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As filed with the Securities and Exchange Commission on July 24, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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
(972) 699-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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EDWARD D. DOHERTY
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(972) 699-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
FULBRIGHT & JAWORSKI L.L.P. CHAPMAN AND CUTLER
1301 MCKINNEY, SUITE 5100 111 WEST MONROE STREET
HOUSTON, TX 77010 CHICAGO, IL 60603
(713) 651-5151 (312) 845-3000
ATTENTION: JOHN A. WATSON ATTENTION: EDWARD L. LEMBITZ, JR.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective, as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
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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 UNIT(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Units representing Preference Limited
Partner Interests . . . . . . . . . 500,000 $35 7/16 $17,718,750 $5,227.03
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low prices as
reported on the New York Stock Exchange on July 20, 1998.
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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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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.
SUBJECT TO COMPLETION, DATED JULY 24, 1998
PROSPECTUS
KANEB PIPE LINE PARTNERS, L.P.
500,000 UNITS REPRESENTING
PREFERENCE LIMITED PARTNER INTERESTS
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This Prospectus has been prepared for use in connection with the sale
upon foreclosure, if any, by Harris Bank and Trust Company (the "Selling
Unitholder") of an aggregate of 500,000 Units representing preference limited
partnership interests (the "Preference Units") in Kaneb Pipe Line Partners,
L.P. (the "Partnership"). Such Preference Units are currently owned by a
subsidiary of Kaneb Pipe Line Company ("KPL"), the general partner of the
Partnership, and pledged to the Selling Unitholder as security for a revolving
credit facility of such subsidiary under which the maximum amount available
thereunder is currently limited to $20 million. If acquired by the Selling
Unitholder pursuant to such pledge, the Preference Units may be sold from time
to time by or for the account of the Selling Unitholder in the over-the-counter
market, on the New York Stock Exchange ("NYSE") or otherwise at prices and on
terms then prevailing or at prices related to the then current market price,
directly or through agents designated from time to time, or through dealers or
underwriters to be designated or in negotiated transactions. The Preference
Units may be sold by any one or more of the following methods: (a) a block
trade (which may involve crosses) in which the broker or dealer so engaged will
attempt to sell the securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) exchange distributions and/or
secondary distributions in accordance with the rules of the NYSE; (d) ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; (e) through the writing of options on Preference Units (whether
such options are listed on an options exchange or otherwise); or (f) privately
negotiated transactions. To the extent required by applicable law, the
specific Preference Units to be sold, the purchase price and public offering
price, the names of any such agent, dealer or underwriter and any applicable
commissions or discounts with respect to a particular offer will be set forth
in an accompanying Prospectus Supplement. See "Plan of Distribution."
The Preference Units are traded on the NYSE under the symbol "KPU".
On July 20, 1998, the last reported sale price for the Preference Units on the
NYSE was $35 7/16 per Preference Unit.
The Partnership will receive no portion of the proceeds of the sale of
the Preference Units offered hereby and will bear certain of the expenses
incident to their registration, which expenses will be reimbursed by KPL. See
"Plan of Distribution" and "Selling Unitholder."
The Preference Units have not been registered for sale under the
securities laws of any state or jurisdiction as of the date of this Prospectus.
Brokers or dealers effecting transactions in the Preference Units should
confirm the registration thereof under the securities laws of the states in
which such transactions occur, or the existence of any exemption from
registration.
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PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET
FORTH IN THIS PROSPECTUS ON PAGES 4 THROUGH 7 UNDER THE CAPTION "RISK FACTORS."
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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
The date of this Prospectus is August , 1998
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AVAILABLE INFORMATION
The Partnership has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Preference Units offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information pertaining to the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
filed as a part thereof.
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Partnership can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; and at its Regional Offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York
10048 or may be obtained on the Internet at http://www.sec.gov. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Preference Units are traded on the New York Stock Exchange ("NYSE") and such
reports, proxy statements and other information concerning the Partnership can
be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
INCORPORATION OF CERTAIN DOCUMENTS
The Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10- K"), and Quarterly Report on Form 10-Q
(the "March 31, 1998 Form 10-Q") for the fiscal quarter ended March 31, 1998,
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: Investor Relations Department, telephone
(972) 699-4055.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and notes set forth and incorporated by reference in this
Prospectus.
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. The pipeline system was initially created in
1953. In September 1989, the Partnership was formed to acquire, own and
operate the refined petroleum products pipeline business previously conducted
by KPL, a wholly owned subsidiary of Kaneb Services, Inc., a Delaware
corporation ("KSI"). 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"). The pipeline operations of the Partnership are
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. ("STOP"), (ii) Support Terminal Services, Inc. ("STS"), (iii) StanTrans,
Inc. ("STI"), (iv) StanTrans Partners L.P. ("STPP"), and (v) StanTrans
Holdings, Inc. KPOP, STOP and STPP are collectively referred to as the
"Operating Partnerships".
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 1,917-mile pipeline system (the "East Pipeline") that
extends through Kansas, Iowa, Nebraska, South Dakota and North Dakota and a
550-mile pipeline system (the "West Pipeline") that extends through Wyoming,
South Dakota and Colorado. The East Pipeline was constructed by KPL commencing
in the 1950's. KPOP acquired the West Pipeline in February 1995 through an
asset purchase from WYCO Pipe Line Company for a purchase price of $27.1
million. The acquisition of the West Pipeline increased the Partnership's
pipeline business in South Dakota and expanded it into Wyoming and Colorado.
The West Pipeline system includes approximately 550 miles of underground
pipeline in Wyoming, Colorado and South Dakota, four truck loading terminals
and numerous pump stations situated along the system. The West Pipeline's
four product terminals have a total storage capacity of over 1.7 million
barrels. 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 Pipeline, 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 regulations. 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 is the third largest independent liquids terminaling
company in the United States. The terminaling business is conducted under the
name ST Services ("ST"). ST operates 32 facilities in 16 states and the
District of Columbia with an aggregate tankage capacity of approximately 18
million barrels. ST and its predecessors have been in the terminaling business
for over 40 years and handle a wide variety of products from petroleum products
to specialty chemicals to edible liquids. ST's terminal facilities provide
storage on a fee basis for petroleum products, specialty chemicals and other
liquids. ST's five largest terminal facilities are located in Piney Point,
Maryland; Jacksonville, Florida; Texas City, Texas; Baltimore, Maryland; and,
Westwego, Louisiana.
The principal executive offices of the Partnership are located at 2435
North Central Expressway, Richardson, Texas 75080, and its telephone number is
(972) 699-4000.
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RISK FACTORS
Prospective purchasers of the Preference Units should consider the
following matters in evaluating an investment in the Preference Units.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
Uncertainties in Rate Making Methodologies. Tariff 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, tariff rates must be just and
reasonable and not unduly discriminatory. The lawfulness of new or changed
tariff rates may be protested by shippers and investigated by the FERC, which
can suspend such tariff rates for a period of up to seven months, and require
refunds of amounts collected under rates ultimately found to be unlawful.
Tariff rates that have become final and effective may also be challenged by
complaint in a court or before the FERC. Because of the complexity of rate
making, the lawfulness of any rate is never assured.
Order No. 561, issued by the FERC on October 22, 1993, established a
primary rate making methodology, which pipelines are required to utilize unless
they qualify and elect to use one of several alternative methodologies. The
primary rate making methodology is a rate indexing mechanism, which ties a
pipeline's rate increase or decrease to the Producer Price Index for Finished
Goods minus 1%. 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 appears that the use of indexing will
not allow pipelines to fully recover their actual increased costs.
In June 1995, the FERC issued a decision involving Lakehead Pipe Line
Company, Limited Partnership ("Lakehead"), an unrelated oil pipeline limited
partnership. In this decision, the FERC partially disallowed Lakehead's
inclusion of income taxes in its cost of service. Specifically, the FERC held
that Lakehead was entitled to receive an income tax allowance with respect to
income attributable to its corporate partners, but was not entitled to receive
such an allowance for income attributable to the partnership interests held by
individuals. In 1996, Lakehead reached an agreement with its shippers on all
contested rates and withdrew its appeal of the June 1995 decision. In another
FERC proceeding involving a different oil pipeline limited partnership, the
Administrative Law Judge followed the FERC's decision in Lakehead and held that
the oil pipeline limited partnership may claim an income tax allowance with
respect to income attributable to its general partner interest and income
attributable to corporations holding publicly traded limited partnership
interests, but not for income attributable to non-corporate limited partners,
both individuals and other entities. If the FERC were to disallow the income
tax allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's ability
to pay the Minimum Quarterly Distribution to the holders of the all Units would
not be impaired; however, in view of the uncertainties involved in this issue,
there can be no assurance in this regard.
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.
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, Inc. ("Williams"), which
operates approximately 100 miles east of and parallel to 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.
Fourteen of the Partnership's 15 delivery terminals on the East Pipeline are in
direct competition with Williams' terminals located within two 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. Diamond Shamrock terminals in Denver and
Colorado Springs connected to a Diamond Shamrock pipeline from their Texas
Panhandle refinery, are major competitors to the West Pipeline's Fountain
terminals, respectively.
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
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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.
Reduced Demand Could Affect Shipments on the Pipelines. The
Partnership's pipeline business depends in large part on the level of demand
for refined petroleum products in the markets served by the Pipelines and 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 as fuel for railroads or 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.
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.
Dependence on Crude Oil Supplies. 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. Refineries in
Kansas, Oklahoma and Texas are connected to the East Pipeline through other
pipelines. These refineries obtain their supplies of crude oil from a variety
of sources. The 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.
Possible Reduction of Business with the Department of Defense. The
storage and transport of jet fuel for the U.S. Department of Defense is an
important part of ST's business. Eleven of ST's terminal sites are involved in
the terminaling or transport (via pipeline) of jet fuel for the Department of
Defense and 7 of the 11 locations have been utilized solely by the U.S.
Government. Two of these locations are presently without government business.
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.
Risk of Environmental Costs and Liabilities. 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.
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RISKS RELATING TO PARTNERSHIP STRUCTURE
Reliance Upon Distributions and Dividends from Subsidiaries. The
Partnership conducts all of its operations through direct and indirect wholly
owned corporate and partnership subsidiaries. Distributions and dividends of
cash generated by such subsidiaries are the principal source of Available Cash
of the Partnership available for the payment of distributions to the holders of
Preference Units.
Absence of Arms' Length Negotiation of Contract Terms. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the General Partner,
KSI and its affiliates, on the other hand, were or will be the result of arm's
length negotiations.
Risk of Dilution of Outstanding LP Units Through Issuance of Senior
Securities and Exchanges of Junior 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, 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, (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 Partnership anticipates that the Preference
Period will end upon payment of the regular quarterly distribution on August
14, 1998. See Note 3 of the Notes to Consolidated Financial Statements
included in the March 31, 1998 Form 10-Q.
Limited Voting Rights; Management and Control. Unitholders 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.
The General Partner manages and controls 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
sufficient LP Units to prevent KPL's removal as the General Partner 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.
Conflicts of Interest. Certain conflicts of interest could arise as a
result of the General Partner's relationships with KSI, 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 KSI 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
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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. The Partnership
has not adopted any guidelines, other than those contained in the Partnership
Agreement, that must be followed by the General Partner in the event of a
conflict of interest. In addition, the General Partner owes certain fiduciary
duties to the Unitholders and is liable for all the debts other than
nonrecourse debt of the Partnership to the extent not paid by the Partnership.
Modification of Fiduciary Duties. The General Partner is generally
accountable to the Partnership and to the Unitholders as a fiduciary.
Consequently, the General Partner generally must exercise good faith and
integrity in handling the assets and affairs of the Partnership. The Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") provides that
Delaware limited partnerships may, in their partnership agreements, modify the
fiduciary duties that might otherwise be applied by a court in analyzing the
duty owed by general partners to limited partners. The Partnership Agreement,
as permitted by the Delaware Act, contains various provisions that have the
effect of restricting the fiduciary duties that might otherwise be owed by the
General Partner to the Partnership and its partners. 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
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. In
addition, holders of Units are deemed to have consented to certain actions and
conflicts of interest that might otherwise be deemed a breach of fiduciary or
other duties under state law. Such modifications of state law standards of
fiduciary duty may significantly limit a Unitholder's ability to successfully
challenge the actions of the General Partner as being in breach of what would
otherwise have been a fiduciary duty. 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.
CASH DISTRIBUTIONS
GENERAL
Because the Partnership holds all of its assets and conducts all of
its operations through the Operating Partnerships, STS 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. The board of directors of STI
and STS have 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 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 or Common Units with respect to such quarter. During the Preference
Period, the
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<PAGE> 9
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 and 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. 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 Preference Period commenced upon the formation of the Partnership
and, in general, 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. The Partnership anticipates
that the Preference Period will end upon payment of the regular quarterly
distribution on August 14, 1998. See Note 3 of the Notes to Consolidated
Financial Statements included in the March 31, 1998 Form 10-Q. Upon expiration
of the Preference Period, all distinctions between the Senior Preference Units,
the Preference Units and the Common Units will automatically cease.
The following table sets forth the amount of distributions of
Available Cash constituting Cash from Operations effected with respect to each
class of the Partnership's LP Units for the quarters in the periods shown:
<TABLE>
<CAPTION>
DISTRIBUTION
QUARTER PER UNIT
------------------------- ------------
<S> <C>
1996:
First . . . . . . . . . . 0.55
Second . . . . . . . . . 0.55
Third . . . . . . . . . . 0.60
Fourth . . . . . . . . . 0.60
1997:
First . . . . . . . . . . 0.60
Second . . . . . . . . . 0.60
Third . . . . . . . . . . 0.65
Fourth . . . . . . . . . 0.65
1998:
First . . . . . . . . . . 0.65
</TABLE>
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 Cash from
Interim Capital Transactions". Distributions of Available Cash are
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".
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".
8
<PAGE> 10
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 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.
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".
9
<PAGE> 11
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 until the Partnership
shall have made distributions of Available Cash constituting Cash from Interim
Capital Transactions in respect of each Senior Preference Unit and Preference
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 AND COMMON UNITS
The Partnership Agreement prohibits the Partnership from distributing
Available Cash on the Preference Units or Common Units or acquiring Preference
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.
The General Partner does not currently anticipate that this restriction will
prevent the distribution of the Minimum Quarterly Distribution to the holders
of Units.
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 and Common Units
for the purpose of distributions shall automatically cease. The Senior
Preference Units, Preference 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 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
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<PAGE> 12
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).
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 and Preference Units
will have no preference with respect to liquidation proceeds available for
distribution to Unitholders. In such event, the holders of Senior Preference
Units and Preference 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 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;
fifth, 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 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");
sixth, 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
11
<PAGE> 13
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");
seventh, 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.
Holders of Senior Preference Units or Preference 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 or Preference
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 Units.
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 KSI. In addition, KSI 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, KSI and the Partnership. The
directors and officers of KSI have fiduciary duties to manage KSI, including
its investments in its subsidiaries and affiliates, in a manner beneficial to
the stockholders of KSI. The General Partner has a fiduciary duty to manage
the Partnership in a manner beneficial to the Unitholders. The duty of the
directors of KSI to the stockholders of KSI 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 KSI 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.
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<PAGE> 14
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 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 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.
(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 KSI 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 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
13
<PAGE> 15
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, KSI and its affiliates, on the
other hand, were or will be the result of arm's length negotiations.
(g) The decision whether to purchase outstanding LP Units at
any time may involve the General Partner or KSI in a conflict of
interest. See "Description of the Partnership Agreements--Limited
Call Right".
(h) 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 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.
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<PAGE> 16
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.
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.
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. 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.
The Preference Units are listed on the NYSE under the symbol "KPU".
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 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
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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 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 the material 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 KSI 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.
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.
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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 Senior
Preference Units and Preference Units voting together as a single class);
provided that the LP 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 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 Senior Preference
Units and
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Preference 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 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.
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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, 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, 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, (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
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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-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,
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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, (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.
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
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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.
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.
22
<PAGE> 24
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 (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
23
<PAGE> 25
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.
SELLING UNITHOLDER
The following table sets forth the beneficial ownership of the
Preference Units held by the Selling Unitholder, immediately prior to and upon
completion of this offering.
<TABLE>
<CAPTION>
Beneficial Ownership After
Units Pledged(1) Offering
------------------------ ---------------------------
Number of Percent of Units to be Number of Percent of
Name Units Class Sold Units Class
- ----------------------------- --------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Harris Bank and Trust Company...... 500,000 8.85% 500,000 - -
</TABLE>
- ---------------
(1) The Selling Unitholder owns no Preference Units as of the date appearing
on the front cover of this Prospectus. However the Selling Unitholder
may, in the future, acquire Preference Units pursuant to the pledge
described below.
In March, 1998, KPL made a capital contribution of 500,000 Preference
Units to Martin Oil Corporation ("Martin"), its wholly-owned subsidiary.
Martin subsequently pledged such Preference Units to the Selling Unitholder as
security for a revolving credit facility under which the maximum amount
available thereunder is currently limited to $20 million. In connection with
such transactions, the Partnership agreed to file and maintain a shelf
registration statement for the sale of such Preference Units by such Selling
Unitholder should it acquire such Preference Units through foreclosure. The
registration statement of which this prospectus is a part was filed by the
Partnership to comply with such commitment.
PLAN OF DISTRIBUTION
The Preference Units may be sold from time to time by or for the
account of the Selling Unitholder pursuant to this Prospectus or pursuant to
Rule 144 under the Securities Act. Sales of Preference Units pursuant to this
Prospectus may be effected in the over-the-counter market, on the NYSE or
otherwise at prices and on terms then prevailing or at prices related to the
then current market price (in each case as determined by the Selling
Unitholder), directly or through agents designated from time to time, or
through dealers or underwriters to be designated or in negotiated transactions.
The Preference Units may be sold by any one or more of the following methods:
(a) a block trade (which may involve crosses) in which the broker or dealer so
engaged will attempt to sell the securities as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) exchange distributions
and/or secondary distributions in accordance with the rules of the NYSE; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; (e) through the writing of options on Shares (whether such options
are listed on an options exchange or otherwise); or (f) privately negotiated
transactions. To the extent required by applicable law, the specific
Preference Units to be sold, the purchase prices and public offering prices,
the names of any such agent, dealer or
24
<PAGE> 26
underwriter and any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying Prospectus Supplement.
The Selling Unitholder may effect such transactions by selling Preference Units
directly to other purchasers, through agents or through broker-dealers, and any
such agents or broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Unitholder,
from purchasers of Preference Units for whom they act as agents, or from both
sources (and such compensation may be in excess of customary commission). The
Selling Unitholder and any broker-dealers that participate in the distribution
of the Preference Units may be deemed to be "underwriters" within the meaning
of the Securities Act in connection with such sales, and any commission, and
any profit on the resale of Preference Units, received by the Selling
Unitholder and any such broker-dealers may be deemed to be underwriting
discounts and commissions.
LEGAL MATTERS
Certain legal matters in connection with the Preference Units will be
passed upon by Fulbright & Jaworski L.L.P., Houston, Texas, as counsel for the
Partnership.
EXPERTS
The consolidated financial statements of Kaneb Pipe Line Partners,
L.P. incorporated in this Prospectus by reference to the Annual Report on Form
10-K for the year ended December 31, 1997 have been so incorporated 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.
"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.
"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
25
<PAGE> 27
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 1,917 mile pipeline system and the 15
associated terminals.
"First Target Distribution" means $0.60 per LP Unit per calendar
quarter, subject to certain adjustments.
"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 (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.
"KPL" means Kaneb Pipe Line Company, a Delaware corporation.
"KPOP" means Kaneb Pipe Line Operating Partnership, L.P., a Delaware
limited partnership.
"KSI" means Kaneb Services, Inc., a Delaware corporation.
"LP Units" means Senior Preference Units, Preference Units and Common
Units.
"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".
"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.
26
<PAGE> 28
"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.
"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".
"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".
"Selling Unitholder" means Harris Bank and Trust Company.
"ST" means the terminal business of Support Terminals Services, Inc..
"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 KPOP's 550-mile pipeline system and its four
associated terminals.
27
<PAGE> 29
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE PARTNERSHIP SINCE THE DATE
HEREOF, OR THAT INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Conflicts of Interest and Fiduciary Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of the Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Selling Unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
================================================================================
================================================================================
500,000 Preference Units
Kaneb Pipe Line Partners, L.P.
Representing Preference
Limited Partner Interests
--------------------
PROSPECTUS
, 1998
--------------------
================================================================================
<PAGE> 30
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 . . . . . . . . . . . . . . . . $ 5,227.03
Printing and engraving costs . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
===============
</TABLE>
- ---------
* To be filed by amendment.
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
<TABLE>
<S> <C> <C>
4.1 -- Form of Amended and Restated Agreement of Limited Partnership of the Partnership (filed as
Exhibit 4.1 to the Partnership's Registration Statement on Form S-3 (Reg. No. 33-59373) and
incorporated by reference herein).
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).
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
*23.1 -- Consent of Independent Accountants.
**23.2 -- Consent of Counsel (contained in the opinion filed as Exhibit 5.1 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.
(b) Financial Statement Schedules
Not applicable.
II-1
<PAGE> 31
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes:
a. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement.
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs 1.a.i and 1.a.ii above do not apply
if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
b. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
c. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to
the securities offered herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE> 32
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 23rd day of
July, 1998.
KANEB PIPE LINE PARTNERS, L.P., by Kaneb Pipe
Line Company, as General Partner
By: EDWARD D. DOHERTY
Edward D. Doherty, Chairman
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<PAGE> 33
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Edward D. Doherty and Howard C.
Wadsworth, and each of them, either one of whom may act without joinder of the
other, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all pre- and post- effective amendments
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, and each of them, or the
substitute or substitutes of any or all of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons, in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Chairman of the Board and
EDWARD D. DOHERTY Director
Edward D. Doherty (Principal Executive Officer) July 23, 1998
Controller
JIMMY L. HARRISON (Principal and Accounting
Jimmy L. Harrison Officer) July 23, 1998
SANGWOO AHN
Sangwoo Ahn Director July 23, 1998
JOHN R. BARNES Director July 23, 1998
John R. Barnes
MURRAY R. BILES
Murray R. Biles Director July 23, 1998
FRANK M. BURKE, JR. Director July 23, 1998
Frank M. Burke, Jr.
CHARLES R. COX
Charles R. Cox Director July 23, 1998
HANS KESSLER
Hans Kessler Director July 23, 1998
JAMES R. WHATLEY
James R. Whatley Director July 23, 1998
</TABLE>
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<PAGE> 34
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
4.1 -- Form of Amended and Restated Agreement of Limited
Partnership of the Partnership (filed as Exhibit 4.1
to the Partnership's Registration Statement on Form S-3
(Reg. No. 33-59373) and incorporated by reference
herein).
4.2 -- Certificate of Limited Partnership of the Partnership
(filed as Exhibit 3.2 to the Partnerships's Registration
Statement of Form S-1 (Reg. No. 33-30330) and
incorporated by reference herein).
**5.1 -- Opinion oof Fulbright & Jaworski L.L.P.
*23.1 -- Consent of Independent Accountants.
**23.2 -- Consent of Counsel (contained in the opinion filed as
Exhibit 5.1. hereto).
*24.1 -- Powers of Attorney (included on page II-4 of this
Registration Statement as originally filed).
- ---------------
* Filed herewith
** To be filed by amendment
<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 our report
dated February 19, 1998, appearing on page F-13 of Kaneb Pipe Line Partners,
L.P.'s Annual Report on Form 10-K for the year ended December 31, 1997. We
also consent to the references to us under the heading "Experts" in such
Prospectus.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
July 24, 1998
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