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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of Registrant as specified in its Charter)
Delaware 75-2287571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ ]
Aggregate market value of the voting Units held by non-affiliates of
the registrant: $319,780,520. This figure is estimated as of March 15, 2000, at
which date the closing price of the Registrant's Units on the New York Stock
Exchange was $24.9375 per Unit and assumes that only the General Partner of the
Registrant (the "General Partner"), officers and directors of the General
Partner and its parent and wholly owned subsidiaries of the General Partner and
its parent were affiliates.
Number of Units of the Registrant outstanding at March 15, 2000: 18,310,000
PART I
Item I. Business
General
Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (the
"Partnership"), is engaged in the refined petroleum products pipeline business
and the terminaling of petroleum products and specialty liquids. Formed in
September 1989 to acquire, own and operate the pipeline system and operations
that had been previously conducted by Kaneb Pipe Line Company, a Delaware
corporation ("KPL" or the "Company"), since 1953, KPL owns a combined 2%
interest as general partner of the Partnership and of Kaneb Pipe Line Operating
Partnership, L.P., a Delaware limited partnership ("KPOP"). The Partnership's
pipeline operations are conducted through KPOP, of which the Partnership is the
sole limited partner and KPL is the sole general partner. The terminaling
business of the Partnership is conducted through Support Terminals Operating
Partnership, L.P. ("STOP"), and its affiliated partnerships and corporate
entities, which operate under the trade names "ST Services" and "StanTrans,"
among others. KPOP and STOP are, collectively with their subsidiaries, referred
to as the "Operating Partnerships." KPL is a wholly-owned subsidiary of Kaneb
Services, Inc., a Delaware corporation ("Kaneb") (NYSE: KAB).
Products Pipeline Business
Introduction
The Partnership's pipeline business consists primarily of the
transportation of refined petroleum products as a common carrier in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
Partnership owns and operates two common carrier pipelines (the "Pipelines")
described below.
East Pipeline
Construction of the East Pipeline commenced in the 1950s with a line
from southern Kansas to Geneva, Nebraska. During the 1960s, the East Pipeline
was extended north to its present terminus at Jamestown, North Dakota. In the
1980's, the 8" line from Geneva, Nebraska to North Platte, Nebraska and the 16"
line from McPherson, Kansas to Geneva, Nebraska were built and the Partnership
acquired a 6" pipeline from Champlin Oil Company, a portion of which originally
ran south from Geneva, Nebraska through Windom, Kansas terminating in
Hutchinson, Kansas. In 1997, the Partnership completed construction of a new 6"
pipeline from Conway, Kansas to Windom, Kansas (approximately 22 miles north of
Hutchinson) that allows the Hutchinson terminal to be supplied directly from
McPherson; a significantly shorter route than was previously used. As a result
of this pipeline becoming operational, a 158 mile segment of the former Champlin
line was shut down, including a terminal located at Superior, Nebraska. The
other end of the line runs northeast approximately 175 miles, crossing the main
pipeline near Osceola, Nebraska, continuing through a terminal at Columbus,
Nebraska, and later interconnecting with the Partnership's Yankton/Milford line
to terminate at Rock Rapids, Iowa. In December 1998, KPOP acquired from Amoco
Oil Company a 175 mile pipeline that runs from Council Bluffs, Iowa to Sioux
Falls, South Dakota and the terminal at Sioux Falls. On December 31, 1998 KPOP,
pursuant to its option, purchased the 203 mile North Platte line for
approximately $5 million at the end of a lease. In January 1999, a connection
was completed to service the Sioux Falls terminal through the main East
Pipeline.
The East Pipeline system also consists of 16 product terminals in
Kansas, Nebraska, Iowa, South Dakota and North Dakota with total storage
capacity of approximately 3.5 million barrels and an additional 22 product tanks
with total storage capacity of approximately 1,006,000 barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump stations in Kansas and 38 booster pump stations throughout the system.
Additionally, the system maintains various office and warehouse facilities, and
an extensive quality control laboratory. KPOP owns the entire 2,090 mile East
Pipeline. KPOP leases office space for its operating headquarters in Wichita,
Kansas.
The East Pipeline transports refined petroleum products, including
propane, received from refineries in southeast Kansas and other connecting
pipelines to its terminals along the system and to receiving pipeline
connections in Kansas. Shippers on the East Pipeline obtain refined petroleum
products from refineries connected to the East Pipeline or through other
pipelines directly connected to the pipeline system. Five connecting pipelines
can deliver propane for shipment through the East Pipeline from gas processing
plants in Texas, New Mexico, Oklahoma and Kansas.
West Pipeline
KPOP acquired the West Pipeline in February 1995, through an asset
purchase from Wyco Pipe Line Company for a purchase price of $27.1 million,
increasing the Partnership's pipeline business in South Dakota and expanding it
into Wyoming and Colorado. The West Pipeline system includes approximately 550
miles of pipeline in Wyoming, Colorado and South Dakota, four truck loading
terminals and numerous pump stations situated along the system. The system's
four product terminals have a total storage capacity of over 1.7 million
barrels.
The West Pipeline originates at Casper, Wyoming and travels east to the
Strouds Station, where it serves as a connecting point with Sinclair's Little
America Refinery and the Seminoe Pipeline that transports product from Billings,
Montana-area refineries. From Strouds, the West Pipeline continues easterly
through its 8" line to Douglas, Wyoming, where a 6" pipeline branches off to
serve the Partnership's Rapid City, South Dakota terminal approximately 190
miles away. The Rapid City terminal has a three bay, bottom-loading truck rack
and storage tank capacity of 256,000 barrels. The 6" pipeline also receives
product from Wyoming Refining's pipeline at a connection located near the
Wyoming/South Dakota border, approximately 30 miles south of Wyoming Refining's
Newcastle, Wyoming Refinery. From Douglas, the Partnership's 8" pipeline
continues southward through a delivery point at the Burlington Northern junction
to the terminal at Cheyenne, Wyoming. The Cheyenne terminal has a two bay,
bottom-loading truck rack, storage tank capacity of 345,000 barrels and serves
as a receiving point for products from the Frontier Oil & Refining Company
refinery at Cheyenne, as well as a product delivery point to Conoco's Cheyenne
Pipeline. From the Cheyenne terminal, the 8" pipeline extends south into
Colorado to the Dupont Terminal located in the Denver metropolitan area. The
Dupont Terminal is the largest terminal on the West Pipeline system, with a six
bay, bottom-loading truck rack and tankage capacity of 692,000 barrels. The 8"
pipeline continues to the Commerce City Station, where the West Pipeline can
receive from and transfer product to the Ultramar Diamond Shamrock and Conoco
refineries and the Phillips Petroleum Terminal. From Commerce City, a 6" line
continues south 90 miles where the system terminates at the Fountain, Colorado
Terminal serving the Colorado Springs area. The Fountain Terminal has a five
bay, bottom-loading truck rack and storage tank capacity of 366,000 barrels.
The West Pipeline system parallels the Partnership's East Pipeline to
the west. The East Pipeline's North Platte line terminates in western Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne, Wyoming Terminal.
Conoco's Cheyenne Pipeline runs from west to east from the Cheyenne Terminal to
near the East Pipeline's North Platte Terminal, although a portion of the line
from Sidney, Nebraska (approximately 100 miles from Cheyenne) to North Platte
has been deactivated. The West Pipeline serves Denver and other eastern Colorado
markets and supplies jet fuel to Ellsworth Air Force Base at Rapid City, South
Dakota, as compared to the East Pipeline's largely agricultural service area.
The West Pipeline has a relatively small number of shippers, who, with a few
exceptions, are also shippers on the Partnership's East Pipeline system.
Other Systems
The Partnership also owns three single-use pipelines, located near
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies
diesel fuel to a railroad fueling facility. The Oregon and Washington lines are
fully automated, however the Wyoming line requires minimal start-up assistance,
which is provided by railroad personnel. For the year ended December 31, 1999,
these three systems combined transported a total of 3.7 million barrels of
diesel fuel, representing an aggregate of $1.5 million in revenues.
Pipelines Products and Activities
The Pipelines' revenues are based upon volumes and distances of product
shipped. The following table reflects the total volume and barrel miles of
refined petroleum products shipped and total operating revenues earned by the
Pipelines for each of the periods indicated:
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Volume (1).......... 85,356 77,965 69,984 73,839 74,965
Barrel miles (2).... 18,440 17,007 16,144 16,735 16,594
Revenues (3)........ $67,607 $63,421 $61,320 $63,441 $60,192
(1) Volumes are expressed in thousands of barrels of refined petroleum
product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of
one barrel of refined petroleum product one mile.
(3) Revenues are expressed in thousands of dollars.
The following table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:
Year Ended December 31,
(Thousands of Barrels)
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Gasoline............ 41,472 37,983 32,237 36,063 37,348
Diesel and fuel oil. 40,435 36,237 33,541 32,934 33,411
Propane............. 3,449 3,745 4,206 4,842 4,146
Other............... - - - - 60
-------- -------- -------- -------- --------
Total.......... 85,356 77,965 69,984 73,839 74,965
======== ======== ======== ======== ========
Diesel and fuel oil are used in farm machinery and equipment,
over-the-road transportation, railroad fueling and residential fuel oil.
Gasoline is primarily used in over-the-road transportation and propane is used
for crop drying, residential heating and to power irrigation equipment. The mix
of refined petroleum products delivered varies seasonally, with gasoline demand
peaking in early summer, diesel fuel demand peaking in late summer and propane
demand higher in the fall. In addition, weather conditions in the areas served
by the East Pipeline affect both the demand for and the mix of the refined
petroleum products delivered through the East Pipeline, although historically
any overall impact on the total volumes shipped has been short-term. Tariffs
charged to shippers for transportation of products do not vary according to the
type of product delivered.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained in a manner
consistent with applicable Federal, state and local laws and regulations,
standards prescribed by the American Petroleum Institute and accepted industry
practice. Further, protective measures are taken and routine preventive
maintenance is performed on the Pipelines, in order to prolong the useful lives
of the Pipelines. Such measures includes cathodic protection to prevent external
corrosion, inhibitors to prevent internal corrosion and periodic inspection of
the Pipelines. Additionally, the Pipelines are patrolled at regular intervals to
identify equipment or activities by third parties that, if left unchecked, could
result in encroachment upon the Pipeline's rights-of-way and possible damage to
the Pipelines.
The Partnership uses a state-of-the-art Supervisory Control and Data
Acquisition remote supervisory control software program to continuously monitor
and control the Pipelines from the Wichita, Kansas headquarters. The system
monitors quantities of refined petroleum products injected in and delivered
through the Pipelines and automatically signals the Wichita headquarters
personnel upon deviations from normal operations that requires attention.
Pipeline Operations
Both the East Pipeline and the West Pipeline are interstate pipelines
and thus subject to Federal regulation by such governmental agencies as the
Federal Energy Regulatory Commission ("FERC"), the Department of Transportation,
and the Environmental Protection Agency. Additionally, the West Pipeline is
subject to state regulation of certain intrastate rates in Colorado and Wyoming
and the East Pipeline is subject to state regulation in Kansas. See
"Regulation."
Except for the three single-use pipelines and certain ethanol
facilities, all of the Partnership's pipeline operations constitute common
carrier operations and are subject to Federal tariff regulation. In May 1998,
KPOP was authorized by the FERC to adopt market-based rates in approximately
one-half of its markets. Also, certain of its intrastate common carrier
operations are subject to state tariff regulation. Common carrier activities are
those under which transportation through the Pipelines is available at published
tariffs filed, in the case of interstate shipments, with the FERC, or in the
case of intrastate shipments in Kansas, Colorado and Wyoming, with the relevant
state authority, to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for transportation.
In general, a shipper on one of the Pipelines delivers products to the
pipeline from refineries or third party pipelines that connect to the Pipelines.
The Pipelines' operations also include 20 truck loading terminals through which
refined petroleum products are delivered to storage tanks and then loaded into
petroleum transport trucks. Five of the 20 terminals also receive propane into
storage tanks and then load it into transport trucks Tariffs for transportation
are charged to shippers based upon transportation from the origination point on
the pipeline to the point of delivery. Such tariffs also include charges for
terminaling and storage of product at the Pipeline's terminals. Pipelines are
generally the lowest cost method for intermediate and long-haul overland
transportation of refined petroleum products.
Each shipper transporting product on a pipeline is required to supply
KPOP with a notice of shipment indicating sources of products and destinations.
All shipments are tested or receive refinery certifications to ensure compliance
with KPOP's specifications. Shippers are generally invoiced by KPOP immediately
upon the product entering one of the Pipelines.
The following table shows the number of tanks owned by KPOP at each
terminal location at December 31, 1999 (except as indicated), the storage
capacity in barrels and truck capacity of each terminal location.
Location of Number Tankage Truck
Terminals of Tanks Capacity Capacity(a)
----------------- -------- --------- -----------
Colorado:
Dupont 18 692,000 6
Fountain 13 366,000 5
Iowa:
LeMars 9 103,000 2
Milford(b) 11 172,000 2
Rock Rapids 12 366,000 2
Kansas:
Concordia(c) 7 79,000 2
Hutchinson 9 162,000 1
Nebraska:
Columbus(d) 12 191,000 2
Geneva 39 678,000 8
Norfolk 16 187,000 4
North Platte 22 198,000 5
Osceola 8 79,000 2
North Dakota:
Jamestown 13 188,000 2
South Dakota:
Aberdeen 12 181,000 2
Mitchell 8 72,000 2
Rapid City 13 256,000 3
Sioux Falls 9 394,000 2
Wolsey 21 149,000 4
Yankton 25 246,000 4
Wyoming:
Cheyenne 15 345,000 2
----- ---------
Totals 292 5,104,000
===== =========
(a) Number of trucks that may be simultaneously loaded.
(b) This terminal is situated on land leased through August 7, 2007 at an
annual rental of $2,400. KPOP has the right to renew the lease upon its
expiration for an additional term of 20 years at the same annual rental
rate.
(c) This terminal is situated on land leased through the year 2060 for a
total rental of $2,000.
(d) Also loads rail tank cars.
The East Pipeline also has intermediate storage facilities consisting
of 12 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas, with aggregate capacities of approximately 472,000 and 534,000 barrels,
respectively. During 1999, approximately 53.3% and 92.2% of the deliveries of
the East Pipeline and the West Pipeline, respectively, were made through their
terminals, and the remainder of the respective deliveries of such lines were
made to other pipelines and customer owned storage tanks.
Storage of product at terminals pending delivery is considered by the
Partnership to be an integral part of the product delivery service of the
Pipelines. Shippers generally store refined petroleum products for less than one
week. Ancillary services, including injection of shipper-furnished and generic
additives, are available at each terminal.
Demand for and Sources of Refined Petroleum Products
The Partnership's pipeline business depends in large part on (i) the
level of demand for refined petroleum products in the markets served by the
Pipelines and (ii) the ability and willingness of refiners and marketers having
access to the Pipelines to supply such demand by deliveries through the
Pipelines.
Most of the refined petroleum products delivered through the East
Pipeline are ultimately used as fuel for railroads or in agricultural
operations, including fuel for farm equipment, irrigation systems, trucks used
for transporting crops and crop drying facilities. Demand for refined petroleum
products for agricultural use, and the relative mix of products required, is
affected by weather conditions in the markets served by the East Pipeline. The
agricultural sector is also affected by government agricultural policies and
crop prices. Although periods of drought suppress agricultural demand for some
refined petroleum products, particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.
While there is some agricultural demand for the refined petroleum
products delivered through the West Pipeline, as well as military jet fuel
volumes, most of the demand is centered in the Denver and Colorado Springs area.
Because demand on the West Pipeline is significantly weighted toward urban and
suburban areas, the product mix on the West Pipeline includes a substantially
higher percentage of gasoline than the product mix on the East Pipeline.
The Pipelines are also dependent upon adequate levels of production of
refined petroleum products by refineries connected to the Pipelines, directly or
through connecting pipelines. The refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. The refineries connected
directly to the East Pipeline obtain crude oil from producing fields located
primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from
other domestic or foreign sources. Refineries in Kansas, Oklahoma and Texas are
connected to the East Pipeline through other pipelines. These refineries obtain
their supplies of crude oil from a variety of sources. The refineries connected
directly to the West Pipeline are located in Casper and Cheyenne, Wyoming and
Denver, Colorado. Refineries in Billings and Laurel, Montana are connected to
the West Pipeline through other pipelines. These refineries obtain their
supplies of crude oil primarily from Rocky Mountain sources. If operations at
any one refinery were discontinued, the Partnership believes (assuming unchanged
demand for refined petroleum products in markets served by the Pipelines) that
the effects thereof would be short-term in nature, and the Partnership's
business would not be materially adversely affected over the long term because
such discontinued production could be replaced by other refineries or by other
sources.
The majority of the refined petroleum product transported through the
East Pipeline in 1999 was produced at three refineries located at McPherson and
El Dorado, Kansas and Ponca City, Oklahoma, and operated by Cooperative Refining
Association ("CRA"), Frontier Refining and Conoco, Inc. respectively. The CRA
and Frontier Refining refineries are connected directly to the East Pipeline.
The McPherson, Kansas refinery operated by CRA, accounted for approximately 31%
of the total amount of product shipped over the East Pipeline in 1999. The East
Pipeline also has direct access by third party pipelines to four other
refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies of products
through connecting pipelines that receive products from pipelines originating on
the Gulf Coast. Five connecting pipelines can deliver propane from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas to the East Pipeline
for shipment.
The majority of the refined petroleum products transported through the
West Pipeline is produced at the Frontier Refinery located at Cheyenne, Wyoming,
the Ultramar Diamond Shamrock and Conoco Refineries located at Denver, Colorado,
and Sinclair's Little America Refinery located at Casper, Wyoming, all of which
are connected directly to the West Pipeline. The West Pipeline also has access
to three Billings, Montana, area refineries through a connecting pipeline.
Principal Customers
KPOP had a total of approximately 47 shippers in 1999. The principal
shippers include four integrated oil companies, three refining companies, two
large farm cooperatives and one railroad. Transportation revenues attributable
to the top 10 shippers of the Pipelines were $42.7 million, $48.3 million and
$43.8 million, which accounted for 63%, 76% and 74% of total revenues shipped
for each of the years 1999, 1998 and 1997, respectively.
Competition and Business Considerations
The East Pipeline's major competitor is an independent, regulated
common carrier pipeline system owned by The Williams Companies, Inc.
("Williams") that operates approximately 100 miles east of and parallel to the
East Pipeline. The Williams system is a substantially more extensive system than
the East Pipeline. Furthermore, Williams and its affiliates have capital and
financial resources that are substantially greater than those of the
Partnership. Competition with Williams is based primarily on transportation
charges, quality of customer service and proximity to end users, although
refined product pricing at either the origin or terminal point on a pipeline may
outweigh transportation costs. Fifteen of the East Pipeline's 16 delivery
terminals are located within 2 to 145 miles of, and in direct competition with
Williams' terminals.
The West Pipeline competes with the truck loading racks of the Cheyenne
and Denver refineries and the Denver terminals of the Chase Terminal Company and
Phillips Petroleum Company. Ultramar Diamond Shamrock terminals in Denver and
Colorado Springs, connected to a Ultramar Diamond Shamrock pipeline from their
Texas Panhandle Refinery, are major competitors to the West Pipeline's Denver
and Fountain Terminals, respectively.
Because pipelines are generally the lowest cost method for intermediate
and long-haul movement of refined petroleum products, the Pipelines' more
significant competitors are common carrier and proprietary pipelines owned and
operated by major integrated and large independent oil companies and other
companies in the areas where the Pipelines deliver products. Competition between
common carrier pipelines is based primarily on transportation charges, quality
of customer service and proximity to end users. The Partnership believes high
capital costs, tariff regulation, environmental considerations and problems in
acquiring rights-of-way make it unlikely that other competing pipeline systems
comparable in size and scope to the Pipelines will be built in the near future,
provided the Pipelines have available capacity to satisfy demand and its tariffs
remain at reasonable levels.
The costs associated with transporting products from a loading terminal
to end users limit the geographic size of the market that can be served
economically by any terminal. Transportation to end users from the loading
terminals of the Partnership is conducted principally by trucking operations of
unrelated third parties. Trucks may competitively deliver products in some of
the areas served by the Pipelines. However, trucking costs render that mode of
transportation not competitive for longer hauls or larger volumes. The
Partnership does not believe that trucks are, or will be, effective competition
to its long-haul volumes over the long term.
Liquids Terminaling
Introduction
The Partnership's Support Terminal Services operation ("ST") is one of
the largest independent petroleum products and specialty liquids terminaling
companies in the United States. For the year ended December 31, 1999, the
Partnership's terminaling business accounted for approximately 57% of the
Partnership's revenues. As of December 31, 1999, ST operated 34 facilities in 19
states and the District of Columbia, with a total storage capacity of
approximately 23.4 million barrels. In addition, in February 1999, ST made its
first significant international acquisition, with the purchase of six terminals
located in the United Kingdom, having a total capacity of approximately 5.4
million barrels. ST and its predecessors have been in the terminaling business
for over 40 years and handle a wide variety of liquids from petroleum products
to specialty chemicals to edible liquids.
ST's terminal facilities provide storage on a fee basis for petroleum
products, specialty chemicals and other liquids. ST's five largest domestic
terminal facilities are located in Piney Point, Maryland; Linden, New Jersey
(50% owned joint venture); Jacksonville, Florida; Texas City, Texas; and,
Philadelphia, Pennsylvania. Excluding the Philadelphia facility, which was
acquired by ST in September 1999 (see: "Description of Largest Terminal
Facilities"), these facilities accounted for approximately 41% of ST's revenues
and 49.9% of its tankage capacity in 1999.
Description of Largest Domestic Terminal Facilities
Piney Point, Maryland. The largest terminal currently owned by ST is
located on approximately 400 acres on the Potomac River. The facility was
acquired as part of the purchase of the liquids terminaling assets of Steuart
Petroleum Company and certain of its affiliates (collectively "Steuart") in
December 1995. The Piney Point terminal has approximately 5.4 million barrels of
storage capacity in 28 tanks and is the closest deep water facility to
Washington, D.C. This terminal competes with other large petroleum terminals in
the East Coast water-borne market extending from New York Harbor to Norfolk,
Virginia. The terminal currently stores petroleum products, consisting primarily
of fuel oils, asphalt and caustic soda solution. The terminal has a dock with a
36-foot draft for tankers and four berths for barges. It also has truck loading
facilities, product blending capabilities and is connected to a pipeline which
supplies residual fuel oil to two power generating stations.
Linden, New Jersey. In October 1998, ST entered into a joint venture
relationship with Northville Industries Corp. ("Northville") to acquire the
management of and a 50% ownership interest in the terminal facility at Linden,
New Jersey that was previously owned by Northville. The 44 acre facility
provides ST with deep-water terminaling capabilities at New York Harbor and
primarily stores petroleum products, including gasoline, jet fuel and fuel oils.
The facility has a total capacity of approximately 3.9 million barrels in 22
tanks, can receive products via ship, barge and pipeline and delivers product by
ship, barge, pipeline and truck. The terminal has two docks (and leases a third)
with draft limits of 35 and 24 feet, respectively.
Jacksonville, Florida. The Jacksonville terminal, also acquired as part
of the Steuart transaction, is located on approximately 86 acres on the St.
John's River and consists of a main terminal and two annexes with combined
storage capacity of approximately 2.1 million barrels in 30 tanks. The terminal
is currently used to store petroleum products including gasoline, No. 2 oil, No.
6 oil, diesel and kerosene. This terminal has a tanker berth with a 38-foot
draft and four barge berths and also offers truck and rail car loading
facilities and facilities to blend residual fuels for ship bunkering.
Texas City, Texas. The Texas City facility is situated on 39 acres of
land leased from the Texas City Terminal Railway Company ("TCTRC") with
long-term renewal options. Located on Galveston Bay near the mouth of the
Houston Ship Channel, approximately sixteen miles from open water, the Texas
City terminal consists of 124 tanks with a total capacity of approximately 2
million barrels. The eastern end of the Texas City site is adjacent to three
deep-water docking facilities, which are also owned by TCTRC. The three
deep-water docks include two 36-foot draft docks and a 40-foot draft dock. The
docking facilities can accommodate any ship or barge capable of navigating the
40-foot draft of the Houston Ship Channel. ST is charged dockage and wharfage
fees on a per vessel and per unit basis, respectively, by TCTRC, which it passes
on to its customers.
The Texas City facility is designed to accommodate a diverse product
mix, including specialty chemicals, such as petrochemicals and has tanks
equipped for the specific storage needs of the various products handled; piping
and pumping equipment for moving the product between the tanks and the
transportation modes; and, an extensive infrastructure of support equipment. ST
receives or delivers the majority of the specialty chemicals that it handles via
ship or barge at Texas City. ST also receives and delivers liquids via rail tank
cars and transport trucks and has direct pipeline connections to refineries in
Texas City.
ST's facility has been designed with engineered structural measures to
minimize the possibility of the occurrence and the level of damage in the event
of a spill or fire. All loading areas, tanks, pipes and pumping areas are
"contained" to collect any spillage and insure that only properly treated water
is discharged from the site.
Philadelphia, Pennsylvania. The Philadelphia facility is situated on
approximately 12 acres on the Schuylkill River near Interstate Highways 76 and
95. The dock at the facility is capable of receiving oceangoing tankers and
barges and is equipped to clean barges for changing the petroleum products they
handle or to prepare the barges to enter a shipyard for maintenance work. In
addition to the capability to receive and deliver products by water, the
terminal can receive product from truck, Sun Pipeline and Colonial Pipeline and
deliver it to trucks and Sun Pipeline. Currently the facilities handle asphalt,
No. 6 fuel oil, heating oil, diesel fuel and gasolines.
Other Terminal Sites. In addition to the five major facilities
described above, ST has 29 other terminal facilities located throughout the
United States, and, as a result of a February 1999 transaction, six facilities
in the United Kingdom. In addition to the Philadelphia facility, a Salisbury,
Maryland terminal was acquired during 1999. During 1999, due to the closure of
the pipeline serving the terminal, ST closed and disposed of all of the assets
except land and buildings at its Farragut Street Terminal in Washington, D.C.
The 29 facilities represented approximately 31.4% of ST's total tankage capacity
and approximately 34.9% of its total revenue for 1999. With the exception of the
facilities in Columbus, Georgia, which handles aviation gasoline and specialty
chemicals; Winona, Minnesota, which handles nitrogen fertilizer solutions;
Savannah, Georgia, which handles chemicals and caustic solutions; and,
Vancouver, Washington, which handles chemicals and bulk fertilizer, these
facilities primarily store petroleum products for a variety of customers.
Overall, these facilities provide ST with diversity geographically and in
products handled and customers served.
The following table outlines ST's terminal locations, capacities, tanks
and primary products handled:
Tankage No. of Primary Products
Facility Capacity Tanks Handled
-------------------------- --------- ------ ----------------------------
Major Terminals:
Piney Point, MD 5,403,000 28 Petroleum
Linden, NJ(a) 3,884,000 22 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Philadelphia, PA 1,044,000 12 Petroleum
Other Terminals:
Montgomery, AL(b) 162,000 7 Petroleum, Jet Fuel
Moundville, AL(b) 310,000 6 Jet Fuel
Tuscon, AZ 181,000 7 Petroleum
Stockton, CA 706,000 32 Petroleum
M Street, DC 133,000 3 Petroleum
Homestead, FL(b) 72,000 2 Jet Fuel
Augusta, GA 110,000 8 Petroleum
Bremen, GA 180,000 8 Petroleum, Jet Fuel
Brunswick, GA 302,000 3 Petroleum, Pulp Liquor
Columbus, GA 180,000 25 Petroleum, Chemicals
Macon, GA(b) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 861,000 19 Petroleum, Chemicals
Blue Island, IL 752,000 19 Petroleum
Chillicothe, IL 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Westwego, LA 858,000 54 Molasses, Fertilizer, Caustic
Salina, KS 98,000 10 Petroleum
Andrews AFB Pipeline, MD(b) 72,000 3 Jet Fuel
Baltimore, MD 821,000 49 Chemicals, Asphalt, Jet Fuel
Salisbury, MD 177,000 14 Petroleum
Winona, MN 229,000 7 Fertilizer
Alamogordo, NM(b) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Petroleum, Jet Fuel
San Antonio, TX 207,000 4 Jet Fuel
Dumfries, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(b) 40,000 2 Jet Fuel
Vancouver, WA 94,000 31 Chemicals, Fertilizer
Milwaukee, WI 308,000 7 Petroleum
Foreign Terminals:
Grays, England 1,945,000 53 Petroleum
Eastham, England 2,185,000 162 Chemicals, Animal Fats
Runcorn, England 146,000 4 Molten sulphur
Glasgow, Scotland 344,000 16 Petroleum
Leith, Scotland 459,000 34 Petroleum
Belfast, Northern Ireland 315,000 38 Petroleum
---------- ---
28,843,000 910
========== ===
(a) The terminal is 50% owned by ST.
(b) Facility also includes pipelines to U.S. government military base
locations.
Customers
The storage and transport of jet fuel for the U.S. Department of
Defense is an important part of ST's business. Eleven of ST's terminal sites are
involved in the terminaling or transport (via pipeline) of jet fuel for the
Department of Defense and seven of the eleven locations have been utilized
solely by the U.S. Government. Two of these locations are presently without
government business. Of the eleven locations, five include pipelines which
deliver jet fuel directly to nearby military bases, while another location
supplies Andrews Air Force Base, Maryland and consists of a barge receiving
dock, an 11.3 mile pipeline, three 24,000 barrel double-bottomed tanks and an
administration building located on the base.
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators,
such as ST, many major energy and chemical companies own extensive terminal
storage facilities. Although such terminals often have the same capabilities as
terminals owned by independent operators, they generally do not provide
terminaling services to third parties. In many instances, major energy and
chemical companies that own storage and terminaling facilities are also
significant customers of independent terminal operators, such as ST. Such
companies typically have strong demand for terminals owned by independent
operators when independent terminals have more cost effective locations near key
transportation links, such as deep-water ports. Major energy and chemical
companies also need independent terminal storage when their owned storage
facilities are inadequate, either because of size constraints, the nature of the
stored material or specialized handling requirements.
Independent terminal owners generally compete on the basis of the
location and versatility of terminals, service and price. A favorably located
terminal will have access to various cost effective transportation modes both to
and from the terminal. Possible transportation modes include waterways,
railroads, roadways and pipelines. Terminals located near deep-water port
facilities are referred to as "deep-water terminals" and terminals without such
facilities are referred to as "inland terminals"; though some inland facilities
are served by barges on navigable rivers.
Terminal versatility is a function of the operator's ability to offer
handling for diverse products with complex handling requirements. The service
function typically provided by the terminal includes, among other things, the
safe storage of the product at specified temperature, moisture and other
conditions, as well as receipt at and delivery from the terminal, all of which
must be in compliance with applicable environmental regulations. A terminal
operator's ability to obtain attractive pricing is often dependent on the
quality, versatility and reputation of the facilities owned by the operator.
Although many products require modest terminal modification, operators with a
greater diversity of terminals with versatile storage capabilities typically
require less modification prior to usage, ultimately making the storage cost to
the customer more attractive.
Several companies offering liquid terminaling facilities have
significantly more capacity than ST. However, much of ST's tankage can be
described as "niche" facilities that are equipped to properly handle "specialty"
liquids or provide facilities or services where management believes they enjoy
an advantage over competitors. Most of the larger operators, including GATX
Terminals Corporation, Williams, and Petroleum Fuel & Terminal Company, have
facilities used primarily for petroleum related products. As a result, many of
ST's terminals compete against other large petroleum products terminals, rather
than specialty liquids facilities. Such specialty or "niche" tankage is less
abundant in the U.S. and "specialty" liquids typically command higher terminal
fees than lower-price bulk terminaling for petroleum products.
Capital Expenditures
Capital expenditures by the Pipelines, excluding acquisitions, were
$4.4 million (including $0.8 million in work-in-process), $5.0 million and $4.5
million for 1999, 1998 and 1997, respectively. During these periods, adequate
capacity existed on the Pipelines to accommodate volume growth and the
expenditures required for environmental and safety improvements were not
material in amount. Capital expenditures, excluding acquisitions, by ST were
$11.0 million, $4.4 million and $6.1 million for 1999, 1998 and 1997,
respectively.
Capital expenditures of the Partnership during 2000 are expected to be
approximately $12 million to $15 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Additional expansion-related capital expenditures will
depend on future opportunities to expand the Partnership's operations. The
General Partner intends to finance future expansion capital expenditures
primarily through Partnership borrowings. Such future expenditures, however,
will depend on many factors beyond the Partnership's control, including, without
limitation, demand for refined petroleum products and terminaling services in
the Partnership's market areas, local, state and Federal governmental
regulations, fuel conservation efforts and the availability of financing on
acceptable terms. No assurance can be given that required capital expenditures
will not exceed anticipated amounts during the year or thereafter or that the
Partnership will have the ability to finance such expenditures through
borrowings or choose to do so.
Regulation
Interstate Regulation. The interstate common carrier pipeline
operations of the Partnership are subject to rate regulation by FERC under the
Interstate Commerce Act. The Interstate Commerce Act provides, among other
things, that to be lawful the rates of common carrier petroleum pipelines must
be "just and reasonable" and not unduly discriminatory. New and changed rates
must be filed with the FERC, which may investigate their lawfulness on protest
or its own motion. The FERC may suspend the effectiveness of such rates for up
to seven months. If the suspension expires before completion of the
investigation, the rates go into effect, but the pipeline can be required to
refund to shippers, with interest, any difference between the level the FERC
determines to be lawful and the filed rates under investigation. Rates that have
become final and effective may be challenged by complaint to FERC filed by a
shipper or on the FERC's own initiative and reparations may be recovered by the
party filing the complaint for the two year period prior to the complaint, if
FERC finds the rate to be unlawful.
The FERC allows for a rate of return for petroleum products pipelines
determined by adding (i) the product of a rate of return equal to the nominal
cost of debt multiplied by the portion of the rate base that is deemed to be
financed with debt and (ii) the product of a rate of return equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity. The appropriate rate of return for a
petroleum pipeline is determined on a case-by-case basis, taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.
Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"),
rates that were in effect on October 24, 1991 that were not subject to a
protest, investigation or complaint are deemed to be just and reasonable. Such
rates are subject to challenge only for limited reasons. Any relief granted
pursuant to such challenges may be prospective only. Because the Partnership's
rates that were in effect on October 24, 1991, were subject to investigation and
protest at that time, its rates were not deemed to be just and reasonable
pursuant to the EP Act. The Partnership's current rates became final and
effective in April 1994, and the Partnership believes that its currently
effective tariffs are just and reasonable and would withstand challenge under
the FERC's cost-based rate standards. Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.
On October 22, 1993, the FERC issued Order No. 561 which adopted a
simplified rate making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for such rate increases, there will be no need to file cost-of-service or
supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline
may make a limitless number of rate change filings. This indexing mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the ceiling rate below a pipeline's existing rates. The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.
The indexation method is to serve as the principal basis for the
establishment of oil pipeline rate changes in the future. However, the FERC
determined that a pipeline may utilize any one of the following alternative
methodologies to indexing: (i) a cost-of-service methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate that its
increased costs are prudently incurred and that there is a substantial
divergence between such increased costs and the rate that would be produced by
application of the index; and (ii) a pipeline may base its rates upon a
"light-handed" market-based form of regulation if it is able to demonstrate a
lack of significant market power in the relevant markets.
On September 15, 1997, the Partnership filed an Application for Market
Power Determination with the FERC seeking market based rates for approximately
half of its markets. In May 1998, the FERC granted the Partnership's application
and approximately half of the pipelines markets subsequently became subject to
market force regulation.
In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the Partnership interests held by individuals. Lakehead's motion
for rehearing was denied by the FERC and Lakehead appealed the decision to the
U.S. Court of Appeals. Subsequently, the case was settled by Lakehead and the
appeal was withdrawn. In another FERC proceeding involving a different oil
pipeline limited partnership, various shippers challenged such pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the disallowance of income taxes. The FERC recently decided this case
on the same basis as the Lakehead case. If the FERC were to disallow the income
tax allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's ability
to pay distributions to the holders of the Units would not be impaired; however,
in view of the uncertainties involved in this issue, there can be no assurance
in this regard.
Intrastate Regulation. The intrastate operations of the East Pipeline
in Kansas are subject to regulation by the Kansas Corporation Commission, and
the intrastate operations of the West Pipeline in Colorado and Wyoming are
subject to regulation by the Colorado Public Utility Commission and the Wyoming
Public Service Commission, respectively. Like the FERC, the state regulatory
authorities require that shippers be notified of proposed intrastate tariff
increases and have an opportunity to protest such increases. KPOP also files
with such state authorities copies of interstate tariff changes filed with the
FERC. In addition to challenges to new or proposed rates, challenges to
intrastate rates that have already become effective are permitted by complaint
of an interested person or by independent action of the appropriate regulatory
authority.
Environmental Matters
General. The operations of the Partnership are subject to Federal,
state and local laws and regulations relating to the protection of the
environment in the United States and, since February 1999, the environmental
laws and regulations of the United Kingdom in regard to the terminals acquired
from GATX Terminals, Limited, in the United Kingdom. Although the Partnership
believes that its operations are in general compliance with applicable
environmental regulations, risks of substantial costs and liabilities are
inherent in pipeline and terminal operations, and there can be no assurance that
significant costs and liabilities will not be incurred by the Partnership.
Moreover, it is possible that other developments, such as increasingly strict
environmental laws, regulations and enforcement policies thereunder, and claims
for damages to property or persons resulting from the operations of the
Partnership, past and present, could result in substantial costs and liabilities
to the Partnership.
See "Item 3 - Legal Proceedings" for information concerning a lawsuit
against certain subsidiaries of the Partnership involving jet fuel leaks from a
pipeline.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other statutes
as they pertain to prevention and response to oil spills. The OPA subjects
owners of facilities to strict, joint and potentially unlimited liability for
removal costs and certain other consequences of an oil spill, where such spill
is into navigable waters, along shorelines or in the exclusive economic zone. In
the event of an oil spill into such waters, substantial liabilities could be
imposed upon the Partnership. Regulations concerning the environment are
continually being developed and revised in ways that may impose additional
regulatory burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual within the petroleum pipeline industry. The East
Pipeline has experienced limited groundwater contamination at five terminal
sites (Milford, Iowa; Norfolk and Columbus, Nebraska; and Aberdeen and Yankton,
South Dakota) resulting from spills of refined petroleum products. Regulatory
authorities have been notified of these findings and remediation projects are
underway or under construction using various remediation techniques. The
Partnership estimates that $1,436,000 has been expended to date for remediation
at these five sites and that ongoing remediation expenses at each site will not
have a material effect on the East Pipeline. Groundwater contamination is also
known to exist at East Pipeline sites in Augusta, Kansas and in Potwin, Kansas,
but no remediation has been required. Although no assurances can be made, if
remediation is required, the Partnership believes that the resulting cost would
not be material.
Groundwater remediation efforts are ongoing at all four of the West
Pipeline's terminals and at a Wyoming pump station. Regulatory officials have
been consulted in the development of remediation plans. In connection with the
purchase of the West Pipeline, KPOP agreed to implement remediation plans at
these specific sites over the succeeding five years following the acquisition in
return for the payment by the seller, Wyco Pipe Line Company, of $1,312,000 to
KPOP to cover the discounted estimated future costs of these remediations. In
conjunction with the acquisition, the Partnership accrued $1.8 million for these
future remediation expenses.
In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain, Colorado failed, and approximately 1,000 barrels of product was
released. Containment and remedial action was immediately commenced. Upon
investigation, it appeared that the failure of the pipeline was due to damage
caused by third party excavations. The Partnership has made claim to the third
party as well as to its insurance carriers. The Partnership has entered into a
Compliance Order on Consent with the State of Colorado with respect to the
remediation. As of December 31, 1999, the Partnership has incurred $1.2 million
of costs in connection with this incident. Future costs are not anticipated to
be significant. The Partnership has recovered substantially all of its costs
from its insurance carrier.
ST has experienced groundwater contamination at its terminal sites at
Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have
been notified of these findings and cleanup is underway using extraction wells
and air strippers. Groundwater contamination also exists at the ST terminal site
in Stockton, California and in the areas surrounding this site as a result of
the past operations of five of the facilities operating in this area. ST has
entered into an agreement with three of these other companies to allocate
responsibility for the clean up of the contaminated area. Under the current
approach, clean up will not be required, however based on risk assessment, the
site will continue to be monitored and tested. In addition, ST is responsible
for up to two-thirds of the costs associated with existing groundwater
contamination at a formerly owned terminal at Marcy, New York, which also is
being remediated through extraction wells and air strippers. The Partnership has
expended approximately $1,001,000 through 1999 for remediation at these four
sites and estimates that on-going remediation expenses will aggregate
approximately $200,000 to $300,000 over the next three years.
Groundwater contamination has been identified at ST terminal sites at
Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken
place. Shell Oil Company has indemnified ST for any contamination at the
Milwaukee site prior to ST's acquisition of the facility. Star Enterprises, the
former owner of the Montgomery terminal, has indemnified ST for contamination at
a portion of the Montgomery site where contamination was identified prior to
ST's acquisition of the facility. A remediation system is in place to address
groundwater contamination at the ST terminal facility in Augusta, Georgia. Star
Enterprises, the former owner of the Augusta terminal, has indemnified ST for
this contamination and has retained responsibility for the remediation system.
There is also a possibility that groundwater contamination may exist at other
facilities. Although no assurance in this regard can be given, the Partnership
believes that such contamination, if present, could be remedied with extraction
wells and air strippers similar to those that are currently in use and that
resulting costs would not be material.
In 1991, the Environmental Protection Agency (the "EPA") implemented
regulations expanding the definition of hazardous waste. The Toxicity
Characteristic Leaching Procedure ("TCLP") has broadened the definition of
hazardous waste by including 25 constituents that were not previously included
in determining that a waste is hazardous. Water that comes in contact with
petroleum may fail the TCLP procedure and require additional treatment prior to
its disposal. The Partnership has installed totally enclosed wastewater
treatment systems at all East Pipeline terminal sites to treat such petroleum
contaminated water, especially tank bottom water.
The EPA has also promulgated regulations that may require the
Partnership to apply for permits to discharge storm water runoff. Storm water
discharge permits also may be required in certain states in which the
Partnership operates. Where such requirements are applicable, the Partnership
has applied for such permits and, after the permits are received, will be
required to sample storm water effluent before releasing it. The Partnership
believes that effluent limitations could be met, if necessary, with minor
modifications to existing facilities and operations. Although no assurance in
this regard can be given, the Partnership believes that the changes will not
have a material effect on the Partnership's financial condition or results of
operations.
Groundwater contamination has been experienced at ST's Piney Point,
Maryland, Jacksonville, Florida and each of the Washington, D.C. facilities.
Foreseeable remediation expenses are estimated not to exceed $1.6 million.
Aboveground Storage Tank Acts. A number of the states in which the
Partnership operates in the United States have passed statutes regulating
aboveground tanks containing liquid substances. Generally, these statutes
require that such tanks include secondary containment systems or that the
operators take certain alternative precautions to ensure that no contamination
results from any leaks or spills from the tanks. Although there is not currently
a Federal statute regulating these above ground tanks, there is a possibility
that such a law will be passed in the United States within the next couple of
years. The Partnership is in substantial compliance with all above ground
storage tank laws in the states with such laws. Although no assurance can be
given, the Partnership believes that the future implementation of above ground
storage tank laws by either additional states or by the Federal government will
not have a material adverse effect on the Partnership's financial condition or
results of operations.
Air Emissions. The operations of the Partnership are subject to the
Federal Clean Air Act and comparable state and local statutes. The Partnership
believes that the operations of the Pipelines and Terminals are in substantial
compliance with such statutes in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that have been
and are to be developed and implemented by the EPA and state environmental
agencies. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides are
subject to increasingly stringent regulations, including requirements that
certain sources install maximum or reasonably available control technology. In
addition, the 1999 Federal Clean Air Act Amendments include a new operating
permit for major sources ("Title V Permits"), which applies to some of the
Partnership's facilities. Additionally, new dockside loading facilities owned or
operated by the Partnership in the United States will be subject to the New
Source Performance Standards that were proposed in May 1994. These regulations
require control of VOC emissions from the loading and unloading of tank vessels.
Although the Partnership is in substantial compliance with applicable
air pollution laws, in anticipation of the implementation of stricter air
control regulations, the Partnership is taking actions to substantially reduce
its air emissions. The Partnership plans to install bottom loading and vapor
recovery equipment on the loading racks at selected terminal sites along the
East Pipeline that do not already have such emissions control equipment. These
modifications will substantially reduce the total air emissions from each of
these facilities. Having begun in 1993, this project is being phased in over a
period of years.
Solid Waste. The Partnership generates non-hazardous solid waste that
is subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes in the United States. The EPA is
considering the adoption of stricter disposal standards for non-hazardous
wastes. RCRA also governs the disposal of hazardous wastes. At present, the
Partnership is not required to comply with a substantial portion of the RCRA
requirements because the Partnership's operations generate minimal quantities of
hazardous wastes. However, it is anticipated that additional wastes, which could
include wastes currently generated during pipeline operations, will in the
future be designated as "hazardous wastes". Hazardous wastes are subject to more
rigorous and costly disposal requirements than are non-hazardous wastes. Such
changes in the regulations may result in additional capital expenditures or
operating expenses by the Partnership.
At the terminal sites at which groundwater contamination is present,
there is also limited soil contamination as a result of the aforementioned
spills. The Partnership is under no present requirements to remove these
contaminated soils, but the Partnership may be required to do so in the future.
Soil contamination also may be present at other Partnership facilities at which
spills or releases have occurred. Under certain circumstances, the Partnership
may be required to clean up such contaminated soils. Although these costs should
not have a material adverse effect on the Partnership, no assurance can be given
in this regard.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the EPA and, in some instances, third parties to
act in response to threats to the public health or the environment and to seek
to recover from the responsible classes of persons the costs they incur. In the
course of its ordinary operations, the Partnership may generate waste that may
fall within CERCLA's definition of a "hazardous substance". The Partnership may
be responsible under CERCLA for all or part of the costs required to clean up
sites at which such wastes have been disposed.
Environmental Impact Statement. The United States National
Environmental Policy Act of 1969 (the "NEPA") applies to certain extensions or
additions to a pipeline system. Under NEPA, if any project that would
significantly affect the quality of the environment requires a permit or
approval from any United States Federal agency, a detailed environmental impact
statement must be prepared. The effect of the NEPA may be to delay or prevent
construction of new facilities or to alter their location, design or method of
construction.
Indemnification. KPL has agreed to indemnify the Partnership against
liabilities for damage to the environment resulting from operations of the East
Pipeline prior to October 3, 1989. Such indemnification does not extend to any
liabilities that arise after such date to the extent such liabilities result
from change in environmental laws or regulations. Under such indemnity, KPL is
presently liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and storage
site referred to under "Water" to the standards that are in effect at the time
such remediation operations are concluded. In addition, ST's former owner has
agreed to indemnify the Partnership against liabilities for damages to the
environment from operations conducted by such former owner prior to March 2,
1993. The indemnity, which expired March 1, 1998, is limited in amount to 60% of
any claim exceeding $100,000 until an aggregate amount of $10 million has been
paid by ST's former owner. In addition, with respect to unknown environmental
expenses from operations conducted by Wyco Pipe Line Company prior to the
closing of the Partnership's acquisition of the West Pipeline, KPOP has agreed
to pay the first $150,000 of such expenses, KPOP and Wyco Pipe Line Company will
share, on an equal basis, the next $900,000 of such expenses and Wyco Pipe Line
Company will indemnify KPOP for up to $2,950,000 of such expenses thereafter.
The indemnity expired August 1999. To the extent that environmental liabilities
exceed the amount of such indemnity, KPOP has affirmatively assumed the excess
environmental liabilities.
Safety Regulation
The Pipelines are subject to regulation by the United States Department
of Transportation under the Hazardous Liquid Pipeline Safety Act of 1979
("HLPSA") relating to the design, installation, testing, construction,
operation, replacement and management of their pipeline facilities. The HLPSA
covers petroleum and petroleum products pipelines and requires any entity that
owns or operates pipeline facilities to comply with such safety regulations and
to permit access to and copying of records and to make certain reports and
provide information as required by the Secretary to Transportation. The Federal
Pipeline Safety Act of 1992 amended the HLPSA to include requirements of the
future use of internal inspection devices. The Partnership does not believe that
it will be required to make any substantial capital expenditures to comply with
the requirements of HLPSA as so amended.
The Partnership is subject to the requirements of the United States
Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes that regulate the protection of the health and safety of workers. In
addition, the OSHA hazard communication standard requires that certain
information be maintained about hazardous materials used or produced in
operations and that this information be provided to employees, state and local
authorities and citizens. The Partnership believes that it is in general
compliance with OSHA requirements, including general industry standards, record
keeping requirements and monitoring of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize information about the hazardous materials used in its operations.
Certain parts of this information must be reported to employees, state and local
governmental authorities, and local citizens upon request. In general, the
Partnership expects to increase its expenditures during the next decade to
comply with higher industry and regulatory safety standards such as those
described above. Such expenditures cannot be accurately estimated at this time,
although they are not expected to have a material adverse impact on the
Partnership.
Employees
The Partnership has no employees. The business of the Partnership is
conducted by the General Partner, KPL, which at December 31, 1999, employed 635
persons. Approximately 196 of the persons employed by KPL were subject to
representation by unions for collective bargaining purposes; however, only 85
persons employed at four of KPL's terminal unit locations were subject to
collective bargaining or similar contracts at that date. Union contracts
regarding conditions of employment for 17, 20, 14 and 34 employees are in effect
through November 1, 2000, June 30, 2001, February 28, 2002 and June 29, 2002,
respectively. All such contracts are subject to automatic renewal for successive
one year periods unless either party provides written notice in a timely manner
to terminate or modify such agreement.
Item 2. Properties
The properties owned or utilized by the Partnership and its
subsidiaries are generally described in Item 1 of this Report. Additional
information concerning the obligations of the Partnership and its subsidiaries
for lease and rental commitments is presented under the caption "Commitments and
Contingencies" in Note 6 to the Partnership's consolidated financial statements.
Such descriptions and information are hereby incorporated by reference into this
Item 2.
The properties used in the operations of the Pipelines are owned by
KPP, through its subsidiary entities, except for KPL's operational headquarters,
located in Wichita, Kansas, which is held under a lease that expires in 2004.
The majority of ST's facilities are owned, while the remainder, including most
of its terminal facilities located in port areas and its operational
headquarters, located in Dallas, Texas, are held pursuant to lease agreements
having various expiration dates, rental rates and other terms.
Item 3. Legal Proceedings
Certain subsidiaries of the Partnership are defendants in a lawsuit
filed in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the
entity from which the Partnership acquired ST Services in 1993. The lawsuit
involves environmental response and remediation allegedly resulting from jet
fuel leaks in the early 1970's from a pipeline. The pipeline, which connected a
former Grace terminal with Otis Air Force Base, was abandoned in 1973, and the
connecting terminal was sold to an unrelated entity in 1976. Grace alleges that
it has incurred since 1996 expenses of approximately $3 million for response and
remediation required by the State of Massachusetts and that it expects to incur
additional expenses in the future. On January 20, 2000, the Massachusetts
Department of Environmental Protection notified the Partnership's subsidiary
that it had reason to believe that the subsidiary was also a Potentially
Responsible Party. The subsidiary replied to that letter denying any
responsibility for the Massachusetts response and/or remediation. Future
expenses could potentially include claims by the United States Government, as
described below. Grace alleges that subsidiaries of the Partnership acquired the
abandoned pipeline, as part of the acquisition of ST Services in 1993, and
assumed responsibility for environmental damages caused by the jet fuel leaks
from the pipeline. Grace is seeking a ruling that these subsidiaries are
responsible for all present and future remediation expenses for these leaks and
that Grace has no obligation to indemnify these subsidiaries for these expenses.
The case is set for trial in May 2000.
The consistent position of the Partnership's subsidiaries is that they
did not acquire the abandoned pipeline as part of the 1993 ST transaction and
did not assume any responsibility for the environmental damage. In an order
granting partial summary judgment, the trial judge has ruled that the pipeline
was an asset of the company acquired by the subsidiary. The subsidiaries are
continuing with their defense that the pipeline had been abandoned prior to the
acquisition of ST Services and could not have been included in the assets they
acquired. The defendants have also counter-claimed against Grace for fraud and
mutual mistake, among other defenses. If they are successful at trial with their
defenses and/or counterclaims, the judge's partial summary judgment order will
be moot. The defendants also believe they have certain rights to indemnification
from Grace under the acquisition agreement with Grace. These rights include
claims against Grace for breaches of numerous representations in the agreement
including the environmental representations. The acquisition agreement includes
Grace's agreement to indemnify the subsidiaries against 60% of post-closing
environmental remediation costs, subject to a maximum indemnity payment of $10
million.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, has been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have also received and responded to
formal inquiries from the United States Government in connection with the
environmental damages allegedly resulting from the jet fuel leaks. The
Partnership's subsidiaries have voluntarily responded to an invitation from the
Government to provide information indicating that they do not own the pipeline.
In connection with a court-ordered mediation between Grace and the subsidiaries,
the Government advised the parties in April 1999 that it has identified the two
spill areas that it believes to be related to the pipeline that is the subject
of the Grace suit. The Government advised the parties that it believes it has
incurred costs of approximately $34 million, and expects in the future to incur
costs of approximately $55 million, for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties that it could not
at that time allocate its costs attributable to the second spill area. The
Partnership believes that the ultimate cost of the remediation, while
substantial, will be considerably less than the Government has indicated. The
Partnership also believes that, even if the lawsuit determines that the
subsidiary is the owner of the pipeline, the defendants have defenses to any
claim of the Government. Any claims by the Government could be material in
amount and, if made and ultimately sustained against the Partnership's
subsidiaries, could adversely affect the Partnership's ability to pay cash
distributions to its Unitholders.
The Partnership has other contingent liabilities resulting from
litigation, claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect on
the financial position or results of operations of the Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
The Partnership did not hold a meeting of Unitholders or otherwise
submit any matter to a vote of security holders in the fourth quarter of 1999.
PART II
Item 5. Market for the Registrant's Units and Related Unitholder Matters
The Partnership's limited partnership interests ("Units") are listed
and traded on the New York Stock Exchange (the "NYSE"), under the symbol "KPP."
At March 15, 2000, there were approximately 1,000 Unitholders. On August 14,
1998, the Partnership paid its regular quarterly cash distribution of $0.65 per
unit to the holders of each class of the Partnership's outstanding Units. This
cash distribution represented the twelfth consecutive quarterly cash
distribution of Available Cash constituting Cash from Operations in an amount
equal to or exceeding the $0.55 Minimum Quarterly Distribution, as such terms
are defined in the Partnership's Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"). As a result of this payment, pursuant
to the terms of the Partnership Agreement, the Preference Period ended effective
July 1, 1998, and all differences and distinctions between Senior Preference,
Preference and Common Units automatically ceased as of such date. Consequently,
as of August 14, 1998, all outstanding units of limited partnership interests in
the Partnership were designated as "Units," constituting a single class of
securities. Set forth below are prices on the NYSE and cash distributions for
the periods indicated for Senior Preference Units and Preference Units,
respectively, through August 14, 1998 and, thereafter, for Units.
Senior Preference Preference Cash
Unit Prices(1) Unit Prices(1) Unit Prices(2) Distributions
Year High Low High Low High Low Declared(3)
- ---- --------------------- --------------------- --------------------- --------------
1998:
First Quarter 37 1/2 34 11/16 36 1/8 33 1/4 $ .65
Second Quarter 37 7/8 34 35 5/8 33 5/16 .65
Third Quarter 37 7/8 32 3/16 35 3/8 32 1/8 33 29 7/5 .65
Fourth Quarter 33 1/4 29 5/8 .65
1999:
First Quarter 29 3/16 26 1/4 .70
Second Quarter 29 3/4 27 1/4 .70
Third Quarter 29 3/4 26 1/2 .70
Fourth Quarter 26 15/16 21 5/16 .70
2000:
First Quarter 28 3/16 24 3/16 .70
(through March 15, 2000)
(1) Through August 14, 1998
(2) From August 14, 1998
(3) The amounts shown were paid on each class of units.
Under the terms of its financing agreements, the Partnership is
prohibited from declaring or paying any distribution if a default exists
thereunder.
Item 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates
indicated, selected historical financial and operating data for Kaneb Pipe Line
Partners, L.P. and subsidiaries (the "Partnership"). The data in the table (in
thousands, except per unit amounts) is derived from the historical financial
statements of the Partnership and should be read in conjunction with the
Partnership's audited financial statements. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995(a)
--------- --------- --------- --------- ---------
Income Statement Data:
Revenues ........................... $ 158,028 $ 125,812 $ 121,156 $ 117,554 $ 96,928
--------- --------- --------- --------- ---------
Operating costs .................... 69,148 52,200 50,183 49,925 40,617
Depreciation and amortization ...... 15,043 12,148 11,711 10,981 8,261
General and administrative ......... 9,424 6,261 5,793 5,259 5,472
--------- --------- --------- --------- ---------
Total costs and expenses ....... 93,615 70,609 67,687 66,165 54,350
--------- --------- --------- --------- ---------
Operating income ................... 64,413 55,203 53,469 51,389 42,578
Interest and other income .......... 408 626 562 776 894
Interest expense ................... (13,390) (11,304) (11,332) (11,033) (6,437)
Minority interest in net income .... (499) (441) (420) (403) (360)
--------- --------- --------- --------- ---------
Income before income taxes ......... 50,932 44,084 42,279 40,729 36,675
Income tax provision ............... (1,496) (418) (718) (822) (627)
--------- --------- --------- --------- ---------
Net income ......................... $ 49,436 $ 43,666 $ 41,561 $ 39,907 $ 36,048
========= ========= ========= ========= =========
Allocation of net income (b)(c) per:
Unit ........................... $ 2.81 $ 2.67
========= =========
Senior Preference Unit ......... $ 2.55 $ 2.46 $ 2.20
========= ========= =========
Preference Unit ................ $ 2.55 $ 2.46 $ 2.20
========= ========= =========
Cash Distributions declared per (c):
Unit ........................... $ 2.80 $ 2.60
========= =========
Senior Preference Unit ......... $ 2.50 $ 2.30 $ 2.20
========= ========= =========
Preference Unit ................ $ 2.50 $ 2.30 $ 2.20
========= ========= =========
Balance Sheet Data (at period end):
Property and equipment, net ........ $ 316,883 $ 268,626 $ 247,132 $ 249,733 $ 246,471
Total assets ....................... 365,953 308,432 269,032 274,765 267,787
Long-term debt ..................... 155,987 153,000 132,118 139,453 136,489
Partners' capital .................. 168,288 105,388 104,196 103,340 100,748
(a) Includes the operations of the West Pipeline since its acquisition in
February 1995 and the operations of Steuart since its acquisition in
December 1995.
(b) Net income is allocated to the limited partnership units in an amount
equal to the cash distributions declared for each reporting period and
any remaining income or loss is allocated to any class of units that
did not receive the same amount of cash distributions per unit (if
any). If the same cash distributions per unit are declared for all
classes of units, income or loss is allocated pro rata based on the
aggregate amount of distributions declared.
(c) Prior to the third quarter of 1998, the Partnership had three classes
of partnership interests designated as Senior Preference Units,
Preference Units and Common Units, respectively. Pursuant to the
Partnership Agreement, on August 14, 1998, each such class of units
were converted into a single class designated as "Units", effective
July 1, 1998. Allocations of net income and cash distributions declared
were equal for all classes of units in 1998. See "Item 5 - Market for
Registrant's Units and Related Unitholder Matters."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the
summary historical financial and operating data included elsewhere in this
report.
General
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and
operate its refined petroleum products pipeline business. The Partnership
operates through KPOP, a limited partnership in which the Partnership holds a
99% interest as limited partner and KPL owns a 1% interest as general partner in
both the Partnership and KPOP. The Partnership is engaged through operating
subsidiaries in the refined petroleum products pipeline business and, since
1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the
transportation through the East Pipeline and the West Pipeline, as common
carriers, of refined petroleum products. The East Pipeline and the West Pipeline
are collectively referred to as the "Pipelines." The Pipelines primarily
transport gasoline, diesel oil, fuel oil and propane. The products are
transported from refineries connected to the Pipeline, directly or through other
pipelines, to agricultural users, railroads and wholesale customers in the
states in which the Pipelines are located and in portions of other states.
Substantially all of the Pipelines' operations constitute common carrier
operations that are subject to Federal or state tariff regulations. The
Partnership has not engaged, nor does it currently intend to engage, in the
merchant function of buying and selling refined petroleum products.
The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST").
On February 1, 1999, the Partnership, through two wholly-owned indirect
subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal
Limited for (pound)22.6 million (approximately $37.2 million) plus transaction
costs and the assumption of certain liabilities. The acquisition of the six
locations, which have an aggregate tankage capacity of 5.4 million barrels, was
initially financed by term loans from a bank. $13.3 million of the term loans
were repaid in July 1999 with the proceeds from a public unit offering. See
"Liquidity and Capital Resources". Three of the terminals, handling petroleum
products, chemicals and molten sulfur, respectively, operate in England. The
remaining three facilities, two in Scotland and one in Northern Ireland, are
primarily petroleum terminals. All six terminals are served by deepwater marine
docks.
On October 30, 1998, the Partnership, through a wholly-owned
subsidiary, entered into acquisition and joint venture agreements with
Northville Industries Corp. ("Northville") to acquire and manage the former
Northville terminal located in Linden, New Jersey. Under the agreements, the
Partnership acquired a 50% interest in the newly-formed ST Linden Terminal LLC
for $20.5 million plus transaction costs. The petroleum storage facility, which
has capacity of 3.9 million barrels in 22 tanks, was funded by bank financing
which was repaid using proceeds from a public unit offering in July 1999. See
"Liquidity and Capital Resources".
The Partnership is the third largest independent liquids terminaling
company in the United States. At December 31, 1999, ST operated 40 facilities in
19 states, the District of Columbia and the United Kingdom with an aggregate
tankage capacity of approximately 28.8 million barrels.
Pipeline Operations
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Revenues......................... $ 67,607 $ 63,421 $ 61,320
Operating costs.................. 23,579 22,057 21,696
Depreciation and amortization.... 5,090 4,619 4,885
General and administrative....... 3,102 3,115 2,912
--------- --------- ---------
Operating income................. $ 35,836 $ 33,630 $ 31,827
========= ========= =========
Pipelines revenues are based on volumes shipped and the distances over
which such volumes are transported. For the years ended December 31, 1999 and
1998, revenues increased by $4.2 million and $2.1 million, respectively, due to
overall increases in volumes shipped, primarily on the East Pipeline. Because
tariff rates are regulated by the FERC, the Pipelines compete primarily on the
basis of quality of service, including delivering products at convenient
locations on a timely basis to meet the needs of its customers. Barrel miles
totaled 18.4 billion, 17.0 billion and 16.1 billion for the years ended December
31, 1999, 1998 and 1997, respectively.
Operating costs, which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee benefits,
and property and other taxes, increased by $1.5 million in 1999 and $0.4 million
in 1998, respectively. The increase in both years were due to increases in
materials and supplies costs, including additives, that are volume related.
General and administrative costs, which include managerial, accounting and
administrative personnel costs, office rental expense, legal and professional
costs and other non-operating costs remained generally level in 1999 and 1998.
Terminaling Operations
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Revenues......................... $ 90,421 $ 62,391 $ 59,836
Operating costs.................. 45,569 30,143 28,487
Depreciation and amortization.... 9,953 7,529 6,826
General and administrative....... 6,322 3,146 2,881
--------- --------- ---------
Operating income................. $ 28,577 $ 21,573 $ 21,642
========= ========= =========
For the years ended December 31, 1999 and 1998, revenues increased by
$28.0 million and $2.6 million, respectively, due to terminal acquisitions and
increased utilization of existing terminals due to favorable market conditions,
partially offset by a decrease in the overall price realized for storage.
Average annual tankage utilized for the years ended December 31, 1999, 1998 and
1997 aggregated 22.6 million barrels, 15.2 million barrels and 12.4 million
barrels, respectively. The 1999 and 1998 increases in average annual tankage
utilized resulted from the acquisitions and increased storage at the
Partnership's largest petroleum storage facility. Average revenues per barrel of
tankage utilized for the years ended December 31, 1999, 1998 and 1997 was $4.00,
$4.11 and $4.83, respectively. The decrease in 1999 and 1998 average revenues
per barrel of tankage utilized was due to the storage of a larger proportionate
volume of petroleum products, which are historically at lower per barrel rates
than specialty chemicals.
Operating costs increased by $15.4 million in 1999 and $1.7 million in
1998, due to the terminal acquisitions and increases in tank utilization.
General and administrative expense increased by $3.2 million and $0.3 million in
1999 and 1998. The increase in 1998 and approximately one-half of the increase
in 1999 was also due to the terminal acquisitions with the remaining portion of
the 1999 increase due to the extraordinarily high litigation costs.
Total tankage capacity (28.8 million barrels at December 31, 1999) has
been, and is expected to remain, adequate to meet existing customer storage
requirements. Customers consider factors such as location, access to cost
effective transportation and quality of service, in addition to pricing, when
selecting terminal storage.
Liquidity and Capital Resources
Cash provided by operating activities was $63.6 million, $58.8 million
and $54.8 million for the years 1999, 1998 and 1997, respectively. The increase
in cash provided by operations in 1999 resulted from increases in revenues and
operating income in the terminaling operations resulting from terminal
acquisitions and improvements in pipeline operations from increases in volumes
shipped. The increase in 1998 resulted from overall improvements in revenues and
operating income in the pipeline operations, and from increased volumes shipped.
Capital expenditures, excluding expansion capital expenditures, were
$15.4 million (including $0.8 million in work-in-process), $9.4 million and
$10.6 million for 1999, 1998 and 1997, respectively. During all periods,
adequate pipeline capacity existed to accommodate volume growth, and the
expenditures required for environmental and safety improvements were not, and
are not expected in the future to be, significant. Environmental damages caused
by sudden and accidental occurrences are included under the Partnership's
insurance coverages (subject to deductible and limits). The Partnership
anticipates that routine maintenance capital expenditures will total
approximately $12 million to $15 million (excluding acquisitions) in 2000. Such
future expenditures, however, will depend on many factors beyond the
Partnership's control, including, without limitation, demand for refined
petroleum products and terminaling services in the Partnership's market areas,
local, state and Federal governmental regulations, fuel conservation efforts and
the availability of financing on acceptable terms. No assurance can be given
that required capital expenditures will not exceed anticipated amounts during
the year or thereafter or that the Partnership will have the ability to finance
such expenditures through borrowings or choose to do so.
The Partnership expects to fund future cash distributions and
maintenance capital expenditures with existing cash and cash flows from
operating activities. Expansionary capital expenditures are expected to be
funded through additional Partnership bank borrowings and/or future public unit
or debt offerings.
The Partnership makes quarterly distributions of 100% of its Available
Cash, as defined in the Partnership Agreement, to holders of limited partnership
units ("Unitholders") and the Company. Available Cash consists generally of all
the cash receipts less all cash disbursements and reserves. Distributions of
$2.80 per unit were declared to Unitholders in 1999, $2.60 per unit were
declared to Unitholders in 1998 and $2.50 per unit was declared in 1997. Payment
of the August 14, 1998, regular cash distribution represented the twelfth
consecutive quarterly distribution of Available Cash constituting Cash from
Operations in an amount equal to or exceeding the $0.55 Minimum Quarterly
Distribution specified in the Partnership Agreement. Accordingly, pursuant to
the terms of the Partnership Agreement, all differences and distinctions between
Senior Preference Units, Preference Units and Common Units automatically ceased
as of such date. At that time, all outstanding units of limited partnership
interest in the Partnership became "Units" constituting a single class of equity
securities, which trade on the New York Stock Exchange under the symbol "KPP".
The Partnership has a Credit Agreement with a bank that currently
provides a $25 million revolving credit facility for working capital and other
partnership purposes. Borrowings under the Credit Agreement bear interest at
variable rates and are due and payable in January 2001. The Credit Agreement has
a commitment fee of 0.15% per annum of the unused credit facility. At December
31, 1999, $2.2 million was drawn under this credit facility.
In January 1999, the Partnership, through two wholly-owned
subsidiaries, entered into a credit agreement with a bank that provides for the
issuance of $39.2 million of term loans in connection with the United Kingdom
terminal acquisition and $5.0 million for general Partnership purposes. The term
loans, which bear interest in varying amounts, are secured by the capital stock
of the subsidiaries that acquired the United Kingdom terminals and by a mortgage
on the East Pipeline and are pari passu with the existing mortgage notes and
credit facility. The term loans also contain certain financial and operational
covenants. $18.3 million of the term loans were repaid in July 1999 with the
proceeds from the public unit offering. The remaining portion ($25.8 million) is
due in January 2002.
In July 1999, the Partnership issued 2.25 million limited partnership
units in a public offering at $30.75 per unit, generating approximately $65.6
million in net proceeds. A portion of the proceeds was used to repay in full the
Partnership's $15.0 million promissory note, the $25.0 million revolving credit
facility and $18.3 million in term loans (including $13.3 million in term loans
resulting from the United Kingdom terminal acquisition).
In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the partnership interests held by individuals. Lakehead's motion
for rehearing was denied by the FERC and Lakehead appealed the decision to the
U. S. Court of Appeals. Subsequently, the case was settled by Lakehead and the
appeal was withdrawn. In another FERC proceeding involving a different oil
pipeline limited partnership, various shippers challenged such pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the disallowance of income taxes. The FERC recently decided the case
on the same basis as the Lakehead case. If the FERC were to disallow the income
tax allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's ability
to pay distributions to the holders of the Units would not be impaired; however,
in view of the uncertainties involved in this issue, there can be no assurance
in this regard.
Year 2000 Issue
As of the date of this Report, the Partnership has not experienced any
significant disruptions in its operations during the transition into the Year
2000 ("Y2K"). In the third quarter of 1999, the Partnership announced that it
had completed its assessment of Y2K risks and that it had formulated contingency
plans to mitigate potential adverse effects which might have arisen from
noncompliant systems or third parties who had not adequately addressed the Y2K
issue. To date, the Partnership has not incurred any significant costs related
to Y2K issues. The Partnership will continue to monitor its operations and
systems and address any date-related problems that may arise as the year
progresses.
Allocation of Net Income and Earnings
Net income or loss is allocated between limited partner interests and
the general partner pro rata based on the aggregate amount of cash distributions
declared (including general partner incentive distributions). Beginning in 1997,
distributions by the Partnership of Available Cash reached the Second Target
Distribution, as defined in the Partnership Agreement, which entitled the
general partner to receive certain incentive distributions at different levels
of cash distributions. Earnings per Unit shown on the consolidated statements of
income are calculated by dividing the limited partners' interest in net income
by the weighted average number of Units outstanding. If the allocation of income
had been made as if all income had been distributed in cash, earnings per Unit
would have been $2.81, $2.66 and $2.53 for the years ended December 31, 1999,
1998 and 1997, respectively.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the
adverse changes in market rates and prices) to which the Partnership is exposed
are interest rates on the Partnership's debt and investment portfolios. The
Partnership centrally manages its debt and investment portfolios considering
investment opportunities and risks and overall financing strategies. The
Partnership's investment portfolio consists of cash equivalents; accordingly,
the carrying amounts approximate fair value. The Partnership's variable rate
debt and investments are not material to the financial position or performance
of the Partnership.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Partnership
begin on page F-1 of this report. Such information is hereby incorporated by
reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Reference is made to the Registrant's Current Reports on Form 8-K and
Form 8-K/A, dated November 6, 1998 and March 9, 1999, respectively, which
reports are incorporated herein by reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership is a limited partnership and has no directors. The
Partnership is managed by KPL as general partner. Set forth below is certain
information concerning the directors and executive officers of KPL. All
directors of the Company are elected annually by Kaneb, as its sole stockholder.
All officers serve at the discretion of the Board of Directors of KPL.
Years of
Position with Service % of
Name Age KPL With KPL Units(m) O/S
- ------------------------ ----- ----------------------------- ------ -------- -----
Edward D. Doherty 64 Chairman of the Board and 10 (a) 87,526 *
Chief Executive Officer
Leon E. Hutchens 65 President 40 (b) 500 *
Ronald D. Scoggins 45 Senior Vice President 3 (c) 1,395 *
Jimmy L. Harrison 46 Vice President and Controller 7 (d) -0- *
Howard C. Wadsworth 55 Vice President,Treasurer 6 (e) -0- *
and Secretary
Sangwoo Ahn 61 Director 11 (f) 38,000 *
John R. Barnes 55 Director 13 (g) 230,900 1.26%
Murray R. Biles 69 Director 46 (h) 500 *
Frank M. Burke, Jr. 60 Director 3 (i) -0- *
Charles R. Cox 57 Director 5 (j) 7,000 *
Hans Kessler 50 Director 3 (k) -0- *
James R. Whatley 73 Director 11 (l) 25,400 *
All Officers and Directors as a group (12 persons) 2.14%
*Less than one percent
(a) Mr. Doherty, Chairman of the Board and Chief Executive Officer of KPL
since September 1989, is also Senior Vice President of Kaneb.
(b) Mr. Hutchens assumed his current position in January 1994, having been
with KPL since January 1960. Mr. Hutchens had been Vice President since
January 1981. Mr. Hutchens was Manager of Product Movement from July
1976 to January 1981.
(c) Mr. Scoggins became an executive officer of KPL in August 1997, prior
to which he served in senior level positions for ST for more than 10
years.
(d) Mr. Harrison assumed his present position in November 1992, prior to
which he served in a variety of financial positions including Assistant
Secretary and Treasurer with ARCO Pipe Line Company for approximately
19 years.
(e) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary
for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.
(f) Mr. Ahn, a director of KPL since July 1989, is also a director of
Kaneb. Mr. Ahn has been a general partner of Morgan Lewis Githens &
Ahn, an investment banking firm, since 1982 and currently serves as a
director of ITI Technologies, Inc., PAR Technology Corporation and
Quaker Fabric Corporation.
(g) Mr. Barnes, a director of KPL, is also Chairman of the Board, President
and Chief Executive Officer of Kaneb.
(h) Mr. Biles joined KPL in November 1953 and served as President from
January 1985 until his retirement at the close of 1993.
(i) Mr. Burke, a director of KPL since January 1997, is also a director of
Kaneb. Mr. Burke has been Chairman and Managing General Partner of
Burke, Mayborn Company, Ltd., a private investment company, for more
than the past five years. Mr. Burke also currently serves as a director
of Medicalcontrol, Inc. and Miller Exploration Company. He was
previously associated with Peat, Marwick, Mitchell & Co. (now KPMG
LLP), an international firm of certified public accountants, for
twenty-four years.
(j) Mr. Cox, a director of KPL since September 1995, is also a director of
Kaneb. Mr. Cox has been a private business consultant since retiring in
January 1998 from Fluor Daniel, Inc., an international services
company, where he served in senior executive level positions during a
29 year career with that organization.
(k) Mr. Kessler, elected to the Board on February 19, 1998, is also a
director of Kaneb. Mr. Kessler has served as Chairman and Managing
Director of KMB Kessler + Partner GmbH since 1992. He was previously a
Managing Director and Vice President of a European Division of Tyco
International Ltd.
(l) Mr. Whatley, a director of KPL since July 1989, is also a director of
Kaneb and served as Chairman of the Board of Directors of Kaneb from
February 1981 until April 1989.
(m) Partnership Units listed are those beneficially owned by the person
indicated, his spouse or children living at home and do not include
Units in which the person has disclaimed any beneficial interest.
Audit Committee
Messrs. Sangwoo Ahn and Frank M. Burke, Jr. serve as the members of the
Audit Committee of KPL. Such Committee will, on an annual basis, or more
frequently as such Committee may determine to be appropriate, review policies
and practices of the Company and the Partnership and deal with various matters
as to which potential conflicts of interest may arise.
Committee Interlocks and Insider Participation
The Company's Board of Directors does not have a compensation committee
or any other committee that performs the equivalent functions. During the fiscal
year ended December 31, 1999, none of KPL's officers or employees participated
in the deliberations of KPL's Board of Directors concerning executive officer
compensation.
Section 16(a) Beneficial Ownership Reporting Compliance Statement
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)") requires the Company's officers and directors, among others,
to file reports of ownership and changes of ownership in the Partnership's
equity securities with the Securities and Exchange Commission and the New York
Stock Exchange. Such persons are also required by related regulations to furnish
the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
KPL believes that, since January 1, 1999, its officers and directors have
complied with all applicable filing requirements with respect to the
Partnership's equity securities.
Item 11. Executive Compensation
The Partnership has no executive officers, but is obligated to
reimburse the Company for compensation paid to KPL's executive officers in
connection with their operation of the Partnership's business.
The following table sets forth information with respect to the
aggregate compensation paid or accrued by the Company during the fiscal years
1999, 1998 and 1997, to the Chief Executive Officer and each of the other most
highly compensated executive officers of KPL.
SUMMARY COMPENSATION TABLE
Name and Principal Annual Compensation All Other
Position Year Salary(a) Bonus(b) Compensation(c)
------------------------- ---- ---------- ---------- ---------------
Edward D. Doherty(d) 1999 $ 225,375 $ -0- $ 6,249
Chairman of the 1998 216,758 -0- 6,402
Board and Chief 1997 208,350 18,420(f) 6,541
Executive Officer
Leon E. Hutchens 1999 195,550 13,600 7,336
President 1998 188,083 10,000 7,027
1997 180,617 -0- 7,338
Ronald D. Scoggins(d) 1999 159,441(e) -0- 6,343
Senior Vice President 1998 161,348(e) -0- 6,100
1997 139,899(e) 9,210(g) 5,003
Jimmy L. Harrison 1999 123,720 6,800 3,844
Vice President and 1998 117,000 5,000 3,120
Controller 1997 110,532 -0- 2,854
(a) Amounts for 1999, 1998 and 1997, respectively, include deferred
compensation for Mr. Doherty ($14,720, $13,692 and $12,980); Mr.
Hutchens ($8,416, $4,869 and $922); and Mr. Scoggins ($11,212, $10,600
and $7,950).
(b) Amounts earned in year shown and paid the following year.
(c) Represents the Company's contributions to Kaneb's Savings Investment
Plan (a 401(k) plan) and the imputed value of Company-paid group term
life insurance.
(d) The compensation for these individuals is paid by Kaneb, which is
reimbursed for all or substantially all of such compensation by KPL.
(e) Amounts for 1999, 1998 and 1997, respectively, include $24,016, $31,131
and $13,608 in the form of Partnership Units (378, 412 and 227) and
Kaneb Services, Inc. Common Stock (969, 1,322 and 1,927).
(f) Includes deferred compensation of $18,420.
(g) Includes deferred compensation of $9,210.
Director's Fees
During 1999, each member of KPL's Board of Directors who was not also
an employee of the Company or Kaneb was paid an annual retainer of $10,000 in
lieu of all attendance fees.
Item 12. Security Ownership of Certain Beneficial Owners and Management
At March 15, 2000, KPL owned a combined 2% General Partner interest in the
Partnership and KPOP and, together with its affiliates, owned Units representing
an aggregate limited partner interest of approximately 28%.
Item 13. Certain Relationships and Related Transactions
KPL is entitled to certain reimbursements under the Partnership
Agreement. For additional information regarding the nature and amount of such
reimbursements, see Note 7 to the Partnership's consolidated financial
statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1)Financial Statements Beginning
Page
Set forth below is a list of financial statements appearing in this report.
Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements:
Consolidated Statements of Income
- Three Years Ended December 31, 1999................... F - 1
Consolidated Balance Sheets
- December 31, 1999 and 1998............................ F - 2
Consolidated Statements of Cash Flows
- Three Years Ended December 31, 1999................... F - 3
Consolidated Statements of Partners' Capital
- Three Years ended December 31, 1999................... F - 4
Notes to Consolidated Financial Statements................... F - 5
Reports of Independent Accountants........................... F - 14
(a) (2)Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(a) (3)List of Exhibits
3.1 Amended and Restated Agreement of Limited Partnership dated September
27, 1989, filed as Appendix A to the Registrant's Prospectus, dated
September 25, 1989, in connection with the Registrant's Registration
Statement on Form S-1 (S.E.C. File No. 33-30330) which exhibit is
hereby incorporated by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between
Grace Energy Corporation, Support Terminal Services, Inc., Standard
Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc.
and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated
March 2, 1993, filed as Exhibit 10.1 of the exhibits to Registrant's
Current Report on Form 8-K ("Form 8-K"), dated March 16, 1993, which
exhibit is hereby incorporated by reference.
10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P.
("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other
Lenders, dated December 22, 1994 (the "TCB Loan Agreement"), filed as
Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
10-K ("Form 10-K") for the year ended December 31, 1994, which exhibit
is hereby incorporated by reference.
10.3 Amendment to the TCB Loan Agreement, dated January 30, 1998, filed as
Exhibit 10.3 to the Registrant's Form 10-K for the year ended December
31, 1997, which exhibit is hereby incorporated by reference.
10.4 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL")
and TCB, dated October 11, 1993 (the "TCB Security Agreement"), filed
as Exhibit 10.3 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1993, which exhibit is hereby incorporated by
reference.
10.5 Amendment to the TCB Security Agreement, filed as Exhibit 10.5 to the
Registrant's Form 10-K for the year ended December 31, 1998, which
exhibit is hereby incorporated by reference.
10.6 Note Purchase Agreements, dated December 22, 1994, filed as Exhibit
10.2 of the exhibits to Registrant's Form 8-K, dated March 13, 1995
(the "March 1995 Form 8-K"), which exhibit is hereby incorporated by
reference.
10.7 Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
the exhibits to the Registrant's Form 10-K for the year ended December
31, 1996, which exhibit is hereby incorporated by reference.
10.8 Agreement for Sale and Purchase of Assets between Wyco Pipe Line
Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
exhibits to the Registrant's March 1995 Form 8-K, which exhibit is
hereby incorporated by reference.
10.9 Asset Purchase Agreements between and among Steuart Petroleum Company,
SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment
Company, Support Terminals Operating Partnership, L.P. and KPOP, as
amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
10.4 of the exhibits to Registrant's Current Report on Form 8-K dated
January 3, 1996, which exhibits are hereby incorporated by reference.
10.10 Formation and Purchase Agreement, between and among Support Terminal
Operating Partnership, L.P., Northville Industries Corp. and AFFCO,
Corp., dated October 30, 1998, filed as exhibit 10.9 to the
Registrant's Form 10-K for the year ended December 31, 1998, which
exhibit is hereby incorporated by reference.
10.11 Agreement, between and among, GATX Terminals Limited, ST Services,
Ltd., ST Eastham, Ltd., GATX Termianls Corporation, Support Terminals
Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated
January 26, 1999, filed as Exhibit 10.10 to the Registrant's Form 10-K
for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
10.12 Credit Agreement, between and among, Kaneb Pipe Line Operating
Partnership, L.P., ST Services, Ltd. and Suntrust Bank, Atlanta, dated
January 27, 1999, filed as Exhibit 10.11 to the Registrant's Form 10-K
for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
21 List of Subsidiaries, filed herewith.
23 Consents of independent accountants: KPMG LLP and
PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
None
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenues ............................. $ 158,028,000 $ 125,812,000 $ 121,156,000
------------- ------------- -------------
Costs and expenses:
Operating costs ................... 69,148,000 52,200,000 50,183,000
Depreciation and amortization ..... 15,043,000 12,148,000 11,711,000
General and administrative ........ 9,424,000 6,261,000 5,793,000
------------- ------------- -------------
Total costs and expenses ....... 93,615,000 70,609,000 67,687,000
------------- ------------- -------------
Operating income ..................... 64,413,000 55,203,000 53,469,000
Interest and other income ............ 408,000 626,000 562,000
Interest expense ..................... (13,390,000) (11,304,000) (11,332,000)
------------- ------------- -------------
Income before minority
interest and income taxes ......... 51,431,000 44,525,000 42,699,000
Minority interest in net income ...... (499,000) (441,000) (420,000)
Income tax provision ................. (1,496,000) (418,000) (718,000)
------------- ------------- -------------
Net income ........................... 49,436,000 43,666,000 41,561,000
General partner's interest
in net income ..................... (1,640,000) (735,000) (560,000)
------------- ------------- -------------
Limited partners' interest
in net income ..................... $ 47,796,000 $ 42,931,000 $ 41,001,000
============= ============= =============
Allocation of net income per
Unit as described in Note 2 ....... $ 2.81 $ 2.67 $ 2.55
============= ============= =============
Weighted average number of Partnership
units outstanding ................. 16,997,500 16,060,000 16,060,000
============= ============= =============
See notes to consolidated financial statements.
F - 1
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 5,127,000 $ 849,000
Accounts receivable ......................... 16,929,000 13,917,000
Prepaid expenses ............................ 5,036,000 4,035,000
------------- -------------
Total current assets ..................... 27,092,000 18,801,000
------------- -------------
Property and equipment ......................... 439,537,000 377,248,000
Less accumulated depreciation .................. 122,654,000 108,622,000
------------- -------------
Net property and equipment ............... 316,883,000 268,626,000
------------- -------------
Investment in affiliate ........................ 21,978,000 21,005,000
------------- -------------
$ 365,953,000 $ 308,432,000
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term debt ............................. $ -- $ 10,000,000
Accounts payable ............................ 3,288,000 3,939,000
Accrued expenses ............................ 6,350,000 4,809,000
Accrued distributions payable ............... 13,372,000 10,725,000
Accrued taxes, other than income taxes ...... 2,267,000 2,080,000
Deferred terminaling fees ................... 3,075,000 3,526,000
Payable to general partner .................. 1,411,000 6,785,000
------------- -------------
Total current liabilities ................ 29,763,000 41,864,000
------------- -------------
Long-term debt, less current portion ........... 155,987,000 153,000,000
Other liabilities and deferred taxes ........... 10,882,000 7,131,000
Minority interest .............................. 1,033,000 1,049,000
Commitments and contingencies
Partners' capital:
Limited partners ............................ 168,019,000 104,342,000
General partner ............................. 1,037,000 1,046,000
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment. (768,000) --
------------- -------------
Total partners' capital .................. 168,288,000 105,388,000
------------- -------------
$ 365,953,000 $ 308,432,000
============= =============
See notes to consolidated financial statements.
F - 2
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating activities:
Net income ............................................ $ 49,436,000 $ 43,666,000 $ 41,561,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 15,043,000 12,148,000 11,711,000
Minority interest in net income .................... 499,000 441,000 420,000
Equity in earnings of affiliate, net of distribution (1,072,000) --
------------ ------------ ------------
Deferred income taxes .............................. 1,487,000 481,000 651,000
Changes in working capital components:
Accounts receivable .............................. (3,012,000) (2,414,000) 37,000
Prepaid expenses ................................. (995,000) (14,000) 300,000
Accounts payable and accrued expenses ............ 3,028,000 3,174,000 (336,000)
Deferred terminaling fees ........................ (451,000) 634,000 18,000
Payable to general partner ....................... (374,000) 642,000 432,000
------------ ------------ ------------
Net cash provided by operating activities ..... 63,589,000 58,758,000 54,794,000
------------ ------------ ------------
Investing activities:
Capital expenditures .................................. (14,568,000) (9,401,000) (10,641,000)
Acquisitions of pipelines and terminals ............... (44,390,000) (44,410,000) --
Other ................................................. (2,064,000) (1,121,000) 313,000
------------ ------------ ------------
Net cash used in investing activities ......... (61,022,000) (54,932,000) (10,328,000)
------------ ------------ ------------
Financing activities:
Changes in amounts due to/from
general partner .................................... (5,000,000) 5,000,000 975,000
Issuance of debt ...................................... 51,319,000 35,000,000 --
Payments of debt and capital lease .................... (58,332,000) (6,453,000) (7,036,000)
Distributions, including minority interest ............ (51,850,000) (42,900,000) (40,225,000)
Net proceeds from issuance of KPP units ............... 65,574,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities ................................ 1,711,000 (9,353,000) (46,286,000)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ......... 4,278,000 (5,527,000) (1,820,000)
Cash and cash equivalents at beginning of period ......... 849,000 6,376,000 8,196,000
------------ ------------ ------------
Cash and cash equivalents at end of period ............... $ 5,127,000 $ 849,000 $ 6,376,000
============ ============ ============
Supplemental information - Cash paid for interest ........ $ 12,881,000 $ 11,156,000 $ 11,346,000
============ ============ ============
See notes to consolidated financial statements.
F - 3
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Accumulated
Other
Limited General Comprehensive Comprehensive
Partners (a) Partner Income (Loss) Total Income
------------- ------------- ------------- -------------- -------------
Partners' capital at January 1, 1997 ............ $ 102,316,000 $ 1,024,000 $ -- $ 103,340,000 $ --
1997 income allocation ........................ 41,001,000 560,000 -- 41,561,000 41,561,000
Distributions declared ........................ (40,150,000) (555,000) -- (40,705,000) --
------------- ------------- ------------ ------------- -------------
Comprehensive income for the year ............. $ 41,561,000
=============
Partners' capital at December 31, 1997 .......... 103,167,000 1,029,000 -- 104,196,000 --
1998 income allocation ........................ 42,931,000 735,000 -- 43,666,000 43,666,000
Distributions declared ........................ (41,756,000) (718,000) -- (42,474,000) --
------------- ------------- ------------ ------------- -------------
Comprehensive income for the year ............. $ 43,666,000
=============
Partners' capital at December 31, 1998 .......... 104,342,000 1,046,000 -- 105,388,000 --
1999 income allocation ........................ 47,796,000 1,640,000 -- 49,436,000 49,436,000
Distributions declared ........................ (49,693,000) (1,649,000) -- (51,342,000) --
Issuance of units ............................. 65,574,000 -- -- 65,574,000 --
Foreign currency translation adjustment ....... -- -- (768,000) (768,000) (768,000)
------------- ------------- ------------ ------------- -------------
Comprehensive income for the year ............. $ 48,668,000
=============
Partners' capital at December 31, 1999 .......... $ 168,019,000 $ 1,037,000 $ (768,000) $ 168,288,000
============= ============= ============ =============
Limited partnership units outstanding at
December 31, 1997 and 1998 16,060,000 (b) -- 16,060,000
Units issued in 1999 ............................ 2,250,000 -- -- 2,250,000
------------- ------------- ------------ -------------
Limited partnership units outstanding at
December 31, 1999 18,310,000 (b) -- 18,310,000
============= ============= ============ =============
(a) Prior to the third quarter of 1998, the Partnership had three classes
of partnership interests designated Senior Preference Units, Preference
Units and Common Units, respectively. Pursuant to the Partnership
Agreement, on August 14, 1998, each such class of units were converted
into a single class designated "Units", effective July 1, 1998. See
Note 2.
(b) KPL owns a combined 2% interest in the Partnership as General Partner.
See notes to consolidated financial statements.
F - 4
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("KPP" or the "Partnership"), a
master limited partnership, owns and operates a refined petroleum products
pipeline business and a petroleum products and specialty liquids storage
and terminaling business. The Partnership operates through Kaneb Pipe Line
Operating Partnership, L.P. ("KPOP"), a limited partnership in which the
Partnership holds a 99% interest as limited partner. Kaneb Pipe Line
Company (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc.
("Kaneb"), as general partner, holds a 1% general partner interest in both
the Partnership and KPOP. The Company's 1% interest in KPOP is reflected
as the minority interest in the financial statements. At December 31,
1999, the Company, together with its affiliates, owned an approximate 28%
interest as a limited partner and as a general partner owned a combined 2%
interest.
In July 1999, the Partnership issued 2.25 million limited
partnership units in a public offering at $30.75 per unit, generating
approximately $65.6 million in net proceeds. A portion of the proceeds was
used to repay in full the Partnership's $15.0 million promissory note, the
$25.0 million revolving credit facility and $18.3 million in term loans
(including $13.3 million in term loans resulting from the United Kingdom
terminal acquisition referred to in Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the
Partnership in the preparation of the consolidated financial statements.
Cash and cash equivalents
The Partnership's policy is to invest cash in highly liquid
investments with original maturities of three months or less. Accordingly,
uninvested cash balances are kept at minimum levels. Such investments are
valued at cost, which approximates market, and are classified as cash
equivalents. The Partnership does not have any derivative financial
instruments.
Property and equipment
Property and equipment are carried at historical cost. Certain
leases have been capitalized and the leased assets have been included in
property and equipment. Additions of new equipment and major renewals and
replacements of existing equipment are capitalized. Repairs and minor
replacements that do not materially increase values or extend useful lives
are expensed. Depreciation of property and equipment is provided on a
straight-line basis at rates based upon expected useful lives of various
classes of assets, as disclosed in Note 4. The rates used for pipeline and
storage facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically
evaluated using undiscounted future cash flows as the basis for
determining if impairment exists under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". To the extent impairment is indicated to exist, an impairment loss
will be recognized under SFAS No. 121 based on fair value.
Revenue and income recognition
KPOP provides pipeline transportation of refined petroleum
products and liquified petroleum gases. Revenue is recognized upon receipt
of the products into the pipeline system.
The Partnership's Support Terminal Services operation ("ST")
provides terminaling and other ancillary services. Storage fees are billed
one month in advance and are reported as deferred income. Revenue is
recognized in the month services are provided.
Foreign currency translation
The Partnership translates the balance sheet of its foreign
subsidiary using year-end exchange rates and translates income statement
amounts using the average exchange rates in effect during the year. The
gains and losses resulting from the change in exchange rates from year to
year have been reported separately as a component of accumulated other
comprehensive income (loss) in Partners' Capital. Gains and losses
resulting from foreign currency transactions are included in the
statements of income.
Environmental matters
Environmental expenditures that relate to current operations are
expensed or capitalized, as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are
recorded when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the timing
of these accruals coincides with the completion of a feasibility study or
the Partnership's commitment to a formal plan of action.
Comprehensive income
The Partnership has adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 130 only requires
additional disclosure and does not affect the Partnership's financial
position or results of operations.
Estimates
The preparation of the Partnership's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income tax considerations
Income before income tax expense is made up of the following components:
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
Partnership operations $46,242,000 $42,827,000 $40,317,000
Corporate operations:
Domestic .......... 501,000 1,257,000 1,962,000
Foreign ........... 4,189,000 -- --
----------- ----------- -----------
$50,932,000 $44,084,000 $42,279,000
=========== =========== ===========
Partnership operations are not subject to Federal or state income
taxes. However, certain operations of ST are conducted through
wholly-owned corporate subsidiaries which are taxable entities. The
provision for income taxes for the periods ended December 31, 1999, 1998
and 1997 primarily consists of deferred U.S. and foreign income taxes of
$1.5 million, $.5 million and $.7 million, respectively. The net deferred
tax liability of $5.1 million and $3.6 million at December 31, 1999 and
1998, respectively, consists of deferred tax liabilities of $12 million
and $8.8 million, respectively, and deferred tax assets of $6.9 million
and $5.2 million, respectively. The deferred tax liabilities consist
primarily of tax depreciation in excess of book depreciation and the
deferred tax assets consist primarily of net operating losses. The U.S.
corporate operations have net operating loss carryforwards for tax
purposes totaling approximately $15.2 million which expire in years 2008
through 2019. Additionally, the Partnership's foreign operations have net
operating loss carryforwards for tax purposes totaling approximately $4.4
million which do not have an expiration date.
Since the income or loss of the operations which are conducted
through limited partnerships will be included in the tax returns of the
individual partners of the Partnership, no provision for income taxes has
been recorded in the accompanying financial statements on these earnings.
The tax returns of the Partnership are subject to examination by Federal
and state taxing authorities. If any such examination results in
adjustments to distributive shares of taxable income or loss, the tax
liability of the partners would be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly
to each individual partner. Individual partners will have different
investment bases depending upon the timing and prices of acquisition of
Partnership units. Further, each partner's tax accounting, which is
partially dependent upon their individual tax position, may differ from
the accounting followed in the financial statements. Accordingly, there
could be significant differences between each individual partner's tax
basis and their proportionate share of the net assets reported in the
financial statements. SFAS No. 109, "Accounting for Income Taxes,"
requires disclosure by a publicly held partnership of the aggregate
difference in the basis of its net assets for financial and tax reporting
purposes. Management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.
Cash distributions
The Partnership makes quarterly distributions of 100% of its
Available Cash, as defined in the Partnership Agreement, to holders of
limited partnership units ("Unitholders") and the Company. Available Cash
consists generally of all the cash receipts of the Partnership plus the
beginning cash balance less all of its cash disbursements and reserves.
The Partnership expects to make distributions of all Available Cash within
45 days after the end of each quarter to Unitholders of record on the
applicable record date. Distributions of $2.80, $2.60 and $2.50 per Unit
were declared to all classes of Units in 1999, 1998 and 1997,
respectively.
Distributions by the Partnership of its Available Cash are made
99% to Unitholders and 1% to the Company, subject to the payment of
incentive distributions to the General Partner if certain target levels of
cash distributions to the Unitholders are achieved. The distribution of
Available Cash for each quarter during the Preference Period, as defined,
was subject to the preferential rights of the holders of the Senior
Preference Units ("SPUs") to receive the Minimum Quarterly Distribution
for such quarter, plus any arrearages in the payment of the Minimum
Quarterly Distribution for prior quarters, before any distribution of
Available Cash was made to holders of Preference Units ("PUs") or Common
Units ("CUs") for such quarter. The CUs were not entitled to arrearages in
the payment of the Minimum Quarterly Distribution. In general, the
Preference Period continued until such time as the Minimum Quarterly
Distribution had been paid to the holders of the SPUs, the PUs and the CUs
for twelve consecutive quarters. Payment of the August 14, 1998 regular
cash distribution represented the twelfth consecutive quarterly
distribution of Available Cash constituting Cash from Operations in an
amount equal to or exceeding the $.55 Minimum Quarterly Distribution
specified in the Partnership Agreement. Accordingly, pursuant to the terms
of the Partnership Agreement, all differences and distinctions between
SPUs, PUs and CUs automatically ceased as of such date. At that time, all
outstanding units of limited partnership interest in the Partnership
became "Units," constituting a single class of equity securities, which
trade on the New York Stock Exchange under the symbol "KPP".
Allocation of net income and earnings
For the periods presented, net income or loss has been allocated
between limited partner interests and the general partner pro rata based
on the aggregate amount of cash distributions declared (including general
partner incentive distributions). Beginning in 1997, distributions by the
Partnership of Available Cash reached the Second Target Distribution, as
defined in the Partnership Agreement, which entitled the general partner
to certain incentive distributions at different levels of cash
distributions. Earnings per Unit shown on the consolidated statements of
income are calculated by dividing the amount of limited partners' interest
in net income, by the weighted average number of Units outstanding. If the
allocation of income had been made as if all income had been distributed
in cash, earnings per Unit would have been $2.81, $2.66 and $2.53 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Change in presentation
Certain prior year financial statement items have been re-
classified to conform with the 1999 presentation.
3. ACQUISITIONS
On October 30, 1998, the Partnership, through a wholly-owned
subsidiary, entered into acquisition and joint venture agreements with
Northville Industries Corp. ("Northville") to acquire and manage the
former Northville terminal located in Linden, New Jersey. Under the
agreements, the Partnership acquired a 50% interest in the newly-formed ST
Linden Terminal LLC for $20.5 million plus transaction costs. The
investment was funded by bank financing which was repaid using proceeds
from the public unit offering in July 1999 (See Note 1). The investment is
being accounted for by the equity method of accounting, with the excess
cost over net book value of the equity investment being amortized over the
life of the underlying assets. During 1998, the Partnership acquired other
terminals and pipelines for aggregate consideration of $23.9 million.
On February 1, 1999, the Partnership, through two wholly-owned
indirect subsidiaries, acquired six terminals in the United Kingdom from
GATX Terminal Limited for (pound)22.6 million (approximately $37.2
million) plus assumption of certain liabilities. The acquisition, which
was initially financed with term loans from a bank, has been accounted for
using the purchase method of accounting. $13.3 million of the term loans
were repaid in July 1999 with the proceeds from a public unit offering
(see Notes 1 and 5). The pro forma effect of the acquisition was not
material to the results of operations.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
Estimated
Useful December 31,
Life ------------------------------
(Years) 1999 1998
--------- ------------- -------------
Land ............................... -- $ 21,585,000 $ 19,744,000
Buildings .......................... 35 8,568,000 7,626,000
Furniture and fixtures ............. 16 2,947,000 2,710,000
Transportation equipment ........... 6 4,469,000 4,131,000
Machinery and equipment ............ 20 - 40 32,939,000 31,226,000
Pipeline and terminaling equipment.. 20 - 40 364,396,000 305,745,000
Construction work-in-progress ...... -- 4,633,000 6,066,000
------------- -------------
Total property and equipment ....... 439,537,000 377,248,000
Accumulated depreciation ........... (122,654,000) (108,622,000)
------------- -------------
Net property and equipment ......... $ 316,883,000 $ 268,626,000
============= =============
5. DEBT
Long-term debt is summarized as follows:
December 31,
---------------------------
1999 1998
------------ ------------
First mortgage notes due 2001 and 2002 ..... $ 60,000,000 $ 60,000,000
First mortgage notes due 2001 through 2016.. 68,000,000 68,000,000
Revolving credit facility .................. 2,200,000 25,000,000
Term loans due in 2002 ..................... 25,787,000 --
------------ ------------
Total long-term debt ....................... $155,987,000 $153,000,000
============ ============
In 1994, a wholly-owned subsidiary entered into a restated credit
agreement with a group of banks that, as subsequently amended, provides a
$25 million revolving credit facility through January 31, 2001. The credit
facility bears interest at variable interest rates and has a commitment
fee of 0.15% per annum of the unused credit facility. At December 31,
1999, $2.2 million was drawn under the credit facility.
Also, in 1994, another wholly-owned subsidiary of the Partnership
issued $33 million of first mortgage notes ("Notes") to a group of
insurance companies. The Notes bear interest at the rate of 8.05% per
annum and are due on December 22, 2001. In 1995, a wholly-owned subsidiary
of the Partnership issued $27 million of additional Notes due February 24,
2002 which bear interest at the rate of 8.37% per annum. The Notes and the
credit facility are secured by a mortgage on the East Pipeline and contain
certain financial and operational covenants.
In June 1996, a wholly-owned subsidiary of the Partnership issued
$68 million of new first mortgage notes bearing interest at rates ranging
from 7.08% to 7.98%. $35.0 million of these notes is due June 2001, $8.0
million is due June 2003, $10.0 million is due June 2006 and $15.0 million
is due June 2016. The loan is secured, pari passu with the existing Notes
and credit facility, by a mortgage on the East Pipeline.
In January 1999, the Partnership, through two wholly-owned
subsidiaries, entered into a credit agreement with a bank that provides
for the issuance of $39.2 million in term loans in connection with the
United Kingdom terminal acquisition and $5.0 million for general
Partnership purposes. The term loans, $18.3 million of which bore interest
in varying amounts, are secured by the capital stock of the subsidiaries
that acquired the United Kingdom terminals and by a mortgage on the East
Pipeline and, are pari passu with existing mortgage notes and credit
facility. The term loans also contain certain financial and operational
covenants. $18.3 million of the term loans were repaid in July 1999 with
the proceeds from the public unit offering. The remaining portion ($25.8
million) with a fixed rate of 7.14% is due in January 2002.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease
payments under operating leases as of December 31, 1999:
Year ending December 31:
2000......................................... $ 1,445,000
2001......................................... 1,021,000
2002......................................... 642,000
2003......................................... 510,000
2004......................................... 212,000
-------------
Total minimum lease payments................. $ 3,830,000
=============
Total rent expense under operating leases amounted to $2.2
million, $1.1 million and $1.3 million for the years ended December
31, 1999, 1998 and 1997, respectively.
The operations of the Partnership are subject to Federal, state
and local laws and regulations relating to protection of the environment.
Although the Partnership believes its operations are in general compliance
with applicable environmental regulations, risks of additional costs and
liabilities are inherent in pipeline and terminal operations, and there
can be no assurance that significant costs and liabilities will not be
incurred by the Partnership. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws,
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the Partnership,
could result in substantial costs and liabilities to the Partnership. The
Partnership has recorded an undiscounted reserve for environmental claims
in the amount of $8.2 million at December 31, 1999, including $7.6 million
related to acquisitions of pipelines and terminals. During 1999 and 1998,
respectively, the Partnership incurred $0.9 million and $0.6 million of
costs related to such acquisition reserves and reduced the liability
accordingly.
The Company has indemnified the Partnership against liabilities
for damage to the environment resulting from operations of the pipeline
prior to October 3, 1989 (the date of formation of the Partnership). The
indemnification does not extend to any liabilities that arise after such
date to the extent that the liabilities result from changes in
environmental laws and regulations.
In December 1995, the Partnership acquired the liquids
terminaling assets of Steuart Petroleum Company and certain of its
affiliates. The asset purchase agreement includes a provision for an
earn-out payment based upon revenues of one of the terminals exceeding a
specified amount for a seven-year period ending in December 2002. No
amount was payable under the earn-out provision in 1997, 1998 and 1999.
Certain subsidiaries of the Partnership are defendants in a
lawsuit filed in a Texas state court in 1997 by Grace Energy Corporation
("Grace"), the entity from which the Partnership acquired ST Services in
1993. The lawsuit involves environmental response and remediation
allegedly resulting from jet fuel leaks in the early 1970's from a
pipeline. The pipeline, which connected a former Grace terminal with Otis
Air Force Base, was abandoned in 1973, and the connecting terminal was
sold to an unrelated entity in 1976. Grace alleges that it has incurred
since 1996 expenses of approximately $3 million for response and
remediation required by the State of Massachusetts and that it expects to
incur additional expenses in the future. On January 20, 2000, the
Massachusetts Department of Environmental Protection notified the
Partnership's subsidiary that it had reason to believe that the subsidiary
was also a Potentially Responsible Party. The subsidiary has replied to
that letter denying any responsibility for the Massachusetts response
and/or remediation. Future expenses could potentially include claims by
the United States Government, as described below. Grace alleges that
subsidiaries of the Partnership acquired the abandoned pipeline, as part
of the acquisition of ST Services in 1993, and assumed responsibility for
environmental damages caused by the jet fuel leaks from the pipeline.
Grace is seeking a ruling that these subsidiaries are responsible for all
present and future remediation expenses for these leaks and that Grace has
no obligation to indemnify these subsidiaries for these expenses. The case
is set for trial in May 2000.
The consistent position of the Partnership's subsidiaries is that
they did not acquire the abandoned pipeline as part of the 1993 ST
transaction and did not assume any responsibility for the environmental
damage. In an order granting partial summary judgment, the trial judge has
ruled that the pipeline was an asset of the company acquired by the
subsidiary. The subsidiaries are continuing with their defense that the
pipeline had been abandoned prior to the acquisition of ST Services and
could not have been included in the assets they acquired. The defendants
have also counter-claimed against Grace for fraud and mutual mistake,
among other defenses. If they are successful at trial with their defenses
and/or counterclaims, the judge's partial summary judgment order will be
moot. The defendants believe they have certain rights to indemnification
from Grace under the acquisition agreement with Grace. These rights
include claims against Grace for breaches of numerous representations in
the agreement including the environmental representations. The acquisition
agreement includes Grace's agreement to indemnify the subsidiaries against
60% of post-closing environmental remediation costs, subject to a maximum
indemnity payment of $10 million.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act.
The MMR Site contains nine groundwater contamination plumes, two of which
are allegedly associated with the pipeline, and various other waste
management areas of concern, such as landfills. The United States
Department of Defense and the United States Coast Guard, pursuant to a
Federal Facilities Agreement, has been responding to the Government
remediation demand for most of the contamination problems at the MMR Site.
Grace and others have also received and responded to formal inquiries from
the United States Government in connection with the environmental damages
allegedly resulting from the jet fuel leaks. The Partnership's
subsidiaries have voluntarily responded to an invitation from the
Government to provide information indicating that they do not own the
pipeline. In connection with a court-ordered mediation between Grace and
the subsidiaries, the Government advised the parties in April 1999 that it
has identified the two spill areas that it believes to be related to the
pipeline that is the subject of the Grace suit. The Government advised the
parties that it believes it has incurred costs of approximately $34
million, and expects in the future to incur costs of approximately $55
million, for remediation of one of the spill areas. This amount was not
intended to be a final accounting of costs or to include all categories of
costs. The Government also advised the parties that it could not at that
time allocate its costs attributable to the second spill area. The
Partnership believes that the ultimate cost of the remediation, while
substantial, will be considerably less than the Government has indicated.
The Partnership also believes that, even if the lawsuit determines that
the subsidiary is the owner of the pipeline, the defendants have defenses
to any claim of the Government. Any claims by the Government could be
material in amount and, if made and ultimately sustained against the
Partnership's subsidiaries, could adversely affect the Partnership's
ability to pay cash distributions to its Unitholders.
The Partnership has other contingent liabilities resulting from
litigation, claims and commitments incident to the ordinary course of
business. Management believes, based on the advice of counsel, that the
ultimate resolution of such contingencies will not have a materially
adverse effect on the financial position or results of operations of the
Partnership.
7. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by
the Company. The Company and Kaneb are entitled to reimbursement of all
direct and indirect costs related to the business activities of the
Partnership. These costs, which totaled $11.9 million, $11.3 million and
$10.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively, include compensation and benefits paid to officers and
employees of the Company and Kaneb, insurance premiums, general and
administrative costs, tax information and reporting costs, legal and audit
fees. Included in this amount is $10.3 million, $9.3 million and $9.0
million of compensation and benefits, paid to officers and employees of
the Company for the years ended December 31, 1999, 1998 and 1997,
respectively, which represent the actual amounts paid by the Company or
Kaneb. In addition, the Partnership paid $.2 million during each of these
respective years for an allocable portion of the Company's overhead
expenses. At December 31, 1999 and 1998, the Partnership owed the Company
$1.4 million and $1.8 million, respectively, for these expenses which are
due under normal invoice terms. Additionally, at December 31, 1998, $5.0
million was payable to the Company under a short-term promissory note
agreement. The promissory note, which accrued interest at 6.75% per annum,
was repaid in February 1999.
8. BUSINESS SEGMENT DATA
The Partnership conducts business through two principal
operations; the "Pipeline Operations," which consists primarily of the
transportation of refined petroleum products in the Midwestern states as a
common carrier, and the "Terminaling Operations," which provide storage
for petroleum products, specialty chemicals and other liquids.
The Partnership measures segment profit as operating income.
Total assets are those assets controlled by each reportable segment.
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Business segment revenues:
Pipeline operations ...................... $ 67,607,000 $ 63,421,000 $ 61,320,000
Terminaling operations ................... 90,421,000 62,391,000 59,836,000
------------- ------------- -------------
$ 158,028,000 $ 125,812,000 $ 121,156,000
============= ============= =============
Business segment profit:
Pipeline operations ...................... $ 35,836,000 $ 33,630,000 $ 31,827,000
Terminaling operations ................... 28,577,000 21,573,000 21,642,000
------------- ------------- -------------
Operating income .................... 64,413,000 55,203,000 53,469,000
Interest expense ......................... (13,390,000) (11,304,000) (11,332,000)
Interest and other income ................ 408,000 626,000 562,000
------------- ------------- -------------
Income before minority interest
and income taxes................... $ 51,431,000 $ 44,525,000 $ 42,699,000
============= ============= =============
Business segment assets:
Depreciation and amortization:
Pipeline operations ................. $ 5,090,000 $ 4,619,000 $ 4,885,000
Terminaling operations .............. 9,953,000 7,529,000 6,826,000
------------- ------------- -------------
$ 15,043,000 $ 12,148,000 $ 11,711,000
============= ============= =============
Capital expenditures (excluding acquisitions):
Pipeline operations ................. $ 3,547,000 $ 5,020,000 $ 4,496,000
Terminaling operations .............. 11,021,000 4,381,000 6,145,000
------------- ------------- -------------
$ 14,568,000 $ 9,401,000 $ 10,641,000
============= ============= =============
December 31,
-----------------------------------------------
1999 1998 1997
------------- -------------- -------------
Total assets:
Pipeline operations .................. $ 104,774,000 $ 103,966,000 $ 97,666,000
Terminaling operations................ 261,179,000 204,466,000 171,366,000
------------- -------------- -------------
$ 365,953,000 $ 308,432,000 $ 269,032,000
============= ============== =============
The following geographical area data includes revenues based on location of
the operating segment and net property and equipment based on physical
location.
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- -------------- -------------
Geographical area revenues:
United States ........................ $ 136,197,000 $ 125,812,000 $ 121,156,000
United Kingdom ....................... 21,831,000 -- --
------------- -------------- -------------
$ 158,028,000 $ 125,812,000 $ 121,156,000
============= ============== =============
Geographical area operating income:
United States ........................ $ 58,539,000 $ 55,203,000 $ 53,469,000
United Kingdom ....................... 5,874,000 -- --
------------- -------------- --------------
$ 64,413,000 $ 55,203,000 $ 53,469,000
============= ============== ==============
Geographical area net property and equipment:
United States ........................ $ 275,178,000 $ 268,626,000 $ 247,132,000
United Kingdom ....................... 41,705,000 -- --
------------- -------------- --------------
$ 316,883,000 $ 268,626,000 $ 247,132,000
============= ============== ==============
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all debt as of December 31, 1999 and
1998 was approximately $163 million and $171 million, as compared to the
carrying value of $156 million and $163 million, respectively. These fair
values were estimated using discounted cash flow analysis, based on the
Partnership's current incremental borrowing rates for similar types of
borrowing arrangements. These estimates are not necessarily indicative of
the amounts that would be realized in a current market exchange. The
Partnership has no derivative financial instruments.
The Partnership markets and sells its services to a broad base of
customers and performs ongoing credit evaluations of its customers. The
Partnership does not believe it has a significant concentration of credit
risk at December 31, 1999. No customer constituted 10 percent or more of
consolidated revenues in 1999, 1998 or 1997.
10. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 1999 and 1998 are summarized as follows:
Quarter Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- --------------- --------------
1999:
Revenues...................... $ 36,845,000 $ 39,171,000 $ 41,573,000 $ 40,439,000
================ ================ =============== ==============
Operating income.............. $ 15,144,000 $ 15,467,000 $ 17,451,000 $ 16,351,000
================ ================ =============== ==============
Net income.................... $ 11,356,000 $ 11,413,000 $ 13,835,000 $ 12,832,000
================ ================ =============== ==============
Allocation of net income
per Unit.................... $ .68 $ .69 $ .76 $ .68
================ ================ =============== ==============
1998:
Revenues...................... $ 28,070,000 $ 30,553,000 $ 33,709,000 $ 33,480,000
================ ================ =============== ==============
Operating income.............. $ 11,900,000 $ 12,946,000 $ 15,710,000 $ 14,647,000
================ ================ =============== ==============
Net income.................... $ 8,960,000 $ 10,030,000 $ 12,598,000 $ 12,078,000
================ ================ =============== ==============
Allocation of net income
per Unit.................... $ .55 $ .61 $ .77 $ .74
================ ================ =============== ==============
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kaneb Pipe Line Partners, L.P.
We have audited the 1999 and 1998 consolidated financial statements of Kaneb
Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") as listed in
the index appearing under Item 14(a)(1) on page 28. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Partnership and
its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 25, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated statements of income, of cash flows and of
changes in partners' capital as of and for the year ended December 31, 1997
(listed in the index appearing under Item 14(a)(1) on page 28) present fairly,
in all material respects, the results of operations and cash flows of Kaneb Pipe
Line Partners, L.P. and its subsidiaries (the "Partnership") for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Kaneb Pipe
Line Partners, L.P. and its subsidiaries for any period subsequent to December
31, 1997.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P.
By: Kaneb Pipe Line Company
General Partner
By: EDWARD D. DOHERTY
Chairman of the Board and
Chief Executive Officer
Date: March 24, 2000
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Kaneb Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line
Company and on the date indicated.
Signature Title Date
- ----------------------------- --------------------------- ---------------
Principal Executive Officer
EDWARD D. DOHERTY Chairman of the Board March 24, 2000
and Chief Executive Officer
Principal Accounting Officer
JIMMY L. HARRISON Controller March 24, 2000
Directors
SANGWOO AHN Director March 24, 2000
JOHN R. BARNES Director March 24, 2000
M.R. BILES Director March 24, 2000
FRANK M. BURKE, JR Director March 24, 2000
CHARLES R. COX Director March 24, 2000
HANS KESSLER Director March 24, 2000
JAMES R. WHATLEY Director March 24, 2000
EXHIBIT LIST
Exhibit
Number Title
- -------- --------------------------------------------------------------------
21 List of Subsidiaries
23 Consents of independent accountants: KPMG LLP and
PricewaterhouseCoopers LLP
27 Financial Data Schedule