partner and its Affiliates own all of the LP Units of such class of LP Units) or
(b) upon the recommendation of the General Partner and the approval of a
Majority Interest (excluding for purposes of such determination LP Units owned
by the General Partner and its Affiliates), the Partnership may be converted
into and reconstituted as a trust or any other type of legal entity (the "New
Entity") in the manner and on other terms so recommended and approved. In such
event, the business of the Partnership shall be continued by the New Entity in
the manner and on the terms so recommended and approved. Notwithstanding the
foregoing, no such reconstitution shall take place unless the Partnership shall
have received an Opinion of Counsel to the effect that the liability of the
Limited Partners for the debts and obligations of the New Entity shall not,
unless such Limited Partners take part in the control of the business of the New
Entity, exceed that which otherwise had been applicable to such Limited Partners
as limited partners of the Partnership under the Delaware Act.
ARTICLE 3 -- PURPOSE
The purpose and nature of the business to be conducted by the
Partnership shall be (i) to serve as limited partner in the Operating
Partnership and, in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership as a limited partner in the Operating
Partnership pursuant to the Operating Partnership Agreement or otherwise, (ii)
to conduct any other business that may be lawfully conducted by a limited
partnership organized pursuant to the Delaware Act and (iii) to do anything
necessary or incidental to the foregoing (including, without limitation, the
making of capital contributions or loans to the Operating Partnership or any
Subsidiary). The General Partner has no obligation or duty to the Partnership,
Limited Partners or Assignees to propose or approve, and in its sole discretion
may decline to propose or approve, the conduct by the Partnership pursuant to
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clause (ii) above of any business other than as contemplated by clause (i)
above. The General Partner shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein and
for the protection and benefit of the Partnership.
ARTICLE 4 -- CAPITAL ACCOUNTS; CAPITAL CONTRIBUTIONS
4.1 Initial Contributions. The initial Capital Contributions to the
Partnership consisted of $1,000, which the Partners contributed to the
Partnership upon the formation of the Partnership. The General Partner
contributed $10 in cash and received in exchange therefor a 1.0% Partnership
Interest as General Partner and Kaneb contributed $990 in cash and received in
exchange therefor 46 Senior Preference Units representing a 99% Partnership
Interest as Limited Partner in the Partnership.
4.2 Contributions on the Closing Date. On the Closing Date, the General
Partner contributed to the Partnership, as provided in the Contribution
Agreement, all of its interest as limited partner in the Operating Partnership
and received in exchange therefor (i) 4,649,954 Senior Preference Units,
6,000,000 Preference Units and 3,160,000 Common Units representing (together
with the 46 Senior Preference Units previously issued to Kaneb) in the aggregate
a 98/99th Partnership Interest as Limited Partner in the Partnership and (ii) a
Partnership Interest and a credit to its capital account as General Partner in
the amount required to increase such capital account to an amount equal to
1/99th of the aggregate capital accounts of all the Partners after giving effect
to the issuance of LP Units contemplated by clause (i) of this Section 4.2. The
Agreed Value of the General Partner's interest as limited partner in the
Operating Partnership on the Closing Date was $306,920,196.
4.3 Additional Issuances of Securities.
4.3.1 Subject to the provisions of Section 4.4, the General Partner is
authorized to cause the Partnership to issue LP Units or classes or series
thereof, or options, rights, warrants or appreciation rights relating thereto,
or any other type of equity security that the Partnership may lawfully issue,
any unsecured or secured debt obligations of the Partnership or debt obligations
of the Partnership convertible into any class or series of equity securities of
the Partnership (collectively "Partnership Securities"), in addition to those
issued pursuant to Sections 4.1 and 4.2, from time to time to Partners or to
other Persons and to admit such Partners or other Persons to the Partnership as
Additional Limited Partners, all without the consent or approval of the Limited
Partners or any percentage or class thereof. The Partnership may assume
liabilities in connection with any such issuance. Subject to the provisions of
Section 4.4 and the requirements of the Delaware Act, the General Partner shall
have sole and complete discretion in determining the considerations and terms
and conditions with respect to any future issuance of Partnership Securities.
The General Partner shall do all things necessary to comply with the Delaware
Act and is authorized and directed to do all things it deems to be necessary or
advisable in connection with any such future issuance, including, without
limitation, compliance with any statute, rule, regulation or guideline of any
federal, state or other governmental agency or any National Securities Exchange
on which any Partnership Securities are listed for trading. Subject to the terms
of Section 4.4, the General Partner is authorized to cause the issuance of
Partnership Securities pursuant to any plan for the benefit of employees
responsible for the operations of the Partnership or the Operating Partnership
maintained or sponsored by the General Partner, the Partnership, the Operating
Partnership or any Affiliate of any of them.
4.3.2 Subject to the provisions of Section 4.4 and the requirements of
the Delaware Act, but notwithstanding any other provision of this Agreement to
the contrary, Partnership Securities issuable by the Partnership pursuant to
this Section 4.3 shall be issuable from time to time in one or more classes or
series of classes with such designations, preferences and relative,
participating, optional or other special rights, powers and duties, including
rights, powers and duties senior to existing classes and series of Partnership
Securities, all as shall be fixed by the General Partner in the exercise of its
sole and complete discretion, including, without limitation, (i) the allocation,
for federal income and other purposes, to each such class or series of
Partnership Securities of
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items of Partnership income, gain, loss, deduction and credit; (ii) the right of
such class or series of Partnership Securities to share in Partnership
distributions; (iii) the rights of each such class or series of Partnership
Securities upon dissolution and liquidation of the Partnership; (iv) whether
such class or series of Partnership Securities is redeemable by the Partnership
and, if so, the price at, and the terms and conditions on, which such class or
series of Partnership Securities may be redeemed by the Partnership; (v) whether
such class or series of Partnership Securities is issued with the privilege of
conversion and, if so, the rate at, and the terms and conditions upon, which
such class or series of Partnership Securities may be converted into any other
class or series of Partnership Securities; (vi) the terms and conditions of the
issuance of such class or series of Partnership Securities, the issuance of Unit
Certificates in respect thereof, and all other matters relating to the
assignment thereof; and (vii) the rights, if any, of each such class or series
of Partnership Securities to vote on matters relating to the Partnership and
this Agreement. Upon the issuance of any class or series of Partnership
Securities, the General Partner (pursuant to the General Partner's powers of
attorney from the Limited Partners), without the approval at the time of any
Limited Partner or Assignee (each Person accepting Partnership Securities being
deemed to approve of such amendment) may amend any provision of this Agreement,
and execute, swear to, acknowledge, deliver, file and record, if required, an
amended Certificate of Limited Partnership and any other documents that may be
required in connection therewith, as shall be necessary or desirable to reflect
the authorization and issuance of such class or series of Partnership Securities
and the relative rights and preferences of such class or series of Partnership
Securities as to the matters set forth in the preceding sentence.
4.4 Limitations on Issuances During the Preference Period.
Notwithstanding the terms of Section 4.3, during the Preference Period the
Partnership shall not issue (i) an aggregate of more than 10,000,000 Senior
Preference Units (excluding for purposes of such determination the 5,000,000
Senior Preference Units issued by the Partnership in connection with its initial
public offering and Senior Preference Units issued upon exchanges of Preference
Units pursuant to Section 5.9.1); (ii) other Partnership Interests on a parity
with, convertible into or exchangeable for Senior Preference Units or (iii)
other Partnership Interests having rights to distributions or in liquidation
ranking prior or senior to Senior Preference Units; without the prior approval
of the Record Holders of at least a majority in interest of the Outstanding
Senior Preference Units (excluding for purposes of the approval, Senior
Preference Units held by the General Partner and its Affiliates).
4.5 Capital Accounts.
4.5.1 The Partnership shall maintain for each Partner (or a beneficial
owner of LP Units held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) a separate Capital Account in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account
shall be increased by (i) the amount of all Capital Contributions made by such
Partner to the Partnership pursuant to this Agreement and (ii) all items of
Partnership income and gain (including income and gain exempt from tax) computed
in accordance with Section 4.5.2 and allocated to such Partner pursuant to
Article 5, and decreased by (x) the amount of cash or Net Agreed Value of all
actual and deemed distributions of cash or property made to such Partner
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 4.5.2 and allocated to such Partner pursuant
to Section 5.1.
4.5.2 For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes (including any method of depreciation, cost recovery or amortization
used for that purpose), provided that:
4.5.2.1 All fees and other expenses incurred by the Partnership
to promote the sale of (or to sell) a Partnership Interest that can
neither be deducted nor amortized under Section 709 of the Code, if
any, shall, for purposes of Capital Account maintenance, be treated as
an item of deduction at the time such fees and other expenses are
incurred and shall be allocated among the Partners pursuant to Sections
5.1.
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4.5.2.2 Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), the computation of all items of income,
gain, loss and deduction shall be made without regard to any election
under Section 754 of the Code which may be made by the Partnership and,
as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of
the Code, without regard to the fact that such items are not includable
in gross income or are neither currently deductible nor capitalized for
federal income tax purposes. To the extent an adjustment to the
adjusted tax basis of any Partnership Asset pursuant to Section 734(b)
or 743(b) of the Code is required, pursuant to Treasury Regulation
Section 1.704- 1(b)(2)(iv)(m), to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital Accounts
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of
the asset).
4.5.2.3 Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as if the
adjusted basis of such property as of such date of disposition were
equal in amount to the Partnership's Carrying Value with respect to
such property as of such date.
4.5.2.4 In accordance with the requirements of Section 704(b)
of the Code, any deductions for depreciation, cost recovery or
amortization attributable to any Contributed Property shall be
determined as if the adjusted basis of such property on the date it was
acquired by the Partnership were equal to the Agreed Value of such
property. Upon an adjustment pursuant to Section 4.5.4 to the Carrying
Value of any Partnership property subject to depreciation, cost
recovery or amortization, any further deductions for such depreciation,
cost recovery or amortization attributable to such property shall be
determined (A) as if the adjusted basis of such property were equal to
the Carrying Value of such property immediately following such
adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income
tax purposes; provided, however, that, if the asset has a zero adjusted
basis for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
4.5.2.5 If the Partnership's adjusted basis in depreciable or
cost recovery property is reduced for federal income tax purposes
pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of
such reduction shall, solely for purposes hereof, be deemed to be an
additional depreciation or cost recovery deduction in the year such
property is placed in service and shall be allocated among the Partners
pursuant to Section 5.1. Any restoration of such basis pursuant to
Section 48(q)(2) of the Code shall, to the extent possible, be
allocated in the same manner to the Partners to whom such deemed
deduction was allocated.
4.5.2.6 Solely for the purpose of this Section 4.5.2, the
Partnership shall be treated as owning directly its proportionate share
(as determined by the General Partner based upon the provisions of the
Operating Partnership Agreement) of all property owned by the Operating
Partnership.
4.5.3 Generally, a transferee of a Partnership Interest shall succeed
to that portion of the Capital Account of the transferor relating to the
Partnership Interest so transferred; provided, however, that, if the transfer
causes a termination of the Partnership under Section 708(b)(1)(B) of the Code,
the Partnership's properties shall be deemed to have been distributed in
liquidation of the Partnership to the Partners and recontributed by such
Partners in reconstitution of the Partnership. In such event, the Carrying
Values of the Partnership properties shall be adjusted immediately prior to such
deemed distribution pursuant to Section 4.5.4.2 and such Carrying Values shall
then constitute the Agreed Values of such properties. The Capital Accounts of
such reconstituted Partnership shall be maintained in accordance with the
principles of this Section 4.5.
4.5.4
4.5.4.1 Consistent with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv)(f), on an issuance of additional LP Units for
cash or Contributed Property or the conversion of the General Partner's
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Partnership Interest as the General Partner to Common Units pursuant to
Section 14.6.2(a), the Capital Accounts of all Partners and the
Carrying Value of each Partnership property immediately prior to such
issuance shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership property, as
if such Unrealized Gain or Unrealized Loss had been recognized on an
actual sale of each such property immediately prior to such issuance
and had been allocated to the Partners at such time pursuant to Section
5.1. In determining Unrealized Gain or Unrealized Loss for purposes of
this Section 4.5.4.1 the aggregate cash amount and fair market value of
all Partnership assets (including cash or cash equivalents) immediately
prior to the issuance of Partnership Interests shall be determined by
the General Partner using such reasonable method of valuation as it may
adopt; provided, however, the General Partner, in arriving at such
valuation, must take into account the Limited Partner Equity Value and
the General Partner Equity Value. The General Partner shall allocate
such aggregate value among the assets of the Partnership (in such
manner as it determines in its sole discretion to be reasonable) to
arrive at a fair market value for individual properties.
4.5.4.2 In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than cash
or cash equivalents), the Capital Accounts of all Partners and the
Carrying Value of each Partnership property shall, immediately prior to
any such distribution, be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership
property, as if such Unrealized Gain or Unrealized Loss had been
recognized in a sale of such property immediately prior to such
distribution for an amount equal to its fair market value, and had been
allocated to the Partners, at such time, pursuant to Section 5.1. Any
Unrealized Gain or Unrealized Loss attributable to such property shall
be allocated in the same manner as Net Termination Sales Gain or Net
Termination Sales Loss pursuant to Section 5.1.3; provided, however,
that, in making any such allocation, Net Termination Sales Gain or Net
Termination Sales Loss actually realized shall be allocated first. In
determining Unrealized Gain or Unrealized Loss for purposes of this
Section 4.5.4.2, the aggregate cash amount and fair market values of
all Partnership assets (including cash or cash equivalents) immediately
prior to a distribution shall (A) in the case of a deemed distribution
occurring as a result of a termination of the Partnership pursuant to
Section 708 of the Code, be determined and allocated in the manner
provided in Section 4.5.4.1 or (B) in the case of a liquidating
distribution pursuant to Section 15.3 or 15.4 be determined and
allocated by the Liquidator using such reasonable methods of valuation
as it may adopt.
4.6 Interest. No interest shall be paid by the Partnership on Capital
Contributions or on balances in Partners' Capital Accounts.
4.7 No Withdrawal. No Partner shall be entitled to withdraw any part of
his Capital Contribution or his Capital Account or to receive any distribution
from the Partnership, except as provided in Articles 5, 14 and 15.
4.8 Loans from Partners. Loans by a Partner to the Partnership shall
not constitute Capital Contributions. If any Partner shall advance funds to the
Partnership in excess of the amounts required hereunder to be contributed by it
to the capital of the Partnership, the making of such excess advances shall not
result in any increase in the amount of the Capital Account of such Partner. The
amount of any such excess advances shall be a debt obligation of the Partnership
to such Partner and shall be payable or collectible only out of the Partnership
Assets in accordance with the terms and conditions upon which such advances are
made.
4.9 No Fractional LP Units. No fractional LP Units shall be issued by
the Partnership.
4.10 Record of Contributions. The books and records of the Partnership
shall include true and full information regarding the amount of cash and cash
equivalents and a designation and statement of the Net Value of any other
property contributed by each Partner to the Partnership.
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4.11 Splits and Combinations.
4.11.1 Subject to the provisions of Section 4.11.4, the General Partner
may make a distribution in Partnership Securities to all Record Holders or may
effect a subdivision or combination of Partnership Securities, but in each case
only on a pro rata basis so that, after any such distribution, subdivision or
combination, each Record Holder shall have the same Percentage Interest in the
Partnership as before such distribution, subdivision or combination.
4.11.2 Whenever such a distribution, subdivision or combination is
declared, the General Partner shall select a Record Date as of which the
distribution, subdivision or combination shall be effective and shall notify
each Record Holder of the distribution, subdivision or combination. The General
Partner may, but shall not be required to, cause a firm of independent public
accountants selected by it to calculate the number of LP Units to be held by
each Record Holder after giving effect to such distribution, subdivision or
combination. The General Partner shall be entitled to rely on any certificate
provided by such firm as conclusive evidence of the correctness of such a
calculation.
4.11.3 Promptly following such distribution, subdivision or
combination, the General Partner may cause the Partnership to issue to the
Record Holders as of such Record Date new Unit Certificates representing the new
number of LP Units held by such Record Holders, or adopt such other procedures
as it may deem appropriate to reflect such distribution, subdivision or
combination; provided, however, that in the case of any such distribution,
subdivision or combination resulting in a smaller total number of Outstanding LP
Units, the General Partner may require, as a condition to the delivery of such
new Unit Certificate, the surrender of any Unit Certificate representing the LP
Units prior to such declaration.
4.11.4 The Partnership shall not issue fractional LP Units upon any
distribution, subdivision or combination of LP Units. If a distribution,
subdivision or combination of LP Units would result in the issuance of
fractional LP Units but for the provisions of Section 4.9 and this Section
4.11.4, each fractional LP Unit shall be rounded to the nearest whole LP Unit
(and a 0.5 LP Unit shall be rounded to the next higher LP Unit).
4.12 No Preemptive Rights. No Person shall have any preemptive,
preferential or other similar right with respect to (i) additional Capital
Contributions; (ii) the issuance or sale of any class or series of Partnership
Securities, whether unissued or held in the treasury or hereafter created; (iii)
the issuance of any obligations, evidences of indebtedness or other securities
of the Partnership convertible into or exchangeable for, or carrying or
accompanied by any rights to receive, purchase or subscribe to, any such
Partnership Securities; (iv) the issuance of any right of subscription to or
right to receive, or any warrant or option for the purchase of, any of the
foregoing securities; or (v) the issuance or sale of any other securities that
may be issued or sold by the Partnership.
ARTICLE 5 -- ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations For Capital Account Purposes. For purposes of
maintaining the Capital Accounts and in determining the rights of the Partners
among themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 4.5.2) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided herein below.
5.1.1 Net Income. After giving effect to the special allocations set
forth in Section 5.1.4, all items of income, gain, loss and deduction taken into
account in computing Net Income for such taxable period shall be allocated in
the same manner as such Net Income is allocated hereunder.
5.1.1.1 First, 100% to the General Partner until aggregate Net
Income allocated to the General Partner pursuant to this Section
5.1.1.1 for the current taxable year and all previous taxable years is
equal
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to the aggregate Net Losses allocated to the General Partner pursuant
to Section 5.1.2.3 for all previous taxable years;
5.1.1.2 Second, 100% to the Limited Partners and the General
Partner, in accordance with their respective Percentage Interests,
until the aggregate Net Income allocated to the Limited Partners and
the General Partner pursuant to this Section 5.1.1.2 for the current
taxable year and all previous taxable years is equal to the aggregate
Net Losses allocated to the Limited Partners and the General Partner
pursuant to Section 5.1.2.2 for all previous taxable years; and
5.1.1.3 Third, the balance, if any, shall be allocated between
the General Partner, in its capacity as general partner, and the
Limited Partners in each taxable year in the same proportion as
Available Cash for such taxable year (including, for this purpose,
distributions of Available Cash made in a subsequent taxable year with
respect to the last quarter of the Partnership year for which the item
of income, gain, loss, deduction or credit, as the case may be, is
being allocated) was distributed to the General Partner and the Limited
Partners. If the Partnership does not distribute any Available Cash in
respect of a taxable year, Net Income (computed in accordance with
Section 4.5.2) shall be allocated among the Partners in accordance with
their respective Percentage Interests. Except as otherwise provided in
this Section 5.1, each item of income, gain, loss, deduction or credit
(computed in accordance with Section 4.5.2) allocated to the Limited
Partners, in the aggregate, shall be allocated to each Limited Partner
pro rata in accordance with the number of LP Units held by such Limited
Partner.
5.1.2 Net Loss. After giving effect to the special allocations set
forth in Section 5.1.4, all items of income, gain, loss and deduction taken into
account in computing Net Loss for such taxable period shall be allocated in the
same manner as such Net Loss is allocated hereunder:
5.1.2.1 First, 100% to the General Partner and the Limited
Partners, until the aggregate Net Losses allocated pursuant to this
Section 5.1.2.1 for the current taxable year and all previous taxable
years is equal to the aggregate Net Income allocated to such Partners
pursuant to Section 5.1.1.3 for all previous taxable years. For
purposes of this Section 5.1.2.1, Net Loss for any taxable year shall
be allocated to the General Partner and the Limited Partners in the
same proportion as any Net Income was allocated to such Partners
pursuant to Section 5.1.1.3 in any previous taxable years (beginning
with the first such taxable year in which Net Income was allocated to
the Partners pursuant to Section 5.1.1.3 up to an amount equal to the
amount of Net Income allocated to the Partners in any such taxable
year);
5.1.2.2 Second, 100% to the Limited Partners and the General
Partner, in accordance with their respective Percentage Interests;
provided, that Net Loss shall not be allocated pursuant to this Section
5.1.2.2 to the extent that such allocation would cause any Limited
Partner to have a deficit balance in its Adjusted Capital Account at
the end of such taxable year (or increase any existing deficit balance
in its Adjusted Capital Account);
5.1.2.3 Third, the balance, if any, 100% to the General
Partner.
5.1.3 Net Termination Gains and Losses. After giving effect to the
special allocations set forth in Section 5.1.4, all items of gain and loss taken
into account in computing Net Termination Sales Gain or Net Termination Sales
Loss for such taxable period shall be allocated in the same manner as such Net
Termination Sales Gain or Net Termination Sales Loss is allocated hereunder. All
allocations under this Section 5.1.3 shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
5.1 and after all distributions of Available Cash provided under Sections 5.4
and 5.5 have been made with respect to the taxable period ending on the
liquidation date.
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5.1.3.1 If a Net Termination Sales Gain is recognized (or
deemed recognized pursuant to Section 4.5.4) such Net Termination Sales
Gain shall be allocated during the Preference Period between the
General Partner and the Limited Partners in the following manner (and
the Capital Accounts of the Partners shall be increased by the amount
so allocated in each of the following subclauses, in the order listed,
before an allocation is made pursuant to the next succeeding
subclause):
First, to each Partner having a deficit balance in such
Partner's Capital Account to the extent of and in proportion to such
deficit balance;
Second, 98/99ths to all Limited Partners holding Senior
Preference Units in the proportion that the respective number of Senior
Preference Units held by them bears to the total number of Senior
Preference Units Outstanding and 1/99th to the General Partner until
each such Limited Partner's Capital Account in respect of each Senior
Preference Unit (determined on a per LP Unit basis) is equal to the sum
of (aa) its Remaining Capital in respect of such Senior Preference Unit
plus (bb) any then existing Cumulative Senior Preference Unit
Deficiency;
Third, 98/99ths to all Limited Partners holding Preference
Units in the proportion that the respective number of Preference Units
held by them bears to the total number of Preference Units Outstanding
and 1/99th to the General Partner until each such Limited Partner's
Capital Account in respect of each Preference Unit (determined on a per
LP Unit basis) is equal to the sum of (aa) its Remaining Capital plus
(bb) any then existing Cumulative Preference Unit Deficiency;
Fourth, 98/99ths to all Limited Partners holding Preference B
Units in the proportion that the respective number of Preference B
Units held by them bears to the total number of Preference B Units
Outstanding and 1/99th to the General Partner until each such Limited
Partner's Capital Account in respect of each Preference B Unit
(determined on a per LP Unit basis) is equal to the sum of (aa) its
Remaining Capital plus (bb) any then existing Cumulative Preference B
Unit Deficiency;
Fifth, 98/99ths to all Limited Partners holding Common Units in
the proportion that the respective number of Common Units held by them
bears to the total number of Common Units Outstanding and 1/99th to the
General Partner until each such Limited Partner's Capital Account in
respect of each Common Unit (determined on a per LP Unit basis) is
equal to its Remaining Capital;
Sixth, 98/99ths to all Limited Partners in the proportion that
their respective Percentage Interest bears to 98/99ths and 1/99th to
the General Partner until each such Limited Partner's Capital Account
in respect of each LP Unit (determined on a per LP Unit basis) is equal
to the First Liquidation Target Amount;
Seventh, 90/99ths to all Limited Partners in the proportion
that their respective Percentage Interest bears to 98/99ths and 9/99ths
to the General Partner until each such Limited Partner's Capital
Account in respect of each LP Unit (determined on a per LP Unit basis)
is equal to the Second Liquidation Target Amount;
Eighth, 80/99ths to all Limited Partners in the proportion that
their respective Percentage Interest bears to 98/99ths and 19/99ths to
the General Partner until each such Limited Partner's Capital Account
in respect of each LP Unit (determined on a per LP Unit basis) is equal
to the Third Liquidation Target Amount; and
Thereafter, 70/99ths to all Limited Partners in the proportion
that their respective Percentage Interest bears to 98/99ths and
29/99ths to the General Partner.
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After the Preference Period, Net Termination Sales Gain shall be
allocated in the same manner as described above; provided, that, no
allocation will be made under paragraphs Second, Third and Fourth and
the references to "Common Units" in paragraph Fifth shall after the
Preference Period refer to "Units".
5.1.3.2 If a Net Termination Sales Loss is recognized (or
deemed recognized pursuant to Section 4.5.4), such Net Termination
Sales Loss shall be allocated to the Partners in the following manner:
(i) First, 100% to the General Partner and the Limited
Partners in proportion to, and to the extent of, the positive
balances in their respective Capital Accounts; and
(ii) Second, the balance, if any, 100% to the General
Partner.
5.1.4 Special Allocations. Notwithstanding any other provision of
this Section 5.1, the following special allocations shall be made for such
taxable period:
5.1.4.1 Partnership Minimum Gain Chargeback. Notwithstanding
any other provision of this Section 5.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period, each
Partner shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) the manner and
amounts provided in Treasury Regulation Sections 1.704-2(f)(6),
1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For for
purposes of this Section 5.1.4, each Partner's Adjusted Capital Account
balance shall be determined, and the allocation of income or gain
required hereunder shall be effected, prior to the application of any
other allocations pursuant to this Section 5.1.4 with respect to such
taxable period. This Section 5.1.4.1 is intended to comply with the
Partnership Minimum Gain chargeback requirement in Treasury Regulation
Section 1.704-1T(b)(4)(iv)(e) and shall be interpreted consistently
therewith;
5.1.4.2 Chargeback of Minimum Gain Attributable to Partner
Nonrecourse Debt. Notwithstanding the other provisions of this Section
5.1 (other than Section 5.1.4.1, except as provided in Treasury
Regulation Section 1.704-2(i)(4)), if there is a net decrease in
Minimum Gain Attributable to Partner Nonrecourse Debt during any
Partnership taxable period, any Partner with a share of Minimum Gain
Attributable to Partner Nonrecourse Debt at the beginning of such
taxable period shall be allocated items of Partnership income and gain
for such period (and, if necessary, subsequent periods) in the manner
and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 5.1.4.2, each Partner's Adjusted Capital Account balance shall
be determined and the allocation of income or gain required hereunder
shall be effected, prior to the application of any other allocations
pursuant to this Section 5.1.4, other than Section 5.1.4.1, with
respect to such taxable period. This Section 5.1.4.2 is intended to
comply with the chargeback of items of income and gain requirement in
Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted
consistently therewith;
5.1.4.3 Priority Allocation. If the amount of cash distributed
(except cash distributed pursuant to Section 15.3) with respect to a
class or series of LP Units is disproportionately greater (on a per LP
Unit basis) than the amount of cash distributed with respect to the
Common Units (on a per LP Unit basis), then before the allocation of
Net Income or Net Loss, as the case may be, between the Limited
Partners and the General Partner pursuant to the other provisions of
this Section 5.1, (a) first, each Limited Partner holding LP Units with
respect to which such disproportionately greater cash distribution was
made shall be allocated gross income in an amount equal to the product
of (X) the amount by which the distribution with respect to such class
or series of LP Units exceeds (on a per LP Unit basis) the distribution
on the Common Units and (Y) the number of LP Units of such class or
series held by such Limited Partner receiving the disproportionately
greater distribution, (b) the General Partner shall be allocated gross
income in an amount equal to 1.01% of the gross income allocated
pursuant to the immediately preceding clause
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(a) and (c) the Net Income or Net Loss otherwise allocable to the
Partners under the other provisions of this Agreement shall be
recomputed by excluding the gross income allocated pursuant to the
immediately preceding clauses (a) and (b);
5.1.4.4 Qualified Income Offset. Except as provided in Section
5.1.4.1 and 5.1.4.2, in the event any Partner unexpectedly receives any
adjustments, allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or
1.704-1(b)(2)(ii)(d)(6) (modified, as appropriate, by Treasury
Regulation Sections 1.704-1T(b)(4)(iv)(e)(3) and
1.704-1T(b)(4)(iv)(h)(4)), items of Partnership income and gain shall
be specially allocated to such Partner in an amount and manner
sufficient to eliminate, to the extent required by the Treasury
Regulations, the deficit balance, if any, in its Adjusted Capital
Account created by such adjustments, allocations or distributions as
quickly as possible; provided, that an allocation pursuant to this
Section 5.1.4.4 shall be made only if and to the extent that such
Partner would have a deficit balance in its Adjusted Capital Account
after all other allocations provided in this Section 5.1 have been
tentatively made as if this Section 5.1.4.4 was not in this Agreement;
5.1.4.5 Gross Income Allocations. In the event any Partner has
a deficit balance in its Adjusted Capital Account at the end of any
Partnership taxable period, such Partner shall be specially allocated
items of Partnership gross income and gain in the amount of such excess
as quickly as possible; provided, that an allocation pursuant to this
Section 5.1.4.5 shall be made only if and to the extent that such
Partner would have a deficit balance in its Adjusted Capital Account in
excess of such sum after all other allocations provided for in this
Section 5.1 have been tentatively made as if Section 5.1.4.4 and this
Section 5.1.4.5 were not in this Agreement;
5.1.4.6 Nonrecourse Deductions. Nonrecourse Deductions for any
taxable period shall be allocated to the Partners in the same ratios
that Net Income or Net Losses, as the case may be, is allocated for the
taxable year. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements
of the Treasury regulations promulgated under Section 704(b) of the
Code, the General Partner is authorized, upon notice to the Limited
Partners, to revise the prescribed ratio to the numerically closest
ratio which does satisfy such requirements;
5.1.4.7 Partner Nonrecourse Deductions. Partner Nonrecourse
Deductions for any taxable period shall be allocated 100% to the
Partner that bears the Economic Risk of Loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable in accordance with Treasury Regulation Section
1.704-2(i). If more than one Partner bears the Economic Risk of Loss
with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be allocated between or among
such Partners in accordance with the ratios in which they share such
Economic Risk of Loss;
5.1.4.8 Nonrecourse Liabilities. For purposes of Treasury
Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse
Liabilities of the Partnership in excess of the sum of (A) the amount
of Partnership Minimum Gain and (B) the total amount of Nonrecourse
Built-in Gain shall be allocated among the Partners in accordance with
their respective Percentage Interests;
5.1.4.9 Code Section 754 Adjustments. To the extent an
adjustment to the adjusted tax basis of any Partnership asset pursuant
to Section 734(b) or 743(b) of the Code is to be taken into account in
determining Capital Accounts, the amount of such adjustment to the
Capital Accounts treated as an item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(m);
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5.1.4.10 Economic Uniformity. At the election of the General
Partner with respect to any taxable period ending upon, or after, the
termination of the Preference Period, all or a portion of the remaining
items of Partnership gross income or gain for such taxable period, if
any can be allocated 100% to each Partner holding Common Units, in the
proportion of the number of Common Units held by such Partner to the
total number of Common Units then outstanding, until each such Partner
has been allocated an amount of gross income or gain which increases
the Capital Account maintained with respect to such Common Units to an
amount equal to the product of (A) the number of Common Units held by
such Partner and (B) the Per Unit Capital Amount. The purpose of this
allocation is to establish uniformity between the Capital Accounts
underlying Common Units and the Capital Accounts underlying LP Units
held by Persons other than the General Partner or any Affiliate of the
General Partner immediately prior to the sale of such Common Units to
unaffiliated third parties.
5.1.4.11 Curative Allocation.
(A) Notwithstanding any other provision of this
Section 5.1, other than the Required Allocations, the Required
Allocations shall be taken into account in making the Agreed
Allocations so that, to the extent possible, the net amount of
items of income, gain, loss and deduction allocated to each
Partner pursuant to the Required Allocations and the Agreed
Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each Partner under the
Agreed Allocations had the Required Allocations and this
Curative Allocation not otherwise been provided in this Section
5.1. Notwithstanding the preceding sentence, Required
Allocations relating to (1) Nonrecourse Deductions shall not be
taken into account except to the extent that there has been a
decrease in Partnership Minimum Gain and (2) Partner
Nonrecourse Deductions shall not be taken into account except
to the extent that there has been a decrease in Minimum Gain
Attributable to Partner Nonrecourse Debts. Allocations pursuant
to this Section 5.1.4.11(A) shall only be made with respect to
Required Allocations to the extent the General Partner
reasonably determines that such allocations will otherwise be
inconsistent with the economic agreement among the Partners.
Further, allocations pursuant to this Section 5.1.4.11(A) shall
be deferred with respect to allocations pursuant to clauses (1)
and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by
subsequent Required Allocations;
(B) The General Partner shall have reasonable
discretion, with respect to each taxable period, to (1) apply
the provisions of Section 5.1.4.11(A) in whatever order is most
likely to minimize the economic distortions that might
otherwise result from the Required Allocations, and (2) divide
all allocations pursuant to Section 5.1.4.11(A) among the
Partners in a manner that is likely to minimize such economic
distortions.
5.2 Allocations for Tax Purposes.
5.2.1 Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of income, gain, loss or
deduction (computed in accordance with Section 4.5.2) is allocated pursuant to
Section 5.1.
5.2.2 In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation and cost recovery deductions shall be allocated for federal income
tax purposes among the Partners as follows:
5.2.2.1 (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the
manner provided under Section 704(c) of the Code that takes into
account the variation between the Agreed Value of such property and its
adjusted basis at the time of
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contribution; and (B) except as otherwise provided in Section 5.2.2.4,
any item of Residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the same
manner as its correlative item of gain or loss is allocated pursuant to
Section 5.1.
5.2.2.2 (A) In the case of an Adjusted Property, such items
shall (1) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into account
the Unrealized Gain or Unrealized Loss attributable to such property
and the allocations thereof pursuant to Section 4.5.4.1 or 4.5.4.2, and
(2) second, in the event such property was originally a Contributed
Property, be allocated among the Partners in a manner consistent with
Section 5.2.2.1(A); and (B) except as otherwise provided in Section
5.2.2.4, any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the same
manner as its correlative item of gain or loss is allocated pursuant to
Section 5.1.
5.2.2.3 Except as otherwise provided in Section 5.2.2.4, all
other items of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as their correlative item of gain
or loss is allocated pursuant to Section 5.1.
5.2.2.4 Any items of income, gain, loss or deduction otherwise
allocable under Section 5.2.2.1(B), 5.2.2.2(B) or 5.2.2.3 shall be
subject to allocation by the General Partner in a manner designated to
eliminate, to the maximum extent possible, Book-Tax Disparities in a
Contributed Property or Adjusted Property otherwise resulting from the
applications of the "ceiling" limitation (under Section 704(c) of the
Code or Section 704(c) principles) to the allocations provided under
Section 5.2.2.1(A) or 5.2.2.2(A).
5.2.3 For proper administration of the Partnership and for the
preservation of uniformity of the LP Units (or any class or classes thereof),
the General Partner shall have sole discretion to (i) adopt such conventions as
it deems appropriate in determining the amount of depreciation, amortization and
cost recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including gross income) or deductions; and (iii) amend the
provisions of this Agreement as appropriate (x) to reflect the proposal or
promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of
the Code or (y) otherwise to preserve or achieve uniformity of the LP Units (or
any class or classes thereof). The General Partner may adopt such conventions,
make such allocations and make such amendments to this Agreement as provided in
this Section 5.2.3 only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of LP Units issued and outstanding or the Partnership, and if such
allocations are consistent with the principles of Section 704 of the Code.
5.2.4 The General Partner in its sole discretion may determine to
depreciate the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation method and useful life applied to the Partnership's common
basis of such property, despite the inconsistency of such approach with Proposed
Treasury Regulation Section 1.168-2(n) and Treasury Regulation Section
1.167(c)-1(a)(6). If the General Partner later determines that such reporting
position cannot reasonably be taken, the General Partner may adopt a
depreciation convention under which all purchasers acquiring LP Units in the
same month would receive depreciation, based upon the same applicable rate as if
they had purchased a direct interest in the Partnership's property. If the
General Partner chooses not to utilize such aggregate method, the General
Partner may use any other reasonable depreciation convention to preserve the
uniformity of the intrinsic tax characteristics of any LP Units that would not
have a material adverse effect on the Limited Partners or the Record Holders of
any class or classes of LP Units.
5.2.5 Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership Asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 5.2
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be characterized as Recapture Income in the same proportions and to the same
extent as such Partners have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as Recapture Income.
5.2.6 All items of income, gain, loss, deduction and credit recognized
by the Partnership for federal income tax purposes and allocated to the Partners
in accordance with the provisions hereof shall be determined without regard to
any election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 or 743 of the Code.
5.2.7 Each item of Partnership income, gain, loss and deduction
attributable to a transferred Partnership Interest of the General Partner or to
transferred LP Units shall, for federal income tax purposes, be determined on an
annual basis and prorated on a monthly basis and shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first Business
Day of each month; provided, however, that gain or loss on a sale or other
disposition of any Partnership Assets other than in the ordinary course of
business shall be allocated to the Partners as of the opening of the New York
Stock Exchange on the first business Day of the month in which such gain or loss
is recognized for federal income tax purposes. The General Partner may revise,
alter or otherwise modify such methods of allocation as it determines necessary,
to the extent permitted or required by Section 706 of the Code and the
regulations or rulings promulgated thereunder.
5.2.8 Allocations that would otherwise be made to a Limited Partner
under the provisions of this Article 5 shall instead be made to the beneficial
owner of LP Units held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
5.2.9 The General Partner shall amend or supplement this Article 5 to
provide for the allocation of any item of income, gain, loss, deduction or
credit for federal, state or local income tax purposes for which provision is
not otherwise made herein in the manner that the General Partner determines to
be reasonable, taking into account the requirements of the Code.
5.2.10 Notwithstanding any other provision of this Section 5.2, if the
Internal Revenue Service is successful in asserting an adjustment to the taxable
income of the General Partner and, as a result of any such adjustment, the
Partnership is entitled to a deduction for federal income tax purposes with
respect to any portion of such adjustment, such deduction shall be allocated to
the General Partner.
5.3 Requirement and Characterization of Distributions. Within 45 days
following the end of each calendar quarter, an amount equal to 100% of Available
Cash with respect to such quarter (or period) shall be distributed in accordance
with this Article 5 by the Partnership to the Partners, as of the Record Date
selected by the General Partner in its reasonable discretion. All amounts of
Available Cash distributed by the Partnership on any date from any source shall
be treated for purposes of determining the order of priority for distributions
of Available Cash as Cash from Operations until the sum of all amounts of
Available Cash theretofore distributed by the Partnership to Partners pursuant
to Sections 5.4 and 5.5 equals the aggregate amount of all Cash from Operations
actually produced by the Partnership since the Closing Date through such date.
Any remaining amounts of Available Cash distributed by the Partnership on such
date shall, except as otherwise provided in Section 5.6, constitute Cash from
Interim Capital Transactions and shall be treated as such for purposes of
determining the order of priority for distributions of Available Cash.
5.4 Distributions During Preference Period. Available Cash with respect
to any calendar quarter within the Preference Period that constitutes or, for
purposes of determining the priority of distributions of Available Cash, is
treated as if it constitutes Cash from Operations pursuant to the provisions of
Section 5.3 or 5.6, shall be distributed as follows:
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5.4.1 First, 98/99ths to Limited Partners holding Senior
Preference Units, in the proportion that the respective number of
Senior Preference Units held by them bears to the total number of
Senior Preference Units Outstanding and 1/99th to the General Partner
until there has been distributed in respect of each Senior Preference
Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
5.4.2 Second, 98/99ths to Limited Partners holding Senior
Preference Units, in the proportion that the respective number of
Senior Preference Units held by them bears to the total number of
Senior Preference Units Outstanding and 1/99th to the General Partner
until there has been distributed in respect of each Senior Preference
Unit an amount equal to any Cumulative Senior Preference Unit
Deficiency;
5.4.3 Third, 98/99ths to Limited Partners holding Preference
Units, in the proportion that the respective number of Preference Units
held by them bears to the total number of Preference Units Outstanding
and 1/99th to the General Partner until there has been distributed in
respect of each Preference Unit Outstanding an amount equal to the
Minimum Quarterly Distribution for such quarter;
5.4.4 Fourth, 98/99ths to Limited Partners holding Preference
Units, in the proportion that the respective number of Preference Units
held by them bears to the total number of Preference Units Outstanding
and 1/99th to the General Partner until there has been distributed in
respect of each Preference Unit an amount equal to any Cumulative
Preference Unit Deficiency;
5.4.5 Fifth, 98/99ths to Limited Partners holding Preference B
Units, in the proportion that the respective number of Preference B
Units held by them bears to the total number of Preference B Units
Outstanding and 1/99th to the General Partner until there has been
distributed in respect of each Preference B Unit Outstanding an amount
equal to the Minimum Quarterly Distribution for such quarter;
5.4.6 Sixth, 98/99ths to Limited Partners holding Preference B
Units, in the proportion that the respective number of Preference B
Units held by them bears to the total number of Preference B Units
Outstanding and 1/99th to the General Partner until there has been
distributed in respect of each Preference B Unit an amount equal to any
Cumulative Preference B Unit Deficiency;
5.4.7 Seventh, 98/99ths to Limited Partners holding Common
Units, in the proportion that the respective number of Common Units
held by them bears to the total number of Common Units Outstanding and
1/99th to the General Partner until there has been distributed in
respect of each Common Unit an amount equal to the Minimum Quarterly
Distribution for such quarter;
5.4.8 Eighth, 98/99ths to all Limited Partners, in the
proportion that their respective Percentage Interest bears to 98/99ths
and 1/99ths to the General Partner until there has been distributed in
respect of each LP Unit Outstanding an amount equal to the excess of
the First Target Distribution over the Minimum Quarterly Distribution;
5.4.9 Ninth, 90/99ths to all Limited Partners, in the
proportion that their respective Percentage Interest bears to 98/99ths
and 9/99ths to the General Partner until there has been distributed in
respect of each LP Unit Outstanding an amount equal to the excess of
the Second Target Distribution over the First Target Distribution;
5.4.10 Tenth, 80/99ths to all Limited Partners, in the
proportion that their respective Percentage Interest bears to 98/99ths,
and 19/99ths to the General Partner until there has been distributed in
respect of each LP Unit Outstanding an amount equal to the excess of
the Third Target Distribution over the Second Target Distribution;
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5.4.11 Thereafter, 70/99ths to all Limited Partners, in the
proportion that their respective Percentage Interest bears to 98/99ths,
and 29/99ths to the General Partner;
provided, however, that after the Record Date for the distribution of Available
Cash to holders of Preference Units with respect to the second calendar quarter
of 1997, no distribution will be made pursuant to Sections 5.4.5 and 5.4.6, and
the Preference B units shall be deemed to be Preference Units for purposes of
this Section 5.4.
5.5 Distributions After Preference Period. Available Cash with respect
to any calendar quarter after the Preference Period that constitutes or, for
purposes of determining the priority of distributions of Available Cash, is
treated as if it constitutes Cash from Operations pursuant to the provisions of
Section 5.3 or 5.6, shall be distributed as follows:
First, 98/99ths to all Limited Partners, in the proportion that
their respective Percentage Interest bears to 98/99ths, and 1/99th to
the General Partner until there has been distributed in respect of each
of the Outstanding LP Units an amount equal to the Minimum Quarterly
Distribution;
Second, 98/99ths to all Limited Partners, in the proportion
that their respective Percentage Interest bears to 98/99ths and 1/99th
to the General Partner until there has been distributed in respect of
each of the Outstanding LP Units an amount equal to the excess of the
First Target Distribution over the Minimum Quarterly Distribution;
Third, 90/99ths to all Limited Partners, in the proportion that
their respective Percentage Interest bears to 98/99ths, and 9/99ths to
the General Partner until there has been distributed in respect of each
of the Outstanding LP Units an amount equal to the excess of the Second
Target Distribution over the First Target Distribution; and
Fourth, 80/99ths to all Limited Partners, in the proportion
that their respective Percentage Interest bears to 98/99ths, and
19/99ths to the General Partner until there has been distributed in
respect of each of the Outstanding LP Units an amount equal to the
excess of the Third Target Distribution over the Second Target
Distribution;
Thereafter, 70/99ths to all Limited Partners, in the proportion
that their respective Percentage Interest bears to 98/99ths, and
29/99ths to the General Partner.
5.6 Distributions of Cash from Interim Capital Transactions.
Distributions by the Partnership of Available Cash that constitutes Cash from
Interim Capital Transactions shall be distributed, unless the provisions of
Section 5.3 require otherwise, 98/99ths to all Limited Partners in proportion to
the respective number of LP Units held by them and 1/99th to the General Partner
until there has been distributed in respect of each Senior Preference Unit sold
in the Initial Offering, since the Closing Date through such date, distributions
of Available Cash that are deemed to be Cash from Interim Capital Transactions
in an aggregate amount equal to $22 per Senior Preference Unit. Thereafter, all
Available Cash shall be distributed as if it were Cash from Operations and shall
be distributed in accordance with Section 5.4 or 5.5, whichever is applicable.
5.7 Definitions. As used herein:
5.7.1 "Available Cash", with respect to any calendar quarter, means (i)
the sum of (a) all cash receipts of the Partnership during such quarter from all
sources (including distributions of cash received from the Operating
Partnership) and (b) any reduction in reserves established in prior quarters,
less (ii) the sum of (aa) all cash disbursements of the Partnership during such
quarter, including, without limitation, disbursements for operating expenses,
taxes on the Partnership as an entity or paid by the Partnership on behalf of,
or amounts withheld with respect to, all, but not less than all of the
Unitholders, if any, debt service (including the payment of principal,
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premium and interest), capital expenditures and contributions, if any, to a
subsidiary corporation or partnership (but excluding all cash distributions to
Partners), (bb) any reserves established in such quarter in such amounts as the
General Partner determines in its reasonable discretion to be necessary or
appropriate (x) to provide for the proper conduct of the business of the
Partnership (including reserves for future capital expenditures) or (y) to
provide funds for distributions with respect to any one or more of the next four
calendar quarters and (cc) any other reserves established in such quarter in
such amounts as the General Partner determines in its reasonable discretion to
be necessary because the distribution of such amounts would be prohibited by
applicable law or by any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which the Partnership is a party
or by which it is bound or its assets are subject. Taxes paid by the Partnership
on behalf of, or amounts withheld with respect to, less than all of the
Unitholders shall not be considered cash disbursements of the Partnership which
reduce "Available Cash". Notwithstanding the foregoing, "Available Cash" shall
not include any cash receipts or reductions in reserves or take into account any
disbursements made or reserves established after commencement of the dissolution
and liquidation of the Partnership.
5.7.2 "Cash from Interim Capital Transactions" means, at any date, such
amounts of Available Cash as are determined by the General Partner to be Cash
from Interim Capital Transactions pursuant to Section 5.3.
5.7.3 "Cash from Operations" means, at any date but prior to
commencement of the dissolution and liquidation of the Partnership, on a
cumulative basis, all cash receipts of the Partnership plus any cash balance of
the Partnership on the Closing Date (including distributions of cash received
from the Operating Partnership and excluding any cash proceeds from any Interim
Capital Transactions or Terminating Capital Transactions) during the period
since the commencement of operations by the Partnership through such date, less
the sum of (a) all cash operating expenditures of the Partnership during such
period including, without limitation, taxes on the Partnership as an entity or
taxes paid by the Partnership on behalf of, or amounts withheld with respect to,
all, but not less than all of the Unitholders, if any, (b) all cash debt service
payments of the Partnership during such period (other than payments or
prepayments of principal and premium required by reason of loan agreements
(including covenants and default provisions therein) or by lenders, in each case
in connection with sales or other dispositions of assets or made in connection
with refinancings or refundings of indebtedness, provided that any payment or
prepayment of principal, whether or not then due, shall be determined at the
election and in the discretion of the General Partner, to be refunded or
refinanced by any indebtedness incurred or to be incurred by the Partnership
simultaneously with or within 180 days prior to or after such payment or
prepayment to the extent of the principal amount of such indebtedness so
incurred), (c) all cash capital expenditures of the Partnership during such
period (other than (i) Expansive Capital Expenditures and (ii) cash expenditures
made in payment of transaction expenses relating to Interim Capital
Transactions), (d) an amount equal to revenues collected pursuant to a rate
increase that are subject to possible refund, (e) any additional reserves
outstanding as of such date which the General Partner determines in its
reasonable discretion to be necessary or appropriate to provide for the future
cash payment of items of the type referred to in (a) through (c) above, and (f)
any reserves that the General Partner determines in its reasonable discretion to
be necessary or appropriate to provide funds for distributions with respect to
any one or more of the next four calendar quarters, all as determined on a
consolidated basis and after elimination of intercompany items and of the
interest attributable to the general partner interest in the Operating
Partnership. Taxes paid by the Partnership on behalf of less than all of the
Unitholders shall not be considered cash operating expenditures of the
Partnership which reduce "Cash from Operations".
5.7.4 "Cumulative Preference Unit Deficiency" means, with respect to
any Preference Unit and as to any calendar quarter, the excess, if any, of (a)
the sum resulting from adding together the Preference Unit Deficiency as to a
Preference Unit acquired in the initial offering of the Preference Units for
each of the quarters within the Preference Period ending prior to such quarter
over (b) the sum of any distributions theretofore made with respect to a
Preference Unit acquired in the initial offering of the Preference Units
pursuant to Section 5.4.4.
5.7.5 "Cumulative Preference B Unit Deficiency" means, with respect to
any Preference B Unit and as to any calendar quarter, the excess, if any, of (a)
the sum resulting from adding together the Preference B Unit
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Deficiency as to a Preference B Unit acquired in the initial exchange of the
Preference B Units for Preference Units pursuant to Section 5.9.2 for each of
the quarters within the Preference Period ending prior to such quarter over (b)
the sum of any distributions theretofore made with respect to a Preference B
Unit acquired in the initial offering of the Preference B Units pursuant to
Section 5.4.6.
5.7.6 "Cumulative Senior Preference Unit Deficiency" means, with
respect to any Senior Preference Unit and as to any calendar quarter, the
excess, if any, of (a) the sum resulting from adding together the Senior
Preference Unit Deficiency as to a Senior Preference Unit acquired in the
Initial Offering for each of the quarters within the Preference Period ending
prior to such quarter over (b) the sum of any distributions theretofore made
with respect to a Senior Preference Unit acquired in the Initial Offering
pursuant to Section 5.4.2.
5.7.7 "First Liquidation Target Amount" means, an amount, determined
with respect to any LP Unit, which equals, as of the date of its determination,
the sum of (a) the Remaining Capital, if any, attributable to such LP Unit, plus
(b)(i) in the case of a Senior Preference Unit, the Cumulative Senior Preference
Unit Deficiency, (ii) in the case of a Preference Unit, the Cumulative
Preference Unit Deficiency or (iii) in the case of a Preference B Unit, the
Cumulative Preference B Unit Deficiency, plus (c) the First Target Distribution
Cumulative Deficiency.
5.7.8 "First Target Distribution" means $.60 per LP Unit per calendar
quarter, subject to adjustment in accordance with Sections 5.8 and 9.6.
5.7.9 "First Target Distribution Cumulative Deficiency" means, an
amount attributable to any LP Unit and determined with respect to all preceding
calendar quarters, which equals the excess of (i) the First Target Distribution
less the Minimum Quarterly Distribution for each quarter of the Partnership's
existence over (ii) the amount of any distributions (on a per LP Unit basis) for
such quarter of Available Cash that were distributed pursuant to Section 5.4.8
or paragraph Second of Section 5.5.
5.7.10 "Interim Capital Transaction" means (a) borrowing and sales of
debt securities (other than for working capital purposes and other than for
items purchased on open account in the ordinary course of business) by the
Partnership or the Operating Partnership, (b) sales of Interests in the
Partnership by the Partnership or the Operating Partnership and (c) sales or
other voluntary or involuntary dispositions of any assets of the Partnership or
the Operating Partnership (other than (x) sales or other dispositions of
inventory in the ordinary course of business, (y) sales or other dispositions of
other current assets including receivables and accounts or (z) sales or other
dispositions of assets as a part of normal retirements or replacements), in each
case prior to the commencement of the dissolution and liquidation of the
Partnership.
5.7.11 "Minimum Quarterly Distribution" means $.55 per LP Unit per
calendar quarter, subject to adjustment in accordance with Sections 5.8 and 9.6.
5.7.12 "Net Termination Sales Gain" means, for each Partnership Year or
shorter period, the sum, if positive, of all items of gain or loss recognized by
the Partnership (including such amounts recognized through the Operating
Partnership) from Terminating Capital Transactions occurring in such Partnership
Year or shorter period. The items included in the determination of Net
Termination Sales Gain shall be determined in accordance with Section 4.5.2 and
shall not include any items of income, gain or loss specially allocated under
Section 5.1. Once an item of income, gain or loss that has been included in the
initial computation of Net Termination Sales Gain is subjected to a Required
Allocation or a Curative Allocation, Net Termination Sales Gain or the resulting
Net Termination Sales Loss, whichever the case may be, shall be recomputed
without regard to such item.
5.7.13 "Net Termination Sales Loss" means, for each Partnership Year or
shorter period, the sum, if negative, of all items of gain or loss recognized by
the Partnership (including such amounts recognized through the Operating
Partnership) from Terminating Capital Transactions occurring in such Partnership
Year or shorter period. The items included in the determination of Net
Termination Sales Loss shall be determined in accordance with
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Section 4.5.2 and shall not include any items of income, gain or loss specially
allocated under Section 5.1.4. Once an item of gain or loss that has been
included in the initial computation of Net Termination Sales Loss is subjected
to a Required Allocation or a Curative Allocation, Net Termination Sales Loss or
the resulting Net Termination Sales Gain, whichever the case may be, shall be
recomputed without regard to such item.
5.7.14 "Preference Period" means the period commencing upon the Closing
Date and ending effective as of the end of the calendar quarter as to which each
of the following conditions is met: (i) the Partnership shall have distributed
to all Unitholders in respect of such calendar quarter and each of the 11 full
consecutive preceding calendar quarters Available Cash that constitutes Cash
from Operations in an amount at least equal to the Minimum Quarterly
Distribution, and (ii) as of the end of such calendar quarter, the sum of (A)
plus (B) is less than an amount equal to Permitted Indebtedness where (A) is
equal to the outstanding principal balance as of such date of the Partnership's
consolidated indebtedness (excluding borrowings for working capital purposes)
and (B) is equal to the amount of revenues collected by the Partnership that (x)
are then subject to possible refund under a pending rate case and (y) are not
maintained by the Partnership in a separate reserve fund.
5.7.15 "Preference Unit Deficiency" means, with respect to any
Preference Unit and as to any calendar quarter within the Preference Period, the
excess of (a) the Minimum Quarterly Distribution over (b) the sum of all
Available Cash distributed in such calendar quarter with respect to a Preference
Unit acquired in the initial offering of the Preference Units pursuant to
Section 5.4.3.
5.7.16 "Preference B Unit Deficiency" means, with respect to any
Preference B Unit and as to any calendar quarter within the Preference Period,
the excess of (a) the Minimum Quarterly Distribution over (b) the sum of all
Available Cash distributed in such calendar quarter with respect to a Preference
B Units acquired in the initial exchange of the Preference B Units for
Preference Units pursuant to Section 5.9.2.
5.7.17 "Remaining Capital" means, at any time with respect to a class
or series of LP Units, the price per LP Unit at which such class or series of LP
Units was initially sold by the Partnership, as determined by the General
Partner, less the sum of any distributions of Available Cash constituting Cash
from Interim Capital Transactions and any distributions of cash (or the Net
Agreed Value of any distributions in kind) in connection with the dissolution
and liquidation of the Partnership theretofore made in respect of a LP Unit of
such class or series that was sold in the initial offering of such LP Units.
5.7.18 "Second Liquidation Target Amount" means an amount, determined
with respect to any LP Unit which equals, as of the date of its determination,
the sum of (a) the First Liquidation Target Amount plus (b) the Second Target
Distribution Cumulative Deficiency.
5.7.19 "Second Target Distribution" means $.65 per LP Unit, subject to
adjustment in accordance with Sections 5.8 and 9.6.
5.7.20 "Second Target Distribution Cumulative Deficiency" means an
amount attributable to any LP Unit and determined with respect to all preceding
calendar quarters, which equals the excess of (i) the Second Target Distribution
less the First Target Distribution for each quarter of the Partnership's
existence over (ii) the amount of any distributions (on a per LP Unit basis) for
such quarter of Available Cash that were distributed pursuant to Section 5.4.9
or paragraph Third of Section 5.5.
5.7.21 "Senior Preference Unit Deficiency" means, with respect to any
Senior Preference Unit and as to any calendar quarter within the Preference
Period, the excess of (a) the Minimum Quarterly Distribution over (b) the sum of
all Available Cash distributed in such calendar quarter with respect to a Senior
Preference Unit acquired in the Initial Offering pursuant to Section 5.4.1.
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5.7.22 "Terminating Capital Transaction" means any sale or other
disposition of assets of the Partnership or the Operating Partnership following
commencement of the dissolution and liquidation of the Partnership or the
Operating Partnership.
5.7.23 "Third Liquidation Target Amount" means an amount, determined
with respect to any LP Unit, which equals, as of the date of its determination,
the sum of (a) the Second Liquidation Target Amount plus (b) the Third Target
Distribution Cumulative Deficiency.
5.7.24 "Third Target Distribution" means $.70 per LP Unit, subject to
adjustment in accordance with Sections 5.8 and 9.6.
5.7.25 "Third Target Distribution Cumulative Deficiency" means an
amount attributable to any LP Unit and determined with respect to all preceding
calendar quarters, which equals the excess of (i) the Third Target Distribution
less the Second Target Distribution for each quarter of the Partnership's
existence over (ii) the amount of any distributions (on a per LP Unit basis) for
such quarter of Available Cash that were distributed pursuant to Section 5.4.10
or paragraph Fourth of Section 5.5.
5.8 Adjustment of Distribution and Target Distribution Levels.
5.8.1 The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution shall be
proportionately adjusted in the event of any distribution, combination or
subdivision (whether effected by a distribution payable in LP Units or
otherwise) of Partnership Securities in accordance with Section 4.11. In the
event of a distribution of Available Cash that constitutes, and which for
purposes of determining the priority of such distribution of Available Cash is
treated as constituting, Cash from Interim Capital Transactions in respect of
Interim Capital Transactions, the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution shall be
adjusted proportionately downward to equal the product of the otherwise
applicable Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution, as the case may be, by a
fraction, of which the numerator is the Unrecovered Capital immediately after
giving effect to such distribution and of which the denominator shall be
Unrecovered Capital immediately prior to such distribution. For such purposes,
"Unrecovered Capital" means, at any time, an amount equal to the excess of $22
per LP Unit over the sum of all distributions theretofore made in respect of a
Senior Preference Unit acquired in the Initial Offering out of Available Cash
constituting, and which for purposes of determining the priority of such
distribution of Available Cash is treated as constituting, Cash from Interim
Capital Transactions.
5.8.2 The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution shall also be subject
to adjustment pursuant to Section 9.6.
5.9 Exchange of LP Units.
5.9.1 After the Exchange Date, KPL may from time to time exchange an
aggregate of up to 2,650,000 Preference Units or Preference B Units or a
combination thereof (the "Exchangeable Amount") for an equal number of Senior
Preference Units; provided, however, that each such exchange shall be
conditioned upon receipt by the Partnership of an Opinion of Counsel that the
intrinsic economic and federal income tax characteristics of the Senior
Preference Units issuable upon such exchange are identical to the intrinsic
economic and federal income tax characteristics of the Senior Preference Units
outstanding immediately prior to such exchange. As used in this Section 5.9.1,
the "Exchange Date" shall mean the later of (i) the Record Date for
distributions of Available Cash to the holders of Senior Preference Units with
respect to the second quarter of 1997, and (ii) the end of the calendar quarter
as to which the Partnership shall have distributed to all Unitholders in respect
of such quarter and each of the three full consecutive preceding calendar
quarters Available Cash that constitutes Cash from Operations in an amount at
least equal to the Third Target Distribution; provided that, as of such date,
the sum of (A) plus (B) is
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less than Permitted Indebtedness where (A) is equal to the outstanding principal
balance as of such date of the Partnership's consolidated indebtedness
(excluding borrowings for working capital purposes) and (B) is equal to the
amount of revenues collected by the Partnership that (x) are then subject to
possible refund under a pending rate case and (y) are not maintained by the
Partnership in a separate reserve fund. In the event of a distribution,
combination or subdivision of the Preference Units or Preference B Units
pursuant to Section 4.11, the "Exchangeable Amount" shall be adjusted to and
become that amount which bears the same ratio to the aggregate number of
Outstanding Preference Units and Outstanding Preference B Units after giving
effect to such distribution, combination or subdivision as the Exchangeable
Amount bears to the aggregate number of Outstanding Preference Units and
Outstanding Preference B Units immediately prior to such distribution,
combination or subdivision. In the event of a distribution, combination or
subdivision of the Senior Preference Units, the number of Senior Preference
Units for which one Preference Unit or Preference B Unit is exchangeable (the
"Exchange Factor") shall be adjusted to and become that amount which bears the
same ratio to the number of Outstanding Senior Preference Units after giving
effect to such distribution, combination or subdivision as the Exchange Factor
immediately prior to such distribution, combination or subdivision bears to the
number of Outstanding Senior Preference Units after giving effect to such
distribution, combination or subdivision.
5.9.2 KPL may, at its option, exchange up to 1,000,000 Preference Units
for an equal number of Preference B Units. In addition, any holder of Preference
B Units may at its option, exercisable from time to time after the Record Date
for distributions of Available Cash to the holders of Senior Preference Units
with respect to the second quarter of 1997, exchange Preference B Units for an
equal number of Preference Units. In the event of a distribution, combination or
subdivision of the Preference Units, the exchange ratio between the Preference B
Units and the Preference Units shall be adjusted to and become that ratio which
bears the same ratio to the number of Outstanding Preference Units after giving
effect to such distribution, combination or subdivision as the exchange ratio
immediately prior to such distribution, combination or subdivision bears to the
number of Outstanding Preference Units after giving effect to such distribution,
combination or subdivision.
5.9.3 Upon the expiration of the Preference Period, all differences and
distinctions between Senior Preference Units, Preference Units, Preference B
Units and Common Units shall automatically cease. The Senior Preference Units,
Preference Units, Preference B Units and Common Units shall remain separately
identified until such time as the Partnership has received an Opinion of Counsel
that the intrinsic economic and federal income tax characteristics of the Senior
Preference Units, the Preference Units, the Preference B Units and the Common
Units are identical. During the time from the expiration of the Preference
Period until such opinion is received, the Senior Preference Units, Preference
Units, Preference B Units and Common Units shall be designated "Class A Units",
"Class B Units", "Class C Units" and "Class D Units", respectively, or such
other designations as may be determined by the General Partner to separately
identify such classes without indicating distribution preferences. Upon receipt
of such an Opinion of Counsel, the Senior Preference Units, Preference Units,
Preference B Units and Common Units shall thereafter be designated "Units".
5.10 Restrictions on Distributions on, and Acquisitions of, Preference
Units, Preference B Units and Common Units during the Preference Period. The
Partnership will not distribute Available Cash on the Preference Units,
Preference B Units or Common Units or acquire Preference Units, Preference B
Units or Common Units with Available Cash in respect of any calendar quarter if
(i) the Preference Period continues in effect during the quarter in respect of
which the distribution or acquisition would be made and (ii) after giving effect
to such distribution or acquisition, the sum of (A) plus (B) would exceed an
amount equal to the Permitted Indebtedness where (A) is equal to the outstanding
principal balance as of the proposed distribution or acquisition date, as the
case may be, of the Partnership's consolidated indebtedness (excluding borrowing
for working capital purposes) and (B) is equal to the amount of revenues
collected by the Partnership that (i) are then subject to possible refund under
a pending rate case and (ii) are not maintained by the Partnership in a separate
reserve fund.
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5.11 Reimbursements and Payments. Amounts payable as reimbursement of
the General Partner pursuant to Section 6.4 or amounts payable to any Person
other than in his capacity as a Partner, such as for services rendered, goods
purchased or money borrowed, shall not be treated as distributions for purposes
of this Article 5.
ARTICLE 6 -- MANAGEMENT AND OPERATION OF BUSINESS
6.1 Management.
6.1.1 Except as otherwise expressly provided in this Agreement, all
decisions respecting any matter set forth herein or otherwise affecting or
arising out of the conduct of the business of the Partnership shall be made by
the General Partner, and the General Partner shall have the exclusive right and
full authority to manage, conduct, control and operate the Partnership's
business and effect the purposes and provisions of this Agreement. Except as
otherwise expressly provided in this Agreement, the General Partner shall have
full authority to do all things on behalf of the Partnership deemed necessary or
desirable by it in the conduct of the business of the Partnership, including,
without limitation, (i) the making of any expenditures, the borrowing of money,
the guaranteeing of indebtedness and other liabilities, the issuance of
evidences of indebtedness and the incurring of any obligations it deems
necessary for the conduct of the activities of the Partnership; (ii) the making
of tax, regulatory and other filings, or rendering of periodic or other reports
to governmental or other agencies having jurisdiction over the business or
assets of the Partnership; (iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any assets of the Partnership or the
merger or other combination of the Partnership with or into another entity (all
of the foregoing subject to any prior approval which may be required by Section
6.13); (iv) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement and on any terms it sees fit, including, without limitation, the
financing of the conduct of the operations of the Partnership, the Operating
Partnership or any Subsidiary, the lending of funds to other persons (including
the Operating Partnership or any Subsidiary) and the repayment of obligations of
the Partnership, the Operating Partnership or any Subsidiary and the making of
capital contributions to the Operating Partnership and any Subsidiary; (v) the
negotiation and execution on any terms deemed desirable in its sole discretion
and the performance of any contracts, conveyances or other instruments that it
considers useful or necessary to the conduct of the Partnership operations or
the implementation of its powers under this Agreement; (vi) the distribution of
Partnership cash; (vii) the selection and dismissal of employees (including,
without limitation, employees having titles such as "president," "vice
president," "secretary" and "treasurer") and agents, outside attorneys,
accountants, consultants and contractors and the determination of their
compensation and other terms of employment or hiring; (viii) the maintenance of
such insurance for the benefit of the Partnership and the Partners as it deems
necessary or appropriate; (ix) the formation of, or acquisition of an interest
in, and the contribution of property to, any further limited or general
partnerships, joint ventures or other relationships that it deems desirable
(including, without limitation, the acquisition of interests in, and the
contributions of property to, the Operating Partnership or any Subsidiary from
time to time); (x) the control of any matters affecting the rights and
obligations of the Partnership, including the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation; (xi) the
lending or borrowing of money, the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the issuance of evidences
of indebtedness and the securing of same by mortgage, deed of trust or other
lien or encumbrance, the bringing and defending of actions at law or in equity
and the indemnification of any Person against liabilities and contingencies to
the extent permitted by law; (xii) the entering into of listing agreements with
the New York Stock Exchange and any other securities exchange and delisting some
or all of the LP Units from, or requesting that trading be suspended on, any
such exchange (subject to any prior approval which may be required under Section
2.6); and (xiii) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership as the limited partner
(including, without limitation, the contribution or loan by the Partnership to
the Operating Partnership of funds).
6.1.2 Each of the Partners and each other Person who may acquire an
interest in LP Units hereby approves, ratifies and confirms the execution,
delivery and performance by the parties thereof to the Operating Partnership
Agreement, the Underwriting Agreement, the Contribution Agreement, the
Conveyance and Assignment,
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the Assignment of Leases and the other agreements described in the Registration
Statement and agrees that the General Partner is authorized to execute, deliver
and perform the above-mentioned agreements and transactions and such other
agreements described in the Registration Statement on behalf of the Partnership
without any further act, approval or vote of the Partners or any other Person
who may acquire an interest in LP Units notwithstanding any other provision of
this Agreement, the Operating Partnership Agreement, the Delaware Act or any
applicable law, rule or regulation. None of the execution, delivery or
performance by the General Partner, the Partnership, the Operating Partnership
or any Affiliate of any of them of any agreement authorized or permitted under
this Agreement shall constitute a breach by the General Partner of any duty that
the General Partner may owe the Partnership or the Limited Partners or any other
Persons under this Agreement or of any duty stated or implied by law or equity.
6.1.3 The General Partner has caused to be filed the Certificate of
Limited Partnership as required by the Delaware Act and shall cause to be filed
such other certificates or documents as may be required for the formation,
continuation, qualification and operation of a limited partnership in the State
of Delaware or any other state in which the Partnership elects to do business or
own property. The General Partner shall file any necessary amendments to the
Certificate of Limited Partnership, including, without limitation, amendments to
reflect a successor or additional General Partner admitted pursuant to Section
13.3, and shall otherwise use its best efforts to do all things (including the
appointment of registered agents of the Partnership and maintenance of
registered offices of the Partnership) requisite to the maintenance of the
Partnership as a limited partnership under the laws of the State of Delaware or
any other state in which the Partnership may elect to do business or own
property. Where applicable law so permits, the General Partner may omit from
certificates filed in the State of Delaware and in states in which the
Partnership elects to do business or own property all information not required
by law, including the names and addresses of Partners, and omit information
relating to capital contributions and shares of profits or compensation of
Partners, or state such information in the aggregate rather than on an
individual Partner basis. Except as provided in Section 7.5.1, the General
Partner shall not be required, before or after filing, to deliver or mail a copy
of the Certificate of Limited Partnership or any amendment thereto to any
Limited Partner or Record Holder.
6.2 Reliance By Third Parties. Notwithstanding any other provision of
this Agreement to the contrary, no lender, purchaser or other Person dealing
with the Partnership shall be required to look to the application of proceeds
hereunder or to verify any representation by the General Partner as to the
extent of the interest in Partnership Assets that the General Partner is
entitled to encumber, sell or otherwise use, and any such lender, purchaser or
other Person shall be entitled to rely exclusively on the representations of the
General Partner as to its authority to enter into such arrangements and shall be
entitled to deal with the General Partner, without the joinder of any other
Person, as if the General Partner were the sole party in interest therein, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such lender, purchaser
or other Person to contest, negate or disaffirm any action of the General
Partner in connection with any such arrangement. In no event shall any Person
dealing with the General Partner or the General Partner's representative with
respect to any business or property of the Partnership be obligated to ascertain
that the terms of this Agreement have been complied with, or be obligated to
inquire into the necessity or expedience of any act or action of the General
Partner or the General Partner's representative; and every contract, agreement,
deed, mortgage, security agreement, promissory note or other instrument or
document executed by the General Partner or the General Partner's representative
with respect to any business or property of the Partnership shall be conclusive
evidence in favor of any and every Person relying thereon or claiming thereunder
that (i) at the time of the execution and delivery thereof, this Agreement was
in full force and effect, (ii) such instrument or document was duly executed in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership and (iii) the General Partner or the General Partner's
representative was duly authorized and empowered to execute and deliver any and
every such instrument or document for and on behalf of the Partnership.
6.3 Purchase or Sale of LP Units. Subject to the provisions of Section
5.10, the General Partner may cause the Partnership to purchase or otherwise
acquire LP Units and may also purchase or otherwise acquire LP
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Units for its own account and may sell or otherwise dispose of such LP Units.
Any LP Units purchased for or otherwise held by the Partnership shall not be
deemed outstanding for any purposes under this Agreement.
6.4 Compensation and Reimbursement of the General Partner.
6.4.1 Except as otherwise provided in this Section 6.4, the General
Partner shall not be compensated for its services as general partner of the
Partnership.
6.4.2 The General Partner shall be reimbursed for all expenses,
disbursements and advances incurred or made in connection with the organization
of the Partnership, the Initial Offering and the qualification of the
Partnership and the General Partner to do business.
6.4.3 The General Partner shall be reimbursed on a monthly basis, or
such other basis as the General Partner may determine in its sole discretion,
for (i) all direct expenses it incurs or makes on behalf of the Partnership
(including amounts paid to any Person to perform services for the Partnership)
and (ii) the portion of the General Partner's legal, accounting, utilities,
investor communication, telephone, secretarial, travel, entertainment,
bookkeeping, reporting, data processing, office rent and other office expenses
(including overhead charges), salaries, fees and other compensation and benefit
expenses of employees, officers and directors, other administrative or overhead
expenses and all other direct and indirect administrative and incidental
expenses, in each case necessary or appropriate to the conduct of the
Partnership's business (including, without limitation, expenses allocated to the
General Partner by its Affiliates). The General Partner shall determine such
fees and expenses that are allocated to the Partnership in any reasonable manner
in its sole discretion. Such reimbursements shall be in addition to any
reimbursement to the General Partner as a result of indemnification pursuant to
Section 6.8.
6.4.4 Subject to the provisions of Section 4.4, the General Partner may
propose and adopt or cause to be adopted on behalf of the Partnership, without
the approval of the Limited Partners, employee benefit plans, including plans
involving the issuance of LP Units, for the benefit of employees of the General
Partner, the Partnership, the Operating Partnership or any Affiliate of any such
Persons, with respect to services performed, directly or indirectly, for the
benefit of the Partnership or the Operating Partnership.
6.5 Partnership Funds. The funds of the Partnership shall be deposited
in such account or accounts as are designated by the General Partner. The
General Partner may, in its sole discretion, deposit funds of the Partnership in
a central account maintained by or in the name of the General Partner or the
Partnership in which funds of the Operating Partnership are also deposited,
provided that at all times books of account are maintained which show the amount
of funds of the Partnership on deposit in such account. All withdrawals from or
charges against such accounts shall be made by the General Partner or by its
officers or agents. Funds of the Partnership may be invested as determined by
the General Partner, except in connection with acts otherwise prohibited by this
Agreement.
6.6 Loans from the General Partner; Contracts with Affiliates.
6.6.1 The General Partner or any Affiliate thereof may lend to the
Partnership, the Operating Partnership or any Subsidiary funds needed by the
Partnership for such periods of time as the General Partner may determine;
provided, however, that the General Partner or such Affiliate may not charge the
Partnership, the Operating Partnership or any Subsidiary interest at a rate
greater than the lesser of (i) the actual interest cost (including points or
other financing charges or fees) that the General Partner or such Affiliate is
required to pay on funds borrowed by it from commercial banks and (ii) the rate
(including points or other financing charges or fees) that would be charged the
Partnership, the Operating Partnership or any Subsidiary (without reference to
the General Partner's financial abilities or guaranties) by unrelated lenders on
comparable loans. The Partnership, the Operating Partnership or such Subsidiary
shall reimburse the General Partner or any Affiliate, as the case may be, for
any costs incurred by it in connection with the borrowing of funds obtained by
the General Partner or such Affiliate and
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loaned to the Partnership, the Operating Partnership or any Subsidiary. The
Partnership may lend or contribute to the Operating Partnership or any
Subsidiary, and the Operating Partnership or any Subsidiary may borrow funds
from the Partnership, on terms and conditions established at the sole discretion
of the General Partner. The foregoing authority shall be exercised by the
General Partner in its reasonable discretion and shall not create any right or
benefit in favor of the Operating Partnership, any Subsidiary or any other
Person. The Partnership may not lend funds to the General Partner or any of its
Affiliates.
6.6.2 The General Partner may itself, or may enter into an agreement
with an Affiliate of the General Partner to, render services to the Partnership.
Any service rendered to the Partnership by the General Partner or any such
Affiliate shall be on terms that are fair and reasonable to the Partnership.
6.6.3 The General Partner or any of its Affiliates may use or lease
property (including, but not limited to, office equipment, computers, vehicles,
aircraft and office space) of the Partnership, and the General Partner or such
Affiliate will reimburse the Partnership based on the incremental cost to the
Partnership of such usage.
6.6.4 Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 6.6.4 shall be deemed to be satisfied as to the transactions
effected pursuant to Section 4.2, the Contribution Agreement and the Conveyance
and Assignment.
6.7 Liability of Indemnitees.
6.7.1 No Indemnitee shall be liable to the Partnership, Limited
Partners, Assignees or any Persons who have acquired any interests in LP Units,
whether as Limited Partners, Assignees or otherwise, for losses sustained or
liabilities incurred as a result of any act or omission if such Indemnitee acted
in good faith and in a manner it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and if such act or omission did not
constitute gross negligence or willful misconduct on the part of such
Indemnitee.
6.7.2 The General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or through its agents, and the General Partner shall not be responsible
for any act or omission on the part of any such agent appointed by the General
Partner in good faith if the agent acted in a manner it reasonably believed to
be in, or not opposed to, the best interests of the Partnership and if such act
or omission did not constitute gross negligence or willful misconduct on the
part of such Person.
6.7.3 Any amendment, modification or repeal of this Section 6.7 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations or the liability to the Partnership and the Limited Partners of the
General Partner, their directors, officers and employees under this Section 6.7
as in effect immediately prior to such amendment, modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
6.8 Indemnification.
6.8.1 To the fullest extent permitted by law but subject to the
limitations expressly provided in this Agreement, each Indemnitee shall be
indemnified and held harmless by the Partnership from and against any and all
losses, claims, damages, liabilities, whether 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 the Indemnitee may be
involved, or threatened to be involved, as a party or otherwise, by reason of
its status as (x) a General Partner, a Departing Partner or any of their
Affiliates, (y) an officer, director, employee, partner, trustee or agent of a
General Partner, any Departing
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Partner or any of their Affiliates or (z) a Person serving at the request of the
Partnership in another entity in a similar capacity, regardless of whether the
Indemnitee continues to be a General Partner or an Affiliate of a General
Partner or an officer, director, employee, partner or agent of a General Partner
or an Affiliate of a General Partner at the time any such liability or expense
is paid or incurred, provided that in each case the Indemnitee acted in good
faith and in a manner it reasonably believed to be in, or not opposed to, the
best interests of the Partnership 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. The termination of any action, suit or
proceeding by a judgment, order, settlement, conviction or upon a plea of nolo
contendere, or its equivalent, shall not, of itself, create a presumption that
the Indemnitee acted in a manner contrary to that specified above.
6.8.2 To the fullest extent permitted by law, expenses (including legal
fees and expenses) incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding subject to this Section 6.8, or in establishing any
right to indemnification hereunder, shall, from time to time, be advanced by the
Partnership prior to the final disposition of such claim, demand, action, suit
or proceeding upon receipt by the Partnership of any undertaking (which need not
be secured) by or on behalf of the Indemnitee to repay such amount if it shall
be determined that such Person is not entitled to be indemnified as authorized
in this Section 6.8.
6.8.3 The advancement of expenses and indemnification provided by this
Section 6.8 shall be in addition to any other rights to which an Indemnitee may
be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
6.8.4 To the extent deemed commercially reasonable by the General
Partner, the Partnership shall purchase and maintain at the expense of the
Partnership insurance on behalf of the General Partner, its Affiliates, and
their respective officers, directors, employees, partners, agents and trustees
and such other Persons as the General Partner shall determine against any
liability that may be asserted against or expense that may be incurred by such
Person in connection with the activities of the Partnership, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
6.8.5 For purposes of this Section 6.8, the Partnership shall be deemed
to have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall be deemed "fines" within the meaning of Section 6.8.1; and action taken or
omitted by it with respect to an employee benefit plan in the performance of its
duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is in, or not opposed to, the best interests of the Partnership.
6.8.6 Any indemnification hereunder shall be satisfied solely out of
the assets of the Partnership. In no event may an Indemnitee subject the General
Partner, the Limited Partners or Assignees to personal liability by reason of
these indemnification provisions.
6.8.7 An Indemnitee shall not be denied indemnification in whole or in
part under this Section 6.8 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applied if the transaction
was otherwise permitted by the terms of this Agreement.
6.8.8 The indemnification provided in this Section 6.8 is for the
benefit of the Indemnitees and shall not be deemed to create any right to
indemnification for any other Persons.
6.8.9 No amendment, modification or repeal of this Section 6.8 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the
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Partnership nor the obligations of the Partnership to indemnify any such
Indemnitee under and in accordance with the provisions of this Section 6.8 as in
effect immediately prior to such amendment, modification or repeal with respect
to claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
6.9 Other Matters Concerning the General Partner.
6.9.1 The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
6.9.2 The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it and any opinion of any such Person as to matters that
the General Partner reasonably believes to be within such Person's professional
or expert competence shall be full and complete authorization and protection in
respect of any action taken or suffered or omitted by the General Partner
hereunder in good faith and in accordance with such opinion.
6.9.3 The General Partner shall have the right, in respect of any of
its powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partner in the power of attorney,
have full power and authority to do and perform all and every act and duty which
is permitted or required to be done by the General Partner hereunder.
6.10 Registration Rights of KPL and its Affiliates.
6.10.1 In the event that (i) KPL or any of its Affiliates holds
Partnership Securities which it desires to sell and (ii) Rule 144 of the
Securities Act (or any successor rule or regulation to Rule 144) is not
available to enable KPL or such Affiliate to dispose of the number of
Partnership Securities it desires to sell at the time it desires to do so, then
upon the request of KPL or such Affiliate, the Partnership shall file with the
Commission as promptly as practicable after receiving such request, and use all
reasonable efforts to cause to become effective and remain effective for a
period not more than six months a registration statement under the Securities
Act registering the offering and sale of the number of Partnership Securities
specified by KPL or such Affiliate, provided, however, that if the General
Partner or, if at the time a request pursuant to this Section 6.10 is submitted
to the Partnership, KPL or such Affiliate requesting registration is the General
Partner or an Affiliate of the General Partner, the Independent Committee in
connection with Special Approval determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in the
best interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the filing of such registration statement or the
effectiveness thereof may be deferred for up to six months but not thereafter.
In connection with any registration pursuant to the preceding sentence, the
Partnership shall promptly prepare and file such documents as may be necessary
to register or qualify the securities subject to such registration under the
securities laws of such states as KPL or such Affiliate shall reasonably request
and do any and all other acts and things that may reasonably be necessary or
advisable to enable KPL or such Affiliate to consummate a public sale of such
Partnership Securities in such states; provided, however, that no such
qualification shall be required in any jurisdiction where, as a result thereof,
the Partnership would become subject to general service of process or to
taxation or qualification to do business as a foreign limited partnership doing
business in such jurisdiction. In no event shall the Partnership be required to
effect a registration relating to Partnership Securities pursuant to this
Section 6.10 for less than $2 million in amount of such Partnership Securities.
All costs and expenses of any such registration shall be paid by KPL or such
Affiliate and none of such costs will be allocated to the Partnership.
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6.10.2 If the Partnership shall at any time propose to file a
registration statement under the Securities Act for an offering of securities of
the Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by KPL and any of its Affiliates in such
registration statement as KPL or any of its Affiliates shall request. If the
proposed offering pursuant to this Section 6.10.2 shall be an underwritten
offering, then, in the event that the managing underwriter advises the
Partnership and KPL or such Affiliate in writing that in its opinion the
inclusion of all or some of KPL's or such Affiliate's securities would adversely
and materially affect the success of the offering, the Partnership shall include
in such offering only that number or amount, if any, of securities held by KPL
or such Affiliate which, in the opinion of the managing underwriter, will not so
adversely and materially affect the offering. In connection with any
registration pursuant to this Section 6.10.2, KPL or such Affiliate shall bear
the expense of all underwriting discounts and commissions attributable to the
securities sold for its own account and shall reimburse the Partnership for all
incremental costs incurred by the Partnership in connection with such
registration resulting from the inclusion of securities held by KPL or such
Affiliate.
6.10.3 If underwriters are engaged in connection with any registration
referred to in this Section 6.10, the Partnership shall provide indemnification
to the underwriters in form and substance reasonably satisfactory to such
underwriters.
6.10.4 The provisions of this Section 6.10 shall continue to be
applicable with respect to KPL (and its Affiliates) if KPL ceases to be a
general partner of the Partnership, during a period of three years subsequent to
the effective date of such cessation and for so long thereafter as is reasonably
required for KPL or its Affiliates to sell all of the Partnership Securities
with respect to which it has requested during such three-year period that a
registration statement be filed.
6.10.5 The rights of KPL and its Affiliates under this Section 6.10 may
be assigned by KPL and any of its Affiliates to any Person acquiring LP Units
from KPL or any of its Affiliates, and any such assignee shall be entitled to
the benefits of this Section 6.10 during such period as the assignor was so
entitled.
6.11 Title to Partnership Assets. All Partnership Assets, whether real
or personal or mixed and whether tangible or intangible, shall be deemed to be
owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership Assets or
any portion thereof. Title to any or all of the Partnership Assets may be held
in the name of the Partnership, the General Partner or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership Assets for which legal title is held in the name
of the General Partner shall be held in trust by the General Partner for the use
and benefit of the Partnership in accordance with the terms and provisions of
this Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership Assets shall be
recorded as the property of the Partnership on its books and records,
irrespective of the name in which legal title to such Partnership Assets is
held.
6.12 Resolution of Conflicts of Interest.
6.12.1 Unless otherwise expressly provided in this Agreement, the
Operating Partnership Agreement or any Subsidiary Partnership Agreement,
whenever a potential conflict of interest exists or arises between the General
Partner or any of its Affiliates, on the one hand, and the Partnership, the
Operating Partnership, any Subsidiary or any Partner, on the other hand, any
resolution or course of action in respect of such conflict of interest shall be
permitted and deemed approved by all Partners, and shall not constitute a breach
of this Agreement, of the Operating Partnership Agreement, of any Subsidiary
Partnership Agreement, of any agreement contemplated herein or therein, or of
any duty stated or implied by law or equity, if the resolution or course of
action is or, by operation of this Agreement, is deemed to be fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with its resolution of such conflict of interest to seek
Special Approval of a resolution
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of such conflict or course of action. Any conflict of interest and any
resolution of such conflict of interest shall be deemed fair and reasonable to
the Partnership upon Special Approval of such conflict of interest or
resolution. The General Partner may also adopt a resolution or course of action
that has not received Special Approval. Any such resolution or course of action
in respect of any conflict of interest shall not constitute a breach of this
Agreement, of the Operating Partnership Agreement, of Subsidiary Partnership
Agreement, of any other agreement contemplated herein or therein or of any
duties stated or implied by law or equity, if such resolution or course of
action is fair and reasonable to the Partnership. The General Partner (including
the Independent Committee in connection with Special Approval) shall be
authorized in connection with its resolution of any conflict of interest to
consider (i) the relative interests of any party to such conflict, agreement,
transaction or situation and the benefits and burdens relating to such interest;
(ii) any customary or accepted industry practices; (iii) any applicable
generally accepted accounting or engineering practices or principles; and (iv)
such additional factors as the General Partner (including such Independent
Committee) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this Agreement,
however, is intended to nor shall it be construed to require the General Partner
(including such Independent Committee) to consider the interest of any Person
other than the Partnership. In the absence of bad faith by the General Partner,
the resolutions, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any standard
of care or duty imposed herein or therein or under the Delaware Act or any other
law, rule or regulation.
6.12.2 Whenever this Agreement or any other agreement contemplated
hereby provides that the General Partner or any of its Affiliates is permitted
or required to make a decision (i) in its "discretion" or under a grant of
similar authority or latitude, the General Partner or such Affiliate shall be
entitled to consider only such interests and factors as it desires and shall
have no duty or obligation to give any consideration to any interest of, or
factors affecting, the Partnership, the Operating Partnership, any Subsidiary or
any Limited Partner, or (ii) in "good faith" or under another express standard,
the General Partner or such Affiliate shall act under such express standard and
shall not be subject to any other or different standards imposed by this
Agreement or any other agreement contemplated hereby. In addition, any actions
taken by the General Partner consistent with the standards of "reasonable
discretion" set forth in the definitions of Available Cash or Cash from
Operations shall not constitute a breach of any duty of the General Partner to
the Partnership or the Limited Partners. During the Preference Period, the
General Partner shall have no duty, express or implied, to sell or otherwise
dispose of any asset of the Operating Partnership, any Subsidiary or the
Partnership, other than in the ordinary course of business. No borrowing by the
Partnership or any Subsidiary or the Operating Partnership or the approval
thereof by the General Partner shall be deemed to constitute a breach of any
duty of the General Partner to the Partnership or the Limited Partners solely by
reason of the fact that the purpose or effect of such borrowing is directly or
indirectly to avoid subordination of the Preference Units, Preference B Units or
Common Units by reason of the provisions of Section 5.4 or 5.5.
6.12.3 Whenever a particular transaction, arrangement or resolution of
a conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
6.12.4 The Limited Partners hereby authorize the General Partner, on
behalf of the Partnership as limited partner of the Operating Partnership, to
approve of actions by the general partner of the Operating Partnership similar
to those actions permitted to be taken by the General Partner pursuant to this
Section 6.12.
6.13 Restrictions on General Partner's Authority.
6.13.1 The General Partner may not, without the written approval of the
specific act by all of the Limited Partners or by other written instrument
executed and delivered by all of the Limited Partners subsequent to the date of
this Agreement, take any action in contravention of this Agreement, including,
without limitation, (i) any act that would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise provided in this
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Agreement; or (ii) possess Partnership property, or assign any rights in
specific Partnership property, for other than a Partnership purpose.
6.13.2 Except as provided in Article 15, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination with any other
Person), or approve on behalf of the Partnership the sale, exchange or other
disposition of all or substantially all of the assets of the Operating
Partnership in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination with any other
Person): (a) during the Preference Period, without the approval of at least a
Majority Interest including the approval of the Record Holders of at least a
majority in interest of the Senior Preference Units (excluding Senior Preference
Units owned by the General Partner and its Affiliates) and (b) after the
Preference Period, without the approval of a Majority Interest; provided,
however, that this provision shall not preclude or limit the mortgage, pledge,
hypothecation or grant of a security interest in all or substantially all of the
Partnership's assets and shall not apply to any forced sale of any or all of the
Partnership's assets pursuant to the foreclosure of, or other realization upon,
any such encumbrance. Without the approval of a Majority Interest including,
during the Preference Period, the approval of the Record Holders of at least a
majority in interest of the Senior Preference Units (excluding Senior Preference
Units owned by the General Partner and its Affiliates), the General Partner
shall not, on behalf of the Partnership, (i) consent to any amendment to the
Operating Partnership Agreement or, except as expressly permitted by Section
6.12.4, take any action permitted to be taken by the limited partner of the
Operating Partnership, in either case, that would adversely affect the
Partnership as the limited partner of the Operating Partnership, (ii) amend the
Contribution Agreement, the Assignment of Leases or the Payment Priority
Agreement, (iii) except as permitted under Sections 12.2 and 14.1, elect or
cause the Partnership to elect a successor general partner of the Operating
Partnership or (iv) vote for or cause the Partnership to vote for the withdrawal
or removal of the general partner of the Operating Partnership.
6.13.3 Unless approved by the affirmative vote of the Record Holders of
at least a majority of each class of Outstanding LP Units (and during the
Preference Period the vote of the Record Holders of at least a majority in
interest of the Outstanding Senior Preference Units (excluding for purposes of
such determination Senior Preference Units owned by the General Partner and its
Affiliates)), the General Partner shall not take any action or refuse to take
any reasonable action the effect of which, if taken or not taken, as the case
may be, would be to cause the Partnership to become taxable as a corporation or
to be treated for federal income tax purposes as an association taxable as a
corporation.
6.13.4 At all times while serving as the general partner of the
Partnership, the General Partner will not pay any dividend on, repurchase any
shares of its capital stock or take any other action if the effect of such
dividend, repurchase or other action would be to reduce its net worth below an
amount necessary to receive an Opinion of Counsel that the Partnership will be
treated as a partnership for federal income tax purposes.
6.13.5 The Partnership will at all times own 100% of the limited
partner interests of the Operating Partnership and the General Partner will not
cause the Partnership to take or approve any action which will result in the
Partnership owning less than 100% of the limited partner interests of the
Operating Partnership and will not permit the Operating Partnership to issue
additional general partner interests, without the approval of a Majority
Interest, including during the Preference Period the approval of the Record
Holders of at least a majority in interest of the Senior Preference Units
(excluding Senior Preference Units owned by the General Partner and its
Affiliates).
6.14 Outside Activities.
6.14.1 Except as described in the Registration Statement or as provided
in Section 6.14.2, no Indemnitee shall be expressly or implicitly restricted or
proscribed pursuant to this Agreement, the Operating Partnership Agreement, or
any Subsidiary Partnership Agreement or the partnership relationship established
hereby or thereby from engaging in other activities for profit, whether in the
business engaged in by the Partnership, the Operating
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Partnership or any Subsidiary or anticipated to be engaged in by the
Partnership, the Operating Partnership or any Subsidiary or otherwise,
including, without limitation, those businesses described in or contemplated by
the Registration Statement or any subsequent registration statement of the
Partnership registering the sale of LP Units. Without limitation of and subject
to the foregoing and Section 6.14.2, each Indemnitee shall have the right to
engage in the transportation of refined petroleum products, liquids terminaling
and any other business of every type and description and to engage in and
possess an interest in other business ventures of any and every type and
description, independently or with others, including business interests and
activities in direct competition with the Partnership, the Operating Partnership
or any Subsidiary. Neither the Partnership, the Operating Partnership, any
Subsidiary, any Limited Partner, nor any other Person shall have any rights by
virtue of this Agreement, the Operating Partnership Agreement, any Subsidiary
Partnership Agreement or the partnership relationship established hereby or
thereby in any business ventures of any Indemnitee, and, except as set forth in
the Registration Statement, such Indemnitees shall have no obligation to offer
any interest in any such business ventures to the Partnership, the Operating
Partnership, any Subsidiary, any Limited Partner or any such other Person. The
General Partner and any other Persons affiliated with the General Partner may
acquire Partnership Securities, in addition to those acquired by any of such
Persons on the Closing Date, and shall be entitled (except to the extent
otherwise provided in this Agreement) to exercise all rights of an Assignee or
Limited Partner, as applicable, relating to such Partnership Securities, as the
case may be.
6.14.2 Without limitation of this Section 6.14, the competitive
activities of certain Indemnitees and the restrictions on the Partnership's
activities described in the Registration Statement under the caption "Conflicts
of Interest and Fiduciary Responsibilities" are hereby approved by all Partners;
provided, however that this Section 6.14 shall not operate as a waiver by the
Partnership, the Operating Partnership, any Subsidiary or any Limited Partner of
any breach of fiduciary duty resulting from competition by an Indemnitee with
the Partnership, the Operating Partnership or any Subsidiary.
ARTICLE 7 -- RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
7.1 Limitation of Liability. The Limited Partners shall have no
liability under this Agreement except as provided in this Agreement or by the
Delaware Act.
7.2 Management of Business. No Limited Partner or Assignee (other than
the General Partner, any of its Affiliates or any director, officer, general
partner, employee or agent of the General Partner or any of its Affiliates, in
his capacity as such, if such Person shall also be a Limited Partner or an
Assignee) shall take part in the operation, management or control (within the
meaning of the Delaware Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by a
director, officer, general partner, employee or agent of the General Partner or
any of its Affiliates shall not affect, impair or eliminate the limitations on
the liability of any Limited Partner under this Agreement.
7.3 Outside Activities. Subject to the provisions of Section 6.14,
which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partners or Assignees,
each Limited Partner and Assignee shall have the right to engage in and possess
an interest in other business ventures of any and every type and description,
independently or with others, including business interests and activities in
direct competition with the Partnership, the Operating Partnership or any
Subsidiary. Neither the Partnership nor any of the Partners shall have any
rights by virtue of this Agreement or the partnership relationship created
hereby or thereby in any such business ventures, and each Limited Partner and
Assignee shall have no obligation to offer any interest in any such business
ventures to the Partnership or any Partner.
7.4 Return of Capital. No Limited Partner or Assignee shall be entitled
to the withdrawal or return of its Capital Contribution, except to the extent,
if any, that distributions made pursuant to this Agreement or upon termination
of the Partnership may be considered as such by law, and then only to the extent
provided for in this
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Agreement. Except to the extent provided by Article 5 or as otherwise expressly
provided in this Agreement, no Limited Partner or Assignee shall have priority
over any other Limited Partner or Assignee either as to the return of Capital
Contribution or as to profits, losses or distributions.
7.5 Access to Information.
7.5.1 In addition to other rights provided by this Agreement or by
applicable law, each Limited Partner and Assignee, and each Limited Partner's
and Assignee's duly authorized representatives shall have the right at
reasonable times, upon reasonable notice which shall not be less than three
Business Days, and at such Person's own expense, but only upon its written
request and for a purpose reasonably related to such Person's interest as a
Limited Partner or Assignee, to (i) have true and full information regarding the
status of the business and financial condition of the Partnership, (ii) inspect
and copy, promptly after they become available, the Partnership's federal, state
and local income tax returns for each year, (iii) have on demand a current list
of the full name and last known business, residence or mailing address of each
Partner, (iv) have true and full information regarding the Net Agreed Value of
any Capital Contributions made by the General Partner and the Limited Partners
and the date on which each such Person became a General Partner or Limited
Partner, (v) have a copy of this Agreement and the Certificate of Limited
Partnership and all amendments thereto, together with copies of executed powers
of attorney pursuant to which this Agreement or any such Certificate has been
executed and (vi) have any other information regarding the affairs of the
Partnership as is just and reasonable.
7.5.2 Anything in Section 7.5.1 to the contrary notwithstanding, the
General Partner may keep confidential from the Limited Partners and Assignees,
and each Limited Partner's and Assignee's duly authorized representatives, for
such period of time as the General Partner deems reasonable, any information
that the General Partner reasonably believes to be in the nature of trade
secrets or other information the disclosure of which the General Partner in good
faith believes is not in the best interests of the Partnership, the Operating
Partnership or any Subsidiary or could damage the business of the Partnership,
the Operating Partnership or any Subsidiary or which the Partnership, the
Operating Partnership or any Subsidiary is required by law or by agreements with
third parties to keep confidential.
ARTICLE 8 -- BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 Records and Accounting. The General Partner shall keep or cause to
be kept complete and accurate books and records with respect to the
Partnership's business, which books and records shall at all times be kept at
the principal office of the Partnership. Any records maintained by the
Partnership in the regular course of its business, including books of account
and records of Partnership proceedings, may be kept on or be in the form of
punch cards, magnetic media, photographs, micrographics or any other information
storage device, provided that the records so kept are convertible into clearly
legible written form within a reasonable period of time. The books of the
Partnership shall be maintained on the accrual basis in accordance with
generally accepted accounting principles, except to the extent otherwise
required herein.
8.2 Fiscal Year. The fiscal year of the Partnership shall be the
calendar year.
8.3 Reports.
8.3.1 As soon as practicable, but in no event later than 120 days after
the close of each Partnership Year, the General Partner shall deliver to each
Record Holder, as of a recent date selected by the General Partner, reports
containing financial statements of the Partnership for the fiscal year,
including a balance sheet and statements of operations, Partners' equity and
changes in financial position, all of which shall be prepared in accordance with
generally accepted accounting principles and shall be audited by the
Partnership's Accountants.
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8.3.2 As soon as practicable, but in no event later than 60 days after
the close of each calendar quarter, except the last calendar quarter of each
fiscal year, the General Partner shall deliver to each Record Holder, as of a
recent date selected by the General Partner, a quarterly report for the calendar
quarter containing such financial and other information (which need not be
audited) as may be required by applicable law, regulation or rule of any
National Securities Exchange on which Partnership Securities are listed for
trading or as the General Partner deems appropriate.
8.3.3 The General Partner may release such information concerning the
operations of the Partnership to such sources as is customary in the industry or
required by law or regulation of any regulatory body.
ARTICLE 9 -- TAX MATTERS
9.1 Section 754 Allocations. The adjustments to basis to Partnership
Assets that are attributable to the Section 754 Election shall be allocated to
the Partners in the manner that the General Partner determines is reasonable,
however, no such adjustment shall be credited or charged to the Capital
Accounts.
9.2 Preparation of Tax Returns. The General Partner shall arrange for
the preparation and timely filing of all returns of the Partnership necessary
for federal income tax purposes and state and local income tax purposes in the
jurisdictions in which the Partnership conducts business and shall use all
reasonable efforts to furnish to the Record Holders within 75 days of the close
of the taxable year the tax information reasonably required for federal, state
and local income tax reporting purposes. The classification, realization and
recognition of income, gain, losses and deductions and other items shall be on
the accrual method of accounting for federal income tax purposes. The taxable
year of the Partnership shall be the calendar year.
9.3 Tax Elections.
9.3.1 The Partnership shall make the Section 754 Election in accordance
with applicable regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the General Partner's determination
that such revocation is in the best interest of the Limited Partners and
Assignees.
9.3.2 The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
9.3.3 Except as otherwise provided herein, the General Partner shall
determine whether to make any other available elections (including the elections
provided for in Sections 167 and 168 of the Code) on behalf of the Partnership
under the Code.
9.3.4 For purposes of computing adjustments under Section 743(b) of the
Code, the General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of LP Units will be deemed to
be the lowest quoted trading price of the LP Units on any National Securities
Exchange on which such LP Units are traded during the calendar month in which
such transfer is deemed to occur pursuant to Section 5.2.7 without regard to the
actual price paid by such transferee.
9.4 Tax Controversies. Subject to the provisions hereof, the General
Partner is designated as the Tax Matters Partner (as defined in Section 6231 of
the Code) and is authorized and required to represent the Partnership (at the
Partnership's expense) in connection with all examinations of the Partnership's
affairs by tax authorities, including resulting administrative and judicial
proceedings, and to expend Partnership funds for professional services and costs
associated therewith. Each Partner agrees to cooperate with the General Partner
and to do or refrain from doing any or all things reasonably required by the
General Partner to conduct such proceedings.
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9.5 Tax Basis and Value Determinations. To the extent that the General
Partner is required to establish fair market values or allocate amounts
realized, tax basis, Carrying Values or Net Agreed Values, the General Partner
shall establish such values and make such allocations in a manner that is
reasonable and fair to the holders of LP Units, taking into account all
applicable laws, governmental regulations, rulings and decisions. The General
Partner may, in its sole discretion, modify or revise such allocations in order
to comply with such laws, governmental regulations, rulings or decisions or to
the extent it otherwise deems such modification or revision appropriate or
necessary. The General Partner is authorized, to the extent deemed by it to be
appropriate or necessary, to utilize the service of an independent appraiser in
establishing such values or allocations and the General Partner shall in such
cases be entitled to rely on the values or allocations established by such
independent appraiser.
9.6 Entity-Level Taxation. If legislation is enacted which causes the
Partnership to become treated as an association taxable as a corporation for
federal income tax purposes, the following shall occur: with respect to any
calendar quarter ending after the Preference Period, the Minimum Quarterly
Distribution, First Target Distribution, the Second Target Distribution or the
Third Target Distribution, as the case may be, shall be equal to the product of
(i) the amount of such distribution multiplied by (ii) 1 minus the sum of (x)
the highest marginal federal corporate income tax rate for the Partnership Year
in which such quarter occurs (expressed as a percentage) plus (y) the effective
overall state and local income tax rate (expressed as a percentage) applicable
to the Partnership for the calendar year next preceding the calendar year in
which such quarter occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes). Such effective overall state and local income
tax rate shall be determined for the calendar year next preceding the first
calendar year during which the Partnership is taxable for federal income tax
purposes as a corporation or treated as an association taxable as a corporation
by determining such rate as if the Partnership had been subject to such state
and local taxes during such preceding calendar year.
9.7 Entity-Level Deficiency Collections. If the Partnership is required
by applicable law to pay any federal, state or local income tax on behalf of, or
withhold such amount with respect to, any Partner or Assignee or any former
Partner or Assignee but the Partnership is not required by applicable law and
does not elect to pay such tax on behalf of, or withhold such amount with
respect to, all Partners or Assignees (i) the General Partner shall cause the
Partnership to pay such tax on behalf of, or withhold such amount with respect
to, such Partner or Assignee or former Partner or Assignee from the funds of the
Partnership and such payment of tax shall not be deducted as a cash operating
expenditure of the Partnership in calculating "Cash from Operations" pursuant to
Section 5.7.3, but shall be deemed to be a distribution of Available Cash to
such Partner or Assignee on whose behalf the tax was paid; and (ii) to the
extent any such Partner or Assignee (but not a former Partner or Assignee) is
not then entitled to such distribution under this Agreement, the General Partner
shall be authorized, without the approval of any Partner or Assignee, to amend
this Agreement insofar as is necessary to maintain or establish the uniformity
of intrinsic tax characteristics as to all LP Units or the uniformity of Capital
Accounts underlying all LP Units and to make subsequent adjustments to
distributions in a manner which, in the reasonable judgment of the General
Partner, will make as little alteration in the priority and amount of
distributions otherwise applicable under this Agreement, and will not otherwise
alter the distributions to which Partners and Assignees are entitled under the
Agreement. The General Partner shall be authorized (but not required) to cause
the Partnership to pay any state or local income tax on behalf of, or withhold
such amount with respect to, all the Partners or Assignees even though such
payment or amount withheld may be greater than the amount that would have been
required to be paid if such payment or withholding had been made directly by a
particular Partner or Assignee; provided, however, that such tax payment or
amount withheld shall be in the same amount with respect to each LP Unit and, in
the General Partner's sole discretion, that such payment of tax on behalf of, or
such withholding with respect to all of the Partners or Assignees is in the best
interests of the Partners or Assignees as a whole. Any amount so paid on behalf
of all Partners or Assignees shall be deducted as a cash operating expenditure
of the Partnership in calculating, "Cash for Operations", and shall be treated
as a distribution to the Partners or Assignees for purposes of Section 4.5.1,
but shall not be treated as a distribution of Available Cash for any other
purpose of this Agreement. The General Partner shall be authorized (but not
required) to take all necessary or appropriate actions to collect all or any
portion
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of a deficiency in the payment of any such tax which relates to prior periods
which is attributable to Persons who were Limited Partners or Assignees when
such deficiencies arose, from such Persons.
9.8 Opinions of Counsel. Notwithstanding any other provision of this
Agreement, if the Partnership is taxable for federal income tax purposes as a
corporation or treated as an association taxable as a corporation at any time
and, pursuant to the provisions hereof, an Opinion of Counsel would otherwise be
required to the effect that an action will not cause the Partnership to become
so taxable as a corporation or to be treated as an association taxable as a
corporation, such requirement for an Opinion of Counsel shall be deemed
automatically waived.
9.9 Withholding. The General Partner is authorized to take any action
that it determines in its sole discretion to be necessary or appropriate to
cause the Partnership to comply with any withholding requirements established
under the Code or any other federal, state or local law including, without
limitation, pursuant to Section 1441, 1442, 1445 and 1446 of the Code.
9.10 General Partner Net Worth. The General Partner shall not declare
or make payment of any dividends (except dividends payable solely in capital
stock), purchase, redeem, retire or otherwise acquire for value any of its
capital stock now or hereafter outstanding, return any capital or make any
distribution of assets on account of any shares of its capital stock, if any
such action would reduce its net worth (computed by excluding any net worth
attributable to its interest in, and accounts and notes receivable from, or
payable to, the Partnership, the Operating Partnership or any other limited
partnership in which it is a general partner) below $5,000,000.00 (or such other
lesser amount as may be required to obtain an Opinion of Counsel that the
Partnership is not taxable as a corporation and will not be treated as an
association taxable as a corporation).
ARTICLE 10 -- POWER OF ATTORNEY
Each Person who accepts LP Units is deemed to constitute and appoint
the General Partner and the Liquidating Trustee (and any successor by merger,
transfer, election or otherwise), and each of the General Partner's and the
Liquidating Trustee's authorized officers and attorneys-in-fact, with full power
of substitution, as its true and lawful agents and attorneys-in-fact, with full
power and authority in its name, place and stead to:
(a) execute, swear to, acknowledge, deliver, file and record in
the appropriate public offices (i) all certificates and other
instruments including, at the option of the General Partner, this
Agreement and the Certificate of Limited Partnership and all amendments
and restatements hereof and thereof that the General Partner or the
Liquidating Trustee deems appropriate or necessary to carry out the
purposes of this Agreement and to form, qualify, or continue the
existence or qualification of, the Partnership as a limited partnership
(or a partnership in which the Limited Partners have limited liability)
in the State of Delaware and all jurisdictions in which the Partnership
may or may wish to conduct business or own property; (ii) all
instruments that the General Partner or the Liquidating Trustee deems
appropriate or necessary to reflect any amendment, change or
modification of this Agreement in accordance with its terms; (iii) all
conveyances and other instruments or documents that the General Partner
or the Liquidating Trustee deems appropriate or necessary to reflect
the dissolution and liquidation of the Partnership pursuant to the
terms of this Agreement (including a certificate of cancellation); and
(iv) all instruments (including, if required by law, this Agreement and
the Certificate of Limited Partnership and amendments and restatements
thereof) relating to the admission of any Partner, the initial or
increased Capital Contribution of any Partner or the determination of
the rights, preferences and privileges of any class or series of LP
Units or other securities issued pursuant to Section 4.3; and
(b) sign, execute, swear to and acknowledge all ballots,
consents, approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole discretion of the General Partner
or the Liquidating Trustee, to make, evidence, give, confirm or ratify
any vote, consent, approval, agreement or other action that is made or
given by the Partners hereunder or is consistent with the terms of this
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Agreement or appropriate or necessary, in the sole discretion of the
General Partner or the Liquidating Trustee, to effectuate the terms or
intent of this Agreement; provided, however, that when required by any
provision of this Agreement which establishes a percentage of the
Limited Partners or Limited Partners of any class required to take any
action, the General Partner or the Liquidating Trustee may exercise the
power of attorney made in this subsection (b) only after the necessary
vote, consent or approval by the Limited Partners or of the Limited
Partners of such class or series.
Nothing herein contained shall be construed as authorizing the General Partner
to amend this Agreement except in accordance with Article 16 or as may be
otherwise expressly provided for in this Agreement.
The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive, and shall not be
affected by, the subsequent death, incompetency, dissolution, disability,
incapacity, bankruptcy or termination of the Limited Partner and shall extend to
the Limited Partner's heirs, successors and assigns. Each Person who accepts LP
Units is deemed to consent to be bound by any representations made by the
General Partner or the Liquidating Trustee, acting in good faith hereby pursuant
to such power of attorney. Each Person who accepts LP Units is deemed to consent
to and waive any and all defenses that may be available to contest, negate or
disaffirm the action of the General Partner or Liquidating Trustee, taken in
good faith under such power of attorney. The Limited Partner shall execute and
deliver to the General Partner or Liquidating Trustee, within 15 days after
receipt of the General Partner's or Liquidating Trustee's request therefor, such
further designations, powers of attorney and other instruments as the General
Partner or Liquidating Trustee deems necessary to effectuate this Agreement and
the purposes of the Partnership.
ARTICLE 11 -- ISSUANCE OF UNIT CERTIFICATES
11.1 Issuance of Unit Certificates. Upon the issuance of LP Units to
any Person, the Partnership will issue one or more unit certificates ("Unit
Certificates") in the name of such Person evidencing the number of such LP Units
being so issued. Unit Certificates shall be executed on behalf of the
Partnership by the General Partner. No Unit Certificate shall be valid for any
purpose until manually countersigned by the Registrar.
11.2 Registration, Registration of Transfer and Exchange.
11.2.1 The Partnership will cause to be kept a register in which,
subject to such reasonable regulations as it may prescribe, the Partnership will
provide for the registration of LP Units and of transfers of such LP Units. The
Registrar is hereby appointed Registrar for the purpose of registering Senior
Preference Units and Preference Units and transfers of such Senior Preference
Units and Preference Units as herein provided. The General Partner may from time
to time designate such additional or successor Registrars as it may deem
appropriate.
11.2.2 Upon surrender for registration of transfer or exchange of any
Unit Certificate, and subject to the provisions of Section 11.2.3 below, the
General Partner on behalf of the Partnership will execute, and the Registrar
will countersign and deliver, in the name of the Record Holder or the designated
transferee or transferees, as required pursuant to the Record Holder's
instructions, one or more new Unit Certificates, evidencing the same aggregate
number of LP Units of the same class as did the Unit Certificate so surrendered.
11.2.3 Every Unit Certificate surrendered for registration of transfer
or exchange shall be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the General Partner or the Registrar, as the
case may be, duly executed by the Record Holder thereof or such Record Holder's
attorney duly authorized in writing. No charge shall be imposed by the
Partnership for such transfer, provided that, as a condition to the issuance of
any new Unit Certificate under this Section 11.2, the General Partner may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto.
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11.3 Lost, Stolen or Destroyed Certificates. The Partnership shall
issue a new Unit Certificate in place of any Unit Certificate previously issued
if the registered owner of the Unit Certificate:
11.3.1 makes proof by affidavit, in form and substance satisfactory to
the General Partner, that a previously issued Unit Certificate has been lost,
destroyed or stolen;
11.3.2 requests the issuance of a new Unit Certificate before the
Partnership has notice that the Unit Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
11.3.3 if requested by the General Partner, delivers to the Partnership
a bond, in form and substance satisfactory to the General Partner, with such
surety or sureties and with fixed or open penalty, as the General Partner may
direct to indemnify the Partnership and the Registrar against any claim that may
be made on account of the alleged loss, destruction or theft of the Unit
Certificate; and
11.3.4 satisfies any other reasonable requirements imposed by the
General Partner.
When a Unit Certificate has been lost, destroyed or stolen, and the holder
thereof fails to notify the Partnership within a reasonable time after he has
notice of it, and a transfer of the LP Units represented by the Unit Certificate
is registered before the Partnership receives such notification, such holder
shall be precluded from making any claim against the Partnership, the Registrar
or any Transfer Agent for such transfer or for a new Unit Certificate.
11.4 Registered Owner. The Partnership shall be entitled to treat the
Record Holder as the Limited Partner or Assignee-in-fact of any LP Units and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such LP Units on the part of any other Person, regardless of whether
it shall have actual or other notice thereof, except as otherwise provided by
law or any applicable rule, regulation, guideline or requirement of any National
Securities Exchange on which the LP Units are listed for trading. Without
limiting the foregoing, when a Person (such as a broker, dealer, bank, trust
company or clearing corporation, or an agent of any of the foregoing) is acting
as a nominee, agent or in some other representative capacity for another Person
in acquiring or holding LP Units, as between the Partnership on the one hand and
such Persons on the other hand, such representative Person (i) shall be the
Limited Partner or Assignee (as the case may be) of record and beneficially,
(ii) must execute and deliver a Transfer Application and (iii) shall be bound by
the Partnership Agreement and shall have the obligations of a Limited Partner or
Assignee (as the case may be) hereunder and as provided for herein.
ARTICLE 12 -- TRANSFER OF PARTNERSHIP INTERESTS
12.1 Transfer.
12.1.1 The term "transfer", when used in this Article 12 with respect
to a Partnership Interest, shall be deemed to refer to a transaction by which
the General Partner assigns all or any part of its Partnership Interest as the
General Partner (which is the Partnership Interest of the General Partner that
is not represented by LP Units) to another Person or by which the holder of an
LP Unit assigns the Partnership Interest evidenced thereby to another Person as
Assignee, and includes a sale, assignment, gift, pledge, hypothecation,
mortgage, exchange or any other disposition.
12.1.2 No Partnership Interest shall be transferred, in whole or in
part, except in accordance with the terms and conditions set forth in this
Article 12. Any transfer or purported transfer of any Partnership Interest not
made in accordance with this Article 12 shall be null and void.
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12.2 Transfer of Interests of the General Partner.
12.2.1 The General Partner may not transfer any portion of its
Partnership Interest as the General Partner unless (i) (A) in the event such
transfer is to be effective at any time prior to January 1, 2000, such transfer
is approved by the affirmative vote of a Majority Interest (other than LP Units
owned by the General Partner and its Affiliates) and by the affirmative vote of
Record Holders of a majority of the Senior Preference Units (other than during
the Preference Period Senior Preference Units owned by the General Partner and
its Affiliates) and (B) the transferee agrees to assume and be bound by the
provisions of this Agreement and the Operating Partnership Agreement and (ii)
the Partnership receives an Opinion of Counsel that such transfer and admission
(A) may be taken without the approval of all Partners, (B) would not cause the
loss of limited liability of the Limited Partners under this Agreement or the
Operating Partnership Agreement and (C) would not cause the Partnership to be
taxable as a corporation or treated as an association taxable as a corporation
for federal income tax purposes. Notwithstanding the provisions of Section
14.6.1, but subject to the foregoing, upon any transfer by the General Partner
of all or any portion of its Partnership Interest pursuant to this Section
12.2.1, the General Partner may receive and retain such purchase price as it may
negotiate with the transferee.
12.2.2 No other provision of this Agreement shall be construed to
prevent (and all Partners hereby expressly approve of) (i) the transfer by the
General Partner of all or any part of its Partnership Interest to an Affiliate,
and the assumption of the rights and duties of the General Partner by such
Affiliate and its admission as General Partner; (ii) the transfer by the General
Partner of its Partnership Interest upon its merger or consolidation with or
into any other Person or the transfer by it of all or substantially all of its
assets to another Person and admission as General Partner, and the assumption of
the rights and duties of the General Partner by such transferee; (iii) the
transfer by the General Partner of any part (but not all) of its interest in
items of Partnership income, gain, losses, deductions, credits, distributions or
surplus; (iv) the transfer by the General Partner of all of its interest in
items of Partnership income, gain, losses, deduction, credits, distributions and
surplus if the General Partner agrees, notwithstanding Section 17-702(a)(4) of
the Delaware Act, to continue as the General Partner and, if it so agrees, all
Partners hereby agree that it shall continue as the General Partner; (v) the
General Partner's mortgaging, pledging, hypothecating or granting a security
interest in all or any part of its Partnership Interest; or (vi) the forced sale
by the General Partner of any or all of its Partnership Interest pursuant to the
foreclosure of, or other realization upon, any encumbrance created pursuant to
clause (v) of this Section 12.2.2; provided, in the event of a transfer pursuant
to clauses (i) through (vi) of this Section 12.2.2, such transferee furnishes to
the Partnership an Opinion of Counsel that such transfer, merger, consolidation
or assumption (i) may be taken without the approval of all Limited Partners to
such specific act, (ii) would not cause the loss of limited liability of the
Limited Partners under this Agreement or the Operating Partnership Agreement and
(iii) would not cause the Partnership to be treated as an association taxable as
a corporation for federal income tax purposes.
12.3 Transfer of LP Units.
12.3.1 LP Units, including LP Units held by the General Partner, may be
transferred as provided in Section 11.2.
12.3.2 A transferee who has completed and delivered a Transfer
Application shall be deemed to have (i) requested admission as a Substituted
Limited Partner and executed and agreed to comply with and be bound by this
Agreement, (ii) represented and warranted that he has all right, power and
authority necessary to enter into this Agreement, (iii) appointed the General
Partner and any Liquidating Trustee his attorney to execute, swear to,
acknowledge and file any document, including this Agreement, any amendment of
this Agreement and the Certificate of Limited Partnership, necessary or
appropriate for his admission as a Substituted Limited Partner and as a party to
this Agreement, (iv) granted the powers of attorney provided for in this
Agreement and (v) made the waivers and given the approvals contained in this
Agreement. Until admitted as a Substituted Limited Partner pursuant to Article
13, the Record Holder of LP Units shall be an Assignee in respect of such LP
Units. Limited Partners may include custodians, nominees or any other individual
or entity in its own or any representative capacity.
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12.3.3 Each distribution in respect of LP Units of a given class shall
be paid by the Partnership, directly or through the Registrar or through any
other Person or agent, only to the Record Holders of LP Units of such class as
of the Record Date set for the distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of any assignment or otherwise.
12.4 Restrictions on Transfers. Notwithstanding the other provisions of
this Article 12, no transfer of any LP Unit or interest therein shall be made if
such transfer (i) would violate the then applicable federal or state securities
laws or rules and regulations of the Commission, any state securities commission
or any other governmental authorities with jurisdiction over such transfer, (ii)
would result in the taxation of the Partnership as a corporation or as an
association taxable as a corporation for federal income tax purposes or (iii)
would affect the Partnership's existence or qualification as a limited
partnership under the Delaware Act.
12.5 Citizenship Certificates; Non-citizen Assignees.
12.5.1 In the event that, because of the nationality (or any other
status) of a Limited Partner or Assignee, the Partnership is or becomes subject
to federal, state or local laws or regulations the effect of which would, in the
reasonable determination of the General Partner, cause cancellation or
forfeiture of any property in which the Partnership or the Operating Partnership
has an interest, the General Partner may request any such Limited Partner or
Assignee to furnish to the General Partner within 30 days after receipt of such
request an executed Citizenship Certification or such other information
concerning his nationality, citizenship or other status (or, if the Limited
Partner or Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other status of such Person) as the General Partner
may request. If a Limited Partner or Assignee fails to furnish such Citizenship
Certification or other information as may be requested, or if upon receipt of
such Citizenship Certification or other information the General Partner
determines, with the advice of counsel, that a Limited Partner or an Assignee is
not an Eligible Citizen, the LP Units owned by such Limited Partner or Assignee
shall be subject to redemption in accordance with the provisions of Section
12.6. In addition to becoming subject to redemption, the General Partner may
require that the status of any such Limited Partner or Assignee be changed to
that of a Non-citizen Assignee, and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect of
his LP Units.
12.5.2 The General Partner shall, in exercising voting rights in
respect of LP Units held by it on behalf of Non-citizen Assignees, distribute
the votes in the same ratios as the votes of Limited Partners in respect of LP
Units other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
12.5.3 Upon dissolution of the Partnership, a Non-citizen Assignee
shall have no right to receive a distribution in kind pursuant to Section 15.4
but shall be entitled to the cash equivalent thereof, and the General Partner
shall provide cash in exchange for an assignment of the Non-citizen Assignee's
share of the distribution in kind. Such payment and assignment shall be treated
for Partnership purposes as a purchase by the General Partner from the
Non-citizen Assignee of his Partnership Interest (representing his right to
receive his share of such distribution in kind).
12.5.4 At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited Partner with respect to any
Partnership Interest of such Non-citizen Assignee not redeemed pursuant to
Section 12.6, and upon his admission pursuant to Section 13.2, the General
Partner shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's LP Units.
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12.6 Redemption of Interests.
12.6.1 If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 12.5.1, or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the General Partner that such Limited Partner or Assignee
is an Eligible Citizen or has transferred his LP Units to a person who furnishes
a Citizenship Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Partnership Interest of such Limited
Partner or Assignee as follows:
12.6.1.1 The General Partner shall, not later than the 30th day
before the date fixed for redemption, give notice of redemption to the
Limited Partner or Assignee, at his last address designated on the
records of the Partnership, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed.
The notice shall specify the Redeemable Units, the date fixed for
redemption, the place of payment, that payment of the redemption price
will be made upon surrender of the Certificate evidencing the
Redeemable Units and that on and after the date fixed for redemption no
further allocations or distributions to which the Limited Partner or
Assignee would otherwise be entitled in respect of the Redeemable Units
will accrue or be made.
12.6.1.2 The aggregate redemption price for Redeemable Units
shall be an amount equal to the Current Market Price (the date of
determination of which shall be the date fixed for redemption) of LP
Units of the class to be so redeemed multiplied by the number of LP
Units of each such class included among the Redeemable Units. The
redemption price shall be paid, in the sole discretion of the General
Partner, in cash or by delivery of a promissory note of the Partnership
in the principal amount of the redemption price, bearing interest at
the rate of 10% annually and payable in three equal annual installments
of principal, together with accrued interest, commencing one year after
the redemption date.
12.6.1.3 Upon surrender by or on behalf of the Limited Partner
or Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Units, duly endorsed in blank or
accompanied by an assignment duly executed in blank, the Limited
Partner or Assignee or his duly authorized representative shall be
entitled to receive the payment therefor.
12.6.1.4 After the redemption date, Redeemable Units shall no
longer constitute issued and Outstanding LP Units.
12.6.2 The provisions of this Section 12.6 shall be applicable to LP
Units held by a Limited Partner or Assignee as nominee of a Person determined to
be other than an Eligible Citizen.
12.6.3 Nothing in this Section 12.6 shall prevent the recipient of a
notice of redemption from transferring his LP Units before the redemption date
if such transfer is otherwise permitted under this Agreement. Upon receipt of
notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided, the transferee of such LP Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make such
certification, such redemption shall be effected from the transferee on the
original redemption date.
12.6.4 If the Partnership or the General Partner determines that
because of the nationality (or other status) of the General Partner, whether or
not in its capacity as such, the Partnership is or becomes subject to federal,
state or local regulations the effect of which would, in the reasonable
determination of the General Partner, cause cancellation or forfeiture of any
property in which the Partnership or the Operating Partnership has an interest,
the Partnership may, unless the General Partner has furnished a Citizenship
Certification to the Independent Committee or transferred his Partnership
Interest or LP Units to a Person who furnishes a Citizenship Certification prior
to the date fixed for redemption, redeem the Partnership Interest or Interests
of the General Partner in the Partnership as
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provided in Section 12.6.1, which redemption shall also constitute redemption of
the general partner interest of the general partner of the Operating
Partnership. If such redemption involves a redemption of the Combined Interest
the redemption price thereof shall be equal to the aggregate sum of the Current
Market Price (the date of determination for which shall be the date fixed for
redemption) of each class of LP Units then Outstanding, in each such case
multiplied by the number of LP Units of such class into which the Combined
Interest would then be convertible under the terms of Section 14.6.2, if the
General Partner were to withdraw or be removed as General Partner (the date of
the determination for which shall be the date fixed for redemption). The
redemption price shall be paid in cash or by delivery of a promissory note of
the Partnership in the principal amount of the redemption price, bearing
interest at the rate of 10% annually and payable in three equal annual
installments of principal, together with accrued interest, commencing one year
after the redemption date.
ARTICLE 13 -- ADMISSION OF PARTNERS
13.1 Admission of Substituted Limited Partners.
13.1.1 A Limited Partner or Assignee shall have the power to give, and
by transfer of LP Units shall be deemed to have given, the transferee the right
to become a Substituted Limited Partner subject to the conditions of and in the
manner permitted under this Agreement. A transferor of LP Units shall only have
the power to give a transferee who does not execute and deliver a Transfer
Application, (i) the right to negotiate such LP Units to another transferee and
(ii) the right to transfer the right to become a Substituted Limited Partner
subject to the conditions of and in the manner permitted under this Agreement to
such other transferee. Each transferee of LP Units (including any Person, such
as a broker, dealer, bank, trust company, clearing corporation, other nominee
holder or an agent of any of the foregoing, acquiring such LP Units for the
account of another Person) shall apply to become a Substituted Limited Partner
with respect to LP Units transferred to such Person by executing and delivering
a Transfer Application at the time of such transfer as provided in Section 12.3.
A Record Holder of LP Units shall be an Assignee at and from the close of
business on the Business Day on which a properly executed Transfer Application
is received by the Registrar or a Transfer Agent until the General Partner
consents to the admission of the Assignee as a Substituted Limited Partner and
such admission is reflected on the books and records of the Partnership, after
which time such Record Holder shall be a Substituted Limited Partner. A Limited
Partner who has transferred his LP Units to an Assignee shall remain a Limited
Partner in respect of such LP Units until such Assignee is admitted as a
Substituted Limited Partner pursuant to this Section 13.1. The consent of the
General Partner may be granted or withheld in its sole discretion. Such consent
shall be deemed to have been given if the General Partner has not, in writing,
withheld its consent within 24 hours following the recordation of the name of
the Assignee on the books and records of the Partnership.
13.1.2 The Partnership will cause the Registrar to prepare as of the
close of business on the last Business Day of each month, a list or other
appropriate evidence of transfers of LP Units registered by all Transfer Agents
since the last Business Day of the preceding month (hereinafter called the
"transfer record") and, as promptly as practicable after the last Business Day
of each month, to submit the transfer record to the General Partner. Upon
receipt of the transfer record by the General Partner, the name of the Assignees
appearing on such transfer record will be recorded on the books and records of
the Partnership, so that each transferee who is a Record Holder on the last
Business Day of the month is admitted as a Substituted Limited Partner in
respect of the underlying LP Units as promptly as practicable thereafter,
subject, however, to the right of the General Partner to withhold its consent to
the admission of any transferee as a Substituted Limited Partner.
13.1.3 Each Limited Partner, by requesting and receiving admission to
the Partnership, is deemed to approve of the admission of each Substituted
Limited Partner pursuant to the terms of this Agreement and no further approval
of Partners, other than that of the General Partner, shall be required to effect
such admission.
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13.2 Admission of Additional Limited Partners.
13.2.1 A Person who makes a Contribution to the Partnership shall be
admitted to the Partnership as an Additional Limited Partner upon furnishing to
the General Partner (i) evidence of his acceptance, in form satisfactory to the
General Partner, of all the terms and conditions of this Agreement, including,
without limitation, the power of attorney granted in Article 10, and (ii) such
other documents or instruments as may be required in order to effect his
admission as a Limited Partner.
13.2.2 Notwithstanding anything in this Section 13.2 to the contrary,
no Person shall be admitted as an Additional Limited Partner until the General
Partner has consented to such admission, which consent may be withheld or
granted in the sole discretion of the General Partner. Such consent shall be
deemed to have been given if the General Partner has not, in writing, withheld
its consent within 24 hours following the recordation of the name of such Person
on the books and records of the Partnership. Each Limited Partner, by requesting
and receiving admission to the Partnership, is deemed to approve of the
admission of each Additional Limited Partner pursuant to the terms of this
Agreement and no further approval of partners, other than that of the General
Partner, shall be required to effect such admission.
13.2.3 The admission of any Person as an Additional Limited Partner
shall become effective on the date upon which the name of such Person is
recorded on the books and records of the Partnership and the General Partner has
consented or is deemed to have consented to such admission pursuant to Section
13.2.2.
13.3 Admission of Successor or Additional General Partner. A successor
or additional General Partner selected pursuant to Section 14.1 or 15.1 or the
transferee or successor to of all or any portion of the Partnership Interest of
the General Partner pursuant to Section 12.2 shall be admitted to the
Partnership as a General Partner (in the place of or in addition to, as the case
may be, the transferor General Partner), effective as of the date that an
amendment to the Certificate of Limited Partnership, adding its name and other
required information, is filed pursuant to Section 6.1.3 (which, in the event
the successor or transferee General Partner is in the place of the withdrawing,
removed or transferor General Partner, shall be contemporaneous with the
withdrawal of such withdrawing, removed or transferor General Partner), and upon
receipt by the withdrawing, removed or transferor General Partner of all of the
following: (i) acceptance of all of the terms and provisions of this Agreement;
(ii) written agreement of the proposed General Partner to continue the business
of the Partnership; and (iii) such other documents or instruments as may be
required in order to effect its admission as a General Partner under this
Agreement and applicable law. Each Limited Partner by requesting and receiving
admission to the Partnership is deemed to approve of the admission of a
successor or additional General Partner selected pursuant to the terms of this
Agreement, and no further approval of Partners shall be required to effect such
admission.
ARTICLE 14 -- WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
14.1 Withdrawal or Removal of the General Partner. The General Partner
shall be deemed to have withdrawn from the Partnership upon the occurrence of
any one of the following events listed in this Section 14.1 (each such event
herein referred to as an "Event of Withdrawal");
14.1.1 The General Partner voluntarily withdraws from the Partnership
by giving written notice to the other Partners.
14.1.2 The General Partner transfers all of its rights as General
Partner pursuant to Section 12.2 hereof.
14.1.3 The General Partner is removed pursuant to Section 14.3 hereof.
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14.1.4 The General Partner
14.1.4.1 makes a general assignment for the benefit of
creditors;
14.1.4.2 files a voluntary bankruptcy petition;
14.1.4.3 files a petition or answer seeking for itself a
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any law;
14.1.4.4 files an answer or other pleading admitting or failing
to contest the material allegations of a petition filed against the
General Partner in a proceeding of the type described in paragraphs (a)
through (c) of this subsection; or
14.1.4.5 seeks, consents to or acquiesces in the appointment of
a trustee, receiver or liquidator of the General Partner or of all or
any substantial part of its properties.
14.1.5 A final and non-appealable judgment is entered by a court with
appropriate jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a court
with appropriate jurisdiction against the General Partner, in each case under
any federal or state bankruptcy or insolvency laws as now or hereafter in
effect.
14.1.6 A certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its charter,
under the laws of its state of incorporation.
14.1.7 The general partner of the Operating Partnership withdraws from,
or is removed as the general partner of, the Operating Partnership.
If an Event of Withdrawal specified in Sections 14.1.4, 14.1.5 or 14.1.6 occurs,
the withdrawing General Partner shall give written notice to the Limited
Partners within 30 days after such occurrence. The Partners hereby agree that
only the Events of Withdrawal described in this Section 14.1 shall result in
withdrawal of the General Partner from the Partnership.
14.2 Withdrawal. The General Partner covenants and agrees that it will
not voluntarily withdraw as the general partner of the Partnership prior to
January 1, 2000, other than a withdrawal effective upon the transfer of all of
the General Partner's Partnership Interest as the General Partner pursuant to
Section 12.2.1, unless such withdrawal is approved by a Majority Interest and
the affirmative vote of Record Holders of at least a majority in interest of the
Senior Preference Units (excluding Senior Preference Units held by the General
Partner and its Affiliates); provided that the General Partner may withdraw
without such approval by the Limited Partners upon 90 days' advance written
notice to the Limited Partners if more than 50% of the Outstanding LP Units are
held or controlled by one Person and its Affiliates other than the withdrawing
General Partner and its Affiliates. The General Partner may, at any time
subsequent to January 1, 2000, voluntarily withdraw from the Partnership
effective on at least 90 days' advance written notice to the Limited Partners,
such withdrawal to take effect on the date specified in such notice. The
withdrawal or removal of the General Partner from the Partnership shall also
constitute the withdrawal or removal of the General Partner from the Operating
Partnership. The General Partner shall have no liability on account of a
withdrawal permitted hereunder. If the General Partner gives notice of
withdrawal, a Majority Interest may, prior to the effective date of such
withdrawal, elect a successor General Partner. The Person so elected shall
automatically become the successor General Partner of the Operating Partnership,
as provided in the Operating Partnership Agreement. If, prior to the effective
date of the General Partner's withdrawal, no successor General Partner is
elected, the provisions of Section 15.1 shall apply. Any withdrawal permitted
pursuant to this Section shall not affect the LP Units owned by a withdrawing
General Partner.
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14.3 Removal. The affirmative vote of (i) Limited Partners, voting as a
single class, holding at least 85% of the issued and Outstanding LP Units and
(ii) Limited Partners holding at least 85% of the issued and Outstanding LP
Units, with the holders of Senior Preference Units and Common Units voting as
separate classes and with the holders of Preference Units and Preference B Units
voting together as one separate class, in each case including LP Units held by
the General Partner and its Affiliates, shall be required to remove the General
Partner. Any such vote of the Limited Partners must also provide for the
election of a successor General Partner. Any removal pursuant to this Section
shall not affect the LP Units owned by a removed General Partner.
14.4 Opinion of Counsel. Notwithstanding the provisions of Section 14.2
or 14.3, the rights of the Limited Partners under Section 14.2 or 14.3 shall not
be exercised until such time as the Partnership has received an Opinion of
Counsel that the action in question (i) may be taken without the approval of all
Partners to such specific act, (ii) would not cause the loss of limited
liability of the Limited Partners under this Agreement or the Operating
Partnership Agreement, (iii) would not cause the Partnership or the Operating
Partnership to be taxable as a corporation or to be treated as an association
taxable as a corporation for federal income tax purposes and (iv) any required
consents of any regulatory authorities to such action have been obtained.
14.5 Amendment of Certificate of Limited Partnership. The Certificate
of Limited Partnership shall be amended to reflect the withdrawal, removal or
succession of the General Partner.
14.6 Interest of Departing Partner and Successor.
14.6.1 14.6.1.1 A successor General Partner shall have the option,
exercisable prior to the effective date of the departure of the Departing
Partner, to acquire such Departing Partner's Partnership Interest as the General
Partner as described in Section 14.6.1.2 for an amount in cash equal to the fair
market value of the Departing Partner's Partnership Interest as the General
Partner herein, determined as of the effective date of its departure. If the
successor General Partner acquires the Departing Partner's Partnership Interest
as the General Partner, such successor General Partner must also acquire at such
time the general partner interest of such Departing Partner or its Affiliate as
general partner of the Operating Partnership for an amount equal to the fair
market value of such interest, determined as of the effective date of departure.
14.6.1.2 For purposes of this Section 14.6, the fair market value of
the Departing Partner's Partnership Interest as the General Partner herein and
the partnership interest of such Departing Partner or its Affiliate as the
general partner of the Operating Partnership (collectively, the "Combined
Interest") shall be determined by agreement between the Departing Partner and
its successor or, failing agreement within 30 days after the effective date of
such Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then such firm shall be designated
by the independent investment banking firm or other independent expert selected
by each of the Departing Partner and its successor. In making its determination,
such independent investing banking firm or other independent expert shall
consider the then current trading price of LP Units on any National Securities
Exchange on which LP Units are then listed, the value of the Partnership's
assets, the rights and obligations of the General Partner and other factors it
may deem relevant.
14.6.2 14.6.2.1 If the Combined Interest is not acquired in the manner
set forth in Section 14.6, the Departing Partner shall become a Limited Partner
and its Combined Interest shall be converted into Common Units with a value
equivalent to the Combined Interest pursuant to a valuation made by an
investment banking firm or other independent expert selected pursuant to Section
14.6.1.2, without reduction in such Partnership Interest (but subject to
proportionate dilution by reason of admission of its successor). Any successor
General Partner shall indemnify the Departing Partner as to all debts and
liabilities of the Partnership arising on or after the date on which the
Departing Partner becomes a Limited Partner.
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14.6.2.2 If the option described in Section 14.6.1 is not exercised by
the party entitled to do so, the successor General Partner shall, at the
effective date of its admission to the Partnership, contribute to the capital of
the Partnership cash equal to the greater of (i) 1/98th of the aggregate Capital
Account balances of the Unitholders as of such date or (ii) the fair market
value of a 1/99th general partner's interest in the Partnership, determined by a
valuation made by an investment banking firm or other independent expert
selected pursuant to Section 14.6.1. In such event, the successor General
Partner shall, subject to the following sentence, be entitled to such Percentage
Interest of all Partnership allocations and distributions and any other
allocations and distributions to which the Departing Partner was entitled as
general partner. In addition, such successor General Partner shall cause this
Partnership Agreement to be amended to reflect that, from and after the date of
such successor General Partner's admission, the successor General Partner's
interest in all Partnership distributions and allocations shall be 1/99th and
that of the Unitholders shall be 98/99ths.
14.6.3 The Partnership shall reimburse the Departing Partner for
employee related liabilities including but not limited to, severance liabilities
incurred in connection with the termination of employees employed by the
Departing Partner for the benefit of the Partnership; and if the Partnership is
otherwise indebted to the Departing Partner at the effective time of its
departure for funds advanced, properties sold or services rendered to the
Partnership by the Departing Partner or otherwise, the Partnership shall, at the
option of the successor General Partner, either (i) within 60 days after the
effective time of such departure, pay to the Departing Partner the full amount
of such indebtedness or (ii) pay such indebtedness or any portion thereof in
accordance with its then existing terms. The successor to the Departing Partner
shall assume all obligations theretofore incurred by the Departing Partner as
the General Partner of the Partnership, and the Partnership and such successor
General Partner shall take all such action as shall be necessary to terminate
any guarantees of the Departing Partner and any of its Affiliates of any
obligations of the Partnership. If for whatever reason the creditors of the
Partnership will not consent to such termination of guarantees, the successor to
the Departing Partner shall be required to indemnify the Departing Partner for
any liabilities and expenses incurred by the Departing Partner on account of
such guarantees.
ARTICLE 15 -- DISSOLUTION AND LIQUIDATION
15.1 Dissolution. Except as provided in Section 15.2, the Partnership
shall be dissolved upon:
15.1.1 the expiration of its term as provided in Section 2.5;
15.1.2 An Event of Withdrawal of the General Partner as provided in
Section 14.1 (other than by reason of a transfer pursuant to Section 12.2 or
withdrawal occurring upon or after, or removal effective upon or after, approval
by the Limited Partners of a successor pursuant to Section 14.2 or 14.3, as the
case may be);
15.1.3 a written determination by the General Partner that projected
future revenues of the Partnership will be insufficient to enable payment of
projected Partnership costs and expenses or, if sufficient, will be such that
continued operation of the Partnership is not in the best interests of the
Partners;
15.1.4 an election to dissolve the Partnership by the General Partner
which is approved by the affirmative vote of a Majority Interest and the
approval of the Record Holders of at least a majority in interest of the
Outstanding Senior Preference Units (excluding Senior Preference Units owned by
the General Partner and its Affiliates); provided, that no such election shall
be effective at any time when the Partnership has outstanding any indebtedness
for borrowed money unless provision shall have been made in connection with such
dissolution for the payment in full of such indebtedness;
15.1.5 except as otherwise provided herein, any other event that, under
the Delaware Act, would cause its dissolution;
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15.1.6 the sale of all or substantially all of the assets and
properties of the Partnership or the Operating Partnership.
The Partnership shall not be dissolved by the admission of a successor Limited
Partner or by the admission of additional or successor General Partners in
accordance with the terms of this Agreement.
15.2 Continuation of the Business of the Partnership.
15.2.1 Within 180 days following an event described in Section 15.1.2,
in the event action pursuant to Section 15.3 is not taken, a Majority Interest
may elect in writing to reconstitute and continue the business of the
Partnership by forming a Reconstituted Partnership on the same terms and
provisions as are set forth in this Agreement. Any such election must also
provide for the election of a general partner of the Reconstituted Partnership.
If such an election is made, all of the Limited Partners of the Partnership
shall continue as limited partners of the Reconstituted Partnership. No such
election shall be made, however, unless prior thereto the Partnership has
received an Opinion of Counsel that (i) the election may be made without the
approval of all Partners, (ii) the limited partners in the Reconstituted
Partnership will have the same limited liability as the Limited Partners in the
Partnership, (iii) the Reconstituted Partnership and the Operating Partnership
will be treated as partnerships and not as associations taxable as corporations
for federal income tax purposes and (iv) any required consents of any regulatory
authorities have been obtained. The Partnership Interest as General Partner of
the former General Partner shall be treated as though it were an equivalent
general partner's interest in the Reconstituted Partnership, and shall be
subject to disposition at the option of the general partner of the Reconstituted
Partnership in the manner provided in Section 14.6.1 (which option must be
exercised contemporaneously with the selection of the new general partner).
15.2.2 Upon an event described in this Section 15.2, all necessary
steps shall be taken to cancel this Agreement and the Certificate of Limited
Partnership of the Partnership and to enter into a new partnership agreement and
certificate of limited partnership of the Reconstituted Partnership, and the
general partner of the Reconstituted Partnership may for this purpose and all
purposes stated therein exercise the power of attorney granted pursuant to
Article 10 or in the Transfer Application.
15.3 Liquidation.
15.3.1 Upon dissolution of the Partnership, unless an election to
continue the business of the Partnership is made pursuant to Section 15.2, the
General Partner or in the event the dissolution was caused by an event described
in Section 15.1.2, a liquidator or liquidating committee elected by a Majority
Interest, shall be the Liquidating Trustee. The Liquidating Trustee shall
liquidate the Partnership Assets and apply and distribute the proceeds of such
liquidation in the following order of priority, unless otherwise required by
applicable law:
15.3.1.1 the payment to creditors of the Partnership, other
than Partners, in order of priority provided by law, including the
establishment of reserves for the payment thereof;
15.3.1.2 pro rata payment to Partners for loans or other
amounts owed to them by the Partnership;
15.3.1.3 to all Partners in accordance with the positive
balances in their respective Capital Accounts after taking into account
adjustments to such Capital Accounts pursuant to Section 5.1.3;
15.3.1.4 to the Partners in proportion to their respective
Percentage Interests.
15.3.2 The Liquidating Trustee (if other than the General Partner)
shall be entitled to receive such compensation for its services as may be
approved by the vote of a Majority Interest. The Liquidating Trustee shall
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agree not to resign at any time without 60 days' prior written notice and (if
other than the General Partner) may be removed at any time, with or without
cause, by written notice of removal approved by the vote of a Majority Interest.
Upon dissolution, removal or resignation of the Liquidating Trustee, a successor
and substitute Liquidating Trustee (who shall have and succeed to all rights,
powers and duties of the original Liquidating Trustee) shall, within 90 days
thereafter, be selected by a Majority Interest. The right to appoint a successor
or substitute Liquidating Trustee in the manner provided herein shall be
recurring and continuing for so long as the functions and services of the
Liquidating Trustee are authorized to continue under the provisions hereof, and
every reference herein to the Liquidating Trustee will be deemed to refer also
to any such successor or substitute Liquidating Trustee appointed in the manner
herein provided. Except as expressly provided in this Article 15, the
Liquidating Trustee appointed in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner, under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers) to the extent necessary or
desirable in the good faith judgment of the Liquidating Trustee to carry out the
duties and functions of the Liquidating Trustee hereunder (including the
establishment of reserves for liabilities that are contingent or uncertain in
amount) for and during such period of time as shall be reasonably required in
the good faith judgment of the Liquidating Trustee to complete the winding-up
and liquidation of the Partnership as provided for herein. In the event a
Majority Interest fails to approve of a Person to be the Liquidating Trustee as
herein provided within 120 days following the event of dissolution or fails to
approve of a successor and substitute Liquidating Trustee within the time period
set forth above, any Partner may make application to a Court of Chancery of the
State of Delaware to wind up the affairs of the Partnership and, if deemed
appropriate, to appoint a Liquidating Trustee.
15.4 Distribution in Kind. Notwithstanding the provisions of Section
15.3 which require the liquidation of the Partnership Assets, but subject to the
order of priorities set forth therein, if on dissolution of the Partnership the
Liquidating Trustee determines that an immediate sale of part or all of the
Partnership Assets would be impractical or would cause undue loss to the
Partners, the Liquidating Trustee may, in its absolute discretion, defer for a
reasonable time the liquidation of any Partnership Assets except those necessary
to satisfy liabilities of the Partnership and may, in its absolute discretion,
distribute to the Partners, in lieu of cash, as tenants in common and in
accordance with Section 15.3, undivided interests in such Partnership Assets as
the Liquidating Trustee deems not suitable for liquidation. Any distributions in
kind shall be subject to such conditions relating to the disposition and
management thereof as the Liquidating Trustee deems reasonable and equitable and
to any agreements governing the operation of such Partnership Assets at such
time. The Liquidating Trustee shall determine the fair market value of any
Partnership Assets distributed in kind using such reasonable method of valuation
as it may adopt.
15.5 Cancellation of Certificate of Limited Partnership. Upon the
completion of the distribution of Partnership Assets as provided in Sections
15.3 and 15.4, the Partnership shall be terminated, and the Liquidating Trustee
(or the General Partner or Limited Partners, if necessary) shall cause the
cancellation of the Certificate of Limited Partnership and all qualifications of
the Partnership as a foreign limited partnership in jurisdictions other than the
State of Delaware and shall take such other actions as may be necessary to
terminate the Partnership.
15.6 Reasonable Time for Winding Up. A reasonable time shall be allowed
for the orderly winding up of the business and affairs of the Partnership and
the liquidation of its assets pursuant to Section 15.3 in order to minimize any
losses otherwise attendant upon such winding up.
15.7 Return of Contributions. The General Partner shall not be liable
for the return of the Capital Contributions of the Limited Partners, or any
portion thereof, it being expressly understood that any such return shall be
made solely from Partnership Assets.
15.8 No Capital Account Restoration. No Partner shall have any
obligation to restore any negative balance in its Capital Account upon
liquidation of the Partnership.
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15.9 Waiver of Partition. Each Partner hereby waives any and all rights
that it may have to maintain an action for partition of the Partnership's
Assets.
ARTICLE 16 -- AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
16.1 Amendments to be Adopted Solely by the General Partner. The
General Partner (pursuant to the General Partner's power of attorney), without
the consent at the time of any Limited Partner or Assignee (each Person who
accepts LP Units being deemed to approve of any such amendment), may amend any
provision of this Agreement, and execute, swear to, acknowledge, deliver, file
and record whatever documents may be required in connection therewith, to
reflect:
16.1.1 a change in the name of the Partnership or the location
of the principal place of business of the Partnership;
16.1.2 the admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
16.1.3 a change that is necessary or advisable in the opinion
of the General Partner to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the
Limited Partners have limited liability under the laws of any state or
to ensure that the Partnership will not be taxable as a corporation or
treated as an association taxable as a corporation for federal income
tax purposes;
16.1.4 a change that (i) in the sole discretion of the General
Partner does not adversely affect the Limited Partners in any material
respect, (ii) is necessary or desirable to satisfy any requirements,
conditions or guidelines contained in any opinion, directive, order,
ruling or regulation of any federal or state agency or contained in any
federal or state statute, (iii) is necessary or desirable to facilitate
the trading of the LP Units or comply with any rule, regulation,
guideline or requirement of any National Securities Exchange on which
the LP Units are or will be listed for trading, compliance with any of
which the General Partner deems to be in the best interests of the
Partnership and the Limited Partners or (iv) is required or
contemplated by this Agreement or the Registration Statement;
16.1.5 an amendment that is necessary, as reflected in an
Opinion of Counsel, to prevent the Partnership or the General Partner
or its directors or officers from in any manner being subjected to the
provisions of the Investment Company Act of 1940, as amended, the
Investment Advisors Act of 1940, as amended, the Public Utility Holding
Company Act of 1935, as amended, or "plan asset" regulations adopted
under the Employee Retirement Income Security Act of 1974, as amended,
whether or not substantially similar to plan asset regulations
currently applied or proposed by the United States Department of Labor;
16.1.6 a change in any provision of this Agreement which
requires any action to be taken by or on behalf of the General Partner
or the Partnership pursuant to the requirements of the Delaware Act if
the provisions of the Delaware Act are amended, modified or revoked so
that the taking of such action is no longer required; provided that
this Section 16.1.6 shall be applicable only if such changes are not
materially adverse to the Limited Partners;
16.1.7 Subject to the terms of Section 4.4, a change that is
necessary or desirable in connection with the issuance of any class of
LP Units pursuant to Section 4.3;
16.1.8 a change that is authorized by Section 9.7; or
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16.1.9 any other amendments similar to the foregoing.
16.2 Amendment Procedures. Except as provided in Sections 16.1 and
16.3, all amendments to this Agreement shall be made in accordance with the
following requirements:
16.2.1 Amendments of this Agreement may be proposed solely by the
General Partner by submitting the text of the amendment to all Limited Partners
in writing.
16.2.2 If an amendment is proposed, the General Partner may call a
meeting of the Limited Partners to consider and vote on the proposed amendment
or solicit the written approval by the Limited Partners unless, in the opinion
of counsel to the Partnership, such proposed amendment would be illegal under
Delaware law if adopted. Subject to Section 16.3, a proposed amendment shall be
effective upon its adoption by the General Partner and the affirmative vote of a
Majority Interest unless a greater or different percentage or a class vote is
required by this Agreement. The General Partner shall keep all Partners advised
of the status of any proposed amendment and shall notify all Partners upon final
adoption or rejection of any proposed amendment.
16.3 Special Amendment Requirements. Notwithstanding the provisions
of Sections 16.1 and 16.2,
16.3.1 Unless approved by the General Partner and by Limited
Partners holding at least 90% of the issued and outstanding LP Units,
voting as separate classes, no amendment to this Agreement, other than
amendments pursuant to Section 16.1, shall be permitted unless the
Partnership has received an Opinion of Counsel that such amendment (i)
would not cause the loss of limited liability of the Limited Partners
under this Agreement or the limited partner of the Operating
Partnership under the Operating Partnership Agreement and (ii) would
not cause the Partnership or the Operating Partnership to be taxable as
a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes.
16.3.2 If the effect of any amendment shall be to affect
materially and adversely any holders of LP Units of a particular class
in relation to any other class of LP Units or the General Partner
interest in the Partnership, the affirmative vote of Record Holder's
holding at least a majority in interest of the Outstanding LP Units of
the class so affected (excluding for purposes of such determination, LP
Units of such class owned by the General Partner and its Affiliates,
unless the General Partner and its Affiliates own all of the LP Units
of such class) shall be required to adopt such amendment.
16.3.3 No provision of this Agreement which establishes a
percentage of the Partners (or an identified class or other portion
thereof) required to take any action shall be amended, altered,
changed, repealed or rescinded in any respect that would have the
effect of reducing such voting requirement, unless such amendment is
approved by written approval or the affirmative vote of Record Holders
whose aggregate LP Units constitute not less than the voting
requirement sought to be reduced.
16.4 Meetings. Meetings of the Limited Partners may be called only by
the General Partner or the Liquidating Trustee, if any. Action at the meeting
shall be limited to those matters specified in the call of the meeting. Limited
Partners may vote either in person or by proxy at any meeting. No action shall
be taken at any meeting unless the Partnership has received an Opinion of
Counsel that such action (i) would not cause the loss of limited liability of
the Limited Partners under this Agreement and (ii) would not cause the
Partnership to be taxed as a corporation or to be treated as an association
taxable as a corporation for federal income tax purposes. Each Limited Partner
shall have one vote for each LP Unit of which he is a Record Holder on the
Record Date for such vote, and may cast such vote in person or by proxy. Except
as provided in Section 16.11, no action shall be taken by the Limited Partners
without a meeting duly called and held. Except as otherwise required by the
terms of this Agreement, and except as otherwise required by law, when a quorum
is present at a meeting of Limited Partners as specified in Section 16.9, the
vote of a Majority Interest present in person or by proxy at such meeting shall
decide all matters submitted to the Limited Partners for determination at such
meeting. For meetings at which there
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is class voting, the foregoing provisions shall be applied separately to the
Limited Partners holding each class of LP Units.
16.5 Notice of a Meeting. Notice of a meeting called pursuant to
Section 16.4 shall be given either personally in writing or by mail or other
means of written communication addressed to each Limited Partner at the address
of the Limited Partner appearing on the books of the Registrar or the
Partnership. An affidavit or certificate of mailing of any notice or report in
accordance with the provisions of this Article 16 executed by the General
Partner or the Registrar, Transfer Agent or mailing organization shall be prima
facie evidence of the giving of notice. If any notice addressed to a Limited
Partner at the address of the Limited Partner appearing on the books of the
Partnership or the Registrar is returned to the Partnership by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver it, such notice and any subsequent notices or reports shall be
deemed to have been duly given without further mailing if they are available for
the Limited Partner at the principal executive office of the Partnership for a
period of one year from the date of the giving of the notice to all other
Limited Partners.
16.6 Record Date. For purposes of determining the Limited Partners
entitled to notice of or to vote at a meeting of the Limited Partners, the
General Partner or the Liquidating Trustee, if any, may set a Record Date, which
shall not be less than ten days nor more than 60 days before the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the LP Units are
listed for trading, in which case the rule, regulation, guideline or requirement
of such National Securities Exchange shall govern).
16.7 Adjournment. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting and a new Record Date need not
be fixed, if the time and place thereof are announced at the meeting at which
the adjournment is taken, unless such adjournment shall be for more than 45
days. At the adjourned meeting, the Partnership may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than 45 days or if a new Record Date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given in accordance with this Article
16.
16.8 Waiver of Notice. Attendance of a Limited Partner at a meeting
shall constitute a waiver of notice of the meeting, except when the Limited
Partner objects, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened; except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required to be included in the notice of the meeting,
but not so included, if the objection is expressly made at the meeting.
16.9 Quorum. A majority of the Outstanding LP Units of the class for
which a meeting is to be held represented in person or by proxy shall constitute
a quorum at a meeting of Limited Partners. The Limited Partners present at a
duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Limited Partners to leave less than a quorum, if any action taken (other than
adjournment) is approved by Limited Partners holding the requisite number of LP
Units specified in this Agreement. In the absence of a quorum, any meeting of
Limited Partners may be adjourned from time to time by the General Partner or
upon the affirmative vote of Limited Partners holding a majority of the LP Units
represented either in person or by proxy, but no other business may be
transacted. For meetings at which there is class voting, the foregoing
provisions shall be applied separately to the Limited Partners holding each
class of LP Units.
16.10 Conduct of Meeting. The General Partner or the Liquidating
Trustee, if any, shall have full power and authority concerning the manner of
conducting any meeting of Limited Partners including, without limitation, the
determination of Persons entitled to vote, the existence of a quorum, the
satisfaction of the requirements of Section 16.4, the conduct of voting, the
validity and effect of any proxies, and the determination of any controversies,
votes or challenges arising in connection with or during the meeting or voting.
The General Partner
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or the Liquidating Trustee, as the case may be, shall designate a Person to
serve as chairman of any meeting and shall further designate a Person to take
the minutes of any meeting in either case including, without limitation, a
Partner or an employee or agent of the General Partner. All minutes shall be
kept with the records of the Partnership maintained by the General Partner. The
General Partner or the Liquidating Trustee, as the case may be, may make such
other regulations consistent with applicable law and this Agreement as they may
deem advisable concerning the conduct of any meeting of the Limited Partners,
including regulations in regard to the appointment of proxies, the appointment
and duties of inspectors of votes, the submission and examination of proxies and
other evidence of the right to vote.
16.11 Action Without a Meeting. Any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if (i) an
approval in writing setting forth the action so taken is signed by Limited
Partners holding not less than the minimum number of LP Units that would be
necessary to authorize or take such action at a meeting at which all the Limited
Partners were present and voted and (ii) such action is approved in writing by
the General Partner. Prompt notice of the taking of action without a meeting
shall be given to the Limited Partners who have not approved such action in
writing. The General Partner may specify that any written ballot submitted to
Limited Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time, not less than 20 days, specified by
the General Partner. If a ballot returned to the Partnership does not vote all
of the LP Units held by the Limited Partner, the Partnership shall be deemed to
have failed to receive a ballot for the LP Units that were not voted. If
approval of the taking of any action by the Limited Partners is solicited by any
Person other than by or on behalf of the General Partner, the written approvals
shall have no force and effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals sufficient to take the
action proposed are dated as of a date not more than 90 days prior to the date
sufficient consents are deposited with the Partnership, and (c) an Opinion of
Counsel is delivered to the General Partner to the effect that the exercise of
such right and the action proposed to be taken with respect to any particular
matter (i) will not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the Partnership so as
to subject the Limited Partners to unlimited liability, (ii) will not jeopardize
the status of the Partnership as a partnership under applicable tax laws and
regulations and (iii) is otherwise permissible under the state statutes then
governing the rights, duties and liabilities of the Partnership and the
Partners.
16.12 Voting and Other Rights.
16.12.1 Only Limited Partners who are Record Holders of LP Units on the
Record Date set pursuant to Section 16.6 shall be entitled to notice of, or to
vote at, a meeting of Limited Partners; provided, however, that the admission of
such Record Holder as a Limited Partner may have occurred at any time prior to
the taking of the vote at such meeting. With respect to voting rights
attributable to LP Units that are owned by Assignees who have not yet been
admitted as Limited Partners, the General Partner shall be deemed to be the
Limited Partner with respect thereto and shall, in exercising voting rights in
respect of such LP Units on any matter, vote such LP Units at the written
direction of such Record Holder; or, if no such direction is given, the General
Partner shall exercise voting rights with respect to such LP Units.
16.12.2 With respect to LP Units that are held for a Person's account
by another Person (such as a broker, dealer, bank, trust company or clearing
corporation, or an agent of any of the foregoing), in whose name such LP Units
are registered, such broker, dealer or other agent shall, in exercising any
voting rights in respect of such LP Units on any matter, vote such LP Units in
favor of, and at the direction of, the Person on whose behalf such broker,
dealer or other agent is holding such LP Units, and the Partnership shall be
entitled to assume it is so acting without further inquiry.
16.12.3 Except as otherwise specifically provided herein, if the
General Partner is also a Limited Partner by virtue of its ownership of LP
Units, it may vote its LP Units on any matter submitted to the Limited Partners
for consideration in such manner as it in its sole discretion shall determine.
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ARTICLE 17 -- MERGER
17.1 Authority. The Partnership may merge or consolidate with one or
more corporations, business trusts or associations, real estate investment
trusts, common law trusts or unincorporated businesses, including, without
limitation, a general partnership or limited partnership, formed under the laws
of the State of Delaware or any other state of the United States of America
pursuant to a written agreement of merger or consolidation ("Merger Agreement")
in accordance with this Article.
17.2 Procedure for Merger or Consolidation. Merger or consolidation of
the Partnership pursuant to this Article requires the prior approval of the
General Partner. If the General Partner shall determine, in the exercise of its
sole discretion, to consent to the merger or consolidation, the General Partner
shall approve the Merger Agreement, which shall set forth:
17.2.1 The names and jurisdictions of formation or organization of
each of the business entities proposing to merge or consolidate;
17.2.2 The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(hereafter designated as the "Surviving Business Entity");
17.2.3 The terms and conditions of the proposed merger or
consolidation;
17.2.4 The manner and basis of exchanging or converting the equity
securities of each constituent business entity for or into cash, property or
general or limited partnership interests, rights, securities or obligations of
the Surviving Business Entity; and (a) if any general or limited partnership
interests, securities or rights of any constituent business entity are not to be
exchanged or converted solely for, or into, cash, property or general or limited
partnership interests, rights, securities or obligations of the Surviving
Business Entity, the cash, property or general or limited partnership interests,
rights, securities or obligations of any limited partnership, corporation, trust
or other entity (other than the Surviving Business Entity) which the holders of
such general or limited partnership interests are to receive in exchange for, or
upon conversion of, their securities or rights, and (b) in the case of
securities represented by certificates, upon the surrender of such certificates,
which cash, property or general or limited partnership interests, rights,
securities or obligations of the Surviving Business Entity or any limited
partnership, corporation, trust or other entity (other than the Surviving
Business Entity), or evidences thereof, are to be delivered;
17.2.5 A statement of any changes in the constituent documents (the
articles or certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership or other similar charter
or governing document) of the Surviving Business Entity to be effected by such
merger or consolidation;
17.2.6 The effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section hereof or a later date
specified in or determinable in accordance with the Merger Agreement (provided
that if the effective time of the merger is to be later than the date of the
filing of the certificate of merger, it shall be fixed no later than the time of
the filing of the certificate of merger and stated therein); and
17.2.7 Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
17.3 Approval by Limited Partners of Merger or Consolidation.
17.3.1 The General Partner of the Partnership, upon its approval of the
Merger Agreement, shall direct that the Merger Agreement be submitted to a vote
of Limited Partners whether at a meeting or by written consent,
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in either case in accordance with the requirements of Article 16 hereof. A copy
or a summary of the Merger Agreement shall be included in or enclosed with the
notice of a meeting or the written consent.
17.3.2 The Merger Agreement shall be approved upon receiving the
affirmative vote or consent of the holders of at least a majority of the
Outstanding LP Units of each class (provided that with respect to the class vote
of Senior Preference Units, Senior Preference Units owned by the General Partner
and its Affiliates shall be excluded and provided further that the holders of
Preference Units and Preference B Units shall vote together as a single class)
unless the Merger Agreement contains any provision which, if contained in an
amendment to the Agreement, the provisions of this Agreement or the Delaware Act
would require the vote or consent of a greater percentage of the Percentage
Interests of the Limited Partners or of any class of Limited Partners, in which
case such greater percentage vote or consent shall be required for approval of
the Merger Agreement.
17.3.3 After such approval by vote or consent of the Limited Partners,
and at any time prior to the filing of the certificate of merger pursuant to
Section 17.4 hereof, the merger or consolidation may be abandoned pursuant to
provisions therefor, if any, set forth in the Merger Agreement.
17.4 Certificate of Merger. Upon the required approval by the General
Partner and Limited Partners of a Merger Agreement, a certificate of merger
shall be executed and filed with the Secretary of State of the State of Delaware
in conformity with the requirements of the Delaware Act.
17.5 Effect of Merger.
17.5.1 Upon the effective date of the certificate of merger:
17.5.1.1 all of the rights, privileges and powers of each of
the business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of those
business entities and all other things and causes of action belonging
to each of those business entities shall be vested in the Surviving
Business Entity and after the merger or consolidation shall be the
property of the Surviving Business Entity to the extent they were of
each constituent business Entity;
17.5.1.2 the title to any real property vested by deed or
otherwise in any of those constituent business entities shall not
revert and is not in any way impaired because of the merger or
consolidation;
17.5.1.3 all rights of creditors and all liens on or security
interests in property of any of those constituent business entities
shall be preserved unimpaired; and
17.5.1.4 all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity, and
may be enforced against it to the same extent as if the debts,
liabilities and duties had been incurred or contracted by it.
17.5.2 A merger or consolidation effected pursuant to this Article
shall not be deemed to result in a transfer or assignment of assets or
liabilities from one entity to another having occurred.
ARTICLE 18 -- RIGHT TO PURCHASE LP UNITS
18.1 Right to Purchase. Notwithstanding any other provision of this
Agreement, if at any time after the Preference Period less than 750,000 LP Units
(such number to be increased or decreased from time to time in proportion to any
distributions, combination or subdivisions of the LP Units) are held by Persons
other than the General Partner and its Affiliates, the General Partner shall
then have the right, which it may assign and transfer to the Partnership or any
of its Affiliates, exercisable in its sole discretion, to purchase all, but not
less than all, of the Outstanding LP Units held by Persons other than the
General Partner and its Affiliates. The price payable
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for any LP Units of a particular class will be the greater of (i) the Current
Market Price as of the date the General Partner mails written notice of its
election to purchase Outstanding LP Units or (ii) the highest cash price paid by
the General Partner or any of its Affiliates for any LP Unit of such class
purchased within the ninety days next preceding the date on which a Notice of
Election to Purchase is given to the Registrar pursuant to Section 18.2.1, if
any such purchase occurred during such period.
18.2 Procedure.
18.2.1 In the event the General Partner, any Affiliate of the General
Partner or the Partnership elects to exercise such right to purchase LP Units
pursuant to this Article 18, the General Partner shall deliver to the Registrar
written notice of such election to purchase (hereinafter in this Article 18
called the "Notice of Election to Purchase") specifying the date (the "Purchase
Date") on which such purchase is to be effected and shall cause the Registrar to
mail a copy of such Notice of Election to Purchase to the Record Holders at
least ten, but not more than 60, days prior to the Purchase Date. Such Notice of
Election to Purchase shall also be printed in the English language and published
in daily newspapers of general circulation in the Borough of Manhattan, New
York. The Notice of Election to Purchase shall specify the class of LP Units to
be purchased, the Purchase Date and the Purchase Price and state that the
General Partner, its Affiliate or the Partnership, as the case may be, elects to
purchase such LP Units, upon surrender thereof in exchange for payment, at such
office or offices of the Registrar as the Registrar may specify, or as may be
required by any National Securities Exchange on which the LP Units are listed or
admitted to trading. Any such Notice of Election to Purchase mailed to a Record
Holder of LP Units at his address as reflected in the records of the Registrar
shall be conclusively presumed to have been given regardless of whether the
owner receives such notice. On or prior to the Purchase Date, the General
Partner, its Affiliate or the Partnership, as the case may be, shall deposit
with the Registrar cash in an amount equal to the purchase price of the LP Units
to be purchased. If the Notice of Election to Purchase shall have been duly
given as aforesaid at least ten days prior to the Purchase Date, and if on or
prior to the Purchase Date the Purchase Funds shall have been deposited with the
Registrar in trust for the benefit of the holders of LP Units subject to
purchase as provided herein, then from and after the Purchase Date,
notwithstanding that any LP Unit Certificates shall not have been surrendered
for purchase, all rights of the holders of such LP Units (including, without
limitation, any rights pursuant to Articles 4, 5 and 16) shall thereupon cease,
except the right to receive the Purchase Price thereof, without interest, upon
surrender to the Registrar of the Unit Certificates representing LP Units, and
such LP Units shall thereupon be deemed to be transferred to the General
Partner, its Affiliate or the Partnership, as the case may be, on the record
books of the Registrar and the Partnership, and the General Partner or any
Affiliate of the General Partner or the Partnership, as the case may be, shall
be deemed to be the owner of all such LP Units from and after the Purchase Date
and shall have the rights as the owner of such LP Units (including, without
limitation, all rights as owner of such LP Units pursuant to Articles 4, 5 and
16).
18.2.2 At any time from and after the Purchase Date, a Record Holder of
an issued and outstanding LP Unit subject to purchase as provided in this
Article 18 may surrender his Unit Certificate evidencing such LP Unit to the
Registrar in exchange for payment of the Purchase Price therefor, without
interest thereon.
ARTICLE 19 -- GENERAL PROVISIONS
19.1 Addresses and Notices. The address of the General Partner for all
purposes shall be the address set forth on the books and records of the
Partnership and for each Limited Partner or Assignee the address set forth in
the books and records of the Partnership or such other address of which the
General Partner has received written notice. Any notice, demand, request or
report required or permitted to be given or made to a Partner under this
Agreement shall be in writing and shall be deemed given or made when delivered
in person or when sent to the Partner at such address by first class mail or by
other means of written communication.
19.2 Consent of Limited Partners. By acceptance of a Unit
Certificate, each Limited Partner expressly approves and agrees that, whenever
in this Agreement it is specified that an action may be taken upon the
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affirmative vote of less than all of the Limited Partners, such action may be so
taken upon the concurrence of less than all of the Limited Partners and each
Limited Partner shall be bound by the results of such action.
19.3 Titles and Captions. All article or section titles or captions in
this Agreement are for convenience only. They shall not be deemed part of this
Agreement and in no way define, limit, extend or describe the scope or intent of
any provisions hereof.
19.4 Pronouns and Plurals. Whenever the context may require, any
pronoun used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
19.5 Further Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purpose of this Agreement.
19.6 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
19.7 Integration. This Agreement constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
19.8 Creditors. Except for the provisions of Section 6.2, none of the
provisions of this Agreement shall be for the benefit of or enforceable by any
creditors of the Partnership.
19.9 Waiver. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
19.10 Counterparts. This Agreement may be executed in counterparts, all
of which together shall constitute one agreement binding on all the parties
notwithstanding that all the parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Agreement immediately
upon affixing its signature hereto, independently of the signature of any other
party.
19.11 Applicable Law. Notwithstanding the place where this Agreement
may be executed by any of the parties hereto, the parties expressly agree that
all of the terms and provisions hereof shall be construed under the substantive
laws of the State of Delaware as now adopted or as may hereafter be amended, and
such laws shall govern this Agreement, without regard to the principles of
conflicts of law.
19.12 Invalidity of Provisions. If any provision of this Agreement is
or becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not be affected thereby.
65
<PAGE> 73
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the ____ day of May, 1995.
GENERAL PARTNER:
KANEB PIPE LINE COMPANY
By: . . . . . . . . . . . . . . . . . . . . . . .
Name:
Title:
LIMITED PARTNERS:
All Limited Partners now and hereafter admitted as
limited partners of the Partnership, pursuant
to Powers of Attorney now and hereafter
executed in favor of, and granted and
delivered to, the General Partner
By: Kaneb Pipe Line Company General Partner,
as attorney-in-fact for all Limited
Partners pursuant to the Powers of
Attorney granted pursuant to Article 10
hereof
By: . . . . . . . . . . . . . . . . . . . . . . .
Name:
Title:
66
<PAGE> 74
APPENDIX A-1
CERTIFICATE
FOR
SENIOR PREFERENCE UNITS
IN
KANEB PIPE LINE PARTNERS, L.P.
No.
Senior Preference Units
Kaneb Pipe Line Company, a Delaware corporation, as the General Partner
of Kaneb Pipe Line Partners, L.P. ("Partnership"), a Delaware limited
partnership, hereby certifies that (the "Holder") is the registered
owner of Senior Preference Units of limited partner interests in the
Partnership ("Senior Preference Units"). The rights, preferences and
limitations of the Senior Preference Units are set forth in the Amended and
Restated Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement"), as the same may, from time to time, be amended and restated, under
which the Partnership was formed and is existing, copies of which are on file
at the principal office of the General Partner in Richardson, Texas. The
rights, preferences and limitations of the LP Units (as defined in the
Partnership Agreement) are set forth in the Partnership Agreement, the terms
of which are incorporated herein by reference.
The Holder, by accepting this Certificate, is deemed to have (i) agreed
to become a Substituted Limited Partner (as defined in the Partnership
Agreement) and to comply with and be bound by and to have executed the
Partnership Agreement, (ii) represented and warranted that the Holder has all
right, power and authority necessary to enter into the Partnership Agreement,
(iii) appointed the General Partner and any liquidator of the Partnership the
Holder's attorney to execute, swear to, acknowledge and file any document,
including the Partnership Agreement, any amendment of the Partnership Agreement,
and the Certificate of Limited Partnership of the Partnership, necessary or
appropriate for the Holder's admission as a Substituted Limited Partner in the
Partnership and as a party to the Partnership Agreement, (iv) made the powers of
attorney provided for in the Partnership Agreement and (v) made the waivers and
given the approvals contained in the Partnership Agreement.
This Certificate and the LP Units evidenced hereby are transferable in
accordance with the terms of the Partnership Agreement.
This Certificate shall not be valid for any purpose unless manually
countersigned by the Registrar (as defined in the Partnership Agreement).
Dated:
Countersigned by: KANEB PIPE LINE PARTNERS, L.P.
American Stock Transfer & Trust Co. By: KANEB PIPE LINE COMPANY, as
as Registrar, General Partner
By: By:
------------------- -----------------------------
A-1-1
<PAGE> 75
[Form of Reverse Side of Certificate]
ASSIGNMENT OF LP UNITS
FOR VALUE RECEIVED, the undersigned (the "Assignor") hereby assigns,
conveys, sells and transfers unto
Please print or typewrite name Please insert Social Security or
and address of Assignee other identifying number of Assignee
all right and interest of the Assignor in the aforementioned LP Units, and
irrevocably constitutes and appoints the General Partner of Kaneb Pipe Line
Partners, L.P. (the "Partnership"), as its attorney-in-fact with full power of
substitution to transfer the same on the books of the Partnership.
Date: Signature:
Signature Guaranteed:
NOTE: The signature to any endorsement hereon must correspond to the
name as written upon the face of the Certificate in every particular, without
alteration or enlargement or any change whatever. If the endorsement is executed
by an attorney, executor, administrator, trustee or guardian, the person
executing the endorsement must give his full title in such capacity, and proper
evidence of authority to act in such capacity, if not on file with the
Partnership or its transfer agent, must be forwarded with this Certificate. The
signature must be guaranteed by an Eligible Guarantor Institution (a bank, trust
company, member of a national securities exchange, savings and association, or
credit union with membership in an approved signature guarantee program)
pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.
A-1-2
<PAGE> 76
APPENDIX A-2
CERTIFICATE
FOR
PREFERENCE UNITS
IN
KANEB PIPE LINE PARTNERS, L.P.
No.
Preference Units
Kaneb Pipe Line Company, a Delaware corporation, as the General Partner
of Kaneb Pipe Line Partners, L.P. ("Partnership"), a Delaware limited
partnership, hereby certifies that (the "Holder") is the
registered owner of Preference Units of limited partner interests in the
Partnership ("Preference Units"). The rights, preferences and limitations of
the Preference Unit are set forth in the Amended and Restated Agreement of
Limited Partnership of the Partnership (the "Partnership Agreement"), as the
same may, from time to time, be amended and restated, under which the
Partnership was formed and is existing, copies of which are on file at the
principal office of the General Partner in Richardson, Texas. The rights,
preferences and limitations of the LP Units (as defined in the Partnership
Agreement) are set forth in the Partnership Agreement, the terms of which are
incorporated herein by reference.
The Holder, by accepting this Certificate, is deemed to have (i) agreed
to become a Substituted Limited Partner (as defined in the Partnership
Agreement) and to comply with and be bound by and to have executed the
Partnership Agreement, (ii) represented and warranted that the Holder has all
right, power and authority necessary to enter into the Partnership Agreement,
(iii) appointed the General Partner and any liquidator of the Partnership the
Holder's attorney to execute, swear to, acknowledge and file any document,
including the Partnership Agreement, any amendment of the Partnership Agreement,
and the Certificate of Limited Partnership of the Partnership, necessary or
appropriate for the Holder's admission as a Substituted Limited Partner in the
Partnership and as a party to the Partnership Agreement, (iv) made the powers of
attorney provided for in the Partnership Agreement and (v) made the waivers and
given the approvals contained in the Partnership Agreement.
This Certificate and the LP Units evidenced hereby are transferable in
accordance with the terms of the Partnership Agreement.
This Certificate shall not be valid for any purpose unless manually
countersigned by the Registrar (as defined in the Partnership Agreement).
Dated:
Countersigned by: KANEB PIPE LINE PARTNERS, L.P.
American Stock Transfer & Trust Co. By: KANEB PIPE LINE COMPANY, as
as Registrar, General Partner
By: By:
--------------------------- ---------------------------
A-2-1
<PAGE> 77
[Form of Reverse Side of Certificate]
ASSIGNMENT OF LP UNITS
FOR VALUE RECEIVED, the undersigned (the "Assignor") hereby assigns,
conveys, sells and transfers unto
Please print or typewrite name Please insert Social Security or
and address of Assignee other identifying number of Assignee
all right and interest of the Assignor in the aforementioned LP Units, and
irrevocably constitutes and appoints the General Partner of Kaneb Pipe Line
Partners, L.P. (the "Partnership"), as its attorney-in-fact with full power of
substitution to transfer the same on the books of the Partnership.
Date: Signature:
Signature Guaranteed:
NOTE: The signature to any endorsement hereon must correspond to the
name as written upon the face of the Certificate in every particular, without
alteration or enlargement or any change whatever. If the endorsement is executed
by an attorney, executor, administrator, trustee or guardian, the person
executing the endorsement must give his full title in such capacity, and proper
evidence of authority to act in such capacity, if not on file with the
Partnership or its transfer agent, must be forwarded with this Certificate. The
signature must be guaranteed by an Eligible Guarantor Institution (a bank, trust
company, member of a national securities exchange, savings and association, or
credit union with membership in an approved signature guarantee program)
pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.
A-2-2
<PAGE> 78
APPENDIX A-2
CERTIFICATE
FOR
PREFERENCE B UNITS
IN
KANEB PIPE LINE PARTNERS, L.P.
No.
Preference B Units
Kaneb Pipe Line Company, a Delaware corporation, as the General Partner
of Kaneb Pipe Line Partners, L.P. ("Partnership"), a Delaware limited
partnership, hereby certifies that (the "Holder") is the registered
owner of Preference B Units of limited partner interests in the Partnership
("Preference B Units"). The rights, preferences and limitations of the
Preference B Unit are set forth in the Amended and Restated Agreement of
Limited Partnership of the Partnership (the "Partnership Agreement"), as the
same may, from time to time, be amended and restated, under which the
Partnership was formed and is existing, copies of which are on file at the
principal office of the General Partner in Richardson, Texas. The rights,
preferences and limitations of the LP Units (as defined in the Partnership
Agreement) are set forth in the Partnership Agreement, the terms of which are
incorporated herein by reference.
The Holder, by accepting this Certificate, is deemed to have (i) agreed
to become a Substituted Limited Partner (as defined in the Partnership
Agreement) and to comply with and be bound by and to have executed the
Partnership Agreement, (ii) represented and warranted that the Holder has all
right, power and authority necessary to enter into the Partnership Agreement,
(iii) appointed the General Partner and any liquidator of the Partnership the
Holder's attorney to execute, swear to, acknowledge and file any document,
including the Partnership Agreement, any amendment of the Partnership Agreement,
and the Certificate of Limited Partnership of the Partnership, necessary or
appropriate for the Holder's admission as a Substituted Limited Partner in the
Partnership and as a party to the Partnership Agreement, (iv) made the powers of
attorney provided for in the Partnership Agreement and (v) made the waivers and
given the approvals contained in the Partnership Agreement.
This Certificate and the LP Units evidenced hereby are transferable in
accordance with the terms of the Partnership Agreement.
Dated:
KANEB PIPE LINE PARTNERS, L.P.
By: KANEB PIPE LINE COMPANY, as
General Partner
By:
----------------------------
A-3-1
<PAGE> 79
[Form of Reverse Side of Certificate]
ASSIGNMENT OF LP UNITS
FOR VALUE RECEIVED, the undersigned (the "Assignor") hereby assigns,
conveys, sells and transfers unto
Please print or typewrite name Please insert Social Security or
and address of Assignee other identifying number of Assignee
all right and interest of the Assignor in the aforementioned LP Units, and
irrevocably constitutes and appoints the General Partner of Kaneb Pipe Line
Partners, L.P. (the "Partnership"), as its attorney-in-fact with full power of
substitution to transfer the same on the books of the Partnership.
Date: Signature:
Signature Guaranteed:
NOTE: The signature to any endorsement hereon must correspond to the
name as written upon the face of the Certificate in every particular, without
alteration or enlargement or any change whatever. If the endorsement is executed
by an attorney, executor, administrator, trustee or guardian, the person
executing the endorsement must give his full title in such capacity, and proper
evidence of authority to act in such capacity, if not on file with the
Partnership or its transfer agent, must be forwarded with this Certificate. The
signature must be guaranteed by an Eligible Guarantor Institution (a bank, trust
company, member of a national securities exchange, savings and association, or
credit union with membership in an approved signature guarantee program)
pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.
A-3-2
<PAGE> 80
APPENDIX A-4
CERTIFICATE
FOR
COMMON UNITS
IN
KANEB PIPE LINE PARTNERS, L.P.
No.
Common Units
Kaneb Pipe Line Company, a Delaware corporation as the General Partner
of Kaneb Pipe Line Partners, L.P. ("Partnership"), a Delaware limited
partnership, hereby certifies that (the "Holder") is the
registered owner of Common Units of limited partner interests in the
Partnership ("Common Units"). The rights, preferences and limitations of the
Common Unit are set forth in the Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"), as the same may, from time to time,
be amended and restated, under which the Partnership was formed and is
existing, copies of which are on file at the principal office of the General
Partner in Richardson, Texas. The rights, preferences and limitations of the LP
Units (as defined in the Partnership) are set forth in the Partnership
Agreement, the terms of which are incorporated herein by reference.
The Holder, by accepting this Certificate, is deemed to have (i) agreed
to become a Substituted Limited Partner (as defined in the Partnership
Agreement) and to comply with and be bound by and to have executed the
Partnership Agreement, (ii) represented and warranted that the Holder has all
right, power and authority necessary to enter into the Partnership Agreement,
(iii) appointed the General Partner and any liquidator of the Partnership the
Holder's attorney to execute, swear to, acknowledge and file any document,
including the Partnership Agreement, any amendment of the Partnership Agreement,
and the Certificate of Limited Partnership of the Partnership, necessary or
appropriate for the Holder's admission as a Substituted Limited Partner in the
Partnership and as a party to the Partnership Agreement, (iv) made the powers of
attorney provided for in the Partnership Agreement and (v) made the waivers and
given the approvals contained in the Partnership Agreement.
Dated:
KANEB PIPE LINE PARTNERS, L.P.
By: KANEB PIPE LINE COMPANY, as
General Partner
By:
------------------------------
A-4-1
<PAGE> 81
[Form of Reverse Side of Certificate]
ASSIGNMENT OF LP UNITS
FOR VALUE RECEIVED, the undersigned (the "Assignor") hereby assigns,
conveys, sells and transfers unto
Please print or typewrite name Please insert Social Security or
and address of Assignee other identifying number of Assignee
all right and interest of the Assignor in the aforementioned LP Units, and
irrevocably constitutes and appoints the General Partner of Kaneb Pipe Line
Partners, L.P. (the "Partnership"), as its attorney-in-fact with full power of
substitution to transfer the same on the books of the Partnership.
Date: Signature:
Signature Guaranteed:
NOTE: The signature to any endorsement hereon must correspond to the
name as written upon the face of the Certificate in every particular, without
alteration or enlargement or any change whatever. If the endorsement is executed
by an attorney, executor, administrator, trustee or guardian, the person
executing the endorsement must give his full title in such capacity, and proper
evidence of authority to act in such capacity, if not on file with the
Partnership or its transfer agent, must be forwarded with this Certificate. The
signature must be guaranteed by an authorized employee of a bank, trust company
or member of a national securities exchange.
A-4-2
<PAGE> 82
APPENDIX B
No assignment of LP Units evidenced by an LP Unit Certificate will be
registered on the books of the Registrar or of Kaneb Pipe Line Partners, L.P.
unless an Application for Transfer of LP Units has been executed and delivered
by an assignee. An assignor of LP Units shall have no duty to an assignee with
respect to the requirement of delivery of an executed transfer application in
order for an assignee to obtain registration of transfer of the LP Units.
APPLICATION FOR TRANSFER OF LP UNITS
The undersigned (the "Applicant") hereby applies for transfer to the
name of the Applicant of the LP Units evidenced by an LP Unit Certificate.
The Applicant (i) agrees to be bound by the terms and conditions of the
LP Unit Certificate, (ii) requests admission as a Substituted Limited Partner in
Kaneb Pipe Line Partners, L.P. (the "Partnership") and agrees to comply with and
be bound by and hereby executes the Agreement of Limited Partnership of the
Partnership, as amended and restated to the date hereof (the "Partnership
Agreement"), (iii) represents and warrants that the Applicant has all right,
power and authority necessary to enter into the Partnership Agreement, (iv)
appoints the General Partner and any liquidator of the Partnership the
Applicant's attorney to execute, swear to, acknowledge and file any document,
including the Partnership Agreement, an amendment of the Partnership Agreement
and the Certificate of Limited Partnership of the Partnership, necessary or
appropriate for the Applicant's admission as a Substituted Limited Partner in
the Partnership and as a party to the Partnership Agreement, (v) makes the
powers of attorney provided for in the Partnership Agreement as set forth below
and (vi) makes the waivers and gives the approvals contained in the Partnership
Agreement.
The Applicant hereby constitutes and appoints the General Partner of
the Partnership and any liquidator of the Partnership (and any successor to
either thereof by merger, assignment, election or otherwise) with full power of
substitution as the Applicant's true and lawful agent and attorney-in-fact, with
full power and authority in the Applicant's name, place and stead, to execute,
swear to, acknowledge, deliver, file and record in the appropriate public
offices (A) the Partnership Agreement, all certificates and other instruments
and all amendments thereof, which such General Partner or such liquidator deems
reasonable and appropriate or necessary to qualify, or continue the existence or
qualification of, the Partnership as a limited partnership (or a partnership in
which the Limited Partners have limited liability) in the State of Delaware and
all other jurisdictions in which the Partnership may conduct business or own
property; (B) all instruments that the General Partner or such liquidator deems
appropriate or necessary to reflect any amendment, change or modification of the
Partnership Agreement in accordance with its respective terms; and (C) all
conveyances and other instruments or documents that the General Partner or such
liquidator deems appropriate or necessary to reflect the dissolution and
liquidation of the Partnership pursuant to the terms of the Partnership
Agreement, including a Certificate of Cancellation.
The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and not be affected
by the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of the Applicant and the transfer of all or any
portion of the Applicant's interest in the Partnership and shall extend to the
Applicant's heirs, successors, assigns and personal representatives.
B-1
<PAGE> 83
Date Signature of Applicant
Social Security Signature of Joint Applicant, if any
or other taxpayer
identification
number of Applicant
City State Zip Code
Purchase Price City State Zip Code
(including commissions, if any)
Type of Entity (check one):
Individual Partnership Corporation
Trust Other
(specify):
If the Applicant is a broker, dealer, bank, trust company, clearing corporation,
other nominee holder or an agent of any of the foregoing, and is holding for the
account of any other person, this application should be completed by an officer
thereof, or, in the case of a broker or dealer, by a registered representative
who is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., or, in the case of any other
nominee holder, a person performing a similar function. If the Applicant is a
broker, dealer, bank, trust company, clearing corporation, other nominee holder
or an agent of any of the foregoing, the above certification as to any person
for whom the Applicant will hold the LP Unit shall be made to the best of the
Applicant's knowledge.
B-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Kaneb Pipe Line
Partners, L.P. of our report dated January 27, 1995, except as to Note 8, which
is as of February 17, 1995, relating to the financial statements of Wyco Pipe
Line Company, which appears in the Current Report on Form 8-K of Kaneb Pipe
Line Partners, L.P. dated March 13, 1995.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 11, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated March 16, 1995, appearing on
page F-2 of this Prospectus and incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report
dated March 16, 1995, appearing on page F-1 of Kaneb Pipe Line Partners, L.P.'s
Annual Report on Form 10-K for the year ended December 31, 1994. We also
consent to the references to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
May 11, 1995
