<PAGE>
As filed with the Securities and Exchange Commission on April 12, 1999
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. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 4200 CHASE TOWER
HOUSTON, TX 77010 600 TRAVIS
(713) 651-5151 HOUSTON, TX 77002
ATTENTION: JOHN A. WATSON (713) 220-4200
ATTENTION: WILLIAM N. FINNEGAN, IV
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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.
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If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, please
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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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 Limited Partner
Interests . . . . . . . . . . . 5,000,000 $30 7/8 $154,375,000 $45,541
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(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 April 7, 1999.
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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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<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 12, 1999
PROSPECTUS
5,000,000 UNITS
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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We may from time to time offer and sell up to 5,000,000 of our units
with this prospectus. We will determine the prices and terms of the sales at
the time of each offering and will describe them in a supplement to this
prospectus.
This prospectus can only be used to offer or sell units if it is
accompanied by a prospectus supplement. The prospectus supplement will
contain important information about us and the units that is not included in
this prospectus. You should read both this prospectus and the prospectus
supplement carefully.
We may sell these units to underwriters or dealers, or we may sell
them directly to other purchasers. See "Plan of Distribution." The prospectus
supplement will list any underwriters and the compensation that they will
receive. The prospectus supplement will also show you the total amount of
money that we will receive from selling these units, after we pay certain
expenses of the offering.
Our units are listed on the New York Stock Exchange under the symbol
"KPP."
Our executive offices are located 2435 North Central Expressway,
Richardson, Texas 75080, and our telephone number is (972) 699-4055.
YOU SHOULD CAREFULLY READ AND CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 5 OF THIS PROSPECTUS BEFORE BUYING UNITS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE, AND WE MAY CHANGE
IT. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
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The date of this Prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
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<S> <C>
ABOUT KANEB PIPE LINE PARTNERS, L.P.............................................3
ABOUT THIS PROSPECTUS...........................................................3
WHERE YOU CAN FIND MORE INFORMATION.............................................3
RISK FACTORS....................................................................5
Risks Inherent in Our Business................................................5
Risks Relating to Year 2000 Problems..........................................7
Risks Relating to Partnership Structure.......................................7
Tax-Related Risks............................................................10
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS................................12
KANEB PIPE LINE PARTNERS, L.P..................................................13
USE OF PROCEEDS................................................................14
CASH DISTRIBUTIONS.............................................................14
General......................................................................14
Quarterly Distributions of Available Cash....................................16
Distributions of Cash from Interim Capital Transactions......................17
Adjustment of the Target Distributions.......................................17
Distributions of Cash Upon Liquidation.......................................17
Certain Defined Terms........................................................18
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES...........................21
Fiduciary Responsibility of the General Partner..............................22
FEDERAL INCOME TAX CONSIDERATIONS..............................................24
Partnership Status...........................................................24
Partner Status...............................................................27
Tax Consequences of Unit Ownership...........................................28
Allocation of Partnership Income, Gain, Loss and Deduction...................30
Uniformity of Units..........................................................30
Tax Treatment of Operations..................................................31
Disposition of Units.........................................................35
Administrative Matters.......................................................37
STATE AND OTHER TAX CONSIDERATIONS.............................................40
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS........................41
PLAN OF DISTRIBUTION...........................................................42
LEGAL..........................................................................43
EXPERTS........................................................................43
</TABLE>
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You should rely only on the information contained in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
have not authorized anyone else to give you different information. We are not
offering these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of
those documents.
2
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ABOUT KANEB PIPE LINE PARTNERS, L.P.
We are a publicly held Delaware limited partnership engaged in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids. Kaneb Pipe Line Company, a wholly owned
subsidiary of Kaneb Services, Inc. ("KSI"), serves as our general partner.
As used in this prospectus, "we," "us," "our" and the "Partnership"
mean Kaneb Pipe Line Partners, L.P. and include our subsidiary operating
companies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission ("SEC") using a "shelf"
registration process. Under this shelf registration process, we may sell up
to 5,000,000 of the units described in this prospectus in one or more
offerings. This prospectus generally describes us and the units. Each time we
sell units with this prospectus, we will provide a prospectus supplement that
will contain specific information about the terms of that offering. The
prospectus supplement may also add to, update or change information in this
prospectus. The information in this prospectus is accurate as of April 12,
1999. You should carefully read both this prospectus and any prospectus
supplement and the additional information described under the heading "Where
You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information
with the SEC. You may read and copy any document we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices at Seven World Trade Center, New York, New York 10048,
and at 500 West Madison Street, Chicago, Illinois 60661. Please call the SEC
at 1-800-733-0330 for further information on their public reference room. Our
SEC filings are also available at the SEC's web site at http://www.sec.gov.
You can also obtain information about us at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we
have filed with the SEC, which means that we can disclose important
information to you without actually including the specific information in
this prospectus by referring you to those documents. The information
incorporated by reference is an important part of this prospectus.
Information that we file later with the SEC will automatically update and may
replace information in this prospectus and information previously filed with
the SEC. The documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934 are incorporated by reference in this prospectus until we sell all of
the units offered by this prospectus.
- Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "Form 10-K").
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You may request a copy of these filings, at no cost, by writing or
calling us at the following address:
Investor Relations Department
Kaneb Pipe Line Partners, L.P.
2435 North Central Expressway
Richardson, Texas 75080
(972) 699-4055.
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RISK FACTORS
You should consider the following risk factors, together with other
information contained in this prospectus, any prospectus supplement and the
information we have incorporated by reference.
RISKS INHERENT IN OUR BUSINESS
UNCERTAINTIES IN SETTING RATES IN OUR INDUSTRY.
The Federal Energy Regulatory Commission, pursuant to the Interstate
Commerce Act, regulates the tariff rates for our interstate common carrier
pipeline operations. To be lawful under that Act, tariff rates must be just
and reasonable and not unduly discriminatory. The lawfulness of new or
changed tariff rates may be protested by shippers and investigated by the
FERC. The FERC can suspend those tariff rates for a period of up to seven
months. It can also require refunds of amounts collected under rates
ultimately found to be unlawful. Tariff rates that have become final and
effective may also be challenged in a court or before the FERC. Because of
the complexity of rate making, the lawfulness of any rate is never assured.
Since 1995, the FERC's primary rate making methodology has been
price indexing. This method allows a pipeline to increase or decrease its
rates by a percentage equal to the Producer Price Index for Finished Goods
minus 1%. Alternative methodologies allow pipelines to use cost-based or
market-based rates, instead of the index-based rates, in certain
circumstances. The FERC's rate making methodologies may limit our ability to
set rates based on our true costs or may delay the implementation of rates
that reflect increased costs. If this occurs, it could adversely affect us.
In addition, if the FERC sets rates using price indexing, changes in the
index might not be large enough to fully reflect actual increases in our
costs. It is also possible that the index will rise by less than 1% or fall,
causing the maximum rates to fall.
On September 15, 1997, we filed an Application for Market Power
Determination with the FERC seeking market based rates for approximately half
of our markets. A pipeline may be allowed to let the market regulate its
rates and be relatively free of FERC regulation if it is able to demonstrate
a lack of significant market power in the relevant markets pursuant to FERC
Order No. 572. In May 1998, the FERC approved market based rates for those
markets for which application was made.
In a 1995 decision involving an unrelated oil pipeline limited
partnership, the FERC partially disallowed the inclusion of income taxes in
that partnership's cost of service. In another FERC proceeding involving a
different oil pipeline limited partnership, the FERC held that the oil
pipeline limited partnership may 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 our pipelines, it could adversely
affect our cash flow and reduce cash distributions to our unitholders.
COMPETITION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
While the FERC's current cost-based rate regulation permits our
pipeline transportation rates to be set within certain limits, competitive
conditions sometimes require that our pipelines file individual rates that
are less than the permissible maximum to avoid losing business to
competitors. The East Pipeline's major competitor is an independent regulated
common carrier pipeline system owned by The Williams Companies, Inc.
Williams' pipeline operates approximately 100 miles east of and parallel to
our East Pipeline. This competing pipeline system is substantially more
extensive than our East Pipeline. Fifteen of
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<PAGE>
our 16 delivery terminals on the East Pipeline directly compete with
Williams' terminals. Williams and its affiliates have capital and financial
resources substantially greater than ours.
Our West Pipeline competes with the truck loading facilities of the
Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline
Company and Phillips Petroleum pipelines. The Ultramar Diamond Shamrock
terminals in Denver and Colorado Springs that connect to a Ultramar Diamond
Shamrock pipeline from their Texas Panhandle refinery are major competitors to
the West Pipeline's Denver and Fountain terminals.
The independent liquids terminaling industry is fragmented and includes
both large, well-financed companies that own many terminal locations and small
companies that may own a single terminal location. Several companies that offer
liquids terminaling facilities have significantly more capacity than ours,
particularly those used primarily for petroleum-related products. We also face
competition from prospective customers that have their own terminal facilities.
REDUCED DEMAND COULD AFFECT SHIPMENTS ON THE PIPELINES.
Our pipeline business depends in large part on the level of demand for
refined petroleum products in the markets served by our pipelines and the
ability and willingness of shippers to supply that demand by deliveries through
our 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. Periods of drought suppress agricultural demand for some refined
petroleum products, particularly those used for fueling farm equipment. Although
the demand for fuel for irrigation systems often increases during those times,
the increase may not be sufficient to offset the reduced demand for refined
petroleum products for agricultural use. The agricultural sector is also
affected by government agricultural policies and crop prices.
The West Pipeline serves the Denver and northeastern Colorado markets.
The West Pipeline also supplies jet fuel to Ellsworth Air Force Base at Rapid
City, South Dakota. Reduced demand in these markets could adversely affect our
business. The West Pipeline has a relatively small number of shippers, who, with
only a few exceptions, are also shippers on the East Pipeline.
Governmental regulation, technological advances in fuel economy, energy
generation devices and future fuel conservation measures could reduce the demand
for refined petroleum products in the market areas our pipelines serve.
INADEQUATE SUPPLIES OF CRUDE OIL COULD ADVERSELY AFFECT OUR BUSINESS.
Our pipelines depend on adequate levels of production of refined
petroleum products by refineries connected to the pipelines, either directly or
through connecting pipelines. The refineries, in turn, depend on adequate
supplies of suitable grades of crude oil. If those supplies were inadequate to
meet the needs of these refineries, our business could be adversely affected.
The refineries connected directly to the East Pipeline primarily obtain crude
oil from producing fields located primarily in Kansas, Oklahoma and Texas. The
East Pipeline also has direct access to Gulf Coast suppliers of products through
connecting third-party pipelines that receive products from pipelines
originating on the Gulf Coast. These refineries obtain their supplies of crude
oil from a variety of sources. The refineries connected directly to the West
Pipeline obtain their supplies of crude oil primarily from Rocky Mountain
sources.
6
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POSSIBLE REDUCTION OF BUSINESS WITH THE DEPARTMENT OF DEFENSE.
The storage and transport of jet fuel for the U.S. Department of
Defense comprises an important part of our liquids terminaling business. Eleven
of our terminal sites are involved in the terminaling or transport (via
pipeline) of jet fuel for the Department of Defense. The U.S. Government is the
sole user of 7 of the 11 locations. Two of these locations are currently without
government business. We cannot predict whether additional bases we serve will be
closed or whether other customers will replace any loss of business with the
Department of Defense.
RISK OF ENVIRONMENTAL COSTS AND LIABILITIES.
Our operations are subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe that
our operations comply with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in pipeline operations and
terminaling operations. We cannot assure you that we will not incur substantial
costs and liabilities. We currently own or lease, and have in the past owned or
leased, many properties that have been used for many years to terminal or store
petroleum products or other chemicals. Hydrocarbons or solid wastes have been
disposed of or released on or under some of these properties. Additionally, some
of the sites we operate are located near current or historical refining and
terminaling operations. There is a risk that contamination has migrated from
those sites to ours. Increasingly strict environmental laws, regulations and
enforcement policies and claims for damages and other similar developments could
result in substantial costs and liabilities.
RISKS RELATING TO YEAR 2000 PROBLEMS
Although we believe that the Year 2000 issue will not materially impact
most of our activities and operations, we have undertaken a review and testing
of our computer systems to identify Year 2000-related issues associated with the
software and hardware we use in our operations. We can not conclusively know
success in being Year 2000 compliant until we actually reach the Year 2000.
Failure by one or more of our own systems could result in lost revenues and/or
additional expenses required to carry out manual processing of transactions. We
cannot predict the effect that external forces could have on our business.
Failures by banking institutions, the telecommunications industry and others
could have far-reaching effects on us and the entire economy.
We expect to complete our Year 2000 compliance program in a timely
manner. However, we believe that it is not possible to determine with certainty
that we have identified or corrected all Year 2000 problems affecting us.
RISKS RELATING TO PARTNERSHIP STRUCTURE
WE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, DILUTING EXISTING
INTERESTS OF UNITHOLDERS.
We can issue an unlimited number of additional units or other equity
securities, including equity securities with rights to distributions and
allocations or in liquidation equal or superior to the units offered by this
prospectus. If we issue more units or other equity securities, your
proportionate ownership interest in us will be reduced. This could cause the
market price of your units to fall and reduce the cash distributions paid to you
as a unitholder.
Our partnership agreement allows the general partner to cause us to
register for sale any units the general partner or its affiliates hold. The
general partner and its affiliates currently own 5,454,950 units.
7
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These registration rights allow the general partner and its affiliates
holding any units to request registration of those units and to include any
of those units in a registration of other units by us. In addition, the
general partner and its affiliates may sell their units in private
transactions at any time.
UNITHOLDERS HAVE LIMITS ON THEIR VOTING RIGHTS; THE GENERAL PARTNER
MANAGES AND OPERATES US.
You have only limited voting rights as a unitholder. The general
partner must either propose or consent to all amendments to our partnership
agreement and certain other major actions.
The general partner manages and controls our activities. Unitholders
have no right to elect the general partner on an annual or other continuing
basis. However, if the general partner withdraws or is removed, the
unitholders may elect a new general partner.
THE GENERAL PARTNER AND ITS AFFILIATES CURRENTLY OWN A SUFFICIENT
NUMBER OF UNITS TO PREVENT THE REMOVAL OF THE GENERAL PARTNER.
The vote of the holders of not less than 85% of the outstanding units
is necessary to remove the general partner. The general partner and its
affiliates currently own enough units to prevent the removal of the general
partner without its consent.
THE GENERAL PARTNER AND ITS AFFILIATES MAY HAVE CONFLICTS WITH US.
Our general partner's dual duties to KSI and to us can cause a conflict
of interest. Conflicts could arise in the following situations:
- The general partner determines the timing and amount of cash
expenditures, borrowings and reserves, which can affect the
amount of cash distributed to our partners.
- The general partner determines whether we will issue
additional units or other securities or purchase any
outstanding units.
- The general partner controls the payment to KSI and its
subsidiaries and affiliates for any services they render on
our behalf, subject to the limitations described under
"Conflicts of Interest."
- The general partner determines which direct and indirect costs
we reimburse.
- The general partner will attempt to limit its liability for
our debt and other contractual liabilities by requiring
debtholders and other creditors to look only to us and to our
assets for payment.
- The general partner can decide to liquidate us.
- The general partner determines whether we will retain separate
counsel, accountants or others to perform services on our
behalf.
- The general partner and its affiliates may compete with us.
8
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The Audit Committee of the Board of Directors of the general partner
will review matters in which these conflicts of interest could arise. We have
not adopted any guidelines, other than those contained in our partnership
agreement, that must be followed by the general partner in the event of a
conflict of interest.
THE GENERAL PARTNER'S LIABILITY TO THE US AND THE UNITHOLDERS MAY BE
LIMITED.
The general partner is accountable to us and to the unitholders as a
fiduciary. Consequently, the general partner generally must exercise good
faith and integrity in handling our assets and affairs. The Delaware Revised
Uniform Limited Partnership 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. Our partnership agreement, as permitted by the
Delaware Act, contains various provisions that have the effect of restricting
the fiduciary duties that the general partner might otherwise owe us and the
unitholders. For example, our partnership agreement provides that:
- Any actions the general partner takes that are consistent with
the standards of reasonable discretion set forth in our
partnership agreement will be deemed not to breach any duty of
the general partner to us or the unitholders.
- 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 our partnership agreement or
a breach of any standard of care or duty.
- Unitholders 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.
These 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. Some provisions of the partnership agreement that purport to
limit the liability of the general partner to us or the unitholders may be
unenforceable under Delaware law.
THE GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO THE
UNITS.
If at any time less than 750,000 of the then-issued and outstanding
units (which number may be increased or decreased from time to time in
proportion to any distributions, combination or subdivisions of the units)
are held by persons other than the general partner and its affiliates, the
general partner will have the right, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of the remaining
units held by those unaffiliated persons at a price generally equal to the
then-current market price of units. As a consequence, a unitholder may be
required to sell his units at a time when he may not desire to sell them or
at a price that is less than the price he would desire to receive upon such
sale.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES
AND MAY BE LIABLE FOR THE RETURN OF CERTAIN DISTRIBUTIONS.
The limitations on the liability of holders of limited partner
interests for the obligations of a limited partnership have not been clearly
established in some states. If it were determined that we had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right, or the exercise of the right by the unitholders as a
group, to: (1) remove or replace the general partner, (2) make certain
amendments to our partnership agreement, or (3) take other action pursuant to
9
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our partnership agreement constituted participation in the "control" of our
business, then the unitholders could be held liable in certain circumstances
for our obligations to the same extent as a general partner.
In addition, under certain circumstances a unitholder may be liable
to us for the amount of a distribution for a period of three years from the
date of the distribution. Unitholders will not be liable for assessments in
addition to their initial capital investment in the common units. Under
Delaware partnership law, we may not make a distribution to you if the
distribution causes all liabilities of the Partnership to exceed the fair
value of the partnership's assets. Liabilities to partners on account of
their partnership interests and non-recourse liabilities are not counted for
purposes of determining whether a distribution is permitted. Delaware law
provides that a limited partner who receives such a distribution and knew at
the time of the distribution that the distribution violated the Delaware law
will be liable to the limited partnership for the distribution amount for
three years from the distribution date. Under Delaware law, an assignee who
becomes a substituted limited partner of a limited partnership is liable for
the obligations of the assignor to make contributions to the partnership.
However, such an assignee is not obligated for liabilities unknown to him at
the time he or she became a limited partner if the liabilities could not be
determined from the partnership agreement.
TAX-RELATED RISKS
For a discussion of the expected federal and state income tax
consequences of acquiring, owning and disposing of units, see "Federal Income
Tax Considerations" and "State and Other Taxes."
TAX TREATMENT DEPENDS ON OUR STATUS AS A PARTNERSHIP.
The availability to a unitholder of the federal income tax benefits of
an investment in units depends in large part on the classification of us and
each of our partnership subsidiaries as a partnership for federal income tax
purposes. Fulbright & Jaworski L.L.P., our tax counsel, has rendered its opinion
that under current law and regulations, we and each of our subsidiary
partnerships will be classified as a partnership for federal income tax
purposes. They based their opinion on factual representations made to them by
the general partner. If any of these facts are incorrect, particularly facts
relating to the nature of our subsidiary partnerships' gross income, U.S. tax
laws could classify us or one or more of our subsidiary partnerships as a
corporation for federal income tax purposes.
THERE ARE LIMITATIONS ON THE DEDUCTIBILITY OF LOSSES.
Any losses we generate will be available to unitholders that are
subject to the passive activity loss limitations of Section 469 of the Internal
Revenue Code only to offset future income we generate. Unitholders cannot use
our losses to offset their income from other passive activities or investments
or any other source. Losses from us that are not deductible because of the
passive loss limitations may be deducted when the unitholder disposes of all his
units in a fully taxable transaction with an unrelated party.
THERE IS A RISK OF CHALLENGE TO CERTAIN ALLOCATION PROVISIONS AND
DEPRECIATION CONVENTIONS.
Because we cannot match transferors and transferees of units, we must
attempt to maintain uniformity of the economic and tax characteristics of the
units. This uniformity is often referred to as "fungibility" of units. In order
to do this, we have adopted and will continue to adopt tax accounting
conventions relating to the allocation of taxable deductions and gain or loss on
contributed assets ("Section 704(c) allocations") and the additional
depreciation and amortization available to unitholders as a result of our
section 754 election ("Section 743(b) conventions") that do not conform with all
aspects of the applicable Treasury Regulations. In January 1998, the IRS
proposed new Regulations to update and clarify
10
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some of the Treasury Regulations at issue. The preamble of the proposed
Regulations states that an intended result of the Regulations is that
"interests in a partnership will generally be fungible;" however, the
proposed Regulations would provide fungibility only for interests in
partnerships that use the remedial method in calculating their Section 704(c)
allocations. Unfortunately, the remedial allocation method can be adopted
only with respect to property contributed to a partnership on and after
December 21, 1993, and a significant part of our assets were acquired by
contribution to us before that date.
We cannot predict whether the final Regulations will allow us to use
the remedial allocation method on our assets acquired by contribution before
December 21, 1993, or allow us to continue to use other allocation methods to
maintain uniformity of units. Because of the continued uncertainty, our
counsel is unable to opine that the Section 704(c) allocations and Section
743(b) depreciation and amortization conventions that we have adopted will be
given effect for federal income tax. If the IRS were successful in
challenging these allocations or conventions, uniformity could be affected.
Without uniformity, compliance with several federal income tax requirements,
both statutory and regulatory, could be substantially diminished. In
addition, non-uniformity could have a negative impact on the ability of a
unitholder to dispose of his interest in us.
A UNITHOLDER'S TAX LIABILITY COULD EXCEED CASH DISTRIBUTIONS ON HIS
UNITS.
Since we are not a taxable entity and incur no federal income tax
liability, a unitholder must pay federal income tax and, in certain cases, state
and local income taxes on his allocable share of our income, whether or not he
receives cash distributions from us. We cannot assure you that unitholders will
receive cash distributions equal to their allocable share of taxable income from
us. Further, on the sale or other disposition of units, a unitholder may incur
tax liability in excess of the amount of cash received. To the extent that a
unitholder's tax liability exceeds the amount distributed to him or the amount
he receives on the sale or other disposition of his units, he will incur an out-
of-pocket cost.
OWNERSHIP OF UNITS RAISES ISSUES FOR TAX-EXEMPT ORGANIZATIONS AND
CERTAIN OTHER INVESTORS.
Substantially all of the gross income attributable to an investment in
units by tax-exempt entities (including individual retirement accounts, Keogh
and other retirement plans) will constitute unrelated business taxable income to
these tax-exempt entities. An investment in units, therefore, may not be
suitable for tax-exempt entities. An investment in units also may not be
suitable for regulated investment companies and foreign investors for the
reasons discussed in "Federal Income Tax Considerations--Tax Treatment of
Operations--Tax Exempt Entities, Regulated Investment Companies and Foreign
Investors."
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<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the
documents we have incorporated by reference contain forward-looking statements.
The words "believe," "expect," "estimate" and "anticipate" and similar
expressions identify forward-looking statements. Forward-looking statements
include those that address activities, events or developments that we expect or
anticipate will or may occur in the future, including the amount and nature of
future capital expenditures, business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of our business and
operations, plans, references to future success, references to intentions as to
future matters and other similar matters. Where any forward-looking statement
includes a statement of the assumptions or bases underlying the forward-looking
statement, we caution you that, while we believe these assumptions or bases are
reasonable and are made in good faith, assumed facts or bases almost always vary
from actual results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances. When considering
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus, any prospectus supplement and the
documents we have incorporated by reference. We will not update these statements
unless the securities laws require us to do so.
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<PAGE>
KANEB PIPE LINE PARTNERS, L.P.
We are 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 following chart
shows our organization and ownership structure as of the date of this prospectus
before giving effect to this offering. Except in the following chart, the
ownership percentages referred to in this prospectus reflect the approximate
effective ownership interest in us and our subsidiary companies on a combined
basis.
[organizational chart]
13
<PAGE>
Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska,
South Dakota, North Dakota, Wyoming and Colorado. We own a 2,125-mile
pipeline system (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 the general partner commencing in the
1950's. We 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 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. We also own three single-use pipelines that supply diesel fuel to
railroad fueling facilities.
Our pipelines primarily transport gasoline, diesel oil, fuel oil and
propane. The products are transported from refineries connected to a
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 our pipeline
operations constitute common carrier operations that are subject to Federal
or state tariff regulations. We are not engaged in the merchant function of
buying and selling refined petroleum products.
We are the third largest independent liquids terminaling company in
the United States. Our terminaling business is conducted under the name ST
Services. ST Services and its predecessors have been in the terminaling
business for over 40 years. We operate 33 facilities in 19 states and the
District of Columbia with an aggregate tankage capacity of approximately 22.2
million barrels. We also own a 50% interest in and manage a 3.9 million
barrel petroleum terminal in Linden, New Jersey. In February 1999, we
acquired six terminals in the United Kingdom for approximately $37.4 million
and the assumption of certain liabilities. Our terminal facilities provide
storage on a fee basis for petroleum products, specialty chemicals and other
liquids. Our five largest wholly owned terminal facilities in the U.S. are
located in Piney Point, Maryland; Jacksonville, Florida; Texas City, Texas;
Baltimore, Maryland; and Westwego, Louisiana. Our U.K. terminals have an
aggregate capacity of 5.5 million barrels. Three of the U.K. terminals are
located in England, two in Scotland and one in Northern Ireland. Our U.S. and
U.K. terminals handle a wide variety of products from petroleum products to
specialty chemicals to edible liquids.
USE OF PROCEEDS
Except as otherwise provided in the applicable prospectus supplement,
we will use the net proceeds we receive from the sale of the units to acquire
properties as suitable opportunities arise and repay indebtedness outstanding at
the time.
CASH DISTRIBUTIONS
GENERAL
Because we hold all of our assets and conduct all of our operations
through our subsidiaries, they will generate all Cash from Operations, and the
distribution of that cash from our subsidiaries to us is expected to be our
principal source of Available Cash from which we will make distributions.
"Available Cash" means generally, with respect to any calendar quarter, the sum
of all of our cash receipts plus net reductions to cash reserves less the sum of
all of our cash disbursements and net additions to cash reserves. Cash from
Operations, which is determined on a cumulative basis, generally means the $3.5
million cash balance we had on the date of our initial public offering in 1989,
plus all cash generated by our operations,
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<PAGE>
after deducting related cash expenditures, reserves and certain other items.
The full definitions of Available Cash and Cash from Operations are set forth
in "-Certain Defined Terms."
Our subsidiary partnerships must, under their partnership agreements,
distribute 100% of their available cash. Available cash is defined in the
subsidiary partnership agreements in substantially the same manner as it is in
our partnership agreement. The boards of directors of our corporate subsidiaries
have adopted a dividend policy under which all available cash (defined in
substantially the same manner as is our Available Cash) is to be distributed as
a dividend. Accordingly, the following paragraphs describing distributions to
unitholders and the general partner, and the percentage interests in our
distributions, are stated on the basis of cash available for distribution by us
and our subsidiaries on a combined basis.
We will make distributions to unitholders and the general partner with
respect to each calendar quarter in an amount equal to 100% of our Available
Cash for the quarter, except in connection with our dissolution and liquidation.
Distributions of our 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 general partner's incentive distributions are
described below under "--Quarterly Distributions of Available
Cash--Distributions of Cash from Operations."
The following table sets forth the amount of distributions of Available
Cash constituting Cash from Operations effected with respect to the units for
the quarters in the periods shown
<TABLE>
<CAPTION>
DISTRIBUTION PER
QUARTER UNIT(1)
------------------------- -----------------
<S> <C>
1997:
First.................. $ 0.60
Second................. 0.60
Third.................. 0.65
Fourth................. 0.65
1998:
First.................. $ 0.65
Second................. 0.65
Third.................. 0.65
Fourth................. 0.65
1999:
First.................. $ 0.70
</TABLE>
- ----------------
(1) Before June 30, 1998, we had three classes of partnership
interests designated Senior Preference Units, Preference Units
and Common Units. Pursuant to our partnership agreement, on
August 14, 1998, each of these classes was converted into a
single class designated "units" effective June 30, 1998. The
cash distributions shown above were paid on each class of our
limited partnership interests.
Cash distributions will be characterized as either distributions of
Cash from Operations or Cash from Interim Capital Transactions. This
distinction is important because it affects the amount of cash that is
distributed to the unitholders relative to the general partner. See
"-Quarterly Distributions of Available Cash-Distributions of Cash from
Operations" and "-Quarterly Distributions of Available Cash-Distributions of
Cash from Interim Capital Transactions" below. We will ordinarily generate
Cash from Interim Capital Transactions by (i) borrowings and sales of debt
securities (other than for working capital purposes), (ii) sales of equity
interests and (iii) sales or other dispositions of our assets.
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<PAGE>
All Available Cash that we distribute 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 that
we generated since we commenced operations through the end of the prior
calendar quarter. Any remaining Available Cash distributed on that 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 how we will distribute cash before we
commence to dissolve or liquidate is set forth below under "--Quarterly
Distributions of Available Cash." Distributions of cash in connection with
our dissolution and liquidation will be made as described below under
"--Distributions of Cash Upon Liquidation."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
DISTRIBUTIONS OF CASH FROM OPERATIONS
Our distributions of Available Cash that constitutes Cash from
Operations in respect of any calendar quarter will be made in the following
priorities:
FIRST, 98% to all unitholders pro rata and 2% to the general
partner until all unitholders have received distributions of $0.60 per
unit for such calendar quarter (the "First Target Distribution");
SECOND, 90% to all unitholders pro rata and 10% to the general
partner until all unitholders have received distributions of $0.65 per
unit for such calendar quarter (the "Second Target Distribution");
THIRD, 80% to all unitholders pro rata and 20% to the general
partner until all unitholders have received distributions of $0.70 per
unit for such calendar quarter (the "Third Target Distribution" and,
together with the First Target Distribution and Second Target
Distribution, the "Target Distributions"); and
THEREAFTER, 70% to all unitholders pro rata and 30% to the
general partner.
The following table illustrates the percentage allocation of
distributions of Available Cash that constitute Cash from Operations among the
unitholders and the general partner up to the various target distribution
levels.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE INTEREST
IN DISTRIBUTIONS
--------------------------------
QUARTERLY AMOUNT UP TO: UNITHOLDERS GENERAL PARTNER
----------------------- ----------- ---------------
<S> <C> <C>
$0.60 98% 2%
$0.65 90% 10%
$0.70 80% 20%
Thereafter 70% 30%
</TABLE>
The Target Distributions are each subject to adjustment as described
below under "--Adjustment of the Target Distributions."
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<PAGE>
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Available Cash that constitutes Cash from Interim
Capital Transactions will be distributed 98/99ths to all unitholders pro rata
and 1/99th to the general partner until a hypothetical holder of a unit acquired
in our initial public offering has received, with respect to that unit,
distributions of Available Cash constituting Cash from Interim Capital
Transactions in an amount per unit equal to $22.00. Thereafter, all Available
Cash will be distributed as if it were Cash from Operations. We have not
distributed any Available Cash that constitutes Cash from Interim Capital
Transactions.
ADJUSTMENT OF THE TARGET DISTRIBUTIONS
The Target Distributions will be proportionately adjusted in the event
of any combination or subdivision (whether effected by a distribution payable in
units or otherwise) of units. In addition, if a distribution is made of
Available Cash constituting Cash from Interim Capital Transactions, the Target
Distributions will also be adjusted proportionately downward to equal the
product resulting from multiplying each of them by a fraction, of which the
numerator shall be the Unrecovered Capital (as defined below) immediately after
giving effect to such distribution and the denominator shall be the Unrecovered
Capital immediately before such distribution. For these purposes, "Unrecovered
Capital" means, at any time, an amount equal to the excess of (i) $22.00 over
(ii) the sum of all distributions theretofore made in respect of a hypothetical
unit offered in our initial public offering (expressed on a per unit basis) out
of Available Cash constituting Cash from Interim Capital Transactions.
The Target Distributions also may be adjusted if legislation is enacted
that causes us to be taxable as a corporation or to be treated as an association
taxable as a corporation for federal income tax purposes. In that event, the
Target Distributions for each quarter thereafter would be reduced to an amount
equal to the product of each of the Target Distributions multiplied by 1 minus
the sum of (i) the maximum marginal federal corporate income tax rate (expressed
as a fraction) plus (ii) the effective overall state and local income tax rate
(expressed as a fraction) applicable to us 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
We will dissolve on December 31, 2039, unless we are dissolved at an
earlier date pursuant to the terms of our partnership agreement. The proceeds of
our liquidation shall be applied first in accordance with the provisions of our
partnership agreement and applicable law to pay our creditors in the order of
priority provided by law. Thereafter, any remaining proceeds (or assets in kind)
will be distributed to unitholders and the general partner as set forth below.
Upon our liquidation, unitholders are entitled to share with the general partner
in the remainder of our assets in proportion to their capital account balances,
after giving effect to the following allocations of any gain or loss realized
from sales or other dispositions of assets following commencement of our
liquidation ("Terminating Capital Transactions"), including any unrealized gain
or loss attributable to assets distributed in kind. Any such gain will be
allocated as follows:
FIRST, to each partner having a deficit balance in his capital
account to the extent of and in proportion to the deficit balance;
SECOND, any then-remaining gain would be allocated 98% to the
unitholders pro rata and 2% to the general partner, until the capital
account of each unit equals the sum of the Remaining Capital (as
defined below) in respect of that unit;
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<PAGE>
THIRD, 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 unit is equal to the sum of (a) the
Remaining Capital with respect to that unit plus (b) the excess of the
First Target Distribution over the Minimum Quarterly Distribution
($0.55 per unit) for each quarter of our existence less (c) 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 our
existence ((c) less (d) being the "Target Amount");
FOURTH, 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 unit is equal to the sum of (a) the Remaining Capital with
respect to that unit plus (b) the Target Amount plus (c) the excess of
the Second Target Distribution over the First Target Distribution for
each quarter of our 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 our existence (the respective
Target Amount plus (c) less (d) being referred to as the "Second Target
Amount");
FIFTH, 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 unit is equal to the sum of (a) the Remaining Capital with
respect to that 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 our 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 our 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 these purposes, "Remaining Capital" means, at any time with respect to
any units, the price per unit at which units were initially sold us, 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 our dissolution and liquidation theretofore made in
respect of a unit that was sold in the initial offering of the units.
Any loss realized from sales or other dispositions of assets
following commencement of our dissolution and liquidation, including any
unrealized gain or loss attributable to assets distributed in kind, will be
allocated to the general partner and the unitholders: first, in proportion to
the positive balances in the partners' capital accounts until all balances
are reduced to zero; and second, to the general partner.
CERTAIN DEFINED TERMS
"Available Cash" means with respect to any calendar quarter, (i) the
sum of (a) all our cash receipts during that 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 our cash disbursements during that quarter, including, without
limitation, disbursements for operating expenses, taxes on us as an entity or
paid by us 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 the general partner), (bb) any reserves
established in that quarter in
18
<PAGE>
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 our business (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 that
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 we are a
party or by which we are bound or our assets are subject. Taxes that we pay
on behalf of, or amounts withheld with respect to, less than all of the
unitholders shall not be considered cash disbursements by us 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 our
dissolution and liquidation.
"Cash from Interim Capital Transactions" means our cash receipts
that the general partner determines to be from Interim Capital Transactions
in accordance with the terms of our partnership agreement.
"Cash from Operations" means, at any date but before the
commencement of our dissolution and liquidation, on a cumulative basis, all
our cash receipts 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 our operations through that date, less
the sum of (a) all our cash operating expenditures during that period
including, without limitation, taxes imposed on us as an entity or taxes paid
by us on behalf of, or amounts withheld with respect to, all but not less
than all of the unitholders, if any, (b) all our cash debt service payments
during that period (other than payments or prepayments of principal and
premium required by reason of loan agreements (including covenants and
default provisions therein) or by lenders, in each case in connection with
sales or other dispositions of assets or made in connection with refinancings
or refundings of indebtedness, provided that any payment or prepayment of
principal, whether or not then due, shall be determined at the election and
in the discretion of the general partner, to be refunded or refinanced by any
indebtedness incurred or to be incurred by us simultaneously with or within
180 days before or after that payment or prepayment to the extent of the
principal amount of such indebtedness so incurred), (c) all our cash capital
expenditures during that 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 our assets, taken as a whole, from the throughput or
deliverable capacity or terminaling capacity (assuming normal operating
conditions, including down-time and maintenance) existing immediately before
those 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 that date that
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 the general partner's
interest in Kaneb Pipe Line Operating Partnership, L.P. 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 that
we pay on behalf of, or amounts withheld with respect to, less than all of
the unitholders shall not be considered cash operating expenditures by us
that reduce "Cash from Operations."
19
<PAGE>
"Interim Capital Transactions" means our (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), (b)
sales of partnership interests and (c) sales or other voluntary or
involuntary dispositions of any assets (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 before the commencement of our dissolution and
liquidation.
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<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
The general partner will make all decisions relating to our management.
In some cases the officers of the general partner who make those decisions also
may be officers of KSI. In addition, KSI owns all the capital stock of the
general partner and owns, either directly or through a subsidiary, 32% of the
outstanding units. Certain conflicts of interest could arise as a result of the
relationships among the general partner, KSI and us. 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 us 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 general partner's Board of Directors
will review conflicts of interest that may arise between KSI or its
subsidiaries, on the one hand, and us and our partners, 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 the conflict and the
benefits and burdens relating to that 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 the general partner, and independent advisers as appropriate, and
will attempt to resolve any the 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, we anticipate that the board would give
considerable weight to the recommendations of the Audit Committee as to matters
involving conflicts of interest.
Potential conflicts of interest could arise in the situations described
below, among others:
- Under the terms of our partnership agreement, the general
partner will exercise its discretion in managing our business
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 us. 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) that we will reimburse to
it.
- The general partner or any of its affiliates may lend to us or
our operating subsidiaries funds needed by them for such
periods of time as the general partner may determine;
provided, however, that the general partner or the affiliate
may not charge us or our 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 the affiliate is required to pay on funds
it borrows 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 the affiliate, as the case
may be, for any costs it incurs in connection with the
borrowing of funds obtained by the general partner or the
affiliate and loaned to the borrowing entity. We may lend or
contribute to our operating subsidiaries and our operating
subsidiaries may borrow funds from us, on terms and conditions
established at the sole discretion of the general partner.
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<PAGE>
- The general partner (through its ownership of units and its
general partner interests) 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
the general partner may be affected by various determinations
made by the general partner (including, for example, those
relating to the decision to liquidate us, the timing of any
capital transaction, the establishment and maintenance of
reserves, the timing of expenditures, the incurrence of debt
and other matters).
- Upon the request of the general partner or any affiliate
holding units or other securities, we must register the offer
and sale of such number of those securities (aggregating at
least $2.0 million in value) specified by the general partner
or the affiliate under the Securities Act and the securities
laws of any states reasonably requested by the general partner
or the affiliate. All costs and expenses of the registration
will be paid by the general partner or the affiliate, and none
of those costs will be allocated to us. Under certain
circumstances, the general partner or the affiliate also will
have the right to include their partnership securities in a
registration statement under the Securities Act in which we
propose to offer our securities for cash.
- Neither our partnership agreement nor any of the other
agreements, contracts and arrangements between us, 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.
- As is customary in many types of public securities offerings,
the unitholders have not been represented by separate counsel
in connection with the preparation of the partnership
agreements or the other agreements referred to herein or in
establishing the terms of the offering made by this
prospectus. The attorneys, accountants and others who have
performed services for us in connection with the offering have
been employed by the general partner, KSI and their affiliates
and may continue to represent the general partner, KSI and
their affiliates. The general partner will select the
attorneys, accountants and others who will perform services
for us in the future, who may also perform services for the
general partner, KSI and their affiliates. The general partner
may retain separate counsel for us or the unitholders after
the sale of the units offered by this prospects, depending on
the nature of any conflict that might arise in the future, but
does not intend to do so in most cases.
- The decision whether to purchase outstanding units at any time
may involve the general partner or KSI in a conflict of
interest.
- Subject to their fiduciary duties to us and the unitholders,
the general partner and its affiliates may compete with us.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The general partner will be accountable to us as a fiduciary.
Consequently, the general partner must exercise good faith and integrity in
handling our assets and affairs in addition to such other obligations as the
general partner may assume under our partnership agreement. Our partnership
agreement provides that whenever a conflict of interest arises between the
general partner or its affiliates, on the one hand, and us or any unitholders,
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
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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 us
or the unitholders. Thus, unlike the strict duty of a fiduciary who must act
solely in the best interests of his beneficiary, our 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,
our ability to engage in transactions with the general partner or its
affiliates or involving conflicts of interest, even if beneficial to us,
would be impaired. Our 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 a
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 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.
Our 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 if such action is not inconsistent with
our overall purposes. Further, the partnership agreement provides that the
general partner will not be liable for monetary damages to us, 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, we are 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, our best interests 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 developing and
changing area of the law, and unitholders should consult their own legal counsel
concerning the fiduciary responsibilities of the general partner and the
remedies available to unitholders.
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FEDERAL INCOME TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax
counsel ("Counsel") and addresses all material income tax consequences to
individuals who are citizens or residents of the United States. Unless otherwise
noted, this section reflects Counsel's opinion with respect to the matters set
forth except for statements of fact and the representations and estimates of the
results of future operations of the general partner included in such discussion
as to which no opinion is expressed. Counsel bases its opinions on its
interpretation of the Internal Revenue Code of 1986, as amended (the "Code") and
Treasury Regulations issued thereunder, judicial decisions, the facts set forth
in this Prospectus and certain factual representations made by the general
partner. Counsel's opinions are subject to both the accuracy of such facts and
the continued applicability of such legislative, administrative and judicial
authorities, all of which authorities are subject to changes and interpretations
that may or may not be retroactively applied.
Other than as described below, we have not requested a ruling from the
IRS with respect to our classification as a partnership for federal income tax
purposes or any other matter affecting us. Accordingly, the IRS may adopt
positions that differ from Counsel's conclusions expressed herein. We may need
to resort to administrative or court proceedings to sustain some or all of
Counsel's conclusions, and some or all of these conclusions ultimately may not
be sustained. The costs of any contest with the IRS will be borne directly or
indirectly by some or all of the unitholders and the general partner.
Furthermore, we cannot assure you that the tax consequences of investing in
units will not be significantly modified by future legislation or administrative
changes or court decisions. Any such modifications may or may not be
retroactively applied.
It is impractical to comment on all aspects of federal, state, local
and foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of units made by this Prospectus and of an investment
in such units. Moreover, certain types of taxpayers such as tax-exempt entities,
regulated investment companies and insurance companies may be subject to rules
and regulations unique to their status or form of organization in addition to
those rules and regulations described herein. Each prospective unitholder should
consult his own tax advisor in deciding to acquire units.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Each partner must take into account in computing his federal income
tax liability his allocable share of our income, gains, losses, deductions and
credits, regardless of whether cash distributions are made. Distributions by a
partnership to a partner are generally not taxable unless the distribution
exceeds the partner's adjusted basis in his partnership interest.
Counsel is of the opinion that under present law, and subject to the
conditions and qualifications set forth below, for federal income tax purposes
both we and each of our subsidiary partnerships will be treated as a
partnership. Counsel's opinion as to our partnership status and that of our
subsidiary partnerships is based principally on its interpretation of the
factors set forth in Treasury Regulations under Sections 7701 and 7704 of the
Code, its interpretation of Section 7704 of the Code, and upon certain
representations made by the general partner.
The Treasury Regulations under Section 7701 pertaining to the
classification of entities such as us as partnerships or corporations for
federal income tax purposes were significantly revised effective January 1,
1997. Pursuant to these revised Treasury Regulations (known as the "check-the-
box" regulations), entities organized as limited partnerships under domestic
partnership statutes are treated as partnerships for federal income tax purposes
unless they elect to be treated as corporations. Domestic
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limited partnerships in existence on January 1, 1997, are deemed to have
elected their classification under the prior Treasury Regulations on December
31, 1996, unless they formally elect another form of classification. We have
not filed an election to be treated as a corporation under the "check-the-box"
regulations, and Counsel has rendered its opinion that we and our subsidiary
partnerships were treated as partnerships on December 31, 1996, under the
prior Treasury Regulations and continue to be so treated.
Notwithstanding the "check-the-box" regulations under Section 7701 of
the Code, Section 7704 of the Code provides that publicly traded partnerships
shall, as a general rule, be taxed as corporations despite the fact that they
are not classified as corporations under Section 7701. Section 7704 of the Code
provides an exception to this general rule (the "Natural Resource Exception")
for a publicly traded partnership if 90% or more of its gross income for every
taxable year consists of "qualifying income." "Qualifying income" includes
income and gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof) or marketing of any mineral or
natural resource. Other types of "qualifying income" include interest,
dividends, real property rents, gains from the sale of real property (including
real property held by one considered to be a "dealer" in such property) and
gains from the sale or other disposition of capital assets held for the
production of income that otherwise constitutes "qualifying income."
The Pipelines, like other pipeline systems transporting petroleum
products, include certain ancillary storage facilities which are an integral
component of the system and are necessary for efficient and competitive
operation. The general partner advised Counsel that we provide storage of
petroleum products before transportation through the Pipelines or after
transportation through the Pipelines while awaiting delivery to the our
customers. Based on these facts, and on statements made by Congressman
Rostenkowski and Senator Bentsen on the floors of the House of Representatives
and Senate, respectively, indicating that storage fees can be "qualifying
income" for purposes of qualifying for the Natural Resource Exception, Counsel
is of the opinion that any fees charged for such storage facilities are
"qualifying income."
Our subsidiary, Support Terminals Operating Partnership, L.P. ("STOP"),
earns fees from its terminaling operations for petroleum products, specialty
chemicals and other liquids. Fees relating to terminaling of liquids that are
not oil, gas, other natural resources or products derived from oil or gas will
not be qualifying gross income for purposes of Section 7704(d) of the Code. Such
fees were approximately 6% of our gross income in 1998, and we believe that such
percentage will be lower in 1999 as a result of the acquisition in February 1999
of our U.K. terminals. STOP received a ruling from the IRS in 1993 to the effect
that fees earned from its terminaling operations for petroleum or other
qualifying products will be qualifying income for purposes of Section 7704(d) of
the Code. Although that ruling was based on the facts as they existed in 1993,
we believe that current operations continue to conform with the facts disclosed
and representations made in STOP's request for the ruling.
If we fail to meet the Natural Resource Exception to the general rule
of Section 7704 of the Code (other than a failure determined by the IRS to be
inadvertent which is cured within a reasonable time after discovery), we will be
treated as if we had transferred all of our assets (subject to liabilities) to a
newly formed corporation (on the first day of the year in which we fail to meet
the Natural Resource Exception) in return for stock in such corporation, and
then distributed such stock to the unitholders in liquidation of their units.
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In rendering its opinion as to periods before 1997 that we and our
subsidiary partnerships were each treated as a partnership for federal income
tax purposes, Counsel has relied on the following factual representations that
the general partner made about us and our subsidiary partnerships:
- As to us and each of our subsidiary partnerships, the
general partner at all times while acting as general
partner had a net worth of at least $5.0 million
computed by excluding any net worth attributable to its
interest in, and accounts and notes receivable from, or
payable to, us or any limited partnership in which it is
a general partner. As to STOP, STS at all times while
acting as general partner of STOP had a net worth of at
least $5.0 million computed by excluding any net worth
attributable to its interest in and the accounts and
notes receivable from, or payable to STOP or any other
limited partnership in which it is a general partner.
- Each such partnership operated and will continue to
operate in accordance with applicable state partnership
statutes, the partnership agreements and the statements
and representations made in this Prospectus.
- Except as otherwise required by Section 704(c) of the
Code, the general partner of each partnership had at
least a 1% interest in each material item of income,
gain, loss, deduction and credit of its respective
partnership.
- For each taxable year, we derived and will continue to
derive less than 10% our aggregate gross income from
sources other than (i) the exploration, development,
production, processing, refining, transportation or
marketing of oil, gas or products thereof or (ii) other
items of "qualifying income" within the meaning of
Section 7704(d) of the Code.
- Our general partner and the general partner of each of
our subsidiary partnerships acted independently of the
limited partners of such partnerships.
Counsel has rendered its opinion as to taxable years beginning after 1996
relying on the accuracy of the second and fourth representations listed above
together with the further representation by the general partner that neither we
nor any of our subsidiary partnerships has or will elect to be treated as a
corporation pursuant to the Section 7701 "check-the-box" Treasury Regulations.
Counsel's opinion as to the classification of us and our subsidiary
partnerships is also based on the assumption that if the general partner or STOP
ceases to be a general partner, any successor general partner will make and
satisfy such representations. In this regard, if the general partner or STOP
were to withdraw as a general partner at a time when there is no successor
general partner, or if the successor general partner could not satisfy the above
representations, then the IRS might attempt to treat us or a subsidiary
partnership as an association taxable as a corporation.
If we or a subsidiary partnership were taxable as a corporation or
treated as an association taxable as a corporation in any taxable year, its
income, gains, losses, deductions and credits would be reflected only on its tax
return rather than being passed through to its partners and its net income would
be taxed at corporate rates. Losses that we realized would not flow through to
the unitholders. In addition, any distribution made to a unitholder would be
treated as either dividend income (to the extent of our current or accumulated
earnings and profits), in the absence of earnings and profits as a nontaxable
return of capital (to the extent of the unitholder's basis in his units) or
taxable capital gain (after the unitholder's basis in the
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units is reduced to zero). Accordingly, treatment of either us or a
subsidiary partnership as a corporation would probably result in a material
reduction in a unitholder's cash flow and after-tax return.
We have three subsidiaries taxable as corporations whose combined
revenues represented approximately 14.6% and 13.4% of our revenues in 1998 and
1997, respectively. These subsidiaries derive substantially all of their
revenues from non-qualifying sources of income. These subsidiaries dividend
their after tax profits to the Partnership. These dividends are treated as
"qualifying income" for purposes of Section 7704 of the Code.
If legislation is enacted which causes us to become taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes, the Minimum Quarterly Distribution and the Target
Distributions for each quarter thereafter would be reduced to an amount equal to
the product of (i) the otherwise applicable Minimum Quarterly Distribution and
Target Distributions, multiplied by (ii) 1 minus the sum of (x) the maximum
marginal federal income tax rate (expressed as a fraction) and (y) the effective
overall state and local income tax rate (expressed as a fraction) applicable to
us for the taxable year in which such quarter occurs.
The discussion below is based on the assumption that we and our
subsidiary partnerships each will be classified as a partnership for federal
income tax purposes. If that assumption proves to be erroneous, most, if not
all, of the tax consequences described below would not be applicable to
unitholders.
PARTNER STATUS
Unitholders who have become our limited partners pursuant to the
provisions of our partnership agreement will be treated as our partners for
federal income tax purposes.
The IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of such ruling, except as otherwise described herein, (i) assignees who
have executed and delivered transfer applications, and are awaiting admission as
limited partners, and (ii) unitholders whose units are held in street name or
by another nominee will be treated as partners for federal income tax purposes.
As such ruling does not extend, on its facts, to assignees of units who are
entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, the tax status of such unitholders is unclear and
Counsel expresses no opinion with respect to the status of such assignees. Such
unitholders should consult their own tax advisors with respect to their status
as partners for federal income tax purposes. A purchaser or other transferee of
units who does not execute and deliver a transfer application may not receive
certain federal income tax information or reports furnished to record holders of
units unless the units are held in a nominee or street name account and the
nominee or broker executes and delivers a transfer application with respect to
such units.
A beneficial owner of units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to such units for federal income tax purposes. These
holders should consult with their own tax advisors with respect to their status
as partners for federal income tax purposes. See "--Tax Treatment of
Operations--Treatment of Short Sales and Constructive Sales of Appreciated
Financial Positions."
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TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
Our income, gains, losses, deductions and credits will consist of our
allocable share of the income, gains, losses, deductions and credits of our
partnership subsidiaries and dividends from our corporate subsidiaries. Since we
are not a taxable entity and incur no federal income tax liability, each
unitholder will be required to take into account his allocable share of our
income, gain, loss and deductions for our taxable year ending within his taxable
year without regard to whether corresponding cash distributions are received by
unitholders. Consequently, a unitholder may be allocated income from us although
he has not received a cash distribution in respect of such income.
Our assets will include all of the capital stock of three corporations,
STI, STS and STH. These corporations will be subject to entity-level taxation
for federal and state income tax purposes. As their sole stockholder, we will
include in our income as dividends any amounts such corporations distribute to
us to the extent of such corporations' current and accumulated earnings and
profits. The general partner estimates that a significant portion of the cash
distributions to us by such corporations will be treated as taxable dividends.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Our distributions generally will not be taxable to a unitholder for
federal income tax purposes to the extent of his basis in his units immediately
before the distribution. Cash distributions in excess of such basis generally
will be considered to be gain from the sale or exchange of the units, taxable in
accordance with the rules described under "--Disposition of Units." Any
reduction in a unitholder's share of our liabilities included in his basis in
his units will be treated as a distribution of cash to such unitholder. See
"--Basis of Units." If a unitholder's percentage interest decreases because we
offer additional units, then such unitholder's share of nonrecourse liabilities
will decrease, and this will result in a corresponding deemed distribution of
cash.
A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his basis in his units, if such
distribution reduces the unitholder's share of our "unrealized receivables"
(including depreciation recapture) and/or appreciated "inventory items" (both as
defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the unitholder will be treated as having received his proportionate
share of the Section 751 Assets and having exchanged such assets with us in
return for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in the unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (i) the non-pro rata portion of such distribution over (ii) the
unitholder's basis for the share of such Section 751 Assets deemed relinquished
in the exchange.
BASIS OF UNITS
In general, a unitholder's tax basis for his units initially will be
equal to the amount paid for the units. A unitholder's tax basis will be
increased by (i) his share of our taxable income and (ii) his share of our
liabilities that are without recourse to any Partner ("nonrecourse
liabilities"), if any. A unitholder's basis in his interest will be decreased
(but not below zero) by (i) his share of our distributions, (ii) his share of
decreases in our nonrecourse liabilities, (iii) his share of our losses and
(iv) his share of our nondeductible expenditures that are not required to be
capitalized. A unitholder's share of nonrecourse liabilities will generally be
based on his share of our profits. See "--Disposition of Units--Aggregate Tax
Basis for Units."
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LIMITATIONS ON DEDUCTIBILITY OF LOSSES
The passive loss limitations contained in Section 469 of the Code
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations can only deduct losses from
passive activities (generally, activities in which the taxpayer does not
materially participate) that are not in excess of the taxpayer's income from
such passive activities or investments. The passive loss limitations are to be
applied separately with respect to each publicly traded partnership.
Consequently, losses that we generate, if any, will only be available to offset
future income that we generate and will not be available to offset income from
other passive activities or investments (including other publicly traded
partnerships) or salary or active business income. Passive losses that are
not deductible because they exceed the unitholder's share of our income may
be deducted in full when the unitholder disposes of his entire investment in
us to an unrelated party in a fully taxable transaction. The passive activity
loss rules are applied after other applicable limitations on deductions such
as the at risk rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses we may have, but may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly traded partnerships. According to an IRS announcement, Treasury
regulations will be issued that characterize net passive income from a publicly
traded partnership as investment income for purposes of deducting investment
interest.
In addition to the foregoing limitations, a unitholder may not deduct
from taxable income his share of our losses, if any, to the extent that such
losses exceed the lesser of (i) the adjusted tax basis of his units at the end
of our taxable year in which the loss occurs and (ii) the amount for which the
unitholder is considered "at risk" under Section 465 of the Code at the end of
that year. In general, a unitholder will initially be "at risk" to the extent of
the purchase price of his units. A unitholder's "at risk" amount increases or
decreases as his adjusted basis in his units increases or decreases, except that
our nonrecourse liabilities (or increases or decreases in such liabilities)
generally do not affect his "at risk" amount. Losses disallowed to a unitholder
as a result of these rules can be carried forward and will be allowable to the
unitholder to the extent that his adjusted basis or "at risk" amount (whichever
was the limiting factor) is increased in a subsequent year. The "at risk" rules
apply to an individual unitholder, a shareholder of a corporate unitholder that
is an S corporation and a corporate unitholder if 50% or more of the value of
the corporation's stock is owned directly or indirectly by five or fewer
individuals.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." A unitholder's net passive income from us will be treated as investment
income for this purpose. In addition, a unitholder's share of our portfolio
income will be treated as investment income. Investment interest expense
includes (i) interest on indebtedness properly allocable to property held for
investment, (ii) a partnership's interest expense attributed to portfolio income
and (iii) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit to the extent attributable to our portfolio income. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expense (other than interest) directly connected with the production
of investment income, but generally does not include gains attributable to the
disposition of property held for investment.
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ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
Our partnership agreement requires that a capital account be maintained
for each partner, that the capital accounts generally be maintained in
accordance with the tax accounting principles set forth in applicable Treasury
Regulations under Section 704 of the Code and that all allocations to a partner
be reflected by appropriate increases or decreases in his capital account.
Distributions upon our liquidation generally are to be made in accordance with
positive capital account balances.
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the unitholders in
accordance with their respective interests in us. If we have a net loss, items
of income, gain, loss and deduction will generally be allocated (1) first, to
the general partner and the unitholders in accordance with their respective
interests in us to the extent of their positive capital accounts; and
(2) second, to the general partner.
Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of income, gain, loss and deduction will be allocated to account
for the difference between the tax basis and fair market value of certain
property held by us ("Contributed Property"). In addition, certain items of
recapture income will be allocated to the extent possible to the partner
allocated the deduction giving rise to the treatment of such gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of income and gain will be allocated in an amount and
manner sufficient to eliminate the negative balances as quickly as possible.
Under Section 704(c) of the Code, the partners in a partnership cannot
be allocated more depreciation, gain or loss than the total amount of any such
item recognized by that partnership in a particular taxable period (the "ceiling
limitation"). To the extent the ceiling limitation is or becomes applicable, our
partnership agreement will require that certain items of income and deduction be
allocated in a way designed to effectively "cure" this problem and eliminate the
impact of the ceiling limitation. Such allocations will not have substantial
economic effect because they will not be reflected in the capital accounts of
the unitholders. Treasury Regulations under Section 704(c) of the Code permit a
partnership to make reasonable curative allocations to reduce or eliminate
disparities between the tax basis and value attributable to Contributed
Properties. Recently proposed Treasury Regulations that are apparently intended
to modify existing laws to make interests in partnerships generally fungible
may, in fact, require Section 704(c) methods that are unavailable to many
publicly traded partnerships such as us. See "--Uniformity of Units."
Because of the uncertainty created by the proposed Treasury Regulations
referred to in the preceding paragraph, Counsel is unable to opine that the
Section 704(c) allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's distributive share of
an item of income, gain, loss or deduction.
UNIFORMITY OF UNITS
There can arise a lack of uniformity in the intrinsic tax
characteristics of units sold pursuant to this offering and units subsequently
converted to units or units that we issue before or after this offering. Without
such uniformity (often referred to as "fungibility"), compliance with several
federal income tax requirements, both statutory and regulatory, could be
substantially diminished. In addition, such non-uniformity could have a negative
impact on the ability of a unitholder to dispose of his interest in us. Such
lack of uniformity can result from the application of Treasury Regulation
Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation 1.197-2(g)(3) to our
Section 743(b) adjustments or the determination that
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our Section 704(c) curative allocations to prevent the application of
"ceiling" limitations on our ability to make allocations to eliminate
disparities between the tax basis and value attributable to Contributed
Properties are unreasonable. Depreciation conventions may be adopted or items
of income and deduction may be specially allocated in a manner that is
intended to preserve the uniformity of intrinsic tax characteristics among
all units, despite the application of either Treasury Regulation Section
1.167(c)-1(a)(6) and Proposed Treasury Regulation 1.197-2(g)(3) or the
"ceiling" limitations to Contributed Properties. Any such special allocation
will be made solely for federal income tax purposes.
In January 1998, the IRS proposed new Regulations to update and clarify
certain of the Treasury Regulations that impact our ability to maintain
fungibility of units. The preamble of the proposed Regulations states that an
intended result of the Regulations is that "interests in a partnership will
generally be fungible;" however, the proposed Regulations would provide
fungibility only for interests in partnerships that use the remedial method in
calculating their Section 704(c) allocations. Unfortunately, the remedial
allocation method can be adopted only with respect to property contributed to a
partnership on and after December 21, 1993, and a significant part of our assets
were acquired by contribution to us before that date. We cannot predict whether
the final Regulations will allow us to use the remedial allocation method on all
of our assets or allow us to continue to use other allocation methods to
maintain uniformity of units. In the event the IRS disallows the use of our
Section 704(c) curative allocations or the depreciation and amortization
conventions that we use in our Section 743(b) adjustments, some or all of the
adverse consequences described in the preceding paragraph could result. See
"--Allocation of Partnership Income, Gain, Loss and Deduction" and "--Tax
Treatment of Operations--Section 754 Election."
TAX TREATMENT OF OPERATIONS
INCOME AND DEDUCTIONS IN GENERAL
We will not pay any federal income tax. Instead, each unitholder must
report on his income tax return his allocable share of our income, gains, losses
and deductions. Such items must be included on the unitholder's federal income
tax return without regard to whether we make a distribution of cash to the
unitholder. A unitholder is generally entitled to offset his allocable share of
our passive income with his allocable share of losses that we generate, if any.
See "--Tax Consequences of Unit Ownership--Limitations on Deductibility of
Losses."
A unitholder who owns units as of the first day of each month during a
quarter and who disposes of such units before the record date for a distribution
with respect to such quarter will be allocated items of our income and gain
attributable to the months in such quarter during which such units were owned
but will not be entitled to receive such cash distribution.
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership uses the calendar year as its taxable year and adopted
the accrual method of accounting for federal income tax purposes.
DEPRECIATION METHOD
The Partnership elected to use depreciation methods that resulted in
the largest depreciation deductions in our early years. We may depreciate
property that we later acquired or constructed using accelerated depreciation
methods permitted by Section 168 of the Code.
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SECTION 754 ELECTION
The Partnership and the Operating Partnerships have each made the
election permitted by Section 754 of the Code. Such election will generally
permit a purchaser of units to adjust his share of the basis in our properties
pursuant to Section 743(b) of the Code. Such elections are irrevocable without
the consent of the IRS. The Section 743(b) adjustment is attributed solely to a
purchaser of units and is not added to the common basis of our assets (the
"Common Bases"). Thus, for purposes of determining income, gains, losses and
deductions, the purchaser will have a special basis for those of our properties
that are adjusted under Section 743(b) of the Code. The amount of the adjustment
under Section 743(b) is the difference between the unitholder's adjusted federal
income tax basis in his units and the unitholder's proportionate share of the
Common Bases attributable to the units pursuant to Section 743. The aggregate
amount of the adjustment computed under Section 743(b) is then allocated among
our various assets pursuant to the rules of Section 755. The Section 743(b)
adjustment provides the purchaser of units with the equivalent of an adjusted
tax basis in his share of our properties equal to the fair market value of such
share.
Proposed Treasury Regulations under Section 743 of the Code generally
require the Section 743(b) adjustment attributable to recovery property to be
depreciated as if the total amount of such adjustment were attributable to newly
acquired recovery property placed in service when the transfer occurs. The
proposed regulations under Section 197 indicate that the Section 743(b)
adjustment attributable to an amortizable Section 197 intangible should be
similarly treated. Under Treasury Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation under
Section 167 of the Code rather than cost-recovery deductions under Section 168
is generally required to be depreciated using either the straight-line method or
the 150 percent declining-balance method. The Partnership utilizes the 150
percent declining method on such property. The depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment,
therefore, may differ from the methods and useful lives generally used to
depreciate the Common Bases in such properties. This could adversely affect the
continued uniformity of the tax characteristics of our units. The general
partner has adopted an accounting convention under Section 743(b) to preserve
the uniformity of units despite its inconsistency with certain Treasury
Regulations. See "Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an
approach, we intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized disparity between the tax basis and value
attributable to Contributed Property) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Bases of such property, despite its inconsistency
with Treasury Regulation Section 1.167(c)-1(a)(6), Proposed Treasury Regulation
1.743-1(j)(4)(i)(B)(1) and Proposed Treasury Regulation 1.197-2(g)(3). If we
determine that such position cannot reasonably be taken, we may adopt a
depreciation or amortization convention under which all purchasers acquiring
units in the same month would receive depreciation or amortization, whether
attributable to Common Bases or Section 743(b) basis, based on the same
applicable rate as if they had purchased a direct interest in our property. Such
an aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain unitholders. See
"-- Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in
accordance with the principles of Section 1060 of the Code. Based on these
principles, the IRS may seek to reallocate some or all of any Section 743(b)
adjustment that we do not allocate to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
Alternatively, it is possible that the IRS
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might seek to treat the portion of such Section 743(b) adjustment
attributable to the underwriters' discount as if it were allocable to a
non-deductible syndication cost.
A Section 754 election is advantageous when the transferee's basis in
such units is higher than such units' share of the aggregate basis in our assets
immediately before the transfer. In such case, pursuant to the election, the
transferee will take a new and higher basis in his share of our assets for
purposes of calculating, among other items, his depreciation deductions and his
share of any gain or loss on a sale of our assets. Conversely, a Section 754
election would be disadvantageous if the transferee's basis in such units is
lower than such units' share of the aggregate basis in our assets immediately
before the transfer. Thus, the amounts that a unitholder would be able to obtain
on a sale or other disposition of his units may be affected favorably or
adversely by the elections under Section 754.
The calculations and adjustments in connection with the Section 754
election depend, among other things, on the date on which a transfer occurs and
the price at which the transfer occurs. To help reduce the complexity of those
calculations and the resulting administrative cost to us, the general partner
will apply the following method in making the necessary adjustments pursuant to
the Section 754 election on transfers after the transfers pursuant to this
offering: the price paid by a transferee for his units will be deemed to be the
lowest quoted trading price for the units during the calendar month in which the
transfer was deemed to occur, without regard to the actual price paid. The
application of such convention yields a less favorable tax result, as compared
to adjustments based on actual price, to a transferee who paid more than the
"convention price" for his units. The calculations under Section 754 elections
are highly complex, and there is little legal authority concerning the mechanics
of the calculations, particularly in the context of publicly traded
partnerships. It is possible that the IRS will successfully assert that the
adjustments made by the general partner do not meet the requirements of the Code
or the applicable regulations and require a different basis adjustment to be
made.
Should the IRS require a different basis adjustment to be made, and
should, in the general partner's opinion, the expense of compliance exceed the
benefit of the elections, the general partner may seek permission from the IRS
to revoke the Section 754 election it previously made for us. Such a revocation
may increase the ratio of a unitholder's distributive share of taxable income to
cash distributions and adversely affect the amount that a unitholder will
receive from the sale of his units.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF PROPERTIES
The consequences of the acquisition, ownership and disposition of units
will depend in part on estimates by the general partner of the relative fair
market values and determinations of the initial tax basis of our assets. The
federal income tax consequences of such estimates and determinations of basis
may be subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or determinations of basis were found to be
incorrect, the character and amount of items of income, gain, loss, deduction or
credit previously reported by unitholders might change, and unitholders might be
required to amend their previously filed tax returns or to file claims for
refund. See "--Administrative Matters--Valuation Overstatements."
TREATMENT OF SHORT SALES AND CONSTRUCTIVE SALES OF APPRECIATED
FINANCIAL POSITIONS
Taxpayers are required to recognize gain (but not loss) on constructive
sales of appreciated financial positions that are entered into after June 8,
1997. These rules would apply to a constructive sale of units. Constructive
sales include short sales of the same or substantially identical property
("short-against-the-box" transactions), entering into a national principal
contract on the same or substantially identical property, and entering into a
futures or forward contract to deliver the same or substantially
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identical property. Thus, gain would be triggered if a unitholder entered
into a contract to sell his or her units for a fixed price on a future date.
If a constructive sale occurs, the taxpayer must recognize gain as if the
appreciated financial position were sold, assigned or otherwise terminated at
its fair market value on the date of the constructive sale. Adjustments for
the gain recognized on the constructive sale are made in the amount of any
gain or loss later realized by the taxpayer with respect to the position.
It would appear that a unitholder whose units are loaned to a "short
seller" to cover a short sale of units would be considered as having transferred
beneficial ownership of such units and would, thus, no longer be a partner with
respect to such units during the period of such loan. As a result, during such
period any Partnership income, gains, deductions, losses or credits with respect
to such units would appear not to be reportable by such unitholder, any cash
distributions the unitholder receives with respect to such units would be fully
taxable and all of such distributions would appear to be treated as ordinary
income. The IRS also may contend that a loan of units to a "short seller"
constitutes a taxable exchange. If such a contention were successfully made, the
lending unitholder may be required to recognize gain or loss. Unitholders
desiring to assure their status as partners should modify their brokerage
account agreements, if any, to prohibit their brokers from borrowing their
units. The IRS announced that it is actively studying issues relating to the tax
treatment of short sales of partnership interests.
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his share of any
items of Partnership income, gain or loss for purposes of the alternative
minimum tax. A portion of our depreciation deductions may be treated as an item
of tax preference for this purpose. A unitholder's alternative minimum taxable
income derived from us may be higher than his share of our net income because we
may use more accelerated methods of depreciation for purposes of computing
federal taxable income or loss. Prospective unitholders should consult with
their tax advisors as to the impact of an investment in units on their liability
for the alternative minimum tax.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN
INVESTORS
Ownership of units by employee benefit plans, other tax exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies may raise issues unique to such persons and,
as described below, may have substantial adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Under Section 512 of the Code, virtually all of the taxable
income such an organization derives from the ownership of a unit will be
unrelated business taxable income and thus will be taxable to such a unitholder.
Regulated investment companies are required to derive 90% or more of
their gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain other qualifying income. We do not
anticipate that any significant amount of our gross income will be qualifying
income.
Nonresident aliens and foreign corporations, trusts or estates that
acquire units will be considered to be engaged in business in the United States
on account of ownership of such units and as a consequence will be required to
file federal tax returns in respect of their distributive shares of Partnership
income, gain, loss, deduction or credit and pay federal income tax at regular
rates (net of credits, including withholding) on such income. Generally, a
partnership is required to pay a withholding tax on the portion of the
partnership's income that is effectively connected with the conduct of a United
States trade or business and
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that is allocable to the foreign partners, regardless of whether any actual
distributions have been made to such partners. However, under rules
applicable to publicly traded partnerships, we will withhold (currently at
the rate of 39.6%) on actual cash distributions made quarterly to foreign
unitholders. Each foreign unitholder must obtain a taxpayer identification
number from the IRS and submit that number to the our transfer agent on a
Form W-8 in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
Because a foreign corporation that owns units will be treated as
engaged in a United States trade or business, such a unitholder may be subject
to United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of our earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
unitholder is a "qualified resident." In addition, such a unitholder is
subject to special information reporting requirements under Section 6038C of
the Code.
The IRS has ruled that a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
disposition of such unit to the extent that such gain is effectively connected
with a United States trade or business of the foreign unitholder. The
Partnership does not expect that any material portion of any such gain will
avoid United States taxation. Moreover, Section 897 of the Code, which is
applied before the above-referenced IRS ruling, may increase the portion of any
gain that is recognized by a foreign unitholder that is subject to United States
income tax if that foreign unitholder has held more than 5% in value of the
units during the five-year period ending on the date of the disposition or if
the units are not regularly traded on an established securities market at the
time of the disposition.
DISPOSITION OF UNITS
GAIN OR LOSS IN GENERAL
If a unit is sold or otherwise disposed of, the determination of gain
or loss from the sale or other disposition will be based on the difference
between the amount realized and the unitholder's tax basis for such unit. See
"--Tax Consequences of Unit Ownership--Basis of Units." A unitholder's "amount
realized" will be measured by the sum of the cash or the fair market value of
other property received plus the portion of our nonrecourse liabilities
allocated to the units sold. To the extent that the amount of cash or property
received plus the allocable share of our nonrecourse liabilities exceeds the
unitholder's basis for the units disposed of, the unitholder will recognize
gain. The tax liability resulting from such gain could exceed the amount of cash
received upon the disposition of such units. See also, "Tax Treatment of
Operations--Treatment of Short Sales and Constructive Sales of Appreciated
Financial Positions."
The IRS has ruled that a partner must maintain an aggregate adjusted
tax basis for his interests in a single partnership (consisting of all interests
acquired in separate transactions). On a sale of a portion of such aggregate
interest, such partner would be required to allocate his aggregate tax basis
between the interest sold and the interest retained by some equitable
apportionment method. If applicable, the aggregation of tax basis of a
unitholder effectively prohibits a unitholder from choosing among units with
varying amounts of inherent gain or loss to control the timing of the
recognition of such inherent gain or loss as would be possible in a stock
transaction. Thus, the IRS ruling may result in an acceleration of gain or
deferral of loss on a sale of a portion of a unitholder's units. It is not clear
whether such ruling applies to publicly traded partnerships, such as us, the
interests in which are evidenced by separate registered certificates, providing
a verifiable means of identifying each separate interest and tracing the
purchase price
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of such interest. A unitholder considering the purchase of additional units
or a sale of units purchased at differing prices should consult his tax
advisor as to the possible consequences of that IRS ruling.
Gain or loss recognized by a unitholder (other that a "dealer" in
units) on the sale or exchange of a unit held more than one year will generally
be taxable as capital gain or loss. To the extent that a portion of the gain
upon the sale of a unit is attributable to a unitholder's share of our
"inventory items" and "unrealized receivables," as those terms are defined in
Section 751 of the Code, such portion will be treated as ordinary income.
Unrealized receivables include (i) to the extent not previously includable in
our income, any rights to pay for services rendered or to be rendered and
(ii) amounts that would be subject to depreciation recapture as ordinary income
if we had sold our assets at their fair market value at the time of the
transfer of a unit. Ordinary income attributable to inventory items and
unrealized receivables may exceed net taxable gain realized upon the sale of
the units and may be recognized even if there is a net taxable loss realized
on the sale of the units. Thus, a unitholder may recognize both ordinary
income and a capital loss upon disposition of the units.
TRANSFEROR/TRANSFEREE ALLOCATIONS
In general, our taxable income and losses are determined annually and
are prorated on a monthly basis and subsequently apportioned among the
unitholders in proportion to the number of units owned by them as of the opening
of the NYSE on the first business day of the month. However, gain or loss
realized on a sale or other disposition of Partnership assets other than in the
ordinary course of business is allocated among the unitholders of record as of
the opening of the NYSE on the first business day of the month in which such
gain or loss is recognized. As a result of this monthly allocation, a unitholder
transferring units in the open market may be allocated income, gain, loss,
deduction and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be permitted
by existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between the
transferors and transferees of units. If the IRS treats transfers of units as
occurring throughout each month and a monthly convention is not allowed by the
regulations (or only applies to transfers of less than all of a partner's
interest), the IRS may contend that our taxable income or losses must be
reallocated among the unitholders. If any such contention were sustained,
certain unitholders' respective tax liabilities would be adjusted to the
possible detriment of other unitholders. The general partner is authorized to
revise our method of allocation between transferors and transferees (as well as
among Partners whose interests otherwise vary during a taxable period) to comply
with any future regulations.
A unitholder who owns units at any time during a quarter and who
disposes of such units prior to the record date set for a cash distribution with
respect to such quarter will be allocated items of our income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive that
cash distribution.
CONSTRUCTIVE TERMINATION OR DISSOLUTION OF PARTNERSHIP
Under Section 708(b)(1)(B) of the Code, a partnership will be
considered to have been terminated if within a twelve-month period there is a
sale or exchange of 50% or more of the interests in partnership capital and
profits. A termination results in a closing of the partnership's taxable year
for all partners, and the partnership's assets are treated as having been
transferred by us to a new partnership in exchange for an interest in the new
partnership followed by a deemed distribution of interests in the new
partnership to the partners of the terminated partnership in liquidation of such
partnership. If a partnership is terminated by sale or exchange of interests in
us, a Section 754 election (including a Section 754 election made by the
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terminated partnership) that is in effect for the taxable year of the terminated
partnership in which the sale occurs, applies with respect to the incoming
partner. Moreover, a Partner with a special basis adjustment in property held by
a partnership that terminates under section 708(b)(1)(B) will continue to have
the same special basis adjustment with respect to property deemed contributed by
the terminated partnership to the new partnership regardless of whether the new
partnership makes a Section 754 election. In the case of a unitholder reporting
on a fiscal year other than a calendar year, the closing of our tax year may
result in more than twelve months' of our taxable income or loss being
includable in his taxable income for the year of termination.
We may not have the ability to determine when a constructive
termination occurs as a result of transfers of units because the units will
be freely transferable under "street name" ownership. Thus, we may be subject
to penalty for failure to file a tax return and may fail to make certain
elections in a timely manner, including the Section 754 election.
ADMINISTRATIVE MATTERS
ENTITY-LEVEL COLLECTIONS
If we are required under applicable law or elect to pay any federal,
state or local income tax on behalf of any unitholder or the general partner or
any former unitholder, the general partner is authorized to pay such taxes from
Partnership funds. Such payments, if made, will be treated as current
distributions to the unitholders for tax purposes, including the calculation of
capital accounts. However, such payments, if made on behalf of all unitholders,
will not be treated as current distributions of Available Cash for purposes of
determining whether (i) distributed cash constitutes Cash from Operations or
Cash from Interim Capital Transactions or (ii) the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution or Third
Target Distribution has been paid. If such payments are made on behalf of some
but not all unitholders, the payments will be treated as distributions of
Available Cash for all purposes including the determination of whether
(i) distributed cash constitutes Cash from Operations or Cash from Interim
Capital Transactions and (ii) the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution or Third Target Distribution has been
distributed on units held by unitholders on whose behalf such payments are made.
The general partner is authorized (but not required) to amend our partnership
agreement in the manner necessary to maintain uniformity of intrinsic tax
characteristics of units and to adjust subsequent distributions so that, after
giving effect to such deemed distributions, the priority and characterization of
distributions otherwise applicable under our partnership agreement are
maintained as nearly as practicable. If we are permitted (but not required)
under applicable law to pay any such taxes, the general partner is authorized
(but not required) to pay such taxes from our funds and to amend our partnership
agreement and adjust subsequent distributions as described above. Our
partnership agreement further provides that the general partner is authorized
(but not required) to attempt to collect tax deficiencies from persons who were
unitholders at the time such deficiencies arose and any amounts so collected
will become Partnership assets.
The amount we pay would be calculated based on the maximum rate of
income tax for individuals or corporations, whichever is higher. Thus, such a
payment by us could give rise to an overpayment of tax on behalf of an
individual unitholder. In such event, the individual unitholder could file a
claim for credit or refund with respect to the overpayment.
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PARTNERSHIP INCOME TAX INFORMATION RETURNS AND PARTNERSHIP AUDIT
PROCEDURES
We will use all reasonable efforts to furnish unitholders with tax
information within 75 days after the close of each taxable year. Specifically,
we intend to furnish to each unitholder a Schedule K-1 which sets forth his
allocable share of our income, gains, losses, deductions and credits, if any. In
preparing such information, the general partner will necessarily use various
accounting and reporting conventions to determine each unitholder's allocable
share of income, gains, losses, deductions and credits. We cannot assure you
that any such conventions will yield a result that conforms to the requirements
of the Code, regulations thereunder or administrative pronouncements of the IRS.
The general partner cannot assure prospective unitholders that the IRS will not
contend that such accounting and reporting conventions are impermissible.
Contesting any such allegations could result in substantial expense to us. In
addition, if the IRS were to prevail, unitholders may incur substantial
liabilities for taxes and interest.
Our federal income tax information returns may be audited by the IRS.
The Code contains partnership audit procedures that significantly simplify the
manner in which IRS audit adjustments of partnership items are resolved.
Adjustments (if any) resulting from such an audit may require each unitholder to
file an amended tax return, and possibly may result in an audit of the
unitholder's return. Any audit of a unitholder's return could result in
adjustments to items not related to our returns as well as those related to our
returns.
Under Sections 6221 through 6233 of the Code, partnerships generally
are treated as separate entities for purposes of federal tax audits, judicial
review of administrative adjustments by the IRS and tax settlement proceedings.
The tax treatment of partnership items of income, gain, loss, deduction and
credit and the imposition of certain penalties and other additions to
unitholders' tax liability are determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with the partners.
The Code provides for one partner to be designated as the "Tax Matters Partner"
for these purposes. Our partnership agreement appoints the general partner as
our Tax Matters Partner.
The Tax Matters Partner is entitled to make certain elections for us
and our unitholders and can extend the statute of limitations for assessment of
tax deficiencies against unitholders with respect to Partnership items. In
connection with adjustments to Partnership tax returns proposed by the IRS, the
Tax Matters Partner may bind any unitholder with less than a 1% profits interest
in us to a settlement with the IRS unless the unitholder elects, by filing a
statement with the IRS, not to give such authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review (to which all the unitholders
are bound) of a final Partnership administrative adjustment and, if the Tax
Matters Partner fails to seek judicial review, such review may be sought by any
unitholder having at least a 1% profit interest in us and by unitholders having,
in the aggregate, at least a 5% profits interest. Only one judicial proceeding
will go forward, however, and each unitholder with an interest in the outcome
may participate.
The unitholders will generally be required to treat Partnership items
on their federal income tax returns in a manner consistent with the treatment of
the items on our information return. In general, that consistency requirement is
waived if the unitholder files a statement with the IRS identifying the
inconsistency. Failure to satisfy the consistency requirement, if not waived,
will result in an adjustment to conform the treatment of the item by the
unitholder to the treatment on our return. Even if the consistency requirement
is waived, adjustments to the unitholder's tax liability with respect to
Partnership items may result from an audit of our or the unitholder's tax
return. Intentional or negligent disregard of the consistency requirement may
subject a unitholder to substantial penalties.
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INFORMATION RETURN FILING REQUIREMENTS
A unitholder who sells or exchanges units is required by Section 6050K
of the Code to notify us in writing of such sale or exchange, and we are
required to notify the IRS of such transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker. In
addition, a transferor and a transferee of a unit will be required to furnish to
the IRS the amount of the consideration received for such unit that is allocated
to our goodwill or going concern value. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
NOMINEE REPORTING
Under Section 6031(c) of the Code, persons who hold an interest in us
as a nominee for another person must report certain information to us. Temporary
Treasury Regulations provide that such information should include (i) the name,
address and taxpayer identification number of the beneficial owners and the
nominee; (ii) whether the beneficial owner is (a) a person that is not a United
States person, (b) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing, or (c) a tax-
exempt entity; (iii) the amount and description of units held, acquired or
transferred for the beneficial owners; and (iv) certain information including
the dates of acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are a United States person and certain
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed for failure to report such information to us. The nominee is required to
supply the beneficial owner of the units with the information furnished to us.
REGISTRATION AS A TAX SHELTER
Section 6111 of the Code requires that "tax shelters" be registered
with the Secretary of the Treasury. The temporary Treasury Regulations
interpreting the tax shelter registration provisions of the Code are extremely
broad. Although it is arguable that we will not be subject to the registration
requirement, the general partner, as our principal organizer, has registered us
as a tax shelter with the IRS in the absence of assurance that we will not be
subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. The
Partnership has received tax shelter registration number 93230000163 from the
IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN
THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS. The Partnership must furnish the registration number to the
unitholders, and a unitholder who sells or otherwise transfers a unit in a
subsequent transaction must furnish the registration number to the transferee.
The penalty for failure of the transferor of a unit to furnish such registration
number to the transferee is $100 for each such failure. The unitholder must
disclose our tax shelter registration number on Form 8271 to be attached to the
tax return on which any deduction, loss, credit or other benefit generated by us
is claimed or income from us is included. A unitholder who fails to disclose the
tax shelter registration number on his return, without reasonable cause for such
failure, will be subject to a $250 penalty for each such failure. Any penalties
discussed herein are not deductible for federal income tax purposes.
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STATE AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, unitholders may be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Partners reside or in which we or our
subsidiary partnerships do business or own property. Although an analysis of
those various taxes cannot be presented here, each prospective unitholder should
consider the potential impact of such taxes on his investment in units. The
Operating Partnerships own property and do business in Alabama, Arizona,
California, Colorado, Florida, Georgia, Indiana, Illinois, Iowa, Kansas,
Louisiana, Maryland, Minnesota, Nebraska, New Mexico, North Dakota, Oklahoma,
Oregon, South Dakota, Texas, Washington, Wisconsin, Wyoming and Virginia. A
unitholder will likely be required to file state income tax returns in such
states (other than Florida, South Dakota, Texas and Wyoming) and may be subject
to penalties for failure to comply with such requirements. In addition, an
obligation to file tax returns or to pay taxes may arise in other states.
Moreover, in certain states, tax losses may not produce a tax benefit in the
year incurred (if, for example, the Partner has no income from sources within
that state) and also may not be available to offset income in subsequent taxable
years. The general partner is authorized (but not required) to cause us to pay
any state or local income tax on behalf of all the Partners even though such
payment may be greater than the amount that would have been required to be paid
if such payment had been made directly by a particular Partner or assignee;
provided, however, that such tax payment shall be in the same amount with
respect to each unit and, in the general partner's sole discretion, payment
of such tax on behalf of all the Partners or assignees is in the best
interests of the Partners or the assignees as a whole. Any amount so paid on
behalf of all Partners or assignees shall be deducted as a cash operating
expenditure of us in calculating "Cash from Operations."
It is the responsibility of each prospective unitholder to investigate
the legal and tax consequences, under the laws of pertinent states or
localities, of his investment in units. Accordingly, each prospective unitholder
should consult, and must depend on, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to
file all state and local, as well as federal, tax returns that may be required
of such unitholder.
40
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to certain
additional considerations because the investments of such plans are subject to
the fiduciary responsibility and prohibited transaction provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, Simplified Employee Pension
Plans, and tax deferred annuities or Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) (i) the fact that such investment could result in recognition of UBTI by
such plan even if there is no net income, (ii) the effect of an imposition of
income taxes on the potential investment return for an otherwise tax-exempt
investor and (iii) whether, as a result of the investment, the plan will be
required to file an exempt organization business income tax return with the IRS.
See "Federal Income Tax Considerations--Tax Treatment of Operations--Tax-Exempt
Entities, Regulated Investment Companies and Foreign Investors." The person with
investment discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that the general partner also would be a
fiduciary of such plan and we would be subject to the regulatory restrictions of
ERISA, including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
Section 406 of ERISA and Section 4975 of the Code (which also applies
to Individual Retirement Accounts which are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
The Department of Labor issued final regulations on November 13, 1986, that
provide guidance with respect to whether the assets of an entity in which
employee benefit plans acquire equity interests would be deemed "plan assets"
under certain circumstances. Pursuant to these regulations, an entity's assets
would not be considered to be "plan assets" if, among other things, (i) the
equity interests acquired by employee benefit plans are publicly offered
securities, I.E., the equity interests are widely held by 100 or more investors
independent of the issuer and each other, freely transferable and registered
pursuant to certain provisions of the federal securities laws, (ii) the entity
is an "operating company," I.E., it is primarily engaged in the production or
sale of a product or service other than the investment of capital either
directly or through a majority-owned subsidiary or subsidiaries, or (iii) there
is no significant investment by benefit plan investors, which is defined to mean
that less than 25% of the value of each class of equity interest (disregarding
certain interests held by the general partner, its affiliates and certain other
persons) is held by employee benefit plans (as defined in Section 3(3) of
ERISA), whether or not they are subject to the provisions of Title I of ERISA,
plans described in Section 4975(e)(1) of the Code, and any entities whose
underlying assets include plan assets by reason of a plan's investments in the
entity. The Partnership's assets would not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (i) above, and also may satisfy requirements (ii) and (iii)
above.
41
<PAGE>
PLAN OF DISTRIBUTION
The Partnership may sell the units to one or more underwriters for
public offering and sale or may sell the units to investors directly or through
agents. Any such underwriter or agent involved in the offer and sale of the
units will be named in the applicable prospectus supplement.
Underwriters may offer and sell the units at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Partnership also may, from time to
time, authorize underwriters acting as our agents to offer and sell the units on
the terms and conditions as are set forth in the applicable prospectus
supplement. In connection with the sale of units, underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the units for
whom they may act as agent. Underwriters may sell the units to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
Any underwriting compensation that we pay to underwriters or agents in
connection with the offering of the units, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of the units may be deemed to be underwriters,
and any discounts and commissions received by them and any profit realized by
them on resale of the units may be deemed to be underwriting discounts and
commissions, under the Securities Act. Underwriters, dealers and agents may be
entitled, under agreements entered into with us, to indemnification against the
contribution toward certain civil liabilities, including liabilities under the
Securities Act.
If so indicated in a prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase the units to which such prospectus supplement relates, providing for
payment and delivery on a future date specified in such prospectus supplement.
There may be limitations on the minimum amount that may be purchased by any such
institutional investor or on the portion of the aggregate number of the units
that may be sold pursuant to such arrangements. Institutional investors to which
such offers may be made, when authorized, include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and such other institutions that we may approve. The
obligations of any such purchasers pursuant to such delayed delivery and payment
arrangements will not be subject to any conditions except that (i) the purchase
by an institution of the units shall not at the time of delivery be prohibited
under the laws of any jurisdiction in the United States to which such
institution is subject and (ii) if the units are being sold to underwriters, the
Partnership shall have sold to such underwriters the total number of such units
less the number thereof covered by such arrangements. Underwriters will not have
any responsibility with respect to the validity of such arrangements or the
performance of us or such institutional investors thereunder.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us in the ordinary course
of business.
42
<PAGE>
LEGAL
Certain legal matters in connection with the units will be passed upon
by Fulbright & Jaworski L.L.P., Houston, Texas, as our counsel. Any underwriter
will be advised about other issues relating to the offering by their own legal
counsel.
EXPERTS
The consolidated financial statements of Kaneb Pipe Line Partners, L.P.
and subsidiaries as of December 31, 1998 and for the year then ended, and the
consolidated balance sheet of Kaneb Pipe Line Company and subsidiaries as of
December 31, 1998, have been incorporated by reference and included herein,
respectively, in reliance upon the reports of KPMG LLP, independent certified
public accountants, incorporated by reference and included herein, and upon the
authority of said firm as experts in auditing and accounting.
The consolidated balance sheet of Kaneb Pipe Line Partners, L.P. as of
December 31, 1997 and the consolidated income statement and statement of cash
flow for the two years then ended incorporated in this Prospectus by reference
to the Annual Report on Form 10-K for the year ended December 31, 1998 have been
so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KANEB PIPE LINE COMPANY
Independent Auditors' Report..........................................F-2
Consolidated Balance Sheet............................................F-3
Notes to Consolidated Balance Sheet...................................F-4
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kaneb Pipe Line Company:
We have audited the accompanying consolidated balance sheet of Kaneb Pipe Line
Company and subsidiaries (the "Company") as of December 31, 1998. This
consolidated balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of the Company as of
December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 25, 1999
F-2
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets:
Cash and cash equivalents ....................................... $ 1,870,000
Accounts receivable ............................................. 21,698,000
Inventories ..................................................... 3,880,000
Prepaid expenses ................................................ 4,463,000
---------------
Total current assets .......................... 31,911,000
---------------
Receivable from affiliates, net .......................................... 7,539,000
Property and equipment ................................................... 398,306,000
Less accumulated depreciation ............................................ 108,631,000
---------------
Net property and equipment ...................................... 289,675,000
Excess of cost over fair value of net assets of acquired business ........ 1,472,000
---------------
$ 330,597,000
---------------
---------------
Liabilities and Stockholder's Equity
Current liabilities:
Short-term debt................................................. $ 10,000,000
Accounts payable................................................ 9,145,000
Accrued expenses................................................ 10,969,000
Accrued distributions payable................................... 7,452,000
Deferred terminaling fees....................................... 3,526,000
---------------
Total current liabilities..................... 41,092,000
---------------
Long-term debt........................................................... 155,852,000
Other liabilities........................................................ 3,558,000
Deferred income taxes.................................................... 7,992,000
Interest of outside non-controlling partners in KPP...................... 79,247,000
Stockholder's equity:
Common stock, $1 par value, authorized and issued 10,000
shares..................................................... 10,000
Additional paid-in capital...................................... 29,573,000
Notes receivable from affiliate................................. (14,500,000)
Retained earnings............................................... 27,773,000
---------------
Total stockholder's equity............................. 42,856,000
---------------
$ 330,597,000
---------------
---------------
</TABLE>
See accompanying notes to consolidated balance sheet.
F-3
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
The following significant accounting policies are followed by Kaneb
Pipe Line Company and subsidiaries (the "Company") in the preparation
of the consolidated balance sheet. The Company is a wholly-owned
subsidiary of Kaneb Services, Inc. (the "Parent Company").
(a) PRINCIPLES OF CONSOLIDATION
The consolidated balance sheet includes the accounts of the
Company and its subsidiaries and Kaneb Pipe Line Partners,
L.P. (the "Partnership" or "KPP"). The Company controls the
operations of KPP through its two percent general partner
interest and a 28% limited partner interest. All significant
intercompany transactions and balances are eliminated in
consolidation.
The Partnership owns and operates a refined petroleum products
pipeline business and a petroleum products and specialty
liquids storage and terminaling business. The Partnership's
business of terminaling petroleum products and specialty
liquids is conducted under the name ST Services ("ST"). The
Partnership operates the refined petroleum products pipeline
business through Kaneb Pipe Line Operating Partnership, L.P.
("KPOP"), a limited partnership in which the Partnership holds
a 99% interest as limited partner. The Company's products
marketing business, acquired in March 1998 (Note 3), provides
wholesale motor fuel marketing services in the Great Lakes and
Rocky Mountain regions, as well as California.
(b) CASH AND EQUIVALENTS
The Company's policy is to invest cash in highly liquid
investments with original maturities of three months or less.
Such investments are valued at cost, which approximates
market, and are classified as cash equivalents.
(c) INVENTORIES
Inventories consist of petroleum products purchased for resale
in the products marketing business and are valued at the lower
of cost or market. Cost is determined using the weighted
average cost method.
(d) PROPERTY AND EQUIPMENT
Property and equipment are carried at original cost. Additions
of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor
replacements that do not materially increase values or extend
useful lives are expensed. Depreciation of property and
equipment is provide on a straight-line basis at rates based
upon expected useful lives of various classes of assets, as
disclosed in Note 5. The rates used for pipeline and storage
facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically
evaluated using undiscounted future cash flows as the basis
for determining if impairment exists under the provisions of
Statement of Financial
(Continued)
F-4
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). To the extent impairment is
indicated to exist, an impairment loss will be recognized
under SFAS 121 based on fair value.
(e) REVENUE RECOGNITION
Revenues from the products marketing business are recognized
when product is sold and title and risk pass to the customer.
Pipeline transportation revenues are recognized upon receipt
of the products into the pipeline system. Storage fees are
billed one month in advance and are reported as deferred
income. Revenue is recognized in the month services are
provided.
(f) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF ACQUIRED
BUSINESS
The excess of the cost of the products marketing business over
the fair value of net assets acquired is being amortized on a
straight-line basis over a period of 40 years. Accumulated
amortization was $28,000 at December 31, 1998.
The Company periodically evaluates the propriety of the
carrying amount of the excess of cost over fair value of net
assets of acquired business, as well as the amortization
period, to determine whether current events or circumstances
warrant adjustments to the carrying value and/or revised
estimates of useful lives. The Company believes that no such
impairment has occurred and that no reduction in estimated
useful lives is warranted.
(g) ENVIRONMENTAL MATTERS
Environmental expenditures that relate to current operations
are expensed or capitalized as appropriate. Expenditures that
relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated.
Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Company's commitment
to a formal plan of action.
(h) KPP CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its
Available Cash, as defined in the Partnership Agreement, to
holders of limited partnership units and the Company.
Available Cash consists generally of all the cash receipts of
the Partnership plus the beginning cash balance less all of
its cash disbursement and reserves. The assets, other than
Available Cash, cannot be distributed without a majority vote
of the non-affiliate unitholders.
(i) ESTIMATES
The preparation of the Company's balance sheet in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts
(Continued)
F-5
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the balance sheet.
Actual results could differ from those estimates.
(2) SALE OF KPP UNITS
In December 1997, the Company, through a wholly-owned subsidiary, sold
500,000 Units in KPP to a wholly-owned subsidiary of the Parent Company in
exchange for two 8.75% notes receivable aggregating $14.5 million. One
note, for $9.5 million, is due in 2003. The other note, for $5.0 million,
is due upon demand. These notes are classified as a reduction to
stockholder's equity.
(3) ASSET ACQUISITIONS
On March 25, 1998, the Company acquired a products marketing business for
$1.5 million, plus the cost of products inventory ($1.8 million). The
products marketing business provides wholesale motor fuel marketing
services throughout the Great Lakes and Rocky Mountain regions, as well as
California. The asset purchase agreement includes a provision for an
earn-out based on annual operating results of the acquired business for a
five-year period ending in March 2003. No amounts were payable under the
earn-out provision in 1998. The acquisition was accounted for using the
purchase method of accounting.
On October 30, 1998, KPP, through a wholly-owned subsidiary, entered into
acquisition and joint venture agreements with Northville Industries Corp.
("Northville") to acquire and manage the former Northville terminal located
in Linden, New Jersey. Under the agreements, KPP acquired a 50% interest in
the newly-formed ST Linden Terminal, LLC for $20.5 million plus transaction
costs. The investment was financed by KPP's existing revolving credit
facility and a revolving promissory note. The investment is being accounted
for by the equity method of accounting, with the excess cost over net book
value of the equity investment being amortized over the life of the
underlying assets. During 1998, KPP acquired other terminals and pipelines
for aggregate consideration of $23.9 million.
On February 1, 1999, KPP, through two wholly-owned subsidiaries, acquired
six terminals in the United Kingdom from GATX Terminal Limited for
(pound)22.6 million (approximately $37.4 million) plus transaction costs
and the assumption of certain liabilities. The acquisition was financed
with term loans from a bank. The acquisition will be accounted for,
beginning in February 1999, using the purchase method of accounting.
(4) INCOME TAXES
The Company participates with the Parent Company in filing a consolidated
Federal income tax return except for certain ST operations which are
conducted through separate taxable wholly-owned corporate subsidiaries. The
income taxes for the Company are reported as if it had filed on a separate
return basis. Amounts payable or receivable for income taxes are included
in receivable from affiliates.
Deferred income tax assets and liabilities result from temporary
differences between the tax basis of assets and liabilities, and their
reported amounts in the financial statements that will result in
differences between income for tax purposes and income for financial
statement purposes in future years.
(Continued)
F-6
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
The Company has recorded a deferred tax asset of approximately $25.2
million at December 31, 1998, relating to domestic net operating loss
carryforwards attributable to certain wholly-owned subsidiaries. The
deferred tax asset is reduced by a valuation allowance of $22.7 million.
The Company has recorded a deferred tax liability of $6.9 million as of
December 31, 1998, primarily relating to differences between the financial
and tax basis in the Partnership's assets. The Company has also recorded a
deferred tax liability of $3.6 million at December 31, 1998, which is
associated with certain subsidiaries not included in the Parent Company's
consolidated Federal income tax return.
(5) PROPERTY AND EQUIPMENT
The cost of property and equipment as of December 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE (YEARS)
----------------
<S> <C> <C>
Land - $ 19,744,000
Buildings 35 7,626,000
Furniture and fixtures 16 2,763,000
Transportation equipment 6 4,131,000
Machinery and equipment 20 - 40 31,226,000
Pipeline and terminaling equipment 20 - 40 305,745,000
Investment in ST Linden Terminal, LLC 25 21,005,000
Construction work-in-progress - 6,066,000
-------------
Total property and equipment 398,306,000
Accumulated depreciation (108,631,000)
-------------
Net property and equipment $ 289,675,000
-------------
-------------
</TABLE>
In December 1998, the Partnership exercised its option to purchase pipeline
equipment previously held under a capital lease for $5.1 million in cash.
(6) DEBT
In October 1998, KPP, through a wholly-owned subsidiary, entered into a
Promissory Note Agreement with a bank that, as amended on February 1, 1999,
provides for a $15 million revolving credit availability through June 30,
1999. The Promissory Note Agreement, which is without recourse to the
Parent Company, bears interest at variable interest rates and has a
commitment fee of 0.35% per annum of the unused available balance. At
December 31, 1998, $10.0 million was drawn under the Promissory Note
Agreement and included in current liabilities.
(Continued)
F-7
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
Long-term debt as of December 31, 1998 is summarized as follows:
<TABLE>
<S> <C>
First mortgage notes due 2001 and 2002 $ 60,000,000
First mortgage notes due 2001 through 2016 68,000,000
Revolving credit facility due January 2001 25,000,000
Revolving credit facility due March 2001 2,852,000
------------
Total long-term debt 155,852,000
Less current portion --
------------
Long-term debt $155,852,000
------------
------------
</TABLE>
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $15 million
revolving credit facility through March 2001. The credit facility bears
interest at variable rates, has a commitment fee of 0.25% per annum on
unutilized amounts and contains certain financial and operational
covenants. The credit facility is secured by essentially all of the assets
of the products marketing business. At December 31, 1998, $2.9 million was
drawn on the facility.
In 1994, KPP, through a wholly-owned subsidiary, entered into a restated
credit agreement with a group of banks that, as subsequently amended,
provides a $25 million revolving credit facility through January 31, 2001.
The credit facility bears interest at variable interest rates and has a
commitment fee of 0.15% per annum of the unused credit facility. At
December 31, 1998, $25 million was drawn under the credit facility.
Also in 1994, another wholly-owned subsidiary of KPP issued $33 million of
first mortgage notes ("Notes") to a group of insurance companies. The Notes
bear interest at the rate of 8.05% per annum and are due on December 22,
2001. In 1995, KPP issued $27 million of additional Notes due February 24,
2002 which bear interest at the rate of 8.37% per annum. The Notes and the
credit facility are secured by a mortgage on the East Pipeline and contain
certain financial and operational covenants.
In June 1996, KPP issued $68.0 million of new first mortgage notes bearing
interest at rates ranging from 7.08% to 7.98%. $35 million of these notes
is due June 2001, $8.0 million is due June 2003, $10.0 million is due June
2006 and $15.0 million is due June 2016. The loan is secured, pari passu
with the existing Notes and credit facility, by a mortgage on the East
Pipeline.
(Continued)
F-8
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
(7) COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under
operating leases as of December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1999 $ 1,359,000
2000 1,345,000
2001 1,265,000
2002 1,082,000
2003 1,088,000
Thereafter 1,023,000
-----------
$ 7,162,000
-----------
-----------
</TABLE>
The operations of KPP are subject to Federal, state and local laws and
regulations relating to protection of the environment. Although KPP
believes its operations are in general compliance with applicable
environmental regulations, risks of additional costs and liabilities are
inherent in pipeline and terminal operations, and there can be no assurance
significant costs and liabilities will not be incurred by KPP. Moreover, it
is possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operation of
KPP, could result in substantial costs and liabilities to KPP. KPP has
recorded an undiscounted reserve for environmental claims in the amount of
$5.3 million in December 31, 1998, including $4.5 million related to
acquisitions of pipelines and terminals. During 1998, KPP incurred $0.6
million of costs related to such acquisition reserves and reduced the
liability accordingly.
In December 1995, the Partnership acquired the liquids terminaling assets
of Steuart Petroleum Company and certain of its affiliates. The asset
purchase agreement includes a provision for an earn-out payment based upon
revenues of one of the terminals exceeding a specified amount for a
seven-year period ending in December 2002. No amount was payable under the
earn-out provision in 1998.
Certain subsidiaries of KPP are defendants in a lawsuit filled in a Texas
state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
whom the Partnership acquired ST in 1993, involving certain issues
allegedly arising out of the Partnership's acquisition of ST. Grace alleges
that the defendants assumed responsibility for certain environmental
damages to a former ST facility located in Massachusetts that occurred at a
time prior to the Partnership's acquisition of ST. The defendants have also
received and responded to inquiries from two governmental authorities in
connection with the same allegation by Grace. The defendants' consistent
position is that it did not acquire the facility in question as part of the
1993 ST transaction and, consequently, did not assume any responsibility
for the environmental damage. The case is set for trial in June 1999.
(Continued)
F-9
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies, including the Grace litigation described
above, will not have a materially adverse effect on the financial position
of the Company.
(8) RELATED PARTY TRANSACTIONS
The Parent Company is entitled to reimbursement of all direct and indirect
costs related to the business activities of the Company. These costs, which
totaled $5.6 million for the year ended December 31, 1998, include
compensation and benefits for officers and employees of the Company and the
Parent Company, insurance premiums, general and administrative costs, tax
information and reporting costs, legal and audit fees. In addition, the
Company paid $.2 million during 1998 for an allocable portion of the Parent
Company's overhead expenses.
The Company participates in the Parent Company's defined contribution
benefit plan which covers substantially all domestic employees and provides
for varying levels of employer matching. Included in the costs above are
Company contributions to this plan of $.7 million for 1998.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amount due to the relatively
short period to maturity of these instruments. The estimated fair value of
all debt as of December 31, 1998 was approximately $174 million as compared
to the carrying value of $166 million. These fair values were estimated
using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The estimates presented above are not necessarily indicative of the amounts
that would be realized in a current market exchange.
The Company markets and sells its services to a broad base of customers and
performs ongoing credit evaluations of its customers. The Company does not
believe it has a significant concentration of credit risk at December 31,
1998. No customer constituted 10 percent or more of revenue in 1998.
F-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee........... $ 45,541
New York Stock Exchange listing fees.......................... *
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 partnership agreements of the Registrant and its subsidiary
partnerships provide that they will, to the fullest extent permitted by law,
indemnify and advance expenses to the general partner, any Departing Partner (as
defined therein), any person who is or was an affiliate of the general partner
or any Departing Partner, any person who is or was an officer, director,
employee, partner, agent or trustee of the general partner or any Departing
Partner or any affiliate of the general partner or any Departing Partner, or any
person who is or was serving at the request of the general partner or any
affiliate of the general partner or any Departing Partner or any affiliate of
any Departing Partner as an officer, director, employee, partner, agent or
trustee of another person ("Indemnitees") from and against any and all losses,
claims, damages, liabilities (joint or several), expenses (including legal fees
and expenses), judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
the general partner, Departing Partner or an affiliate of either, an officer,
director, employee, partner, agent or trustee of the general partner, any
Departing Partner or affiliate of either or a person serving at the request of
the Registrant in another entity in a similar capacity, provided that in each
case the Indemnitee acted in good faith and in a manner which such Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Registrant and such action did not constitute gross negligence or willful
misconduct on the part of the Indemnitee, and, with respect to any criminal
proceeding, the Indemnitee had no reasonable cause to believe its conduct was
unlawful. This indemnification would under certain circumstances include
indemnification for liabilities under the Securities Act. In addition, each
Indemnitee would automatically be entitled to the advancement of expenses in
connection with the foregoing indemnification. Any indemnification under
these provisions will be only out of the assets of the Registrant. The
Registrant is authorized to purchase insurance against liabilities asserted
against and expenses incurred by such persons in connection with the
Registrant's activities, whether or not the Registrant would have the power
to indemnify such person against such liabilities under the provisions
described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
**1.1 -- Form of Underwriting Agreement.
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.
33-60040) and incorporated by reference
herein).
II-1
<PAGE>
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.
**8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating
to tax matters.
*23.1 -- Consent of KPMG LLP.
*23.2 -- Consent of PricewaterhouseCoopers LLP.
**23.3 -- Consent of Counsel (the consent of Fulbright &
Jaworski L.L.P. to the use of their opinion filed as
Exhibit 5.1 to the Registration Statement and the
reference to their firm in this Registration Statement
is contained in such opinion).
**23.4 -- Consent of Counsel (the consent of Fulbright &
Jaworski L.L.P. to the use of their opinion filed as
Exhibit 8.1 to the Registration Statement and the
reference to their firm in this Registration Statement
is contained in such opinion).
*24.1 -- Powers of Attorney (included on page II-5 of this
Registration Statement as originally filed).
- ----------
* Filed herewith
** To be filed by amendment.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
(10) 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 (10)(a)i and (10)(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.
(11) 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
II-2
<PAGE>
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.
(12) 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-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richardson, State of Texas, on the 12th day of April,
1999.
KANEB PIPE LINE PARTNERS, L.P., by Kaneb Pipe Line
Company, as General Partner
By: EDWARD D. DOHERTY
Edward D. Doherty, Chairman
II-4
<PAGE>
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) April 12, 1999
Controller
JIMMY L. HARRISON (Principal Financial and Ac- April 12, 1999
Jimmy L. Harrison counting Officer)
SANGWOO AHN
Sangwoo Ahn Director April 12, 1999
JOHN R. BARNES
John R. Barnes Director April 12, 1999
MURRAY R. BILES
Murray R. Biles Director April 12, 1999
FRANK M. BURKE, JR.
Frank M. Burke, Jr. Director April 12, 1999
CHARLES R. COX
Charles R. Cox Director April 12, 1999
II-5
<PAGE>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
- ------------------------------------------------------------------------------------
HANS KESSLER
Hans Kessler Director April 12, 1999
JAMES R. WHATLEY
James R. Whatley Director April 12, 1999
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kaneb Pipe Line Company:
We consent to the use of our reports included herein and incorporated
by reference herein and to the reference to our firm under the heading "Experts"
in the Prospectus.
KPMG LLP
Dallas, Texas
April 9, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement on Form S-3 of our report dated February 19, 1998
relating to the financial statements, which appears in Kaneb Pipe Line
Partners, L.P.'s Annual Report on Form 10-K for the year ended December 31,
1998. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
April 9, 1999
