<PAGE>
As filed with the Securities and Exchange Commission on June 3, 1999
Registration No. 333-76067
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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KANEB PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2287571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(972) 699-4000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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EDWARD D. DOHERTY
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TX 75080
(972) 699-4000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 4200 CHASE TOWER
HOUSTON, TX 77010 600 TRAVIS
(713) 651-5151 HOUSTON, TX 77002
ATTENTION: JOHN A. WATSON (713) 220-4200
ATTENTION: WILLIAM N. FINNEGAN, IV
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective, as determined by
market conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
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.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE, AND WE MAY CHANGE IT.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<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
Distributions of Cash from Interim Capital Transactions . . . . . . . . . . . . 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
</TABLE>
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You should rely only on the information contained in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
have not authorized anyone else to give you different information. We are not
offering these securities in any state where 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.
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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 ("SEC") using a "shelf" registration
process. Under this shelf registration process, we may sell up to 5,000,000 of
the units described in this prospectus in one or more offerings. This prospectus
generally describes us and the units. Each time we sell units with this
prospectus, we will provide a prospectus supplement that will contain specific
information about the terms of that offering. The prospectus supplement may also
add to, update or change information in this prospectus. The information in this
prospectus is accurate as of June 18, 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."
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RISK FACTORS
You should consider the following risk factors, together with other
information contained in this prospectus, any prospectus supplement and the
information we have incorporated by reference.
RISKS INHERENT IN OUR BUSINESS
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. The East Pipeline's major competitor is an independent
regulated common carrier pipeline system owned by The Williams Companies, Inc.
Williams' pipeline operates approximately 100 miles east of and parallel to our
East Pipeline. This competing pipeline system is substantially more extensive
than our East Pipeline. Fifteen of our sixteen delivery terminals on the East
Pipeline directly compete with Williams' terminals. Williams and its affiliates
have capital and financial resources substantially greater than ours.
Our West Pipeline competes with the truck loading facilities of
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 a Ultramar Diamond Shamrock pipeline from their Texas Panhandle
refinery are major competitors to the West Pipeline's Denver and Fountain
terminals.
The independent liquids terminaling industry is fragmented and includes
both large, well-financed companies that own many terminal locations and small
companies that may own a single terminal location. Several companies that offer
liquids terminaling facilities have significantly more capacity than ours,
particularly
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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 the 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 the 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 can not
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.
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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.
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- 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 22.
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:
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- 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
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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."
9
<PAGE>
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.
10
<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the documents
we have incorporated by reference contain forward-looking statements. The words
"believe," "expect," "estimate" and "anticipate" and similar expressions
identify forward-looking statements. Forward-looking statements include those
that address activities, events or developments that we expect or anticipate
will or may occur in the future. 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
<PAGE>
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.
[organizational chart]
12
<PAGE>
Our pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska,
South Dakota, North Dakota, Wyoming and Colorado. We own a 2,125 mile
pipeline system that extends through Kansas, Iowa, Nebraska, South Dakota and
North Dakota (the "East Pipeline") and a 550 mile pipeline system that
extends through Wyoming, South Dakota and Colorado (the "West Pipeline"). The
East Pipeline serves the agricultural markets of the midwestern United States
and transports a broad range of refined petroleum products and propane. The
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 over 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.
13
<PAGE>
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."
14
<PAGE>
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 GENERAL
AMOUNT 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 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.
15
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES OF ADJUSTMENTS TO BE MADE UPON UNIT COMBINATIONS AND SUBDIVISIONS
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 two 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
<CAPTION>
EXAMPLES OF ADJUSTMENTS TO BE MADE UPON DISTRIBUTIONS OF AVAILABLE CASH
CONSTITUTING CASH FROM INTERIM CAPITAL TRANSACTIONS
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 ("Terminating Capital Transactions"). 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 Terminating Capital Transactions.
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 loaned to the borrowing entity. We may lend or
contribute to our operating subsidiaries and our operating
subsidiaries may borrow funds from us, on terms and conditions
established at the sole discretion of the general partner.
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
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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 (a partnership derivative action) to
recover damages from a third party where the general partner has failed to
institute the action or where an effort to cause the general partner to do so
is not likely to succeed. In addition, cases have been decided under the
common law of partnerships in Delaware and the common or statutory law of
other jurisdictions to the effect that a limited partner may institute legal
action on behalf of himself or all other similarly situated limited partners
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.
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FEDERAL INCOME TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax counsel
("Counsel") and addresses all material income tax consequences to individuals
who are citizens or residents of the United States. Unless otherwise noted, this
section is Counsel's opinion with respect to the matters set forth except for
statements of fact and the representations and estimates of the results of
future operations of the general partner included in such discussion as to which
no opinion is expressed. Counsel bases its opinions on its interpretation of the
Internal Revenue Code of 1986, as amended (the "Code") and Treasury Regulations
issued thereunder, judicial decisions, the facts set forth in this prospectus
and factual representations made by the general partner. Counsel's opinions are
subject to both the accuracy of such facts and the continued applicability of
such legislative, administrative and judicial authorities, all of which
authorities are subject to changes and interpretations that may or may not be
retroactively applied.
Other than as described below, we have not requested a ruling from the
IRS with respect to our classification as a partnership for federal income tax
purposes or any other matter affecting us. Accordingly, the IRS may adopt
positions that differ from Counsel's conclusions expressed herein. We may need
to resort to administrative or court proceedings to sustain some or all of
Counsel's conclusions, and some or all of these conclusions ultimately may not
be sustained. The costs of any contest with the IRS will be borne directly or
indirectly by some or all of the unitholders and the general partner.
Furthermore, 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.
Counsel is of the opinion that under present law, and subject to the
conditions and qualifications set forth below, for federal income tax purposes
both we and each of our subsidiary partnerships will be treated as a
partnership. Counsel's opinion as to our partnership status and that of our
subsidiary partnerships is based principally on its interpretation of the
factors set forth in Treasury Regulations under Sections 7701 and 7704 of the
Code, its interpretation of Section 7704 of the Code, and upon 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 Counsel has rendered its opinion that we and
our subsidiary partnerships were treated as partnerships on December 31,
1996, under the prior Treasury Regulations and continue to be so treated.
Notwithstanding the "check-the-box" regulations under Section 7701 of the
Code, Section 7704 of the Code provides that publicly traded partnerships shall,
as a general rule, be taxed as corporations despite the fact
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that they are not classified as corporations under Section 7701. Section 7704
of the Code provides an exception to this general rule (the "Natural Resource
Exception") for a publicly traded partnership if 90% or more of its gross
income for every taxable year consists of "qualifying income." "Qualifying
income" includes income and gains derived from the exploration, development,
mining or production, processing, refining, transportation 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 Counsel that we provide storage of petroleum products
before transportation through the Pipelines or after transportation through the
Pipelines while awaiting delivery to the our customers. Based on these facts,
and on statements made by Congressman Rostenkowski and Senator Bentsen on the
floors of the House of Representatives and Senate, respectively, indicating that
storage fees can be "qualifying income" for purposes of qualifying for the
Natural Resource Exception, Counsel is of the opinion that any fees charged for
such storage facilities are "qualifying income."
Our subsidiary, Support Terminals Operating Partnership, L.P. ("STOP"),
earns fees from its terminaling operations for petroleum products, specialty
chemicals and other liquids. Fees relating to terminaling of liquids that are
not oil, gas, other natural resources or products derived from oil or gas will
not be qualifying gross income for purposes of Section 7704(d) of the Code. Such
fees were approximately 6% of our gross income in 1998, and we have advised
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 Code. Although that ruling was based on
the facts as they existed in 1993, we have advised 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 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, 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 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.
Counsel has rendered its opinion as to taxable years beginning after 1996
relying on the accuracy of the second and fourth representations listed above
together with the further representation by the general partner that neither we
nor any of our subsidiary partnerships has or will elect to be treated as a
corporation pursuant to the Section 7701 "check-the-box" Treasury Regulations.
Counsel's opinion as to the classification of us and our subsidiary
partnerships is also based on the assumption that if the general partner or STOP
ceases to be a general partner, any successor general partner will make and
satisfy such representations. In this regard, if the general partner or STOP
were to withdraw as a general partner at a time when there is no successor
general partner, or if the successor general partner could not satisfy the above
representations, then the IRS might attempt to treat us or a subsidiary
partnership as an association taxable as a corporation.
If we or a subsidiary partnership were taxable as a corporation or
treated as an association taxable as a corporation in any taxable year, its
income, gains, losses, deductions and credits would be reflected only on its tax
return rather than being passed through to its partners and its net income would
be taxed at corporate rates. Losses that we realized would not flow through to
the unitholders. In addition, any distribution made to a unitholder would be
treated as either
- dividend income to the extent of our current or accumulated earnings
and profits,
- in the absence of earnings and profits, as a nontaxable return of
capital to the extent of the unitholder's basis in his units, or
- taxable capital gain, after the unitholder's basis in the 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. Counsel has advised us that these
dividends are treated as "qualifying income" for purposes of Section 7704 of the
Code.
If legislation is enacted which causes us to become taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes, the Minimum Quarterly Distribution and the Target
Distributions for each quarter thereafter would be reduced to an amount equal to
the product of
(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
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
will be considered to be gain from the sale or exchange of the units, taxable in
accordance with the rules described
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under "--Disposition of Units." Any reduction in a unitholder's share of our
liabilities included in his basis in his units will be treated as a
distribution of cash to such unitholder. See "--Basis of Units." If a
unitholder's percentage interest decreases because we offer additional units,
then such unitholder's share of nonrecourse liabilities will decrease, and
this will result in a corresponding deemed distribution of cash.
A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his basis in his units, if such
distribution reduces the unitholder's share of our "unrealized receivables,"
including depreciation recapture, and/or appreciated "inventory items" (both as
defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, the unitholder will be treated as having received his proportionate
share of the Section 751 Assets and having exchanged such assets with us in
return for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in the unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (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 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 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 Code and that all allocations to a partner
be reflected by appropriate increases or decreases in his capital account.
Distributions upon our liquidation generally are to be made in accordance with
positive capital account balances.
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the unitholders in
accordance with their respective interests in us. If we have a net loss, items
of income, gain, loss and deduction will generally be allocated (1) first, to
the general partner and the unitholders in accordance with their respective
interests in us to the extent of their positive capital accounts; and
(2) second, to the general partner.
Notwithstanding the above, as required by Section 704(c) of the Code,
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 we do not expect that
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our operations will result in the creation of negative capital accounts, if
negative capital accounts nevertheless result, items of income and gain will
be allocated in an amount and manner sufficient to eliminate the negative
balances as quickly as possible.
Under Section 704(c) of the Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount of any such item
recognized by that partnership in a particular taxable period (the "ceiling
limitation"). To the extent the ceiling limitation is or becomes applicable, our
partnership agreement will require that items of income and deduction be
allocated in a way designed to effectively "cure" this problem and eliminate the
impact of the ceiling limitation. Such allocations will not have substantial
economic effect because they will not be reflected in the capital accounts of
the unitholders. Treasury Regulations under Section 704(c) of the Code permit a
partnership to make reasonable curative allocations to reduce or eliminate
disparities between the tax basis and value attributable to Contributed
Properties. Recently proposed Treasury Regulations that are apparently intended
to modify existing laws to make interests in partnerships generally fungible
may, in fact, require Section 704(c) methods that are unavailable to many
publicly traded partnerships such as us. See "--Uniformity of Units."
Because of the uncertainty created by the proposed Treasury Regulations
referred to in the preceding paragraph, Counsel is unable to opine that the
Section 704(c) allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's distributive share of
an item of income, gain, loss or deduction.
UNIFORMITY OF UNITS
There can arise a lack of uniformity in the intrinsic tax characteristics
of units sold pursuant to this offering and units subsequently converted to
units or units that we issue before or after this offering. 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 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 Code.
SECTION 754 ELECTION
Kaneb Partners and the Operating Partnerships have each made the election
permitted by Section 754 of the Code. Such election will generally permit a
purchaser of units to adjust his share of the basis in our properties pursuant
to Section 743(b) of the Code. Such elections are irrevocable without the
consent of the IRS. The Section 743(b) adjustment is attributed solely to a
purchaser of units and is not added to the common basis of our assets (the
"Common Bases"). Thus, for purposes of determining income, gains, losses and
deductions, the purchaser will have a special basis for those of our properties
that are adjusted under Section 743(b) of the Code. The amount of the adjustment
under Section 743(b) is the difference between the unitholder's adjusted federal
income tax basis in his units and the unitholder's proportionate share of the
Common Bases attributable to the units pursuant to Section 743. The aggregate
amount of the adjustment computed under Section 743(b) is then allocated among
our various assets pursuant to the rules of Section 755. The Section 743(b)
adjustment provides the purchaser of units with the equivalent of an adjusted
tax basis in his share of our properties equal to the fair market value of such
share.
Proposed Treasury Regulations under Section 743 of the Code generally
require the Section 743(b) adjustment attributable to recovery property to be
depreciated as if the total amount of such adjustment were attributable to
newly acquired recovery property placed in service when the transfer occurs.
The proposed regulations under Section 197 indicate that the Section 743(b)
adjustment attributable to an amortizable Section 197 intangible should be
similarly treated. Under Treasury Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost-recovery deductions under
Section 168 is generally required to be depreciated using either the
straight-line method or the 150 percent declining-balance method. 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 Bases in such properties. This
could adversely affect the continued uniformity of the tax characteristics of
our units. The general partner has adopted an accounting convention under
Section 743(b) to preserve the uniformity of units despite its inconsistency
with these Treasury Regulations. See "Uniformity of Units."
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Although Counsel is unable to opine as to the validity of such an
approach, we intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property to
the extent of any unamortized disparity between the tax basis and value
attributable to Contributed Property. We will use a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Bases of such property, despite its inconsistency
with Treasury Regulation Section 1.167(c)-1(a)(6), Proposed Treasury Regulation
1.743-1(j)(4)(i)(B)(1) and Proposed Treasury Regulation 1.197-2(g)(3). If we
determine that such position cannot reasonably be taken, we may adopt a
depreciation or amortization convention under which all purchasers acquiring
units in the same month would receive depreciation or amortization, whether
attributable to Common Bases or Section 743(b) basis, based on the same
applicable rate as if they had purchased a direct interest in our property. Such
an aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to unitholders. See "-- Uniformity
of Units."
The allocation of the Section 743(b) adjustment must be made in
accordance with the principles of Section 1060 of the Code. Based on these
principles, the IRS may seek to reallocate some or all of any Section 743(b)
adjustment that we do not allocate to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
Alternatively, it is possible that the IRS might seek to treat the portion of
such Section 743(b) adjustment attributable to the underwriters' discount as if
it were allocable to a non-deductible syndication cost.
A Section 754 election is advantageous when the transferee's basis in
such units is higher than such units' share of the aggregate basis in our assets
immediately before the transfer. In such case, pursuant to the election, the
transferee will take a new and higher basis in his share of our assets for
purposes of calculating, among other items, his depreciation deductions and his
share of any gain or loss on a sale of our assets. Conversely, a Section 754
election would be disadvantageous if the transferee's basis in such units is
lower than such units' share of the aggregate basis in our assets immediately
before the transfer. Thus, the amounts that a unitholder would be able to obtain
on a sale or other disposition of his units may be affected favorably or
adversely by the elections under Section 754.
The calculations and adjustments in connection with the Section 754
election depend, among other things, on the date on which a transfer occurs
and the price at which the transfer occurs. To help reduce the complexity of
those calculations and the resulting administrative cost to us, the general
partner will apply the following method in making the necessary adjustments
pursuant to the Section 754 election on transfers after the transfers
pursuant to this offering: the price paid by a transferee for his units will
be deemed to be the lowest quoted trading price for the units during the
calendar month in which the transfer was deemed to occur, without regard to
the actual price paid. The application of such convention yields a less
favorable tax result, as compared to adjustments based on actual price, to a
transferee who paid more than the "convention price" for his units. The
calculations under Section 754 elections are highly complex, and there is
little legal authority concerning the mechanics of the calculations,
particularly in the context of publicly traded partnerships. It is possible
that the IRS will successfully assert that the adjustments made by the
general partner do not meet the requirements of the Code or the applicable
regulations and require a different basis adjustment to be made.
Should the IRS require a different basis adjustment to be made, and
should, in the general partner's opinion, the expense of compliance exceed the
benefit of the elections, the general partner may seek permission from the IRS
to revoke the Section 754 election it previously made for us. Such a revocation
may increase the ratio of a unitholder's distributive share of taxable income to
cash distributions and adversely affect the amount that a unitholder will
receive from the sale of his units.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF PROPERTIES
The consequences of the acquisition, ownership and disposition of units
will depend in part on estimates by the general partner of the relative fair
market values and determinations of the initial tax basis of our assets. The
federal income tax consequences of such estimates and determinations of basis
may be subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or determinations of basis were found to be
incorrect, the character and amount of items of income, gain, loss, deduction or
credit previously reported by
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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
("short-against-the-box" transactions), entering into a national principal
contract on the same or substantially identical property, and entering into a
futures or forward contract to deliver the same or substantially identical
property. Thus, gain would be triggered if a unitholder entered into a contract
to sell his or her units for a fixed price on a future date. If a constructive
sale occurs, the taxpayer must recognize gain as if the appreciated financial
position were sold, assigned or otherwise terminated at its fair market value on
the date of the constructive sale. Adjustments for the gain recognized on the
constructive sale are made in the amount of any gain or loss later realized by
the taxpayer with respect to the position.
It would appear that a unitholder whose units are loaned to a "short
seller" to cover a short sale of units would be considered as having transferred
beneficial ownership of such units and would, thus, no longer be a partner with
respect to such units during the period of such loan. As a result, during such
period any Partnership income, gains, deductions, losses or credits with respect
to such units would appear not to be reportable by such unitholder, any cash
distributions the unitholder receives with respect to such units would be fully
taxable and all of such distributions would appear to be treated as ordinary
income. The IRS also may contend that a loan of units to a "short seller"
constitutes a taxable exchange. If such a contention were successfully made, the
lending unitholder may be required to recognize gain or loss. Unitholders
desiring to assure their status as partners should modify their brokerage
account agreements, if any, to prohibit their brokers from borrowing their
units. The IRS announced that it is actively studying issues relating to the tax
treatment of short sales of partnership interests.
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his share of any
items of Partnership income, gain or loss for purposes of the alternative
minimum tax. A portion of our depreciation deductions may be treated as an
item of tax preference for this purpose. A unitholder's alternative minimum
taxable income derived from us may be higher than his share of our net income
because we may use more accelerated methods of depreciation for purposes of
computing federal taxable income or loss. Prospective unitholders should
consult with their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN INVESTORS
Ownership of units by employee benefit plans, other tax exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies may raise issues unique to such persons and,
as described below, may have substantial adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts ("IRAs") and other
retirement plans, are subject to federal income tax on unrelated business
taxable income. Under Section 512 of the Code, virtually all of the taxable
income such an organization derives from the ownership of a unit will be
unrelated business taxable income and thus will be taxable to such a unitholder.
Regulated investment companies are required to derive 90% or more of
their gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or 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
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or credit and pay federal income tax at regular rates, net of credits
including withholding, on such income. Generally, a partnership is required
to pay a withholding tax on the portion of the partnership's income that is
effectively connected with the conduct of a United States trade or business
and that is allocable to the foreign partners, regardless of whether any
actual distributions have been made to such partners. However, under rules
applicable to publicly traded partnerships, 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 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 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,"
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as those terms are defined in Section 751 of the Code, such portion will be
treated as ordinary 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, 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 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.
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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 Counsel
can assure you that any such conventions will yield a result that conforms to
the requirements of the Code, regulations thereunder or administrative
pronouncements of the IRS. The general partner cannot assure prospective
unitholders that the IRS will not contend that such accounting and reporting
conventions are impermissible. Contesting any such allegations could result in
substantial expense to us. In addition, if the IRS were to prevail, unitholders
may incur substantial liabilities for taxes and interest.
Our federal income tax information returns may be audited by the IRS. The
Code contains partnership audit procedures that significantly simplify the
manner in which IRS audit adjustments of partnership items are resolved.
Adjustments, if any, resulting from such an audit may require each unitholder to
file an amended tax return, and possibly may result in an audit of the
unitholder's return. Any audit of a unitholder's return could result in
adjustments to items not related to our returns as well as those related to our
returns.
Under Sections 6221 through 6233 of the Code, partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial review
of administrative adjustments by the IRS and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss, deduction and credit and
the imposition of penalties and other additions to unitholders' tax liability
are determined at the partnership level in a unified
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partnership proceeding rather than in separate proceedings with the partners.
The Code provides for one partner to be designated as the "Tax Matters Partner"
for these purposes. Our partnership agreement appoints the general partner as
our Tax Matters Partner.
The Tax Matters Partner is entitled to make 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 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 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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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 Code requires that "tax shelters" be registered with
the Secretary of the Treasury. The temporary Treasury Regulations interpreting
the tax shelter registration provisions of the Code are extremely broad.
Although it is arguable that we will not be subject to the registration
requirement, the general partner, as our principal organizer, has registered us
as a tax shelter with the IRS in the absence of assurance that we will not be
subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. 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.
38
<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 ("ERISA"), and restrictions
imposed by Section 4975 of the Code. As used herein, the term "employee benefit
plan" includes, but is not limited to, qualified pension, profit-sharing and
stock bonus plans, Keogh plans, Simplified Employee Pension Plans, and tax
deferred annuities or Individual Retirement Accounts established or maintained
by an employer or employee organization. Among other things, consideration
should be given to
- 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 (a
"fiduciary") should determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in us, be deemed to own an undivided
interest in our assets. 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 Code.
Section 406 of ERISA and Section 4975 of the 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
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 Code, and any entities whose underlying assets include
plan assets by reason of a plan's investments in the entity.
39
<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
<PAGE>
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.
41
<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.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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>
<S> <C>
Assets
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.
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
(Continued)
F-5
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
million. One note, for $9.5 million, is due in 2003. The other note, for
$5.0 million, is due upon demand. These notes are classified as a reduction
to stockholder's equity.
(3) ASSET ACQUISITIONS
On March 25, 1998, the Company acquired a products marketing business for
$1.5 million, plus the cost of products inventory ($1.8 million). The
products marketing business provides wholesale motor fuel marketing services
throughout the Great Lakes and Rocky Mountain regions, as well as
California. The asset purchase agreement includes a provision for an
earn-out based on annual operating results of the acquired business for a
five-year period ending in March 2003. No amounts were payable under the
earn-out provision in 1998. The acquisition was accounted for using the
purchase method of accounting.
On October 30, 1998, KPP, through a wholly-owned subsidiary, entered into
acquisition and joint venture agreements with Northville Industries Corp.
("Northville") to acquire and manage the former Northville terminal located
in Linden, New Jersey. Under the agreements, KPP acquired a 50% interest in
the newly-formed ST Linden Terminal, LLC for $20.5 million plus transaction
costs. The investment was financed by KPP's existing revolving credit
facility and a revolving promissory note. The investment is being accounted
for by the equity method of accounting, with the excess cost over net book
value of the equity investment being amortized over the life of the
underlying assets. During 1998, KPP acquired other terminals and pipelines
for aggregate consideration of $23.9 million.
On February 1, 1999, KPP, through two wholly-owned subsidiaries, acquired
six terminals in the United Kingdom from GATX Terminal Limited for 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 financial
(Continued)
F-7
<PAGE>
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
December 31, 1998
and operational covenants. The credit facility is secured by essentially
all of the assets of the products marketing business. At December 31, 1998,
$2.9 million was drawn on the facility.
In 1994, KPP, through a wholly-owned subsidiary, entered into a restated
credit agreement with a group of banks that, as subsequently amended,
provides a $25 million revolving credit facility through January 31, 2001.
The credit facility bears interest at variable interest rates and has a
commitment fee of 0.15% per annum of the unused credit facility. At
December 31, 1998, $25 million was drawn under the credit facility.
Also in 1994, another wholly-owned subsidiary of KPP issued $33 million of
first mortgage notes ("Notes") to a group of insurance companies. The Notes
bear interest at the rate of 8.05% per annum and are due on December 22,
2001. In 1995, KPP issued $27 million of additional Notes due February 24,
2002 which bear interest at the rate of 8.37% per annum. The Notes and the
credit facility are secured by a mortgage on the East Pipeline and contain
certain financial and operational covenants.
In June 1996, KPP issued $68.0 million of new first mortgage notes bearing
interest at rates ranging from 7.08% to 7.98%. $35 million of these notes is
due June 2001, $8.0 million is due June 2003, $10.0 million is due June 2006
and $15.0 million is due June 2016. The loan is secured, pari passu with the
existing Notes and credit facility, by a mortgage on the East Pipeline.
(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 1023000
------------------
$ 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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee. . . $ 45,541
New York Stock Exchange listing fees . . . . . . . . . . 47,800
Printing and engraving costs . . . . . . . . . . . . . . 50,000
Legal fees and expenses. . . . . . . . . . . . . . . . . 125,000
Accounting fees and expenses . . . . . . . . . . . . . . 45,000
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 6,659
-------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 370,000
-------------
-------------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The partnership agreements of the Registrant and its subsidiary
partnerships provide that they will, to the fullest extent permitted by law,
indemnify and advance expenses to the general partner, any Departing Partner (as
defined therein), any person who is or was an affiliate of the general partner
or any Departing Partner, any person who is or was an officer, director,
employee, partner, agent or trustee of the general partner or any Departing
Partner or any affiliate of the general partner or any Departing Partner, or any
person who is or was serving at the request of the general partner or any
affiliate of the general partner or any Departing Partner or any affiliate of
any Departing Partner as an officer, director, employee, partner, agent or
trustee of another person ("Indemnitees") from and against any and all losses,
claims, damages, liabilities (joint or several), expenses (including legal fees
and expenses), judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
the general partner, Departing Partner or an affiliate of either, an officer,
director, employee, partner, agent or trustee of the general partner, any
Departing Partner or affiliate of either or a person serving at the request of
the Registrant in another entity in a similar capacity, provided that in each
case the Indemnitee acted in good faith and in a manner which such Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Registrant and such action did not constitute gross negligence or willful
misconduct on the part of the Indemnitee, and, with respect to any criminal
proceeding, the Indemnitee had no reasonable cause to believe its conduct was
unlawful. This indemnification would under certain circumstances include
indemnification for liabilities under the Securities Act. In addition, each
Indemnitee would automatically be entitled to the advancement of expenses in
connection with the foregoing indemnification. Any indemnification under these
provisions will be only out of the assets of the Registrant. The Registrant is
authorized to purchase insurance against liabilities asserted against and
expenses incurred by such persons in connection with the Registrant's
activities, whether or not the Registrant would have the power to indemnify such
person against such liabilities under the provisions described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
**1.1 -- Form of Underwriting Agreement.
4.1 -- Form of Amended and Restated Agreement of Limited
Partnership of Kaneb Partners (filed as Exhibit 4.1 to
Kaneb Partners's Quarterly Report on Form 10-Q filed
August 13, 1998 and incorporated by reference herein).
4.2 -- Certificate of Limited Partnership of Kaneb Partners
(filed as Exhibit 3.2 to Kaneb Partners's Registration
Statement on Form S-1 (Reg. No. 33-30330) and
incorporated by reference herein).
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating to tax
matters.
***23.1 -- Consent of KPMG LLP.
***23.2 -- Consent of PricewaterhouseCoopers LLP.
*23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion filed as Exhibit 5.1
to the Registration Statement and the reference to
their firm in this Registration Statement is contained
in such opinion).
*23.4 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion filed as Exhibit 8.1
to the Registration Statement and the reference to
their firm in this Registration Statement is contained
in such opinion).
*24.1 -- Powers of Attorney (included on page II-5 of this
Registration Statement as originally filed).
</TABLE>
- --------
* Previously filed.
** To be filed as an exhibit to a current report on Form 8-K of the
registrant.
*** Filed herewith.
(b) Financial Statement Schedules
Not applicable.
ITEM 17. UNDERTAKINGS
I. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement.
i. To include any prospectus required by Section 10(a)(3) of
the Securities Act;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement; and
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in this Registration Statement;
provided, however, that paragraphs (9)(a)i and (9)(a)ii above do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Exchange Act that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
III. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the provisions
described in Item 15 above, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richardson, State of Texas, on the 17th day of
June, 1999.
KANEB PIPE LINE PARTNERS, L.P., by Kaneb
Pipe Line Company, as General Partner
By: EDWARD D. DOHERTY
Edward D. Doherty, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
amendment to Registration Statement has been signed by the following persons, in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
Chairman of the Board and
EDWARD D. DOHERTY Director
Edward D. Doherty (Principal Executive Officer) June 17, 1999
JIMMY L. HARRISON* Controller
Jimmy L. Harrison (Principal Financial and
Accounting Officer) June 17, 1999
SANGWOO AHN*
Sangwoo Ahn Director June 17, 1999
JOHN R. BARNES*
John R. Barnes Director June 17, 1999
MURRAY R. BILES*
Murray R. Biles Director June 17, 1999
FRANK M. BURKE, JR*.
Frank M. Burke, Jr. Director June 17, 1999
CHARLES R. COX*
Charles R. Cox Director June 17, 1999
HANS KESSLER*
Hans Kessler Director June 17, 1999
JAMES R. WHATLEY*
James R. Whatley Director June 17, 1999
*By EDWARD D. DOHERTY
Edward D. Doherty, as
Attorney-in-Fact for
each of the persons indicated
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
**1.1 -- Form of Underwriting Agreement.
4.1 -- Form of Amended and Restated Agreement of Limited
Partnership of Kaneb Partners (filed as Exhibit 4.1 to
Kaneb Partners's Quarterly Report on Form 10-Q filed
August 13, 1998 and incorporated by reference herein).
4.2 -- Certificate of Limited Partnership of Kaneb Partners
(filed as Exhibit 3.2 to Kaneb Partners's Registration
Statement on Form S-1 (Reg. No. 33-30330) and
incorporated by reference herein).
*5.1 -- Opinion of Fulbright & Jaworski L.L.P.
*8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating to tax
matters.
***23.1 -- Consent of KPMG LLP.
**23.2 -- Consent of PricewaterhouseCoopers LLP.
*23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion filed as Exhibit 5.1
to the Registration Statement and the reference to
their firm in this Registration Statement is contained
in such opinion).
*23.4 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion filed as Exhibit 8.1
to the Registration Statement and the reference to
their firm in this Registration Statement is contained
in such opinion).
*24.1 -- Powers of Attorney (included on page II-5 of this
Registration Statement as originally filed).
</TABLE>
- --------
* Previously filed.
** To be filed as an exhibit to a current report on Form 8-K of the
registrant.
*** Filed herewith.
II-5
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kaneb Pipe Line Company:
We consent to the use of our reports included herein and incorporated by
reference herein and to the reference to our firm under the heading "Experts"
in the Prospectus.
KPMG LLP
Dallas, Texas
June 17, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement of Form S-3 of our report dated February 19, 1998 relating to the
financial statements, which appears in Kaneb Pipe Line Partners, L.P.'s
Annual Report on Form 10-K for the year December 31, 1998. We also consent to
the reference to us under the heading "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
June 17, 1999
