<PAGE>
Filed pursuant to Rule 424(b)(5)
Registration No. 333-76067
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 25, 1999)
2,250,000 UNITS
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$30 3/4 PER UNIT
------------------
We are selling 2,250,000 units with this prospectus supplement and the
accompanying prospectus. The underwriters named in this prospectus supplement
may purchase up to 337,500 additional units from us under certain
circumstances.
Our units are listed on the New York Stock Exchange under the symbol
"KPP." The last reported sale price of our units on the New York Stock
Exchange on July 22, 1999, was $30 3/4 per unit.
------------------
YOU SHOULD CAREFULLY READ AND CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 4 OF THE ACCOMPANYING PROSPECTUS BEFORE BUYING UNITS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
------------------
<TABLE>
<CAPTION>
PER UNIT TOTAL
------------- --------------
<S> <C> <C>
Public Offering Price $ 30.750 $ 69,187,500
Underwriting Discount $ 1.384 $ 3,114,000
Proceeds to Kaneb Partners (before expenses) $ 29.366 $ 66,073,500
</TABLE>
The underwriters are offering the units subject to various conditions.
The underwriters expect to deliver the units to purchasers on or about July 28,
1999.
------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
July 22, 1999
<PAGE>
[MAPS SHOWING LOCATION OF PIPELINES AND TERMINALS]
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
Prospectus Supplement Summary.....................................................S-4
Use of Proceeds...................................................................S-8
Capitalization....................................................................S-8
Selected Historical Financial and Operating Data..................................S-9
Business.........................................................................S-11
Management ......................................................................S-17
Underwriting.....................................................................S-18
Validity of Units................................................................S-19
PROSPECTUS
About Kaneb Partners ...............................................................3
About this Prospectus...............................................................3
Risk Factors........................................................................4
Where You Can Find More Information................................................10
Forward-looking Statements and Associated Risks....................................11
Kaneb Partners ....................................................................12
Use of Proceeds....................................................................13
Cash Distributions.................................................................13
Conflicts of Interest and Fiduciary Responsibilities...............................21
Federal Income Tax Considerations..................................................24
State and Other Tax Considerations.................................................38
Investment in Kaneb Partners by Employee Benefit Plans.............................39
Plan of Distribution...............................................................41
Legal..............................................................................42
Experts............................................................................42
Index to Financial Statements.....................................................F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS WE HAVE
INCORPORATED BY REFERENCE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS,
AS WELL AS THE INFORMATION WE PREVIOUSLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION THAT IS INCORPORATED BY REFERENCE HEREIN, IS ACCURATE AS
OF ANY DATE OTHER THAN ITS RESPECTIVE DATE.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere in this
prospectus supplement and the accompanying prospectus. It is not complete and
may not contain all of the information that you should consider before
investing in our units. You should read the entire prospectus supplement and
the accompanying prospectus carefully, including the "Risk Factors" section,
before making an investment decision.
As used in this prospectus supplement and the accompanying
prospectus, "we," "us," "our" and "Kaneb Partners" mean Kaneb Pipe Line
Partners, L.P. and include our subsidiary operating companies. Our units
represent limited partner interests in Kaneb Partners.
KANEB PARTNERS
WHO WE ARE
We are a publicly held Delaware limited partnership engaged in the
pipeline transportation of refined petroleum products and the terminaling of
petroleum products and specialty liquids. Our revenues, cash flows from
operations and EBITDA increased to $125.8 million, $58.8 million and $67.4
million, respectively, in 1998 from $78.7 million, $37.9 million and $40.2
million, respectively, in 1994. The growth in revenues, cash flows from
operations and EBITDA over this period was attributable primarily to
acquisitions, particularly in our terminaling business. Our terminaling
business contributed approximately 50% of our revenues and 43% of our EBITDA
in 1998, compared with 41% and 37%, respectively, in 1994. Kaneb Pipe Line
Company, a wholly owned subsidiary of Kaneb Services, Inc., serves as our
general partner.
Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska,
South Dakota, North Dakota, Wyoming and Colorado. We own a 2,125-mile
pipeline system that extends through Kansas, Iowa, Nebraska, South Dakota and
North Dakota and a 550-mile pipeline system that extends through Wyoming,
South Dakota and Colorado. Our east pipeline serves the agricultural markets
of the midwestern United States and transports a broad range of refined
petroleum products and propane. Our west pipeline serves Eastern Wyoming,
Western South Dakota, and the urban areas of Colorado and transports mainly
gasoline. These products are transported from refineries connected to our
pipelines, directly or through other pipelines, to agricultural users,
railroads and wholesale customers. During 1998, we shipped approximately 17
million barrel miles of refined petroleum products on our pipeline systems.
Substantially all of our pipeline operations constitute common carrier
operations that are subject to federal and state tariff regulation. In May
1998, the Federal Energy Regulatory Commission authorized us to adopt
market-based rates in approximately one-half of our markets.
We are also the third largest independent liquids terminaling
company in the United States. We conduct our terminaling business under the
name ST Services. ST Services and its predecessors have been in the
terminaling business for over 40 years. Our total worldwide storage capacity
is approximately 27.7 million barrels. Since 1994, we have acquired 14
terminal facilities with an aggregate storage capacity of 15.7 million
barrels. In the United States, we operate 33 facilities in 19 states and the
District of Columbia. Our three largest wholly owned terminal facilities in
the U.S. are in Piney Point, Maryland; Jacksonville, Florida; and Texas City,
Texas. We also own a 50% interest in and manage a 3.9 million barrel
petroleum terminal in Linden, New Jersey. In February 1999, we acquired six
terminals in the United Kingdom with an aggregate storage capacity of
approximately 5.5 million barrels for approximately U.S. $37.4 million. Three
of the U.K. terminals are in England, two are in Scotland and one is in
Northern Ireland. Our U.S. and U.K. terminals provide storage on a fee basis
for a variety of products from petroleum products to specialty chemicals to
edible liquids.
S-4
<PAGE>
Our strategy is to continue our growth through:
- selective strategic acquisitions of pipelines and terminaling
and storage facilities that complement our existing asset base
and distribution capabilities or provide entry into new markets,
- improving the performance of our asset base, and
- expanding into related businesses.
Consistent with this strategy, we have recently completed several
acquisitions that we expect will contribute significantly to our future
operating results. In 1998, our pipeline group made two acquisitions adding
7% to our existing pipeline capacity:
- On December 30, 1998, we acquired a 175-mile pipeline from Amoco
Oil Company for approximately $8 million. This line originates
at Council Bluffs, Iowa and connects with our east pipeline at
Sioux Falls, South Dakota. The acquisition also included a truck
loading terminal in Sioux Falls. We believe that, by connecting
our existing system to the Sioux Falls terminal and opening up
that terminal for third-party storage, we can make significant
inroads into this Midwestern market.
- On December 31, 1998, we purchased a 203-mile pipeline that
extends from Geneva, Nebraska to North Platte, Nebraska for
approximately $5.1 million. This pipeline, which we had
previously operated under lease since 1981, serves our
connection to the Union Pacific Rail Yard at North Platte and
our own terminal at North Platte. The purchase will save us
approximately $2.5 million per year in lease payments.
Since the beginning of 1998, we have completed six terminaling
acquisitions that increased our total storage capacity by 29%, including the
following:
- On March 12, 1998 we acquired a 752,000 barrel petroleum
terminal in the Chicago area for approximately $5.7 million.
This acquisition gave us our first entry into the Chicago area
market.
- On September 1, 1998 we acquired for approximately $7 million a
unique terminal in Vancouver, Washington that has three distinct
operations: liquid chemical storage, dry bulk fertilizer storage
and a bottling and packaging operation. The purchase of this
terminal allowed us to add two new lines of business - dry bulk
storage and packaging. In the dry bulk operation, fertilizer
unloaded from ships is transported to our warehouses by Port of
Vancouver personnel. We then ship product by rail or truck to
agricultural cooperatives or other large customers. The bottling
operation consists of mixing and packaging antifreeze/coolant
for brand and private label customers. We believe that we can
introduce similar operations at our other terminals in the
future.
- On October 30, 1998, we acquired a 50% interest in, and became
manager of, a 3.9 million barrel petroleum terminal at Linden,
New Jersey for approximately $20.5 million. Northville
Industries Corporation continues to own the remaining 50%
interest and remains a major storage customer. This acquisition
gives us a presence in the New York Harbor market. This terminal
is the newest, and we believe the most advanced, terminal in New
York Harbor. It is currently 100% utilized, and we expect it to
be a significant source of earnings in the future.
- We expanded our terminaling operations internationally when, on
February 1, 1999, we acquired six liquids terminals in the
United Kingdom for approximately U.S. $37.4 million. Four of
these terminals are primarily petroleum terminals, one is a
large chemicals and specialty products terminal, and the sixth
is a molten sulfur terminal. These terminals have a total
storage capacity of approximately 5.5 million barrels, which
makes us the largest independent terminal operator in the United
Kingdom.
S-5
<PAGE>
We continually evaluate new acquisition opportunities. We seek to
acquire pipeline assets that are contiguous with our existing pipeline system
and acquisitions of terminal and storage facilities that are adjacent to our
existing terminals or pipelines. We can normally absorb these acquisitions
with little or no incremental operating expense. Since 1991, we have made 11
acquisitions of this type. We also pursue acquisitions that allow us to
expand our operations into new markets or related businesses.
------------------
Our address is 2435 North Central Expressway, Richardson, Texas
75080, and our telephone number is (972) 699-4055. You may contact us through
our Investor Relations Department by phone at (972) 699-4057 or by facsimile
at (972) 699-4025.
S-6
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise
the option we granted to them to buy additional units in the offering.
<TABLE>
<CAPTION>
<S> <C>
SECURITIES OFFERED.............................. 2,250,000 units (2,587,500 units if the underwriters' over-
allotment option is exercised in full).
UNITS TO BE OUTSTANDING AFTER THE
OFFERING................................... 18,310,000 units (18,647,500 units if the underwriters' over-
allotment option is exercised in full), representing a 98%
limited partner interest.
USE OF PROCEEDS................................. We will receive net proceeds from the offering of approximately
$65.7 million. We intend to use $58.3 million to repay
$33.3 million of bank indebtedness due in 1999 and $25
million outstanding under a bank revolving credit facility.
We intend to use the remaining $7.4 million of net proceeds
to reduce our indebtedness under our first mortgage notes,
to purchase additional terminals, pipelines or related operations
or for general corporate purposes.
NEW YORK STOCK EXCHANGE SYMBOL.................. KPP
</TABLE>
RISK FACTORS
See "Business-Litigation" beginning on page S-16 of this prospectus
supplement for a discussion of a pending claim against two of our
subsidiaries for environmental investigation and remediation expenses. See
also "Risk Factors" beginning on page 4 of the accompanying prospectus for a
more detailed discussion of additional factors that you should consider
before purchasing units.
TAX CONSIDERATIONS
The tax consequences to you of an investment in units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the purchase,
ownership and disposition of units, see "Tax Considerations" in the
accompanying prospectus. You may wish to consult your own tax advisor about
the federal, state and local tax consequences peculiar to your circumstances.
We estimate that if you purchase a unit in this offering and hold
the unit through the record date for the distribution with respect to the
final calendar quarter of 2001 (assuming quarterly distributions on the units
with respect to that period are equal to the current quarterly distribution
rate of $0.70 per unit), you will be allocated an amount of federal taxable
income for that period that is less than or equal to approximately 19% of the
amount of cash distributed to you with respect to that period.
This estimate is based upon many assumptions regarding our business
and operations, including assumptions as to tariffs, capital expenditures,
cash flows and anticipated cash distributions. This estimate and the
assumptions are subject to, among other things, numerous business, economic,
regulatory and competitive uncertainties beyond our control and to certain
tax reporting positions that we have adopted. The Internal Revenue Service
could disagree with our tax reporting positions, including estimates of the
relative fair market values of our assets and the validity of curative
allocations. Accordingly, we cannot assure you that the estimate will be
correct. The actual percentage of distributions that will constitute taxable
income could be higher or lower, and any differences could be material.
S-7
<PAGE>
USE OF PROCEEDS
Of the net proceeds from the offering of approximately
$65.7 million ($75.6 million if the underwriters exercise their
over-allotment option in full), we intend to use $58.3 million to repay $33.3
million of bank indebtedness due in 1999 and $25 million outstanding under a
bank revolving credit facility. After such payments, we will have $25 million
of credit available for future borrowings under that facility. We intend to
use the remaining $7.4 million of net proceeds ($17.3 million if the
underwriters exercise their over-allotment option in full) to reduce our
indebtedness under our first mortgage notes, to purchase additional
terminals, pipelines or related operations or for general corporate purposes.
As of March 31, 1999, approximately $84.2 million was outstanding
under our bank credit agreements, with a weighted average annual interest
rate of 6%, and approximately $128 million was outstanding under our first
mortgage notes, with a weighted average annual interest rate of 7.8%. At that
date, $95 million was outstanding under our first mortgage notes due in 2001
and 2002 and $33 million was outstanding under our first mortgage notes due
2003 through 2016. We used the proceeds of our bank credit agreements and the
proceeds from the sale of our first mortgage notes for pipeline and terminal
acquisitions.
CAPITALIZATION
The following table sets forth our consolidated capitalization at
March 31, 1999, and as adjusted to give effect to the offering and the
application of the net proceeds (assuming the underwriters' over-allotment
option is not exercised) to repay our indebtedness under our bank credit
agreements. For a discussion of the application of these proceeds, see "Use
of Proceeds." This table should be read in conjunction with our consolidated
financial statements and the notes to those financial statements that are
incorporated by reference in this prospectus supplement and the accompanying
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------
ACTUAL AS ADJUSTED
------------------ -----------------
(in thousands)
<S> <C> <C>
Short-term borrowings:
Bank term loans.......................................... $ 18,300 $ --
Bank revolving loan...................................... 15,000 --
------------------ -----------------
Total short-term borrowings.......................... 33,300 --
------------------ -----------------
Long-term debt, less current portion:
First Mortgage Notes due 2001 and 2002........................ 95,000 95,000
First Mortgage Notes due 2003 through 2016.................... 33,000 33,000
Bank revolving credit facility........................... 25,000 --
Bank term loan........................................... 25,920 25,920
------------------ -----------------
Total long-term debt, less current portion........... 178,920 153,920
------------------ -----------------
Partners' capital............................................. 104,821 169,868
------------------ -----------------
Total capitalization..................................... $ 317,041 $ 323,788
------------------ -----------------
------------------ -----------------
</TABLE>
S-8
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table presents, for the periods and at the dates
indicated, selected historical financial and operating data for us and our
subsidiaries. The data in the table for each of the years ended December 31,
1994 through 1998 is derived from our historical financial statements and
should be read together with our audited financial statements. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this prospectus supplement and the
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ ----------------------
1994 1995(a) 1996 1997 1998 1998 1999
---------- --------- ---------- --------- ---------- --------- ---------
(dollars in thousands except per unit amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................$ 78,745 $ 96,928 $ 117,554 $ 121,156 $ 125,812 $ 28,070 $ 36,845
---------- --------- ---------- --------- ---------- --------- ---------
Operating costs .............. 33,586 40,617 49,925 50,183 52,200 11,688 16,183
Depreciation
and amortization............ 7,257 8,261 10,981 11,711 12,148 2,947 3,615
General and administrative.... 4,924 5,472 5,259 5,793 6,261 1,535 1,903
---------- --------- ---------- --------- ---------- --------- ---------
Total costs and expenses .. 45,767 54,350 66,165 67,687 70,609 16,170 21,701
---------- --------- ---------- --------- ---------- --------- ---------
Operating income ............. 32,978 42,578 51,389 53,469 55,203 11,900 15,144
Interest and other income,
net......................... 1,299 894 776 562 626 48 244
Interest expense ............. (3,706) (6,437) (11,033) (11,332) (11,304) (2,707) (3,509)
Minority interest in net
income...................... (295) (360) (403) (420) (441) (91) (115)
---------- --------- ---------- --------- ---------- --------- ---------
Income before income taxes ... 30,276 36,675 40,729 42,279 44,084 9,150 11,764
Income tax provision (b) ..... (818) (627) (822) (718) (418) (190) (408)
---------- --------- ---------- --------- ---------- --------- ---------
Net income ...................$ 29,458 $ 36,048 $ 39,907 $ 41,561 $ 43,666 $ 8,960 $ 11,356
---------- --------- ---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------- --------- ---------
Allocation of net income per: (c)(d)
Unit ...................... $ 2.67 $ 0.55 $ 0.68
---------- --------- ---------
---------- --------- ---------
Senior Preference Unit ....$ 2.20 $ 2.20 $ 2.46 $ 2.55
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Preference Unit ...........$ 2.20 $ 2.20 $ 2.46 $ 2.55
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Common Unit................$ 0.29 $ 2.31 $ 2.46 $ 2.55
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Cash Distributions declared per: (d)
Unit ...................... $ 2.60 $ 0.65 $ 0.70
---------- --------- ---------
---------- --------- ---------
Senior Preference Unit ....$ 2.20 $ 2.20 $ 2.30 $ 2.50
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Preference Unit ...........$ 2.20 $ 2.20 $ 2.30 $ 2.50
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Common Unit................$ 0.55 $ 2.00 $ 2.30 $ 2.50
---------- --------- ---------- ---------
---------- --------- ---------- ---------
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net ..$ 145,646 $ 246,471 $ 249,733 $ 247,132 $ 289,631 $ 251,956 $ 328,847
Total assets ................. 163,105 267,787 274,765 269,032 308,432 271,996 358,233
Long-term debt ............... 43,265 136,489 139,453 132,118 153,000 133,000 178,920
Partners' capital............. 99,754 100,748 103,340 104,196 105,388 102,610 104,821
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ ----------------------
1994 1995(a) 1996 1997 1998 1998 1999
---------- --------- ---------- --------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA (e).................... $ 40,235 $ 50,839 $ 62,370 $ 65,180 $ 67,351 $ 14,847 $ 18,759
Net cash provided by operating
activities................. 37,853 44,471 49,180 54,794 58,758 12,765 16,212
Net cash used in investing
activities.................. 19,264 104,367 16,212 10,328 54,932 8,818 39,660
Net cash provided by (used in)
financing activities....... (29,505) 62,058 (31,079) (46,286) (9,353) (6,382) 32,492
Capital expenditures included
in investing activities.... 7,147 8,946 7,075 10,641 9,401 2,350 2,255
Operating income--terminals... 11,822 12,831 19,168 21,642 21,573 5,126 7,788
Operating income--pipelines... 21,156 29,747 32,221 31,827 33,630 6,774 7,356
PIPELINE OPERATING DATA:
Volume (thousand barrels) .... 54,561 74,965 73,839 69,984 77,965 16,737 18,582
Barrel miles (in millions)
(f).......................... 14,460 16,594 16,735 16,144 17,007 3,674 3,967
TERMINALS OPERATING DATA
(THOUSAND BARRELS):
Storage capacity at period
end (g)...................... 7,712 16,757 17,153 17,153 22,249 16,768 27,711
Average utilization .......... 6,122 6,730 11,932 12,282 15,184 12,388 21,928
</TABLE>
- -----------------
(a) Includes the operations of our west pipeline since its acquisition in
February 1995 and the operations of Steuart Petroleum Company since
its acquisition in December 1995.
(b) Certain operations are conducted in taxable entities.
(c) Net income is allocated to the limited partnership units in an amount
equal to the cash distributions declared for each reporting period
and any remaining income or loss is allocated to any class of units
that did not receive the same amount of cash distributions per unit
(if any). If the same cash distributions per unit are declared for
all classes of units, income or loss is allocated pro rata based on
the aggregate amount of distributions declared.
(d) Prior to the third quarter of 1998, we had three classes of
partnership interests designated as Senior Preference Units,
Preference Units and Common Units, respectively. Pursuant to our
partnership agreement, on August 14, 1998, each such class of units
was converted into a single class, designated as "units", effective
July 1, 1998. Allocations of net income and cash distributions
declared were equal for all classes of units in 1998.
(e) EBITDA is defined for this purpose as operating income before
depreciation and amortization. EBITDA is used as a supplemental
financial measurement in the evaluation of our business and should
not be considered as an alternative to net income, as an indicator of
our operating performance or as an alternative to cash flows from
operating activities as a measure of liquidity. EBITDA may not be a
comparable measurement among different companies. EBITDA is presented
here to provide additional information about us.
(f) A barrel mile is the movement of one barrel of refined petroleum
product one mile.
(g) Amounts for 1998 and 1999 include our 3.9 million barrel terminal in
Linden, New Jersey. We manage this terminal and own a 50% interest in
it.
S-10
<PAGE>
BUSINESS
OVERVIEW
We are a publicly held Delaware limited partnership engaged in the
pipeline transportation of refined petroleum products and the terminaling of
petroleum products and specialty liquids. Our revenues, cash flows from
operations and EBITDA increased to $125.8 million, $58.8 million and $67.4
million, respectively, in 1998 from $78.7 million, $37.9 million and $40.2
million, respectively, in 1994. The growth in revenues, cash flows from
operations and EBITDA over this period was attributable primarily to
acquisitions, particularly in our terminaling business. Our terminaling business
contributed approximately 50% of our revenues and 43% of our EBITDA in 1998,
compared with 41% and 37%, respectively, in 1994. Kaneb Pipe Line Company, a
wholly owned subsidiary of Kaneb Services, Inc., serves as our general partner.
Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska, South
Dakota, North Dakota, Wyoming and Colorado. We own a 2,125-mile pipeline system
that extends through Kansas, Iowa, Nebraska, South Dakota and North Dakota and a
550-mile pipeline system that extends through Wyoming, South Dakota and
Colorado. Our east pipeline serves the agricultural markets of the midwestern
United States and transports a broad range of refined petroleum products and
propane. Our west pipeline serves Eastern Wyoming, Western South Dakota, and the
urban areas of Colorado and transports mainly gasoline. These products are
transported from refineries connected to our pipelines, directly or through
other pipelines, to agricultural users, railroads and wholesale customers.
During 1998, we shipped approximately 17 million barrel miles of refined
petroleum products on our pipeline systems. Substantially all of our pipeline
operations constitute common carrier operations that are subject to federal and
state tariff regulation. In May 1998, the Federal Energy Regulatory Commission
authorized us to adopt market-based rates in approximately one-half of our
markets.
We are also the third largest independent liquids terminaling company
in the United States. We conduct our terminaling business under the name ST
Services. ST Services and its predecessors have been in the terminaling business
for over 40 years. Our total worldwide storage capacity is approximately 27.7
million barrels. Since 1994, we have acquired 14 terminal facilities with an
aggregate storage capacity of 15.7 million barrels. In the United States, we
operate 33 facilities in 19 states and the District of Columbia. Our three
largest wholly owned terminal facilities in the U.S. are in Piney Point,
Maryland; Jacksonville, Florida; and Texas City, Texas. We also own a 50%
interest in and manage a 3.9 million barrel petroleum terminal in Linden, New
Jersey. In February 1999, we acquired six terminals in the United Kingdom with
an aggregate storage capacity of approximately 5.5 million barrels for
approximately U.S. $37.4 million. Three of the U.K. terminals are in England,
two are in Scotland and one is in Northern Ireland. Our U.S. and U.K. terminals
provide storage on a fee basis for a variety of products from petroleum products
to specialty chemicals to edible liquids.
PRODUCTS PIPELINE BUSINESS
INTRODUCTION
Our pipeline business consists primarily of the transportation of
refined petroleum products in Kansas, Nebraska, Iowa, South Dakota, North
Dakota, Colorado and Wyoming. We own and operate the two common carrier
pipelines described below.
Except for our three single-use pipelines and certain ethanol
facilities, all of our pipeline operations constitute common carrier operations
and are subject to Federal tariff regulation. In May 1998, the FERC authorized
us to adopt market-based rates in approximately one-half of our markets. Our
east pipeline and our west pipeline are also subject to regulation by
governmental agencies such as the Department of Transportation and the
Environmental Protection Agency. Additionally, our west pipeline is subject to
state regulation of certain intrastate rates in Colorado and Wyoming, and our
east pipeline is subject to state regulation in Kansas. We charge tariffs for
transportation to shippers based upon transportation from the origination point
on our pipeline to the final point of delivery on our system. Pipelines are
generally the lowest cost method for intermediate and long-haul overland
transportation of refined petroleum products.
S-11
<PAGE>
Our pipeline operations also include 20 truck loading terminals through
which refined petroleum products are delivered to storage tanks and then loaded
into petroleum transport trucks. Shippers generally store refined petroleum
products for less than one week. Ancillary services, including injection of
shipper-furnished and generic additives, are available at each terminal. We
consider storage of product at terminals pending delivery to be an integral part
of the product delivery service of our pipelines. We include charges for
terminaling and storage of product at a pipeline's terminals in our tariffs for
transportation.
PRODUCTS TRANSPORTED
Our pipeline revenues are based upon volumes and distances of product
shipped. The following table reflects the total volume and barrel miles of
refined petroleum products shipped and total operating revenues earned by our
pipelines for each period shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1994 1995(a) 1996 1997 1998 1998 1999
--------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Volume(b)............. 54,561 74,965 73,839 69,984 77,965 16,737 18,582
Barrel miles(c)....... 14,460 16,594 16,735 16,144 17,007 3,674 3,967
Revenues(d)........... $ 46,117 $ 60,192 $ 63,441 $ 61,320 $ 63,421 $ 14,101 $ 15,164
</TABLE>
- ----------
(a) Amounts for 1995 and subsequent periods include amounts attributable to
our west pipeline, which we acquired in February 1995.
(b) Volumes are expressed in thousands of barrels of refined petroleum
product.
(c) Barrel miles are shown in millions. A barrel mile is the movement of
one barrel of refined petroleum product one mile.
(d) Revenues are expressed in thousands of dollars.
The following table sets forth volumes by type of product transported
by our pipelines during each period shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------
1994 1995(a) 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ -----
(thousands of barrels)
<S> <C> <C> <C> <C> <C> <C> <C>
Gasoline.............. 23,958 37,348 36,063 32,237 37,983 7,399 8,242
Diesel and fuel oil... 26,355 33,411 32,934 33,541 36,237 8,049 9,146
Propane............... 4,204 4,146 4,842 4,206 3,745 1,289 1,194
Other................. 44 60 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total........ 54,561 74,965 73,839 69,984 77,965 16,737 18,582
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(a) Amounts for 1995 and subsequent periods include amounts attributable to
our west pipeline, which we acquired in February 1995.
EAST PIPELINE
Our east pipeline transports refined petroleum products, including
propane, received from refineries in southeast Kansas and other connecting
pipelines to its terminals along the system and to receiving pipeline
connections in Kansas. Five connecting pipelines can deliver propane for
shipment through our east pipeline from gas processing plants in Texas, New
Mexico, Oklahoma and Kansas.
S-12
<PAGE>
Construction of our east pipeline commenced in the 1950's with a line
from southern Kansas to Geneva, Nebraska. During the 1960's, we extended our
east pipeline north to its present terminus at Jamestown, North Dakota. In the
1980's, the lines from Geneva, Nebraska to North Platte, Nebraska and the 16"
line from McPherson, Kansas to Geneva, Nebraska were built and we acquired a 6"
pipeline from Champlin Oil Company, part of which originally ran south from
Geneva, Nebraska through Windom, Kansas terminating in Hutchinson, Kansas. In
1997, we completed construction of a new 6" pipeline from Conway, Kansas to
Windom, Kansas, which is approximately 22 miles north of Hutchinson, that allows
the Hutchinson terminal to be supplied directly from McPherson, a significantly
shorter route than that previously used. As a result of this pipeline becoming
operational, a 158-mile segment of the former Champlin line was shut down,
including a terminal at Superior, Nebraska. The other end of the line runs
northeast approximately 175 miles, crossing the pipeline at Osceola, Nebraska,
continuing through a terminal at Columbus, Nebraska, and later interconnecting
with our Yankton/Milford line to terminate at Rock Rapids, Iowa. In December
1998, we acquired a 175-mile pipeline from Amoco Oil Company that runs from
Council Bluffs, Iowa to Sioux Falls, South Dakota and the terminal at Sioux
Falls. On December 31, 1998 we purchased the 203-mile North Platte line for
approximately $5.1 million at the end of a lease. In January 1999, a connection
was completed to service the Sioux Falls terminal through the main east
pipeline.
Our east pipeline system also consists of 16 product terminals in
Kansas, Nebraska, Iowa, South Dakota and North Dakota with total storage
capacity of approximately 3.5 million barrels and an additional 23 product tanks
with total storage capacity of approximately 922,000 barrels at our tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump stations in Kansas and 38 booster pump stations throughout the system.
Additionally, the system maintains various offices and warehouse facilities, and
an extensive quality control laboratory.
Most of the refined petroleum products delivered through our east
pipeline are ultimately used as fuel for railroads or in agricultural
operations, including fuel for farm equipment, irrigation systems, trucks used
for transporting crops and crop drying facilities. Demand for refined petroleum
products for agricultural use, and the relative mix of products required, is
affected by weather conditions in the markets served by our east pipeline.
Government agricultural policies and crop prices also affect the agricultural
sector. Although periods of drought suppress agricultural demand for some
refined petroleum products, particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.
The mix of refined petroleum products delivered varies seasonally, with
gasoline demand peaking in early summer, diesel fuel demand peaking in late
summer and propane demand higher in the fall. In addition, weather conditions in
the areas served by our east pipeline affect both the demand for and the mix of
the refined petroleum products delivered through our east pipeline, although
historically any overall impact on the total volumes shipped has been
short-term. Tariffs charged to shippers for transportation of products do not
vary according to the type of product delivered.
WEST PIPELINE
We acquired our west pipeline in February 1995 from Wyco Pipe Line
Company for approximately $27.1 million. This acquisition increased our pipeline
business in South Dakota and expanded it into Wyoming and Colorado. Our west
pipeline system includes approximately 550 miles of pipeline in Wyoming,
Colorado and South Dakota, four truck loading terminals and numerous pump
stations situated along the system. The system's four product terminals have a
total storage capacity of more than 1.7 million barrels.
Our west pipeline originates at Casper, Wyoming and travels east to the
Strouds station, where it serves as a connecting point with Sinclair's Little
America refinery and the Seminole pipeline that transports product from
Billings, Montana-area refineries. From Strouds, the west pipeline continues
eastward through its 8" line to Douglas, Wyoming, where a 6" pipeline branches
off to serve our Rapid City, South Dakota terminal approximately 190 miles away.
The Rapid City terminal has a three bay, bottom-loading truck rack and storage
tank capacity of 256,000 barrels. The 6" pipeline also receives product from
Wyoming Refining's pipeline at a connection near the Wyoming/South Dakota
border, approximately 30 miles south of Wyoming Refining's Newcastle, Wyoming
refinery. From Douglas, our 8" pipeline continues southward through a delivery
point at the
S-13
<PAGE>
Burlington Northern junction to the terminal at Cheyenne, Wyoming. The Cheyenne
terminal has a two bay, bottom-loading truck rack, storage tank capacity of
345,000 barrels and serves as a receiving point for products from the Frontier
Oil & Refining Company refinery at Cheyenne, as well as a product delivery point
to the Cheyenne pipeline. From the Cheyenne terminal, the 8" pipeline extends
south into Colorado to the DuPont terminal in the Denver metropolitan area. The
DuPont terminal is the largest terminal on our west pipeline system, with a six
bay, bottom-loading truck rack and storage capacity of 692,000 barrels. The 8"
pipeline continues to the Commerce City station, where it can receive from and
transfer product to the Ultramar Diamond Shamrock and Conoco refineries and the
Phillips Petroleum terminal. From Commerce City, a 6" line continues south 90
miles where the system terminates at the Fountain, Colorado terminal serving the
Colorado Springs area. The Fountain terminal has a five bay, bottom-loading
truck rack and storage tank capacity of 366,000 barrels.
Our west pipeline serves Denver and other eastern Colorado markets and
supplies jet fuel to Ellsworth Air Force Base at Rapid City, South Dakota. Our
west pipeline has a relatively small number of shippers, who, with a few
exceptions, are also shippers on our east pipeline system.
While there is some agricultural and military jet fuel demand for the
refined petroleum products delivered through our west pipeline, most of the
demand is centered in the Denver and Colorado Springs area. Because demand on
our west pipeline is significantly weighted toward urban and suburban areas, the
product mix on our west pipeline includes a substantially higher percentage of
gasoline than the product mix on our east pipeline.
OTHER SYSTEMS
We also own three single-use pipelines, in Umatilla, Oregon; Rawlins,
Wyoming; and Pasco, Washington, each of which supplies diesel fuel to a railroad
fueling facility. The Oregon and Washington lines are fully automated, though
the Wyoming line requires minimal start-up assistance, which the railroad
provides. For the year ended December 31, 1998, these three systems transported
a combined total of 3.2 million barrels of diesel fuel, representing an
aggregate of $1.3 million in revenues.
TERMINALING BUSINESS
INTRODUCTION
Our terminaling business, ST Services, is one of the largest
independent petroleum products and specialty liquids terminaling companies in
the United States. For the year ended December 31, 1998, our terminaling
business accounted for approximately 50% of our revenues and 43% of our EBITDA.
As of December 31, 1998, ST Services operated 33 facilities in 18 states and the
District of Columbia, with a total storage capacity of approximately 22.2
million barrels. In February 1999, ST Services made its first international
acquisition, with the purchase of six terminals in the United Kingdom, having a
total capacity of approximately 5.5 million barrels. ST Services and its
predecessors have been in the terminaling business for more than 40 years and
handle a variety of liquids from petroleum products to specialty chemicals to
edible liquids.
ST Services' terminal facilities provide storage on a fee basis for
petroleum products, specialty chemicals and other liquids. ST Services' four
largest domestic terminal facilities are in Piney Point, Maryland; Linden, New
Jersey (50% owned joint venture); Jacksonville, Florida; and Texas City, Texas.
The following table outlines ST Services' terminal locations, capacities, tanks
and primary products handled:
S-14
<PAGE>
<TABLE>
<CAPTION>
STORAGE NO. OF
FACILITY CAPACITY TANKS PRIMARY PRODUCTS HANDLED
- ------------------------------------------ ------------ -------- -------------------------------------------------
(thousand
barrels)
<S> <C> <C> <C>
PRIMARY U.S. TERMINALS:
Piney Point, MD........................ 5,403 28 Petroleum
Linden, NJ(a).......................... 3,884 22 Petroleum
Jacksonville, FL....................... 2,066 30 Petroleum
Texas City, TX......................... 2,002 124 Chemicals and petrochemicals
Other U.S. terminals (29 total)........ 8,894 371 Petroleum, jet fuel, chemicals, pulp liquor,
fertilizer and animal fats
------------ --------
Total U.S.......................... 22,249 575
------------ --------
U.K. TERMINALS:
England................................ 4,345 219 Chemicals, animal fats, petroleum and molten
sulphur
Scotland............................... 802 50 Petroleum
Northern Ireland....................... 315 38 Petroleum
------------ --------
Total U.K.......................... 5,462 307
------------ --------
Total U.K. and U.S. 27,711 882
------------ --------
------------ --------
</TABLE>
- ----------
(a) 50% owned.
DESCRIPTION OF LARGEST TERMINAL FACILITIES
PINEY POINT, MARYLAND. This is the largest U.S. terminal currently
owned by ST Services and is located on approximately 400 acres on the Potomac
River. We acquired this facility as part of the purchase of the liquids
terminaling assets of Steuart Petroleum Company and certain of its affiliates in
December 1995. The Piney Point terminal has approximately 5.4 million barrels of
storage capacity in 28 tanks and is the closest deep water facility to
Washington, D.C. This terminal competes with other large petroleum terminals in
the East Coast water-borne market extending from New York Harbor to Norfolk,
Virginia. The terminal currently stores petroleum products, consisting primarily
of fuel oils, asphalt and caustic soda solution. The terminal has a dock with a
36-foot draft for tankers and four berths for barges. It also has truck loading
facilities, product blending capabilities and is connected to a pipeline that
supplies residual fuel oil to two power generating stations.
LINDEN, NEW JERSEY. In October 1998, ST Services entered into a joint
venture relationship with Northville Industries Corp. to acquire the management
of and a 50% ownership interest in the terminal facility at Linden, New Jersey
that Northville previously owned. The 44-acre facility provides ST Services with
deep water terminaling capabilities at New York Harbor and primarily stores
petroleum products, including gasoline, jet fuel and fuel oils. The facility has
a total capacity of approximately 3.9 million barrels in 22 tanks, can receive
products via ship, barge and pipeline and delivers product by ship, barge,
pipeline and truck. The terminal has two docks and leases a third with draft
limits of 35, 24 and 24 feet, respectively.
JACKSONVILLE, FLORIDA. The Jacksonville terminal, also acquired as part
of the Steuart transaction, is on approximately 86 acres on the St. John's River
and consists of a main terminal and two annexes with combined storage capacity
of approximately 2.1 million barrels in 30 tanks. The terminal is currently used
to store petroleum products including gasoline, No. 2 oil, No. 6 oil, diesel and
kerosene. This terminal has a tanker berth with a 38- foot draft and four barge
berths and offers truck and rail car loading facilities and facilities to blend
residual fuels for ship bunkering.
TEXAS CITY, TEXAS. The Texas City facility is situated on 39 acres of
land leased from the Texas City Terminal Railway Company with long-term renewal
options. Located on Galveston Bay near the mouth of the
S-15
<PAGE>
Houston Ship Channel, approximately 16 miles from open water, the Texas City
terminal consists of 124 tanks with a total capacity of approximately two
million barrels. The eastern end of the Texas City site is adjacent to three
deep water docking facilities, which TCTRC also owns. The three deep water docks
include two 36-foot draft docks and a 40-foot draft dock. The docking facilities
can accommodate any ship or barge capable of navigating the 40-foot draft of the
Houston Ship Channel. ST Services is charged dockage and wharfage fees on a per
vessel and per unit basis, respectively, by TCTRC, which it passes on to its
customers.
OTHER U.S. TERMINAL SITES. Besides the four major facilities described
above, ST Services has 29 other terminal facilities located throughout the
United States. Two of these facilities, located in Blue Island, Illinois and
Vancouver, Washington, were acquired during 1998. ST Services also expanded the
capacity of its Stockton, California facility through two additional
transactions, one of which involved the disposition of a ST Services terminal
facility in Imperial, California. The 29 facilities represented approximately
32% of ST Services' total worldwide storage capacity as of March 31, 1999.
Twenty-five of these facilities primarily store petroleum products, while the
remaining four handle a wide range of other products. These facilities provide
ST Services with a geographically diverse base of customers and revenue.
U.K. TERMINALS. In February 1999, ST Services acquired six terminals in
the United Kingdom from GATX Terminals Limited for approximately U.S. $37.4
million. These terminals, which have an aggregate capacity of approximately 5.5
million barrels in 307 tanks, are served by deep water marine docks and handle a
variety of liquids, including petroleum products, chemicals, fats, vegetable
oils and molten sulphur. The transaction, the first international acquisition by
ST Services, was financed by bank borrowings. Three of the terminals are in
England, two are in Scotland and one is in Northern Ireland.
LITIGATION
Two of our subsidiaries are defendants in a lawsuit filed in a
Texas state court in 1997 by Grace Energy Corporation, the entity from whom we
acquired ST Services in 1993. The lawsuit involves environmental response and
remediation allegedly resulting from jet fuel leaks in the early 1970's from a
pipeline. The pipeline, which connected a former Grace terminal with Otis Air
Force Base, was abandoned in 1973, and the connecting terminal was sold to an
unrelated entity in 1976. Grace alleges that it has incurred since 1996 expenses
of approximately $3 million for response and remediation required by the State
of Massachusetts and that it expects to incur additional expenses in the future.
Future expenses could potentially include claims by the United States
Government, as described below. Grace alleges that our subsidiaries acquired the
abandoned pipeline as part of the acquisition of ST Services in 1993 and assumed
responsibility for environmental damages caused by the jet fuel leaks from the
pipeline. Grace is seeking a ruling that our subsidiaries are responsible for
all present and future remediation expenses for these leaks and that Grace has
no obligation to indemnify our subsidiaries for these expenses. The case is set
for trial in September, 1999.
Our subsidiaries' consistent position is that they did not acquire the
abandoned pipeline as part of the 1993 ST transaction and did not assume any
responsibility for the environmental damage. In a motion for partial summary
judgment, the trial judge has ruled that the pipeline was an asset of the
company we acquired. We intend to seek a rehearing on this issue from the trial
judge. In addition, we are continuing with our defense that the pipeline had
been abandoned prior to our acquisition of ST Services and could not have been
included in the assets we acquired. The defendants also believe that they have
certain rights to indemnification from Grace under the acquisition agreement
with Grace. These rights include claims against Grace for fraud and breach of
environmental representations in the acquisition agreement. The acquisition
agreement also includes Grace's agreement to indemnify our subsidiaries against
60% of post-closing environmental remediation costs, subject to a maximum
indemnity payment of $10 million.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation, which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, has been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have
S-16
<PAGE>
also received and responded to formal inquiries from the United States
Government in connection with the environmental damages allegedly resulting from
the jet fuel leaks. Our subsidiaries have voluntarily responded to an invitation
from the Government to provide information indicating that they do not own the
pipeline. In connection with a court-ordered mediation between Grace and our
subsidiaries, the Government advised the parties in April 1999 that it has
identified two spill areas that it believes to be related to the pipeline that
is the subject of the Grace suit. The Government advised the parties that it
believes it has incurred costs of approximately $34 million, and expects in the
future to incur costs of approximately $55 million, for remediation of one of
the spill areas. This amount was not intended to be a final accounting of costs
or to include all categories of costs. The Government also advised the parties
that it could not at that time allocate its costs attributable to the second
spill area. Any claims by the Government could be material in amount and, if
made and ultimately sustained against us, could adversely affect our ability to
pay cash distributions to our partners.
MANAGEMENT
We are a limited partnership and have no officers or directors. Our
general partner manages us. Set forth below is certain information concerning
some of the key personnel of our general partner. All officers serve at the
discretion of the Board of Directors of our general partner.
<TABLE>
<CAPTION>
YEARS OF INDUSTRY
NAME AGE POSITION WITH THE GENERAL PARTNER EXPERIENCE
----------------------- ------ ---------------------------------- ------------------
<S> <C> <C> <C>
Edward D. Doherty 63 Chairman of the Board and 9
Chief Executive Officer
Leon E. Hutchens 64 President 39
Fred T. Johnson 57 President of ST Services 36
Ronald D. Scoggins 44 Senior Vice President 19
Jimmy L. Harrison 45 Vice President and Controller 25
Howard C. Wadsworth 54 Vice President, Treasurer and 5
Secretary
</TABLE>
S-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus summary, each underwriter named
below has severally agreed to purchase, and we have agreed to sell to such
underwriter, the number of units set forth opposite the name of such
underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS
---- ------------
<S> <C>
Salomon Smith Barney Inc. ............ 751,500
A.G. Edwards & Sons, Inc. ............ 749,250
PaineWebber Incorporated ............ 749,250
------------
Total ........................... 2,250,000
============
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the units included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the units (other than those
covered by the over-allotment option described below) if they purchase any of
the units.
The underwriters, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the units directly to the public at
the public offering price set forth on the cover page of this prospectus
supplement and some of the units to certain dealers at the public offering
price less a concession not in excess of $0.830 per unit. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 per
unit on sales to certain other dealers. If all of the units are not sold at
the initial offering price, the representatives may change the public
offering price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30
days from the date of this prospectus supplement, to purchase up to 337,500
additional units at the public offering price less the underwriting discount
and, if the option is closed after August 23, 1999, the record date for our
quarterly cash distribution for the first quarter of 1999, minus $0.70 per
unit. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent this option is exercised, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional units approximately
proportionate to the underwriter's initial purchase commitment.
We and our general partner and its affiliates have agreed that, for
a period of 90 days from the date of this prospectus supplement, neither we
nor it will, without the prior written consent of Salomon Smith Barney Inc.,
offer, sell, contract to sell or otherwise dispose of or hedge any units or
any securities substantially similar to, convertible into or exercisable or
exchangeable for units or grant any options or warrants to purchase any units
or any such securities. That agreement does not include securities that we
may may issue to acquire terminals or pipelines. Salomon Smith Barney Inc.,
in its sole discretion, may release any of the securities subject to these
lock-up agreements at any time without notice.
The units are listed on the New York Stock Exchange under the symbol
"KPP."
Because the National Association of Securities Dealers, Inc. views
the units offered hereby as interests in a direct participation program, this
offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules.
The following table shows the underwriting discounts and commissions
to be paid to the underwriters by us in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional units.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------------------- ------------------
<S> <C> <C>
Per Unit..................................... $ 1.384 $ 1.384
Total........................................ $ 3,114,000 $ 3,581,100
</TABLE>
S-18
<PAGE>
In connection with this offering, Salomon Smith Barney Inc., on behalf
of the underwriters, may purchase and sell units in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of units in
excess of the number of units to be purchased by the underwriters in the
offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the units in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of units made for
the purpose of preventing or retarding the decline in the market price of the
units while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases units originally sold by that syndicate
member.
Any of these activities may cause the price of the units to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. These transactions may be effected on the New York Stock
Exchange or in the over-the-counter market, or otherwise, and, if commenced, may
be discontinued at any time.
We estimate that our total expenses of this offering will be
approximately $370,000.
In the ordinary course of their respective businesses, certain of the
underwriters and their affiliates have engaged, and may in the future engage, in
investment banking or commercial banking transactions with us and our
affiliates.
We, together with our subsidiary operating partnerships and our general
partner, have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
VALIDITY OF UNITS
The validity of the units is being passed upon for us by Fulbright &
Jaworski L.L.P., Houston, Texas. Certain legal matters will be passed upon for
the underwriters by Andrews & Kurth L.L.P., Houston, Texas.
S-19
<PAGE>
PROSPECTUS
5,000,000 UNITS
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
------------------
We may from time to time offer and sell up to 5,000,000 of our units
with this prospectus. We will decide the prices and terms of the sales at the
time of each offering and will describe them in a supplement to this
prospectus.
We may use this prospectus to offer or sell units only if a
prospectus supplement accompanies it. The prospectus supplement will contain
important information about us and the units that this prospectus does not
include. 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 our share
of the expenses of the offering.
The New York Stock Exchange has listed our units under the symbol
"KPP."
Our address is 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 4 OF THIS PROSPECTUS BEFORE BUYING UNITS.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- -------------------------------------------------------------------------------
THE 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.
- -------------------------------------------------------------------------------
The date of this prospectus is June 25, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
ABOUT KANEB PARTNERS.................................................................3
ABOUT THIS PROSPECTUS................................................................3
RISK FACTORS.........................................................................4
Risks Inherent in Our Business....................................................4
Risks Relating to Year 2000 Problems..............................................5
Risks Relating to Our Partnership Structure.......................................6
Tax-Related Risks....................................................................8
WHERE YOU CAN FIND MORE INFORMATION.................................................10
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS.....................................11
KANEB PARTNERS......................................................................12
USE OF PROCEEDS.....................................................................13
CASH DISTRIBUTIONS..................................................................13
General ........................................................................13
Quarterly Distributions of Available Cash........................................15
Adjustment of the Target Distributions...........................................15
Distributions of Cash Upon Liquidation...........................................16
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...............................................27
Allocation of Partnership Income, Gain, Loss and Deduction.......................29
Uniformity of Units..............................................................30
Tax Treatment of Operations......................................................31
Disposition of Units.............................................................34
Administrative Matters...........................................................36
STATE AND OTHER TAX CONSIDERATIONS..................................................38
INVESTMENT IN KANEB PARTNERS BY EMPLOYEE BENEFIT PLANS..............................39
PLAN OF DISTRIBUTION................................................................41
LEGAL...............................................................................42
EXPERTS.............................................................................42
INDEX TO FINANCIAL STATEMENTS......................................................F-1
</TABLE>
------------------
You should rely only on the information contained in this
prospectus, any prospectus supplement and the documents we have incorporated
by reference. We have not authorized anyone else to give you different
information. We are not offering these securities in any state where they do
not permit the offer. We will disclose any material changes in our affairs in
an amendment to this prospectus, a prospectus supplement or a future filing
with the SEC incorporated by reference in this prospectus.
2
<PAGE>
ABOUT KANEB PARTNERS
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., serves as our general partner.
As used in this prospectus, "we," "us," "our" and "Kaneb Partners"
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 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 June 25,
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."
3
<PAGE>
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
OUR RATES MAY BE LIMITED BY FERC REGULATIONS.
The Federal Energy Regulatory Commission, pursuant to the Interstate
Commerce Act, regulates the tariff rates for our interstate common carrier
pipeline operations. To be lawful under that Act, tariff rates must be just
and reasonable and not unduly discriminatory. Shippers may protest, and the
FERC may investigate, the lawfulness of new or changed tariff rates. The FERC
can suspend those tariff rates for up to seven months. It can also require
refunds of amounts collected under rates ultimately found unlawful. The FERC
may also challenge tariff rates that have become final and effective. Because
of the complexity of rate making, the lawfulness of any rate is never assured.
The FERC's primary rate making methodology is price indexing. We use
this methodology in approximately half of our markets. With FERC approval, we
use market based rates in our other markets. The indexing method allows a
pipeline to increase its rates by a percentage equal to the Producer Price
Index for Finished Goods minus 1%. If the index rises by less than 1% or
falls, we will be required to reduce our rates that are based on the FERC's
price indexing methodology if they exceed the new maximum allowable rate. In
addition, changes in the index might not be large enough to fully reflect
actual increases in our costs. The FERC's rate making methodologies may limit
our ability to set rates based on our true costs or may delay the use of
rates that reflect increased costs. If this occurs, it could adversely affect
us. Competition constrains our rates in all of our markets. As a result we
may from time to time be forced to reduce some of our rates to remain
competitive.
UNCERTAINTIES IN CALCULATING COST OF SERVICE FOR RATE-MAKING PURPOSES.
In a 1995 decision involving an unrelated oil pipeline limited
partnership, the FERC partially disallowed the inclusion of income taxes in
that partnership's cost of service. In another FERC proceeding involving a
different oil pipeline limited partnership, the FERC held that the oil
pipeline limited partnership may not claim an income tax allowance for income
attributable to non-corporate limited partners, both individuals and other
entities. If we were to become involved in a contested rate proceeding, this
issue could be raised by an adverse party in that proceeding. Disallowance of
the income tax allowance in the cost of service of our pipelines would
adversely affect our cash flow and could reduce cash distributions to our
unitholders.
COMPETITION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Competitive conditions sometimes require that our pipelines file
individual rates that are less than the maximum permitted by law to avoid
losing business to competitors. Our east pipeline's major competitor is an
independent regulated common carrier pipeline system owned by The Williams
Companies, Inc. Williams' pipeline operates approximately 100 miles east of
and parallel to our east pipeline. This competing pipeline system is
substantially more extensive than our east pipeline. Fifteen of our sixteen
delivery terminals on our east pipeline directly compete with Williams'
terminals. Williams and its affiliates have capital and financial resources
substantially greater than ours.
Our west pipeline competes with the truck loading facilities of
refineries in Denver, Colorado, and Cheyenne, Wyoming and the Denver
terminals of the Chase Pipeline Company and Phillips Petroleum Company. The
Ultramar Diamond Shamrock terminals in Denver and Colorado Springs that
connect to an Ultramar Diamond Shamrock pipeline from their Texas Panhandle
refinery are major competitors to our west pipeline's Denver and Fountain
terminals.
The independent liquids terminaling industry is fragmented and
includes both large, well-financed companies that own many terminal locations
and small companies that may own a single terminal location.
4
<PAGE>
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 demand for
refined petroleum products in the markets served by our pipelines. Reductions
in that demand adversely affect our pipeline business. Most of the refined
petroleum products delivered through our east pipeline are ultimately used as
fuel for railroads or in agricultural operations. Agricultural operations
include fuel for farm equipment, irrigation systems, trucks transporting
crops and crop drying facilities. Weather conditions in the geographic areas
served by our east pipeline affect the demand for refined petroleum products
for agricultural use and the relative mix of products required. Periods of
drought suppress agricultural demand for some refined petroleum products,
particularly those used for fueling farm equipment. Although the demand for
fuel for irrigation systems often increases during those times, the increase
may not be sufficient to offset the reduced demand for refined petroleum
products for agricultural use. Governmental agricultural policies and crop
prices also affect the agricultural sector. Governmental policies or crop
prices that result in reduced farming operations in the markets we serve
could indirectly reduce the demand for refined petroleum products in those
markets.
Governmental regulation, technological advances in fuel economy,
energy generation devices and future fuel conservation measures could reduce
the demand for refined petroleum products in the market areas our pipelines
serve.
RISK OF ENVIRONMENTAL COSTS AND LIABILITIES.
Our operations are subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe
that our operations comply with applicable environmental regulations, risks
of substantial costs and liabilities are inherent in pipeline operations and
terminaling operations. We cannot assure you that we will not incur
substantial costs and liabilities. We currently own or lease, and have in the
past owned or leased, many properties that have been used for many years to
terminal or store petroleum products or other chemicals. Owners, tenants or
users of these properties have disposed of or released hydrocarbons or solid
wastes on or under them. Additionally, some sites we operate are located near
current or former refining and terminaling operations. There is a risk that
contamination has migrated from those sites to ours. Increasingly strict
environmental laws, regulations and enforcement policies and claims for
damages and other similar developments could result in substantial costs and
liabilities.
RISKS RELATING TO YEAR 2000 PROBLEMS
A failure by one or more of our computer systems to properly handle
dates after the year 1999 could result in lost revenues and additional
expenses required to carry out manual processing of transactions. Also,
failure by third parties with whom we do business to adequately resolve their
Y2K problems could have a material adverse effect on our operations.
We have undertaken a review and testing of our computer systems to
identify Y2K-related issues associated with the software and hardware we use
in our operations. We have also contacted our primary suppliers and service
providers to assess their state of Y2K readiness. However, we cannot
conclusively know whether all of our systems and those of third parties are
Y2K compliant until we actually reach the Year 2000.
Failures by banking institutions, the telecommunications industry
and others could have far-reaching effects on us and the entire economy. We
cannot predict the effect that external forces could have on our business.
5
<PAGE>
RISKS RELATING TO OUR 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, it will reduce
your proportionate ownership interest in us. This could cause the market
price of your units to fall and reduce the cash distributions paid to you as
a unitholder.
THE GENERAL PARTNER MAY SELL UNITS IN THE TRADING MARKET, WHICH
COULD REDUCE THE MARKET PRICE OF OUR UNITS.
The general partner and its affiliates currently own 5,454,950
units. If they were to sell a substantial number of these units in the
trading markets, it could reduce the market price of your units. Our
partnership agreement allows the general partner to cause us to register for
sale any units the general partner or its affiliates hold. 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.
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 other major actions such as mergers involving us.
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 ENOUGH 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 approximately 34% of our outstanding units, which is
enough 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 Kaneb Services 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 Kaneb Services 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.
6
<PAGE>
- The general partner determines whether we will retain separate
counsel, accountants or others to perform services for us.
- The general partner and its affiliates may compete with us.
See "Conflict of Interest and Fiduciary Responsibilities--Fiduciary
Responsibility of the General Partner" at page 21.
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 the general partner must follow if there were a conflict of
interest.
THE GENERAL PARTNER'S LIABILITY TO 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 a
court might otherwise apply 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 actions specified in
our partnership agreement and conflicts of interest that a court
might otherwise deem 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 our 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 persons other than the general partner and its
affiliates hold less than 750,000 of the then-issued and outstanding units,
the general partner will have the right to acquire all, but not less than
all, of the remaining units held by those unaffiliated persons. The general
partner may assign this right to any of its affiliates or to us. The
acquisition price will generally equal 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 THE CIRCUMSTANCES
DESCRIBED BELOW AND MAY BE LIABLE FOR THE RETURN OF WRONGFUL
DISTRIBUTIONS.
Some states have not clearly established the limitations on the
liability of holders of limited partner interests for the obligations of a
limited partnership. 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:
7
<PAGE>
- remove or replace the general partner,
- make amendments to our partnership agreement to the extent
permitted in the partnership agreement, or
- take other action pursuant to our partnership agreement,
constituted participation in the "control" of our business, then the
unitholders might be held liable for our obligations to the same extent as a
general partner.
In addition, under the circumstances described below a unitholder
may be liable to us for the amount of a distribution for three years from the
date of the distribution. Unitholders will not be liable for assessments in
addition to their initial capital investment in the units. Under Delaware
partnership law, we may not make a distribution to you if the distribution
causes all our liabilities to exceed the fair value of our 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. A unitholder may deduct losses from us that
are not deductible because of the passive loss limitations when the
unitholder disposes of all his units in a fully taxable transaction with an
unrelated party.
THERE IS A RISK OF CHALLENGE TO SOME OF OUR 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 called "fungibility" of units. 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
8
<PAGE>
regulations to update and clarify 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, a partnership can adopt the
remedial allocation method only with respect to property contributed to it on
and after December 21, 1993. Our partners contributed a significant part of
our assets 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. A
lack of uniformity could substantially diminish our compliance with several
federal income tax requirements, both statutory and regulatory. In addition,
non-uniformity could have a negative impact on the ability of a unitholder to
dispose of his units.
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, if applicable, 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 greater than the amount of cash he
receives. 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
EMPLOYEE BENEFIT PLANS.
Substantially all of the gross income attributable to an investment
in units by tax-exempt entities, such as individual retirement accounts,
Keogh and other retirement plans, will constitute unrelated business taxable
income to these 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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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 1-800-732-0330 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. This means that we can disclose important
information to you without actually including the specific information in
this prospectus by referring you to those documents. The information
incorporated by reference is an important part of this prospectus.
Information that we 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.
- Current Report on Form 8-K filed February 12, 1999.
- Current Report on Form 8-K/A filed March 9, 1999.
- Quarterly Report on Form 10-Q filed May 14, 1999.
- The description of the units contained in Kaneb Partners'
Registration Statement on Form 8-A, dated August 3, 1989.
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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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the
documents we have incorporated by reference contain forward-looking statements.
The words "believe," "expect," "estimate" and "anticipate" and similar
expressions identify forward-looking statements. Forward-looking statements
include those that address activities, events or developments that we expect or
anticipate will or may occur in the future. These include the following:
- the amount and nature of future capital expenditures,
- business strategy and measures to carry out strategy,
- competitive strengths,
- goals and plans,
- expansion and growth of our business and operations,
- references to intentions as to future matters and
- other similar matters.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus, any prospectus supplement and the documents we
have incorporated by reference. We will not update these statements unless the
securities laws require us to do so.
11
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KANEB PARTNERS
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.
[ORGANIZATION CHART]
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Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska, South
Dakota, North Dakota, Wyoming and Colorado. We own a 2,125 mile pipeline system
that extends through Kansas, Iowa, Nebraska, South Dakota and North Dakota and a
550 mile pipeline system that extends through Wyoming, South Dakota and
Colorado. Our east pipeline serves the agricultural markets of the midwestern
United States and transports a broad range of refined petroleum products and
propane. Our west pipeline serves Eastern Wyoming, Western South Dakota, and the
urban areas of Colorado and transports mainly gasoline. These products are
transported from refineries connected to our pipelines, directly or through
other pipelines, to agricultural users, railroads and wholesale customers.
During 1998, we shipped approximately 17 million barrel miles of refined
petroleum products on our pipeline system. Substantially all of our pipeline
operations constitute common carrier operations that are subject to federal and
state tariff regulation. In May 1998, we were authorized by the Federal Energy
Regulatory Commission to adopt market-based rates in approximately one-half of
our markets.
We are also the third largest independent liquids terminaling company
in the United States. Our terminaling business is conducted under the name ST
Services. ST Services and its predecessors have been in the terminaling business
for more than 40 years. Our total worldwide tankage capacity is approximately
27.7 million barrels. Since 1994, we have acquired 14 terminal facilities with
an aggregate storage capacity of 15.7 million barrels. In the United States, we
operate 33 facilities in 19 states and the District of Columbia. Our five
largest wholly owned terminal facilities in the U.S. are located in Piney Point,
Maryland; Jacksonville, Florida; Texas City, Texas; Baltimore, Maryland; and
Westwego, Louisiana. We also own a 50% interest in and manage a 3.9 million
barrel petroleum terminal in Linden, New Jersey. In February 1999, we acquired
six terminals in the United Kingdom with an aggregate capacity of approximately
5.5 million barrels for approximately $37.4 million and the assumption of
certain liabilities. Three of the U.K. terminals are located in England, two in
Scotland and one in Northern Ireland. Our U.S. and U.K. terminals provide
storage on a fee basis for a wide variety of products from petroleum products to
specialty chemicals to edible liquids.
USE OF PROCEEDS
Except as otherwise provided in the applicable prospectus supplement,
we will use the net proceeds we receive from the sale of the units to acquire
properties as suitable opportunities arise and repay indebtedness outstanding at
the time.
CASH DISTRIBUTIONS
GENERAL
We hold all of our assets and conduct all of our operations through our
subsidiaries. Our subsidiaries will generate all of our Cash from Operations.
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 all cash
generated by our operations, after deducting related cash expenditures, reserves
and other items specified in our partnership agreement. It also includes the
$3.5 million cash balance we had on the date of our initial public offering in
1989. The full definitions of Available Cash and Cash from Operations are set
forth in "-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 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.
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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 specified 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 (1) borrowings and sales of debt securities other than for
working capital purposes, (2) sales of equity interests and (3) sales or other
dispositions of our assets.
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
(a) all Available Cash distributed as Cash from Operations to the
unitholders and to the general partner equals
(b) 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."
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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 GENERAL
UP TO: UNITHOLDERS 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."
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 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 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 (1) $22.00 over (2) the sum
of all distributions theretofore made in respect of a hypothetical unit offered
in our initial public offering out of Available Cash constituting Cash from
Interim Capital
15
<PAGE>
Transactions. The following table shows an example of how these adjustments
would be made. None of the events identified in the table have occurred or are
currently anticipated to occur.
EXAMPLES OF ADJUSTMENTS TO BE MADE UPON UNIT COMBINATIONS AND SUBDIVISIONS
<TABLE>
<CAPTION>
BEFORE EVENT: AFTER EVENT:
---------------------------------- ----------------------------------
TARGET DISTRIBUTION THRESHOLD: TARGET DISTRIBUTION THRESHOLD:
---------------------------------- ----------------------------------
EVENT: FIRST SECOND THIRD FINAL FIRST SECOND THIRD FINAL
------ ----- ------ ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 for 1 unit split............ $ 0.600 $ 0.650 $ 0.700 $ 0.800 $ 0.300 $ 0.325 $ 0.350 $ 0.400
3 for 1 unit split............ 0.600 0.650 0.700 0.800 0.200 0.217 0.233 0.267
1 for 2 reverse unit split.... 0.600 0.650 0.700 0.800 1.200 1.300 1.400 1.600
1 for 3 reverse unit split.... 0.600 0.650 0.700 0.800 1.800 1.950 2.100 2.400
</TABLE>
EXAMPLES OF ADJUSTMENTS TO BE MADE UPON DISTRIBUTIONS OF AVAILABLE CASH
CONSTITUTING CASH FROM INTERIM CAPITAL TRANSACTIONS
<TABLE>
<CAPTION>
BEFORE DISTRIBUTION: AFTER DISTRIBUTION:
------------------------------------ ----------------------------------
TARGET DISTRIBUTION THRESHOLD: TARGET DISTRIBUTION THRESHOLD:
------------------------------------ ----------------------------------
AMOUNT OF
DISTRIBUTION: FIRST SECOND THIRD FINAL FIRST SECOND THIRD FINAL
------------- ----- ------ ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0.25 $ 0.600 $ 0.650 $ 0.700 $ 0.800 $ 0.593 $ 0.643 $ 0.692 $ 0.791
0.50 0.600 0.650 0.700 0.800 0.586 0.635 0.684 0.782
1.00 0.600 0.650 0.700 0.800 0.573 0.620 0.668 0.764
3.00 0.600 0.650 0.700 0.800 0.518 0.561 0.605 0.691
</TABLE>
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
(1) the maximum marginal federal corporate income tax rate plus
(2) the effective overall state and local income tax rate
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 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. Their sharing will be 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. Gain or loss will include 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;
16
<PAGE>
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 in respect of that unit;
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
- the Remaining Capital with respect to that unit PLUS
- the excess of
(a) the First Target Distribution over the
Minimum Quarterly Distribution for each
quarter of our existence LESS
(b) 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 ((a) less (b) being the "Target
Amount");
FOURTH, any then-remaining gain would be allocated 90% to all unitholders
pro rata and 10% to the general partner, until the capital account
of each outstanding unit is equal to the sum of
- the Remaining Capital with respect to that unit PLUS
- the Target Amount PLUS
- the excess of
(a) the Second Target Distribution over the First
Target Distribution for each quarter of our
existence LESS
(b) 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 ((a)
less (b) being the "Second Target Amount");
FIFTH, any then-remaining gain would be allocated 80% to all unitholders
pro rata and 20% to the general partner, until the capital account
of each outstanding unit is equal to the sum of
- the Remaining Capital with respect to that unit PLUS
- the Target Amount PLUS
- the Second Target Amount PLUS
- the excess of the
(a) Third Target Distribution over the Second
Target Distribution for each quarter of our
existence LESS
(b) 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
17
<PAGE>
THEREAFTER, any then-remaining gain would be allocated 70% to all
unitholders pro rata and 30% to the general partner.
For these purposes, "Remaining Capital" means, at any time with respect to
any units,
- $22, less
- the sum of
(a) any distributions of Available Cash constituting Cash from
Interim Capital Transactions, and
(b) any distributions of cash and 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.
DEFINED TERMS
"AVAILABLE CASH" means, with respect to any calendar quarter, the
sum of:
- all our cash receipts during that quarter from all sources,
including distributions of cash received from subsidiaries,
PLUS
- any reduction in reserves established in prior quarters,
LESS the sum of
- 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,
- any reserves established in that quarter in such amounts as
the general partner shall determine to be necessary or
appropriate in its reasonable discretion
- to provide for the proper conduct of our business,
including reserves for future capital expenditures, or
- to provide funds for distributions with respect to any of
the next four calendar quarters, and
- 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.
18
<PAGE>
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 during the period since the commencement
of our operations through that date, plus
- $3,526,000
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 or by lenders in connection with
sales or other dispositions of assets
- payments or prepayments of principal and premium 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
(1) cash capital expenditures made to increase the throughput
or deliverable capacity or terminaling capacity of our
assets, taken as a whole, from the throughput or
deliverable capacity or terminaling capacity existing
immediately before those capital expenditures and
(2) 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.
19
<PAGE>
Cash from Operations excludes any cash proceeds from
- any Interim Capital Transactions or
- sales or other dispositions of assets following commencement of
our liquidation.
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."
"INTERIM CAPITAL TRANSACTIONS" means our
- 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,
- sales of partnership interests, and
- sales or other voluntary or involuntary dispositions of any assets
other than
- sales or other dispositions of inventory in the ordinary
course of business,
- sales or other dispositions of other current assets
including receivables and accounts or
- 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.
20
<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 Kaneb Services. In addition, Kaneb Services owns all the
capital stock of the general partner and owns, either directly or through a
subsidiary, 32% of the outstanding units. Conflicts of interest could arise as a
result of the relationships among the general partner, Kaneb Services and us.
The directors and officers of Kaneb Services have fiduciary duties to manage
Kaneb Services, including its investments in its subsidiaries and affiliates, in
a manner beneficial to the stockholders of Kaneb Services. The general partner
has a fiduciary duty to manage us in a manner beneficial to the unitholders. The
duty of the directors of Kaneb Services to the stockholders of Kaneb Services
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 Kaneb Services 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
- the relative interests of any party to the conflict and the
benefits and burdens relating to that interest,
- any customary or accepted industry practices,
- any applicable generally accepted accounting or engineering
practices or principles and
- 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 conflict of interest consistent with provisions of the partnership agreement
and the general partner's fiduciary duties under Delaware law. 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.
Nevertheless, 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 Kaneb
Services 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 that we will reimburse to it.
- The general partner may lend us funds for such periods of time as
the general partner may determine. The general partner may not
charge us interest at a rate greater than the lesser of
- the actual interest cost, including points or other
financing charges or fees, that the general partner is
required to pay on funds it borrows from commercial banks
and
- the rate, including points or other financing charges or
fees, that unrelated lenders on comparable loans would
charge us without reference to the general partner's
financial abilities or guaranties.
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 lent 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.
21
<PAGE>
- The general partner through its ownership of units and its general
partner interests has 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 determinations
made by the general partner 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 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. The general partner may not require us to register
securities aggregating less than $2 million in value. 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. 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, Kaneb Services and its affiliates, on the other
hand, were or will be the result of arm's length negotiations.
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 Kaneb Services 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 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. 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. This contrasts with the strict
duty of a fiduciary who must act solely in the best interests
22
<PAGE>
of his beneficiary. 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 various
circumstances the general partner shall act in its sole discretion, in good
faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal
action on behalf of a partnership 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 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 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 SEC 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.
23
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax
counsel, and addresses all material income tax consequences to individuals who
are citizens or residents of the United States. Unless otherwise noted, this
section is our tax 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. Our tax counsel bases its opinions on its
interpretation of the Internal Revenue Code of 1986, as amended and Treasury
Regulations issued thereunder, judicial decisions, the facts set forth in this
prospectus and factual representations made by the general partner. Our tax
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 our tax counsel's conclusions expressed herein. We
may need to resort to administrative or court proceedings to sustain some or all
of our tax 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, neither we nor counsel can 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, 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. A prospective unitholder may wish to
consult his own tax advisor about the tax consequences peculiar to his
circumstances.
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.
Our tax 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. Our tax 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
Internal Revenue Code, its interpretation of Section 7704 of the Internal
Revenue Code, and upon 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 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 our tax 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.
24
<PAGE>
Notwithstanding the "check-the-box" regulations under Section 7701 of
the Internal Revenue Code, Section 7704 of the Internal Revenue 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 Internal Revenue 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 or marketing of any mineral or natural resource. Transportation
includes pipelines transporting gas, oil or products thereof. 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 ancillary storage facilities which are an integral component
of the system and are necessary for efficient and competitive operation. The
general partner advised our tax 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, Our tax 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 Internal
Revenue Code. Such fees were approximately 6% of our gross income in 1998, and
we have advised our tax counsel that 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
Internal Revenue Code. Although that ruling was based on the facts as they
existed in 1993, we have advised our tax counsel that 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 Internal Revenue Code, 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. However, this
treatment will not apply if the IRS determines that the failure is inadvertent
and if it is cured within a reasonable time after its discovery.
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, Our tax 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.
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- Except as otherwise required by Section 704(c) of the Internal
Revenue 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
"qualifying income" as defined above.
- Our general partner and the general partner of each of our
subsidiary partnerships acted independently of the limited
partners of such partnerships.
Our tax 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.
Our tax 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 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 Kaneb Partners. Our tax counsel has advised us that
these dividends are treated as "qualifying income" for purposes of Section 7704
of the Internal Revenue 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
(1) the otherwise applicable Minimum Quarterly Distribution and
Target Distributions, multiplied by
(2) 1 minus the sum of
(x) the maximum marginal federal income tax rate, expressed as
a fraction, and
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(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, (1) assignees who
have executed and delivered transfer applications, and are awaiting admission as
limited partners, and (2) 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
our tax 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 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."
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
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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 Internal Revenue 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 Internal Revenue
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) 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
- his share of our taxable income and
- 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
- his share of our distributions,
- his share of decreases in our nonrecourse liabilities,
- his share of our losses and
- 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."
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
The passive loss limitations contained in Section 469 of the Internal
Revenue Code generally provide that individuals, estates, trusts and closely
held C corporations and personal service corporations can only deduct losses
from passive activities that are not in excess of the taxpayer's income from
such passive activities or investments. Generally, passive activities are those
in which the taxpayer does not materially participate. 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
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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 (1) the adjusted tax basis of his units at the end
of our taxable year in which the loss occurs and (2) the amount for which the
unitholder is considered "at risk" under Section 465 of the Internal Revenue
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
- interest on indebtedness properly allocable to property held for
investment,
- a partnership's interest expense attributed to portfolio income
and
- the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit 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.
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 Internal Revenue 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
Internal Revenue Code, some items of income, gain, loss and deduction will be
allocated to account for the difference between the tax basis and fair market
value of property contributed to us ("Contributed Property"). In addition, 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
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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 Internal Revenue 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 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 Internal Revenue 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, Our tax 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. Such
uniformity is often referred to as "fungibility." Without such uniformity,
compliance with several federal income tax requirements, both statutory and
regulatory, could be substantially diminished. In addition, such non- uniformity
could have a negative impact on the ability of a 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 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
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. Neither we nor our tax counsel can 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."
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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
Kaneb Partners uses the calendar year as its taxable year and adopted
the accrual method of accounting for federal income tax purposes.
DEPRECIATION METHOD
Kaneb Partners 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 Internal Revenue Code.
SECTION 754 ELECTION
Kaneb Partners and the Operating Partnerships have each made the
election permitted by Section 754 of the Internal Revenue 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 Internal Revenue 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. 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 Internal Revenue 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 basis of our assets 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 Internal Revenue
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 Internal Revenue Code rather than cost-recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150 percent declining-balance method.
Kaneb Partners 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 basis 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 these Treasury Regulations. See "Uniformity of Units."
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Although Our tax 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. We will use a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis 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 basis 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 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 Internal Revenue 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 might seek to treat
the portion of such Section 743(b) adjustment attributable to the underwriters'
discount as if it were allocable to a nondeductible 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
Internal Revenue 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
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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,
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 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 lent 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, nonresident 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 and other retirement plans,
are subject to federal income tax on unrelated business taxable income. Under
Section 512 of the Internal Revenue 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 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.
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Generally, a partnership is required to pay a withholding tax on the portion of
the partnership's income that is effectively connected with the conduct of a
United States trade or business and 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 on actual cash distributions made quarterly to foreign unitholders. The
current rate for withholding is 39.6%. 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
Internal Revenue 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. Kaneb Partners
does not expect that any material portion of any such gain will avoid United
States taxation. Moreover, Section 897 of the Internal Revenue 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 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 Internal Revenue Code, such portion will be treated as
ordinary
34
<PAGE>
income. Unrealized receivables include (1) to the extent not previously
includable in our income, any rights to pay for services rendered or to be
rendered and (2) 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, Our tax 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, the IRS may contend that our taxable income or losses must be
reallocated among the unitholders. If any such contention were sustained, the
tax liabilities of some unitholders would be adjusted to the possible detriment
of other unitholders. The general partner is authorized to revise our method of
allocation (1) between transferors and transferees and (2) 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 Internal Revenue 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
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 partnership tax
elections in a timely manner, including the Section 754 election.
35
<PAGE>
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 (1) distributed cash constitutes Cash from Operations or
Cash from Interim Capital Transactions or (2) 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 (1)
distributed cash constitutes Cash from Operations or Cash from Interim Capital
Transactions and (2) 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.
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. Neither we nor our tax
counsel can assure you that any such conventions will yield a result that
conforms to the requirements of the Internal Revenue 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 Internal Revenue 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 Internal Revenue 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
36
<PAGE>
imposition of 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 Internal Revenue 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 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. 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.
INFORMATION RETURN FILING REQUIREMENTS
A unitholder who sells or exchanges units is required by Section 6050K
of the Internal Revenue 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
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 Internal Revenue Code, persons who hold an
interest in us as a nominee for another person must report information to us.
Temporary Treasury Regulations provide that such information should include
- the name, address and taxpayer identification number of the
beneficial owners and the nominee;
- whether the beneficial owner is
- a person that is not a United States person,
- a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the
foregoing, or
- a tax-exempt entity;
- the amount and description of units held, acquired or transferred
for the beneficial owners; and
- 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.
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<PAGE>
Brokers and financial institutions are required to furnish additional
information, including whether they are a United States person and 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 Internal Revenue Code requires that "tax shelters"
be registered with the Secretary of the Treasury. The temporary Treasury
Regulations interpreting the tax shelter registration provisions of the Internal
Revenue Code are extremely broad. 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. Kaneb Partners 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. Kaneb Partners 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.
STATE AND OTHER TAX CONSIDERATIONS
Unitholders may be subject to 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 Jersey, 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 some states, tax losses may not produce a tax benefit in
the year incurred and also may not be available to offset income in subsequent
taxable years. This could occur, for example, if the unitholder has no income
from sources within that state. 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 state and local tax 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.
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<PAGE>
INVESTMENT IN KANEB PARTNERS BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to
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, and restrictions
imposed by Section 4975 of the Internal Revenue 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
- whether such investment is prudent under Section 404(a)(1)(B) of
ERISA,
- whether in making such investment such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA,
- the fact that such investment could result in recognition of UBTI
by such plan even if there is no net income,
- the effect of an imposition of income taxes on the potential
investment return for an otherwise tax-exempt investor and
- 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
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. If so, 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 Internal Revenue Code.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit an employee benefit plan from engaging in transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan. These
provisions also apply to Individual Retirement Accounts which are not considered
part of an employee benefit 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." Pursuant to these regulations, an entity's assets
would not be considered to be "plan assets" if, among other things,
(1) the equity interests acquired by employee benefit plans are
publicly offered securities, I.E., the equity interests are
widely held by 100 or more investors independent of the issuer
and each other, freely transferable and registered under the
federal securities laws,
(2) 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
(3) 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 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 Internal Revenue Code,
and any entities whose underlying assets include plan assets
by reason of a plan's investments in the entity.
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<PAGE>
Kaneb Partners's assets would not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (1) above, and also may satisfy requirements (2) and (3) above.
40
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PLAN OF DISTRIBUTION
Kaneb Partners 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. Kaneb Partners 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 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 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
- 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
- if the units are being sold to underwriters, Kaneb Partners 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.
Some 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.
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<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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KANEB PIPE LINE COMPANY
<S> <C>
Independent Auditors' Report........................................F-2
Consolidated Balance Sheet..........................................F-3
Notes to Consolidated Balance Sheet.................................F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kaneb Pipe Line Company:
We have audited the accompanying consolidated balance sheet of Kaneb Pipe
Line Company and subsidiaries (the "Company") as of December 31, 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.
Kaneb Partners owns and operates a refined petroleum products
pipeline business and a petroleum products and specialty liquids
storage and terminaling business. Kaneb Partners's business of
terminaling petroleum products and specialty liquids is conducted
under the name ST Services ("ST"). Kaneb Partners operates the
refined petroleum products pipeline business through Kaneb Pipe
Line Operating Partnership, L.P. ("KPOP"), a limited partnership
in which Kaneb Partners 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 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.
(Continued)
F-4
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
(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
Kaneb Partners makes quarterly distributions of 100% of its
Available Cash, as defined in its partnership agreement, to
holders of limited partnership units and the Company. Available
Cash consists generally of all the cash receipts of Kaneb Partners
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 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.
(Continued)
F-5
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
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 L22.6
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.
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 Kaneb Partners'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.
(Continued)
F-6
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
(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, Kaneb Partners 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.
Long-term debt as of December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
<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
(Continued)
F-7
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
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 our east
pipeline and contain certain financial and operational covenants.
In June 1996, KPP issued $68.0 million of new first mortgage notes
bearing interest at rates ranging from 7.08% to 7.98%. $35 million of
these notes is due June 2001, $8.0 million is due June 2003, $10.0
million is due June 2006 and $15.0 million is due June 2016. The loan is
secured, pari passu with the existing Notes and credit facility, by a
mortgage on our east pipeline.
(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>
Year ending December 31:
<S> <C>
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.
(Continued)
F-8
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
In December 1995, Kaneb Partners 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 Kaneb Partners acquired ST in 1993, involving certain issues
allegedly arising out of Kaneb Partners'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 Kaneb Partners'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.
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-9
<PAGE>
================================================================================
2,250,000 UNITS
KANEB PIPE LINE
PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
------------------
PROSPECTUS SUPPLEMENT
July 22, 1999
(INCLUDING PROSPECTUS DATED JUNE 25, 1999)
------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
================================================================================
