Management’s Discussion and
Analysis of
Financial Condition and Results of Operations
The following is a discussion of the historical
consolidated financial condition and results of operations of K-Sea
Transportation Partners L.P. and should be read in conjunction with our
historical consolidated financial statements and notes thereto incorporated by
reference in this prospectus.
General
We are a leading provider of refined petroleum product
marine transportation, distribution and logistics services in the U.S. domestic
marine transportation business. We currently operate a fleet of 71 tank barges,
one tanker and 58 tugboats that serves a wide range of customers, including
major oil companies, oil traders and refiners. With approximately
4.2 million barrels of carrying capacity, we believe we operate the
largest coastwise tank barge fleet in the United States.
Demand for our
services is driven primarily by demand for refined petroleum products in the
areas in which we operate. We generate revenue by charging customers for the
transportation and distribution of their products utilizing our tank vessels
and tugboats. These services are generally provided under the following four
basic types of contractual relationships:
·
time
charters, which are contracts to charter a vessel for a fixed period of time,
generally one year or more, at a set daily rate;
·
contracts
of affreightment, which are contracts to provide transportation services for
products over a specific trade route, generally for one or more years, at a
negotiated per barrel rate;
·
voyage
charters, which are charters for shorter intervals, usually a single
round-trip, that are made on either a current market rate or advance
contractual basis; and
·
bareboat
charters, which are longer-term agreements that allow a customer to operate one
of our vessels and utilize its own operating staff without taking ownership of
the vessel.
In addition, a variation of a voyage charter is known
as a “consecutive voyage charter.” Under this arrangement, consecutive voyages
are performed for a specified period of time.
The
table below illustrates the primary distinctions among these types of
contracts:
|
|
|
Time Charter
|
|
Contract of
Affreightment
|
|
Voyage
Charter(1)
|
|
Bareboat
Charter
|
|
Typical contract length
|
|
One year or more
|
|
One year or more
|
|
Single voyage
|
|
Two years or more
|
|
Rate basis
|
|
Daily
|
|
Per barrel
|
|
Varies
|
|
Daily
|
|
Voyage expenses(2)
|
|
Customer pays
|
|
We pay
|
|
We pay
|
|
Customer pays
|
|
Vessel operating expenses(2)
|
|
We pay
|
|
We pay
|
|
We pay
|
|
We pay
|
|
Idle time
|
|
Customer pays as long as vessel is available for
operations
|
|
Customer does not pay
|
|
Customer does not pay
|
|
Customer pays
|
(1)
Under a consecutive
voyage charter, the customer pays for idle time.
(2)
See “Definitions” below.
For contracts of affreightment and voyage charters,
revenue is recognized based upon the relative transit time in each period, with
expenses recognized as incurred. Although contracts of affreightment and
S-24
certain contracts for
voyage charters may be effective for a period in excess of one year, revenue is
recognized over the transit time of individual voyages, which are generally
less than ten days in duration. For time charters and bareboat charters,
revenue is recognized ratably over the contract period, with expenses
recognized as incurred.
One of the principal
distinctions among these types of contracts is whether the vessel operator or
the customer pays for voyage expenses, which include fuel, port charges, pilot
fees, tank cleaning costs and canal tolls. Some voyage expenses are fixed, and
the remainder can be estimated. If we, as the vessel operator, pay the voyage
expenses, we typically pass these expenses on to our customers by charging
higher rates under the contract or re-billing such expenses to them. As a
result, although voyage revenue from different types of contracts may vary, the
net revenue that remains after subtracting voyage expenses, which we call net
voyage revenue, is comparable across the different types of contracts.
Therefore, we principally use net voyage revenue, rather than voyage revenue,
when comparing performance between different periods. Since net voyage revenue
is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement,
voyage revenue, under “Results of Operations” below.
Recent Developments
On August 14, 2007, we completed the acquisition
of all of the equity interests in Smith Maritime, Go Big and Sirius
Maritime. Smith Maritime, Go Big and Sirius Maritime are providers of marine
transportation and logistics services to major oil companies, oil traders and
refiners in Hawaii and along the West Coast of the United States. On a combined
basis, the operations of these companies included 11 petroleum tank barges and
14 tugboats, aggregating 777,000 barrels of capacity, of which 669,000 barrels,
or 86%, are double-hulled. The tank barges added by this acquisition represent
a 22% increase in the barrel-carrying capacity of our fleet to approximately
4.2 million barrels. The aggregate purchase price for Smith Maritime, Go Big
and Sirius Maritime was approximately $203.0 million, comprising $169.2 million
in cash, $23.6 million of assumed debt, and common units valued at
approximately $10.2 million. Prior to the acquisition, Gordon L.K. Smith
was the owner of 80.3% of the capital stock of Smith Maritime and 100% of the
equity interests in Go Big. Mr. Smith was also the sole member of Smith
Maritime, LLC, which owned 33
1
¤
3
% of the
membership interests in Sirius Maritime. Six of the 12 vessels operated by
Sirius Maritime were owned by subsidiaries of Smith Maritime or by Go Big and
chartered in by Sirius Maritime. Because the acquisition of Smith Maritime, Go
Big and Sirius Maritime was completed after June 30, 2007, the operations of
Smith Maritime, Go Big and Sirius Maritime are not included in the fourth
quarter or fiscal 2007 results.
Also on August 14, 2007, we amended and restated
our revolving credit agreement with KeyBank National Association, as
administrative agent and lead arranger, to provide for (1) an increase in
availability to $175.0 million under our senior secured revolving credit
facility, which we refer to as the revolving facility, with an extension of the
term to seven years, (2) a $45.0 million 364-day senior secured
revolving credit facility, which we refer to as the 364-day facility, (3) amendments
to certain financial covenants and (4) a reduction in interest rate
margins. Under certain conditions, we have the right to increase the revolving
facility by up to $75.0 million, to a maximum total facility amount of $250.0
million. The revolving facility and the 364-day facility are
collateralized by a first perfected security interest in vessels having a total
fair market value of approximately $275.0 million and certain equipment and
machinery related to such vessels. The revolving facility and the 364-day
facility bear interest at the London Interbank Offered Rate, or LIBOR, plus a
margin ranging from 0.7% to 1.5% depending on our ratio of total funded debt to
EBITDA (as defined in the agreement). On August 14, 2007, we borrowed
$67.0 million under the revolving facility and $45.0 million under the 364-day
facility to fund a portion of the purchase price of Smith Maritime, Go Big and
Sirius Maritime. As of August 14, 2007, we had approximately $166.4
million outstanding under the revolving facility and $45.0 million outstanding
under the 364-day facility.
S-25
Also on August 14,
2007, we entered into a bridge loan facility for up to $60.0 million with an
affiliate of KeyBank National Association. The bridge loan facility bears interest
at an annual rate of LIBOR plus 1.5%. The bridge loan facility matures on November 12,
2007. The bridge loan facility is not collateralized until October 13,
2007 and, thereafter, will be collateralized by a second perfected security
interest in the vessels collateralizing the revolving facility and the 364-day
facility. During an event of default, the bridge loan facility will bear
interest at an annual rate of LIBOR plus 7.5%. On August 14, 2007, we
borrowed $60.0 million under the bridge loan facility in connection with the Smith
Maritime, Go Big and Sirius Maritime acquisition.
Definitions
In order to
understand our discussion of our results of operations, it is important to
understand the meaning of the following terms used in our analysis and the
factors that influence our results of operations:
·
Voyage revenue.
Voyage revenue
includes revenue from time charters, contracts of affreightment and voyage
charters, where we, as vessel operator, pay the vessel operating expenses.
Voyage revenue is impacted by changes in charter and utilization rates and by
the mix of business among the types of contracts described in the preceding
sentence.
·
Voyage expenses.
Voyage expenses
include items such as fuel, port charges, pilot fees, tank cleaning costs and
canal tolls, which are unique to a particular voyage. Depending on the form of
contract and customer preference, voyage expenses may be paid directly by
customers or by us. If we pay voyage expenses, they are included in our results
of operations when they are incurred. Typically when we pay voyage expenses, we
add them to our freight rates at an approximate cost.
·
Net voyage revenue.
Net voyage
revenue is equal to voyage revenue less voyage expenses. As explained above,
the amount of voyage expenses we incur for a particular contract depends upon
the form of the contract. Therefore, in comparing revenues between reporting
periods, we use net voyage revenue to improve the comparability of reported
revenues that are generated by the different forms of contracts. Since net
voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP
measurement, voyage revenue, under “Results of Operations” below.
·
Bareboat charter and other revenue.
Bareboat
charter and other revenue includes revenue from bareboat charters and from
towing and other miscellaneous services.
·
Vessel operating expenses.
The most
significant direct vessel operating expenses are wages paid to vessel crews,
routine maintenance and repairs and marine insurance. We may also incur outside
towing expenses during periods of peak demand and in order to maintain our
operating capacity while our tugs are drydocked or otherwise out of service for
scheduled and unscheduled maintenance.
·
Depreciation and amortization.
We
incur fixed charges related to the depreciation of the historical cost of our
fleet and the amortization of expenditures for drydockings. The aggregate
number of drydockings undertaken in a given period, the size of the vessels and
the nature of the work performed determine the level of drydocking
expenditures. We capitalize expenditures incurred for drydocking and amortize
these expenditures over 36 months. We also amortize, over periods ranging
from four to ten years, intangible assets in connection with vessel
acquisitions.
·
General and administrative expenses.
General
and administrative expenses consist of employment costs of shoreside staff and
the cost of facilities, as well as legal, audit, insurance and other
administrative costs.
·
Total tank vessel days.
Total tank
vessel days is equal to the number of calendar days in the period multiplied by
the total number of tank vessels operating or in drydock during that period.
S-26
·
Scheduled drydocking days.
Scheduled
drydocking days are days designated for the inspection and survey of tank
vessels, and identification and completion of required refurbishment work, as
required by the U.S. Coast Guard and the American Bureau of Shipping to
maintain the vessels’ qualification to work in the U.S. coastwise trade.
Generally, drydockings are required twice every five years and last between 30
and 60 days, based upon the size of the vessel and the type and extent of
work required.
·
Net utilization.
Net utilization is
a primary measure of operating performance in our business. Net utilization is
a percentage equal to the total number of days worked by a tank vessel or group
of tank vessels during a defined period, divided by total tank vessel days for
that tank vessel or group of tank vessels. Net utilization is adversely
impacted by scheduled drydocking, scheduled and unscheduled maintenance and
idle time not paid for by the customer.
·
Average daily rate.
Average daily
rate, another key measure of our operating performance, is equal to the net
voyage revenue earned by a tank vessel or group of tank vessels during a
defined period, divided by the total number of days actually worked by that
tank vessel or group of tank vessels during that period. Fluctuations in
average daily rates result not only from changes in charter rates charged to
our customers, but also from changes in vessel utilization and efficiency,
which could result from internal factors, such as newer and more efficient tank
vessels, and from external factors such as weather or other delays.
·
Coastwise and local trades.
Our
business is segregated into coastwise trade and local trade. Our coastwise
trade generally comprises voyages of between 200 and 1,000 miles by vessels
with greater than 40,000 barrels of barrel-carrying capacity. These
voyages originate from the mid-Atlantic states to points as far north as Canada
and as far south as Cape Hatteras, from points within the Gulf Coast region to
other points within that region or to the Northeast, and to and from points on
the West Coast of the United States and Alaska. We also own two non-Jones Act
tank barges that transport petroleum products internationally. Our local trade
generally comprises voyages by smaller vessels of less than 200 miles. The term
U.S. coastwise trade is an industry term used generally for Jones Act purposes,
and would include both our coastwise and local trades.
S-27
Results of
Operations
The
following table summarizes our results of operations for the periods presented
(dollars in thousands, except average daily rates):
|
|
|
For the Years Ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Voyage revenue
|
|
$
|
216,924
|
|
$
|
176,650
|
|
$
|
118,811
|
|
|
Bareboat charter
and other revenue
|
|
9,650
|
|
6,118
|
|
2,583
|
|
|
Total revenues
|
|
226,574
|
|
182,768
|
|
121,394
|
|
|
Voyage expenses
|
|
45,875
|
|
37,973
|
|
24,220
|
|
|
Vessel operating
expenses
|
|
96,005
|
|
77,325
|
|
49,296
|
|
|
% of total revenues
|
|
42.4
|
%
|
42.3
|
%
|
40.6
|
%
|
|
General and
administrative expenses
|
|
20,472
|
|
17,309
|
|
11,163
|
|
|
% of total revenues
|
|
9.0
|
%
|
9.5
|
%
|
9.2
|
%
|
|
Depreciation and
amortization
|
|
33,415
|
|
26,810
|
|
21,399
|
|
|
Net (gain) loss
on sale of vessels
|
|
102
|
|
(313
|
)
|
(264
|
)
|
|
Operating income
|
|
30,705
|
|
23,664
|
|
15,580
|
|
|
% of total revenues
|
|
13.6
|
%
|
12.9
|
%
|
12.8
|
%
|
|
Interest expense,
net
|
|
14,097
|
|
10,118
|
|
5,949
|
|
|
Net loss on
reduction of debt
|
|
—
|
|
7,224
|
|
1,359
|
|
|
Other (income)
expense, net
|
|
(63
|
)
|
(64
|
)
|
(27
|
)
|
|
Income before provision for income taxes
|
|
16,671
|
|
6,386
|
|
8,299
|
|
|
Provision for
income taxes
|
|
851
|
|
484
|
|
163
|
|
|
Net income
|
|
$
|
15,820
|
|
$
|
5,902
|
|
$
|
8,136
|
|
|
Net voyage revenue by trade
|
|
|
|
|
|
|
|
|
Coastwise
|
|
|
|
|
|
|
|
|
Total tank vessel days
|
|
11,032
|
|
9,430
|
|
6,691
|
|
|
Days worked
|
|
9,954
|
|
8,467
|
|
6,035
|
|
|
Scheduled drydocking days
|
|
511
|
|
403
|
|
142
|
|
|
Net utilization
|
|
90
|
%
|
90
|
%
|
90
|
%
|
|
Average daily rate
|
|
$
|
12,375
|
|
$
|
11,967
|
|
$
|
11,369
|
|
|
Total coastwise net voyage revenue(a)
|
|
$
|
123,182
|
|
$
|
101,324
|
|
$
|
68,610
|
|
|
Local
|
|
|
|
|
|
|
|
|
Total tank vessel days
|
|
8,864
|
|
8,537
|
|
6,084
|
|
|
Days worked
|
|
6,987
|
|
6,534
|
|
4,795
|
|
|
Scheduled drydocking days
|
|
232
|
|
317
|
|
263
|
|
|
Net utilization
|
|
79
|
%
|
77
|
%
|
79
|
%
|
|
Average daily rate
|
|
$
|
6,851
|
|
$
|
5,717
|
|
$
|
5,418
|
|
|
Total local net voyage revenue(a)
|
|
$
|
47,867
|
|
$
|
37,353
|
|
$
|
25,981
|
|
|
Tank
vessel fleet
|
|
|
|
|
|
|
|
|
Total tank vessel days
|
|
19,896
|
|
17,967
|
|
12,775
|
|
|
Days worked
|
|
16,941
|
|
15,001
|
|
10,830
|
|
|
Scheduled drydocking days
|
|
743
|
|
720
|
|
405
|
|
|
Net utilization
|
|
85
|
%
|
83
|
%
|
85
|
%
|
|
Average daily rate
|
|
$
|
10,097
|
|
$
|
9,245
|
|
$
|
8,734
|
|
|
Total
fleet net voyage revenue(a)
|
|
$
|
171,049
|
|
$
|
138,677
|
|
$
|
94,591
|
|
(a)
Net
voyage revenue is a non
-
GAAP measure
which is defined above under “Definitions” and reconciled to Voyage revenue,
the nearest GAAP measure, under “Voyage
Revenue and Voyage Expenses” in the period-to-period comparisons below.
S-28
Fiscal Year Ended June 30,
2007 Compared to the Fiscal Year Ended June 30, 2006
Voyage Revenue and Voyage Expenses
Voyage revenue was $216.9
million for the fiscal year ended June 30, 2007, an increase of
$40.2 million, or 23%, as compared to voyage revenue of
$176.7 million for the fiscal year ended June 30, 2006. Voyage
expenses were $45.9 million for the fiscal year ended June 30, 2007,
an increase of $7.9 million, or 21%, as compared to voyage expenses of
$38.0 million for the fiscal year ended June 30, 2006.
Net Voyage Revenue
Net voyage revenue was $171.0 million for the
fiscal year ended June 30, 2007, an increase of $32.3 million, or
23%, as compared to net voyage revenue of $138.7 million for the fiscal
year ended June 30, 2006. In our coastwise trade, net voyage revenue was
$123.2 million for the fiscal year ended June 30, 2007, an increase of
$21.9 million, or 22%, as compared to $101.3 million for the fiscal year ended June 30,
2006. Net utilization in our coastwise
trade remained constant at 90% for both the fiscal year ended June 30,
2007 and 2006. The acquisition of Sea Coast Transportation LLC, or Sea Coast,
in October 2005 resulted in increased coastwise net voyage revenue of
$14.3 million for the fiscal year ended June 30, 2007, as compared to the
fiscal year ended June 30, 2006. Increases totaling $7.6 million in
coastwise net voyage revenue resulted from an increase in days worked by the
following vessels: (1) the DBL 103, which was placed in service in January 2006,
(2) the DBL 104, which was placed in service in April 2007, (3) the
McCleary’s Spirit, which was purchased in October 2005, and (4) the
DBL 53, which commenced operations in June 2006 after being rebuilt. These
increases were partially offset by a $1.0 million decrease in coastwise net
voyage revenue resulting from the loss of the DBL 152 in the previously
reported November 2005 barge incident. Average daily rates in coastwise
net voyage revenue increased 3% to $12,375 for the fiscal year ended June 30,
2007 from $11,967 for the fiscal year ended June 30, 2006, which accounted
for approximately $3.5 million of increased net voyage revenue.
Net voyage revenue in our
local trade for the fiscal year ended June 30, 2007 increased by $10.5
million, or 28%, to $47.9 million from $37.4 million for the year ended June 30,
2006. The acquisition of Sea Coast in October 2005 resulted in increased
local net voyage revenue of $1.8 million for the fiscal year ended June 30,
2007, as compared to the fiscal year ended June 30, 2006. Additionally,
local net voyage revenue increased by $8.6 million for the fiscal year ended June 30,
2007 due to the increased number of work days for the newbuild barges DBL 28,
DBL 29 and DBL 26, and BDL 27 delivered in March 2006, May 2006, August 2006,
and January 2007, respectively. This was partially offset by the
retirement of three small tank vessels which decreased net voyage revenue by
$3.4 million. Net utilization in our local trade was 79% for the fiscal year
ended June 30, 2007, compared to 77% for the fiscal year ended June 30,
2006. Average daily rates in our local trade increased 20% to $6,851 for the
fiscal year ended June 30, 2007 from $5,717 for the comparative prior
year, positively impacted by higher charter rates resulting from strong market
conditions, particularly for short term charters. Increased charter rates
accounted for approximately $5.1 million of increased net voyage revenue for
the fiscal year ended June 30, 2007.
Bareboat Charter and Other Revenue
Bareboat charter and other
revenue was $9.7 million for the fiscal year ended June 30, 2007, compared
to $6.1 million for the fiscal year ended June 30, 2006. Of this $3.6
million increase, $1.5 million was generated by increased outside chartering of
tank barges and $1.9 million was generated by a small lube oil operation
purchased in the fall of 2006.
S-29
Vessel Operating Expenses
Vessel operating expenses
were $96.0 million for the fiscal year ended June 30, 2007, an increase of
$18.7 million, or 24%, as compared to $77.3 million for the fiscal year ended June 30,
2006. Vessel operating expenses as a percentage of total revenues increased to 42.4%
for the fiscal year ended June 30, 2007 from 42.3% for the fiscal year
ended June 30, 2006, resulting mainly from a higher such percentage for
the Sea Coast vessels acquired in October 2005 and increased outside
towing during tugboat shipyard periods. Four of the Sea Coast barges are
chartered in, and we pay a charter fee that is included in vessel operating
expenses. The charter fee increases the percentage of vessel operating expenses
to net voyage revenue; however, there is no associated depreciation or interest
expense. Vessel labor and related costs increased $11.4 million as a result of
contractual labor rate increases and a higher average number of employees due
to the operation of the additional barges described under “—Net voyage revenue”
above, and additional tugboats purchased in October 2005, November 2006,
and April 2007. Insurance costs and vessel repairs and supplies increased
$4.0 million as a result of the operation of the larger number of vessels. Additionally,
outside towing increased $1.3 million due to higher shipyard days of our
tugboats.
Depreciation and Amortization
Depreciation and
amortization was $33.4 million for fiscal 2007, an increase of $6.6 million, or
25%, as compared to $26.8 million for the fiscal year ended June 30, 2006.
The increase resulted from additional depreciation and drydocking amortization
on our newbuild and purchased vessels described above, plus $0.4 million in
increased amortization of certain intangible assets acquired in our acquisition
of Sea Coast.
General and Administrative Expenses
General and administrative
expenses were $20.5 million for the fiscal year ended June 30, 2007, an
increase of $3.2 million, or 18%, as compared to general and administrative
expenses of $17.3 million for the fiscal year ended June 30, 2006. As a
percentage of total revenues, general and administrative expenses decreased to 9.0%
for the fiscal year ended June 30, 2007 from 9.5% for the fiscal year
ended June 30, 2006. The $3.2 million increase included $1.1 million of
increased personnel and facilities costs resulting from the Sea Coast acquisition,
and also a $2.2 million increase relating to increased headcount and facilities
costs of our new corporate office and a small satellite office in Philadelphia
to support our growth.
Interest Expense, Net
Net interest expense was
$14.1 million for the fiscal year ended June 30, 2007, or $4.0 million
higher than the $10.1 million incurred in fiscal year ended June 30, 2006.
The increase resulted from higher average debt balances resulting from
increased credit line and term loan borrowings in connection with our
acquisition and vessel newbuilding program, and higher average interest rates.
Loss on Reduction of Debt
In November 2005, in
connection with our redemption of the Title XI bonds (see “—Liquidity and
Capital Resources—Title XI Borrowings” below), we made a make-whole payment of
$4.0 million. After writing off $2.7 million in unamortized deferred financing
costs relating to the Title XI bonds, and after costs and expenses relating to
the transaction, we recorded a loss on reduction of debt of $6.9 million. We
recorded an additional $0.3 million of loss on reduction of debt in April 2006
resulting from the write-off of deferred financing costs relating to a
downsizing of our revolving credit facility.
S-30
Provision For Income Taxes
For fiscal 2007, our
effective tax rate decreased to 5.1%, compared to 7.6% in fiscal 2006. Our
effective tax rate comprises the New York City Unincorporated Business Tax and
foreign taxes on our operating partnership, plus federal, state, local and
foreign corporate income taxes on the taxable income of our operating
partnership’s corporate subsidiaries. Our effective tax rate for the fiscal
year ended June 30, 2007 was lower than the comparable prior year period
primarily because a smaller percentage of our pre-tax book income related to
our corporate subsidiaries.
Net Income
Net income was $15.8
million for the fiscal year ended June 30, 2007, an increase of $9.9
million compared to net income of $5.9 million for the fiscal year ended June 30,
2006. This increase resulted primarily from a $7.2 million decrease in net loss
on reduction of debt and a $7.0 million increase in operating income partially
offset by a $4.0 million increase in interest expense and a $0.4 million
increase in the provision for income taxes.
Fiscal Year Ended June 30,
2006 Compared to the Fiscal Year Ended June 30, 2005
Voyage Revenue and Voyage Expenses
Voyage revenue was $176.7
million for the fiscal year ended June 30, 2006, an increase of
$57.9 million, or 49%, as compared to voyage revenue of
$118.8 million for the fiscal year ended June 30, 2005. Voyage
expenses were $38.0 million for the fiscal year ended June 30, 2006,
an increase of $13.8 million, or 57%, as compared to voyage expenses of
$24.2 million for the fiscal year ended June 30, 2005.
Net Voyage Revenue
Net voyage revenue was $138.7 million for the
fiscal year ended June 30, 2006, an increase of $44.1 million, or
47%, as compared to net voyage revenue of $94.6 million for the fiscal
year ended June 30, 2005. In our coastwise trade, net voyage revenue was
$101.3 million for the fiscal year ended June 30, 2006, an increase of
$32.7 million, or 48%, as compared to $68.6 million for the fiscal year ended June 30,
2005. Net utilization in our coastwise
trade remained constant at 90% for each fiscal year. The acquisition of Sea
Coast in October 2005 resulted in increased coastwise net voyage revenue
of $23.0 million in fiscal 2006, compared to fiscal 2005. Other increases for
the year ended June 30, 2006 included $14.0 million in coastwise net
voyage revenue resulting from an increase in days worked by the following
vessels: (1) the DBL 78, which was
placed in service in June 2005, (2) the KTC 50, which was placed in
service in January 2005, (3) the Spring Creek, which was in shipyard
for most of the fiscal 2005 second quarter in preparation for a new time
charter which commenced in January 2005, (4) the DBL 103, which was
placed in service in January 2006, (5) the McCleary’s Spirit, a
Canadian-flag vessel which was purchased in October 2005, and (6) the
DBL 155, which returned to service in September 2004 after its
double-hulling. These increases were partially offset by a $7.2 million
decrease in coastwise net voyage revenue during fiscal 2006 resulting from the
phase-out of the KTC 90 and KTC 96 in December 2004, and the loss of the
DBL 152. Coastwise net voyage revenue also benefited from a 5% increase in
average daily rates to $11,967 for the year ended June 30, 2006 from
$11,369 for the year ended June 30, 2005, which accounted for
approximately $3.6 million of increased net voyage revenue. Coastwise average
daily rates were positively impacted by the continuing strong demand for
petroleum products and increasing oil prices.
Net voyage revenue in our
local trade for the year ended June 30, 2006 increased by $11.4 million,
or 44%, to $37.4 million from $26.0 million for the year ended June 30,
2005. The acquisition of Sea Coast in October 2005 resulted in increased
local net voyage revenue of $5.8 million for fiscal 2006. Additionally,
S-31
local
net voyage revenue increased by $3.0 million during the year ended June 30,
2006 due to the increased number of work days for vessels acquired in our
Norfolk acquisition in December 2004. The newbuild barges DBL 28 and DBL
29, delivered during the third and fourth quarters of fiscal 2006, contributed
$0.8 million of net voyage revenue. Net utilization in our local trade was 77%
for the year ended June 30, 2006, compared to 79% for the year ended June 30,
2005. Average daily rates in our local trade increased 6% to $5,717 for the
year ended June 30, 2006 from $5,418 for the comparative prior year,
positively impacted by higher charter rates resulting from strong market
conditions, which accounted for approximately $1.4 million of increased net
voyage revenue.
Bareboat Charter and Other Revenue
Bareboat charter and other
revenue was $6.1 million for the fiscal year ended June 30, 2006, compared
to $2.6 million for the fiscal year ended June 30, 2005. Of this $3.5
million increase, $1.5 million resulted from increased revenue from our water
treatment plant in Norfolk, and an additional $1.8 million was generated by
outside chartering of tank barges by Sea Coast.
Vessel Operating Expenses
Vessel operating expenses
were $77.3 million for the fiscal year ended June 30, 2006, an increase of
$28.0 million, or 57%, as compared to $49.3 million for the fiscal year ended June 30,
2005. Vessel operating expenses as a percentage of total revenues increased to 42.3%
for the fiscal year ended June 30, 2006 from 40.6% for the fiscal year
ended June 30, 2005, resulting
mainly from a higher such percentage for the Sea Coast vessels acquired in October 2005.
Four of the Sea Coast barges are chartered in, and we pay a charter fee that is
included in vessel operating expenses. The charter fee increases the percentage
of vessel operating expenses to net voyage revenue; however, there is no
associated depreciation or interest expense. Vessel labor and related costs
increased as a result of contractual labor rate increases and a higher average
number of employees due to the operation of the additional barges described
under “—Net Voyage Revenue” above, an additional tugboat purchased in October 2005,
and integration of the additional vessels purchased in December 2004. Insurance
costs and vessel repairs and supplies also increased as a result of the
operation of the larger number of vessels. Outside towing expense increased by
$1.8 million due to the need for additional tugboats to satisfy increased
demand for our tank vessels, and to replace certain of our tugboats during
coupling and re-powering projects.
Depreciation and Amortization
Depreciation and
amortization was $26.8 million for fiscal 2006, an increase of $5.4 million, or
25%, as compared to $21.4 million for the fiscal year ended June 30, 2005.
The increase resulted from additional depreciation and drydocking amortization
on our newbuild and purchased vessels described above, plus $0.7 million in
amortization of certain intangible assets acquired in our acquisition of Sea
Coast.
General and Administrative Expenses
General and administrative
expenses were $17.3 million for the fiscal year ended June 30, 2006, an
increase of $6.1 million, or 54%, as compared to general and administrative
expenses of $11.2 million for the fiscal year ended June 30, 2005. As a
percentage of total revenues, general and administrative expenses increased to 9.5%
for the fiscal year ended June 30, 2006 from 9.2% for the fiscal year
ended June 30, 2005. The $6.1 million increase reflected $4.7 million of
increased personnel and facilities costs in support of our growth, including
the Norfolk and Sea Coast acquisitions, and $0.3 million in costs related to a
cancelled bond offering.
S-32
Interest Expense, Net
Net interest expense was
$10.1 million for the year ended June 30, 2006, or $4.2 million higher
than the year ended June 30, 2005. The increase resulted from higher
average debt balances resulting from increased credit line and term loan
borrowings in connection with the Norfolk vessel acquisitions in fiscal 2005,
the Sea Coast acquisition in October 2005, and higher average interest
rates.
Loss on Reduction of Debt
In connection with our redemption of the Title XI
bonds, we made a make-whole payment of $4.0 million. After writing off $2.7
million in unamortized deferred financing costs relating to these bonds, and
after costs and expenses relating to the transaction, we recorded a loss on
reduction of debt of $6.9 million. We recorded an additional $0.3 million of
loss on reduction of debt in April 2006 resulting from the write-off of
deferred financing costs relating to a downsizing of our revolving credit
facility.
In connection with the
refinancing of our revolving credit facility and repayment of certain term
loans in March 2005, we incurred a $1.4 million loss on reduction of debt.
Included in this amount was $1.1 million in deferred financing costs related to
the repaid debt that were written off, and $0.3 million of prepayment costs.
Provision (Benefit) For Income Taxes
For fiscal 2006, our
effective tax rate increased to 7.6%, compared to 2.0% in fiscal 2005, owing to
an increased amount of non U.S. taxes incurred relative to our operations in
Puerto Rico, Venezuela and Canada. Our effective tax rate comprises the New
York City Unincorporated Business Tax and foreign taxes on our operating
partnership, plus federal, state, local and foreign corporate income taxes on
the taxable income of the operating partnership’s corporate subsidiaries.
Net Income
Net income was $5.9
million for the fiscal year ended June 30, 2006, a decrease of $2.2
million compared to net income of $8.1 million for the fiscal year ended June 30,
2005. This decrease resulted primarily from the $7.2 million loss on reduction
of debt, the $4.2 million increase in interest expense, net, and the $0.3
million increase in the provision for income taxes, which were partially offset
by the $8.1 million increase in operating income. The year ended June 30,
2005 included a $1.4 million loss on reduction of debt.
Liquidity and
Capital Resources
Operating
Cash Flows.
Net
cash provided by operating activities was $41.6 million in fiscal 2007, $20.8
million in fiscal 2006 and $24.2 million in fiscal 2005. The increase of $20.8
million in fiscal 2007, compared to fiscal 2006, resulted primarily from $14.7
million of improved operating results, after adjusting for non-cash expenses
such as depreciation and amortization and net loss on reduction of debt, and a
$9.0 million positive impact from changes in operating working capital,
partially offset by increased drydocking payments of $2.9 million. The decrease
of $3.4 million in fiscal 2006, compared to fiscal 2005, resulted primarily
from a $4.9 million increase in drydocking expenditures and a $3.8 million
negative impact from changes in operating working capital, partially offset by
the improved operating income of $5.3 million, after adjusting for the
aforementioned non-cash expenses. During the year ended June 30, 2007, our
working capital decreased mainly due to increases in accrued expenses and other
current liabilities resulting from increased payroll, self-insured medical and
claim accruals, and decreased prepaid and other current assets resulting mainly
from the collection of insurance claim receivables. During the year ended June 30,
2006, working capital increased primarily as a result of increased accounts
receivable
S-33
due to increased revenues
and increased prepaid and other current assets primarily as a result of
increases in insurance claims receivable.
Investing
Cash Flows.
Net
cash used in investing activities totaled $63.7 million in fiscal 2007,
$105.4 million in fiscal 2006 and $55.9 million in fiscal 2005. The
primary elements of these activities were acquisitions of vessels and
companies, and construction of new vessels. Vessel acquisitions, which totaled
$16.2 million for the fiscal year ended June 30, 2007, included the
purchase of five tugboats and the purchase of certain small tank vessels. In
fiscal 2006, we spent $76.5 million in cash, net, to acquire Sea Coast in October 2005.
Also during fiscal 2006, we acquired an 85,000-barrel integrated
tug-barge unit for approximately $13.1 million. During fiscal 2005, we acquired
ten tank barges and seven tugboats from Bay Gulf Trading Company, Ltd. of Norfolk,
Virginia and its affiliates. The purchase price of $21.2 million, included a
water treatment facility in Norfolk. The fiscal 2005 acquisitions included the
Norfolk vessels and also the DBL 78, which was acquired in June 2005. Construction
expenditures for our tank vessel newbuilding program and rebuilding projects
totaled $33.3 million in fiscal 2007, $20.7 million in fiscal 2006
and $16.8 million in fiscal 2005. Other capital expenditures of
$14.8 million in fiscal 2007, $9.1 million in fiscal 2006 and
$9.0 million in fiscal 2005 related primarily to re-powering of, and
installation of coupling systems on, certain tugboats used with our newbuild
tank barges, and expenditures related to upgrading the vessels acquired in December 2004.
Additionally, in fiscal 2007, we completed rebuilding of one of our larger tank
vessels. Capital expenditures made in the normal course of business are
generally financed by cash from operations and, where necessary, borrowings
under our credit agreement.
Financing
Cash Flows.
Net
cash provided by financing activities was $22.1 million in fiscal 2007,
$85.4 million in fiscal 2006, and $31.4 million in fiscal 2005. During the year ended June 30, 2007, we
increased our credit line borrowings by $43.1 million, increased borrowings on term loans by $14.9 million
to finance the construction of new tank barges, repaid term loans by $7.7
million, and paid $27.1 million in distributions to partners.
In fiscal 2006, our primary financing activities were
the issuance of $109.4 million in new term loans and $34.0 million in gross
proceeds from the sale of 950,000 common units in October 2005. These
proceeds were used in financing the Sea Coast acquisition and the other
investing activities described above. Additionally, we paid $36.8 million to
redeem the principal balance of the Title XI bonds, and made $23.0 million of
distributions to partners. We also amended our revolving credit agreement (see “—Credit
Agreement” below) and increased our credit line borrowings by $6.9 million.
As a result of a restructuring of our financial
agreement for the Title XI bonds in January 2004, we were required to make
monthly reserve fund deposits which were used to make semi-annual debt service
payments. The principal portion of such deposits, which are reflected as
principal payments to Title XI reserve funds, were $0.7 million and $1.6
million for fiscal 2006, and 2005, respectively. When we redeemed the Title XI
bonds in November 2005, the balance of the Title XI reserve funds,
totaling $2.9 million which are reflected as proceeds from Title XI reserve
funds under “Investing Cash Flows” above, was returned to us. For more
information, please read “—Title XI Borrowings” below.
During fiscal 2005, we increased our credit line
borrowings and term loans by a net of $36.8 million, primarily to finance
vessel acquisitions. We also paid $18.2 million in distributions to our
unitholders in fiscal 2005. In March 2005, we signed a new five-year $80.0
million credit agreement with a syndicate of banks, which replaced our
then-existing $47.0 million credit agreement, which was repaid and terminated. On
June 1, 2005, we issued and sold 500,000 common units in a private
placement for gross proceeds of $16.0 million.
Oil
Pollution Act of 1990.
Tank
vessels are subject to the requirements of OPA 90. OPA 90 mandates that all
single-hull tank vessels operating in U.S. waters be removed from petroleum and
petroleum product transportation services at various times through January 1,
2015, and provides a schedule for the phase-out of the single-hull vessels
based on their age and size. At June 30, 2007, approximately 71% of the
S-34
barrel-carrying
capacity of our tank vessel fleet was double-hulled in compliance with
OPA 90, and the remainder will be in compliance with OPA 90 until January 2015.
Ongoing Capital
Expenditures.
Marine
transportation of refined petroleum products is a capital intensive business,
requiring significant investment to maintain an efficient fleet and to stay in
regulatory compliance. We estimate that, over the next five years, we will
spend an average of approximately $20.5 million per year to drydock and maintain
our fleet. We expect drydocking and maintenance expenditures to approximate $21.5 million
in fiscal 2008. In addition, we anticipate that we will spend $1.0 million
annually for other general capital expenditures. Periodically, we also make
expenditures to acquire or construct additional tank vessel capacity and/or to
upgrade our overall fleet efficiency. For a further discussion of maintenance and
expansion capital expenditures, please read footnote 4 to the table in Selected
Historical and Unaudited Pro Forma Financial and Operating Data included
elsewhere in this prospectus supplement. The following table summarizes total
maintenance capital expenditures, including drydocking expenditures, and
expansion capital expenditures for the periods presented (in thousands):
|
|
|
Years Ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Maintenance
capital expenditures
|
|
$
|
20,337
|
|
$
|
13,753
|
|
$
|
8,024
|
|
|
Expansion capital
expenditures (including vessel and company acquisitions)
|
|
25,960
|
|
97,420
|
|
39,337
|
|
|
Total capital expenditures
|
|
$
|
46,297
|
|
$
|
111,173
|
|
$
|
47,361
|
|
|
Construction of tank vessels
|
|
$
|
33,315
|
|
$
|
20,702
|
|
$
|
16,816
|
|
During
fiscal 2007, we took delivery of the following newbuild vessels: in June 2007, a 28,000-barrel tank
barge, the DBL 22; in March 2007, a 100,000-barrel tank barge, the
DBL 104; in January 2007, a 28,000-barrel tank barge, the DBL 27;
and in August 2006, a 28,000-barrel tank barge, the DBL 26. Additionally,
we acquired five tugboats during the year. These tank barges and tugboats cost,
$40.1 million in the aggregate. We have also entered into agreements with
shipyards for the construction of additional new tank barges, as follows:
|
Vessels
|
|
|
|
Expected Delivery
|
|
Three 28,000-barrel tank barges
|
|
1st Quarter fiscal
2008 - 3
rd
Quarter
fiscal 2008
|
|
Three 80,000-barrel tank barges
|
|
4th Quarter fiscal
2008 - 1st Quarter fiscal 2009
|
|
Four 50,000-barrel tank barges
|
|
2
nd
Quarter fiscal 2010 -
2
nd
Quarter
fiscal 2011
|
The four barges listed above are expected to cost, in
the aggregate and after the addition of certain special equipment,
approximately $100.0 million, of which $13.3 million has been spent as of June 30,
2007.
Additionally, we intend to retire, retrofit or replace
28 (including four chartered-in) single-hull tank vessels by December 2014,
which at August 15, 2007 represented approximately 27% of our barrel-carrying
capacity. The capacity of certain of these single-hulled vessels has already
been effectively replaced by double-hulled vessels placed into service in the
past two years. We estimate that the current cost to replace the remaining
capacity with newbuildings and by retrofitting certain of our existing vessels
will range from $80.0 million to $82.0 million. This capacity can also be
replaced by acquiring existing double-hulled tank vessels as opportunities
arise. We evaluate the most cost-effective means to replace this capacity on an
ongoing basis. In addition, we will deduct an additional $2.0 million per year
from the cash that we would otherwise distribute to our unitholders to
contribute to the replacement of the operating capacity of our single hull
vessels when they phase-out under OPA 90 in January 2015.
Liquidity
Needs.
Our
primary short-term liquidity needs are to fund general working capital
requirements, distributions to unitholders, and drydocking expenditures while
our long term liquidity needs are primarily associated with expansion and other
maintenance capital expenditures. Expansion
S-35
capital expenditures are
primarily for the purchase of vessels, while maintenance capital expenditures
include drydocking expenditures and the cost of replacing tank vessel operating
capacity. Our primary sources of funds for our short term liquidity needs are
cash flows from operations and borrowings under our credit agreement, while our
long term sources of funds are cash from operations, long term bank borrowings
and other debt or equity financings.
We believe that cash flows from operations and
borrowings under our credit agreement, described under “—Credit Agreement”
below, will be sufficient to meet our liquidity needs for the next 12 months.
Credit
Agreement.
In March 2005, we entered into a
new five-year $80.0 million revolving credit agreement with a syndicate of
banks led by KeyBank National Association. The credit agreement replaced our
then-existing $47.0 million revolving credit agreement, which was repaid and
terminated. On October 18, 2005, to partially finance the acquisition of
Sea Coast, we amended our credit agreement to increase the available borrowings
to $120.0 million, of which $77.0 million was drawn down to pay the cash
portion of the purchase price. On November 29, 2005, to fund the
redemption of our Title XI bonds (see “Title XI Borrowings” below), we further
amended the credit agreement to increase the maximum borrowings to $155.0
million. On April 3, 2006, we used the net proceeds from the issuance of
$80.0 million in new term loans to repay outstanding borrowings under the credit
agreement, and further amended it to reduce the available borrowings, to
release certain vessels from the collateral pool, and to reduce certain covenant
requirements. During fiscal 2007, we further amended the credit agreement to
add additional bank participants, increase the available borrowings, amend
certain financial covenants and reduce interest rates.
On August 14, 2007,
we amended and restated the credit agreement to provide for (1) an increase in
availability to $175.0 million under a senior secured revolving credit
facility, which we refer to as the revolving facility, with an extension of the
term to seven years to August 2014, (2) a $45.0 million 364-day senior secured
revolving credit facility, which we refer to as the 364-day facility, (3)
amendments to certain financial covenants and (4) a reduction in interest rate
margins. Under certain conditions, we have the right to increase the revolving
facility by up to $75.0 million, to a maximum total facility amount of $250.0
million. The revolving facility and the 364-day facility are collateralized by
a first perfected security interest in vessels having a total fair market value
of approximately $275.0 million and certain equipment and machinery related to
such vessels. On August 14, 2007, we borrowed $67.0 million under the revolving
facility and $45.0 million under the 364-day facility to fund a portion of the
purchase price of Smith Maritime, Go Big and Sirius Maritime. As of August 14,
2007, we had approximately $166.4 million outstanding under the revolving
facility and $45.0 million outstanding under the 364-day facility.
The
following table summarizes the rates of interest and commitment fees for the
revolving facility and 364-day facility under our credit agreement:
|
Ratio of Total Funded Debt to EBITDA
|
|
|
|
LIBOR
Margin
|
|
Base Rate
Margin
|
|
Commitment
Fee
|
|
|
Less than 2.00 :
1.00
|
|
0.70
|
%
|
|
0.00
|
%
|
|
|
0.150
|
%
|
|
|
Greater than or
equal to 2.00 : 1.00 and less than 2.50 : 1.00
|
|
0.85
|
%
|
|
0.00
|
%
|
|
|
0.150
|
%
|
|
|
Greater than or
equal to 2.50 : 1.00 and less than 3.00 : 1.00
|
|
1.10
|
%
|
|
0.00
|
%
|
|
|
0.200
|
%
|
|
|
Greater than or
equal to 3.00 : 1.00 and less than 3.50 : 1.00
|
|
1.25
|
%
|
|
0.00
|
%
|
|
|
0.200
|
%
|
|
|
Greater than or equal to
3.50 : 1.00
|
|
1.50
|
%
|
|
0.25
|
%
|
|
|
0.300
|
%
|
|
S-36
Interest on a base rate
loan is payable monthly over the term of the agreement, and outstanding
principal amounts under the 364-day facility are due on August 12, 2008. Interest
on a LIBOR-based loan is due, at our election, one, two or three months after
such loan is made. Outstanding principal amounts are due upon termination of
the credit agreement.
Loan proceeds under the credit
agreement may be used for any purpose in the ordinary course of business,
including vessel acquisitions, ongoing working capital needs and distributions.
Amounts borrowed and repaid may be re-borrowed. Borrowings made for working
capital purposes must be reduced to zero for a period of at least 15
consecutive days once each year.
The credit
agreement contains covenants that include, among others:
·
the maintenance of the
following financial ratios (all as defined in the agreement):
·
EBITDA
to fixed charges of at least 1.85 to 1.00;
·
maximum
first lien funded debt to EBITDA of no greater than 4.25 to 1.00 until the “Adjustment
Date,” defined as the earlier of (i) December 31, 2007 or (ii) payment of the
364-Day Facility and the Bridge Facility using other than second-priority
lien or subordinated debt. After the Adjustment Date, the ratio steps down to
4.00 to 1.00; and
·
total
funded debt to EBITDA of no greater than 4.75 to 1.00 until the Adjustment
Date, and thereafter stepping down to 4.00 to 1.00;
·
restrictions
on creating liens on or disposing of the vessels collateralizing the credit
agreement, subject to permitted exceptions;
·
restrictions
on merging and selling assets outside the ordinary course of business;
·
prohibitions
on making distributions to limited or general partners of ours during the
continuance of an event of default; and
·
restrictions
on transactions with affiliates and materially changing our business.
The credit agreement
contains customary events of default. If a default occurs and is continuing, we
must repay all amounts outstanding under the agreement.
Other Term Loans.
On August 14, 2007, we entered into a
bridge loan facility for up to $60.0 million with an affiliate of KeyBank
National Association. The bridge loan facility bears interest at a rate per
annum equal to, at our option, (a) the greater of the prime rate and the
federal funds rate plus 0.25% or (b) the 30-day LIBOR plus a margin of 1.50%.
Interest is due on a monthly basis. The bridge loan facility matures on
November 12, 2007. The bridge loan facility is not collateralized until October
13, 2007, and thereafter, will be collateralized by a second perfected security
interest in the vessels collateralizing the revolving facility and the 364-day
facility. During an event of default, the bridge loan facility will bear
interest at an annual rate of LIBOR plus 7.5%. On August 14, 2007, we borrowed
$60.0 million under the bridge loan facility in connection with the Smith
Maritime and Sirius Maritime acquisition.
Also on August 14, 2007 in connection with the Smith
Maritime, Go Big and Sirius Maritime acquisition, we assumed two term loans
totaling $23.6 million. The first, in the amount of $19.5 million, bears
interest at the same LIBOR-based variable rate as the credit agreement (see
table under “—Credit Agreement” above) and is repayable in equal monthly
installments of $147,455, plus interest, until August 2018. The second, in the
amount of $4.0 million, bears interest at LIBOR plus 1.0% and is repayable in
monthly installments ranging from $59,269 to $81,320, plus interest, until May
2012. The loans are collateralized by three tank barges. We also agreed with
the related lending institution to assume the two existing interest rate swaps
relating to these two loans. The LIBOR-based, variable interest payments on
these loans have been swapped for fixed payments at an average rate of 5.44%,
over the same terms as the loans.
S-37
On April 3, 2006, we
entered into an agreement with a lending institution to borrow $80.0 million,
for which we pledged six tugboats and six tank barges as collateral. We used
the
proceeds of these loans to repay indebtedness under our credit agreement. Borrowings are represented by six notes which
have been assigned to other lending institutions. These loans bear interest at
a rate equal to LIBOR on one-month Eurodollar deposits plus 1.40%, and are
repayable in 84 monthly installments with the remaining principal payable at
maturity. The agreement contains certain prepayment premiums. Borrowings
outstanding on these loans totaled $75.9 million as of June 30, 2007. Also
on April 3, 2006, we entered into an agreement with the lending institution
to swap the one-month, LIBOR based, variable interest payments on the $80.0
million of loans for a fixed payment at a rate of 5.2275%, over the same terms
as the loans. This swap will result in a fixed interest rate on the Notes of
6.6275% for their seven-year term. This swap contract has been designated as a
cash flow hedge. Therefore, the unrealized gains and losses during fiscal 2007
and 2006 resulting from the change in fair value of the swap contract have been
reflected in other comprehensive income. The fair value of the swap contract of
$0.4 million and $1.1 million as of June 30, 2007 and 2006,
respectively, is included in other assets in the consolidated balance sheet.
On December 19, 2005, one of our subsidiaries
entered into a seven year Canadian dollar term loan to refinance purchase of an
integrated tug-barge unit. The proceeds of $13.0 million were used to repay
borrowings under the amended revolving credit agreement which had been used to
finance purchase of the unit. The loan bears interest at a fixed rate of 6.59%,
is repayable in 84 monthly installments of CDN 136,328 with the remaining
principal amount payable at maturity, and is collateralized by the related
tug-barge unit and one other tank barge. Borrowings outstanding on this loan
total $13.4 million as of June 30, 2007.
In May 2006, we entered into an agreement to
borrow up to $23.0 million to partially finance construction of two 28,000-barrel
and one 100,000-barrel tank barges. The third and final vessel was
delivered, and the note termed-out, during the fourth quarter of fiscal 2007. The
loan bears interest at 30-day LIBOR plus 1.40%, and is repayable, plus
accrued interest, over seven years, with the remaining principal amount payable
at maturity. The loan is collateralized by the related tank barges and two
other tank vessels. Borrowings outstanding on this loan total $20.3 million at June 30, 2007.
In March 2005, we entered into an agreement to
borrow up to $11.0 million to partially finance construction of a 100,000-barrel
tank barge. The loan bears interest at 30-day LIBOR plus 1.05%, and is
repayable in monthly principal installments of $65,500 with the remaining
principal amount payable at maturity. The loan is collateralized by the related
tank barge. Borrowings outstanding on this loan totaled $9.9 million at June 30,
2007.
In March 2005 we entered into a three-year term
loan in the amount of $11.7 million.
The loan bears interest at a fixed rate of 6.25% annually, and is repayable in
monthly principal installments of $69,578 with the remaining principal amount
payable at maturity. The loan is collateralized by three vessels and the
proceeds were used to refinance an existing term loan. Borrowings outstanding
on this loan total $9.8 million
at June 30, 2007, but it is classified as a long-term liability because we
intend to refinance it with our credit agreement.
In June 2005, we entered into an agreement to
borrow up to $18.0 million to finance the purchase of an 80,000-barrel double-hull
tank barge and construction of two 28,000-barrel double-hull tank barges.
The loan bears interest at 30-day LIBOR plus 1.71%, and is repayable in
monthly principal installments of $107,143 with the remaining principal amount
payable at maturity. The loan is collateralized by the related tank barges. Borrowings
outstanding on this loan were $16.6 million at June 30, 2007.
Title
XI Borrowings.
On
June 7, 2002, to provide financing for four newbuild tank vessels, we
privately placed $40.4 million of bonds (“Title XI bonds”), which were
guaranteed by the Maritime Administration of the U.S. Department of
Transportation, or MARAD, pursuant to Title XI of the Merchant Marine Act of
1936. The proceeds of $39.1 million, net of certain closing fees, were deposited
in
S-38
a reserve account with the
U.S. Department of the Treasury and used to fund construction of the related
vessels. On November 29, 2005, we redeemed the outstanding $36.8 million
principal balance of bonds, paid $0.8 million of accrued interest, and made a
make-whole payment of $4.0 million as required under the trust indenture. We
funded the redemption using funds from our revolving credit agreement. After
writing off $2.7 million in unamortized deferred financing costs, and after
costs and expenses relating to the transaction, we recorded a loss on reduction
of debt of $6.9 million. Retirement of the Title XI bonds improved our
borrowing flexibility, and eliminated certain restrictive covenants, collateral
requirements, and working capital constraints.
Restrictive
Covenants.
The
agreements governing our credit facility and term loans contain restrictive
covenants that, among others, (a) prohibit distributions under defined
events of default, (b) restrict investments and sales of assets, and (c) require
us to adhere to certain financial covenants, including defined ratios of fixed
charge coverage and funded debt to EBITDA (earnings before interest, taxes,
depreciation and amortization and loss on reduction of debt, as defined)
Issuances
of Common Units.
On October 14,
2005, we sold 950,000 common units in a public offering under our shelf
registration statement. The net proceeds of $33.1 million from the offering,
after payment of underwriting discounts and commissions but before payment of
expenses, were used to repay borrowings under our amended credit agreement. On October 18,
2005, we issued 125,000 units to the seller in connection with our acquisition
of Sea Coast. On June 1, 2005, we issued and sold 500,000 common units in
a private placement for proceeds of $16.0 million, before expenses associated
with the offering. A shelf registration statement with respect to the Sea Coast
issuance and the June 2005 private placement was declared effective by the
Securities and Exchange Commission in February 2006. On August 14,
2007, we issued 250,000 common units to certain sellers in connection with our
acquisition of Smith Maritime, Go Big and Sirius Maritime.
Contractual Obligations
and Contingencies.
Our
contractual obligations at June 30, 2007 consisted of the following (in
thousands):
Payments
Due by Period
|
|
|
Total
|
|
Less than
1 Year
|
|
2-3 Years
|
|
4-5 Years
|
|
After
5 Years
|
|
|
Long-term
debt and capital lease obligations
|
|
$
|
244,287
|
|
|
$
|
18,466
|
|
|
$
|
18,170
|
|
$
|
114,325
|
|
$
|
93,326
|
|
|
Interest on
long-term debt and capital lease obligations(2)
|
|
29,729
|
|
|
6,379
|
|
|
10,747
|
|
9,186
|
|
3,417
|
|
|
Operating lease
obligations
|
|
7,614
|
|
|
3,093
|
|
|
2,836
|
|
717
|
|
968
|
|
|
Purchase
obligations(1)
|
|
84,825
|
|
|
35,304
|
|
|
38,521
|
|
11,000
|
|
—
|
|
|
|
|
$
|
366,455
|
|
|
$63,242
|
|
|
$
|
70,274
|
|
$
|
135,228
|
|
$
|
97,711
|
|
(1)
Capital expenditures
relating to shipyard payments for the construction of three new 28,000-barrel
double-hull tank barges, three new 80,000-barrel double-hull tank barges
and four new 50,000-barrel double-hull tank barges.
(2)
Interest is only on fixed
rate debt. Please read “—Quantitative and Qualitative Disclosures About Market
Risk” for a discussion of interest on variable rate debt.
Certain executive officers of K-Sea General Partner
GP LLC have entered into employment agreements with K-Sea Transportation Inc.,
our indirect wholly owned corporate subsidiary. Each of these employment
agreements had an initial term of one year, which is automatically extended for
successive one-year terms unless either party gives 30 days written notice
prior to the end of the term that such party desires not to renew the
employment agreement. The employment agreements currently provide for annual base
salaries aggregating $930,000. In addition, each employee is eligible to
receive an annual
S-39
bonus award based upon consideration
of our partnership performance and individual performance. If the employee’s
employment is terminated without cause or if the employee resigns for good
reason, the employee will be entitled to severance in an amount equal to the
greater of (a) the product of 1.3125 (1.75 multiplied by .75) multiplied
by the employee’s base salary at the time of termination or resignation and (b) the
product of 1.75 multiplied by the remaining term of the employee’s
non-competition provisions multiplied by the employee’s base salary at the time
of termination or resignation.
We are a party to various claims and lawsuits in the
ordinary course of business for monetary relief arising principally from
personal injuries, collision or other casualty and to claims arising under
vessel charters. Our personal injury, collision and casualty claims are fully
covered by insurance, subject to deductibles ranging from $25,000 to $100,000. We
accrue on a current basis for estimated deductibles we expect to pay.
The European Union is currently working toward a new
directive for the insurance industry, called “Solvency 2,” that is expected to
become law within three to four years and require increases in the level of
free, or unallocated, reserves required to be maintained by insurance entities,
including protection and indemnity clubs that provide coverage for the maritime
industry. The West of England Ship Owners Insurance Services Ltd., or WOE,
a mutual insurance association based in Luxembourg, provides our protection and
indemnity insurance coverage and would be impacted by the new directive. In
anticipation of these new regulatory requirements, the WOE has assessed its
members an additional capital call which it believes will contribute to
achievement of the projected required free reserve increases. Our capital call,
payable during calendar year 2007, will be approximately $1.1 million, of which
$0.7 million was paid in February 2007. A further request for capital may
be made in the future; however, the amount of such further assessment, if any,
cannot be reasonably estimated at this time. As a shipowner member of the WOE,
we have an interest in the WOE’s free reserves, and therefore have recorded the
additional $1.1 million capital call as an investment, at cost, subject to
periodic review for impairment. This amount is included in other assets in the June 30,
2007 consolidated balance sheet.
EW Transportation Corp., a predecessor to our
partnership, and many other marine transportation companies operating in New
York have come under audit with respect to the New York State Petroleum
Business Tax, or PBT, which is a tax on vessel fuel consumed while operating in
New York State territorial waters. An industry group in which we and EW
Transportation Corp. participate has come to a final agreement with the New
York taxing authority on a calculation methodology for the PBT. Effective January 1,
2007, we and the other marine transportation companies began rebilling this tax
to customers. For applicable periods prior to 2007, we accrued an estimated
liability using the agreed methodology. In accordance with the agreements
entered into in connection with our initial public offering, any liability
resulting from the PBT prior to January 14, 2004 (the effective date of
the initial public offering) is a retained liability of the predecessor.
As discussed in note 4 to our audited consolidated
financial statements incorporated by reference in this prospectus supplement,
one of our tank barges struck submerged debris in the U.S. Gulf of Mexico,
causing significant damage which resulted in the barge eventually capsizing. At
the time of the incident, the barge was carrying approximately 120,000 barrels
of No. 6 fuel oil, a heavy oil product. In January 2006, submerged
oil recovery operations were suspended and a monitoring program, which sought
to determine if any recoverable oil could be found on the ocean floor, was
begun. In February 2007, the Coast Guard agreed to end the cleanup and
response phase, including our obligation to conduct any further monitoring of
the area around the spill site. Our insurers responded to the pollution-related
costs and environmental damages resulting from the incident, paying
approximately $65.0 million less $60,000 in total deductibles, and are pursuing
their own financial recovery efforts. Our incident response effort is complete.
We are not aware of any further recovery, cleanup or other costs. However, if
any such costs are incurred, they are expected to be paid by the insurers.
S-40
EW
Transportation LLC, an affiliate, and its predecessors have been named,
together with a large number of other companies, as co-defendants in 39 civil
actions by various parties, including former employees, alleging unspecified
damages from past exposure to asbestos and second-hand smoke aboard some of the
vessels that it contributed to us in connection with our initial public
offering. EW Transportation LLC and its predecessors have been dismissed
from 38 of these lawsuits for an aggregate sum of approximately $47.0 million
and are seeking to settle the other case. We may be subject to litigation in
the future involving these plaintiffs and others alleging exposure to asbestos
due to alleged failure to properly encapsulate friable asbestos or remove
friable asbestos on our vessels, as well as for exposure to second-hand smoke
and other matters.
Inflation
During the last three
years, inflation has had a relatively minor effect on our financial results.
Our contracts generally contain escalation clauses whereby certain cost
increases, including labor and fuel, can be passed through to our customers.
Related Party
Transactions
We lease our Staten Island office and pier facilities
from, and charter certain vessels to, affiliates of an employee. Additionally,
we utilize one of these affiliates for tank cleaning services. Please read
note 8 to our audited consolidated financial statements incorporated by
reference in this prospectus supplement.
KSP Investors A L.P.,
KSP Investors B L.P., and KSP Investors C L.P. and their controlled
affiliates have agreed to indemnify us for claims associated with certain
retained liabilities. For more information regarding the indemnification
obligations and other related party transactions, please read “Certain
Relationships and Related Transactions” in Item 13 of our annual report on Form
10-K for the fiscal year ended June 30, 2007.
Seasonality
We operate our tank
vessels in markets that exhibit seasonal variations in demand and, as a result,
in charter rates. For example, movements of clean oil products, such as motor
fuels, generally increase during the summer driving season. In certain regions,
movements of black oil products and distillates, such as heating oil, generally
increase during the winter months, while movements of asphalt products
generally increase in the spring through fall months. Unseasonably cold winters
result in significantly higher demand for heating oil in the northeastern United
States. Meanwhile, our operations along the West Coast and in Alaska
historically have been subject to seasonal variations in demand that vary from
those exhibited in the East Coast and Gulf Coast regions. The summer driving
season can increase demand for automobile fuel in all of our markets and,
accordingly, the demand for our services. A decline in demand for, and level of
consumption of, refined petroleum products could cause demand for tank vessel
capacity and charter rates to decline, which would decrease our revenues and
cash flows. Our West Coast operations provide seasonal diversification
primarily as a result of service to our Alaskan markets, which experience the
greatest demand for petroleum products in the summer months, due to weather conditions.
Considering the above, we believe seasonal demand for our services is lowest
during our third fiscal quarter. We do not see any significant seasonality in
the Hawaiian market.
Critical Accounting
Policies
The accounting treatment
of a particular transaction is governed by generally accepted accounting
principles, or GAAP, and, in certain circumstances, requires us to make
estimates, judgments and assumptions that we believe are reasonable based upon
information available. We base our estimates, judgments and assumptions on
historical experience and known facts that we believe to be reasonable
S-41
under
the circumstances. Actual results may differ from these estimates under
different assumptions and conditions. We believe that, of our significant accounting
policies discussed in note 2 to our audited consolidated financial
statements incorporated by reference in this prospectus supplement, the
following may involve a higher degree of judgment.
Revenue Recognition
We earn revenue under
contracts of affreightment, voyage charters, time charters and bareboat
charters. For contracts of affreightment and voyage charters, revenue is
recognized based upon the relative transit time in each period, with expenses
recognized as incurred. Although contracts of affreightment and certain
contracts for voyage charters may be effective for a period in excess of one
year, revenue is recognized over the transit time of individual voyages, which
are generally less than ten days in duration. For time charters and bareboat
charters, revenue is recognized ratably over the contract period, with expenses
recognized as incurred. Estimated losses on contracts of affreightment and
charters are accrued when such losses become evident.
Depreciation
Vessels and equipment are
recorded at cost, including capitalized interest where appropriate, and
depreciated using the straight-line method over the estimated useful lives of
the individual assets as follows: tank vessels—ten to twenty-five years;
tugboats—ten to twenty years; and pier and office equipment—five years. For
single-hull tank vessels, these useful lives are limited to the remaining
period of operation prior to mandatory retirement as required by OPA 90. Also
included in vessels are drydocking expenditures that are capitalized and
amortized over three years. Major renewals and betterments of assets are
capitalized and depreciated over the remaining useful lives of the assets.
Maintenance and repairs that do not improve or extend the useful lives of the
assets are expensed. To date, our experience confirms that these policies are
reasonable, although there may be events or changes in circumstances in the
future that indicate the recovery of the carrying amount of a vessel might not
be possible. Examples of events or changes in circumstances that could indicate
that the recoverability of a vessel’s carrying amount should be assessed might
include a change in regulations such as OPA 90, or continued operating losses,
or projections thereof, associated with a vessel or vessels. If events or
changes in circumstances as set forth above indicate that a vessel’s carrying
amount may not be recoverable, we would then be required to estimate the
undiscounted future cash flows expected to result from the use of the vessel
and its eventual disposition. If the sum of the undiscounted expected future
cash flows is less than the carrying amount of the vessel, we would recognize
an impairment loss to the extent the carrying value exceeds its fair value by
appraisal. Our assumptions and estimates would include, but not be limited to,
the estimated fair market value of the assets and their estimated future cash
flows, which are based on additional assumptions such as asset utilization,
length of service of the asset and estimated salvage values. Although we
believe our assumptions and estimates are reasonable, deviations from the
assumptions and estimates could produce a materially different result.
Amortization of Drydocking Expenditures
Drydocking expenditures
are capitalized and amortized over three years. Drydocking of vessels is
required by both the U.S. Coast Guard and by the applicable classification
society, which in our case is the American Bureau of Shipping. Such drydocking
activities include, but are not limited to, the inspection, refurbishment and
replacement of steel, engine components, tailshafts, mooring equipment and
other parts of the vessel. Amortization of drydocking expenditures is included
in depreciation and amortization expense.
S-42
Accounts Receivable
We extend credit to our
customers in the normal course of business. We regularly review our accounts,
estimate the amount of uncollectible receivables each period, and establish an
allowance for uncollectible amounts. The amount of the allowance is based on
the age of unpaid amounts, information about the current financial strength of
customers, and other relevant information. Estimates of uncollectible amounts
are revised each period, and changes are recorded in the period they become
known. Historically, credit risk with respect to our trade receivables has
generally been considered minimal because of the financial strength of our
customers.
Deferred Income Taxes
We provide deferred taxes
for the tax effects of differences between the financial reporting and tax
bases of assets and liabilities at enacted tax rates in effect in the
jurisdictions where we operate for the years in which the differences are
expected to reverse. A valuation allowance is provided, if necessary, for
deferred tax assets that are not expected to be realized.
New Accounting
Pronouncements
On June 2, 2005, the FASB issued FASB Statement No. 154,
“Accounting Changes and Error Corrections-a replacement of APB No. 20 and
FAS No. 3” (“FAS 154”). FAS 154 replaces APB Opinion No. 20, “Accounting
Changes” (“APB 20”) and FASB Statement No. 3, “Reporting Accounting
Changes in Interim Financial Statements” and changes the requirements for the
accounting for and reporting of a change in accounting principle. FAS 154
applies to all voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions should
be followed. We adopted FAS 154 as of July 1, 2006, and such adoption did
not have a significant impact on our financial position, results of operations
or cash flows.
On February 16, 2006 the FASB issued FASB
Statement No. 155, “Accounting for Certain Hybrid Financial Instruments,
an amendment of FASB Statements No. 133 and 140” (“FAS 155”). FAS 155
amends FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities” and FASB Statement No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”. We are
required to adopt FAS 155 as of July 1, 2007, and do not expect that such
adoption will have a significant impact on our financial position, results of
operations or cash flows.
In June 2006, the FASB issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN
48 prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for our fiscal year beginning July 1,
2007, and we are currently analyzing its impact, if any.
In September 2006, the FASB issued FASB Statement
No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. FAS
157 applies under other accounting pronouncements that require or permit fair
value measurements. FAS 157 is effective for fiscal years beginning after November 15,
2007, and we are currently analyzing its impact, if any.
S-43
In September 2006,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides
guidance on quantifying and evaluating the materiality of unrecorded
misstatements. SAB 108 does not require prior period restatement as a result of
adopting the new guidance if management properly applied its previous approach
to assessing unrecorded misstatements and all relevant qualitative factors were
considered. The cumulative effect of the initial application of SAB 108, if
any, would be reported in the carrying amounts of assets and liabilities at the
beginning of the year, with an offsetting adjustment to the beginning balance
of retained earnings. The nature and amount of each of the individual
misstatements corrected would be required to be disclosed. SAB 108 is effective
for the first fiscal year ending after November 15, 2006. We adopted SAB
108 for the fiscal year ended June 30, 2007, and such adoption did not
have a significant impact on our financial position, results of operations or
cash flows.
Quantitative And
Qualitative Disclosures About Market Risk
Our primary market risk is the potential impact of
changes in interest rates on our variable rate borrowings. After considering
the interest rate swap agreement discussed below, as of June 30, 2007
approximately $100.4 million of our long-term debt bears interest at fixed
interest rates ranging from 6.25% to 6.63%. Borrowings under our credit
agreement and certain other term loans, totaling $143.9 million at June 30,
2007, bear interest at a floating rate based on LIBOR, which will subject us to
increases or decreases in interest expense resulting from movements in that
rate. Based on our total outstanding floating rate debt as of June 30,
2007, the impact of a 1% change in interest rates would result in a change in
interest expense, and a corresponding impact on income before income taxes, of
approximately $1.4 million annually.
We utilize an interest rate swap to reduce our
exposure to market risk from changes in interest rates. The primary objective
of this contract is to reduce the aggregate risk of higher interest costs associated
with variable rate debt. The interest rate swap contract we currently hold has
been designated as a cash flow hedge and, accordingly, gains and losses
resulting from changes in the fair value of this contract are recognized as
other comprehensive income as required by SFAS No. 133. We are exposed to
credit related losses in the event of non-performance by counterparties to
these instruments, however the counterparties are major financial institutions
and we consider such risk of loss to be minimal. We do not hold or issue
derivative financial instruments for trading purposes.
As of June 30, 2007, we had one outstanding
interest rate swap agreement which expires on May 1, 2013 concurrently
with the hedged term loans. As of such date, the notional amount of the swap
was $75.9 million, we are paying a fixed rate of 6.63%, and we are receiving a
variable interest rate of 6.72%. The fair value of the swap contract was $0.4
million as of June 30, 2007.
S-44
OVERVIEW
OF THE DOMESTIC TANK VESSEL INDUSTRY
Introduction
Tank vessels, which
include tank barges and tankers, are a critical link in the refined petroleum
product distribution chain. Tank vessels transport gasoline, diesel fuel,
heating oil, asphalt and other products from refineries and storage facilities
to a variety of destinations, including other refineries, distribution
terminals, power plants and ships. According to a June 2006 study by the
Association of Oil Pipe Lines, 29.9% of all domestic refined petroleum product
transportation was by water in 2004, making waterborne transportation the most
used mode of transportation for refined petroleum products after pipelines.
Among the laws governing
the domestic tank vessel industry is the one commonly referred to as the Jones
Act, the federal statute that restricts foreign competition in the U.S. marine
transportation industry. Under the Jones Act, marine transportation of cargo
between points in the United States, generally known as U.S. coastwise trade,
is limited to U.S.-flag vessels that were built in the United States and are
owned, manned and operated by U.S. citizens. All of our tank vessels except two
operate under the U.S. flag, and all but four are qualified to transport cargo
between U.S. ports under the Jones Act. Please read “Risk Factors—Risks
Inherent in Our Business—Our business would be adversely affected if we failed
to comply with the Jones Act provisions on coastwise trade, or if those
provisions were modified, repealed or waived” in the accompanying prospectus.
The Oil Pollution Act of
1990, or OPA 90, mandates, among other things, the phase-out of all single-hull
tank vessels transporting petroleum and petroleum products in U.S. waters at
varying times by January 1, 2015. The effect of this legislation has been,
and is expected to continue to be, the replacement of domestic single-hull tank
vessel capacity with newbuildings and retrofitting of existing single-hull tank
vessels.
Demand for Domestic Tank Vessel Service
The demand for domestic
tank vessels is driven primarily by U.S. demand for refined petroleum products,
which can be categorized as either clean oil products or black oil products.
Clean oil products include motor gasoline, diesel fuel, heating oil, jet fuel
and kerosene. Black oil products, which are what remain after clean oil
products have been separated from crude oil, include residual fuel oil in the
refining process, asphalt, petrochemical feedstocks and bunker fuel.
The Energy Information Administration, or EIA,
projects that refined petroleum product consumption in the United States will
increase by an average of approximately 1.09% per year from 2006 to 2015. The
U.S. demand for refined petroleum products has grown at an average annual rate
of 1.06% from 1998 to 2006. In 2006, the East and West Coast regions consumed 6.2 million
and 3.2 million barrels of refined petroleum products per day, respectively, or
30.14% and 15.55%, respectively, of the total average daily consumption of
refined petroleum products in the United States. The following table shows the
average daily demand for refined petroleum products in each region of the
United States since 1998:
S-45
Average
Daily Demand of Refined Petroleum Products
|
|
|
1998
|
|
% of
Total
|
|
1999
|
|
% of
Total
|
|
2000
|
|
% of
Total
|
|
2001
|
|
% of
Total
|
|
|
East
Coast
|
|
5,733
|
|
|
30
|
%
|
|
5,818
|
|
|
30
|
%
|
|
5,868
|
|
|
30
|
%
|
|
5,916
|
|
|
30
|
%
|
|
|
Midwest
|
|
4,820
|
|
|
25
|
%
|
|
4,995
|
|
|
26
|
%
|
|
4,971
|
|
|
25
|
%
|
|
4,913
|
|
|
25
|
%
|
|
|
Gulf
Coast
|
|
4,911
|
|
|
26
|
%
|
|
5,217
|
|
|
27
|
%
|
|
5,288
|
|
|
27
|
%
|
|
5,189
|
|
|
26
|
%
|
|
|
Rockies
|
|
585
|
|
|
3
|
%
|
|
629
|
|
|
3
|
%
|
|
655
|
|
|
3
|
%
|
|
639
|
|
|
3
|
%
|
|
|
West
Coast
|
|
2,868
|
|
|
15
|
%
|
|
2,861
|
|
|
15
|
%
|
|
2,919
|
|
|
15
|
%
|
|
2,991
|
|
|
15
|
%
|
|
|
Total
|
|
18,917
|
|
|
100
|
%
|
|
19,520
|
|
|
100
|
%
|
|
19,701
|
|
|
100
|
%
|
|
19,648
|
|
|
100
|
%
|
|
|
|
|
2002
|
|
% of
Total
|
|
2003
|
|
% of
Total
|
|
2004
|
|
% of
Total
|
|
2005
|
|
% of
Total
|
|
2006
|
|
% of
Total
|
|
|
East
Coast
|
|
5,869
|
|
|
30
|
%
|
|
6,253
|
|
|
31
|
%
|
|
6,435
|
|
|
31
|
%
|
|
6,545
|
|
|
31
|
%
|
|
6,206
|
|
|
30
|
%
|
|
|
Midwest
|
|
4,989
|
|
|
25
|
%
|
|
5,034
|
|
|
25
|
%
|
|
5,175
|
|
|
25
|
%
|
|
5,285
|
|
|
25
|
%
|
|
5,214
|
|
|
25
|
%
|
|
|
Gulf
Coast
|
|
5,198
|
|
|
26
|
%
|
|
5,041
|
|
|
25
|
%
|
|
5,336
|
|
|
26
|
%
|
|
5,167
|
|
|
25
|
%
|
|
5,315
|
|
|
26
|
%
|
|
|
Rockies
|
|
648
|
|
|
3
|
%
|
|
656
|
|
|
3
|
%
|
|
686
|
|
|
3
|
%
|
|
643
|
|
|
3
|
%
|
|
651
|
|
|
3
|
%
|
|
|
West
Coast
|
|
3,057
|
|
|
15
|
%
|
|
3,049
|
|
|
15
|
%
|
|
3,098
|
|
|
15
|
%
|
|
3,162
|
|
|
15
|
%
|
|
3,202
|
|
|
16
|
%
|
|
|
Total
|
|
19,761
|
|
|
100
|
%
|
|
20,033
|
|
|
100
|
%
|
|
20,730
|
|
|
100
|
%
|
|
20,802
|
|
|
100
|
%
|
|
20,588
|
|
|
100
|
%
|
|
Source: EIA, Petroleum Supply Annual 1998-2006.
The demand for clean oil
products is impacted by vehicle usage, air travel and prevailing weather
conditions, while demand for black oil products varies depending on the type of
product transported and other factors, such as oil refinery requirements and
turnarounds, asphalt use, the use of residual fuel oil by electric utilities
and bunker fuel consumption.
Transportation of
Refined Petroleum Products
Refined petroleum products
are transported by pipelines, water carriers, motor carriers and railroads. In
2004, these modes of transportation carried refined petroleum products 528.4
billion ton-miles. The following chart shows the relative contribution by each
mode of transportation:
Transportation
of Petroleum Products by Mode
(Based on billions of ton-miles, 2004)
Source: Association of Oil Pipe Lines, Pipelines
and Water Carriers Continue to Lead All Other Modes of Transport in Ton-Miles
Movement of Oil in 2004 (June 2006)
Tank vessels are used
frequently to continue the transportation of refined petroleum products along
the distribution chain after these products have first been transported by
another method of transportation, such as a pipeline. For example, many areas
have access to refined petroleum products only by using marine transportation
as the last link in their distribution chain. In addition, tank vessel
S-46
transportation
is generally a more cost-effective and energy efficient means of transporting
bulk commodities such as refined petroleum products than transportation by rail
car or truck. The carrying capacity of a 100,000-barrel tank barge is the
equivalent of approximately 162 average-size rail tank cars and approximately
439 average-size tractor trailer tank trucks.
Types of Tank Vessels
The domestic tank vessel fleet consists of tankers,
which have internal propulsion systems, and tank barges, which do not have
internal propulsion systems and are instead pushed or towed by a tugboat. Tank
barges generally move at slower speeds than comparably sized tankers, but are
less expensive to build and operate. Although tank barge configuration varies,
the bow and stern of most tank barges are square or sloped, with the stern of
many tank barges having a notch of varying depth to permit pushing by a tug. While
a larger tank vessel may be able to carry more cargo, some voyages require a
tank vessel to go through a lock, bridge opening or narrow waterway, which
limit the size of vessels that may be used. In addition, some loading and
discharge facilities have physical limitations that prevent larger tank vessels
from loading or discharging their cargo. Tank barges are often able to navigate
the shallower waters of the inland waterway system and the waters along the
coast. Tankers, however, are often confined to the deeper waters offshore due
to their size.
Tank vessels can be
categorized by:
·
Barrel-carrying
Capacity
—the number of barrels of refined product that it takes to
fill a vessel;
·
Gross
Tonnage
—the total volume capacity of the interior space of a vessel,
including non-cargo space, using a convention of 100 cubic feet per gross ton;
·
Net Tonnage
—the
volume capacity of a vessel determined by subtracting the engine room, crew
quarters, stores and navigation space from the gross tonnage using a convention
of 100 cubic feet per net ton;
·
Deadweight
Tonnage
—the number of long-tons (2,240 pounds) of cargo that a
vessel can transport. A deadweight ton is equivalent to approximately 6.5 to
7.5 barrels of capacity, depending on the specific gravity of the cargo. In
this report, we have assumed that a deadweight ton is equivalent to 7.0 barrels
of capacity;
·
Hull Type
—the
body or framework of a vessel. Vessels can have more than one hull, which means
they have additional compartments between the cargo and the outside of the
vessel. Typical vessels are single or double hulled; and
·
Cargo
—the
type of commodity transported.
Tank vessels can
also be categorized into the following fleets based on the primary waterway
system typically navigated by the vessel:
·
Coastwise
Fleet
. The term coastwise fleet generally refers to commercial
vessels that transport goods in the following areas:
·
along the Atlantic, Gulf
and Pacific coasts;
·
between the U.S. mainland
and Puerto Rico, Alaska, Hawaii and other U.S. Pacific Islands; and
·
between the Atlantic or
Gulf and Pacific coasts by way of the Panama Canal.
·
Inland
Waterways Fleet
. The term inland waterways fleet generally
refers to commercial vessels that transport goods on the navigable internal
waterways of the Atlantic, Gulf and Pacific Coasts,
S-47
and the Mississippi River
System. The main arteries of the inland waterways network for the mid-continent
are the Mississippi and the Ohio Rivers. The inland waterways fleet consists
primarily of tugboats and tank barges, which typically have a shallower depth,
and are generally less costly, than many tank barges operating in the coastwise
fleet. The vessels comprising the inland waterways fleet are generally not
built to standards required for operation in coastal waters.
·
Great Lakes Fleet
. The term Great Lakes fleet
generally refers to commercial vessels normally navigating the waters among the
U.S. Great Lakes ports and connecting waterways.
Tugboats
Tugboats are equipped to
push, pull or tow tank barges alongside. The amount of horsepower required to
handle a barge depends on a number of factors, including the size of the barge,
the amount of product loaded, weather conditions and the waterways navigated. A
typical tug is manned by six people: a captain, a mate, an engineer, an
assistant engineer and two deckhands. These individuals perform the duties and
tasks required to operate the tug, such as standing navigational watches,
maintaining and repairing machinery, rigging and line-handling, and painting
and other routine maintenance. A standard work schedule for a tugboat crew is
14 days on, 14 days off. While on duty, the crew members generally work two
six-hour shifts each day.
Integrated
Tug-Barge Units
Tugboats can also be integrated into a barge utilizing
a notching system that connects the two vessels. An integrated tug-barge unit,
or ITB, has certain advantages over other tug-barge combinations, including
higher speed and better maneuverability. In addition, an ITB can operate in
certain sea and weather conditions in which conventional tug-barge combinations
cannot.
S-48
BUSINESS
We are a leading provider of refined petroleum
products marine transportation, distribution and logistics services in the U.S.
domestic marine transportation business. We currently operate a fleet of 71 tank
barges, one tanker and 58 tugboats that serves a wide range of customers,
including major oil companies, oil traders and refiners. With approximately
4.2 million barrels of carrying capacity, we believe we operate the
largest coastwise tank barge fleet in the United States.
For the fiscal year ended June 30, 2007, our
fleet transported approximately 140 million barrels of refined petroleum
products for our customers, including BP, Chevron, ConocoPhillips, ExxonMobil and
Rio Energy. Our five largest customers in fiscal 2007 have been doing business
with us for approximately 17 years on average. We do not assume ownership
of any of the products we transport. During fiscal 2007, we derived
approximately 79% of our revenue from longer-term contracts that are generally
for periods of one year or more.
We believe we have a
high-quality, well-maintained fleet. Approximately 73% of our current barrel-carrying
capacity is double-hulled. Furthermore, we will be permitted to continue
to operate our single-hull tank vessels until January 1, 2015 in
compliance with the Oil Pollution Act of 1990, or OPA 90, which mandates
the phase-out of all single-hull tank vessels transporting petroleum and
petroleum products in U.S. waters. All of our tank vessels except two operate
under the U.S. flag, and all but four are qualified to transport cargo between
U.S. ports under the Jones Act, the federal statutes that restrict foreign
owners from operating in the U.S. maritime transportation industry.
Transformation of
K-Sea Transportation Partners L.P.
Our predecessor company, Eklof Marine Corp., was
founded in 1959. Following the acquisition of Eklof in April 1999, we
implemented an expansion plan fuelled by acquisitions and newbuilding programs.
In April 1999, we owned 24 tank barges, 6 tankers and 8 tugboats with a
total barrel-carrying capacity of approximately 1.1 million barrels. From April 1999
through December 2003, we acquired 18 tank vessels in 9 separate
transactions, increasing the total barrel-carrying capacity of our fleet, net
of vessel sales and retirements, to approximately 2.3 million barrels. A
majority of this capacity increase resulted from our acquisition of vessels from Maritrans, which
included 8 tugboats and 10 barges with a combined carrying capacity of nearly
one million barrels, located predominately in the Northeast.
In January 2004,
we went public on the New York Stock Exchange. Under the same management, we
have continued to grow our business—in terms of both the size and scale of
operations and the geographical and commercial scope of our business.
Significant activities since our initial public offering include:
·
In
January 2004, we purchased a 140,000 barrel barge and a tugboat from
SeaRiver Maritime, Inc., a subsidiary of Exxon Mobil Corporation.
·
In
December 2004, we acquired 10 tank barges and seven tugboats from Bay Gulf
Trading of Norfolk, Virginia, with a combined total barrel-carrying capacity of
255,000 barrels.
·
In
October 2005, we acquired 15 tank barges and 15 tugboats through our
acquisition of Sea Coast Towing, Inc., thereby increasing our
barrel-carrying capacity by 705,000 barrels and providing us with an attractive
entry point into the complementary markets of the Pacific Northwest and Alaska.
·
In
August 2007, we acquired 11 tank barges and 14 tugboats with combined
capacity of 777,000 barrels through our acquistion of Smith Maritime of
Honolulu, Hawaii and Go Big and Sirius Maritime of Seattle, Washington.
Since January 2004, we have also taken delivery
of two tank barges and six tugboats with a combined capacity of 183,000 barrels
in separate transactions. In addition, we have a vessel newbuilding program for
S-49
10 tank barges totaling
540,000 barrels of capacity. These tank barges are expected to be delivered
before the end of 2010. As a result of our expansion program, our total
barrel-carrying capacity, net of vessel sales and retirements, is expected to
increase to over 4.8 million by 2010, roughly double the size of our fleet at
our initial public offering and four times our size in 1999.
Our growth has been
prudently managed and accretive to cash flow. Quarterly distributions have
increased from $0.50 per common unit for the quarter ended March 31, 2004
(pro rated for the number of days between the date of our initial public
offering to March 31, 2004) to $0.70 for the quarter ended June 30,
2007, reflecting 11 quarterly distribution increases. The following table sets
forth our distributions since our initial public offering in January 2004:
Cash
Distribution History
S-50
The
following table sets forth certain financial and operating data for our company
for the year ended June 30, 2004 as compared to pro forma information for
the year ended June 30, 2007. For a reconciliation of EBITDA to its most
directly comparable GAAP measures, please read “Summary—Non-GAAP Financial
Measures.”
|
|
|
June 30, 2004
|
|
Pro Forma
June 30, 2007(1)
|
|
% Increase
Since
June 30, 2004
|
|
|
|
|
(unaudited)
|
|
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Barges
|
|
|
34
|
|
|
|
71
|
|
|
|
108.8
|
%
|
|
|
Number of Tankers
|
|
|
2
|
|
|
|
1
|
|
|
|
(50.0
|
)%
|
|
|
Total Fleet
|
|
|
36
|
|
|
|
72
|
|
|
|
100.0
|
%
|
|
|
Total Carrying
Capacity (mm bbls)
|
|
|
2,410
|
|
|
|
4,240
|
|
|
|
75.9
|
%
|
|
|
Number of
Tugboats
|
|
|
19
|
|
|
|
58
|
|
|
|
205.3
|
%
|
|
|
Financial
Data (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
95.8
|
|
|
|
$
|
283.5
|
|
|
|
195.9
|
%
|
|
|
Net Voyage Revenue
|
|
|
77.6
|
|
|
|
216.2
|
|
|
|
178.6
|
%
|
|
|
Net Income(2)
|
|
|
21.2
|
|
|
|
17.8
|
|
|
|
(16.0)
|
%
|
|
|
EBITDA(3)
|
|
|
29.3
|
|
|
|
93.6
|
|
|
|
219.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Pro forma for acquisition
of Smith Maritime, Go Big and Sirius Maritime.
(2)
Includes a non cash tax benefit of $17.6 million for
fiscal 2004 attributable to a reduction in deferred taxes resulting from the
change in income tax status of the assets and liabilities constituting the
business of our predecessor that were transferred at the date of the initial
public offering.
(3)
For a reconciliation of
EBITDA to its most directly comparable GAAP measures, please read “Prospectus
Summary—Non-GAAP Financial Measures.”
Recent Developments
Borrowings
On August 14, 2007, we amended and restated our
revolving credit agreement with KeyBank National Association, as administrative
agent and lead arranger, to provide for (1) an increase in availability to
$175.0 million under our senior secured revolving credit facility, which we
refer to as the revolving facility, with an extension of the term to seven
years, (2) a $45.0 million 364-day senior secured revolving credit
facility, which we refer to as the 364-day facility, (3) amendments
to certain financial covenants and (4) a reduction in interest rate
margins. Under certain conditions, we have the right to increase the revolving
facility by $75.0 million, to a maximum total facility amount of $250.0
million. The revolving facility and the 364-day facility are
collateralized by a first perfected security interest in vessels having a total
fair market value of approximately $275.0 million and certain equipment and
machinery related to such vessels. The revolving facility and the 364-day
facility bear interest at the London Interbank Offered Rate, or LIBOR, plus a
margin ranging from 0.7% to 1.5% depending on our ratio of total funded debt to
EBITDA (as defined in the agreement). On August 14, 2007, we borrowed
$67.0 million under the revolving facility and $45.0 million under the 364-day
facility to fund a portion of the purchase price of Smith Maritime, Go Big and
Sirius Maritime. As of August 14, 2007, we had approximately $166.4
million outstanding under the revolving facility and $45.0 million outstanding
under the 364-day facility.
Also on August 14, 2007, we entered into a bridge
loan facility for up to $60.0 million with an affiliate of KeyBank National
Association. The bridge loan facility bears interest at an annual rate of LIBOR
plus 1.5%. The bridge loan facility matures on November 12, 2007. The
bridge loan facility is not collateralized until October 13, 2007 and,
thereafter, will be collateralized by a second perfected security interest in
the
S-51
vessels collateralizing
the revolving facility and the 364-day facility. During an event of
default, the bridge loan facility will bear interest at an annual rate of LIBOR
plus 7.5%. On August 14, 2007, we borrowed $60.0 million under the
bridge loan facility in connection with the Smith Maritime and Sirius Maritime
acquisition.
Acquisition of Smith Maritime, Ltd., Go Big
Chartering, LLC and Sirius Maritime, LLC
On August 14, 2007, we acquired all of the equity
interests in Smith Maritime, Ltd., or Smith Maritime, Go Big Chartering, LLC,
or Go Big, and Sirius Maritime, LLC, or Sirius Maritime, for a combined
purchase price of $203.0 million, consisting of approximately $169.2 million in
cash, $23.6 million of assumed debt and common units valued at
approximately $10.2 million. We funded the cash portion of the purchase
price through additional borrowings, which we expect to repay with the proceeds
of this offering as described under “Use of Proceeds.”
Smith Maritime and Sirius Maritime are providers of
maritime transportation and logistics services to major oil companies, oil
traders and refiners in Hawaii and Alaska and along the West Coast of the
United States. On a combined basis, the operations of these companies included
11 petroleum tank barges and 14 tugboats, aggregating 777,000 barrels of
capacity, of which 669,000 barrels, or 86%, are double-hulled. The tank barges added
by this acquisition represent a 22% increase in the barrel-carrying capacity of
our fleet to approximately 4.2 million barrels.
We believe that the
acquisition of Smith Maritime, Go Big and Sirius Maritime will provide the
following strategic benefits:
·
Customer Opportunities.
The Smith Maritime, Go Big and
Sirius Maritime acquisition provides us with an opportunity to expand our
existing customer relationships in a new geographic market, Hawaii, and to
broaden our presence in our West Coast and Alaska markets with the addition of
Smith Maritime and Sirius Maritime’s customers.
·
Diversification.
The expansion into the Hawaiian
market will provide greater geographic and customer diversity to our
operations.
·
Stability.
We estimate that approximately 82% of Smith
Maritime, Go Big and Sirius Maritime’s contracts are for terms greater than one
year, providing stability of revenue.
·
Favorable Market Environment.
We believe that Hawaii
is solely dependent upon marine transportation systems.
·
Increase in Cash
Available for Distribution.
We anticipate that the
acquisitions will be immediately accretive to the amount of cash available for
distribution to unitholders, without considering the impact of any synergies.
Articulated Tug-Barge Unit
In September 2007, we
entered into a letter of intent with a builder to construct a 185,000 barrel
articulated tug-barge unit. The expected cost is between $68 million to $70
million with delivery projected for the fourth quarter of calendar 2009. We
also have an agreement in principle for a long-term charter for the unit with a
major customer that is expected to commence upon delivery. The letter of
intent, which includes an option to build a second unit of similar design and
cost, is subject to various conditions, including the execution and delivery of
definitive agreements with respect to the construction of the unit.
S-52
Competitive
Strengths
Our competitive
strengths include:
·
A large, versatile fleet that enables us to maximize
utilization and provide comprehensive customer service.
We
have a large and versatile tank vessel fleet of 71 tank barges, one tanker
and 58 tugboats. We believe that our tank vessel fleet, with over
4.2 million barrels of carrying capacity, is the largest coastwise tank
barge fleet in the United States. Many of our tank vessels can be transitioned
between clean and black oil products and among geographic locations with
relative ease, giving us the flexibility and efficiency to allocate the right
vessel for the right cargo assignment on a timely basis. This flexibility
allows us to reduce our waiting time between charter assignments and to provide
comprehensive and efficient customer service.
·
A significant percentage of double-hull tank vessels in relation to the
industry average, which should benefit us given the projected decrease in tank
vessel capacity due to OPA 90.
As of August 15, 2007,
approximately 73% of our barrel-carrying capacity was double-hulled. Without a
meaningful increase in new tank vessel construction or retrofittings of
existing tank vessels, we believe there will be a decrease in tank vessel
supply due to OPA 90.
·
A reputation for high standards of performance, reliability and safety,
which fosters long-term customer
relationships
with major oil companies, oil traders and refiners.
We have actively
developed and maintained relationships with major oil companies, oil traders
and refiners. We have been doing business with BP, Chevron, ConocoPhillips,
ExxonMobil and Rio Energy for 34, 18, 11, 11 and 9 years, respectively. We
believe our customers place significant importance on our established reputation
for high standards of performance, reliability and safety.
·
A proven track record of successfully acquiring and integrating vessels
and businesses
. From April 30, 1999 through August 15,
2007, we acquired 61 tank vessels, which increased the total
barrel-carrying capacity of our fleet, net of vessel sales and retirements,
from approximately 1.1 million barrels to approximately 4.2 million
barrels. Over the same period, we increased the net utilization of the tank
vessels we operate from 75% to 85%.
·
The
financial flexibility to
pursue acquisitions and other expansion opportunities through the issuance of
additional common units and borrowings under our credit agreement.
After
the application of the proceeds we receive from this offering and our credit
agreement, we will have approximately $40 million available for working
capital purposes and internal growth and acquisitions. Under certain
conditions, we have the right to increase our borrowing capacity under the
revolving credit agreement by up to $75 million. We believe the borrowings
available under our credit agreement and our ability to issue additional debt
or equity securities should provide us with financial flexibility to enable us
to pursue expansion and acquisition opportunities.
·
A
management team with extensive
industry experience.
Members of our management team have, on average,
more than 20 years of experience in the maritime transportation industry.
Further, members of our management team have been employed by us or one of our
predecessors, on average, for approximately 12 years. Our management team
has a successful track record of achieving internal growth and completing
acquisitions. We believe our management team’s experience and familiarity with
our industry and businesses are important assets that will assist us in implementing
our business strategies and pursuing our growth strategies.
S-53
Business Strategies
Our primary
business objective is to increase distributable cash flow per unit by executing
the following strategies:
·
Expanding our fleet through newbuildings and accretive
and strategic acquisitions.
We have grown successfully in the
past through newbuildings and strategic acquisitions. We expect to continue
this strategy by regularly surveying the marketplace to identify and pursue
newbuilding opportunities and acquisitions that expand the services and
products we offer or that expand our geographic presence. Since our initial
public offering in January 2004, we have grown our fleet barrel-carrying
capacity from 2.3 million barrels to 4.2 million barrels currently, and we have
524,000 barrels of capacity under construction.
·
Maximizing fleet utilization and improving productivity.
The
interchangeability of our tank vessels and the critical mass of our fleet give
us the flexibility to allocate the right vessel for the right cargo assignment
on a timely basis. We intend to continue improving our operational efficiency
through the use of new technology and comprehensive training programs for new
and existing employees. We also intend to minimize down time by emphasizing
efficient scheduling and timely completion of planned and preventative
maintenance.
·
Maintaining safe, low-cost and efficient operations.
We
believe we are a cost-efficient and reliable tank vessel operator. We intend to
continue to reduce operating costs through constant evaluation of each vessel’s
performance and concurrent adjustment of operating and chartering procedures to
maximize each vessel’s safety and profitability. We also intend to continue to
minimize costs through an active preventative maintenance program both on-shore
and at sea, employing qualified officers and crew and continually training our
personnel to ensure safe and reliable vessel operations.
·
Balancing our fleet deployment between longer-term contracts and
shorter-term business in an effort to provide stable cash flows through
business cycles, while preserving flexibility to respond to changing market
conditions
. During fiscal 2007, we derived approximately 79% of our
revenue from time charters, consecutive voyage charters, contracts of
affreightment and bareboat charters, all of which are generally for periods of
one year or more. We derived the remaining 21% of our revenue for fiscal 2007
from single voyage charters, which are generally priced at prevailing market
rates. Vessels operating under voyage charters may generate increased profit
margins during periods of improved charter rates, while vessels operating on
time charters generally provide more predictable cash flow. We intend to pursue
a strategy of emphasizing longer-term contracts, while preserving operational
flexibility to take advantage of changing market conditions.
·
Attracting and maintaining customers by adhering to high standards of
performance, reliability and safety.
Customers place
particular emphasis on efficient operations and strong environmental and safety
records. We intend to continue building on our reputation for maintaining high
standards of performance, reliability and safety, which we believe will enable
us to attract increasingly selective customers.
Our Customers
We provide marine transportation services primarily to
major oil companies, oil traders and refiners in the East, West and Gulf Coast
regions of the United States. We monitor the supply and distribution patterns
of our actual and prospective customers and focus our efforts on providing
services that are responsive to the current and future needs of these
customers.
S-54
The following chart sets
forth our major customers and the number of years each of them has been a
customer.
Major
Customers
|
Major Customers
|
|
|
|
Years as
Customer
|
|
|
BP
|
|
|
34
|
|
|
|
Chevron
|
|
|
18
|
|
|
|
ConocoPhillips
|
|
|
11
|
|
|
|
ExxonMobil
|
|
|
11
|
|
|
|
Rio Energy
|
|
|
9
|
|
|
Our two largest customers in fiscal 2007, were
ExxonMobil and ConocoPhillips, each of which accounted for more than 10% of our
fiscal 2007 consolidated revenue.
S-55
Our Vessels
Tank Vessel Fleet
At August 15, 2007,
our fleet consisted of the following tank vessels:
K-Sea
Transportation Partners L.P. Tank Vessel Fleet
|
Vessel(1)
|
|
|
|
Year
Built
|
|
Capacity
(barrels)
|
|
Gross
Tons
|
|
OPA 90
Phase-Out
|
|
|
Double-Hull Barges
|
|
|
|
|
|
|
|
|
|
|
|
|
DBL 155(2)
|
|
2004
|
|
165,882
|
|
12,152
|
|
|
N.A.
|
|
|
|
DBL 151
|
|
1981
|
|
150,000
|
|
8,710
|
|
|
N.A.
|
|
|
|
DBL 140
|
|
2000
|
|
140,000
|
|
10,303
|
|
|
N.A.
|
|
|
|
DBL 134(3)
|
|
1994
|
|
134,000
|
|
9,514
|
|
|
N.A.
|
|
|
|
DBL 105(4)
|
|
2004
|
|
105,000
|
|
11,438
|
|
|
N.A.
|
|
|
|
DBL 101
|
|
2002
|
|
102,000
|
|
6,774
|
|
|
N.A.
|
|
|
|
DBL 102
|
|
2004
|
|
102,000
|
|
6,774
|
|
|
N.A.
|
|
|
|
DBL 103
|
|
2006
|
|
102,000
|
|
6,774
|
|
|
N.A.
|
|
|
|
DBL 104
|
|
2007
|
|
102,000
|
|
6,774
|
|
|
N.A.
|
|
|
|
Casablanca(5)
|
|
1987
|
|
89,293
|
|
5,736
|
|
|
N.A.
|
|
|
|
Lemon Creek(5)
|
|
1987
|
|
89,293
|
|
5,736
|
|
|
N.A.
|
|
|
|
Spring Creek(5)
|
|
1987
|
|
89,293
|
|
5,736
|
|
|
N.A.
|
|
|
|
Nale(*)
|
|
2007
|
|
86,000
|
|
6,508
|
|
|
N.A.
|
|
|
|
McCleary’s Spirit(6)
|
|
1969
|
|
85,000
|
|
6,554
|
|
|
N.A.
|
|
|
|
Antares(*)
|
|
2004
|
|
84,000
|
|
5,855
|
|
|
N.A.
|
|
|
|
Deneb(*)
|
|
2006
|
|
84,000
|
|
5,855
|
|
|
N.A.
|
|
|
|
DBL 81
|
|
2003
|
|
82,000
|
|
5,667
|
|
|
N.A.
|
|
|
|
DBL 82
|
|
2003
|
|
82,000
|
|
5,667
|
|
|
N.A.
|
|
|
|
Capella(*)
|
|
2002
|
|
81,751
|
|
5,159
|
|
|
N.A.
|
|
|
|
Leo(*)
|
|
2003
|
|
81,540
|
|
5,954
|
|
|
N.A.
|
|
|
|
Pacific
|
|
1993
|
|
81,000
|
|
5,669
|
|
|
N.A.
|
|
|
|
Rigel(*)
|
|
1993
|
|
80,861
|
|
5,669
|
|
|
N.A.
|
|
|
|
Sasanoa
|
|
2001
|
|
81,000
|
|
5,790
|
|
|
N.A.
|
|
|
|
DBL 78
|
|
2000
|
|
80,000
|
|
5,559
|
|
|
N.A.
|
|
|
|
DBL 70
|
|
1972
|
|
73,024
|
|
5,248
|
|
|
N.A.
|
|
|
|
Kays Point(7)
|
|
1999
|
|
67,000
|
|
4,720
|
|
|
N.A.
|
|
|
|
Noa(*)
|
|
2002
|
|
67,000
|
|
4,826
|
|
|
N.A.
|
|
|
|
Cascades(7)
|
|
1993
|
|
67,000
|
|
4,721
|
|
|
N.A.
|
|
|
|
Na-Kao(*)
|
|
2005
|
|
52,000
|
|
4,076
|
|
|
N.A.
|
|
|
|
Ne’ena(*)
|
|
2004
|
|
52,000
|
|
4,076
|
|
|
N.A.
|
|
|
|
DBL 53
|
|
1965
|
|
53,000
|
|
4,543
|
|
|
N.A.
|
|
|
|
DBL 31
|
|
1999
|
|
30,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 32
|
|
1999
|
|
30,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 28
|
|
2006
|
|
28,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 29
|
|
2006
|
|
28,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 26
|
|
2006
|
|
28,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 27
|
|
2007
|
|
28,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
DBL 22
|
|
2007
|
|
28,000
|
|
2,146
|
|
|
N.A.
|
|
|
|
Puget Sounder
|
|
1992
|
|
25,000
|
|
1,870
|
|
|
N.A.
|
|
|
|
DBL 2202
|
|
1962
|
|
22,000
|
|
1,830
|
|
|
N.A.
|
|
|
|
DBL 16
|
|
1954
|
|
20,000
|
|
1,420
|
|
|
N.A.
|
|
|
|
DBL 19
|
|
1998
|
|
18,000
|
|
1,499
|
|
|
N.A.
|
|
|
|
DBL 18
|
|
1998
|
|
18,000
|
|
1,499
|
|
|
N.A.
|
|
|
S-56
|
DBL 17
|
|
1998
|
|
18,000
|
|
1,499
|
|
|
N.A.
|
|
|
|
Subtotal
|
|
|
|
3,111,937
|
|
223,176
|
|
|
|
|
|
|
Single-Hull Tanker
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Gull
|
|
1969
|
|
30,000
|
|
1,729
|
|
|
2015
|
|
|
|
Single-Hull Barges
|
|
|
|
|
|
|
|
|
|
|
|
|
KTC 80
|
|
1981
|
|
82,878
|
|
4,576
|
|
|
2015
|
|
|
|
KTC 71
|
|
1975
|
|
81,759
|
|
4,719
|
|
|
2015
|
|
|
|
BB 110(7)
|
|
1976
|
|
78,000
|
|
4,754
|
|
|
2015
|
|
|
|
STC 340
|
|
1983
|
|
75,000
|
|
4,395
|
|
|
2015
|
|
|
|
344(7)
|
|
1984
|
|
75,000
|
|
5,214
|
|
|
2015
|
|
|
|
Noho Hele(*)
|
|
1982
|
|
67,880
|
|
4,185
|
|
|
2015
|
|
|
|
KTC 60
|
|
1980
|
|
61,638
|
|
3,824
|
|
|
2015
|
|
|
|
KTC 55
|
|
1972
|
|
53,012
|
|
3,113
|
|
|
2015
|
|
|
|
KTC 50
|
|
1974
|
|
54,716
|
|
3,367
|
|
|
2015
|
|
|
|
SCT 280
|
|
1977
|
|
48,000
|
|
3,081
|
|
|
2015
|
|
|
|
SCT 282
|
|
1978
|
|
48,000
|
|
3,081
|
|
|
2015
|
|
|
|
Hui Mana(*)
|
|
1988
|
|
40,000
|
|
2,299
|
|
|
2015
|
|
|
|
Essex
|
|
1967
|
|
35,160
|
|
2,307
|
|
|
2015
|
|
|
|
DBL 3201
|
|
1968
|
|
31,000
|
|
2,033
|
|
|
2015
|
|
|
|
KTC 30
|
|
1960
|
|
30,000
|
|
1,807
|
|
|
2015
|
|
|
|
Wallabout Bay
|
|
1986
|
|
28,330
|
|
1,687
|
|
|
2015
|
|
|
|
Newark Bay
|
|
1969
|
|
27,390
|
|
1,595
|
|
|
2015
|
|
|
|
PM 230(7)
|
|
1983
|
|
25,000
|
|
1,610
|
|
|
2015
|
|
|
|
Trader II
|
|
1949
|
|
20,475
|
|
1,194
|
|
|
2015
|
|
|
|
KTC 21
|
|
1961
|
|
20,000
|
|
1,214
|
|
|
2015
|
|
|
|
KTC 20
|
|
1980
|
|
20,000
|
|
1,065
|
|
|
2015
|
|
|
|
American 21
|
|
1968
|
|
19,500
|
|
1,262
|
|
|
2015
|
|
|
|
Oyster Bay
|
|
1951
|
|
19,370
|
|
1,278
|
|
|
2015
|
|
|
|
SCT 180
|
|
1980
|
|
16,250
|
|
1,053
|
|
|
2015
|
|
|
|
Josiah Bartlett
|
|
1955
|
|
14,000
|
|
1,287
|
|
|
2015
|
|
|
|
SEA 76
|
|
1969
|
|
13,313
|
|
830
|
|
|
2015
|
|
|
|
KTC 14
|
|
1941
|
|
13,000
|
|
820
|
|
|
2015
|
|
|
|
Subtotal
|
|
|
|
1,128,671
|
|
69,379
|
|
|
|
|
|
|
Total Fleet
|
|
|
|
4,240,608
|
|
292,555
|
|
|
|
|
|
(*)
Acquired in the Smith
Maritime, Go Big and Sirius Maritime acquisition on August 14, 2007.
(1)
Excludes one potable
water barge and one deck barge, which we also operate.
(2)
Built in 1974; double-hulling
was completed and the vessel redelivered in September 2004.
(3)
Built in 1986 and
rebuilt in 1994.
(4)
Built in 1982 and
rebuilt for petroleum transportation in 2004.
(5)
Vessel not qualified for
Jones Act trade due to foreign construction.
(6)
Built in 1969 and
rebuilt in 2001.
(7)
Chartered-in
vessel.
S-57
Newbuildings
The
following table sets forth the size and expected delivery date for vessels in
our newbuilding program:
|
Vessels
|
|
|
|
Expected Delivery
|
|
|
Three
28,000-barrel tank barges
|
|
1
st
Quarter fiscal 2008—3
rd
Quarter fiscal 2008
|
|
|
Three
80,000-barrel tank barges
|
|
4
th
Quarter fiscal 2008—1
st
Quarter fiscal 2009
|
|
|
Four 50,000-barrel tank
barges
|
|
2
nd
Quarter fiscal 2010—2
nd
Quarter fiscal 2011
|
|
The total cost of the
barges described above, in the aggregate and after the addition of certain
special equipment, is approximately $100 million, of which approximately $13 million
has been spent as of June 30, 2007. For more information on our
newbuilding program, please read “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources—Ongoing
Capital Expenditures.”
Tugboat Fleet
We use tugboats as the primary means of propelling our
tank barge fleet and generally do not charter them out to third parties. Therefore,
we seek to maintain the proper balance between the number of tugboats and the
number of tank barges in our fleet. This balance is influenced by a variety of
factors, including the condition of the vessels in our fleet, the mix of our
coastwise business and our local business and the level of longer-term
contracts versus shorter-term business. We are also able to maintain a proper
balance between tugboats and tank barges by analyzing the historical trading
patterns of our customers and the nature of their cargoes. While a tank barge
is unloading, we often dispatch its tugboat to perform other work.
S-58
At August 15,
2007, we operated the following tugboats:
K-Sea
Transportation Partners L.P. Tugboat Fleet
|
Name(1)
|
|
|
|
Year Built
|
|
Horsepower
|
|
Dimensions
|
|
|
Lincoln Sea
|
|
|
2000
|
|
|
|
8000
|
|
|
119’ x 40’ x 22’
|
|
|
Rebel
|
|
|
1975
|
|
|
|
7200
|
|
|
150’ x 46’ x 22’
|
|
|
Yankee
|
|
|
1976
|
|
|
|
7200
|
|
|
150’ x 46’ x 22’
|
|
|
Jimmy Smith(*)
|
|
|
1976
|
|
|
|
7200
|
|
|
150’ x 40’ x 22’
|
|
|
Barents Sea
|
|
|
1976
|
|
|
|
6200
|
|
|
136’ x 40’ x 16’
|
|
|
Irish Sea
|
|
|
1969
|
|
|
|
5750
|
|
|
135’ x 35’ x 18’
|
|
|
Sirius(*)
|
|
|
1974
|
|
|
|
5750
|
|
|
135’ x 38’ x 19’
|
|
|
Nakolo(*)
|
|
|
1974
|
|
|
|
5750
|
|
|
125’ x 38’ x 14’
|
|
|
EI Lobo Grande(*)
|
|
|
1978
|
|
|
|
5750
|
|
|
128’ x 36’ x 19’
|
|
|
Nakoa(*)
|
|
|
1976
|
|
|
|
5500
|
|
|
118’ x 34’ x 17’
|
|
|
Volunteer
|
|
|
1982
|
|
|
|
4860
|
|
|
120’ x 37’ x 18’
|
|
|
Adriatic Sea(2)
|
|
|
2004
|
|
|
|
4800
|
|
|
126’ x 34’ x 15’
|
|
|
Java Sea(3)
|
|
|
2005
|
|
|
|
4800
|
|
|
119” x 34’ x 15’
|
|
|
Namahoe(*)
|
|
|
1997
|
|
|
|
4400
|
|
|
105’ x 34’ x 16’
|
|
|
Pacific Freedom(4)
|
|
|
1998
|
|
|
|
4500
|
|
|
120’ x 31’ x 15’
|
|
|
Viking
|
|
|
1972
|
|
|
|
4300
|
|
|
133’ x 34’ x 18’
|
|
|
Beaufort Sea
|
|
|
1971
|
|
|
|
4300
|
|
|
113’ x 32’ x 16’
|
|
|
Pacific Wolf
|
|
|
1975
|
|
|
|
4100
|
|
|
111’ x 24’ x 13’
|
|
|
William J. Moore
|
|
|
1970
|
|
|
|
4000
|
|
|
135’ x 35’ x 20’
|
|
|
Niolo(*)
|
|
|
1982
|
|
|
|
4000
|
|
|
117’ x 34’ x 17’
|
|
|
Nokea(*)
|
|
|
1975
|
|
|
|
4000
|
|
|
105’ x 30’ x 14’
|
|
|
Nunui(*)
|
|
|
1978
|
|
|
|
4000
|
|
|
185’ x 40’ x 12’
|
|
|
Tasman Sea
|
|
|
1976
|
|
|
|
3900
|
|
|
124 x 34’ x 16’
|
|
|
Norwegian Sea(5)
|
|
|
2006
|
|
|
|
3900
|
|
|
133’ x 34’ x 17’
|
|
|
Sea Hawk(6)
|
|
|
2006
|
|
|
|
3900
|
|
|
112’ x 32’ x 15’
|
|
|
John Brix(7)
|
|
|
1999
|
|
|
|
3900
|
|
|
141’ x 35’ x 8’
|
|
|
Pacific Avenger
|
|
|
1977
|
|
|
|
3900
|
|
|
140’ x 34’ x 17’
|
|
|
Altair(*)
|
|
|
1981
|
|
|
|
3800
|
|
|
106’ x 33’ x 17’
|
|
|
Kara Sea
|
|
|
1974
|
|
|
|
3520
|
|
|
111’ x 32’ x 14’
|
|
|
Coral Sea
|
|
|
1973
|
|
|
|
3280
|
|
|
111’ x 32’ x 14’
|
|
|
Nathan E. Stewart
|
|
|
2001
|
|
|
|
3200
|
|
|
95’ x 32’ x 14”
|
|
|
Maryland
|
|
|
1962
|
|
|
|
3010
|
|
|
110’ x 28’ x 14’
|
|
|
Baltic Sea
|
|
|
1973
|
|
|
|
3000
|
|
|
101’ x 30’ x 13’
|
|
|
Pacific Challenger
|
|
|
1976
|
|
|
|
3000
|
|
|
118’ x 34’ x 16’
|
|
|
Paragon
|
|
|
1978
|
|
|
|
3000
|
|
|
99’ x 32’ x 15’
|
|
|
Pacific Raven
|
|
|
1970
|
|
|
|
3000
|
|
|
112’ x 31’ x 14’
|
|
|
Na Hoku(*)
|
|
|
1981
|
|
|
|
3000
|
|
|
105’ x 34’ x 17’
|
|
|
Nalani(*)
|
|
|
1981
|
|
|
|
3000
|
|
|
105’ x 34’ x 17’
|
|
|
Nohea(*)
|
|
|
1983
|
|
|
|
3000
|
|
|
98’ x 30’ x 14’
|
|
|
Pacific Pride(8)
|
|
|
1989
|
|
|
|
2500
|
|
|
84’ x 28’ x 13’
|
|
|
Sargasso Sea
|
|
|
1972
|
|
|
|
2460
|
|
|
105’ x 30’ x 15”
|
|
|
Labrador Sea
|
|
|
2002
|
|
|
|
2400
|
|
|
82’ x 26’ x 12’
|
|
|
Bering Sea
|
|
|
1975
|
|
|
|
2250
|
|
|
105’ x 29’ x 13’
|
|
|
Caspian Sea
|
|
|
1981
|
|
|
|
2000
|
|
|
65’ x 24’ x 9’
|
|
|
Inland Sea
|
|
|
2000
|
|
|
|
2000
|
|
|
76’ x 26’ x 10’
|
|
|
Pacific Patriot
|
|
|
1981
|
|
|
|
2000
|
|
|
77’ x 27’ x 12’
|
|
|
Davis Sea
|
|
|
1982
|
|
|
|
2000
|
|
|
77.4’ x 26’ x 9’
|
|
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|
Pacific Eagle(9)
|
|
|
2001
|
|
|
|
2000
|
|
|
98’ x 27’ x 13’
|
|
|
Tiger
|
|
|
1966
|
|
|
|
2000
|
|
|
88’ x 27’ 12’
|
|
|
Houma
|
|
|
1970
|
|
|
|
1950
|
|
|
90’ x 29’ x 11’
|
|
|
Timor Sea
|
|
|
1960
|
|
|
|
1920
|
|
|
80’ x 24’ x 10’
|
|
|
Odin
|
|
|
1982
|
|
|
|
1860
|
|
|
72’ x 28’ x 12’
|
|
|
Taurus
|
|
|
1979
|
|
|
|
1860
|
|
|
79’ x 25’ x 12’
|
|
|
Falcon
|
|
|
1978
|
|
|
|
1800
|
|
|
80’ x 25’ x 12’
|
|
|
Naupaka(*)
|
|
|
1983
|
|
|
|
1800
|
|
|
75’ x 26’ x 10’
|
|
|
Fidalgo
|
|
|
1973
|
|
|
|
1400
|
|
|
98’ x 25’ x 8’
|
|
|
Banda Sea
|
|
|
1966
|
|
|
|
1350
|
|
|
75’ x 23’ x 8’
|
|
|
Pacific Falcon
|
|
|
1985
|
|
|
|
1250
|
|
|
65’ x 22’ x 9’
|
|
(*)
Acquired
in the Smith Maritime, Go Big and Sirius Maritime acquisition, which was
completed on August 14, 2007.
(1)
Excluding
certain workboats and other small vessels most of which are less than 1,000 HP.
(2)
Built
in 1978 and rebuilt in 2004.
(3)
Built
in 1981 and rebuilt in 2005.
(4)
Built
in 1969 and rebuilt in 1998.
(5)
Built
in 1976 and rebuilt in 2006.
(6)
Built
in 1978 and rebuilt in 2006.
(7)
Built
in 1963 and rebuilt in 1999.
(8)
Built
in 1976 and rebuilt in 1989.
(9)
Built
in 1966 and rebuilt in 1985 and 2001.
Integrated
Tug-Barge Units
We currently operate eighteen
ITBs. At August 15, 2007, ITBs represented approximately 37% of the barrel-carrying
capacity of our tank barge fleet.
Bunkering
For over 30 years, we
have specialized in the shipside delivery of fuel, known as bunkering, for the
major and independent bunker suppliers in New York Harbor. We also provide
bunkering services in the port of Norfolk, Virginia. Demand for bunkering
services is driven primarily by the number of ship arrivals. A ship’s time in
port generally is limited, and the cost of delaying sailing due to bunkering or
other activities can be significant. Therefore, we continually strive to
improve the level of service and on-time deliveries we provide to our
customers.
The majority of our bunker
delivery tank vessels are equipped with advanced, whole-load sampling devices
to provide the supplier and receiver a representative sample. Our bunker
delivery tank barges are also equipped with extended booms for hose handling
ease alongside ships, remote pump engine shut-offs, spill rails, spill
containment equipment and supplies, VHF and UHF radio communication and
fendering.
Preventative Maintenance
We have a computerized
preventative maintenance program that tracks U.S. Coast Guard and American
Bureau of Shipping inspection schedules and establishes a system for the
reporting and handling of routine maintenance and repair.
Vessel captains submit
monthly inspection reports, which are used to note conditions that may require
maintenance or repair. Vessel superintendents are responsible for reviewing
these reports, inspecting
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identified
discrepancies, assigning a priority classification and generating work orders.
Work orders establish job type, assign personnel responsible for the task and
record target start and completion dates. Vessel superintendents inspect
repairs completed by the crew, supervise outside contractors as needed and
conduct quarterly inspections following the same criteria as the captains.
Drills and training exercises are conducted in conjunction with these
inspections, which are typically more comprehensive in scope. In addition, an
operations duty officer is available on a 24-hour basis to handle any
operational issues. The operations duty officer is prepared to respond on scene
whenever required and is trained in technical repair issues, spill control and
emergency response.
The American Bureau of
Shipping and the U.S. Coast Guard establish drydocking schedules. Typically, we
drydock our vessels twice every five years. Prior to sending a vessel to a
shipyard, we develop comprehensive work lists to ensure all required
maintenance is completed. Repair facilities bid on these work lists, and jobs
are awarded based on price and time to complete. Vessels then report to a
cleaning facility to prepare for shipyard. Once the vessel is gas-free, a
certified marine chemist issues paperwork certifying that no dangerous vapors
are present. The vessel proceeds to the shipyard where the vessel
superintendent and certain crewmembers assist in performing the maintenance and
repair work. The planned maintenance period is considered complete when all
work has been tested to the satisfaction of American Bureau of Shipping or U.S.
Coast Guard inspectors or both.
Safety
General
We are committed to
operating our vessels in a manner that protects the safety and health of our
employees, the general public and the environment. Our primary goal is to
minimize the number of safety- and health-related accidents on our
vessels and our property. Our primary concerns are to avoid personal injuries
and to reduce occupational health hazards. We want to prevent accidents that
may cause damage to our personnel, equipment or the environment, such as fire,
collisions, petroleum spills and groundings of our vessels. In addition, we are
committed to reducing overall emissions and waste generation from each of our
facilities and vessels and to the safe management of associated cargo residues
and cleaning wastes.
Our policy is to follow
all laws and regulations as required, and we are actively participating with
government, trade organizations and the public in creating responsible laws,
regulations and standards to safeguard the workplace, the community and the
environment. Our Operations Department is responsible for coordinating all
facets of our health and safety program and identifies areas that may require
special emphasis, including new initiatives that evolve within the industry.
Our Human Resources Department is responsible for all training, whether
conducted in-house or at a training facility. Supervisors are responsible for
carrying out and monitoring compliance for all of the safety and health
policies on their vessels.
Tank Barge
Characteristics
To protect the
environment, today’s tank barge hulls are required not only to be leak-proof
into the body of water in which they float but also to be vapor-tight to
prevent the release of any fumes or vapors into the atmosphere. Our tank barges
that carry light products such as gasoline or naphtha have alarms that indicate
when the tank is full (95% of capacity) and when it is overfull (98% of
capacity). Each tank barge also has a vapor recovery system that connects the
cargo tanks to the shore terminal via pipe and hose to return to the plant the
vapors generated while loading.
The majority of our bunker
delivery tank barges are equipped with advanced, whole load sampling devices to
provide the supplier and receiver a representative sample. Our bunker delivery tank
barges are also equipped with extended booms for hose handling ease alongside
ships, remote pump engine shut-offs, spill rails, spill containment equipment
and supplies, VHF and UHF radio, satellite and internet communication.
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Safety Management
Systems
We belong to and adhere to
the recommendations of the American Waterways Operators, or AWO, Responsible
Carrier Program. The program is designed as a framework for continuously
improving the industry’s and member companies’ safety performance. The program
complements and builds upon existing government regulations, requiring company
safety and training standards that in many instances exceed those required by
federal law or regulation.
Developed
by the AWO, the Responsible Carrier Program incorporates best industry
practices in three primary areas:
·
management
and administration;
·
equipment
and inspection; and
·
human
factors.
The Responsible Carriers
Program has been recognized by many groups, including the U.S. Coast Guard and
shipper organizations. We are periodically audited by an AWO-certified auditor
to verify compliance. We were last audited in early 2007, and our Responsible
Carrier Program certificate remains in effect until March 2010.
We are also certified to the
standards of the International Safety Management, or ISM, system. The ISM
standards were promulgated by the International Maritime Organization, or IMO,
and have been adopted through treaty by many IMO member countries, including
the United States. Although ISM is not required for coastal tug and barge
operations, we have determined that an integrated safety management system
including the ISM and Responsible Carriers Program standards promotes safer
operations and provides us with necessary operational flexibility as we
continue to grow.
Ship Management, Crewing and Employees
We maintain an experienced
and highly qualified work force of shore-based and seagoing personnel. As
of August 15, 2007, we employed 925 persons, comprising 148 shore staff
and 777 fleet personnel. Our tug and tanker captains are non-union management
supervisors. Effective July 1, 2004, we entered into a new four-year
collective bargaining agreement with our maritime union covering certain of our
seagoing personnel comprising 44% of our workforce. The collective bargaining
agreement provides for wage increases totaling 15% over its term, and requires
us to make contributions to certain pension and other welfare programs. No
unfunded pension liability exists under any of these programs. Our vessel
employees are paid on a daily or hourly basis and typically work 14 days
on and 14 days off. Our shore-based personnel are generally salaried
and most are located at our headquarters in East Brunswick, New Jersey, our
facilities in Staten Island, New York, Seattle, Washington, and Norfolk,
Virginia. We believe that our relations with our employees are satisfactory.
Our shore staff provides
worldwide support for all aspects of our fleet and business operations, including
sales and scheduling, crewing and human resources functions, engineering,
compliance and technical management, financial and insurance services, and
information technology. A staff of dispatchers and schedulers maintain a 24-hour
duty rotation to monitor communications and to coordinate fleet operations with
our customers and terminals. Communication with our vessels is accomplished by
various methods, including wireless data links, cellular telephone, VHF, UHF
and HF radio.
Our crews regularly
inspect each vessel, both at sea and in port, and perform most of the ordinary
course maintenance. Our procedures call for a member of our shore-based
staff to inspect each vessel at least once each fiscal quarter, making specific
notations and recommendations regarding the overall condition of the vessel,
maintenance, safety and crew welfare. In addition, selected vessels are
inspected each year by independent consultants. All of the vessels that are on
bareboat charters to third parties are managed and operated by the customer.
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Classification, Inspection and Certification
Most of our coastwise
vessels have been certified as being “in class” by the American Bureau of
Shipping and, in the case of one vessel, by Lloyds of London. Other vessels,
primarily in our West Coast operations, have the required “loadline”
certification. The American Bureau of Shipping is one of several
internationally recognized classification societies that inspect vessels at
regularly scheduled intervals to ensure compliance with American Bureau of
Shipping classification rules and some applicable federal safety
regulations. Most insurance underwriters require at least a loadline
certification by a classification society before they will extend coverage to a
coastwise vessel. The classification society certifies that the pertinent
vessel has been built and maintained in accordance with the rules of the
society and complies with applicable rules and regulations of the vessel’s
country of registry and the international conventions of which that country is
a member. Inspections are conducted on the pertinent vessel by a surveyor of
the classification society in three surveys of varying frequency and
thoroughness: annual surveys each year, an intermediate survey every two to
three years and a special survey every four to five years. As part of the
intermediate survey, a vessel may be required to be drydocked every 24 to
30 months for inspection of its underwater parts and for any necessary
repair work related to such inspection.
Our vessels are also
inspected at periodic intervals by the U.S. Coast Guard to ensure compliance
with Federal safety regulations. All of our tank vessels carry Certificates of
Inspection issued by the U.S. Coast Guard.
Our vessels and shoreside
operations are also inspected and audited periodically by our customers, in
some cases as a precondition to chartering our vessels. We maintain all
necessary approvals required for our vessels to operate in their normal trades.
We believe that the high quality of our tonnage, our crews and our shoreside
staff are advantages when competing against other vessel operators for
long-term business.
Insurance Program
We maintain insurance
coverage consistent with industry practice that we believe is adequate to
protect against the accident-related risks involved in the conduct of our
business and risks of liability for environmental damage and pollution. Nevertheless,
we cannot provide assurance that all risks are adequately insured against, that
any particular claims will be paid or that we will be able to procure adequate
insurance coverage at commercially reasonable rates in the future. K-Sea
General Partner GP LLC, the general partner of our general partner,
maintains a key man insurance policy on Mr. Timothy J. Casey, its
President and Chief Executive Officer.
Our hull and machinery
insurance covers risks of actual or constructive loss from collision, towers
liabilities, fire, grounding and engine breakdown up to an agreed value per
vessel. Our war-risks insurance covers risks of confiscation, seizure, capture,
vandalism, sabotage and other war-related risks. While some tanker owners and
operators obtain loss-of-hire insurance covering the loss of revenue during
extended tanker off-hire periods, we do not have this type of coverage. We
believe that, given our diversified marine transportation operations and high
utilization rate, this type of coverage is not economical and is of limited
value to us. However, we evaluate the need for such coverage on an ongoing
basis taking into account insurance market conditions and the employment of our
vessels.
Our protection and
indemnity insurance covers third-party liabilities and other related
expenses from, among other things, injury or death of crew, passengers and
other third parties, claims arising from collisions, damage to cargo, damage to
third-party property, asbestos exposure and pollution arising from oil or
other substances. Our current protection and indemnity insurance coverage for
pollution is $1 billion per incident and is provided by West of England
Ship Owners Insurance Services Ltd., or West of England, a mutual
insurance association. West of England is a member of the International Group
of protection and indemnity mutual assurance associations. The protection and
indemnity associations that comprise the
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International
Group insure approximately 90% of the world’s commercial tonnage and have
entered into a pooling agreement to reinsure each association’s liabilities. Each
protection and indemnity association has capped its exposure to this pooling
agreement at approximately $4.3 billion per non-pollution incident. As a
member of West of England, we are subject to calls payable to the association
based on our claim records, as well as the claim records of all other members
of the individual associations and members of West of England.
We are not currently the
subject of any claims alleging exposure to asbestos or second-hand smoke,
although such claims have been brought against our predecessors in the past and
may be brought against us in the future. Our predecessor company, EW
Transportation LLC, has contractually agreed to retain any such
liabilities that occurred prior to our initial public offering in January 2004,
will indemnify us for up to $10 million of such liabilities until January 2014,
and will make available to us the benefit of certain indemnities it received in
connection with the purchase of certain vessels. If, notwithstanding the
foregoing, we are ultimately obligated to pay any asbestos-related or
similar claims for any reason, we believe we or EW Transportation LLC
would have adequate insurance coverage for periods after March 1986 to pay
such claims. However, EW Transportation LLC and its predecessors may not
have insurance coverage prior to March 1986. If we were subject to claims
related to that period, including claims from current or former employees, EW
Transportation LLC may not have insurance to pay the liabilities, if any,
that could be imposed on us. If we had to pay claims solely out of our own
funds, it could have a material adverse effect on our financial condition. Furthermore,
any claims covered by insurance would be subject to deductibles, and because it
is possible that a large number of claims could be brought, the aggregate
amount of these deductibles could be material.
We may not be able to
obtain insurance coverage in the future to cover all risks inherent in our
business, and insurance, if available, may be at rates that we do not consider
to be commercially reasonable. In addition, as more single-hull vessels are
retired from active service, insurers may be less willing to insure, and
customers less willing to hire, single-hull vessels.
Competition
The domestic tank vessel
industry is highly competitive. The Jones Act restricts U.S. point-to-point maritime
shipping to vessels built in the United States, owned and operated by U.S.
citizens and manned by U.S. crews. In our market areas, our primary direct
competitors are the operators of U.S.-flag ocean-going tank barges and
U.S.-flag refined petroleum product tankers, including the captive fleets of
major oil companies.
In the
voyage and short-term charter market, our vessels compete with all other
vessels of a size and type required by a charterer that can be available at the
date specified. In the voyage market, competition is based primarily on price
and availability, although charterers have become more selective with respect
to the quality of vessels they hire, with particular emphasis on factors such
as age, double hulls and the reliability and quality of operations. Increasingly,
major charterers are demonstrating a preference for modern vessels based on
concerns about the environmental risks associated with older vessels.
Consequently, we believe that owners of large modern fleets have been able to
gain a competitive advantage over owners of older fleets.
U.S.-flag tank vessels
also compete with petroleum product pipelines and are affected by the level of
imports on foreign flag products carriers. The Colonial Pipeline system, which
originates in Texas and terminates at New York Harbor, the Plantation Pipe Line
system, which originates in Louisiana and terminates in Washington D.C., and
smaller regional pipelines between Philadelphia and New York carry refined
petroleum products to the major storage and distribution facilities that we
currently serve. We believe that high capital costs, tariff regulation and
environmental considerations make it unlikely that a new refined product
pipeline system will be built in our market areas in the near future. It is
possible, however, that new pipeline segments, including pipeline segments that
connect with existing pipeline
S-64
systems,
could be built or that existing pipelines could be converted to carry refined
petroleum products. Either of these occurrences could have an adverse effect on
our ability to compete in particular locations.
Regulation
Our operations are subject
to significant federal, state and local regulation, the principal provisions of
which are described below.
Environmental
General.
Government regulation significantly
affects the ownership and operation of our tank vessels. Our tank vessels are
subject to international conventions, federal, state and local laws and
regulations relating to safety and health and environmental protection,
including the generation, storage, handling, emission, transportation, and
discharge of hazardous and non-hazardous materials. Although we believe that we
are in substantial compliance with applicable environmental laws and
regulations, we cannot predict the ultimate cost of complying with these
requirements, or the impact of these requirements on the resale value or useful
lives of our tank vessels. The recent trend in environmental legislation is
toward stricter requirements, and this trend will likely continue. In addition,
a future serious marine incident occurring in U.S. waters, or internationally,
that results in significant oil pollution or causes significant environmental
impact could result in additional legislation or regulation that could affect
our profitability.
Various governmental and
quasi-governmental agencies require us to obtain permits, licenses and
certificates for the operation of our tank vessels. While we believe that we
are in substantial compliance with applicable environmental laws and
regulations and have all permits, licenses and certificates necessary for the
conduct of our operations, frequently changing and increasingly stricter
requirements, future non-compliance or failure to maintain necessary permits or
approvals could require us to incur substantial costs or temporarily suspend
operation of one or more of our tank vessels.
We maintain operating
standards for all our tank vessels that emphasize operational safety, quality
maintenance, continuous training of our crews and officers, care for the
environment and compliance with U.S. regulations. Our tank vessels are subject
to both scheduled and unscheduled inspections by a variety of governmental and
private entities, each of which may have unique requirements. These entities
include the local port authorities (U.S. Coast Guard, harbor master or
equivalent), classification societies, flag state administration and
charterers, particularly terminal operators and oil companies.
Finally, we manage our
exposure to losses from potential discharges of pollutants through the use of
well-maintained and well-managed facilities, well maintained and well equipped
vessels and safety and environmental programs, including a maritime compliance
program and our insurance program. Moreover, we believe we will be able to
accommodate reasonably foreseeable environmental regulatory changes. However,
the risks of substantial costs, liabilities, and penalties are inherent in
marine operations. As a result, there can be no assurance that any new regulations
or requirements or any discharge of pollutants by us will not have a material
adverse effect on us.
The Oil Pollution Act of
1990.
The
Oil Pollution Act of 1990, or OPA 90, affects all vessels trading in U.S.
waters including the exclusive economic zone extending 200 miles seaward. OPA
90 sets forth various technical and operating requirements for tank vessels
operating in U.S. waters. Existing single-hull, double-sided and double-bottomed
tank vessels are to be phased out of service at varying times based on their
tonnage and age, with all such vessels being phased out by January 2015. As
of August 15, 2007, 28 of our tank vessels, which are single-hulled, will be
precluded from transporting petroleum products as of January 1, 2015.
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Under OPA 90,
owners or operators of tank vessels and certain non-tank vessels operating in
U.S. waters must file vessel spill response plans with the U.S. Coast Guard and
operate in compliance with the plans. These vessel response plans must, among
other things:
·
address
a “worst case” scenario and identify and ensure, through contract or other
approved means, the availability of necessary private response resources;
·
describe
crew training and drills; and
·
identify
a qualified individual with specific authority and responsibility to implement
removal actions in the event of an oil spill.
Our vessel response plans have been approved by the
U.S. Coast Guard, and all of our tankermen have been trained to comply with
these guidelines. In addition, we conduct regular oil-spill response drills in
accordance with the guidelines set out in OPA 90. We believe that all of our vessels
are in substantial compliance with OPA 90.
Environmental
Spill and Release Liability.
OPA 90 and various state laws substantially increased
over historic levels the statutory liability of owners and operators of vessels
for the discharge or substantial threat of a discharge of oil and the resulting
damages, both regarding the limits of liability and the scope of damages. OPA
90 imposes joint and several strict liability on responsible parties, including
owners, operators and bareboat charterers, for all oil spill and containment
and clean-up costs and other damages arising from spills attributable to their
vessels. A complete defense is available only when the responsible party
establishes that it exercised due care and took precautions against foreseeable
acts or omissions of third parties and when the spill is caused solely by an
act of God, act of war (including civil war and insurrection) or a third party
other than an employee or agent or party in a contractual relationship with the
responsible party. These limited defenses may be lost if the responsible party
fails to report the incident or reasonably cooperate with the appropriate
authorities or refuses to comply with an order concerning clean-up activities.
Even if the spill is caused solely by a third party, the owner or operator must
pay removal costs and damage claims and then seek reimbursement from the third
party or the trust fund established under OPA 90. Finally, in certain
circumstances involving oil spills, OPA 90 and other environmental laws may
impose criminal liability on personnel and/or the corporate entity.
OPA 90 limits the
liability of each responsible party for oil pollution from vessels, and these
limits were increased substantially in 2006. The limits for a tank vessel
without a qualifying double hull are the greater of (1) $3,000 per gross ton or
(2) $22 million for a tank vessel of greater than 3,000 tons or $6 million for
a tank vessel of 3,000 gross tons or less. The limits for a tank vessel with a
qualifying double hull are the greater of (1) $1,900 per gross ton or (2) $16
million for a tank vessel of greater than 3,000 gross tons or $4 million for a
tank vessel of 3,000 gross tons or less. The limits for any vessel other than a
tank vessel are the greater of $950 per gross ton or $0.8 million. The limits
of liability are subject to periodic increase to account for inflation. These
limits do not apply where, among other things, the spill is caused by gross
negligence or willful misconduct of, or a violation of an applicable federal
safety, construction or operating regulation by, a responsible party or its
agent or employee or any person acting in a contractual relationship with a
responsible party. In addition to removal costs, OPA 90 provides for recovery
of damages, including:
·
natural
resource damages and related assessment costs;
·
real
and personal property damages;
·
net
loss of taxes, royalties, rents, fees and other lost revenues;
·
net
costs of public services necessitated by a spill response, such as protection
from fire, safety or health hazards;
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·
loss
of profits or impairment of earning capacity due to the injury, destruction or
loss of real property, personal property or natural resources; and
·
loss
of subsistence use of natural resources.
OPA 90 requires owners and operators of vessels
operating in U.S. waters to establish and maintain with the U.S. Coast Guard
evidence of their financial responsibility sufficient to meet their potential
liabilities imposed by OPA 90. Under the regulations, we may provide evidence
of insurance, a surety bond, a guarantee, letter of credit, qualification as a
self-insurer or other evidence of financial responsibility. We have qualified
as a self-insurer under the regulations and have received Certificates of
Financial Responsibility from the U.S. Coast Guard for all of our vessels
subject to this requirement.
OPA 90 expressly provides that individual states are
entitled to enforce their own oil pollution liability laws, even if
inconsistent with or imposing greater liability than OPA 90. There is no
uniform liability scheme among the states. Some states have OPA 90-like
schemes for limiting liability to various amounts, some rely on common law
fault-based remedies and others impose strict and/or unlimited liability
on an owner or operator. Virtually all coastal states have enacted their own
pollution prevention, liability and response laws, whether statutory or through
court decisions, with many providing for some form of unlimited liability. We
believe that the liability provisions of OPA 90 and similar state laws have
greatly expanded potential liability in the event of an oil spill, even where
we are not at fault. Some states have also established their own requirements
for financial responsibility. However, at least
two states have repealed regulations concerning the operation, manning,
construction or design of tank vessels as a result of the U.S. Supreme Court’s
2000 ruling in
United States v. Locke
. In
Locke
, the Court held that the regulation of maritime
commerce is generally a federal responsibility because of the need for national
and international uniformity.
Parties affected by oil pollution that do not fully
recover from a responsible party may pursue relief from the Oil Spill Liability
Trust Fund. Responsible parties may seek reimbursement from the fund for costs
incurred that exceed the liability limits of OPA 90. In order to obtain reimbursement
of excess costs, the responsible party would need to establish that it is
entitled to a statutory limitation of liability as discussed above. If we are
deemed a responsible party for an oil pollution incident and are ineligible for
reimbursement of excess costs, the costs of responding to an oil pollution
incident could have a material adverse effect on our results of operations,
financial condition and cash flows. We presently maintain oil pollution
liability insurance in an amount in excess of that required by OPA 90. Through
West of England, our current coverage for oil pollution is $1 billion per
incident. It is possible, however, that our liability for an oil pollution
incident may be in excess of the insurance coverage we maintain.
We are also subject to potential liability arising
under the U.S. Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA, which applies to the discharge of hazardous
substances, whether on land or at sea. Specifically, CERCLA provides for
liability of owners and operators of vessels for cleanup and removal of
hazardous substances. Liability under CERCLA for releases of hazardous
substances from vessels is limited to the greater of $300 per gross ton or
$5 million per incident unless attributable to willful misconduct or
neglect, a violation of applicable standards or rules, or upon failure to
provide reasonable cooperation and assistance. CERCLA liability for releases
from facilities other than vessels is generally unlimited.
We are required to show proof of insurance, surety
bond, self insurance or other evidence of financial responsibility to pay
damages under OPA 90 and CERCLA in the amount of $1,500 per gross ton for
vessels, consisting of the sum of the OPA 90 liability limit of $1,200 per
gross ton or $10 million per discharge and the CERCLA liability limit of
$300 per gross ton or $5 million per discharge. We have satisfied these
requirements and obtained a U.S. Coast Guard Certificate of Financial
Responsibility for each of our tank vessels. OPA 90 and CERCLA each preserve
the right to recover damages under other existing laws, including maritime tort
law.
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Water.
The federal Clean Water Act, or
CWA, imposes restrictions and strict controls on the discharge of pollutants
into navigable waters, and such discharges generally require permits. The CWA
provides for civil, criminal and administrative penalties for any unauthorized
discharges and imposes substantial liability for the costs of removal,
remediation and damages. State laws for the control of water pollution also
provide varying civil, criminal and administrative penalties and liabilities in
the case of a discharge of petroleum, its derivatives, hazardous substances,
wastes and pollutants into state waters. In addition, the Coastal Zone
Management Act authorizes state implementation and development of programs of
management measures for non-point source pollution to restore and protect
coastal waters.
A 2005 United States district court decision could
result in certain of our vessels being required to obtain Clean Water Act
permits for the discharge of ballast water. Under current CWA regulations, our
vessels are exempt from such permitting requirements, but in the
March 2005
Northwest Environmental Advocates v. EPA
decision, the federal district court in California ordered the EPA to repeal
the exemption. Under the court’s ruling owners and operators of vessels would
be required to comply with the Clean Water Act permitting requirements or face
penalties. The remedy phase of the proceeding is ongoing. However, if the
permitting exemption is repealed, we will incur certain costs to obtain CWA
permits for our vessels. Because we do not yet know how or when this matter
ultimately will be resolved, we cannot estimate its potential financial impact
at this time. However, we believe that any financial impacts resulting from the
repeal of the permitting exemption for ballast water discharge will not be
material.
Solid
Waste.
Our
operations occasionally generate and require the transportation, treatment and
disposal of both hazardous and non-hazardous solid wastes that are subject to
the requirements of the federal Resource Conservation and Recovery Act, or
RCRA, and comparable state and local requirements. In addition, in the course
of our tank vessel operations, we engage contractors to remove and dispose of
waste material, including tank residue. In the event that such waste is found
to be “hazardous” under either RCRA or the CWA, and is disposed of in violation
of applicable law, we could be found jointly and severally liable for the
cleanup costs and any resulting damages. Finally, the EPA does not currently
classify “used oil” as “hazardous waste,” provided certain recycling standards
are met. However, some states in which we operate have classified “used oil” as
“hazardous” under state laws patterned after RCRA. The cost of managing wastes
generated by tank vessel operations has increased in recent years under
stricter state and federal standards. Additionally, from time to time we
arrange for the disposal of hazardous waste or hazardous substances at offsite
disposal facilities. If such materials are improperly disposed of by third
parties, we could be liable for clean up costs under CERCLA or the equivalent
state laws. We use only certified haulers for this work.
EW Transportation Corp. (formerly K-Sea Transportation
Corp., a predecessor company) was previously notified that it is potentially
responsible for the cleanup of hazardous substances at the “Palmer Barge Site”
in Port Arthur, Texas, where cleaning was performed on two of our barges in
1996 and 1997. We assumed this liability at the time of our initial public
offering, subject to insurance and certain indemnification from our
predecessors (see “Certain Relationships and Related Transactions—Omnibus Agreement—Indemnification”
in Item 13 of our annual report on Form 10-K for the fiscal year ended June 30,
2007). In August 2007, we agreed to settle our share of liability for the
EPA-mandated investigation and site cleanup for $25,000, which we anticipate
will be indemnified by our predecessor. We believe that further costs, if
any, will be immaterial to our financial position, results of operations and
cash flows.
Air
Emissions.
The federal Clean Air Act, or CAA,
requires the EPA to promulgate standards applicable to emissions of volatile
organic compounds and other air contaminants. Our vessels are subject to vapor
control and recovery requirements for certain cargoes when loading, unloading,
ballasting, cleaning and conducting other operations in regulated port areas.
Our tank barges are equipped with vapor control systems that satisfy these
requirements. In addition, the EPA issued final rules regarding
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emissions standards for
various classes of marine diesel engines. While these rules are currently
limited to new engines beginning with the 2004 model year, the EPA has noted
that it may revisit the application of emissions standards to rebuilt or
remanufactured engines if the industry does not take steps to introduce new
pollution control technologies. Adoption of such standards could require
modifications to some existing marine diesel engines and may require
substantial expenditures.
The CAA also requires
states to draft State Implementation Plans, or SIPs, designed to attain
national health-based air quality standards in primarily major
metropolitan and/or industrial areas. Where states fail to present approvable
SIPs or SIP revisions by certain statutory deadlines, the federal government is
required to draft a Federal Implementation Plan. Several SIPs regulate
emissions resulting from barge loading and degassing operations by requiring
the installation of vapor control equipment. As stated above, our tank barges
are already equipped with vapor control systems that satisfy these
requirements. Although a risk exists that new regulations could require
significant capital expenditures and otherwise increase our costs, we believe,
based upon the regulations that have been proposed to date, that no material
capital expenditures beyond those currently contemplated and no material
increase in costs are likely to be required.
Coastwise Laws
A substantial
portion of our operations are conducted in the U.S. domestic trade, which is
governed by the coastwise laws of the United States. The U.S. coastwise laws
reserve marine transportation between points in the United States, including
harbor tug services, to vessels built in and documented under the laws of the
United States (U.S.-flag) and owned and manned by U.S. citizens. Generally, an
entity is deemed a U.S. citizen for these purposes so long as:
·
it
is organized under the laws of the United States or a state;
·
each
of its chief executive officer (by whatever title) and the chairman of its
board of directors is a U.S. citizen;
·
no
more than a minority of the number of its directors necessary to constitute a
quorum for the transaction of business are non-U.S. citizens;
·
at
least 75.0% of the interest and voting power in the corporation is held by U.S.
citizens free of any trust, fiduciary arrangement or other agreement,
arrangement or understanding whereby voting power may be exercised directly or
indirectly by non-U.S. citizens; and
·
in
the case of a limited partnership, the general partner meets U.S. citizenship
requirements for U.S. coastwise trade.
Because we could lose the privilege of operating our
vessels in the U.S. coastwise trade if non-U.S. citizens were to own or control
in excess of 25.0% of our outstanding interests, our limited partnership
agreement restricts foreign ownership and control of our common and
subordinated units to not more than 15.0% of our outstanding interests.
There have been repeated
efforts aimed at repeal or significant change of the Jones Act. Although we
believe it is unlikely that the Jones Act will be substantially modified or
repealed, there can be no assurance that Congress will not substantially modify
or repeal such laws. Such changes could have a material adverse effect on our
operations and financial condition.
Other
Our vessels are subject to
the jurisdiction of the U.S. Coast Guard, the National Transportation Safety
Board, the U.S. Customs and Border Protection (CBP) and the U.S. Maritime
Administration, as well as subject to rules of private industry
organizations such as the American Bureau of Shipping. These agencies
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and
organizations establish safety standards and are authorized to investigate
vessels and accidents and to recommend improved maritime safety standards.
Moreover, to ensure compliance with applicable safety regulations, the U.S. Coast
Guard is authorized to inspect vessels at will.
Occupational Health Regulations
Our shoreside facilities
are subject to occupational safety and health regulations issued by the U.S.
Occupational Safety and Health Administration, or OSHA, and comparable state
programs. These regulations currently require us to maintain a workplace free
of recognized hazards, observe safety and health regulations, maintain records,
and keep employees informed of safety and health practices and duties. Our
vessel operations are also subject to occupational safety and health
regulations issued by the U.S. Coast Guard and, to an extent, OSHA. These
regulations currently require us to perform monitoring, medical testing and
recordkeeping with respect to mariners engaged in the handling of the various
cargoes transported by our chemical and petroleum product carriers.
Vessel Condition
Our vessels are subject to
periodic inspection and survey by, and drydocking and maintenance requirements
of, the U.S. Coast Guard and/or the American Bureau of Shipping. We believe we
are currently in compliance in all material respects with the environmental and
other laws and regulations, including health and safety requirements, to which
our operations are subject. We are unaware of any pending or threatened
litigation or other judicial, administrative or arbitration proceedings against
us occasioned by any alleged non-compliance with such laws or regulations. The
risks of substantial costs, liabilities and penalties are, however, inherent in
marine operations, and there can be no assurance that significant costs,
liabilities or penalties will not be incurred by or imposed on us in the
future.
Properties
We lease pier facilities and approximately 7,000
square feet of office space in Staten Island, New York. The lease expires in April 2009;
however, we have the option to renew it for two additional ten-year periods. We
own and use a 2,100 square-foot modular facility for additional office space on
the premises.
We lease pier facilities, a water treatment facility
and approximately 10,500 square feet of office space in Norfolk, Virginia. This
lease expires in January 2010, and we have an option to purchase the
facility.
We lease approximately 9,500 square feet of office
space for our principal executive office in East Brunswick, New Jersey, for
which the lease expires in December 2013.
We lease pier facilities and approximately 16,000
square feet of office space in Seattle, Washington. This lease expires in October 2008
with a renewal option for one additional five-year term. We also lease
approximately 6,000 square feet of other office space in Seattle, Washington.
This lease expires in February 2008.
We also lease pier facilities and approximately 22,000
square feet of office and warehouse space in Philadelphia, Pennsylvania, which
terminates in December 2009, and we also lease pier facilities and
approximately 2,800 square feet of office and warehouse space, on a month to
month basis, in Honolulu, Hawaii.
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MANAGEMENT
K-Sea General Partner GP LLC, as the general
partner of K-Sea General Partner L.P., our general partner, manages our
operations and activities. Our general partner is not elected by our
unitholders and is not subject to re-election on a regular basis in the future.
Unitholders are not entitled to elect the directors of K-Sea General Partner
GP LLC or directly or indirectly participate in our management or
operation.
The board of directors of K-Sea General Partner
GP LLC oversees our operations. K-Sea General Partner GP LLC has appointed
six members to its board of directors, three of whom, Messrs. Abbate,
Alperin and Salerno, are independent as defined under the independence
standards established by the New York Stock Exchange. The New York Stock
Exchange does not require a listed limited partnership, like us, to have a
majority of independent directors on the board of directors of its general
partner or to establish a compensation committee or a nominating or governance
committee.
The
following table provides information concerning the directors and executive
officers of K-Sea General Partner GP LLC as of September 7, 2007. Executive
officers and directors are elected for one-year terms.
|
Name
|
|
|
|
Age
|
|
Position with K-Sea General Partner
GP LLC
|
|
James J. Dowling
|
|
61
|
|
Chairman of the Board
|
|
Timothy J. Casey
|
|
46
|
|
President, Chief
Executive Officer and Director
|
|
Anthony S. Abbate
|
|
67
|
|
Director
|
|
Barry J. Alperin
|
|
67
|
|
Director
|
|
Brian P. Friedman
|
|
51
|
|
Director
|
|
Frank Salerno
|
|
48
|
|
Director
|
|
John J. Nicola
|
|
53
|
|
Chief Financial Officer
|
|
Thomas M. Sullivan
|
|
48
|
|
Vice President,
Operations
|
|
Richard P. Falcinelli
|
|
46
|
|
Vice President,
Administration and Secretary
|
|
Gregory J. Haslinsky
|
|
44
|
|
Vice President, Sales
and Marketing
|
|
Charles Kauffman
|
|
56
|
|
Vice President,
Corporate Development
|
James
J. Dowling
has served as our Chairman of the Board
since July 2003, has served as Chairman of the Board of EW Transportation
LLC (formerly K-Sea Transportation LLC) since January 2002 and has served
as a director of EW Transportation LLC since its formation in April 1999.
Mr. Dowling has been a Managing Director of Jefferies Capital Partners, a
private investment firm, since January 2002, and is a director of various
private companies in which Jefferies Capital Partners has an interest.
Jefferies Capital Partners is the manager of Furman Selz Investors II L.P. and
its affiliated entities, principal owners of our general partner.
Timothy
J. Casey
has served as our President, Chief Executive
Officer and Director since July 2003. Mr. Casey has served as
President, Chief Executive Officer and Director of EW Transportation LLC since
April 1999. Mr. Casey is also a board member for American Waterways
Operators and The Seamen’s Church Institute.
Anthony
S. Abbate
has served as a Director since
February 2004. Mr. Abbate was President, Chief Executive Officer and
a director of Interchange Financial Services Corporation, a bank holding
company, since 1984 until his retirement in 2007 and President, Chief Executive
Officer and a director of its principal subsidiary, Interchange Bank, from 1981
until his retirement in 2007. In April 2007, Mr. Abbate joined the
Board of Directors of Sussex Bancorp, a bank holding company.
Barry
J. Alperin
has served as a Director since
February 2004. Mr. Alperin is a business consultant who retired from
Hasbro Inc. in 1996 after 11 years in various senior executive
positions, including Vice Chairman and Director. Mr. Alperin is currently
on the board of Henry Schein, Inc., a distributor of
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healthcare products to
office-based practitioners, and The Hain Celestial Group, Inc., a natural
and organic beverage, snack, specialty food and personal care products company.
Brian
P. Friedman
has served as a director since
July 2003. Since 1997, Mr. Friedman has been President of Jefferies
Capital Partners, a private investment firm. Mr. Friedman also serves as
Chairman of the Executive Committee of Jefferies & Company, Inc.,
a global securities and investment banking firm. Mr. Friedman serves as a
director of Jefferies Group, Inc. As a result of his management of various
private equity funds and the significant equity positions those funds hold in
their portfolio companies, Mr. Friedman serves on several boards of
directors of private portfolio companies.
Frank
Salerno
has served as a Director since
February 2004. Mr. Salerno has served as a director for WisdomTree
Investments, Inc. (formerly known as Index Development Partners) since
July 2005 and as a director for Crystal International Travel Group since
April 2006. From mid-1999 until his retirement in
February 2004, Mr. Salerno was Managing Director and Chief Operating
Officer of Merrill Lynch Investment Advisors—Americas Institutional Division,
an investment advisory company.
John
J. Nicola
has served as our Chief Financial Officer
since July 2003, and has served as Chief Financial Officer of EW
Transportation LLC since July 2000. Mr. Nicola was employed from
November 1993 to July 2000 by Maersk Sealand, a container shipping
company, in various senior financial management roles, including Chief
Financial Officer of Maersk’s East Coast and Gulf terminal operating
subsidiary. Mr. Nicola is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants.
Thomas
M. Sullivan
has served as our Vice President of
Operations since July 2003. Mr. Sullivan served as Vice President of
Operations for EW Transportation LLC since April 1999. Mr. Sullivan
also served as Vessel Supervisor for EW Transportation LLC’s predecessor from
March 1995 until April 1999.
Richard
P. Falcinelli
has served as our Vice President of
Administration and Secretary since July 2003. Mr. Falcinelli has
served as Vice President of Administration and Secretary of EW Transportation
LLC since April 1999.
Gregory
J. Haslinsky
has served as our Vice President, Sales
and Marketing since October 2005 and has been employed by K-Sea
Transportation since December 1999 in various sales capacities.
Mr. Haslinsky was employed from November 1988 to November 1999
by Maritrans, a marine transportation company, holding various sales and
marketing positions within the organization.
Charles
Kauffman
has served as our Vice President, Corporate
Development since the acquisition of Sea Coast Transportation in
October 2005. Mr. Kauffman was employed from February 1984 to
October 2005 by Saltchuk Resources Inc., a privately held maritime
company, where he held various senior management positions, including President
of Sea Coast Transportation since July 2002.
S-72
MATERIAL TAX
CONSEQUENCES
The tax consequences to you of an investment in our
common units will depend in part on your own tax circumstances. For a
discussion of the principal federal income tax considerations associated with
our operations and the purchase, ownership and disposition of common units,
please read “Material Tax Consequences” beginning on page 52 of the
accompanying prospectus. You are urged to consult your own tax advisor about
the federal, state, foreign and local tax consequences particular to your
circumstances.
We estimate that if you purchase a common unit in this
offering and hold the common unit through the record date for the distribution
with respect to the quarter ending December 31, 2009, you will be
allocated, on a cumulative basis, an amount of federal taxable income for the
taxable years 2007 through 2009 that will be less than 20% of the amount of
cash distributed to you with respect to that period. This estimate is based
upon many assumptions regarding our business and operations, including
assumptions with respect to capital expenditures, cash flows and anticipated
cash distributions. This estimate and our assumptions are subject to, among
other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, this estimate is based on
current tax law and tax reporting positions that we have adopted and with which
the Internal Revenue Service might disagree. Accordingly, we cannot assure you
that this estimate will be correct. The actual percentage of distributions that
will constitute taxable income could be higher or lower than our estimate, and
any differences could materially affect the value of the common units. For
example, the percentage of taxable income relative to our distributions could
be higher, and perhaps substantially higher, than our estimate with respect to
the period described above if:
·
gross
income from operations exceeds the amount required to make the current level of
quarterly distributions on all units, yet we only distribute the current level
of quarterly distributions on all units; or
·
we
make a future offering of common units and use the proceeds of the offering in
a manner that does not produce substantial additional deductions during the
period described above, such as to repay indebtedness outstanding at the time
of this offering or to acquire property that is not eligible for depreciation
or amortization for federal income tax purposes or that is depreciable or
amortizable at a rate significantly slower than the rate applicable to our
assets at the time of this offering.
S-73
UNDERWRITING
Lehman
Brothers Inc., Citigroup Global Markets Inc. and UBS Securities LLC are
acting as representatives of the underwriters and the joint book-running
managers of this offering. Under the terms of an underwriting agreement, which
we will file as an exhibit to our current report on Form 8-K and
incorporate by reference in this prospectus supplement and the accompanying
prospectus, each of the underwriters named below has severally agreed to
purchase from us the respective number of common units shown opposite its name
below:
|
Underwriters
|
|
|
|
Number of
Common Units
|
|
|
Lehman Brothers
Inc.
|
|
|
|
|
|
|
Citigroup Global
Markets Inc.
|
|
|
|
|
|
|
UBS
Securities LLC
|
|
|
|
|
|
|
Wachovia Capital
Markets, LLC
|
|
|
|
|
|
|
RBC Capital
Markets Corporation
|
|
|
|
|
|
|
KeyBanc Capital
Markets
|
|
|
|
|
|
|
Raymond
James & Associates, Inc.
|
|
|
|
|
|
|
Stifel,
Nicolaus & Company, Incorporated
|
|
|
|
|
|
|
Total
|
|
|
3,000,000
|
|
|
The underwriting
agreement provides that the underwriters’ obligation to purchase common units
depends on the satisfaction of the conditions contained in the underwriting
agreement including:
·
the
obligation to purchase all of the common units offered hereby (other than those
common units covered by their option to purchase additional common units as
described below), if any of the common units are purchased;
·
the
representations and warranties made by us to the underwriters are true;
·
there
is no material change in our business or in the financial markets; and
·
we deliver customary closing
documents to the underwriters.
Commissions and
Expenses
The
following table summarizes the underwriting discounts and commissions we will
pay to the underwriters. These amounts are shown assuming both no exercise and
full exercise of the underwriters’ option to purchase additional common units.
The underwriting fee is the difference between the initial price to the public
and the amount the underwriters pay to us for the common units.
|
|
|
No Exercise
|
|
Full Exercise
|
|
|
Per common unit
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The representatives of the underwriters have advised
us that the underwriters propose to offer the common units directly to the
public at the public offering price on the cover of this prospectus supplement
and to selected dealers, which may include the underwriters, at such offering
price less a selling concession not in excess of $ per common unit. After the offering, the
representatives may change the offering price and other selling terms.
We estimate that the total
expenses for this common unit offering, excluding underwriting discounts and
commissions, will be approximately $600,000.
S-74
Option to Purchase
Additional Common Units
We have granted the
underwriters an option exercisable for 30 days after the date of this
prospectus supplement, to purchase, from time to time, in whole or in part, up
to an aggregate of 450,000 common units at the public offering price less
underwriting discounts and commissions. This option may be exercised if the
underwriters sell more than 3,000,000 common units in connection with this
offering. To the extent that this option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase its pro rata portion of
these additional common units based on the underwriter’s percentage
underwriting commitment in the offering as indicated in the table at the
beginning of this section.
Lock-Up Agreements
We, all of the directors and executive officers of the
general partner of our general partner and EW Transportation LLC have
agreed that, subject to certain exceptions without the prior written consent of
each of Lehman Brothers Inc., Citigroup Global Markets Inc. and UBS Securities LLC, we and they will not
directly or indirectly (1) offer for sale, sell, pledge, or otherwise
dispose of (or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at any time in
the future of) any common units (including, without limitation, common units
that may be deemed to be beneficially owned by us or them in accordance with
the rules and regulations of the Securities and Exchange Commission common
units that may be issued upon exercise of any options or warrants) or
securities convertible into or exercisable or exchangeable for common units, (2) enter
into any swap or other derivatives transaction that transfers to another, in
whole or in part, any of the economic consequences of ownership of the common
units, (3) make any demand for or exercise any right or file or cause to
be filed a registration statement, including any amendments thereto, with
respect to the registration of any common units or securities convertible,
exercisable or exchangeable into common units or any of our other securities,
or (4) publicly disclose the intention to do any of the foregoing for a
period of 90 days after the date of this prospectus supplement, except with
respect to (a) issuances of common units, or securities convertible into
or exercisable or exchangeable for common units, pursuant to our long-term
incentive plan and our unit purchase plan as in effect on the date of the
underwriting agreement or pursuant to currently outstanding options, warrants
or rights, (b) the filing by us of any registration statement on
Form S-8 or a resale registration statement related to 250,000 common
units pursuant to existing registration right or (c) the transfer of
common units, or securities convertible into or exercisable or exchangeable for
common units, to one or more affiliates who agree to be bound by the foregoing
restrictions.
The 90-day
restricted period described in the preceding paragraph will be extended if:
·
during
the last 17 days of the 90-day restricted period we issue an earnings
release or material news or a material event relating to us occurs; or
·
prior
to the expiration of the 90-day restricted period, we announce that we
will release earnings results during the 16-day period beginning on the
last day of the 90-day period;
in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration of the 18-day
period beginning on the issuance of the earnings release or the announcement of
the material news or material event, unless such extension is waived in writing
by Lehman Brothers Inc., Citigroup Global Markets Inc. and UBS
Securities LLC.
Lehman Brothers Inc.,
Citigroup Global Markets Inc. and UBS Securities LLC, in their sole
discretion, may release the common units and other securities subject to the
lock-up agreements described above in whole or in part at any time with or
without notice. When determining whether or not to release common units and
other securities from lock-up agreements, Lehman Brothers Inc., Citigroup
Global Markets Inc. and UBS Securities LLC will consider, among other
factors, the holder’s reasons for
S-75
requesting
the release, the number of common units and other securities for which the
release is being requested and market conditions at the time.
Indemnification
We have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments that the underwriters
may be required to make for these liabilities.
Stabilization,
Short Positions and Penalty Bids
The representatives
may engage in stabilizing transactions, short sales and purchases to cover
positions created by short sales, and penalty bids or purchases for the purpose
of pegging, fixing or maintaining the price of the common units, in accordance
with Regulation M under the Securities Exchange Act of 1934:
·
Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum.
·
A
short position involves a sale by the underwriters of common units in excess of
the number of common units the underwriters are obligated to purchase in the
offering, which creates the syndicate short position. This short position may
be either a covered short position or a naked short position. In a covered
short position, the number of common units involved in the sales made by the
underwriters in excess of the number of common units they are obligated to
purchase is not greater than the number of common units that they may purchase
by exercising their option to purchase additional common units. In a naked
short position, the number of common units involved is greater than the number
of common units in their option to purchase additional common units. The
underwriters may close out any short position by either exercising their option
to purchase additional common units and/or purchasing common units in the open
market. In determining the source of common units to close out the short
position, the underwriters will consider, among other things, the price of
common units available for purchase in the open market as compared to the price
at which they may purchase common units through their option to purchase
additional common units. A naked short position is more likely to be created if
the underwriters are concerned that there could be downward pressure on the
price of the common units in the open market after pricing that could adversely
affect investors who purchase in the offering.
·
Syndicate
covering transactions involve purchases of the common units in the open market
after the distribution has been completed in order to cover syndicate short
positions.
·
Penalty
bids permit the representatives to reclaim a selling concession from a
syndicate member when the common units originally sold by the syndicate member
is purchased in a stabilizing or syndicate covering transaction to cover
syndicate short positions.
These stabilizing transactions, syndicate covering
transactions and penalty bids may have the effect of raising or maintaining the
market price of our common units or preventing or retarding a decline in the
market price of the common units. As a result, the price of the common units
may be higher than the price that might otherwise exist in the open market. These
transactions may be effected on The New York Stock Exchange or otherwise and,
if commenced, may be discontinued at any time.
Neither we nor any of the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common units. In addition, neither we nor any of the underwriters
make representation that the representatives will engage in these stabilizing
transactions or that any transaction, once commenced, will not be discontinued
without notice.
S-76
Electronic
Distribution
A prospectus in electronic format may be made
available on the Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members participating in
this offering, or by their affiliates. In those cases, prospective investors
may view offering terms online and, depending upon the particular underwriter
or selling group member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a specific number of
common units for sale to online brokerage account holders. Any such allocation
for online distributions will be made by the representatives on the same basis
as other allocations.
Other than the prospectus
in electronic format, the information on any underwriter’s or selling group
member’s web site and any information contained in any other web site
maintained by an underwriter or selling group member is not part of the
prospectus or the registration statement of which this prospectus supplement and
the accompanying prospectus forms a part, has not been approved and/or endorsed
by us or any underwriter or selling group member in its capacity as underwriter
or selling group member and should not be relied upon by investors.
Stamp Taxes
If you purchase common
units offered in this prospectus supplement and the accompanying prospectus,
you may be required to pay stamp taxes and other charges under the laws and
practices of the country of purchase, in addition to the offering price listed
on the cover page of this prospectus supplement and the accompanying
prospectus.
Relationships/NASD
Conduct Rules
Certain of the underwriters and their related entities
have engaged and may engage in commercial and investment banking transactions
with us in the ordinary course of their business. They have received customary
compensation and expenses for these commercial and investment banking
transactions.
Citibank, N.A., Wachovia Bank, National Association
and KeyBank National Association, which are affiliates of the underwriters,
also serve as lenders under our revolving facility, for which they receive
customary compensation. Citibank, N.A. and KeyBank National Association are
lenders under our 364-day facility, and KBCM Bridge, LLC, an affiliate of
KeyBanc Capital Markets Inc., is a lender under our bridge loan facility. Accordingly,
Citibank, N.A., Wachovia Bank, National Association and KeyBank National
Association will receive greater than 10% of the net proceeds of this offering
through our repayment of these borrowings. Accordingly, this offering is being
made in compliance with the requirements of Rule 2710(h) of the NASD Conduct
Rules.
Because a bona fide independent market exists for our
common units, the Financial Industry Regulatory Authority does not require that
we use a qualified independent underwriter for this offering.
Because the Financial Industry Regulatory Authority
views the common units offered hereby as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the
NASD Conduct Rules. Investor suitability with respect to the common units
should be judged similarly to the suitability with respect to other securities
that are listed for trading on a national securities exchange.
S-77
LEGAL MATTERS
Baker Botts L.L.P.,
Houston, Texas, will pass upon the validity of the common units offered hereby
and various other legal matters in connection with the offering on our behalf. Andrews
Kurth LLP, Houston, Texas, will pass upon certain legal matters in connection
with the offering on behalf of the underwriters.
EXPERTS
The consolidated financial statements and management’s
assessment of the effectiveness of internal control over financial reporting
(which is included in Management’s Report on Internal Control over Financial
Reporting) of K-Sea Transportation Partners L.P. incorporated in this
prospectus supplement by reference to our Annual Report on Form 10-K for
the year ended June 30, 2007 have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts in auditing and
accounting.
The audited historical combined
financial statements of the Smith Maritime Group included in K-Sea
Transportation Partners L.P.’s Current Report on Form 8-K/A filed
on September 19, 2007 incorporated by reference in this prospectus
supplement have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in auditing and accounting.
INFORMATION INCORPORATED BY REFERENCE
We file annual, quarterly and other reports with and
furnish other information to the SEC. You may read and copy any document we
file with or furnish to the SEC at the SEC’s public reference room at 100 F
Street, NE, Room 1580, Washington, D.C. 20549. 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 supplement by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus supplement. Information that we file later
with the SEC will automatically update and may replace information in this
prospectus supplement and information previously filed with the SEC. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
(excluding any information furnished under Items 2.02 or 7.01 on any current
report on Form 8-K) after the date of this prospectus supplement and
until the termination of this offering:
·
Annual
Report on Form 10-K for the fiscal year ended June 30, 2007;
·
Current
Reports on Form 8-K filed on August 13, 2007 and August 20,
2007;
·
Current
Report on Form 8-K/A filed on September 19, 2007; and
·
The
description of our common units contained in our registration statement on Form 8-A
(File No. 1-31920), filed on December 4, 2003, and any
subsequent amendment thereto filed for the purpose of updating such
description.
S-78
You may obtain any of the
documents incorporated by reference in this prospectus from the SEC through the
SEC’s website at the address provided above. You may request a copy of any
document incorporated by reference into this prospectus (including exhibits to
those documents specifically incorporated by reference in this document), at no
cost, by visiting our website at http://www.k-sea.com, or by writing or calling
us at the following address:
K-Sea Transportation Partners L.P.
One Tower Center Boulevard
17th Floor
East Brunswick, New Jersey 08816
Attention: John J. Nicola
(732) 565-3818
Any statement contained in a document incorporated or
considered to be incorporated by reference in this prospectus supplement shall
be considered to be modified or superseded for purposes of this prospectus
supplement to the extent that a statement contained in this prospectus
supplement or in any subsequently filed document that is or is considered to be
incorporated by reference modifies or supersedes that statement. Any statement
that is modified or superseded shall not, except as so modified or superseded,
constitute a part of this prospectus supplement.
You should rely only on the information incorporated
by reference or provided in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone else to provide you with any
information. You should not assume that the information incorporated by
reference or provided in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the front of each
document.
The information contained
on our website is not part of this prospectus supplement.
FORWARD-LOOKING STATEMENTS
Statements included in this prospectus supplement, the
accompanying prospectus and in the documents we incorporate by reference that
are not historical facts (including statements concerning plans and objectives
of management for future operations or economic performance, or assumptions
related thereto) are forward looking statements. In addition, we may from time
to time make other oral or written statements that are also forward looking
statements. Forward-looking statements may include words such as “anticipate,” “estimate,”
“expect,” “project,” “intend,” “plan,” “believe,” “should” and other words and
terms of similar meaning.
Forward looking
statements appear in a number of places in this prospectus supplement, the
accompanying prospectus and in the documents we incorporate by reference and
include statements with respect to, among other things:
·
our
ability to pay distributions;
·
the
benefits to be derived from our acquisition of Smith Maritime, Go Big and
Sirius Maritime, including our ability to apply our current business strategies
in new geographic markets, platforms for future growth, possible synergies with
the rest of our business, the benefits of geographic and seasonal diversity,
and possible accretion in our distributable cash flow;
·
planned
capital expenditures and availability of capital resources to fund capital
expenditures;
·
our
expected cost of complying with the Oil Pollution Act of 1990;
·
estimated
future expenditures for drydocking and maintenance of our tank vessels’
operating capacity;
S-79
·
our
plans for the retirement or retrofitting of tank vessels and the expected
delivery, and cost of, newbuild vessels;
·
our
expectations regarding charters for our newbuild vessels;
·
the
integration of acquisitions of tank barges and tugboats, including the timing,
effects and benefits thereof;
·
expected
decreases in the supply of domestic tank vessels;
·
expected
demand in the domestic tank vessel market in general and the demand for our
tank vessels in particular;
·
the
adequacy and availability of our insurance and the amount of any capital calls;
·
expectations
regarding litigation;
·
the
likelihood that pipelines will be built that compete with us;
·
the
effect of new or existing regulations or requirements on our financial
position;
·
our
future financial condition or results of operations and our future revenues and
expenses;
·
our
business strategies and other plans and objectives for future operations;
·
our
future financial exposure to lawsuits currently pending against EW
Transportation LLC and its predecessors; and
·
any
other statements that are not historical facts.
These forward looking statements are made based upon
management’s current plans, expectations, estimates, assumptions and beliefs
concerning future events and, therefore, involve a number of risks and
uncertainties. We caution that forward looking statements are not guarantees
and that actual results could differ materially from those expressed or implied
in the forward looking statements.
Important factors that could cause our actual results
of operations or our actual financial condition to differ from our expectations
are described under “Risk Factors” beginning on page S-15 of this
prospectus supplement and on page 1 of the accompanying prospectus.
S-80
PROSPECTUS
$400,000,000
K-Sea Transportation Partners L.P.
Common Units
K-Sea Transportation Partners L.P.
K-Sea Transportation Finance Corporation
Debt Securities
The following
securities may be offered under this prospectus:
·
Common
units representing limited partner interests in K-Sea Transportation Partners
L.P.; and
·
Debt
securities of K-Sea Transportation Partners L.P. and K-Sea Transportation
Finance Corporation.
K-Sea Transportation Finance Corporation may act as
co-issuer of the debt securities, and certain direct or indirect subsidiaries
of K-Sea Transportation Partners L.P. may guarantee the debt securities.
We may offer and sell these securities to or through
one or more underwriters, dealers or agents, or directly to purchasers, on a
continuous or delayed basis. This prospectus describes only the general terms
of these securities and the general manner in which we will offer the
securities. The specific terms of any securities will be included in a
supplement to this prospectus. The prospectus supplement will describe the
specific manner in which we will offer the securities and also may add, update
or change information contained in this prospectus.
Our common units are listed on the New York Stock
Exchange under the symbol “KSP.”
Investing
in our securities involves risk. Please read “Risk Factors” beginning on page 1.
Neither the
Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined whether this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 8, 2007.
You should rely only on the information we have
provided or incorporated by reference in this prospectus. We have not
authorized any person to provide you with additional or different information.
You should not assume that the information in this prospectus is accurate as of
any date other than the date on the cover page of this prospectus or that
any information we have incorporated by reference is accurate as of any date
other than the date of the documents incorporated by reference. Our business,
financial condition, results of operations and prospectus may have changed
since those dates.
TABLE
OF CONTENTS
ABOUT THIS
PROSPECTUS
This prospectus is part of a registration statement on
Form S-3 that we have filed with the Securities and Exchange
Commission using a “shelf” registration process. Under this shelf registration
process, we may sell, in one or more offerings, up to $400,000,000 in total
aggregate offering price of securities described in this prospectus. This
prospectus provides you with a general description of us and the securities
offered under this prospectus.
Each time we sell securities under this prospectus, we
will provide a prospectus supplement that will contain specific information
about the terms of that offering and the securities being offered. The
prospectus supplement also may add to, update or change information in this
prospectus. If there is any inconsistency between the information in this
prospectus and any prospectus supplement, you should rely on the information in
the prospectus supplement. You should read carefully this prospectus, any
prospectus supplement and the additional information described below under the
heading “Where You Can Find More Information.”
As used in this
prospectus, “we,” “us” and “our” and similar terms mean K-Sea Transportation
Partners L.P. and its subsidiaries, unless the context indicates otherwise.
i
K-SEA
TRANSPORTATION PARTNERS L.P.
We are a leading provider of refined petroleum product
marine transportation, distribution and logistics services in the United
States. Our fleet of 62 tank barges, 2 tankers and 46 tugboats serves a wide
range of customers, including major oil companies, oil traders and refiners.
With 3.5 million barrels of capacity, we believe we own and operate the largest
coastwise tank barge fleet in the United States as measured by barrel-carrying
capacity.
We own 100% of K-Sea Transportation Finance
Corporation. K-Sea Transportation Finance Corporation was organized for the
purpose of co-issuing our debt securities and has no material assets or
liabilities, other than as co-issuer of our debt securities. Its activities
will be limited to co-issuing our debt securities and engaging in activities
incidental to co-issuing our debt securities.
K-Sea OLP GP, LLC, K-Sea Operating Partnership L.P.,
Sea Coast Transportation LLC, K-Sea Transportation Inc., Norfolk Environmental
Services, Inc., K-Sea Canada Holdings Inc., K-Sea Acquisition1, LLC and
K-Sea Acquisition2, LLC may unconditionally guarantee any series of debt
securities of K-Sea Transportation Partners L.P. and K-Sea Transportation
Finance Corporation offered by this prospectus, as set forth in a related
prospectus supplement. As used in this prospectus, the term “Subsidiary
Guarantors” means the subsidiaries that fully, unconditionally, jointly and
severally guarantee any such series of debt securities.
Our principal executive
offices are located at One Tower Center Boulevard, New Brunswick, New Jersey,
08816, and our telephone number is (732) 565-3818.
RISK FACTORS
Limited partner
interests are inherently different from the capital stock of a corporation,
although many of the business risks to which we are subject are similar to
those that would be faced by a corporation engaged in a similar business. You should carefully consider the following
risk factors together with all of the other information included in this
prospectus and the documents we have incorporated by reference in evaluating an
investment in the common units.
If any of the following risks actually were to occur,
our business, financial condition or results of operations could be affected
materially and adversely. In that case, we may be unable to pay distributions
on our common units, the trading price of our common units could decline and
you could lose all or part of your investment.
Risks Inherent in
Our Business
Marine transportation is an inherently risky business.
Our vessels and
their cargoes are at risk of being damaged or lost because of events such as:
·
marine
disasters;
·
bad
weather;
·
mechanical
failures;
·
grounding,
fire, explosions and collisions;
·
human
error; and
·
war
and terrorism.
All of these hazards can result in death or injury to
persons, loss of property, environmental damages, delays or rerouting. If one
of our vessels were involved in an accident, with the potential risk of
1
environmental
contamination, the resulting media coverage could have a material adverse
effect on our business, financial condition and results of operations.
On November 11, 2005, one of our double-hulled
tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico,
causing significant damage. The submerged debris was determined to be a service
platform which collapsed during Hurricane Rita in September 2005. At the
time of the incident, the barge was carrying approximately 120,000 barrels of No. 6
fuel oil, a heavy oil product. Our insurers responded to the pollution-related
costs and environmental damages resulting from the incident, paying
approximately $65 million less $60,000 in total deductibles.
Our affiliate, EW
Transportation LLC, and its predecessors have been named, together with a large
number of other companies, as co-defendants in 39 civil actions by various
parties alleging unspecified damages from past exposure to asbestos and
second-hand smoke aboard some of the vessels that it contributed to us in
connection with the initial public offering of our common units. EW
Transportation LLC and its predecessors have been dismissed from 38 of these
lawsuits for an aggregate sum of approximately $47,000 and are pursuing
settlement of the other case. We may be subject to litigation in the future
involving these plaintiffs and others alleging exposure to asbestos due to
alleged failure to properly encapsulate friable asbestos or remove friable
asbestos on our vessels, as well as for exposure to second-hand smoke and other
matters.
A decline in demand
for, and level of consumption of, refined petroleum products could cause demand
for tank vessel capacity and charter rates to decline, which would decrease our
revenues and profitability.
The demand for tank
vessel capacity is influenced by the demand for refined petroleum products and
other factors including:
·
global
and regional economic and political conditions;
·
developments
in international trade;
·
changes
in seaborne and other transportation patterns, including changes in the
distances that cargoes are transported;
·
environmental
concerns; and
·
competition
from alternative sources of energy, such as natural gas, and alternate
transportation methods.
Any of these factors could adversely affect the demand
for tank vessel capacity and charter rates. Any decrease in demand for tank
vessel capacity or decrease in charter rates could adversely affect our
business, financial condition and results of operations.
In addition, we operate
our tank vessels in markets that have historically exhibited seasonal variations
in demand and, as a result, in charter rates. For example, movements of certain
clean oil products, such as motor fuels, generally increase during the summer
driving season. In those same regions, movements of black oil products and
certain clean oil products, such as heating oil, generally increase during the
winter months, while movements of asphalt products generally increase in the
spring through fall months. Unseasonably mild winters can result in
significantly lower demand for heating oil in the northeastern United States.
Meanwhile, our operations along the West Coast and in Alaska historically have
been subject to seasonal variations in demand that vary from those exhibited in
the East Coast and Gulf Coast regions. In addition, unpredictable weather
patterns and variations in oil reserves disrupt vessel scheduling. Seasonality
could materially affect our business, financial condition and results of
operations in the future.
2
Our business would
be adversely affected if we failed to comply with the Jones Act provisions on
coastwise trade, or if those provisions were modified, repealed or waived.
We are subject to the Jones Act and other federal laws
that restrict maritime transportation between points in the United States to
vessels built and registered in the United States and owned and manned by U.S.
citizens. We are responsible for monitoring the ownership of our common units
and other partnership interests. If we do not comply with these restrictions,
we would be prohibited from operating our vessels in U.S. coastwise trade, and
under certain circumstances we would be deemed to have undertaken an unapproved
foreign transfer, resulting in severe penalties, including permanent loss of
U.S. coastwise trading rights for our vessels, fines or forfeiture of the
vessels.
In the past, interest groups have lobbied Congress to
repeal the Jones Act to facilitate foreign flag competition for trades and
cargoes currently reserved for U.S.-flag vessels under the Jones Act and cargo
preference laws. We believe that interest groups may continue efforts to modify
or repeal the Jones Act and cargo preference laws currently benefiting
U.S.-flag vessels. If these efforts are successful, it could result in
increased competition, which could reduce our revenues and cash available for
distribution.
The Secretary of the Department of Homeland Security
is vested with the authority and discretion to waive the coastwise laws to such
extent and upon such terms as he may prescribe whenever he deems that such
action is necessary in the interest of national defense. In response to the
effects of Hurricane Katrina, the Secretary of the Department of Homeland
Security waived the coastwise laws generally for the transportation of
petroleum products from September 1 to September 19, 2005 and from September 26,
2005 to October 24, 2005. In addition, the Secretary of the Department of
Homeland Security has waived without a specific termination date the coastwise
laws generally for the transportation of petroleum released from the Strategic
Petroleum Reserve undertaken in response to circumstances arising from
Hurricane Katrina. Any waiver of the coastwise laws, whether in response to
natural disasters or otherwise, could result in increased competition from
foreign tank vessel operators, which could reduce our revenues and cash
available for distribution.
We may not be able to grow or effectively manage
our growth.
A principal focus
of our strategy is to continue to grow by expanding our business in the East,
West and Gulf Coast regions and to expand into other geographic markets. Our
future growth will depend upon a number of factors, some of which we can
control and some of which we cannot. These factors include our ability to:
·
identify
businesses engaged in managing, operating or owning vessels for acquisitions or
joint ventures;
·
identify
vessels for acquisition;
·
consummate
acquisitions or joint ventures;
·
integrate
any acquired businesses or vessels successfully with our existing operations;
·
hire,
train and retain qualified personnel to manage and operate our growing business
and fleet;
·
identify
new geographic markets;
·
improve
our operating and financial systems and controls; and
·
obtain
required financing for our existing and new operations.
A deficiency in any of
these factors would adversely affect our ability to achieve anticipated levels
of cash flows or realize other anticipated benefits. In addition, competition
from other buyers could reduce our acquisition opportunities or cause us to pay
a higher price than we might otherwise pay.
3
Increased competition in the domestic tank vessel
industry could result in reduced profitability and loss of market share for us.
Contracts
for our vessels are generally awarded on a competitive basis, and competition
in the markets we serve is intense. The most important factors determining
whether a contract will be awarded include:
·
availability
and capability of the vessels;
·
ability
to meet the customer’s schedule;
·
price;
·
safety
record;
·
reputation;
and
·
experience.
Some of our competitors
may have greater financial resources and larger operating staffs than we do. As
a result, they may be able to make vessels available more quickly and
efficiently, transition to double-hull barges from single-hull barges more
rapidly, and withstand the effects of declines in charter rates for a longer
period of time. They may also be better able to weather a downturn in the oil
and gas industry. As a result, we could lose customers and market share to
these competitors.
We also face competition
from refined petroleum product pipelines. Long-haul transportation of refined
petroleum products is generally less costly by pipeline than by tank vessel.
The construction of new pipeline segments to carry petroleum products into our
markets, including pipeline segments that connect with existing pipeline
systems, and the conversion of existing non-refined petroleum product
pipelines, could adversely affect our ability to compete in particular
locations.
We rely on a limited number of customers for a
significant portion of our revenues. The loss of any of these customers could
adversely affect our business and operating results.
Our customers consist
primarily of major oil companies, oil traders and refineries. The portion of
our revenues attributable to any single customer changes over time, depending
on the level of relevant activity by the customer, our ability to meet the
customer’s needs and other factors, many of which are beyond our control. Two
customers accounted for 20% and 15%, respectively, of our consolidated revenues
for fiscal 2006. If we were to lose either of these customers or if either of
these customers significantly reduced its use of our services, our business and
operating results could be adversely affected.
Voyage charters may not be available at rates that
will allow us to operate our vessels profitably.
During fiscal 2006, we
derived approximately 21% of our revenue from single voyage charters. Voyage
charter rates fluctuate significantly based on tank vessel availability, the
demand for refined petroleum products and other factors. Increased dependence
on the voyage charter market by us could result in a lower utilization of our
vessels and decreased profitability. Future voyage charters may not be
available at rates that will allow us to operate our vessels profitably.
We may not be able to renew time charters, consecutive
voyage charters, contracts of affreightment and bareboat charters when they
expire.
We received approximately
79% of our revenue from time charters, consecutive voyage charters, contracts
of affreightment and bareboat charters during fiscal 2006. These arrangements,
which are generally for periods of one year or more, may not be renewed, or if
renewed, may not be renewed at similar rates. If we are unable to obtain new
charters at rates equivalent to those received under the old charters, our
profitability may be adversely affected.
4
We must make
substantial expenditures to maintain the operating capacity of our fleet, which
will reduce our cash available for distribution.
Tank vessels are subject to the requirements of the
Oil Pollution Act of 1990, or OPA 90. OPA 90 mandates that all single-hull tank
vessels operating in U.S. waters be removed from petroleum and petroleum
product transportation services at various times through January 1, 2015,
and provides a schedule for the phase-out of the single-hull vessels based on
their age and size. As of March 31, 2007, approximately 69% of the
barrel-carrying capacity of our tank vessel fleet was double-hulled in
compliance with OPA 90. The remaining 31% (except for one 75,000-barrel
vessel which will phase out in January 2009) will be in compliance with
OPA 90 until January 2015. The capacity of certain of our single-hull
vessels has already been effectively replaced by double-hull vessels recently
placed into service, although we may continue to operate those single-hull
vessels until their phase-out date. We estimate that the current cost to
replace our remaining single hull capacity with newbuildings or by retrofitting
certain of our existing vessels ranges from $75.0 million to $79.0 million.
This capacity can also be replaced by acquiring existing double-hull tank
vessels as opportunities arise. At the time we make these expenditures, the
actual cost could be higher due to inflation and other factors.
Marine transportation of refined petroleum products is
a capital intensive business, requiring significant investment to maintain an
efficient fleet and to stay in regulatory compliance. We estimate that, over
the next five years, we will spend an average of approximately $16.0 million
per year to drydock and maintain our tank vessels’ operating capacity.
Periodically, we will also make expenditures to acquire or construct additional
tank vessel capacity and to upgrade our overall fleet efficiency.
Please read “—Risks
Related to Our Common Units—In calculating our available cash from operating surplus
each quarter, we are required to deduct estimated maintenance capital
expenditures, which may result in less cash available for distribution to
unitholders than if actual maintenance capital expenditures were deducted” for
information about our requirement to deduct estimated maintenance capital
expenditures in calculating our available cash from operating surplus.
Capital
expenditures and other costs necessary to operate and maintain a vessel vary
depending on the age of the vessel and changes in governmental regulations,
safety or other equipment standards.
Capital expenditures and other costs necessary to
operate and maintain a vessel increase with the age of the vessel. In addition,
changes in governmental regulations, safety or other equipment standards, as
well as compliance with standards imposed by maritime self-regulatory
organizations and customer requirements or competition, may require us to make
additional expenditures. For example, we may be required to make significant
expenditures for alterations or the addition of new equipment to satisfy
requirements of the U.S. Coast Guard and the American Bureau of Shipping. In
addition, we may be required to take our vessels out of service for extended
periods of time, with corresponding losses of revenues, in order to make such
alterations or to add such equipment. In the future, market conditions may not
justify these expenditures or enable us to operate our older vessels profitably
during the remainder of their economic lives.
In order to fund these
capital expenditures, we will either incur borrowings or raise capital through
the sale of debt or equity securities. Our ability to access the capital
markets for future offerings may be limited by our financial condition at the
time as well as by adverse market conditions resulting from, among other
things, general economic conditions and contingencies and uncertainties that
are beyond our control. Our failure to obtain the funds for necessary future
capital expenditures would limit our ability to continue to operate some of our
vessels and could have a material adverse effect on our business and on our
ability to make distributions to unitholders.
5
Our purchase of
existing vessels carries risks associated with the quality of those vessels.
Our fleet renewal and
expansion strategy includes the acquisition of existing vessels as well as the
ordering of newbuildings. Unlike newbuildings, existing vessels typically do
not carry warranties with respect to their condition. While we generally
inspect any existing vessel prior to purchase, such an inspection would
normally not provide us with as much knowledge of its condition as we would
possess if the vessel had been built for us and operated by us during its life.
Repairs and maintenance costs for existing vessels are difficult to predict and
may be more substantial than for vessels we have operated since they were
built. These costs could decrease our profits and reduce our liquidity.
We are subject to
complex laws and regulations, including environmental regulations, that can
adversely affect the cost, manner or feasibility of doing business.
Increasingly stringent federal, state and local laws
and regulations governing worker health and safety and the manning,
construction and operation of vessels significantly affect our operations. Many
aspects of the marine industry are subject to extensive governmental regulation
by the U.S. Coast Guard, the Department of Transportation, the Department of
Homeland Security, the National Transportation Safety Board and the U.S.
Customs Service, and to regulation by private industry organizations such as
the American Bureau of Shipping. The U.S. Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards. The U.S.
Coast Guard is authorized to inspect vessels at will.
Our operations are also
subject to federal, state, local and international laws and regulations that
control the discharge of pollutants into the environment or otherwise relate to
environmental protection. Compliance with such laws, regulations and standards
may require installation of costly equipment or operational changes. Failure to
comply with applicable laws and regulations may result in administrative and
civil penalties, criminal sanctions or the suspension or termination of our
operations. Some environmental laws often impose strict liability for
remediation of spills and releases of oil and hazardous substances, which could
subject us to liability without regard to whether we were negligent or at
fault. Under OPA 90, owners, operators and bareboat charterers are jointly and
severally strictly liable for the discharge of oil within the internal and
territorial waters of, and the 200-mile exclusive economic zone around,
the United States. Additionally, an oil spill could result in significant
liability, including fines, penalties, criminal liability and costs for natural
resource damages. The potential for these releases could increase as we
increase our fleet capacity. Most states bordering on a navigable waterway have
enacted legislation providing for potentially unlimited liability for the
discharge of pollutants within their waters.
Our insurance may
not be adequate to cover our losses.
We may not be adequately insured to cover losses from
our operational risks, which could have a material adverse effect on our
operations. For example, a catastrophic oil spill or other disaster could
exceed our insurance coverage. In addition, our affiliate, EW Transportation
LLC, and its predecessors may not have insurance coverage prior to March 1986.
If we were subject to claims related to that period, including claims from
current or former employees, EW Transportation LLC may not have insurance to
pay the liabilities, if any, that could be imposed on us. If we had to pay
claims solely out of our own funds, it could have a material adverse effect on
our financial condition. Furthermore, any claims covered by insurance would be
subject to deductibles, and since it is possible that a large number of claims
could be brought, the aggregate amount of these deductibles could be material.
We may not be able to procure adequate insurance
coverage at commercially reasonable rates in the future, and some claims may
not be paid. In the past, stricter environmental regulations have led to higher
costs for insurance covering environmental damage or pollution, and new
regulations could lead to similar
6
increases or even make
this type of insurance unavailable. In addition, our insurance may be voidable
by the insurers as a result of certain actions of ours.
Because we obtain some of
our insurance through protection and indemnity associations, we also may be
subject to calls, or premiums, in amounts based not only on our own claim records
but also the claim records of all other members of the protection and indemnity
associations through which we receive insurance coverage for tort liability,
including pollution-related liability. Our payment of these calls could result
in significant expenses to us, which could reduce our profits or cause losses.
Moreover, the protection and indemnity clubs and other insurance providers
reserve the right to make changes in insurance coverage with little or no
advance notice.
Terrorist attacks
have resulted in increased costs and have disrupted our business. Continued
hostilities in the Middle East or other sustained military campaigns may
adversely impact our results of operations.
After the terrorist attacks of September 11,
2001, New York Harbor was shut down temporarily, resulting in the suspension of
our local operations in the New York City area for four days and the loss of
revenue related to these operations. The long-term impact that terrorist
attacks and the threat of terrorist attacks may have on the petroleum industry
in general, and on us in particular, is not known at this time. Uncertainty
surrounding continued hostilities in the Middle East or other sustained
military campaigns may affect our operations in unpredictable ways, including disruptions
of petroleum supplies and markets, and the possibility that infrastructure
facilities could be direct targets of, or indirect casualties of, an act of
terror.
Changes in the insurance
markets attributable to terrorist attacks may make certain types of insurance
more difficult for us to obtain. Moreover, the insurance that may be available
to us may be significantly more expensive than our existing insurance coverage.
Instability in the financial markets as a result of terrorism or war could also
affect our ability to raise capital.
We depend upon
unionized labor for the provision of our services in certain geographic areas.
Any work stoppages or labor disturbances could disrupt our business in
those areas.
Certain of our seagoing
personnel are employed under a contract with a division of the International
Longshoreman’s Association that expires on June 30, 2008. Any work stoppages or
other labor disturbances could have a material adverse effect on our business,
financial condition and results of operations.
Our employees are
covered by federal laws that may subject us to job-related claims in addition
to those provided by state laws.
Some of our employees are
covered by provisions of federal statutory and general maritime law. These laws
typically operate to make liability limits established by state workers’
compensation laws inapplicable to these employees and to permit these employees
and their representatives to pursue actions against employers for job-related
injuries in federal courts. Because we are not generally protected by the
limits imposed by state workers’ compensation statutes, we may have greater
exposure for claims made by these employees.
We depend on key
personnel for the success of our business.
We depend on the services of our senior management
team and other key personnel. In particular, our success depends on the
continued efforts of Mr. Timothy J. Casey, the President and Chief
Executive Officer of K-Sea General Partner GP LLC, and other key employees. The
loss of the services of any key employee could have a material adverse effect
on our business, financial condition and results of
7
operations. We may not be
able to locate or employ on acceptable terms qualified replacements for senior
management or key employees if their services were no longer available.
Due to
our lack of asset diversification, adverse developments in our marine
transportation business would reduce our ability to make distributions to our
unitholders.
We rely exclusively on the
revenues generated from our marine transportation business. Due to our lack of
asset diversification, an adverse development in this business would have a
significantly greater impact on our business, financial condition and results
of operations than if we maintained more diverse assets.
Changes in
international trade agreements could affect our ability to provide marine
transportation services at competitive rates.
Currently, vessel trade or
marine transportation between two points within the same country, generally
known as cabotage or coastwise trade, is not included in the General Agreement
on Trade in Services or the North American Free Trade Agreement. In addition,
the Jones Act restricts maritime cargo transportation between U.S. ports to
U.S.-flag vessels qualified to engage in U.S. coastwise trade. If maritime
services were deemed to include cabotage and included in the General Agreement
on Trade in Services, the North American Free Trade Agreement or other
multi-national trade agreements, transportation of maritime cargo between U.S.
ports could be opened to foreign-flag vessels. Foreign vessels would have lower
construction costs and would generally operate at significantly lower costs
than we do in U.S. markets, which would likely have a material adverse effect
on our ability to compete.
Risks Related to
Our Common Units
We may
not have sufficient cash from operations to enable us to pay the minimum
quarterly distribution following establishment of cash reserves and payment of
fees and expenses, including payments to our general partner.
We may not have
sufficient available cash each quarter to pay the minimum quarterly
distribution. The amount of cash we can distribute on our common units
principally depends upon the amount of cash we generate from our operations,
which will fluctuate from quarter to quarter based on, among other things:
·
the
level of consumption of refined petroleum products in the markets in which we
operate;
·
the
prices we obtain for our services;
·
the
level of our operating costs, including payments to our general partner; and
·
prevailing
economic conditions.
Additionally, the
actual amount of cash we have available for distribution depends on other
factors such as:
·
the
level of capital expenditures we make, including for acquisitions, retrofitting
of vessels and compliance with new regulations;
·
the
restrictions contained in our debt instruments and our debt service
requirements;
·
fluctuations
in our working capital needs;
·
our
ability to make working capital borrowings; and
·
the
amount, if any, of reserves, including reserves for future capital expenditures
and other matters, established by our general partner in its discretion.
8
The amount of cash we have
available for distribution depends primarily on our cash flow, including cash
flow from operations and working capital borrowings, and not solely on
profitability, which will be affected by non-cash items. As a result, we may
make cash distributions during periods when we record losses and may not make
cash distributions during periods when we record net income.
K-Sea General
Partner L.P. and its affiliates have conflicts of interest and limited
fiduciary duties, which may permit them to favor their own interests to the
detriment of our unitholders.
Affiliates of our
general partner indirectly own the 2% general partner interest and a 41.1%
limited partner interest in us and own and control the general partner of our
general partner. Conflicts of interest may arise between K-Sea General Partner
L.P. and its affiliates, on the one hand, and us and our unitholders, on the
other hand. As a result of these conflicts, our general partner may favor its
own interests and the interests of its affiliates over the interests of our
unitholders. These conflicts include, among others, the following situations:
·
our
general partner is allowed to take into account the interests of parties other
than us, such as our affiliates, in resolving conflicts of interest, which has
the effect of limiting its fiduciary duty to our unitholders;
·
our
general partner may limit its liability and reduce its fiduciary duties, while
also restricting the remedies available to our unitholders for actions that,
without the limitations, might constitute breaches of fiduciary duty. As a
result of purchasing common units, our unitholders consent to some actions and
conflicts of interest that might otherwise constitute a breach of fiduciary or
other duties under applicable state law;
·
our
general partner determines the amount and timing of asset purchases and sales,
capital expenditures, borrowings, issuance of additional partnership securities
and reserves, each of which can affect the amount of cash that is distributed
to our unitholders;
·
in
some instances, our general partner may cause us to borrow funds in order to
permit the payment of cash distributions, even if the purpose or effect of the
borrowing is to make a distribution on the subordinated units, to make
incentive distributions or to hasten the expiration of the subordination
period;
·
our
general partner determines which costs incurred by it and its affiliates,
including K-Sea General Partner GP LLC, are reimbursable by us;
·
our
partnership agreement does not restrict our general partner from causing us to
pay it or its affiliates for any services rendered on terms that are fair and
reasonable to us or entering into additional contractual arrangements with any
of these entities on our behalf;
·
our
general partner controls the enforcement of obligations owed to us by it and
its affiliates; and
·
our general partner decides
whether to retain separate counsel, accountants or others to perform services
for us.
Even if unitholders are dissatisfied, they cannot
remove our general partner without its consent.
Unlike the holders of common stock in a corporation,
unitholders have only limited voting rights on matters affecting our business
and, therefore, limited ability to influence management’s decisions regarding
our business. Unitholders did not elect our general partner or the board of
directors of its general partner and will have no right to elect our general
partner or the board of directors of its general partner on an annual or other
continuing basis. The board of directors of the general partner of our general
partner is chosen by its members.
9
Furthermore, if the unitholders are dissatisfied with
the performance of our general partner, they will have little ability to remove
our general partner. Unitholders are currently unable to remove our general
partner without its consent because our affiliates currently own sufficient
units to be able to prevent the general partner’s removal. The vote of the
holders of at least 66
2
¤
3
% of all outstanding common and
subordinated units voting together as a single class is required to remove our
general partner. Also, if our general partner is removed without cause during
the subordination period and units held by our general partner and its
affiliates are not voted in favor of that removal, all remaining subordinated
units will automatically be converted into common units and any existing
arrearages on the common units will be extinguished. A removal of our general
partner under these circumstances would adversely affect the common units by
prematurely eliminating their distribution and liquidation preference over the
subordinated units, which would otherwise have continued until we had met
certain distribution and performance tests.
Cause is narrowly defined
in our partnership agreement to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding our general partner liable for
actual fraud, gross negligence or willful or wanton misconduct in its capacity
as our general partner. Cause does not include most cases of charges of poor
management of the business, so the removal of our general partner during the
subordination period because of the unitholders’ dissatisfaction with our
general partner’s performance in managing our partnership will most likely
result in the termination of the subordination period.
Our general partner’s
discretion in establishing cash reserves may reduce the amount of cash
available for distribution to unitholders.
Our partnership agreement
gives our general partner broad discretion in establishing financial reserves
for the proper conduct of our business. These reserves also will affect the amount
of cash available for distribution. Our general partner may establish reserves
for distributions on the subordinated units, but only if those reserves will
not prevent us from distributing the full minimum quarterly distribution, plus
any arrearages, on the common units for the following four quarters. As
described above under “—Risks Inherent in Our Business—We must make substantial
expenditures to maintain the operating capacity of our fleet, which will reduce
our cash available for distribution,” the partnership agreement requires our
general partner to deduct from operating surplus each quarter estimated
maintenance capital expenditures as opposed to actual expenditures, which could
reduce the amount of available cash for distribution.
In
calculating our available cash from operating surplus each quarter, we are
required to deduct estimated maintenance capital expenditures, which may result
in less cash available for distribution to unitholders than if actual
maintenance capital expenditures were deducted.
Our partnership agreement requires us to deduct
estimated maintenance capital expenditures from operating surplus each quarter,
as opposed to actual maintenance capital expenditures, in order to reduce
disparities in operating surplus caused by the fluctuating level of maintenance
capital expenditures, such as drydocking. Because of the substantial capital
expenditures we intend to make by January 1, 2015 to replace the operating
capacity of our single-hull vessels, our annual estimated maintenance capital
expenditures for purposes of calculating operating surplus also includes $2.0
million to reduce the fluctuation in operating surplus that would otherwise be
caused by the required expenditures.
The amount of estimated maintenance capital expenditures
we deduct from operating surplus is subject to review and change by the board
of directors of K-Sea General Partner GP LLC, with the concurrence of the
conflicts committee of such board. In years when estimated maintenance capital
expenditures are higher than actual maintenance capital expenditures, as we
expect will be the case in some years until we actually make expenditures for
the OPA 90 replacements and retrofitting, the amount
10
of cash available for
distribution to unitholders will be lower than if actual maintenance capital
expenditures were deducted from operating surplus.
Please read “—Risks
Inherent in Our Business—We must make substantial expenditures to maintain the
operating capacity of our fleet, which will reduce our cash available for distribution”
for information regarding substantial expenditures that we must make to
maintain the operating capacity of our fleet.
We may issue
additional common units without the approval of unitholders, which would dilute
unitholders’ ownership interests.
During the
subordination period, without the approval of our unitholders, our general
partner may cause us to issue up to 2,082,500 additional common units. Our
general partner may also cause us to issue an unlimited number of additional
common units or other equity securities of equal rank with the common units,
without unitholder approval, in a number of circumstances such as:
·
the
issuance of common units in connection with acquisitions or capital
improvements that increase cash flow from operations per unit on a pro forma or
estimated pro forma basis;
·
issuances
of common units to repay indebtedness, the cost of which to service is greater
than the distribution obligations associated with the units issued in
connection with the repayment of the indebtedness;
·
the
redemption of common units from the net proceeds of an issuance of common
units;
·
the
conversion of subordinated units into common units;
·
the
conversion of units of equal rank with the common units into common units under
some circumstances; issuances of common units under our employee benefit plans;
·
the
conversion of the general partner interest and the incentive distribution
rights into common units as a result of the withdrawal or removal of our
general partner; or
·
the
combination or subdivision of common units.
The issuance by us
of additional common units or other equity securities of equal or senior rank
will have the following effects:
·
our
unitholders’ proportionate ownership interest in us will decrease;
·
the
amount of cash available for distribution on each unit may decrease;
·
because
a lower percentage of total outstanding units will be subordinated units, the
risk that a shortfall in the payment of the minimum quarterly distribution will
be borne by our common unitholders will increase;
·
the
relative voting strength of each previously outstanding unit may be diminished;
and
·
the market price of the
common units may decline.
After the end of the
subordination period, we may issue an unlimited number of limited partner
interests of any type without the approval of our unitholders. Our partnership
agreement does not give our unitholders the right to approve our issuance of
equity securities ranking junior to the common units at any time.
11
Our partnership agreement currently limits the
ownership of our partnership interests by individuals or entities that are not
U.S. citizens. This restriction could limit the liquidity of our common units.
In order to ensure
compliance with Jones Act citizenship requirements, the board of directors of
the general partner of our general partner has adopted a requirement that at
least 85% of our partnership interests must be held by U.S. citizens. This
requirement may have an adverse impact on the liquidity or market value of our
common units, because unitholders will be unable to sell units to non-U.S.
citizens. Any purported transfer of common units in violation of these
provisions will be ineffective to transfer the common units or any voting,
dividend or other rights in respect of the common units.
Our general partner has a limited call right that may
require unitholders to sell their common units at an undesirable time or price.
If at any time our general
partner and its affiliates own more than 80% of the common units, our general
partner will have the right, but not the obligation, which it may assign to any
of its affiliates or to us, to acquire all, but not less than all, of the
common units held by unaffiliated persons at a price not less than their then-current
market price. As a result, unitholders may be required to sell their common
units at an undesirable time or price and may not receive any return on their
investment. Unitholders may also incur a tax liability upon a sale of their
units. Our general partner is not obligated to obtain a fairness opinion
regarding the value of the common units to be repurchased by it upon exercise
of the limited call right. There is no restriction in our partnership agreement
that prevents our general partner from issuing additional common units and
exercising its call right. If our general partner exercised its limited call
right, the effect would be to take us private and, if the units were
subsequently deregistered, we would no longer be subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended.
Our partnership agreement restricts the voting rights
of unitholders owning 20% or more of our common units.
Our partnership agreement
restricts unitholders’ voting rights by providing that any units held by a
person that owns 20% or more of any class of units then outstanding, other than
our general partner, its affiliates, their transferees and persons who acquired
such units with the prior approval of the board of directors of the general partner
of our general partner, cannot vote on any matter. The partnership agreement
also contains provisions limiting the ability of unitholders to call meetings
or to acquire information about our operations, as well as other provisions
limiting the unitholders’ ability to influence the manner or direction of
management.
Cost reimbursements due our general partner and its
affiliates will reduce cash available for distribution to unitholders.
Prior to making any
distribution on the common units, we will reimburse our general partner and its
affiliates for all expenses they incur on our behalf, which will be determined
by our general partner in its sole discretion. These expenses will include all
costs incurred by the general partner and its affiliates in managing and
operating us, including costs for rendering corporate staff and support
services to us. In addition, our general partner and its affiliates may provide
us with other services for which the general partner or its affiliates may
charge us fees. The reimbursement of expenses and payment of fees, if any, to
our general partner and its affiliates could adversely affect our ability to
pay cash distributions to unitholders.
Unitholders may not have limited liability if a court
finds that unitholder action constitutes control of our business.
As a limited partner in a
partnership organized under Delaware law, a unitholder could be held liable for
our obligations to the same extent as a general partner if such unitholder
participates in the “control” of our business. Our general partner generally
has unlimited liability for the obligations of the partnership, such as its
debts and environmental liabilities, except for those contractual obligations
of the partnership
12
that are
expressly made without recourse to our general partner. In addition, Section 17-607
of the Delaware Revised Uniform Limited Partnership Act provides that, under
some circumstances, a unitholder may be liable to us for the amount of a
distribution for a period of three years from the date of the distribution. The
limitations on the liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly established in some
of the other states in which we do business.
Restrictions
in our debt agreements may prevent us from engaging in some beneficial
transactions or paying distributions.
We
have a significant amount of indebtedness. Our payment of principal and
interest on the debt will reduce cash available for distribution on our units.
Our credit agreement prohibits the payment of distributions after the
occurrence of the following events, among others, and receipt of notice from
our lenders:
·
failure
to pay any principal, interest, fees, expenses or other amounts when due;
·
default
under any vessel mortgage;
·
failure
to notify the lenders of any oil spill or discharge of hazardous material, or
of any action or claim related thereto;
·
breach
or lapse of any insurance with respect to the vessels;
·
breach
of certain financial covenants;
·
breach
by our general partner or any of our subsidiaries of the guarantees issued
under our new credit agreement;
·
failure
to observe any other agreement, security instrument, obligation or covenant
beyond specified cure periods in certain cases;
·
default
under other material indebtedness of our operating partnership, our general
partner or any of our subsidiaries;
·
bankruptcy
or insolvency events involving us, our general partner or any of our
subsidiaries;
·
failure
of any representation or warranty to be materially correct;
·
a
change of control, as defined in the applicable agreement;
·
a
material adverse effect, as defined in the applicable agreement, occurs
relating to us or our business; and
·
a
judgment against us, our general partner or any of our subsidiaries in excess
of certain allowances and not covered by insurance.
Any subsequent refinancing
of our current debt or any new debt could have similar restrictions.
The control of our
general partner may be transferred to a third party without unitholder consent.
Our general partner may
transfer its general partner interest to a third party in a merger or in a sale
of all or substantially all of its assets without the consent of the
unitholders so long as the third party satisfies the citizenship requirements
of the Jones Act. Furthermore, there is no restriction in the partnership
agreement on the ability of the partners of our general partner from
transferring their respective partnership interests in our general partner to a
third party that satisfies the citizenship requirements of the Jones Act. The
new partners of our general partner would then be in a position to replace the
board of directors and officers of the general partner of our general partner
with their own choices and to control the decisions taken by the board of
directors and officers.
13
Our affiliates may
engage in activities that compete directly with us.
Pursuant to the omnibus
agreement entered into in connection with the initial public offering of our
common units, certain of our affiliates have agreed not to engage, either
directly or indirectly, in the business of providing refined petroleum product
marine transportation, distribution and logistics services in the United States
to the extent such business generates qualifying income for federal income tax
purposes. The omnibus agreement does not prohibit the equity owners of our
affiliates from owning assets or engaging in businesses that compete directly
or indirectly with us.
Tax Risks to Common Unitholders
In addition to reading the
following risk factors, prospective unitholders should read “Material Tax
Consequences” for a more complete discussion of the expected material federal
income tax consequences of owning and disposing of our common units.
Our tax treatment depends on our status as a
partnership for federal income tax purposes, as well as our not being subject
to a material amount of entity-level taxation by individual states. If the IRS
were to treat us as a corporation or if we were to become subject to a material
amount of entity-level taxation for state tax purposes, then our cash available
for distribution to unitholders would be substantially reduced.
The anticipated after-tax
economic benefit of an investment in us depends largely on our being treated as
a partnership for federal income tax purposes. If less than 90% of our gross
income for any taxable year is “qualifying income” from transportation or
processing of crude oil, natural gas or products thereof, interest, dividends
or similar sources, we will be a “publicly traded partnership” under Section 7704
of the Internal Revenue Code and taxable as a corporation for federal income
tax purposes for that taxable year and all subsequent years. The IRS has not
provided any ruling on this matter.
If we were treated as a
corporation for federal income tax purposes, we would pay federal income tax on
our income at the corporate tax rate, which is currently a maximum of 35%, and
would likely pay state income tax at varying rates. Distributions would
generally be taxed again to unitholders as corporate distributions and no
income, gains, losses, or deductions would flow through to unitholders. Because
a tax would be imposed upon us as an entity, cash available for distribution to
unitholders would be substantially reduced. Treatment of us as a corporation
would result in a material reduction in the anticipated cash flow and after-tax
return to unitholders and thus would likely result in a substantial reduction
in the value of the common units.
Current law may change so
as to cause us to be treated as a corporation for federal income tax purposes
or otherwise subject us to entity-level taxation. In addition, because of
widespread state budget deficits and other reasons, several states are
evaluating ways to subject partnerships to entity-level taxation through the
imposition of state income, franchise and other forms of taxation. The
partnership agreement provides that, if a law is enacted or an existing law is
modified or interpreted in a manner that subjects us to taxation as a corporation
or otherwise subjects us to entity-level taxation for federal, state, or local
income tax purposes, the minimum quarterly distribution amount and the target
distribution amounts will be adjusted to reflect the impact of that law on us.
If the IRS contests any of the federal income tax
positions we take, the market for our common units may be adversely affected,
and the costs of any contest will reduce our cash available for distribution to
unitholders.
The IRS has not provided
any ruling with respect to our treatment as a partnership for federal income
tax purposes or any other matter affecting us. The IRS may adopt positions that
differ from our counsel’s conclusions expressed in this prospectus or from the
positions we take. It may be necessary to resort to administrative or court
proceedings to sustain some or all of our counsel’s conclusions or the
positions we take. A court may not agree with some or all of our counsel’s
conclusions or the positions we take. Any contest with the IRS may materially
and adversely impact the market for our common units and the price
14
at which
they trade. In addition, the costs of any contest with the IRS will be borne
indirectly by our unitholders and our general partner because the costs will
reduce our cash available for distribution.
Unitholders may be required to pay taxes on their
share of our income even if they do not receive any cash distributions from us.
Because our unitholders
will be treated as partners to whom we will allocate taxable income, which
could be different in amount than the cash we distribute, our unitholders will
be required to pay any federal income taxes and, in some cases, state and local
income taxes on their share of our taxable income, even if they receive no cash
distributions from us. Unitholders may not receive cash distributions equal to
their share of our taxable income or even the tax liability that results from
that income.
Tax gain or loss on the disposition of our common
units could be different than expected.
If a unitholder sells his
common units, that unitholder will recognize gain or loss equal to the
difference between the amount realized and the unitholder’s tax basis in those
common units. Prior distributions in excess of the total net taxable income the
unitholder was allocated for a common unit, which decreased the unitholder’s
tax basis in that common unit, will, in effect, become taxable income to the
unitholder if the common unit is sold at a price greater than the unitholder’s
tax basis in that common unit, even if the price the unitholder receives is
less than the unitholder’s original cost. A substantial portion of the amount
realized, whether or not representing gain, may be ordinary income to
unitholders. Should the IRS successfully contest some positions we take, unitholders
could recognize more gain on the sale of common units than would be the case
under those positions, without the benefit of decreased income in prior years.
In addition, if unitholders sell their common units, they may incur a tax
liability in excess of the amount of cash they receive from the sale.
Tax-exempt entities and foreign persons face unique
tax issues from owning our common units that may result in adverse tax
consequences to them.
Investment in common units
by tax-exempt entities, such as individual retirement accounts (known as IRAs)
and other retirement plans, and non-United States persons, raises issues unique
to them. For example, virtually all of our income allocated to organizations
exempt from federal income tax, including IRAs and other retirement plans, will
be unrelated business taxable income and will be taxable to them. Distributions
to non-United States persons will be reduced by withholding taxes at the
highest applicable effective tax rate, and non-United States persons will be
required to file United States federal income tax returns and pay tax on their
share of our taxable income. If you are a tax-exempt entity or a foreign
person, you should consult your tax advisor before investing in our common
units.
We registered as a tax shelter under prior law. This
may increase the risk of an IRS audit of us or a unitholder.
Prior to the enactment of
the American Jobs Creation Act of 2004, certain types of entities were required
to register with the IRS as “tax shelters,” based on a perception that those
entities might claim tax benefits that were unwarranted. We registered as a tax
shelter under such prior law. The American Jobs Creation Act of 2004 repealed
the tax shelter registration requirement and replaced it with a regime that
requires reporting, and will likely require registration, of certain “reportable
transactions.” We do not expect to engage in any reportable transactions.
Nevertheless, our registration as a tax shelter under prior law, or our future
participation in a reportable transaction, might increase the likelihood that
we will be audited, and any such audit might lead to tax adjustments.
Should our tax returns be
audited, any adjustments to our tax returns may lead to adjustments to our
unitholders’ tax returns and may lead to audits of unitholders’ tax returns.
Our unitholders’ would be responsible for the consequences of any audits to their tax returns.
15
We treat each purchaser of common units as having the
same tax benefits without regard to the units purchased. The IRS may challenge
this treatment, which could adversely affect the value of the common units.
Because
we cannot match transferors and transferees of common units and because of
other reasons, we will take depreciation and amortization positions that may
not conform to all aspects of the Treasury Regulations. A successful IRS
challenge to those positions could adversely affect the amount of tax benefits
available to unitholders. It also could affect the timing of these tax benefits
or the amount of gain from the sale of common units and could have a negative
impact on the value of our common units or result in audit adjustments to
unitholders’ tax returns. Please read “Material Tax Consequences—Uniformity of
Units” for a further discussion of the effect of the depreciation and
amortization positions we will adopt.
Unitholders may be
subject to state, local and foreign taxes and return filing requirements as a
result of investing in our common units.
In addition to federal
income taxes, unitholders will likely be subject to other taxes, such as state
and local income taxes, unincorporated business taxes and estate, inheritance,
or intangible taxes that are imposed by the various jurisdictions in which we
do business or own property. Unitholders will likely be required to file state
and local income tax returns and pay state and local income taxes in some or
all of the various jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those requirements. We
own property or conduct business in Alaska, New York, New Jersey, Pennsylvania,
Washington and Virginia, all of which impose a state income tax. We currently
conduct certain operations in Puerto Rico, Canada and Venezuela in a manner
that we believe does not subject unitholders to direct liability to pay tax or
file returns in those countries, but there can be no assurance that we will
conduct our foreign operations in this manner in the future. Taxes we pay with
respect to our foreign operations reduce the cash flow available for
distribution to our unitholders. We may do business or own property in other
states or foreign countries in the future. It is the responsibility of
unitholders to file all federal, state, local, and foreign tax returns. Our
counsel has not rendered an opinion on the state, local or foreign tax
consequences of an investment in our common units.
We have subsidiaries that are treated as corporations
for federal income tax purposes and subject to corporate-level income taxes.
We conduct a portion of
our operations through subsidiaries that are, or are treated as, corporations
for federal income tax purposes. Currently, those operations consist primarily
of our bunkering activities and our operation of a Canadian flagged vessel. We
may elect to conduct additional operations in corporate form in the future.
These corporate subsidiaries will be subject to corporate-level tax, which will
reduce the cash available for distribution to us and, in turn, to our
unitholders. If the IRS were to successfully assert that these corporate
subsidiaries have more tax liability than we anticipate or legislation was
enacted that increased the corporate tax rate, our cash available for
distribution to our unitholders would be further reduced.
The sale or exchange of 50% or more of our capital and
profits interests during any twelve-month period will result in the termination
of our partnership for federal income tax purposes.
We will be considered to
have terminated for federal income tax purposes if there is a sale or exchange
of 50% or more of the total interests in our capital and profits within a
twelve-month period. Our termination would, among other things, result in the
closing of our taxable year for all unitholders and could result in a deferral
of depreciation deductions allowable in computing our taxable income.
16
Risks Related to Debt Securities
We
have a holding company structure in which our subsidiaries conduct our
operations and own our operating assets.
We have a holding company
structure, and our subsidiaries conduct all of our operations and own all of
our operating assets. We have no significant assets other than the ownership
interests in our subsidiaries. As a result, our ability to make required
payments on the debt securities, including interest payments, depends on the
performance of our subsidiaries and their ability to distribute funds to us.
The ability of our subsidiaries to make distributions to us may be restricted
by, among other things, credit facilities and applicable state partnership laws
and other laws and regulations. Pursuant to the credit facilities, we may be
required to establish cash reserves for the future payment of principal and
interest on the amounts outstanding under the credit facilities. If we are
unable to obtain the funds necessary to pay the principal amount of the debt
securities at maturity, or to repurchase the debt securities upon an event of
mandatory repurchase, we may be required to adopt one or more alternatives,
such as a refinancing of the debt securities. We cannot assure you that we
would be able to refinance the debt securities.
If we issue unsecured debt securities, your right to
receive payments on the debt securities will be unsecured and will be
effectively subordinated to our existing and future secured indebtedness and to
indebtedness of any of our subsidiaries who do not guarantee the debt
securities.
Any unsecured debt
securities, including any guarantees, issued by us, K-Sea Transportation
Finance Corporation or any Subsidiary Guarantors will be effectively
subordinated to the claims of our secured creditors. In the event of the
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of our business or that of K-Sea Transportation Finance Corporation or any
Subsidiary Guarantors, their secured creditors would generally have the right
to be paid in full before any distribution is made to the holders of the
unsecured debt securities. Furthermore, if any of our subsidiaries do not
guarantee the unsecured securities, these debt securities will be effectively
subordinated to the claims of all creditors, including trade creditors and tort
claimants, of those subsidiaries. In the event of the insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of a
subsidiary that is not a guarantor, creditors of that subsidiary would
generally have the right to be paid in full before any distribution is made to
the issuers of the unsecured debt securities or the holders of the unsecured
debt securities.
We do not have the same flexibility as other types of
organizations to accumulate cash, which may limit cash available to service the
debt securities or to repay them at maturity.
Unlike
a corporation, our partnership agreement requires us to distribute on a
quarterly basis, 100% of our available cash to our unitholders of record and
our general partner. Available cash is generally all of our cash on hand at the
end of each quarter, after payment of fees and expenses and the establishment
of cash reserves by our general partner in its discretion. Our general partner
determines the amount and timing of cash distributions and has broad discretion
to establish and make additions to our reserves or the reserves of our
operating partnerships in amounts the general partner determines in its
reasonable discretion to be necessary or appropriate:
·
to
provide for the proper conduct of our business and the businesses of our
operating partnerships (including reserves for future capital expenditures and
for our anticipated future credit needs);
·
to
provide funds for distributions to our unitholders and our general partner from
any one or more of the next four calendar quarters; or
·
to
comply with applicable law or any of our loan or other agreements.
Depending on the timing
and amount of our cash distributions to unitholders and because we are not
required to accumulate cash for the purpose of meeting obligations to holders
of any debt securities, such distributions could significantly reduce the cash
available to us in subsequent periods to make payments on any debt securities.
17
FORWARD-LOOKING
STATEMENTS
Statements included in this prospectus and in the
documents that we incorporate by reference that are not historical facts
(including statements concerning plans and objectives of management for future
operations or economic performance, or assumptions related thereto) are
forward-looking statements. In addition, we may from time to time make other
oral or written statements that are also forward-looking statements.
Forward-looking
statements appear in a number of places and include statements with respect to,
among other things:
·
the
expected closing of and benefits to be derived from proposed acquisitions;
·
planned
capital expenditures and availability of capital resources to fund capital
expenditures;
·
our
expected cost of complying with OPA 90;
·
estimated
future expenditures for drydocking and maintenance of our tank vessels’
operating capacity;
·
our
plans for the retirement or retrofitting of tank vessels and the expected
delivery, and cost, of newbuild vessels;
·
the
integration of acquisitions of tank barges and tugboats, including the timing
and effects thereof;
·
expected
decreases in the supply of domestic tank vessels;
·
expected
demand in the domestic tank vessel market in general and the demand for our
tank vessels in particular;
·
our
expectations regarding the DBL 152 barge incident;
·
the
adequacy of our insurance;
·
the
likelihood that pipelines will be built that compete with us;
·
the
effect of new regulations or requirements on our financial position;
·
our
future financial condition or results of operations and our future revenues and
expenses;
·
our
business strategy and other plans and objectives for future operations; and
·
our
future financial exposure to lawsuits currently pending against EW
Transportation LLC and its predecessors.
These forward-looking statements are made based upon
management’s current plans, expectations, estimates, assumptions and beliefs
concerning future events and therefore involve a number of risks and
uncertainties. We caution that forward-looking statements are not guarantees
and that actual results could differ materially from those expressed or implied
in the forward-looking statements.
Important factors that
could cause our actual results of operations or our actual financial condition
to differ are described under “Risk Factors” beginning on page 1 of this
prospectus.
18
USE OF PROCEEDS
Unless we specify
otherwise in any prospectus supplement, we will use the net proceeds we receive
from the sale of securities covered by this prospectus for general partnership
purposes, which may include, among other things:
·
paying
or refinancing all or a portion of our indebtedness outstanding at the time;
and
·
funding
working capital, capital expenditures or acquisitions.
The actual application of
proceeds from the sale of any particular offering of securities using this
prospectus will be described in the applicable prospectus supplement relating
to such offering. The precise amount and timing of the application of these
proceeds will depend upon our funding requirements and the availability and
cost of other funds.
RATIO OF EARNINGS
TO FIXED CHARGES
The
table below sets forth the ratio of earnings to fixed charges for us and our
predecessor for each of the periods indicated:
|
|
|
Year Ended June 30,
|
|
Six-Months Ended
December 31,
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
Ratio of Earnings
to Fixed Charges(1)
|
|
1.80
|
|
1.47
|
|
1.50
|
|
2.17
|
|
1.52
|
|
|
1.33
|
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
information appearing in this table is for our predecessor for all periods
prior to January 14, 2004.
19
DESCRIPTION OF DEBT
SECURITIES
K-Sea Transportation Partners L.P. and K-Sea
Transportation Finance Corporation may issue senior debt securities and
subordinated debt securities. The issuers will issue senior debt securities
under an indenture among them, the Subsidiary Guarantors, if any, and a trustee
that we will name in the related prospectus supplement. We refer to this
indenture as the senior indenture. The issuers may also issue subordinated debt
securities under an indenture to be entered into among them, the Subsidiary
Guarantors, if any, and the trustee. We refer to this indenture as the
subordinated indenture. We refer to the senior indenture and the subordinated
indenture collectively as the indentures. The debt securities will be governed
by the provisions of the related indenture and those made part of the indenture
by reference to the Trust Indenture Act of 1939.
We have summarized material provisions of the
indentures, the debt securities and the guarantees below. This summary is not
complete. We have filed the forms of senior and subordinated indentures with
the SEC as exhibits to the registration statement of which this prospectus
forms a part, and you should read the indentures for provisions that may be
important to you.
Unless the context
otherwise requires, references in this section to “we,” “us,” “our” and “the
issuers” mean K-Sea Transportation Partners L.P. and K-Sea Transportation
Finance Corporation, and references in this prospectus to an “indenture” refer
to the particular indenture under which we issue a series of debt securities.
Provisions
Applicable to Each Indenture
General.
Any
series of debt securities:
·
will
be general obligations of the issuers of such series;
·
will
be general obligations of the Subsidiary Guarantors if they are guaranteed by
the Subsidiary Guarantors; and
·
may
be subordinated to the Senior Indebtedness of the issuers and the Subsidiary
Guarantors.
The indentures do not limit the amount of debt
securities that may be issued under any indenture, and do not limit the amount
of other indebtedness or securities that we may issue. We may issue debt
securities under the indentures from time to time in one or more series, each
in an amount authorized prior to issuance.
No indenture contains any covenants or other
provisions designed to protect holders of the debt securities in the event we
participate in a highly leveraged transaction or upon a change of control. The
indentures also do not contain provisions that give holders the right to
require us to repurchase their securities in the event of a decline in our
credit ratings for any reason, including as a result of a takeover,
recapitalization or similar restructuring or otherwise.
Terms.
We
will prepare a prospectus supplement and either a supplemental indenture, or
authorizing resolutions of the board of directors of our general partner’s
general partner, accompanied by an officers’ certificate, relating to any
series of debt securities that we offer, which will include specific terms
relating to some or all of the following:
·
whether
the debt securities will be senior or subordinated debt securities;
·
the
form and title of the debt securities of that series;
·
the
total principal amount of the debt securities of that series;
·
whether
the debt securities of that series will be issued in individual certificates to
each holder or in the form of temporary or permanent global securities held by
a depositary on behalf of holders;
20
·
the
date or dates on which the principal of and any premium on the debt securities
of that series will be payable;
·
any
interest rate which the debt securities of that series will bear, the date from
which interest will accrue, interest payment dates and record dates for
interest payments;
·
any
right to extend or defer the interest payment periods and the duration of the
extension;
·
whether
and under what circumstances any additional amounts with respect to the debt
securities of that series will be payable;
·
whether
debt securities of that series are entitled to the benefits of any guarantee of
any Subsidiary Guarantor;
·
the
place or places where payments on the debt securities of that series will be
payable;
·
any
provisions for the optional redemption or early repayment of that series of
debt securities;
·
any
provisions that would require the redemption, purchase or repayment of that
series of debt securities;
·
the
denominations in which that series of debt securities will be issued;
·
the
portion of the principal amount of that series of debt securities that will be
payable if the maturity is accelerated, if other than the entire principal
amount;
·
any
additional means of defeasance of that series of debt securities, any
additional conditions or limitations to defeasance of the debt securities or
any changes to those conditions or limitations;
·
any
changes or additions to the events of default or covenants described in this
prospectus;
·
any
restrictions or other provisions relating to the transfer or exchange of that
series of debt securities;
·
any
terms for the conversion or exchange of that series of debt securities for our
other securities or securities of any other entity;
·
any
changes to the subordination provisions for the subordinated debt securities;
and
·
any
other terms of the debt securities of that series.
This description of debt securities will be deemed
modified, amended or supplemented by any description of any series of debt
securities set forth in a prospectus supplement related to that series.
We may sell the debt securities at a discount, which
may be substantial, below their stated principal amount. These debt securities
may bear no interest or interest at a rate that at the time of issuance is
below market rates. If we sell these debt securities, we will describe in the
prospectus supplement any material United States federal income tax
consequences and other special considerations.
The
Subsidiary Guarantees.
The Subsidiary Guarantors
may fully, unconditionally, jointly and severally guarantee on an unsecured
basis all series of debt securities of the issuers. In the event of any such
guarantee, each Subsidiary Guarantor will execute a notation of guarantee as
further evidence of their guarantee. The term “Subsidiary Guarantors” means
K-Sea OLP GP, LLC, K-Sea Operating Partnership L.P., Sea Coast Transportation
LLC, K-Sea Transportation Inc., Norfolk Environmental Services, Inc., K-Sea
Canada Holdings, Inc., K-Sea Acquisition1, LLC and K-Sea Acquisition2, LLC. The
applicable prospectus supplement will describe the terms of any guarantee by
the Subsidiary Guarantors.
If a series of senior debt securities is so
guaranteed, the Subsidiary Guarantors’ guarantee of the senior debt securities
will be the Subsidiary Guarantors’ unsecured and unsubordinated general
obligation,
21
and will rank on a parity
with all of the Subsidiary Guarantors’ other unsecured and unsubordinated
indebtedness. If a series of subordinated debt securities is so guaranteed, the
Subsidiary Guarantors’ guarantee of the subordinated debt securities will be
the Subsidiary Guarantors’ unsecured general obligation and will be
subordinated to all of the Subsidiary Guarantors’ other unsecured and unsubordinated
indebtedness.
The obligations of
each Subsidiary Guarantor under its guarantee of the debt securities will be
limited to the maximum amount that will not result in the obligations of the
Subsidiary Guarantor under the guarantee constituting a fraudulent conveyance
or fraudulent transfer under federal or state law, after giving effect to:
·
all
other contingent and fixed liabilities of the Subsidiary Guarantor; and
·
any
collections from or payments made by or on behalf of any other Subsidiary
Guarantors in respect of the obligations of the Subsidiary Guarantor under its
guarantee.
The guarantee of
any Subsidiary Guarantor may be released under certain circumstances. If we
exercise our legal or covenant defeasance option with respect to debt securities
of a particular series as described below in “—Defeasance,” then any Subsidiary
Guarantor will be released with respect to that series. Further, if no default
has occurred and is continuing under the indentures, and to the extent not
otherwise prohibited by the indentures, a Subsidiary Guarantor will be
unconditionally released and discharged from the guarantee:
·
automatically
upon any sale, exchange or transfer, whether by way of merger or otherwise, to
any person that is not our affiliate, of all of our direct or indirect limited
partnership or other equity interests in the Subsidiary Guarantor;
·
automatically
upon the merger of the Subsidiary Guarantor into us or any other Subsidiary
Guarantor or the liquidation and dissolution of the Subsidiary Guarantor; or
·
following
delivery of a written notice by us to the trustee, upon the release of all
guarantees by the Subsidiary Guarantor of any debt of ours for borrowed money
for a purchase money obligation or for a guarantee of either, except for any
series of debt securities.
Consolidation, Merger and
Sale of Assets.
The indentures generally permit
a consolidation or merger involving the issuers or the Subsidiary Guarantors.
They also permit the issuers or the Subsidiary Guarantors, as applicable, to
lease, assign, transfer or otherwise dispose of all or substantially all of
their assets. Each of the issuers and the Subsidiary Guarantors has agreed,
however, that it will not consolidate with or merge into any entity (other than
one of the issuers or a Subsidiary Guarantor, as applicable) or lease, assign,
transfer or otherwise dispose of all or substantially all of its assets to any
entity (other than one of the issuers or a Subsidiary Guarantor, as applicable)
unless:
·
it
is the continuing entity; or
·
if
it is not the continuing entity, the resulting entity or transferee is
organized and existing under the laws of any United States jurisdiction and
assumes the performance of its covenants and obligations under the indentures;
and
·
in
either case, immediately after giving effect to the transaction, no default or
event of default would occur and be continuing or would result from the
transaction.
Upon any such consolidation, merger or asset lease,
assignment, transfer or other disposition involving the issuers or the
Subsidiary Guarantors, the resulting entity or transferee will be substituted
for the issuers or the Subsidiary Guarantors, as applicable, under the
applicable indenture and debt securities. In the case of an asset transfer or other
disposition other than a lease, the issuers or the Subsidiary Guarantors, as
applicable, will be released from the applicable indenture.
22
Events of Default.
Unless
we inform you otherwise in the applicable prospectus supplement, the following
are events of default with respect to a series of debt securities:
·
failure
to pay interest on or other charges relating to that series of debt securities
when due that continues for 30 days;
·
default
in the payment of principal of or premium, if any, on any debt securities of
that series when due, whether at its stated maturity, upon redemption, by declaration,
upon required repurchase or otherwise;
·
default
in the deposit of any sinking fund payment with respect to any debt securities
of that series when due that continues for 30 days;
·
failure
by the issuers, or if the series of debt securities is guaranteed by any
Subsidiary Guarantors, by such Subsidiary Guarantor, to comply for 60 days with
the other agreements contained in the indentures, any supplement to the
indentures or any board resolution authorizing the issuance of that series
after written notice by the trustee or by the holders of at least 25% in principal
amount of the outstanding debt securities issued under that indenture that are
affected by that failure;
·
certain
events of bankruptcy, insolvency or reorganization of the issuers or, if the
series of debt securities is guaranteed by any Subsidiary Guarantor, of any
such Subsidiary Guarantor;
·
if
the series of debt securities is guaranteed by any Subsidiary Guarantor:
·
any
of the guarantees ceases to be in full force and effect, except as otherwise
provided in the indentures;
·
any
of the guarantees is declared null and void in a judicial proceeding;
·
any
Subsidiary Guarantor denies or disaffirms its obligations under the indentures
or its guarantee; and
·
any
other event of default provided for in that series of debt securities.
A default under one series of debt securities will not
necessarily be a default under another series. The trustee may withhold notice
to the holders of the debt securities of any default or event of default
(except in any payment on the debt securities) if the trustee considers it in
the interest of the holders of the debt securities to do so.
If an event of default for any series of debt
securities occurs and is continuing, the trustee or the holders of at least 25%
in principal amount of the outstanding debt securities of the series affected
by the default (or, in some cases, 25% in principal amount of all debt
securities issued under the applicable indenture that are affected, voting as
one class) may declare the principal of and all accrued and unpaid interest on
those debt securities to be due and payable. If an event of default relating to
certain events of bankruptcy, insolvency or reorganization occurs, the
principal of and interest on all the debt securities issued under the
applicable indenture will become immediately due and payable without any action
on the part of the trustee or any holder. The holders of a majority in
principal amount of the outstanding debt securities of the series affected by
the default (or, in some cases, of all debt securities issued under the applicable
indenture that are affected, voting as one class) may in some cases rescind
this accelerated payment requirement.
A holder of a debt
security of any series issued under each indenture may pursue any remedy under
that indenture only if:
·
the
holder gives the trustee written notice of a continuing event of default for
that series;
23
·
the
holders of at least 25% in principal amount of the outstanding debt securities
of that series make a written request to the trustee to pursue the remedy;
·
the
holders offer to the trustee indemnity satisfactory to the trustee;
·
the
trustee fails to act for a period of 60 days after receipt of the request and
offer of indemnity; and
·
during
that 60-day period, the holders of a majority in principal amount of the
debt securities of that series do not give the trustee a direction inconsistent
with the request.
This provision does not, however, affect the right of
a holder of a debt security to sue for enforcement of any overdue payment.
In most cases,
holders of a majority in principal amount of the outstanding debt securities of
a series (or of all debt securities issued under the applicable indenture that
are affected, voting as one class) may direct the time, method and place of:
·
conducting
any proceeding for any remedy available to the trustee; and
·
exercising
any trust or power conferred upon the trustee relating to or arising as a
result of an event of default.
The issuers are required to file each year with the
trustee a written statement as to its compliance with the covenants contained
in the applicable indenture.
Modification and Waiver.
Each
indenture may be amended or supplemented if the holders of a majority in
principal amount of the outstanding debt securities of all series issued under
that indenture that are affected by the amendment or supplement (acting as one
class) consent to it. Without the consent of the holder of each debt security
affected, however, no modification may:
·
reduce
the amount of debt securities whose holders must consent to an amendment, a
supplement or a waiver;
·
reduce
the rate of or change the time for payment of interest on the debt security;
·
reduce
the principal of, any premium on or any sinking fund payment with respect to the
debt security or change its stated maturity;
·
reduce
any premium payable on the redemption of the debt security or change the time
at which the debt security may or must be redeemed;
·
change
any obligation to pay additional amounts on the debt security;
·
make
payments on the debt security payable in currency other than as originally
stated in the debt security;
·
impair
the holder’s right to institute suit for the enforcement of any payment on or
with respect to the debt security;
·
make
any change in the percentage of principal amount of debt securities necessary
to waive compliance with certain provisions of the indenture or to make any
change in the provision related to modification;
·
modify
the provisions relating to the subordination of any subordinated debt security
in a manner adverse to the holder of that security;
·
waive
a continuing default or event of default regarding any payment on the debt
securities; or
24
·
release
any Subsidiary Guarantor, or modify the guarantee of any Subsidiary Guarantor
in any manner adverse to the holders.
Each indenture may
be amended or supplemented or any provision of that indenture may be waived
without the consent of any holders of debt securities issued under that
indenture:
·
to
cure any ambiguity, omission, defect or inconsistency;
·
to
provide for the assumption of the issuers’ obligations under the indentures by
a successor upon any merger, consolidation or asset transfer permitted under
the indenture;
·
to
provide for uncertificated debt securities in addition to or in place of
certificated debt securities or to provide for bearer debt securities;
·
to
provide any security for, any guarantees of or any additional obligors on any
series of debt securities or, with respect to the senior indenture, the related
guarantees;
·
to
comply with any requirement to effect or maintain the qualification of that
indenture under the Trust Indenture Act of 1939;
·
to
add covenants that would benefit the holders of any debt securities or to
surrender any rights the issuers have under the indentures;
·
to
add events of default with respect to any debt securities; and
·
to
make any change that does not adversely affect any outstanding debt securities
of any series issued under that indenture in any material respect.
The holders of a majority in principal amount of the
outstanding debt securities of any series (or, in some cases, of all debt
securities issued under the applicable indenture that are affected, voting as
one class) may waive any existing or past default or event of default with
respect to those debt securities. Those holders may not, however, waive any
default or event of default in any payment on any debt security or compliance
with a provision that cannot be amended or supplemented without the consent of
each holder affected.
Defeasance.
When
we use the term defeasance, we mean discharge from some or all of our obligations
under the indentures. If any combination of funds or government securities are
deposited with the trustee under an indenture sufficient to make payments on
the debt securities of a series issued under that indenture on the dates those
payments are due and payable, then, at our option, either of the following will
occur:
·
we
will be discharged from our or their obligations with respect to the debt
securities of that series and, if applicable, the related guarantees (“legal
defeasance”); or
·
we
will no longer have any obligation to comply with the restrictive covenants,
the merger covenant and other specified covenants under the applicable
indenture, and the related events of default will no longer apply (“covenant
defeasance”).
If a series of debt securities is defeased, the
holders of the debt securities of the series affected will not be entitled to
the benefits of the applicable indenture, except for obligations to register
the transfer or exchange of debt securities, replace stolen, lost or mutilated
debt securities or maintain paying agencies and hold moneys for payment in
trust. In the case of covenant defeasance, our obligation to pay principal,
premium and interest on the debt securities and, if applicable, guarantees of
the payments will also survive.
25
Unless we inform you
otherwise in the prospectus supplement, we will be required to deliver to the
trustee an opinion of counsel that the deposit and related defeasance would not
cause the holders of the debt securities to recognize income, gain or loss for
U.S. federal income tax purposes. If we elect legal defeasance, that opinion of
counsel must be based upon a ruling from the U.S. Internal Revenue Service or a
change in law to that effect.
No Personal Liability of
General Partner.
K-Sea General Partner L.P., our
general partner, and K-Sea General Partner GP LLC, the general partner of our
general partner, and their directors, managers, officers, employees, partners
and unitholders, in such capacity, will not be liable for the obligations of
the issuers or any Subsidiary Guarantor under the debt securities, the
indentures or the guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. By accepting a debt security,
each holder of that debt security will have agreed to this provision and waived
and released any such liability on the part of K-Sea General Partner, L.P. and
K-Sea General Partner GP LLC and their directors, managers, officers,
employees, partners and unitholders. This waiver and release are part of the
consideration for our issuance of the debt securities. It is the view of the
SEC that a waiver of liabilities under the federal securities laws is against
public policy and unenforceable.
Governing Law.
New
York law will govern the indentures and the debt securities.
Trustee.
We
may appoint a separate trustee for any series of debt securities. We use the
term “trustee” to refer to the trustee appointed with respect to any such
series of debt securities. We may maintain banking and other commercial
relationships with the trustee and its affiliates in the ordinary course of
business, and the trustee may own debt securities.
Form, Exchange,
Registration and Transfer.
The debt securities
will be issued in registered form, without interest coupons. There will be no
service charge for any registration of transfer or exchange of the debt
securities. However, payment of any transfer tax or similar governmental charge
payable for that registration may be required.
Debt securities of any series
will be exchangeable for other debt securities of the same series, the same
total principal amount and the same terms but in different authorized
denominations in accordance with the applicable indenture. Holders may present
debt securities for registration of transfer at the office of the security
registrar or any transfer agent we designate. The security registrar or
transfer agent will effect the transfer or exchange if its requirements and the
requirements of the applicable indenture are met.
The trustee will be
appointed as security registrar for the debt securities. If a prospectus
supplement refers to any transfer agents we initially designate, we may at any
time rescind that designation or approve a change in the location through which
any transfer agent acts. We are required to maintain an office or agency for
transfers and exchanges in each place of payment. We may at any time designate
additional transfer agents for any series of debt securities.
In the
case of any redemption, we will not be required to register the transfer or
exchange of:
·
any
debt security during a period beginning 15 business days prior to the mailing
of the relevant notice of redemption and ending on the close of business on the
day of mailing of such notice; or
·
any
debt security that has been called for redemption in whole or in part, except
the unredeemed portion of any debt security being redeemed in part.
Payment and Paying Agents.
Unless
we inform you otherwise in a prospectus supplement, payments on the debt securities
will be made in U.S. dollars at the office of the trustee and any paying agent.
At our option, however, payments may be made by wire transfer for global debt
securities or by check mailed to the address of the person entitled to the
payment as it appears in the security register. Unless we inform you otherwise
in a prospectus supplement, interest payments may be made to the person in
whose name the debt security is registered at the close of business on the
record date for the interest payment.
26
Unless we inform you
otherwise in a prospectus supplement, the trustee under the applicable
indenture will be designated as the paying agent for payments on debt
securities issued under that indenture. We may at any time designate additional
paying agents or rescind the designation of any paying agent or approve a
change in the office through which any paying agent acts.
If the principal of or any
premium or interest on debt securities of a series is payable on a day that is
not a business day, the payment will be made on the following business day. For
these purposes, unless we inform you otherwise in a prospectus supplement, a “business
day” is any day that is not a Saturday, a Sunday or a day on which banking
institutions in New York, New York or a place of payment on the debt securities
of that series is authorized or obligated by law, regulation or executive order
to remain closed.
Subject to the
requirements of any applicable abandoned property laws, the trustee and paying
agent will pay to us upon written request any money held by them for payments
on the debt securities that remains unclaimed for two years after the date upon
which that payment has become due. After payment to us, holders entitled to the
money must look to us for payment. In that case, all liability of the trustee
or paying agent with respect to that money will cease.
Book-Entry Debt Securities.
The
debt securities of a series may be issued in the form of one or more global
debt securities that would be deposited with a depositary or its nominee
identified in the prospectus supplement. Global debt securities may be issued
in either temporary or permanent form. We will describe in the prospectus
supplement the terms of any depositary arrangement and the rights and
limitations of owners of beneficial interests in any global debt security.
Provisions Applicable Solely to the Subordinated
Indenture
Debt securities of a
series may be subordinated to the issuers’ “Senior Indebtedness,” which is
defined generally to include any obligation created or assumed by the issuers
(or, if the series is guaranteed, any Subsidiary Guarantors) for the repayment
of borrowed money, any purchase money obligation created or assumed by the
issuer, and any guarantee therefor, whether outstanding or hereafter issued,
unless, by the terms of the instrument creating or evidencing such obligation,
it is provided that such obligation is subordinate or not superior in right of
payment to the debt securities (or, if the series is guaranteed, the guarantee
of any Subsidiary Guarantor), or to other obligations which are
pari passu
with or subordinated to the debt securities (or,
if the series is guaranteed, the guarantee of any Subsidiary Guarantor).
Subordinated debt securities will be subordinated in right of payment, to the
extent and in the manner set forth in the subordinated indenture and the
prospectus supplement relating to such series, to the prior payment of all of
our indebtedness and that of any Subsidiary Guarantor that is designated as “Senior
Indebtedness” with respect to the series.
The
holders of Senior Indebtedness of the issuers or, if applicable, a Subsidiary
Guarantor, will receive payment in full of the Senior Indebtedness before
holders of subordinated debt securities will receive any payment of principal,
premium or interest with respect to the subordinated debt securities upon any
payment or distribution of our assets or, if applicable to any series of
outstanding debt securities, the Subsidiary Guarantors’ assets, to creditors:
·
upon
a liquidation or dissolution of the issuers or, if applicable to any series of
outstanding debt securities, the Subsidiary Guarantors; or
·
in
a bankruptcy, receivership or similar proceeding relating to the issuers or, if
applicable to any series of outstanding debt securities, to the Subsidiary
Guarantors.
Until the Senior
Indebtedness is paid in full, any distribution to which holders of subordinated
debt securities would otherwise be entitled will be made to the holders of
Senior Indebtedness, except that the holders of subordinated debt securities
may receive units representing limited partner interests and any debt
securities that are subordinated to Senior Indebtedness to at least the same
extent as the subordinated debt securities.
27
If the
issuers do not pay any principal, premium or interest with respect to Senior
Indebtedness within any applicable grace period (including at maturity), or any
other default on Senior Indebtedness occurs and the maturity of the Senior
Indebtedness is accelerated in accordance with its terms, the issuers may not:
·
make
any payments of principal, premium, if any, or interest with respect to subordinated
debt securities;
·
make
any deposit for the purpose of defeasance of the subordinated debt securities;
or
·
repurchase,
redeem or otherwise retire any subordinated debt securities, except that in the
case of subordinated debt securities that provide for a mandatory sinking fund,
the issuers may deliver subordinated debt securities to the trustee in
satisfaction of our sinking fund obligation,
unless,
in either case,
·
the
default has been cured or waived and any declaration of acceleration has been rescinded;
·
the
Senior Indebtedness has been paid in full in cash; or
·
the
issuers and the trustee receive written notice approving the payment from the
representatives of each issue of “Designated Senior Indebtedness.”
Generally,
“Designated Senior Indebtedness” will include:
·
any
specified issue of Senior Indebtedness of at least $100.0 million; and
·
any
other Senior Indebtedness that we may designate in respect of any series of
subordinated debt securities.
During the continuance of
any default, other than a default described in the immediately preceding
paragraph, that may cause the maturity of any Designated Senior Indebtedness to
be accelerated immediately without further notice, other than any notice
required to effect such acceleration, or the expiration of any applicable grace
periods, the issuers may not pay the subordinated debt securities for a period
called the “Payment Blockage Period.” A Payment Blockage Period will commence
on the receipt by the issuers and the trustee of written notice of the default,
called a “Blockage Notice,” from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
will end 179 days thereafter.
The
Payment Blockage Period may be terminated before its expiration:
·
by
written notice from the person or persons who gave the Blockage Notice;
·
by
repayment in full in cash of the Designated Senior Indebtedness with respect to
which the Blockage Notice was given; or
·
if
the default giving rise to the Payment Blockage Period is no longer continuing.
Unless the holders of the
Designated Senior Indebtedness have accelerated the maturity of the Designated
Senior Indebtedness, we may resume payments on the subordinated debt securities
after the expiration of the Payment Blockage Period.
Generally, not more than
one Blockage Notice may be given in any period of 360 consecutive days. The
total number of days during which any one or more Payment Blockage Periods are
in effect, however, may not exceed an aggregate of 179 days during any period
of 360 consecutive days.
After all Senior
Indebtedness is paid in full and until the subordinated debt securities are
paid in full, holders of the subordinated debt securities will be subrogated to
the rights of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness.
As a result of the
subordination provisions described above, in the event of insolvency, the
holders of Senior Indebtedness, as well as certain of our general creditors,
may recover more, ratably, than the holders of the subordinated debt
securities.
28
DESCRIPTION OF
COMMON UNITS
Our common units represent
limited partner interests in us that entitle the holders thereof to participate
in our cash distributions and to exercise the rights or privileges available to
limited partners under our partnership agreement. For a description of the
relative rights and preferences of holders of units and our general partner in
and to partnership distributions, please read “Cash Distribution Policy.” For a
general discussion of the expected federal income tax consequences of owning
and disposing of common units, please read “Material Tax Consequences.” For a description of the rights and
privileges of limited partners under our partnership agreement, including
voting rights, please read “Our Partnership Agreement.” References in this
section to “we,” “us” and “our” mean K-Sea Transportation Partners L.P.
General
We have two classes of limited partner interests in
our partnership: common units and subordinated units. Both classes of units are
entitled to participate in partnership distributions and exercise the rights or
privileges available to limited partners under our partnership agreement. The
rights of holders of subordinated units to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units.
Our common units are
listed for trading on the New York Stock Exchange under the symbol “KSP.” Unlike the common units, the subordinated
units are not publicly traded.
Transfer of Common
Units
Each purchaser of
common units offered by this prospectus must execute a transfer application and
certification. By executing and delivering a transfer application and
certification, the purchaser of common units:
·
becomes
the record holder of the common units and is an assignee until admitted into
our partnership as a substituted limited partner;
·
automatically
requests admission as a substituted limited partner in our partnership;
·
agrees
to be bound by the terms and conditions of, and executes, our partnership
agreement;
·
represents
that the transferee has the capacity, power and authority to enter into the
partnership agreement;
·
grants
powers of attorney to officers of K-Sea General Partner GP LLC and any liquidator
of us as specified in the partnership agreement; and
·
makes
the consents, covenants, representations and waivers contained in the
partnership agreement, including representations and covenants about the
transferee’s citizenship for Jones Act and tax withholding purposes.
In addition to a transfer application and its related
certification, any assignee who will hold more than 5% of the total outstanding
common units must execute and deliver an affidavit of citizenship in form and
substance satisfactory to the U.S. Maritime Administration.
An assignee will become a substituted limited partner
of our partnership for the transferred common units upon the consent of our
general partner and the recording of the name of the assignee on our books and
records. Our general partner may withhold its consent in its sole discretion.
A transferee’s broker, agent or nominee may complete,
execute and deliver a transfer application and certification. We may, at our
discretion, treat the nominee holder of a common unit as the absolute owner.
29
In that case, the
beneficial holder’s rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the beneficial owner and
the nominee holder.
Common units are
securities and are transferable according to the laws governing transfer of
securities. In addition to other rights acquired upon transfer, the transferor
gives the transferee the right to request admission as a substituted limited
partner in our partnership for the transferred common units. A purchaser or
transferee of common units who does not execute and deliver a transfer
application obtains only:
·
the
right to assign the common unit to a purchaser or the transferee; and
·
the
right to transfer the right to seek admission as a substituted limited partner
in our partnership for the transferred common units.
Thus, a purchaser
or transferee of common units who does not execute and deliver a transfer
application:
·
will
not receive cash distributions or federal income tax allocations, unless the
common units are held in a nominee or “street name” account and the nominee or
broker has executed and delivered a transfer application and certification as
to itself and any beneficial holders; and
·
may
not receive some federal income tax information or reports furnished to record
holders of common units.
The transferor of common units has a duty to provide
the transferee with all information that may be necessary to transfer the
common units. The transferor does not have a duty to insure the execution of
the transfer application and certification by the transferee and has no
liability or responsibility if the transferee neglects or chooses not to
execute and forward the transfer application and certification to the transfer
agent.
Until a common unit has
been transferred on our books, we and the transfer agent may treat the record
holder of the unit as the absolute owner for all purposes, except as otherwise
required by law or stock exchange regulations.
Transfer Agent and
Registrar
The transfer agent and registrar for our common units
is American Stock Transfer & Trust Company.
30
OUR PARTNERSHIP
AGREEMENT
The following is a summary of the material provisions
of our partnership agreement. Our partnership agreement and the partnership
agreement of K-Sea Operating Partnership L.P. are included as exhibits to the
registration statement of which this prospectus constitutes a part.
We summarize the
following provisions of the partnership agreement elsewhere in this prospectus:
·
with
regard to distributions of available cash, please read “Cash Distribution
Policy;”
·
with
regard to the transfer of common units, please read “Description of Common
Units—Transfer of Common Units”; and
·
with regard to allocations
of taxable income and taxable loss, please read “Material Tax Consequences.”
Organization and
Duration
We were organized on July 8,
2003 and have a perpetual existence.
Purpose
Our purpose under
the partnership agreement is limited to serving as a partner of K-Sea Operating
Partnership L.P., our operating partnership, and engaging in any business
activities that may be engaged in by our operating partnership and its
subsidiaries or that are approved by our general partner. The partnership
agreement of our operating partnership provides that the operating partnership
may, directly or indirectly, engage in:
·
its
operations as conducted immediately before our initial public offering;
·
any
other activity approved by the general partner but only to the extent that the
general partner reasonably determines that, as of the date of the acquisition
or commencement of the activity, the activity generates “qualifying income” as
this term is defined in Section 7704 of the Internal Revenue Code of 1986,
as amended; or
·
any
activity that enhances the operations of an activity that is described in
either of the two preceding clauses or any other activity provided such
activity does not affect our treatment as a partnership for federal income tax
purposes.
Although our general
partner has the ability to cause us, our operating partnership or its
subsidiaries to engage in activities other than the marine transportation of
refined petroleum products, our general partner has no current plans to do so.
Our general partner is authorized in general to perform all acts deemed
necessary to carry out our purposes and to conduct our business.
Restrictions on Foreign
Ownership
To enjoy the
benefits of U.S. coastwise trade, we must maintain U.S. citizenship for U.S.
coastwise trade purposes as defined in the Merchant Marine Act of 1936, as
amended, the Shipping Act of 1916, as amended, and the regulations thereunder.
Under these regulations, to maintain U.S. citizenship and, therefore, be
qualified to engage in U.S. coastwise trade:
·
not
less than 75% of the interests in our general partner must be owned by U.S.
citizens;
·
the
president or chief executive officer, the chairman of the board and a majority
of a quorum of the board of directors of the general partner of our general
partner must be U.S. citizens; and
31
·
at
least 75% of the ownership and voting power of our units must be held by U.S.
citizens free of any trust, fiduciary arrangement or other agreement,
arrangement or understanding whereby voting power may be exercised directly or
indirectly by non-U.S. citizens, as defined in the Merchant Marine Act, the
Shipping Act and the regulations thereunder.
In order to protect our ability to register our
vessels under federal law and operate our vessels in U.S. coastwise trade, our
partnership agreement restricts foreign ownership of our interests to a
percentage equal to not more than 24.0% as determined from time to time by our
general partner. The general partner has determined to limit foreign ownership
of our interests to 15.0%. We refer to the percentage limitation on foreign
ownership as the permitted percentage.
Our partnership
agreement provides that:
·
any
transfer, or attempted transfer, of any units that would result in the
ownership or control, in each case, in excess of the permitted percentage by
one or more persons who is not a U.S. citizen for purposes of U.S. coastwise
shipping (as defined in the Merchant Marine Act and the Shipping Act) will be
void and ineffective as against us; and
·
if,
at any time, persons other than U.S. citizens own units or possess voting power
over units, in each case, (either of record or beneficially) in excess of the
permitted percentage, we will withhold payment of distributions on and suspend
the voting rights of such units and may redeem such units.
Unit certificates
bear legends concerning the restrictions on ownership by persons other than
U.S. citizens. In addition, our partnership agreement:
·
permits
us to require, as a condition precedent to the transfer of units on our
records, representations and other proof as to the identity of existing or
prospective unitholders; and
·
permits us to establish and
maintain a dual unit certificate system under which different forms of
certificates may be used to reflect whether or not the owner thereof is a U.S.
citizen.
Issuance of
Additional Securities
Our partnership agreement authorizes us to issue an
unlimited number of additional common units and other partnership securities
and rights to buy partnership securities for the consideration and on the terms
and conditions established by our general partner in its sole discretion
without the approval of the unitholders. During the subordination period,
however, except as set forth in the following paragraph, we may not issue
equity securities ranking senior to the common units or an aggregate of more
than 2,082,500 additional common units or units on a parity with the common units,
in each case, without the approval of the holders of a unit majority.
During or after the
subordination period, we may issue an unlimited number of common units, without
the approval of unitholders, as follows:
·
in
connection with an acquisition or a capital improvement that increases cash
flow from operations per unit on a pro forma basis; or
·
if
the proceeds of the issuance are used exclusively to repay indebtedness the
cost of which to service is greater than the distribution obligations
associated with the units issued in connection with its retirement;
·
the
redemption of common units or other equity securities of equal rank with the
common units from the net proceeds of an issuance of common units or parity
units provided that the redemption price equals the net proceeds per unit,
before expenses, to us;
·
upon
conversion of the subordinated units;
32
·
upon
conversion of units of equal rank with the common units into common units under
some circumstances;
·
under
employee benefit plans;
·
upon
conversion of the general partner interest and incentive distribution rights
into common units as a result of a withdrawal of our general partner; or
·
in
the event of a combination or subdivision of common units.
It is possible that we will fund acquisitions through
the issuance of additional common units or other equity securities. Holders of
any additional common units we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of available cash.
In addition, the issuance of additional common units or other equity securities
interests may dilute the value of the interests of the then-existing holders of
common units in our net assets.
In accordance with Delaware law and the provisions of
our partnership agreement, we may also issue additional partnership securities
interests that, in the sole discretion of our general partner, have special
voting rights to which the common units are not entitled.
Upon the issuance of
additional common units or other partnership securities, our general partner
may make additional capital contributions to the extent necessary to maintain
its 2% general partner interest in us. Moreover, our general partner will have
the right, which it may from time to time assign in whole or in part to any of
its affiliates, to purchase common units, subordinated units or other equity
securities whenever, and on the same terms that, we issue those securities to
persons other than our general partner and its affiliates, to the extent
necessary to maintain its and its affiliates’ percentage interest, including
its interest represented by common units and subordinated units, that existed
immediately prior to each issuance. The holders of common units will not have
preemptive rights to acquire additional common units or other partnership
securities.
Limited Liability
Participation in the
Control of Our Partnership.
Assuming that a
limited partner does not participate in the control of our business within the
meaning of the Delaware Revised Uniform Limited Partnership Act, or Delaware
Act, and that he otherwise acts in conformity with the provisions of our
partnership agreement, his liability under the Delaware Act will be limited,
subject to possible exceptions, to the amount of capital he is obligated to
contribute to us for his common units plus his share of any undistributed
profits and assets. If it were determined, however, that the right, or exercise
of the right, by the limited partners as a group:
·
to
remove or replace our general partner;
·
to
approve some amendments to our partnership agreement; or
·
to
take other action under the partnership agreement;
constituted “participation in the control” of our
business for the purposes of the Delaware Act, then the limited partners could
be held personally liable for our obligations under Delaware law, to the same
extent as our general partner. This liability would extend to persons who
transact business with us who reasonably believe that the limited partner is a
general partner. Neither our partnership agreement nor the Delaware Act
specifically provides for legal recourse against our general partner if a
limited partner were to lose limited liability through any fault of our general
partner. While this does not mean that a limited partner could not seek legal
recourse, we have found no precedent for this type of a claim in Delaware case
law.
Unlawful
Partnership Distributions.
Under the Delaware
Act, a limited partnership may not make a distribution to a partner if, after
the distribution, all liabilities of the limited partnership, other than
33
liabilities to partners on
account of their partnership interests and liabilities for which the recourse
of creditors is limited to specific property of the partnership, would exceed
the fair value of the assets of the limited partnership. For the purpose of
determining the fair value of the assets of a limited partnership, the Delaware
Act provides that the fair value of property subject to liability for which
recourse of creditors is limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds the
nonrecourse liability. The Delaware Act provides that a limited partner who
receives a distribution and knew at the time of the distribution that the
distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years. Under
the Delaware Act, an assignee who becomes a substituted limited partner of a
limited partnership is liable for the obligations of his assignor to make
contributions to the partnership, except the assignee is not obligated for
liabilities unknown to him at the time he became a limited partner and that
could not be ascertained from the partnership agreement.
Failure to Comply with the
Limited Liability Provisions of Jurisdictions in Which We Do Business.
Our subsidiaries conduct business in Alaska, New
York, New Jersey, Pennsylvania, Washington, Virginia and certain foreign
jurisdictions. Maintenance of our limited liability, as a limited partner of
the operating partnership, may require compliance with legal requirements in
the jurisdictions in which our operating partnership conducts business,
including qualifying our subsidiaries to do business there. Limitations on the
liability of limited partners for the obligations of a limited partnership have
not been clearly established in many jurisdictions. If, by virtue of our
limited partner interest in our operating partnership or otherwise, it were
determined that we were conducting business in any state without compliance
with the applicable limited partnership or limited liability company statute,
or that the right or exercise of the right by the limited partners as a group
to remove or replace our general partner, to approve some amendments to our
partnership agreement, or to take other action under the partnership agreement
constituted “participation in the control” of our business for purposes of the
statutes of any relevant jurisdiction, then the limited partners could be held
personally liable for our obligations under the law of that jurisdiction to the
same extent as our general partner under the circumstances. We will operate in
a manner that our general partner considers reasonable and necessary or
appropriate to preserve the limited liability of the limited partners.
Voting Rights
The following
matters require the unitholder vote specified below. Matters requiring the
approval of a “unit majority” require:
·
during
the subordination period, the approval of at least a majority of the common
units, excluding those common units held by our general partner and its
affiliates, and a majority of the subordinated units, voting as separate
classes; and
·
after
the subordination period, the approval of a majority of the common units.
34
|
Matter
|
|
Vote Requirement
|
|
|
Issuance of additional
common units or units of equal rank with the common units during the
subordination period
|
|
Unit majority, with certain exceptions described under “—Issuance of
Additional Securities.”
|
|
|
Issuance of units senior
to the common units during the subordination period
|
|
Unit majority.
|
|
|
Issuance of units junior to
the common units during the subordination period
|
|
No approval
right.
|
|
|
Issuance of additional
units after the subordination period
|
|
No approval
right.
|
|
|
Amendment of the partnership
agreement
|
|
Certain
amendments may be made by our general partner without the approval of the
unitholders. Other amendments generally require the approval of a unit
majority. Please read “—Amendment of the Partnership Agreement.”
|
|
|
Merger of our partnership
or the sale of all or substantially all of our assets
|
|
Unit majority.
|
|
|
Amendment of the limited
partnership agreement of the operating partnership and other action taken by
us as a limited partner of the operating partnership
|
|
Unit majority if such amendment or other action would adversely affect our
limited partners (or any particular class of limited partners) in any
material respect.
|
|
|
Dissolution of our
partnership
|
|
Unit majority.
|
|
|
Reconstitution of our partnership upon
dissolution
|
|
Unit majority.
|
|
|
Withdrawal of our
general partner
|
|
Under most
circumstances, the approval of a majority of the common units, excluding
common units held by the general partner and its affiliates, is required for
the withdrawal of our general partner prior to December 31, 2013 in a
manner which would cause a dissolution of our partnership. Please read
“—Withdrawal or Removal of Our General Partner.”
|
|
|
Removal of our general
partner
|
|
Not less than 66
2
/
3
% of the outstanding units,
including units held by our general partner and its affiliates. Please read
“—Withdrawal or Removal of Our General Partner.”
|
|
35
|
Transfer of the general
partner interest
|
|
Our general
partner may transfer all, but not less than all, of its general partner
interest in us without a vote of our unitholders to an affiliate or to
another person in connection with its merger or consolidation with or into,
or sale of all or substantially all of its assets to such person. The
approval of a majority of the common units, excluding common units held by
the general partner and its affiliates, is required in other circumstances
for a transfer of the general partner interest to a third party prior to
December 31, 2013.
|
|
|
Transfer of incentive
distribution rights
|
|
Except for
transfers to an affiliate or another person as part of our general partner’s
merger or consolidation with or into, or sale of all or substantially all of
its assets to, or sale of all or substantially all its equity interest to,
such person, the approval of a majority of the common units, excluding common
units held by our general partner and its affiliates, is required in most
circumstances for a transfer of the incentive distribution rights to a third
party prior to December 31, 2013.
|
|
|
Transfer of ownership interests in our general
partner
|
|
No approval required at
any time.
|
|
Amendment of the
Partnership Agreement
General.
Amendments to our partnership agreement may be
proposed only by or with the consent of our general partner, which consent may
be given or withheld in its sole discretion. In order to adopt a proposed
amendment, other than the amendments discussed below, our general partner is
required to seek written approval of the holders of the number of units
required to approve the amendment or call a meeting of the limited partners to
consider and vote upon the proposed amendment. Except as we describe below, an
amendment must be approved by a unit majority.
Prohibited Amendments.
No amendment may be made that would:
·
enlarge
the obligations of any limited partner without its consent, unless approved by
at least a majority of the type or class of limited partner interests so
affected;
·
enlarge
the obligations of, restrict in any way any action by or rights of, or reduce
in any way the amounts distributable, reimbursable or otherwise payable by us
to our general partner or any of its affiliates without the consent of our
general partner, which may be given or withheld in its sole discretion;
·
change
the term of our partnership;
·
provide
that our partnership is not dissolved upon an election to dissolve our
partnership by our general partner that is approved by a unit majority; or
·
give
any person the right to dissolve our partnership other than our general partner’s
right to dissolve our partnership with the approval of a unit majority.
36
The provision of our partnership agreement preventing
the amendments having the effects described in any of the clauses above can be
amended upon the approval of the holders of at least 90% of the outstanding
units voting together as a single class (including units owned by our general
partner and its affiliates).
No Unitholder Approval.
Our general partner may generally make amendments to
the partnership agreement without the approval of any limited partner or
assignee to reflect:
·
a
change in our name, the location of our principal place of business, our
registered agent or our registered office;
·
the
admission, substitution, withdrawal or removal of partners in accordance with
the partnership agreement;
·
a
change that, in the sole discretion of our general partner, is necessary or
advisable for us to qualify or to continue our qualification as a limited
partnership or a partnership in which the limited partners have limited
liability under the laws of any state or to ensure that neither we, the
operating partnership nor any of its subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
·
an
amendment that is necessary, in the opinion of our counsel, to prevent us, our
general partner, K-Sea General Partner GP LLC or the directors, officers,
agents or trustees of K-Sea General Partner GP LLC from in any manner being
subjected to the provisions of the Investment Company Act of 1940, the
Investment Advisors Act of 1940, or “plan asset” regulations adopted under the
Employee Retirement Income Security Act of 1974, whether or not substantially
similar to plan asset regulations currently applied or proposed;
·
subject
to the limitations on the issuance of
additional partnership securities described above, an amendment that in the
discretion of our general partner is necessary or advisable for the
authorization of additional partnership securities or rights to acquire
partnership securities;
·
any
amendment expressly permitted in the partnership agreement to be made by our
general partner acting alone;
·
an
amendment effected, necessitated or contemplated by a merger agreement that has
been approved under the terms of the partnership agreement;
·
any
amendment that, in the discretion of our general partner, is necessary or
advisable for the formation by us of, or our investment in, any corporation,
partnership or other entity, as otherwise permitted by our partnership
agreement;
·
certain
mergers or conveyances as set forth in our partnership agreement;
·
a
change in our fiscal year or taxable year and related changes; or
·
any
other amendments substantially similar to any of the matters described in the
preceding clauses.
In addition, our
general partner may make amendments to the partnership agreement without the
approval of any limited partner or assignee if those amendments, in the
discretion of our general partner:
·
do
not adversely affect the limited partners (or any particular class of limited
partners as compared to other classes of limited partners) in any material
respect;
·
are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or judicial authority or contained in any federal or state
statute;
37
·
are
necessary or advisable to facilitate the trading of limited partner interests
or to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the limited partner interests are or will be
listed for trading, compliance with any of which our general partner deems to
be in our best interest and the best interest of our limited partners;
·
are
necessary or advisable for any action taken by our general partner relating to
splits or combinations of units under the provisions of the partnership
agreement; or
·
are
required to effect the intent expressed in this prospectus or the intent of the
provisions of our partnership agreement or are otherwise contemplated by our
partnership agreement.
Opinion
of Counsel and Unitholder Approval.
Our general partner will not be required to obtain an
opinion of counsel that an amendment will not result in a loss of limited
liability to the limited partners or result in our being treated as an entity
for federal income tax purposes if one of the amendments described above under “—No
Unitholder Approval” should occur. No other amendments to the partnership
agreement will become effective without the approval of holders of at least 90%
of the outstanding units voting as a single class unless we obtain an opinion
of counsel to the effect that the amendment will not affect the limited
liability under applicable law of any limited partner in our partnership.
In addition to the above
restrictions, any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding units in relation to
other classes of units will require the approval of at least a majority of the
type or class of units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners whose aggregate outstanding units
constitute not less than the voting requirement sought to be reduced.
Liquidation and
Distribution of Proceeds
Upon our dissolution,
unless we are reconstituted and continued as a new limited partnership, the
liquidator authorized to wind up our affairs will, acting with all of the
powers of our general partner that the liquidator deems necessary or desirable
in its judgment, liquidate our assets and apply the proceeds of the liquidation
as provided in “Cash Distribution Policy—Distributions of Cash Upon
Liquidation.” The liquidator may defer liquidation or distribution of our
assets for a reasonable period of time or distribute assets to partners in kind
if it determines that a sale would be impractical or would cause undue loss to
our partners.
Withdrawal or
Removal of Our General Partner
Except as described below, our general partner has
agreed not to withdraw voluntarily as our general partner prior to
December 31, 2013 without obtaining the approval of the holders of at
least a majority of the outstanding common units, excluding common units held
by our general partner and its affiliates, and furnishing an opinion of counsel
regarding limited liability and tax matters. On or after December 31, 2013
our general partner may withdraw as general partner without first obtaining
approval of any unitholder by giving 90 days’ written notice, and that
withdrawal will not constitute a violation of the partnership agreement.
Notwithstanding the information above, our general partner may withdraw without
unitholder approval upon 90 days’ notice to the limited partners if at least
50% of the outstanding common units are held or controlled by one person and
its affiliates other than our general partner and its affiliates. In addition,
our partnership agreement permits our general partner in some instances to sell
or otherwise transfer all of its general partner interest in us without the
approval of the unitholders.
38
Upon the withdrawal of our
general partner under any circumstances, other than as a result of a transfer
by our general partner of all or a part of its general partner interest in us,
the holders of a majority of the outstanding common units and subordinated
units, voting as separate classes, may select a successor to that withdrawing
general partner. If a successor is not elected, or is elected but an opinion of
counsel regarding limited liability and tax matters cannot be obtained, we will
be dissolved, wound up and liquidated, unless within 90 days after that
withdrawal, the holders of units representing a unit majority agree in writing
to continue our business and to appoint a successor general partner.
Our general partner may
not be removed unless that removal is approved by the vote of the holders of
not less than 66
2
/
3
% of the outstanding units,
voting together as a single class, including units held by our general partner
and its affiliates, and we receive an opinion of counsel regarding limited
liability and tax matters. Any removal of the general partner is also subject
to the approval of a successor general partner by the vote of the holders of a
majority of the outstanding common units and subordinated units, voting as
separate classes. The ownership of more than 33
1
/
3
%
of the outstanding units by our general partner and its affiliates would give
it the practical ability to prevent its removal.
Our
partnership agreement also provides that if K-Sea General Partner L.P. is
removed as our general partner under circumstances where cause does not exist
and units held by our general partner and its affiliates are not voted in favor
of that removal:
·
the
subordination period will end and all outstanding subordinated units will
immediately convert into common units on a one-for-one basis;
·
any
existing arrearages in payment of the minimum quarterly distribution on the
common units will be extinguished; and
·
our
general partner will have the right to convert its general partner interest and
its incentive distribution rights into common units or to receive cash in
exchange for those interests based on the fair market value of those interests
at the time.
In the event of removal of
the general partner under circumstances where cause exists or withdrawal of a general
partner where that withdrawal violates the partnership agreement, a successor
general partner will have the option to purchase the general partner interest
and incentive distribution rights of the departing general partner for a cash
payment equal to the fair market value of those interests. Under all other
circumstances where a general partner withdraws or is removed by the limited
partners, the departing general partner will have the option to require the
successor general partner to purchase the general partner interest of the
departing general partner and its incentive distribution rights for fair market
value. In each case, this fair market value will be determined by agreement
between the departing general partner and the successor general partner. If no
agreement is reached, an independent investment banking firm or other
independent expert selected by the departing general partner and the successor
general partner will determine the fair market value. If the departing general
partner and the successor general partner cannot agree upon an expert, then an
expert chosen by agreement of the experts selected by each of them will
determine the fair market value.
If the option described
above is not exercised by either the departing general partner or the successor
general partner, the departing general partner’s general partner interest and
its incentive distribution rights will automatically convert into common units
equal to the fair market value of those interests as determined by an
investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
In addition, we will be
required to reimburse the departing general partner for all amounts due the
departing general partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the termination of
any employees employed by the departing general partner or its affiliates for
our benefit.
39
Change of Management Provisions
The partnership agreement
contains specific provisions that are intended to discourage a person or group
from attempting to remove K-Sea General Partner L.P. as our general partner or
otherwise change our management. If any person or group other than our general
partner and its affiliates acquires beneficial ownership of 20% or more of any
class of units, that person or group loses voting rights on all of its units.
This loss of voting rights does not apply to any person or group that acquires
the units from our general partner or its affiliates and any transferees of
that person or group approved by our general partner or to any person or group
who acquires the units with the prior approval of the board of directors of the
general partner of our general partner.
Our
partnership agreement also provides that if our general partner is removed
under circumstances where cause does not exist and units held by our general
partner and its affiliates are not voted in favor of that removal:
·
the
subordination period will end and all outstanding subordinated units will
immediately convert into common units on a one-for-one basis;
·
any
existing arrearages in payment of the minimum quarterly distribution on the
common units will be extinguished; and
·
our general partner will
have the right to convert its general partner interest and its incentive
distribution rights into common units or to receive cash in exchange for those
interests.
Limited Call Right
If at
any time our general partner and its affiliates hold more than 80% of the
then-issued and outstanding partnership securities of any class, our general
partner will have the right, which it may assign in whole or in part to any of
its affiliates or to us, to acquire all, but not less than all, of the
remaining partnership securities of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at least 10 but not
more than 60 days notice. The purchase price in the event of this purchase is
the greater of:
·
the
highest price paid by our general partner or any of its affiliates for any
partnership securities of the class purchased within the 90 days preceding the
date on which our general partner first mails notice of its election to
purchase those partnership securities; or
·
the
current market price as of the date three days before the date the notice is
mailed.
As a result of our general
partner’s right to purchase outstanding partnership securities, a holder of
partnership securities may have his partnership securities purchased at an
undesirable time or price. Our partnership agreement provides that the
resolution of any conflict of interest that is fair and reasonable will not be
a breach of the partnership agreement. Our general partner may, but it is not
obligated to, submit the conflict of interest represented by the exercise of
the limited call right to the conflicts committee for approval or seek a
fairness opinion from an investment banker. If our general partner exercises
its limited call right, it will make a determination at the time, based on the facts
and circumstances, and upon the advice of counsel, as to the appropriate method
of determining the fairness and reasonableness of the transaction. Our general
partner is not obligated to obtain a fairness opinion regarding the value of
the common units to be repurchased by it upon exercise of the limited call
right.
There is no restriction in
our partnership agreement that prevents our general partner from issuing
additional common units and exercising its call right. If our general partner
exercised its limited call right, the effect would be to take us private and,
if the units were subsequently deregistered, we would no longer be subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended.
The tax consequences to a
unitholder of the exercise of this call right are the same as a sale by that
unitholder of his common units in the market. Please read “Material Tax
Consequences—Disposition of Common Units.”
40
Meetings; Voting
Except as described below
regarding a person or group owning 20% or more of any class of units then
outstanding, unitholders or assignees who are record holders of units on the
record date will be entitled to notice of, and to vote at, meetings of our
limited partners and to act upon matters for which approvals may be solicited.
Common units that are owned by an assignee who is a record holder, but who has
not yet been admitted as a limited partner, will be voted by our general
partner at the written direction of the record holder. Absent direction of this
kind, the common units will not be voted, except that, in the case of common
units held by our general partner on behalf of non-citizen assignees, our
general partner will distribute the votes on those common units in the same
ratios as the votes of limited partners on other units are cast.
Our general partner does
not anticipate that any meeting of unitholders will be called in the
foreseeable future. Any action that is required or permitted to be taken by the
unitholders may be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken are signed by
holders of the number of units necessary to authorize or take that action at a
meeting. Meetings of the unitholders may be called by our general partner or by
unitholders owning at least 20% of the outstanding units of the class for which
a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of the class or
classes for which a meeting has been called, represented in person or by proxy,
will constitute a quorum unless any action by the unitholders requires approval
by holders of a greater percentage of the units, in which case the quorum will
be the greater percentage.
Each record holder of a
unit has a vote according to his percentage interest in us, although additional
limited partner interests having special voting rights could be issued. Please
read “—Issuance of Additional Securities” above. However, if at any time any person
or group, other than our general partner and its affiliates, or a direct or
subsequently approved transferee of our general partner or its affiliates or a
person or group who acquires the units with the prior approval of the board of
directors of the general partner of our general partner, acquires, in the
aggregate, beneficial ownership of 20% or more of any class of units then
outstanding, that person or group will lose voting rights on all of its units
and the units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders, calculating
required votes, determining the presence of a quorum or for other similar
purposes. Common units held in nominee or street name accounts will be voted by
the broker or other nominee in accordance with the instruction of the
beneficial owner unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as the partnership agreement otherwise
provides, subordinated units will vote together with common units as a single
class.
Any notice, demand,
request, report or proxy material required or permitted to be given or made to
record holders of common units under our partnership agreement will be
delivered to the record holder by us or by the transfer agent.
Non-citizen Assignees; Redemption
If we are or become
subject to federal, state or local laws or regulations that, in the reasonable
determination of our general partner, create a substantial risk of cancellation
or forfeiture of any property in which we have an interest because of the
nationality, citizenship or other related status of any limited partner or
assignee, we may redeem the units held by the limited partner or assignee at
their current market price, in accordance with the procedures set forth in our
partnership agreement. In order to avoid any cancellation or forfeiture, our
general partner may require each limited partner or assignee to furnish
information about his nationality, citizenship or related status. If a limited
partner or assignee fails to furnish information about his nationality,
citizenship or other related status within 30 days after a request for the
information or our general partner determines after receipt of the information
that the limited partner or assignee is not an eligible citizen, the limited
partner or assignee may be treated as a non-citizen assignee. In addition to
other limitations on the rights of an assignee that is not a substituted
limited
41
partner,
a non-citizen assignee does not have the right to direct the voting of his
units and may not receive distributions in kind upon our liquidation.
Indemnification
Under
our partnership agreement, in most circumstances, we will indemnify the
following persons, to the fullest extent permitted by law, from and against all
losses, claims, damages or similar events:
·
our
general partner;
·
any
departing general partner;
·
any
person who is or was an affiliate of the general partner of our general partner
or any departing general partner;
·
any
person who is or was a director, officer or manager of any entity described in
the preceding three bullet points; or
·
any
person designated by the general partner of our general partner.
Any indemnification under
these provisions will only be out of our assets. Our general partner will not
be personally liable for, or have any obligation to contribute or lend funds or
assets to us to enable us to effectuate, indemnification. We are authorized to
purchase insurance against liabilities asserted against and expenses incurred
by persons for our activities, regardless of whether we would have the power to
indemnify the person against liabilities under the partnership agreement.
Books and Reports
Our general partner is
required to keep appropriate books of our business at our principal offices.
The books will be maintained for both tax and financial reporting purposes on
an accrual basis. For tax reporting purposes, our fiscal year is the calendar
year. For financial reporting purposes, our fiscal year ends on June 30.
We will furnish or make
available to record holders of common units, within 120 days after the close of
each fiscal year, an annual report containing audited financial statements and
a report on those financial statements by our independent registered public
accounting firm. Except for our fourth quarter, we will also furnish or make
available summary financial information within 90 days after the close of each
quarter.
We will furnish each
record holder of a unit with information reasonably required for tax reporting
purposes within 90 days after the close of each calendar year. This information
is expected to be furnished in summary form so that some complex calculations
normally required of partners can be avoided. Our ability to furnish this
summary information to unitholders will depend on the cooperation of
unitholders in supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and state tax
liability and filing his federal and state income tax returns, regardless of
whether he supplies us with information.
Registration Rights
Under our partnership
agreement, we have agreed to register for resale under the Securities Act of
1933 and applicable state securities laws any common units, subordinated units
or other partnership securities proposed to be sold by our general partner or
any of its affiliates or their assignees if an exemption from the registration
requirements is not otherwise available. These registration rights continue for
two years following any withdrawal or removal of K-Sea General Partner L.P. as
our general partner. We are obligated to pay all expenses incidental to the
registration, excluding underwriting discounts and commissions.
42
CASH DISTRIBUTION
POLICY
Distributions of
Available Cash
References in this section to “we,” “us” and “our”
mean K-Sea Transportation Partners L.P.
General.
Within
approximately 45 days after the end of each quarter, we will distribute all of
our available cash to unitholders of record on the applicable record date.
Definition of Available
Cash.
Available cash is defined in our
partnership agreement and generally means, for any quarter ending prior to
liquidation:
·
the
sum of
·
all
cash and cash equivalents of K-Sea Transportation Partners L.P. and its
subsidiaries on hand at the end of that quarter; and
·
all
additional cash and cash equivalents of K-Sea Transportation Partners L.P. and
its subsidiaries on hand on the date of determination of available cash for
that quarter resulting from working capital borrowings made after the end of
that quarter;
·
less
the amount of cash reserves that is necessary or appropriate in the reasonable
discretion of the general partner to
·
provide
for the proper conduct of the business of K-Sea Transportation Partners L.P.
and its subsidiaries (including reserves for future capital expenditures and
for future credit needs of K-Sea Transportation Partners L.P. and its
subsidiaries) after that quarter;
·
comply
with applicable law or any debt instrument or other agreement or obligation to
which K-Sea Transportation Partners L.P. or any of its subsidiaries is a party
or its assets are subject; and
·
provide
funds for minimum quarterly distributions and cumulative common unit arrearages
for any one or more of the next four quarters;
provided
, however, that the
general partner may not establish cash reserves for distributions to the
subordinated units unless the general partner has determined that, in its
judgment, the establishment of reserves will not prevent K-Sea Transportation
Partners L.P. from distributing the minimum quarterly distribution on all
common units and any cumulative common unit arrearages thereon for the next
four quarters; and
provided, further
,
that disbursements made by K-Sea Transportation Partners L.P. or any of its
subsidiaries or cash reserves established, increased or reduced after the end
of that quarter but on or before the date of determination of available cash
for that quarter shall be deemed to have been made, established, increased or
reduced, for purposes of determining available cash, within that quarter if our
general partner so determines.
Minimum Quarterly
Distribution.
Common units are entitled to
receive distributions from operating surplus of $0.50 per quarter, or $2.00 on
an annualized basis, before any distributions are paid on our subordinated
units. There is no guarantee that we will pay the minimum quarterly distribution
on the common units in any quarter, and we will be prohibited from making any
distributions to unitholders if it would cause a default or an event of default
under our credit agreement.
Operating Surplus
and Capital Surplus
General.
All
cash distributed to unitholders will be characterized either as “operating
surplus” or “capital surplus.” We distribute available cash from operating
surplus differently than available cash from capital surplus.
43
Definition of Operating
Surplus.
Operating surplus is defined in our
partnership agreement and for any period it generally means:
·
our
cash balance of $1.1 million at the closing of our initial public offering;
plus
·
$5.0
million (as described below); plus
·
all
of our cash receipts since the closing of our initial public offering,
excluding cash from borrowings that are not working capital borrowings and
excluding sales of equity and debt securities and sales or other dispositions
of assets outside the ordinary course of business; plus
·
working
capital borrowings made after the end of a quarter but before the date of
determination of operating surplus for the quarter; less
·
all
of our operating expenditures since the closing of our initial public offering,
including estimated maintenance capital expenditures and the repayment of
working capital borrowings, but not the repayment of other borrowings; less
·
the
amount of cash reserves that our general partner deems necessary or advisable
to provide funds for future operating expenditures and estimated maintenance
capital expenditures.
As reflected above, our definition of operating
surplus includes $5.0 million in addition to our cash balance of $1.1 million
at the closing of our initial public offering, cash receipts from our
operations and cash from working capital borrowings. This amount does not
reflect actual cash on hand at closing that is available for distribution to
our unitholders. Rather, it is a provision that will enable us, if we choose,
to distribute as operating surplus up to $5.0 million of cash we receive in the
future from non-operating sources, such as asset sales, issuances of securities
and long-term borrowings, that would otherwise be distributed as capital
surplus. While we do not anticipate that we will make any distributions from
capital surplus in the near term, we may determine that the sale or disposition
of an asset or business owned or acquired by us may be beneficial to our
unitholders. If we distribute to you the proceeds from the sale of one of our
businesses, such a distribution would be characterized as a distribution from
capital surplus. Any distributions of capital surplus would trigger certain
adjustment provisions in our partnership agreement as described below. Please
read “—Distributions From Capital Surplus” below and “—Adjustment to the
Minimum Quarterly Distribution and Target Distribution Levels” below.
Operating surplus is reduced by the amount of our
maintenance capital expenditures, but not our expansion capital expenditures.
For our purposes, maintenance capital expenditures are those capital
expenditures required to maintain, over the long term, the operating capacity
of our capital assets, and expansion capital expenditures are those capital
expenditures that increase, over the long term, the operating capacity of our
capital assets. Examples of maintenance capital expenditures include capital
expenditures associated with drydocking a vessel, retrofitting an existing
vessel or acquiring a new vessel to the extent such expenditures maintain the
operating capacity of our fleet. If, however, capital expenditures associated
with retrofitting an existing vessel or acquiring a new vessel increase the
operating capacity of our fleet over the long term, whether through increasing
our aggregate barrel-carrying capacity, improving the operational performance
of a vessel or otherwise, those capital expenditures would be classified as
expansion capital expenditures. Because maintenance capital expenditures can be
very large and irregular, the amount of actual maintenance capital expenditures
may differ substantially from period to period, which would cause similar
fluctuations in the amount of operating surplus, adjusted operating surplus and
available cash for distribution to our unitholders if we subtracted actual
maintenance capital expenditures from operating surplus.
To eliminate the effect on operating surplus of
fluctuations in actual maintenance capital expenditures, our partnership
agreement requires that an estimate of the average quarterly maintenance
capital expenditures necessary to maintain the operating capacity of our
capital assets over the long-term
44
be subtracted from
operating surplus each quarter as opposed to the actual amounts spent. The
determination of the estimate will be made by the board of directors of the
general partner of our general partner in any manner it determines is
reasonable in its sole discretion. The conflicts committee of the board of
directors of the general partner of our general partner must concur with this
determination. The estimate will be made at least annually and whenever an
event occurs that is likely to result in a material adjustment to the amount of
our maintenance capital expenditures over the long-term, such as a major
acquisition or new governmental regulations. For purposes of calculating
operating surplus, any adjustment to this estimate will be prospective only.
The use of
estimated maintenance capital expenditures in calculating operating surplus
will have the following effects:
·
it
will reduce the risk that maintenance capital expenditures in any one quarter
will be large enough to render operating surplus insufficient to pay the
minimum quarterly distribution on all the units;
·
it
will reduce the need for us to borrow under our working capital facility to pay
distributions;
·
prior
to the time we begin incurring material capital expenditures related to
retrofitting or replacing single-hull tank vessels that must be phased out by January 1,
2015 under OPA 90, it will be more difficult for us to raise our distribution
above the minimum quarterly distribution and pay incentive distributions to our
general partner; and
·
it
will reduce the likelihood that a large capital expenditure in a period will
prevent the general partner’s affiliates from being able to convert some or all
of their subordinated units into common units.
Definition of Capital
Surplus.
Capital surplus is defined in our
partnership agreement and it generally will be generated only by:
·
borrowings
other than working capital borrowings;
·
sales
of debt and equity securities; and
·
sales
or other disposition of assets for cash, other than inventory, accounts
receivable and other current assets sold in the ordinary course of business or
as part of normal retirements or replacements of assets.
Characterization of Cash
Distributions.
We will treat all available cash
distributed as coming from operating surplus until the sum of all available
cash distributed since we began operations equals the operating surplus as of
the most recent date of determination of available cash. We will treat any
amount distributed in excess of operating surplus, regardless of its source, as
capital surplus.
Subordination
Period
General.
During
the subordination period, which is defined below and in our partnership
agreement, the common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.50 per quarter, plus any arrearages in the payment
of the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating surplus may be made
on the subordinated units. The purpose of the subordinated units is to increase
the likelihood that during the subordination period there will be available
cash to be distributed on the common units.
45
Definition of
Subordination Period.
The subordination period
will extend until the first day of any quarter beginning after December 31,
2008 that each of the following tests are met:
·
distributions
of available cash from operating surplus on each of the outstanding common
units and subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping four-quarter
periods immediately preceding that date;
·
the
“adjusted operating surplus” (as described below) generated during each of the
three consecutive, non-overlapping four quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units during those periods
on a fully diluted basis and the related distribution on the 2% general partner
interest during those periods; and
·
there
are no arrearages in payment of the minimum quarterly distribution on the
common units.
Early Conversion of
Subordinated Units.
Before the end of the
subordination period, 50% of the subordinated units, or up to 2,082,500
subordinated units, may convert into common units on a one-for-one basis
immediately after the distribution of available cash to partners in respect of
any quarter ending on or after:
·
December 31,
2006 with respect to 25% of the subordinated units; and
·
December 31,
2007 with respect to 25% of the subordinated units.
Twenty-five percent
of the subordinated units (or 1,041,250 subordinated units) converted into
common units after the distribution in respect of the quarter ended December 31,
2006. The early conversion of an additional 25% of our subordinated units will
occur after the distribution in respect
of the quarter ended December 31, 2007 if each of the following three
tests is met:
·
distributions
of available cash from operating surplus on each of the outstanding common
units and the subordinated units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping four-quarter
periods immediately preceding that date;
·
the
adjusted operating surplus generated during each of the three consecutive
non-overlapping four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a fully
diluted basis and the related distribution on the 2% general partner interest
during those periods; and
·
there
are no arrearages in payment of the minimum quarterly distribution on the
common units.
The second early conversion of the subordinated units
may not occur until at least one year following the first early conversion of
the subordinated units.
Definition of Adjusted
Operating Surplus.
Adjusted operating surplus is
defined in our partnership agreement and for any period it generally means:
·
operating
surplus generated with respect to that period; less
·
any
net increase in working capital borrowings with respect to that period; less
·
any
net reduction in cash reserves for operating expenditures with respect to that
period not relating to an operating expenditure made with respect to that
period; plus
·
any
net decrease in working capital borrowings with respect to that period; plus
·
any
net increase in cash reserves for operating expenditures with respect to that
period required by any debt instrument for the repayment of principal, interest
or premium.
46
Adjusted operating surplus is intended to reflect the
cash generated from operations during a particular period and therefore
excludes net increases in working capital borrowings and net drawdowns of
reserves of cash generated in prior periods.
Effect of Expiration of
the Subordination Period.
Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by our general partner and
its affiliates are not voted in favor of such removal:
·
the
subordination period will end and each subordinated unit will immediately
convert into one common unit;
·
any
existing arrearages in payment of the minimum quarterly distribution on the
common units will be extinguished; and
·
our general partner will
have the right to convert its general partner interest and its incentive
distribution rights into common units or to receive cash in exchange for those
interests.
Distributions of
Available Cash From Operating Surplus During the Subordination Period
We will make
distributions of available cash from operating surplus for any quarter during
the subordination period in the following manner:
·
first
, 98% to the common unitholders, pro rata, and 2% to
our general partner, until we distribute for each outstanding common unit an
amount equal to the minimum quarterly distribution for that quarter;
·
second
, 98% to the common unitholders, pro rata, and 2% to
our general partner, until we distribute for each outstanding common unit an
amount equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination period;
·
third
, 98% to the subordinated unitholders, pro rata, and 2%
to our general partner, until we distribute for each subordinated unit an
amount equal to the minimum quarterly distribution for that quarter; and
·
thereafter
,
in the manner described in “—Incentive Distribution Rights” below.
Distributions of
Available Cash From Operating Surplus After the Subordination Period
We will make
distributions of available cash from operating surplus for any quarter after
the subordination period in the following manner:
·
first
, 98% to all unitholders, pro rata, and 2% to our
general partner until we distribute for each outstanding unit an amount equal
to the minimum quarterly distribution for that quarter; and
·
thereafter
,
in the manner described in “—Incentive Distribution Rights” below.
Incentive
Distribution Rights
Incentive distribution rights represent the right to
receive an increasing percentage of quarterly distributions of available cash
from operating surplus after the minimum quarterly distribution and the target
distribution levels have been achieved. Our general partner currently holds the
incentive distribution rights, but may transfer these rights separately from
its general partner interest, subject to restrictions in the partnership
agreement.
47
If for any quarter:
·
we
have distributed available cash from operating surplus to the common and
subordinated unitholders in an amount equal to the minimum quarterly
distribution; and
·
we
have distributed available cash from operating surplus on outstanding common
units in an amount necessary to eliminate any cumulative arrearages in payment
of the minimum quarterly distribution;
then, we will
distribute any additional available cash from operating surplus for that
quarter among the unitholders and our general partner in the following manner:
·
first
, 98% to all unitholders, pro rata, and 2% to our
general partner, until each unitholder receives a total of $0.55 per unit for
that quarter (the “first target distribution”);
·
second
, 85% to all unitholders, pro rata, and 15% to our
general partner, until each unitholder receives a total of $0.625 per unit for
that quarter (the “second target distribution”);
·
third
, 75% to all unitholders, pro rata, and 25% to our
general partner, until each unitholder receives a total of $0.75 per unit for
that quarter (the “third target distribution”); and
·
thereafter
, 50% to all unitholders, pro rata, and 50% to our
general partner.
In each case, the amount
of the target distribution set forth above is exclusive of any distributions to
common unitholders to eliminate any cumulative arrearages in payment of the
minimum quarterly distribution. The percentage interests set forth above for
our general partner assume that our general partner has made any capital
contributions necessary to maintain its 2% general partner and has not
transferred the incentive distribution rights.
Percentage
Allocations of Available Cash From Operating Surplus
The
following table illustrates the percentage allocations of the additional
available cash from operating surplus among the unitholders, our general
partner up to the various target distribution levels. The amounts set forth
under “Marginal Percentage Interest in Distributions” are the percentage
interests of our unitholders and our general partner in any available cash from
operating surplus we distribute up to and including the corresponding amount in
the column “Total Quarterly Distribution Target Amount,” until available cash
from operating surplus we distribute reaches the next target distribution
level, if any. The percentage interests shown for the unitholders and our
general partner for the minimum quarterly distribution are also applicable to
quarterly distribution amounts that are less than the minimum quarterly
distribution. The percentage interests shown for our general partner include
its 2% general partner interest and assume the general partner has not
transferred the incentive distribution rights.
|
|
|
Total Quarterly Distribution
|
|
Marginal Percentage Interest in
Distributions
|
|
|
|
|
Target Amount
|
|
Unitholders
|
|
General Partner
|
|
|
Minimum Quarterly
Distribution
|
|
$0.50
|
|
|
98
|
%
|
|
|
2
|
%
|
|
|
First Target
Distribution
|
|
up to $0.55
|
|
|
98
|
%
|
|
|
2
|
%
|
|
|
Second Target
Distribution
|
|
above $0.55 up to $0.625
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
Third Target
Distribution
|
|
above $0.625 up to $0.75
|
|
|
75
|
%
|
|
|
25
|
%
|
|
|
Thereafter
|
|
above $0.75
|
|
|
50
|
%
|
|
|
50
|
%
|
|
48
Distributions From
Capital Surplus
How Distributions from
Capital Surplus Will Be Made.
We will make
distributions of available cash from capital surplus, if any, in the following
manner:
·
first
, 98% to all unitholders, pro rata, and 2% to our
general partner, until we distribute for each common unit that was issued in
the initial public offering, an amount of available cash from capital surplus
equal to the initial public offering price;
·
second
, 98% to the common unitholders, pro rata, and 2% to
our general partner, until we distribute for each common unit, an amount of
available cash from capital surplus equal to any unpaid arrearages in payment
of the minimum quarterly distribution on the common units; and
·
thereafter
, we will make all distributions of available cash
from capital surplus as if they were from operating surplus.
Effect
of a Distribution from Capital Surplus.
The
partnership agreement treats a distribution of capital surplus as the repayment
of the initial unit price from the initial public offering, which is a return
of capital. The initial public offering price less any distributions of capital
surplus per unit is referred to as the “unrecovered initial unit price.” Each
time a distribution of capital surplus is made, the minimum quarterly
distribution and the target distribution levels will be reduced in the same
proportion as the corresponding reduction in the unrecovered initial unit
price. Because distributions of capital surplus will reduce the minimum
quarterly distribution, after any of these distributions are made, it may be
easier for our general partner to receive incentive distributions and for the
subordinated units to convert into common units. However, any distribution of
capital surplus before the unrecovered initial unit price is reduced to zero
cannot be applied to the payment of the minimum quarterly distribution or any
arrearages.
Once we distribute capital
surplus on a unit in an amount equal to the initial unit price, we will reduce
the minimum quarterly distribution and the target distribution levels to zero.
We will then make all future distributions from operating surplus, with 50%
being paid to the holders of units and 50% to our general partner. The
percentage interests shown for our general partner include its 2% general
partner interest and assume the general partner has not transferred the
incentive distribution rights.
Adjustment to the
Minimum Quarterly Distribution and Target Distribution Levels
In addition to
adjusting the minimum quarterly distribution and target distribution levels to
reflect a distribution of capital surplus, if we combine our units into fewer
units or subdivide our units into a greater number of units we will proportionately
adjust:
·
the
minimum quarterly distribution;
·
the
target distribution levels;
·
the
unrecovered initial unit price;
·
the
number of common units issuable during the subordination period without a
unitholder vote; and
·
the
number of common units into which a subordinated unit is convertible.
For example, if a two-for-one split of the common
units should occur, the minimum quarterly distribution, the target distribution
levels and the unrecovered initial unit price would each be reduced to 50% of its
initial level, the number of common units issuable during the subordination
period without a unitholder vote would double and each subordinated unit would
be convertible into two common units. We will not make any adjustment by reason
of the issuance of additional units for cash or property.
49
In addition, if
legislation is enacted or if existing law is modified or interpreted by a
governmental taxing authority so that we become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels for each quarter by multiplying each distribution level by
a fraction, the numerator of which is available cash for that quarter and the
denominator of which is the sum of available cash for that quarter plus the
general partner’s estimate of our aggregate liability for such income taxes
payable by reason of such legislation or interpretation. To the extent that the
actual tax liability differs from the estimated tax liability for any quarter,
the difference will be accounted for in subsequent quarters.
Distributions of
Cash Upon Liquidation
General.
If
we dissolve in accordance with our partnership agreement, we will sell or
otherwise dispose of our assets in a process called a liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We
will distribute any remaining proceeds to the unitholders and our general
partner, in accordance with their capital account balances, as adjusted to
reflect any gain or loss upon the sale or other disposition of our assets in
liquidation.
The allocations of gain
and loss upon liquidation are intended, to the extent possible, to entitle the
holders of outstanding common units to a preference over the holders of
outstanding subordinated units upon our liquidation, to the extent required to
permit common unitholders to receive their unrecovered initial unit price plus
the minimum quarterly distribution for the quarter during which liquidation
occurs plus any unpaid arrearages in payment of the minimum quarterly
distribution on the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully recover all of
these amounts, even though there may be cash available for distribution to the
holders of subordinated units. Any further net gain recognized upon liquidation
will be allocated in a manner that takes into account the incentive
distribution rights of our general partner.
Manner of Adjustments for
Gain.
The manner of the adjustment for gain is
set forth in the partnership agreement. If our liquidation occurs before the
end of the subordination period, we will allocate any gain to the partners in
the following manner:
·
first
, to our general partner and the holders of units who
have negative balances in their capital accounts to the extent of and in
proportion to those negative balances;
·
second
,
98% to the common unitholders, pro rata, and 2% to our general partner, until
the capital account for each common unit is equal to the sum of:
(1)
the unrecovered initial
unit price;
(2)
the amount of the
minimum quarterly distribution for the quarter during which our liquidation
occurs; and
(3)
any
unpaid arrearages in payment of the minimum quarterly distribution;
·
third
,
98% to the subordinated unitholders, pro rata, and 2% to our general partner,
until the capital account for each subordinated unit is equal to the sum of:
(1)
the unrecovered initial
unit price; and
(2)
the amount of the
minimum quarterly distribution for the quarter during which our liquidation
occurs;
·
fourth
, 98% to all unitholders, pro rata, and 2% to our
general partner, until we allocate under this paragraph an amount per unit
equal to:
(1)
the sum of the excess of
the first target distribution per unit over the minimum quarterly distribution
per unit for each quarter of our existence; less
50
(2)
the
cumulative amount per unit of any distributions of available cash from
operating surplus in excess of the minimum quarterly distribution per unit that
we distributed 98% to the unitholders, pro rata, and 2% to our general partner
for each quarter of our existence;
·
fifth
, 85% to all unitholders, pro rata, and 15% to our
general partner, until we allocate under this paragraph an amount per unit
equal to:
(1)
the
sum of the excess of the second target distribution per unit over the first
target distribution per unit for each quarter of our existence; less
(2)
the
cumulative amount per unit of any distributions of available cash from
operating surplus in excess of the first target distribution per unit that we
distributed 85% to the unitholders, pro rata, and 15% to our general partner
for each quarter of our existence;
·
sixth
, 75% to all unitholders, pro rata, and 25% to our
general partner, until we allocate under this paragraph an amount per unit
equal to:
(1)
the
sum of the excess of the third target distribution per unit over the second
target distribution per unit for each quarter of our existence; less
(2)
the
cumulative amount per unit of any distributions of available cash from
operating surplus in excess of the second target distribution per unit that we
distributed 75% to the unitholders, pro rata, and 25% to our general partner
for each quarter of our existence;
·
thereafter
, 50% to all unitholders, pro rata, and 50% to our
general partner.
The percentage interests
set forth above for our general partner include its 2% general partner interest
and assume the general partner has not transferred the incentive distribution
rights.
If the liquidation occurs
after the end of the subordination period, the distinction between common units
and subordinated units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will no longer be
applicable.
Manner of Adjustments for
Losses.
Upon our liquidation, we will generally
allocate any loss to our general partner and the unitholders in the following
manner:
·
first
, 98% to holders of subordinated units in proportion to
the positive balances in their capital accounts and 2% to our general partner,
until the capital accounts of the subordinated unitholders have been reduced to
zero;
·
second
, 98% to the holders of common units in proportion to
the positive balances in their capital accounts and 2% to our general partner,
until the capital accounts of the common unitholders have been reduced to zero;
and
·
thereafter
, 100% to our general partner.
If the liquidation occurs
after the end of the subordination period, the distinction between common units
and subordinated units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments to Capital
Accounts.
We will make adjustments to capital
accounts upon the issuance of additional units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and our general partner in the same manner
as we allocate gain or loss upon liquidation. In the event that we make
positive adjustments to the capital accounts upon the issuance of additional
units, we will allocate any later negative adjustments to the capital accounts
resulting from the issuance of additional units or upon our liquidation in a
manner which results, to the extent possible, in our general partner’s capital
account balances equaling the amount which they would have been if no earlier
positive adjustments to the capital accounts had been made.
51
MATERIAL TAX
CONSEQUENCES
This section is a summary of the material tax
consequences that may be relevant to prospective unitholders who are individual
citizens or residents of the United States and, unless otherwise noted in the
following discussion, is the opinion of Baker Botts L.L.P., counsel to our
general partner and us, insofar as it relates to matters of United States federal
income tax law and legal conclusions with respect to those matters. This
section is based upon current provisions of the Internal Revenue Code, existing
and proposed regulations, and current administrative rulings and court
decisions, all of which are subject to change. Later changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to “us” or “we” are references to K-Sea Transportation Partners
L.P. and K-Sea Operating Partnership L.P.
The following discussion does not comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts (IRAs), real estate investment trusts (REITs) employee
benefit plans, or mutual funds. Accordingly, we urge each prospective
unitholder to consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to him of the
ownership or disposition of common units.
All statements as to matters of law and legal
conclusions, but not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Baker Botts L.L.P., and are based on the
accuracy of the representations made by us.
The IRS has not provided any ruling regarding any
matter affecting us or prospective unitholders. Instead, we will rely on
opinions of Baker Botts L.L.P. Unlike a ruling, an opinion of counsel
represents only that counsel’s best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made here may not be
sustained by a court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for the common units and the
prices at which the common units trade. In addition, the costs of any contest
with the IRS, principally legal, accounting and related fees, will result in a
reduction in cash available for distribution to our unitholders and our general
partner and thus will be borne indirectly by our unitholders and our general
partner. Furthermore, the tax treatment of us, or of an investment in us, may
be significantly modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be retroactively applied.
For the reasons
described below, Baker Botts L.L.P. has not rendered an opinion with respect to
the following specific federal income tax issues:
·
the
treatment of a unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read “—Tax Consequences of Unit
Ownership—Treatment of Short Sales” below);
·
whether
our monthly convention for allocating taxable income and losses is permitted by
existing Treasury Regulations (please read “—Disposition of Common Units—Allocations
between Transferors and Transferees” below); and
·
whether our method for
depreciating Section 743 adjustments is sustainable (please read “—Tax
Consequences of Unit Ownership—Section 754 Election” and “Uniformity of
Units” below).
Partnership Status
A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income, gain, loss and
deduction of the
52
partnership in computing
his federal income tax liability, regardless of whether cash distributions are
made to him by the partnership. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed is in excess of the
partner’s adjusted basis in his partnership interest.
The IRS has not
made any determination as to our status for federal income tax purposes or
whether our operations generate “qualifying income” under Section 7704 of
the Internal Revenue Code. Instead, we will rely on the opinion of Baker Botts
L.L.P. that, based upon the Internal Revenue Code and its regulations, the
operating partnership will be disregarded as an entity separate from us for
federal income tax purposes so long as the operating partnership and its
general partner (which is a limited liability company) do not elect to be
treated as a corporation and we will be treated as a partnership so long as:
·
we
do not elect to be treated as a corporation; and
·
for
each taxable year, more than 90% of our gross income is “qualifying income”
within the meaning of Section 7704(d) of the Internal Revenue Code.
Qualifying income includes certain income and gains
derived from the transportation and processing of crude oil, natural gas and
products thereof. Other types of qualifying income include interest other than
from a financial business, dividends, gains from the sale of real property and
gains from the sale or other disposition of assets held for the production of
income that otherwise constitutes qualifying income. We estimate that
approximately 93% of our income for 2006 was within one or more categories of
income that are qualifying income in the opinion of Baker Botts L.L.P. The
portion of our income that is qualifying income can change from time to time,
but we believe that our qualifying income has been, and will be, more than 90%
of our gross income for all relevant tax periods.
Section 7704 of the Internal Revenue Code
provides that publicly traded partnerships will, as a general rule, be taxed as
corporations. However, an exception, referred to as the “Qualifying Income
Exception,” exists with respect to publicly traded partnerships of which 90% or
more of the gross income for every taxable year consists of “qualifying income.”
In order to meet the Qualifying Income Exception, we may have to forego earning
certain income or transfer assets to a corporation that will recognize that
income. Such income will then be subject to a corporate level tax but will not
affect whether we meet the Qualifying Income Exception. Although we expect to
conduct our business so as to meet the Qualifying Income Exception, if we fail
to meet the Qualifying Income Exception, other than a failure that is
determined by the IRS to be inadvertent and that is cured within a reasonable
time after discovery, we will be treated as if we had transferred all of our
assets, subject to liabilities, to a newly formed corporation, on the first day
of the year in which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This deemed contribution
and liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxed as a corporation in any taxable year,
either as a result of a failure to meet the Qualifying Income Exception or
otherwise, our items of income, gain, loss and deduction would be reflected
only on our tax return rather than being passed through to the unitholders, and
our net earnings would be taxed to us at corporate rates. In addition, any
distribution made to a unitholder would be treated as either taxable dividend
income, to the extent of our current or accumulated earnings and profits, or,
in the absence of earnings and profits, a nontaxable return of capital, to the
extent of the unitholder’s tax basis in his common units, or taxable gain,
after the unitholder’s tax basis in his common units is reduced to zero.
Accordingly, taxation as a corporation would result in a material reduction in
a unitholder’s cash flow and after-tax return and thus would likely result in a
substantial reduction of the value of the common units.
53
The discussion below
assumes that we will be treated as a partnership for federal income tax
purposes. Please read the above discussion of the opinion of Baker Botts L.L.P.
that we will be treated as a partnership for federal income tax purposes.
Limited Partner
Status
Unitholders who
have become limited partners of K-Sea Transportation Partners L.P. will be
treated as partners of K-Sea Transportation Partners L.P. for federal income
tax purposes. Also,
·
assignees
who are awaiting admission as limited partners; and
·
unitholders
whose common units are held in street name or by a nominee and who have the
right to direct the nominee in the exercise of all substantive rights attendant
to the ownership of their common units will be treated as partners of K-Sea
Transportation Partners L.P. for federal income tax purposes.
A beneficial owner of common units whose common 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 those common units for federal
income tax purposes. Please read “—Tax Consequences of Unit Ownership—Treatment
of Short Sales” below.
Income, gain, deductions
or losses would not appear to be reportable by a unitholder who is not a
partner for federal income tax purposes, and any cash distributions received by
a unitholder who is not a partner for federal income tax purposes would
therefore appear to be fully taxable as ordinary income. These holders are
urged to consult their own tax advisors with respect to their status as
partners in K-Sea Transportation Partners L.P. for federal income tax purposes.
Tax Consequences of
Unit Ownership
Flow-through
of Taxable Income.
We
will not pay any federal income tax. Instead, each unitholder will be required
to report on his income tax return his share of our income, gains, losses and
deductions without regard to whether corresponding cash distributions are
received by him. Consequently, we may allocate income to a unitholder even if
he has not received a cash distribution. Each unitholder will be required to
include in income his allocable share of our income, gains, losses and
deductions for our taxable year or years ending with or within his taxable year.
Please read “—Tax Treatment of Operations—Taxable Year and Accounting Method”
below.
Treatment
of Distributions.
Distributions
by us to a unitholder generally will not be taxable to the unitholder for
federal income tax purposes to the extent of his tax basis in his common units
immediately before the distribution. Our cash distributions in excess of a
unitholder’s tax basis in his common units generally will be considered to be
gain from the sale or exchange of the common units, taxable in accordance with
the rules described under “—Disposition of Common Units” below. Any
reduction in a unitholder’s share of our liabilities for which no partner,
including our general partner, bears the economic risk of loss, known as “nonrecourse
liabilities,” will be treated as a distribution of cash to that unitholder. To
the extent our distributions cause a unitholder’s “at risk” amount to be less
than zero at the end of any taxable year, he must recapture any losses deducted
in previous years. Please read “—Limitations on Deductibility of Losses” below.
A decrease in a unitholder’s percentage interest in us
because of our issuance of additional common units will decrease his share of
our nonrecourse liabilities and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
common units, if the distribution reduces the unitholder’s share of our “unrealized
receivables,” including depreciation recapture, and/or substantially
appreciated “inventory items,” both as defined in Section 751 of the
Internal Revenue Code, and collectively,
54
“Section 751 Assets.”
To that extent, he will be treated as having been distributed his proportionate
share of the Section 751 Assets and having exchanged those 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, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the unitholder’s tax
basis for the share of Section 751 Assets deemed relinquished in the
exchange.
Basis
of Common Units.
A
unitholder’s initial tax basis for his common units will be the amount he paid
for the common units plus his share of our nonrecourse liabilities. That basis
will be increased by his share of our income and by any increases in his share
of our nonrecourse liabilities. That basis will be decreased, but not below
zero, by distributions from us, by the unitholder’s share of our losses, by any
decreases in his share of our nonrecourse liabilities and by his share of our
expenditures that are not deductible in computing taxable income and are not
required to be capitalized. A unitholder will have no share of our debt that is
recourse to our general partner, but will have a share, generally based on his
share of profits, of our nonrecourse liabilities. Please read “—Disposition of
Common Units—Recognition of Gain or Loss” below.
Limitations
on Deductibility of Losses.
The deduction by a unitholder of his share of our
losses will be limited to the tax basis in his common units and, in addition,
in the case of an individual unitholder or a corporate unitholder, if more than
50% of the value of the corporate unitholder’s stock is owned directly or
indirectly by five or fewer individuals or some tax-exempt organizations, the
unitholder’s deduction for his share of our losses is limited to the amount for
which the unitholder is considered to be “at risk” with respect to our
activities if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable as a deduction in a later year to the
extent that his tax basis or at risk amount, whichever is the limiting factor,
is subsequently increased. Upon the taxable disposition of a unit, any gain
recognized by a unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended
by the basis limitation. Any excess loss above that gain and that was
previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent
of the tax basis of his common units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities, reduced by any amount
of money he borrows to acquire or hold his common units, if the lender of those
borrowed funds owns an interest in us, is related to the unitholder or can look
only to the common units for repayment. A unitholder’s at risk amount will
increase or decrease as the tax basis of the unitholder’s common units
increases or decreases, other than tax basis increases or decreases attributable
to increases or decreases in his share of our nonrecourse liabilities.
The passive loss limitations generally provide that
individuals, estates, trusts and some closely-held corporations and personal
service corporations can deduct losses from passive activities, which are
generally corporate or partnership activities in which the taxpayer does not
materially participate, only to the extent of the taxpayer’s income from those
passive activities. The passive loss limitations are applied separately with
respect to each publicly traded partnership. Consequently, any passive losses
we generate will only be available to offset our passive income generated in
the future and will not be available to offset income from other passive
activities or investments, including our investments or a unitholder’s
investments in other publicly traded partnerships, or a unitholder’s salary or
active business income. Passive losses that are not deductible because they
exceed a unitholder’s share of income we generate may be deducted in full when
he disposes of his entire investment in us in a fully taxable transaction with
an unrelated party. The passive activity loss rules are applied after
other applicable limitations on deductions, including the at risk rules and
the basis limitation.
55
A unitholder’s share of our net earnings may be offset
by any suspended passive losses, but it may not be offset by any other current
or carryover losses from other passive activities, including those attributable
to other publicly traded partnerships.
Limitations on Interest
Deductions.
The
deductibility of a non-corporate taxpayer’s “investment interest expense” is
generally limited to the amount of that taxpayer’s “net investment income.”
Investment interest expense includes:
·
interest
on indebtedness properly allocable to property held for investment;
·
our
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. Net investment income includes
gross income from property held for investment and amounts treated as portfolio
income under the passive loss rules, less deductible expenses, 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. The IRS has indicated that the net passive income earned
by a publicly traded partnership will be treated as investment income to its
unitholders. In addition, the unitholder’s share of our portfolio income will
be treated as investment income.
Entity-Level
Collections.
If
we are required or elect under applicable law to pay any federal, state, local
or foreign income tax on behalf of any unitholder or our general partner or any
former unitholder, we are authorized to pay those taxes from our funds. That
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as
a distribution to all current unitholders. We are authorized to amend the
partnership agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of common units and to adjust later
distributions, so that after giving effect to these distributions, the priority
and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual unitholder in which event the unitholder would be required to
file a claim in order to obtain a credit or refund.
Allocation
of Income, Gain, Loss and Deduction.
In general, if we have a net
profit, our items of income, gain, loss and deduction will be allocated among
our general partner and the unitholders in accordance with their percentage
interests in us. At any time that distributions are made to the common units in
excess of distributions to the subordinated units, or incentive distributions
are made to our general partner, gross income will be allocated to the
recipients to the extent of these distributions. Gross income may also be
allocated to holders of subordinated units after the close of the subordination
period to the extent necessary to give them economic rights at liquidation
identical to the rights of common units. If we have a net loss for the entire
year, that loss will be allocated first to the general partner and the
unitholders in accordance with their percentage interests in us to the extent
of their positive capital accounts and, second, to our general partner.
For tax purposes, each time we issue units we are
required to adjust the “book” basis of all assets held by us immediately prior
to the issuance of the new units to their fair market values at the time the
new units are issued. We are further required to adjust this book basis for
each asset in proportion to tax depreciation or amortization we later claim
with respect to the asset. Section 704(c) principles set forth in
Treasury regulations require that subsequent allocations of depreciation, gain,
loss and similar items with respect to the asset take into account, among other
things, the difference between the “book” and tax basis of the asset. In this
context, we use the term ‘book” as that term is used in Treasury regulations
relating to
56
partnership allocations
for tax purposes. The “book” value of our property for this purpose may not be
the same as the book value of our property for financial reporting purposes.
For example, at the time of an offering by us of units
pursuant to this prospectus, a substantial portion of our assets may be
depreciable property with a “book” basis in excess of its tax basis. In that
event, Section 704(c) principles generally will require that
depreciation with respect to each such property be allocated disproportionately
to purchasers of common units in that offering and away from our general
partner and unitholders who acquired their units prior to the offering. To the
extent these disproportionate allocations do not produce a result to purchasers
of common units in the offering that is similar to that which would be the case
if all of our assets had a tax basis equal to their “book” basis on the date
the offering closes, purchasers of common units in the offering will be
allocated the additional “remedial” tax deductions needed to produce that
result as to any asset with respect to which we elect the “remedial method” of
taking into account the difference between the “book” and tax basis of the
asset. Upon a later issuance of units by us, similar adjustments may be made
for the benefit of purchasers of units in the later offering, reducing the net
amount of our deductions allocable to the purchaser of units in the earlier
offering.
Items of recapture income will be allocated to the
extent possible to the unitholder who was allocated the deduction giving rise
to the treatment of that gain as recapture income in order to minimize the
recognition of ordinary income by unitholders that did not receive the benefit
of such deduction.
Although we do not expect that our operations will
result in the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will be allocated in
an amount and manner to eliminate the negative balance as quickly as possible.
An allocation of
items of our income, gain, loss or deduction, other than an allocation required
under Section 704(c) principles, will generally be given effect for
federal income tax purposes in determining a partner’s share of an item of
income, gain, loss or deduction only if the allocation has substantial economic
effect. In any other case, a partner’s share of an item will be determined on
the basis of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
·
his
relative contributions to us
·
the
interest of all the partners in profits and losses;
·
the
interest of all the partners in cash flow; and
·
the
rights of all the partners to distributions of capital upon liquidation.
Baker Botts L.L.P. is of the opinion that, with the
exception of the issues described in “—Tax Consequences of Unit Ownership—Section 754
Election,”—“Uniformity of Units” and “—Disposition of Common Units—Allocations
Between Transferors and Transferees,” the allocations under our partnership
agreement will be given effect for federal income tax purposes in determining a
partner’s share of an item of income, gain, loss or deduction.
57
Treatment of Short Sales.
A unitholder whose common units are
loaned to a “short seller” to cover a short sale of common units may be
considered as having disposed of those common units. If so, he would no longer
be treated for tax purposes as a partner for those common units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
·
any
of our income, gain, loss or deduction with respect to those common units would
not be reportable by the unitholder;
·
any
cash distributions received by the unitholder as to those common units would be
fully taxable; and all of these distributions would appear to be ordinary
income.
Baker Botts L.L.P. has not rendered an opinion
regarding the treatment of a unitholder where common units are loaned to a
short seller to cover a short sale of common units; therefore, unitholders
desiring to assure their status as partners and avoid the risk of gain
recognition from a loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their
common units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. Please
also read “—Disposition of Common Units—Recognition of Gain or Loss” below.
Alternative
Minimum Tax.
Each
unitholder will be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the alternative
minimum tax. The current minimum tax rate for noncorporate taxpayers is 26% on
the first $175,000 of alternative minimum taxable income in excess of the
exemption amount and 28% on any additional alternative minimum taxable income.
Prospective unitholders are urged to consult with their tax advisors as to the
impact of an investment in common units on their liability for the alternative
minimum tax.
Tax
Rates.
In
general, the highest federal income tax rate for individuals is currently 35%
and the maximum federal income tax rate for net capital gains of an individual
is currently 15% if the asset disposed of was held for more than 12 months
at the time of disposition.
Section 754
Election.
We
made the election permitted by Section 754 of the Internal Revenue Code.
That election is irrevocable without the consent of the IRS. The election
generally permits us to adjust a common unit purchaser’s tax basis in our assets
(“inside basis’) under Section 743(b) of the Internal Revenue Code to
reflect his purchase price. This election does not apply to a person who
purchases common units directly from us, but it will apply to a purchaser of
outstanding units from another unitholder. The Section 743(b) adjustment
belongs to the purchaser and not to other unitholders. For purposes of this
discussion, a unitholder’s inside basis in our assets will be considered to
have two components: (1) his share
of our tax basis in our assets (“common basis”) and (2) his Section 743(b) adjustment
to that basis.
The timing of deductions attributable to Section 743(b) adjustments
to our common basis will depend upon a number of factors, including the nature
of the assets to which the adjustment is allocable, the extent to which the
adjustment offsets any Section 704(c) type gain or loss with respect
to an asset and certain elections we make as to the manner in which we apply Section 704(c) principles
with respect to an asset to which the adjustment is applicable. Please read “—Allocation
of Income, Gain, Loss and Deduction” above. The timing of these deductions may
affect the uniformity of our units. Please read “—Uniformity of Units” below.
A Section 754 election is advantageous if the
transferee’s tax basis in his common units is higher than the common units’
share of the aggregate tax basis of our assets immediately prior to the
transfer. In that case, as a result of the election, the transferee would have,
among other items, a greater amount of depreciation deductions and his share of
any gain or loss on a sale of our assets would be less. Conversely, a Section 754
election is disadvantageous if the transferee’s tax basis in his common units
is lower than those common units’ share of the aggregate tax basis of our
assets immediately prior to the transfer.
58
Our Section 754 election will separately apply to
any transferee of a unitholder who purchases outstanding common units from
another unitholder based upon the values and bases of our assets at the time of
the transfer to the transferee. Depending upon the relationship of the value
and the basis of our assets at the time of such a transfer, our Section 754
election may favorably or unfavorably affect the price that a potential
transferee will be willing to pay for the units. Thus, the fair market value of
the units may be affected either favorably or unfavorably by the election. A
basis adjustment is required regardless of whether a Section 754 election
is made in the case of a transfer of an interest in us if we have a substantial
built-in loss immediately after the transfer or if we distribute property and
have a substantial basis reduction. Generally, a built-in loss or basis
reduction is substantial if it exceeds $250,000.
The calculations involved in the Section 754
election are complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment
among our assets must be made in accordance with the Internal Revenue Code. The
IRS could seek to reallocate some or all of any Section 743(b) adjustment
allocated by us to our tangible assets to goodwill instead. Goodwill, as an
intangible asset, is generally either nonamortizable or amortizable over a longer
period of time or under a less accelerated method than our tangible assets. We
cannot assure prospective unitholders that the determinations we make will not
be successfully challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If permission is granted, a
subsequent purchaser of common units may be allocated more income than he would
have been allocated had the election not been revoked.
In order to preserve our
ability to determine the tax attributes of a common unit (which includes the
effect of the Section 743(b) adjustments) from its date of purchase
and the amount that is paid therefor, our general partner may (as it is
permitted to do under our partnership agreement) take positions in filing our
tax returns that reduce for some unitholders the depreciation or amortization
deductions to which they would otherwise be entitled. For example, we may not
be able to depreciate Section 743(b) adjustments in respect of
certain property in the same manner as we depreciate those adjustments in
respect of recovery property. In addition, in order to preserve our ability to
determine the tax attributes of a common unit from its date of purchase and the
amount that is paid therefor, we may report a slower amortization of Section 743(b) adjustments
for some unitholders than that to which they would otherwise be entitled. Other
fact patterns could have the same effect. Counsel is unable to opine as to
validity of any matter that is discussed above in this paragraph because there
is no clear applicable authority. A unitholder’s basis in a common unit is
reduced by his or her share of our deductions (whether or not such deductions
were claimed on an individual income tax return) so that any position that we
take that understates deductions will overstate the unitholder’s basis in his
or her common units and may cause the unitholder to understate gain or
overstate loss on any sale of such common units. Please read “Uniformity of
Units” below.
Tax Treatment of
Operations
Taxable
Year and Accounting Method.
We use the year ending December 31 as our
taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending within or with
his taxable year. In addition, a unitholder who has a taxable year different
from our taxable year and who disposes of all of his common units following the
close of our taxable year but before the close of his taxable year must include
his share of our income, gain, loss and deduction in income for his taxable
year, with the result that he will be required to include in income for his
taxable year his share of more than one year of our income, gain, loss and
deduction. Please read “—Disposition of Common Units—Allocations Between
Transferors and Transferees” below.
59
Tax
Basis, Depreciation and Amortization.
The tax basis of our assets, as
adjusted with respect to each purchaser on account of the Section 754
election, is used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. Please
read “—Tax Consequences of Unit Ownership—Section 754 Election” above and “—Allocation
of Income, Gain, Loss and Deduction” above.
To the extent allowable, we may elect to use the
depreciation and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are placed in service. Part or
all of the goodwill deemed to arise upon an offering of units by the
partnership may not produce any amortization deductions to a purchaser of units
in the offering if our general partner determines not to adopt the remedial
method of allocation with respect to any difference between the tax basis and
the fair market value of such property immediately prior to that offering or
any previous offering. Please read “—Uniformity of Units” below. Property we
subsequently acquire or construct may be depreciated using accelerated methods
permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale,
foreclosure, or otherwise, all or a portion of any gain, determined by
reference to the amount of depreciation previously deducted and the nature of
the property, may be subject to the recapture rules and taxed as ordinary
income rather than capital gain. Similarly, a unitholder who has taken cost
recovery or depreciation deductions with respect to property we own will likely
be required to recapture some or all of those deductions as ordinary income
upon a sale of his interest in us. Please read “—Tax Consequences of Unit
Ownership—Allocation of Income, Gain, Loss and Deduction” above and “—Disposition
of Common Units—Recognition of Gain or Loss” below.
The costs that we incur in selling our units must be
capitalized and cannot be deducted currently, ratably or upon or termination.
Valuation and Tax Basis of
Our Properties.
The
federal income tax consequences of the ownership and disposition of common
units will depend in part on our estimates of the relative fair market values,
and the tax bases, of our assets. Although we may from time to time consult
with professional appraisers regarding valuation matters, we will make many of
the relative fair market value estimates ourselves. These estimates of value
and determination of basis are subject to challenge and will not be binding on
the IRS or the courts. If the estimates of fair market value or basis are later
found to be incorrect, the character and amount of items of income, gain, loss
or deduction previously reported by unitholders might change, and unitholders
might be required to adjust their tax liability for prior years and incur
interest and penalties with respect to those adjustments.
Disposition of
Common Units
Recognition
of Gain or Loss.
Gain
or loss will be recognized on a sale of common units equal to the difference
between the unitholder’s amount realized and the unitholder’s tax basis for the
common units sold. A unitholder’s amount realized will be measured by the sum
of the cash or the fair market value of other property received by him plus his
share of our nonrecourse liabilities. Because the amount realized includes a
unitholder’s share of our nonrecourse liabilities, the gain recognized on the
sale of common units could result in a tax liability in excess of any cash
received from the sale.
Prior distributions from us in excess of cumulative
net taxable income for a common unit that decreased a unitholder’s tax basis in
that common unit will, in effect, become taxable income if the common unit is
sold at a price greater than the unitholder’s tax basis in that common unit,
even if the price received is less than his original cost.
Except as noted below, gain or loss recognized by a
unitholder, other than a “dealer” in common units, on the sale or exchange of a
unit held for more than one year will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of common units held
more than 12 months
60
will generally be taxed at
a maximum rate of 15%. However, a portion of this gain or loss will be
separately computed and taxed as ordinary income or loss under Section 751
of the Internal Revenue Code to the extent attributable to assets giving rise
to “unrealized receivables” or to “inventory items” we own. The term “unrealized
receivables” includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of common units. Net capital losses may
offset capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires
interests in a partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those interests.
Upon a sale or other disposition of less than all of those interests, a portion
of that tax basis must be allocated to the interests sold using an “equitable
apportionment” method. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can identify common units
transferred with an ascertainable holding period to elect to use the actual
holding period of the common units transferred. Thus, according to the ruling,
a common unitholder will be unable to select high or low basis common units to
sell as would be the case with corporate stock, but, according to the
regulations, may designate specific common units sold for purposes of
determining the holding period of common units transferred. A unitholder
electing to use the actual holding period of common units transferred must
consistently use that identification method for all subsequent sales or
exchanges of common units. A unitholder considering the purchase of additional
common units or a sale of common units purchased in separate transactions is
urged to consult his tax advisor as to the possible consequences of this ruling
and application of the regulations.
Specific provisions
of the Internal Revenue Code affect the taxation of some financial products and
securities, including partnership interests, by treating a taxpayer as having
sold an “appreciated” partnership interest, one in which gain would be
recognized if it were sold, assigned or terminated at its fair market value, if
the taxpayer or related persons enter(s) into:
·
a
short sale;
·
an
offsetting notional principal contract; or
·
a
futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a
short sale, an offsetting notional principal contract or a futures or forward
contract with respect to the partnership interest, the taxpayer will be treated
as having sold that position if the taxpayer or a related person then acquires
the partnership interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat a taxpayer that
enters into transactions or positions that have substantially the same effect
as the preceding transactions as having constructively sold the financial
position.
Allocations
Between Transferors and Transferees.
In general, our taxable income and
losses will be determined annually, will be prorated on a monthly basis and
will be subsequently apportioned among the unitholders in proportion to the
number of common units owned by each of them as of the opening of the
applicable exchange on the first business day of the month which we refer to in
this discussion as the “Allocation Date.”. However, gain or loss realized on a
sale or other disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and deduction realized
after the date of transfer.
61
The use of this method may not be permitted under
existing Treasury Regulations as there is no controlling authority on this
issue. Accordingly, Baker Botts L.L.P. is unable to opine on the validity of
this method of allocating income and deductions between unitholders. If this
method is not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholder’s interest, our taxable income or
losses might be reallocated among the unitholders. We are authorized to revise
our method of allocation between unitholders, as well as unitholders whose
interests vary during a taxable year, to conform to a method permitted under
future Treasury Regulations.
A unitholder who owns common units at any time during
a quarter and who disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our income, gain, loss
and deductions attributable to that quarter but will not be entitled to receive
that cash distribution.
Transfer
Notification Requirements.
A unitholder who acquires units generally is required
to notify us in writing of that acquisition within 30 days after the purchase,
unless a broker or nominee will satisfy such requirement. A unitholder who
sells any of his units, other than through a broker, generally is required to
notify us in writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). We are required to
notify the IRS of any such transfers and to furnish specified information to
the transferor and transferee. Failure to notify us of a transfer of units may,
in some cases, lead to the imposition of penalties.
Constructive
Termination.
We
will be considered to have been terminated for tax purposes if there is a sale
or exchange of 50% or more of the total interests in our capital and profits
within a 12-month period. A constructive termination results in the
closing of our taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year different from our taxable year, the closing of our
taxable year may result in more than 12 months of our taxable income or
loss being includable in his taxable income for the year of termination. Please
read “—Tax Treatment of Operations—Taxable Year and Accounting Method” above.
We would be required to make new tax elections after a termination, including a
new election under Section 754 of the Internal Revenue Code, and a termination
would result in a deferral of our deductions for depreciation. A termination
could also result in penalties if we were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject us to, any tax legislation enacted before the
termination.
Uniformity
of Units.
Because
we cannot match transferors and transferees of units, we must maintain
uniformity of the economic and tax characteristics of the units to a purchaser
of these units. In the absence of uniformity, we may be unable to completely
comply with a number of federal income tax requirements, both statutory and
regulatory. Any non-uniformity could have a negative impact on the value of the
units. The timing of deductions attributable to Section 743(b) adjustments
to the common basis of our assets with respect to persons purchasing units
after this offering may affect the uniformity of our units. Please read “—Tax
Consequences of Unit Ownership—Section 754 election” above. For example,
we did not elect the remedial allocation method under Section 704(c) principles
with respect to certain of our intangible assets in certain prior offerings of
our units (Please read “—Tax Consequences of Unit Ownership—Allocation of
Income, Gain, Loss and Deduction” above and “—Tax Consequences of Unit
Ownership—Section 754 Election” above, and it is possible that we own, or
will acquire, certain depreciable assets that are not subject to the typical rules governing
depreciation (under Section 168 of the Internal Revenue Code) or
amortization (under Section 197 of the Internal Revenue Code) of assets. Any
or all of these factors could cause the timing of a purchaser’s deductions to
differ, depending on when the unit he purchased was issued.
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Our partnership agreement
permits our general partner to take positions in filing our tax returns that
preserve the uniformity of our units even under circumstances like those
described above. These positions may include reducing for some unitholders the
depreciation, amortization or loss deductions to which they would otherwise be
entitled or reporting a slower amortization of Section 743(b) adjustments
for some unitholders than that to which they would otherwise be entitled. Our
counsel, Baker Botts L.L.P., is unable to opine as to validity of such filing
positions. A unitholder’s basis in units is reduced by his or her share of our
deductions (whether or not such deductions were claimed on an individual income
tax return) so that any position that we take that understates deductions will
overstate the unitholder’s basis in his or her common units, which may cause
the unitholder to understate gain or overstate loss on any sale of such units. Please
read “—Disposition of Common Units—Recognition of Gain or Loss” above and”—Tax
Consequences of Unit Ownership—Section 754 Election” above. The IRS may
challenge one or more of any positions we take to preserve the uniformity of
units. If such a challenge were sustained, the uniformity of units might be
affected, and, under some circumstances, the gain from the sale of units might
be increased without the benefit of additional deductions.
Tax-Exempt
Organizations and Non-United States Investors
Ownership of common units by employee benefit plans,
other tax-exempt organizations, nonresident aliens, foreign corporations, and
other foreign persons raises issues unique to those investors and, as described
below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt
from federal income tax, including individual retirement accounts and other
retirement plans, are subject to federal income tax on unrelated business
taxable income. Virtually all of our income allocated to a unitholder that is a
tax-exempt organization will be unrelated business taxable income and will be
taxable to it.
Nonresident aliens and foreign corporations, trusts or
estates that own common units will be considered to be engaged in business in
the United States because of the ownership of common units. As a consequence,
they will be required to file federal tax returns to report their share of our
income, gain, loss or deduction and pay federal income tax at regular rates on
their share of our net earnings or gain. Moreover, under rules applicable
to publicly traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to foreign
unitholders. Each foreign unitholder must obtain a taxpayer identification
number from the IRS and submit that number to our transfer agent on a Form W-8 BEN
or applicable substitute form in order to obtain credit for these withholding
taxes. A change in applicable law may require us to change these procedures.
In addition, because a foreign corporation that owns
common units will be treated as engaged in a United States trade or business,
that corporation may be subject to the United States branch profits tax at a
rate of 30%, in addition to regular federal income tax, on its share of our
income and gain, as adjusted for changes in the foreign corporation’s “U.S. net
equity,” which is effectively connected with the conduct of a United States
trade or business. That tax may be reduced or eliminated by an income tax
treaty between the United States and the country in which the foreign corporate
unitholder is a “qualified resident.” In addition, this type of unitholder is
subject to special information reporting requirements under Section 6038C
of the Internal Revenue Code.
Under a ruling of the IRS,
a foreign unitholder who sells or otherwise disposes of a unit will be subject
to federal income tax on gain realized on the sale or disposition of that unit
to the extent that this gain is effectively connected with a United States
trade or business of the foreign unitholder. Apart from the ruling, a foreign
unitholder will not be taxed or subject to withholding upon the sale or
disposition of a unit if he has owned less than 5% in value of the common units
during the five-year period ending on the date of the disposition and if the
common units are regularly traded on an established securities market at the
time of the sale or disposition.
63
Administrative
Matters
Information
Returns and Audit Procedures.
We intend to furnish to each
unitholder, within 90 days after the close of each taxable year, specific
tax information, including a Schedule K-1, which describes his share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have been mentioned
earlier, to determine his share of income, gain, loss and deduction. We cannot
assure prospective unitholders that those positions will yield a result that
conforms to the requirements of the Internal Revenue Code, Treasury Regulations
or administrative interpretations of the IRS. Neither we nor Baker Botts L.L.P.
can assure prospective unitholders that the IRS will not successfully contend
in court that those positions are impermissible. Any challenge by the IRS could
negatively affect the value of the common units.
The IRS may audit our federal income tax information
returns. Adjustments resulting from an IRS audit may require each unitholder to
adjust a prior year’s tax liability, and possibly may result in an audit of his
return. Any audit of a unitholder’s return could result in adjustments not
related to our returns as well as those related to our returns.
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 and deduction is determined in a
partnership proceeding rather than in separate proceedings with the partners.
The Internal Revenue Code requires that one partner be designated as the “Tax
Matters Partner” for these purposes. The partnership agreement names K-Sea
General Partner L.P. as our Tax Matters Partner.
The Tax Matters Partner will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax Matters Partner
can extend the statute of limitations for assessment of tax deficiencies
against unitholders for items in our returns. The Tax Matters Partner may bind
a unitholder with less than a 1% profits interest in us to a settlement with
the IRS unless that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review, by which all the unitholders are bound, of a final
partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, judicial review may be sought by any unitholder having at
least a 1% interest in profits or by any group of unitholders having in the
aggregate at least a 5% interest in profits. However, only one action for
judicial review will go forward, and each unitholder with an interest in the outcome
may participate.
A unitholder must file a statement with the IRS
identifying the treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return. Intentional or
negligent disregard of this consistency requirement may subject a unitholder to
substantial penalties.
Nominee Reporting.
Persons who hold an interest in us
as a nominee for another person are required to furnish to us:
·
the
name, address and taxpayer identification number of the beneficial owner 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 common units held, acquired or transferred for the
beneficial owner; and
64
·
specific
information including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as well as the
amount of net proceeds from sales.
Brokers and financial institutions are required to
furnish additional information, including whether they are United States
persons and specific information on common 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 by the Internal Revenue Code for failure
to report that information to us. The nominee is required to supply the
beneficial owner of the common units with the information furnished to us.
Accuracy-related
Penalties.
An
additional tax equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes, including negligence
or disregard of rules or regulations, substantial understatements of
income tax and substantial valuation misstatements, is imposed by the Internal
Revenue Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause for that portion
and that the taxpayer acted in good faith regarding that portion.
For individuals, a
substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds:
·
the
greater of 10% of the tax required to be shown on the return for the taxable
year; or
·
$5,000.
The amount of any understatement subject to penalty generally is reduced if any
portion is attributable to a position adopted on the return:
·
for
which there is, or was, “substantial authority”; or
·
as
to which there is a reasonable basis and the pertinent facts of that position
are disclosed on the return.
More stringent rules apply to “tax shelters,” but
we believe we are not a “tax shelter.”
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of an “understatement”
of income for which no “substantial authority” exists, we must disclose the
pertinent facts on our return. In addition, we will make a reasonable effort to
furnish sufficient information for unitholders to make adequate disclosure on
their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the
value of any property, or the adjusted basis of any property, claimed on a tax
return is 200% or more of the amount determined to be the correct amount of the
valuation or adjusted basis. No penalty is imposed unless the portion of the
underpayment attributable to a substantial valuation misstatement exceeds
$5,000 ($10,000 for most corporations). If the valuation claimed on a return is
400% or more than the correct valuation, the penalty imposed increases to 40%.
Reportable Transactions.
If we were to engage in a “reportable transaction,”
we (and possibly our unitholders and others) would be required to make a
detailed disclosure of the transaction to the IRS. A transaction may be a
reportable transaction based upon any of several factors, including the fact
that it is a type of tax avoidance transaction publicly identified by the IRS
as a “listed transaction” or that it produces certain kinds of losses in excess
of $2 million in any single year, or $4 million in any combination of tax years.
Our participation in a reportable transaction could increase the likelihood
that our federal income tax information return (and possibly the tax returns of
our unitholders) would be audited by the IRS. Please read “—Information Returns
and Audit Procedures” above. Moreover, if we were to participate in a
reportable transaction with a significant purpose to avoid or evade tax, or in
any listed transaction, our unitholders may be subject to the following
provisions of the American Jobs Creation Act of 2004:
·
accuracy-related
penalties with a broader scope, significantly narrower exceptions, and
potentially greater amounts than described above at “—Accuracy-related
Penalties”;
65
·
for
those persons otherwise entitled to deduct interest on federal tax deficiencies,
nondeductibility of interest on any resulting tax liability, and
·
in
the case of a listed transaction, an extended statute of limitations.
We do not expect to engage
in any “reportable transactions.”
State, Local,
Foreign and Other Tax Considerations
In addition to federal income taxes, a unitholder will
be subject to other taxes, including state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or intangible taxes that
may be imposed by the various jurisdictions in which we conduct business or own
property or in which the unitholder is a resident. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We own property and
conduct business in Alaska, New York, New Jersey, Pennsylvania, Washington and
Virginia. We currently conduct certain operations in Puerto Rico, Canada and
Venezuela in a manner that we believe does not subject unitholders to direct
liability to pay tax or file returns in those countries, but there can be no
assurance that we will conduct our foreign operations in this manner in the
future. We may also own property or conduct business in other jurisdictions in
the future. Although a unitholder may not be required to file a return and
pay taxes in some jurisdictions because the unitholder’s income from that
jurisdiction falls below the filing and payment requirement, a unitholder will
be required to file income tax returns and to pay income taxes in many of these
jurisdictions in which we conduct business or own property and may be subject
to penalties for failure to comply with those requirements. In some
jurisdictions, tax losses may not produce a tax benefit in the year incurred
and may not be available to offset income in subsequent taxable years. Some of
the jurisdictions may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to a unitholder who is not a resident of
the jurisdiction. Withholding, the amount of which may be greater or less than
a particular unitholder’s income tax liability to the jurisdiction, generally
does not relieve a nonresident unitholder from the obligation to file an income
tax return. We may, but are not required to, treat amounts withheld as if
distributed to unitholders for purposes of determining the amounts distributed
by us. Please read “—Tax Consequences of Unit Ownership—Entity-Level
Collections” above. Based on current law and our estimate of our future
operations, we anticipate that any amounts required to be withheld will not be
material.
It is the responsibility of each unitholder to
investigate the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each prospective
unitholder is urged to consult, and depend upon, his tax counsel or other
advisor with regard to those matters. Further, it is the responsibility of each
unitholder to file all state, local and foreign, as well as United States
federal tax returns, that may be required of him. Baker Botts L.L.P. has not
rendered an opinion on the state, local or foreign tax consequences of an
investment in us.
Tax Consequences of Ownership of Debt Securities.
A description of the material federal income tax
consequences of the acquisition, ownership and disposition of debt securities
will be set forth in the prospectus supplement relating to the offering of debt
securities.
66
INVESTMENT IN US BY
EMPLOYEE BENEFIT PLANS
An equity
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 Internal Revenue Code. For these purposes,
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 IRAs established or maintained by
an employer or employee organization. Among other things, consideration should
be given to:
·
whether
the investment is prudent under Section 404(a)(1)(B) of ERISA;
·
whether
in making the investment, the employee benefit plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of ERISA; and
·
whether
the investment will result in recognition of unrelated business taxable income
by the employee benefit plan and, if so, the potential after-tax investment
return.
The person with investment discretion with respect to
the assets of an employee benefit plan is a fiduciary under applicable law and
should determine whether an investment in us is authorized by the appropriate
governing instruments and is a proper investment for the employee benefit plan.
Section 406 of ERISA and Section 4975 of the
Internal Revenue Code prohibit employee benefit plans, and IRAs that are not
considered part of an employee benefit plan, from engaging in specified
transactions involving “plan assets” with parties that are “parties in interest”
under ERISA or “disqualified persons” under the Internal Revenue Code with
respect to the employee benefit plan.
In addition to considering whether the purchase of
common units is a prohibited transaction, a fiduciary of an employee benefit
plan should consider whether the plan will, by investing in us, be deemed to
own an undivided interest in our assets, with the result that our general
partner also would be a fiduciary of the plan and our operations would be
subject to the regulatory restrictions of ERISA, including its prohibited
transaction rules, as well as the prohibited transaction rules of the
Internal Revenue Code.
The Department of
Labor regulations provide guidance with respect to whether the assets of an
entity in which employee benefit plans acquire equity interests would be deemed
“plan assets” under some circumstances. Under these regulations, an entity’s
assets would not be considered to be “plan assets” if, among other things:
·
the
equity interests acquired by employee benefit plans are publicly offered
securities; i.e., the equity interests are held by 100 or more investors
independent of the issuer and of each other, freely transferable and registered
under certain provisions of the federal securities laws;
·
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
·
there
is no significant investment in the entity by benefit plan investors, which
means that less than 25% of the value of each class of equity interest, disregarding some interests held by our
general partner, its affiliates, and any other persons who have discretionary
authority or control with respect to our assets or who provide investment
advice for a fee with respect to such assets, is held by employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to ERISA,
including governmental plans.
67
Following an equity investment in us by an employee
benefit plan, our assets should not be considered “plan assets” under these
regulations because it is expected that the common units will constitute
publicly offered securities, within the meaning of the first bullet point
above.
Plan fiduciaries
contemplating a purchase of common units should consult with their own counsel
regarding the consequences under ERISA and the Internal Revenue Code in light
of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
68
PLAN OF
DISTRIBUTION
We may sell the securities
being offered hereby directly to purchasers, through agents, through
underwriters or through dealers.
We, or agents designated
by us, may directly solicit, from time to time, offers to purchase the
securities. Any such agent may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933. We will name the agents involved in the
offer or sale of the securities and describe any commissions payable by us to
these agents in the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, these agents will be acting on a best efforts basis for
the period of their appointment. The agents may be entitled under agreements they
may enter into with us to indemnification by us against specified civil
liabilities, including liabilities under the Securities Act of 1933. The agents
may also be our customers or may engage in transactions with or perform
services for us in the ordinary course of business.
If we use any underwriters
in the sale of the securities in respect of which this prospectus is delivered,
we will enter into an underwriting agreement with those underwriters at the
time of sale to them. We will set forth the names of the underwriters and the
terms of the transaction in a prospectus supplement, which will be used by the
underwriters to make resales of the securities in respect of which this
prospectus is delivered to the public. We may indemnify the underwriters under
the underwriting agreement against specified liabilities, including liabilities
under the Securities Act. The underwriters may also be our customers or may
engage in transactions with or perform services for us in the ordinary course
of business.
If we use a dealer in the
sale of the securities in respect of which this prospectus is delivered, we
will sell those securities to the dealer, as principal. The dealer may then
resell those securities to the public at varying prices to be determined by the
dealer at the time of resale. We may indemnify the dealers against specified
liabilities, including liabilities under the Securities Act. The dealers may
also be our customers or may engage in transactions with, or perform services
for us in the ordinary course of business.
We also may sell common units
and debt securities directly. In this case, no underwriters or agents would be
involved. We may use electronic media, including the Internet, to sell offered
securities directly.
Because the NASD views our
common units as interests in a direct participation program, any offering of
common units under the registration statement of which this prospectus forms a
part will be made in compliance with Rule 2810 of the NASD Conduct Rules.
To the extent required,
this prospectus may be amended or supplemented from time to time to describe a particular
plan of distribution. The place and time of delivery for the securities in
respect of which this prospectus is delivered will be set forth in the
accompanying prospectus supplement.
In connection with
offerings of securities under the registration statement of which this
prospectus forms a part and in compliance with applicable law, underwriters,
brokers or dealers may engage in transactions that stabilize or maintain the
market price of the securities at levels above those that might otherwise
prevail in the open market. Specifically, underwriters, brokers or dealers may
over-allot in connection with offerings, creating a short position in the
securities for their own accounts. For the purpose of covering a syndicate
short position or stabilizing the price of the securities, the underwriters,
brokers or dealers may place bids for the securities or effect purchases of the
securities in the open market. Finally, the underwriters may impose a penalty
whereby selling concessions allowed to syndicate members or other brokers or
dealers for distribution of the securities in offerings may be reclaimed by the
syndicate if the syndicate repurchases previously distributed securities in
transactions to cover short positions, in stabilization transactions or
otherwise. These activities may stabilize, maintain or otherwise affect the
market price of the securities, which may be higher than the price that might
otherwise prevail in the open market, and, if commenced, may be discontinued at
any time.
69
LEGAL MATTERS
The validity of the
securities offered in this prospectus will be passed upon for us by Baker Botts
L.L.P. Baker Botts L.L.P. will also render an opinion on the material federal
income tax considerations regarding the common units. If certain legal matters
in connection with an offering of the securities made by this prospectus and a
related prospectus supplement are passed on by counsel for the underwriters of
such offering, that counsel will be named in the applicable prospectus
supplement related to that offering.
EXPERTS
The consolidated financial statements and management’s
assessment of the effectiveness of internal control over financial reporting
(which is included in Management’s Report on Internal Control over Financial
Reporting) of K-Sea Transportation Partners L.P. incorporated in this prospectus
by reference to the Annual Report on Form 10-K of K-Sea
Transportation Partners L.P. for the year ended June 30, 2006 have been so
incorporated in reliance on the report (which contains an explanatory paragraph
on management's assessment of the effectiveness of internal control over
financial reporting and on the effectiveness of internal control over financial
reporting due to the exclusion of Sea Coast Transportation LLC from the
assessment of internal control over financial reporting as of June 30, 2006
because it was acquired by K-Sea Transportation Partners L.P. in a purchase
business combination during fiscal 2006) of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The audited historical
financial statements of Sea Coast Towing, Inc. included in K-Sea Transportation
Partners L.P.'s Current Report on Form 8-K dated October 7, 2005 have been
incorporated by reference in this prospectus in reliance on the report (which
contains an explanatory paragraph relating to Sea Coast Towing, Inc.'s related
party transactions as described in Note 1, Note 10 and Note 11 to the financial
statements) of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND
MORE INFORMATION
We have filed a registration statement with the SEC
under the Securities Act of 1933 that registers the securities offered by this
prospectus. The registration statement, including the attached exhibits,
contains additional relevant information about us. The rules and
regulations of the SEC allow us to omit some information included in the
registration statement from this prospectus.
In addition, 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 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the SEC at 1-800-732-0330
for further information on the operation of the SEC’s public reference room.
Our SEC filings are available on the SEC’s web site at
http://www.sec.gov
.
We also make available free of charge on our website, at
http://www.k-sea.com
,
all materials that we file electronically with the SEC, including our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, Section 16 reports and amendments
to these reports as soon as reasonably practicable after such materials are
electronically filed with, or furnished to, the SEC. Information contained on
our website or any other website is not incorporated by reference into this
prospectus and does not constitute a part of this prospectus.
70
INCORPORATION BY
REFERENCE
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 other documents filed
separately with the SEC. These other documents contain important information
about us, our financial condition and results of operations. 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.
We are
incorporating by reference into this prospectus the documents listed below and
any subsequent filings we make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 (file no. 001-31920) (excluding information deemed to be
furnished and not filed with the SEC) until all the securities are sold:
·
our annual report on Form 10-K for the fiscal year ended June 30,
2006;
·
our quarterly reports on Form 10-Q for the quarters ended September 30,
2006, December 31, 2006 and March 31, 2007;
·
our
current report on Form 8-K dated October 7, 2005 regarding our acquisition of
Sea Cost Transportation;
·
our current reports on Form 8-K filed on January 5, 2007,
March 29, 2007 and April 30, 2007; and
·
the description of our common units in our registration statement on Form 8-A
(File No. 001-31920) filed pursuant to the Securities Exchange Act
of 1934 on December 4, 2003.
You may obtain any of the documents incorporated by
reference in this prospectus from the SEC through the SEC’s web site at the
address provided above. You also may request a copy of any document
incorporated by reference in this prospectus (including exhibits to those
documents specifically incorporated by reference in this document), at no cost,
by visiting our web site at http:/ /www.k-sea.com, or by writing or calling us
at the following address:
K-Sea Transportation Partners L.P.
One Center Tower Boulevard
New Brunswick, New Jersey 08816
Attention: John J. Nicola
Telephone: (732) 565-3818
Any statement contained in a
document incorporated or considered to be incorporated by reference in this
prospectus shall be considered to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
in any subsequently filed document that is or is considered to be incorporated
by reference modifies or supersedes that statement. Any statement that is
modified or superseded shall not, except as so modified or superseded,
constitute a part of this prospectus.
71
3,000,000 Common Units
Representing Limited Partner Interests
PROSPECTUS SUPPLEMENT
SEPTEMBER , 2007
LEHMAN BROTHERS
CITI
UBS INVESTMENT BANK
WACHOVIA SECURITIES
RBC CAPITAL MARKETS
KEYBANC
CAPITAL MARKETS
RAYMOND
JAMES
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