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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-44634
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2287673
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(972) 699-4062
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2005
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three Months Ended
March 31, 2005 and 2004 1
Condensed Consolidated Balance Sheets - March 31, 2005
and December 31, 2004 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2005 and 2004 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 6. Exhibits 25
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
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Three Months Ended
March 31,
----------------------------
2005 2004
------------ -------------
Revenues:
Services $ 99,222 $ 90,698
Products 83,796 55,715
------------ -------------
Total revenues 183,018 146,413
------------ -------------
Costs and expenses:
Cost of products sold 77,085 51,039
Operating costs 46,402 43,210
Depreciation and amortization 14,834 13,898
General and administrative 10,265 5,704
------------ -------------
Total costs and expenses 148,586 113,851
------------ -------------
Operating income 34,432 32,562
Interest and other income 204 5
Interest expense (11,105) (10,436)
------------ -------------
Income before income taxes 23,531 22,131
Income tax expense (1,514) (1,152)
------------ -------------
Net income $ 22,017 $ 20,979
============ =============
See notes to consolidated financial statements.
1
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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March 31, December 31,
2005 2004
----------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 38,856 $ 34,336
Accounts receivable 68,282 71,035
Inventories 6,746 15,519
Prepaid expenses and other 9,662 12,371
--------------- ---------------
Total current assets 123,546 133,261
--------------- ---------------
Property and equipment 1,459,347 1,450,972
Less accumulated depreciation 316,535 302,381
--------------- ---------------
Net property and equipment 1,142,812 1,148,591
--------------- ---------------
Investment in affiliates 26,751 25,939
Excess of cost over fair value of net assets of
acquired businesses and other assets 16,712 17,525
--------------- ---------------
$ 1,309,821 $ 1,325,316
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 42,528 $ 44,071
Accrued expenses 37,440 42,573
Accrued distributions payable 26,960 26,960
Accrued interest payable 8,625 9,365
Payable to general partner 4,007 4,528
--------------- ---------------
Total current liabilities 119,560 127,497
--------------- ---------------
Long-term debt 671,016 671,952
Other liabilities and deferred taxes 43,362 44,386
Commitments and contingencies
Partners' capital 475,883 481,481
--------------- ---------------
$ 1,309,821 $ 1,325,316
=============== ===============
See notes to consolidated financial statements.
2
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Three Months Ended
March 31,
----------------------------
2005 2004
------------ -------------
Operating activities:
Net income $ 22,017 $ 20,979
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,834 13,898
Equity in earnings of affiliates, net of distributions (812) (1,638)
Deferred income taxes 558 (53)
Changes in working capital components 4,716 (692)
------------ -------------
Net cash provided by operating activities 41,313 32,494
------------ -------------
Investing activities:
Capital expenditures (8,743) (7,347)
Other (1,090) (884)
------------ -------------
Net cash used in investing activities (9,833) (8,231)
------------ -------------
Financing activities:
Distributions (26,960) (26,344)
------------ -------------
Net cash used in financing activities (26,960) (26,344)
------------ -------------
Increase (decrease) in cash and cash equivalents 4,520 (2,081)
Cash and cash equivalents at beginning of period 34,336 38,626
------------ -------------
Cash and cash equivalents at end of period $ 38,856 $ 36,545
============ =============
Supplemental cash flow information - cash paid for interest $ 11,571 $ 10,738
============ =============
See notes to consolidated financial statements.
3
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
Kaneb Pipe Line Operating Partnership, L.P. (the "Partnership"), a limited
partnership, owns and operates a refined petroleum products and fertilizer
pipeline business and a petroleum products and specialty liquids storage
and terminaling business. Kaneb Pipe Line Partners, L.P. ("KPP"), a master
limited partnership, holds a 99% interest as limited partner in the
Partnership. Kaneb Pipe Line Company LLC ("KPL"), a wholly owned subsidiary
of Kaneb Services LLC ("KSL"), manages and controls the operations of KPP
through its general partner interest and an 18% (at March 31, 2005) limited
partnership interest. KPL owns a 1% interest as general partner of the
Partnership and a 1% interest as general partner of KPP.
The unaudited condensed consolidated financial statements of the
Partnership for the three month periods ended March 31, 2005 and 2004, have
been prepared in accordance with accounting principles generally accepted
in the United States of America. Significant accounting policies followed
by the Partnership are disclosed in the notes to the consolidated financial
statements included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2004. In the opinion of the Partnership's
management, the accompanying condensed consolidated financial statements
contain all of the adjustments, consisting of normal recurring accruals,
necessary to present fairly the consolidated financial position of the
Partnership and its consolidated subsidiaries at March 31, 2005, and the
consolidated results of their operations and cash flows for the periods
ended March 31, 2005 and 2004. Operating results for the three months ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
2. VALERO L.P. MERGER AGREEMENT
On October 31, 2004, Valero L.P. and KPP entered into a definitive
agreement to merge (the "KPP Merger") Valero L.P. and KPP. Under the terms
of the agreement, each holder of units of limited partnership interests in
KPP will receive a number of Valero L.P. common units based on an exchange
ratio that fluctuates within a fixed range to provide $61.50 in value of
Valero L.P. units for each unit of KPP. The actual exchange ratio will be
determined at the time of the closing of the proposed merger and is subject
to a fixed value collar of plus or minus five percent of Valero L.P.'s per
unit price of $57.25 as of October 7, 2004. Should Valero L.P.'s per unit
price fall below $54.39 per unit, the exchange ratio will remain fixed at
1.1307 Valero L.P. units for each unit of KPP. Likewise, should Valero
L.P.'s per unit price exceed $60.11 per unit of KPP, the exchange ratio
will remain fixed at 1.0231 Valero L.P. units for each unit of KPP.
In a separate definitive agreement, on October 31, 2004, Valero L.P. agreed
to acquire by merger (the "KSL Merger") all of the outstanding common
shares of KSL for cash. Under the terms of that agreement, Valero L.P. is
offering to purchase all of the outstanding shares of KSL at $43.31 per
share.
The completion of the KPP Merger is subject to the customary regulatory
approvals including those under the Hart-Scott-Rodino Antitrust
Improvements Act. The completion of the KPP Merger is also subject to
completion of the KSL Merger. All required unitholder and shareholder
approvals have been obtained. Upon completion of the mergers, the general
partner of the combined partnership will be owned by affiliates of Valero
Energy Corporation and KPP and KSL will become wholly owned subsidiaries of
Valero L.P.
3. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2005 and 2004, is
as follows:
Three Months Ended
March 31,
---------------------------------
2005 2004
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Net income $ 22,017 $ 20,979
Foreign currency translation adjustment (776) (236)
Interest rate hedging transaction 33 46
------------- --------------
Comprehensive income $ 21,274 $ 20,789
============= ==============
Accumulated other comprehensive income aggregated $15.7 million and $16.4
million at March 31, 2005 and December 31, 2004, respectively.
4. CASH DISTRIBUTIONS
The Partnership makes regular cash distributions in accordance with its
partnership agreement within 45 days after the end of each quarter to
holders of limited partner and general partner interests. Aggregate cash
distributions of $27.0 million and $26.3 million were paid to limited
partner and general partner interests for the three month periods ended
March 31, 2005 and 2004, respectively.
5. CONTINGENCIES
The operations of the Partnership are subject to Federal, state and local
laws and regulations in the United States and various foreign locations
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.
Certain subsidiaries of the Partnership were sued 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 costs 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 in Massachusetts
(the "Otis pipeline" or the "pipeline"), ceased operations in 1973 and was
abandoned before 1978, when the connecting terminal was sold to an
unrelated entity. Grace alleged 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 allegedly
caused by the jet fuel leaks. Grace sought a ruling from the Texas court
that these subsidiaries are responsible for all liabilities, including all
present and future remediation expenses, associated with these leaks and
that Grace has no obligation to indemnify these subsidiaries for these
expenses. In the lawsuit, Grace also sought indemnification for expenses of
approximately $3.5 million that it had incurred since 1996 for response and
remediation required by the State of Massachusetts and for additional
expenses that it expects to incur in the future. The consistent position of
the Partnership's subsidiaries has been that they did not acquire the
abandoned pipeline as part of the 1993 ST Services transaction, and
therefore did not assume any responsibility for the environmental damage
nor any liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition agreement
by failing to disclose matters related to the pipeline, and (2) the
pipeline was abandoned before 1978 -- 15 years before the Partnership's
subsidiaries acquired ST Services. On August 30, 2000, the Judge entered
final judgment in the case that Grace take nothing from the subsidiaries on
its claims seeking recovery of remediation costs. Although the
Partnership's subsidiaries have not incurred any expenses in connection
with the remediation, the court also ruled, in effect, that the
subsidiaries would not be entitled to indemnification from Grace if any
such expenses were incurred in the future. Moreover, the Judge let stand a
prior summary judgment ruling that the pipeline was an asset acquired by
the Partnership's subsidiaries as part of the 1993 ST Services transaction
and that any liabilities associated with the pipeline would have become
liabilities of the subsidiaries. Based on that ruling, the Massachusetts
Department of Environmental Protection and Samson Hydrocarbons Company
(successor to Grace Petroleum Company) wrote letters to ST Services
alleging its responsibility for the remediation, and ST Services responded
denying any liability in connection with this matter. The Judge also
awarded attorney fees to Grace of more than $1.5 million. Both the
Partnership's subsidiaries and Grace have appealed the trial court's final
judgment to the Texas Court of Appeals in Dallas. In particular, the
subsidiaries have filed an appeal of the judgment finding that the Otis
pipeline and any liabilities associated with the pipeline were transferred
to them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an
automatic stay of actions against Grace. This automatic stay covers the
appeal of the Dallas litigation, and the Texas Court of Appeals has issued
an order staying all proceedings of the appeal because of the bankruptcy.
Once that stay is lifted, the Partnership's subsidiaries that are party to
the lawsuit intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA.
The MMR Site contains a number of groundwater contamination plumes, two of
which are allegedly associated with the Otis pipeline, and various other
waste management areas of concern, such as landfills. The United States
Department of Defense, 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 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 Partnership's subsidiaries, the Government advised
the parties in April 1999 that it has identified two spill areas that it
believes to be related to the pipeline that is the subject of the Grace
suit. The Government at that time advised the parties that it believed it
had incurred costs of approximately $34 million, and expected 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.
By letter dated July 26, 2001, the United States Department of Justice
("DOJ") advised ST Services that the Government intends to seek
reimbursement from ST Services under the Massachusetts Oil and Hazardous
Material Release Prevention and Response Act and the Declaratory Judgment
Act for the Government's response costs at the two spill areas discussed
above. The DOJ relied in part on the Texas state court judgment, which in
the DOJ's view, held that ST Services was the current owner of the pipeline
and the successor-in-interest of the prior owner and operator. The
Government advised ST Services that it believes it has incurred costs
exceeding $40 million, and expects to incur future costs exceeding an
additional $22 million, for remediation of the two spill areas. The
Partnership believes that its subsidiaries have substantial defenses. ST
Services responded to the DOJ on September 6, 2001, contesting the
Government's positions and declining to reimburse any response costs. The
DOJ has not filed a lawsuit against ST Services seeking cost recovery for
its environmental investigation and response costs. Representatives of ST
Services have met with representatives of the Government on several
occasions since September 6, 2001 to discuss the Government's claims and to
exchange information related to such claims. Additional exchanges of
information are expected to occur in the future and additional meetings may
be held to discuss possible resolution of the Government's claims without
litigation. The Partnership does not believe this matter will have a
materially adverse effect on its financial condition, although there can be
no assurances as to the ultimate outcome.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
Power Company ("PEPCO") ruptured. Work performed with regard to the
pipeline was conducted by a partnership of which ST Services is general
partner. PEPCO has reported that it has incurred total cleanup costs of $70
million to $75 million. PEPCO probably will continue to incur some cleanup
related costs for the foreseeable future, primarily in connection with EPA
requirements for monitoring the condition of some of the impacted areas.
Since May 2000, ST Services has provisionally contributed a minority share
of the cleanup expense, which has been funded by ST Services' insurance
carriers. ST Services and PEPCO have not, however, reached a final
agreement regarding ST Services' proportionate responsibility for this
cleanup effort, if any, and cannot predict the amount, if any, that
ultimately may be determined to be ST Services' share of the remediation
expense, but ST Services believes that such amount will be covered by
insurance and therefore will not materially adversely affect the
Partnership's financial condition.
As a result of the rupture, purported class actions were filed against
PEPCO and ST Services in federal and state court in Maryland by property
and business owners alleging damages in unspecified amounts under various
theories, including under the Oil Pollution Act ("OPA") and Maryland common
law. The federal court consolidated all of the federal cases in a case
styled as In re Swanson Creek Oil Spill Litigation. A settlement of the
consolidated class action, and a companion state-court class action, was
reached and approved by the federal judge. The settlement involved creation
and funding by PEPCO and ST Services of a $2,250,000 class settlement fund,
from which all participating claimants would be paid according to a
court-approved formula, as well as a court-approved payment to plaintiffs'
attorneys. The settlement has been consummated and the fund, to which PEPCO
and ST Services contributed equal amounts, has been distributed.
Participating claimants' claims have been settled and dismissed with
prejudice. A number of class members elected not to participate in the
settlement, i.e., to "opt out," thereby preserving their claims against
PEPCO and ST Services. All non-participant claims have been settled for
immaterial amounts with ST Services' portion of such settlements provided
by its insurance carrier.
PEPCO and ST Services agreed with the federal government and the State of
Maryland to pay costs of assessing natural resource damages arising from
the Swanson Creek oil spill under OPA and of selecting restoration
projects. This process was completed in mid-2002. ST Services' insurer has
paid ST Services' agreed 50 percent share of these assessment costs. In
late November 2002, PEPCO and ST Services entered into a Consent Decree
resolving the federal and state trustees' claims for natural resource
damages. The decree required payments by ST Services and PEPCO of a total
of approximately $3 million to fund the restoration projects and for
remaining damage assessment costs. The federal court entered the Consent
Decree as a final judgment on December 31, 2002. PEPCO and ST Services have
each paid their 50% share and thus fully performed their payment
obligations under the Consent Decree. ST Services' insurance carrier funded
ST Services' payment.
The U.S. Department of Transportation ("DOT") has issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over
several years of pipeline safety regulations and proposing a civil penalty
of $647,000 jointly against the two companies. ST Services and PEPCO have
contested the DOT allegations and the proposed penalty. A hearing was held
before the Office of Pipeline Safety at the DOT in late 2001. In June of
2004, the DOT issued a final order reducing the penalty to $256,250 jointly
against ST Services and PEPCO and $74,000 against ST Services. On September
14, 2004, ST Services petitioned for reconsideration of the order which was
subsequently denied.
By letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it intended to seek penalties
from ST Services in connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties against ST
Services and PEPCO totaling up to $12 million. A settlement of this claim
was reached in mid-2002 under which ST Services' insurer will pay a total
of slightly more than $1 million in installments over a five year period.
PEPCO has also reached a settlement of these claims with the State of
Maryland. Accordingly, the Partnership believes that this matter will not
have a material adverse effect on its financial condition.
On December 13, 2002, ST Services sued PEPCO in the Superior Court,
District of Columbia, seeking, among other things, a declaratory judgment
as to ST Services' legal obligations, if any, to reimburse PEPCO for costs
of the oil spill. On December 16, 2002, PEPCO sued ST Services in the
United States District Court for the District of Maryland, seeking recovery
of all its costs for remediation of and response to the oil spill. Pursuant
to an agreement between ST Services and PEPCO, ST Services' suit was
dismissed, subject to refiling. ST Services has moved to dismiss PEPCO's
suit. ST Services is vigorously defending against PEPCO's claims and is
pursuing its own counterclaims for return of monies ST Services has
advanced to PEPCO for settlements and cleanup costs. The Partnership
believes that any costs or damages resulting from these lawsuits will be
covered by insurance and therefore will not materially adversely affect the
Partnership's financial condition. The amounts claimed by PEPCO, if
recovered, would trigger an excess insurance policy which has a $600,000
retention, but the Partnership does not believe that such retention, if
incurred, would materially adversely affect the Partnership's financial
condition.
In 2003, Exxon Mobil filed a lawsuit in a New Jersey state court against
GATX Corporation, Kinder Morgan Liquid Terminals ("Kinder Morgan"), the
successor in interest to GATX Terminals Corporation ("GATX"), and ST
Services, seeking reimbursement for remediation costs associated with the
Paulsboro, New Jersey terminal. The terminal was owned and operated by
Exxon Mobil from the early 1950's until 1990 when purchased by GATX. ST
Services purchased the terminal in 2000 from GATX. GATX was subsequently
acquired by Kinder Morgan. As a condition to the sale to GATX in 1990,
Exxon Mobil undertook certain remediation obligations with respect to the
site. In the lawsuit, Exxon Mobil is claiming that it has complied with its
remediation and contractual obligations and is entitled to reimbursement
from GATX Corporation, the parent company of GATX, Kinder Morgan, and ST
Services for costs in the amount of $400,000 that it claims are related to
releases at the site subsequent to its sale of the terminal to GATX. It is
also alleging that any remaining remediation requirements are the
responsibility of GATX Corporation, Kinder Morgan, or ST Services. Kinder
Morgan has alleged that it was relieved of any remediation obligations
pursuant to the sale agreement between its predecessor, GATX, and ST
Services. ST Services believes that, except for remediation involving
immaterial amounts, GATX Corporation or Exxon Mobil are responsible for the
remaining remediation of the site. Costs of completing the required
remediation depend on a number of factors and cannot be determined at the
current time.
A subsidiary of the Partnership purchased the approximately 2,000-mile
ammonia pipeline system from Koch Pipeline Company, L.P. and Koch
Fertilizer Storage and Terminal Company in 2002. The rates of the ammonia
pipeline are subject to regulation by the Surface Transportation Board (the
"STB"). The STB had issued an order in May 2000, prescribing maximum
allowable rates the Partnership's predecessor could charge for
transportation to certain destination points on the pipeline system. In
2003, the Partnership instituted a 7% general increase to pipeline rates.
On August 1, 2003, CF Industries, Inc. ("CFI") filed a complaint with the
STB challenging these rate increases. On August 11, 2004, STB ordered the
Partnership to pay reparations to CFI and to return CFI's rates to the
levels permitted under the rate prescription. The Partnership has complied
with the order. The STB, however, indicated in the order that it would lift
the rate prescription in the event the Partnership could show "materially
changed circumstances." The Partnership has submitted evidence of
"materially changed circumstances," which specifically includes its capital
investment in the pipeline. CFI has argued that the Partnership's
acquisition costs should not be considered by the STB as a measure of the
Partnership's investment base. The STB is expected to decide the issue
within the second quarter of 2005.
Also, on June 16, 2003, Dyno Nobel Inc. ("Dyno") filed a complaint with the
STB challenging the 2003 rate increase on the basis that (i) the rate
increase constitutes a violation of a contract rate, (ii) rates are
discriminatory and (iii) the rates exceed permitted levels. Dyno also
intervened in the CFI proceeding described above. Unlike CFI, Dyno's rates
are not subject to a rate prescription. As of March 31, 2005, Dyno would be
entitled to approximately $2.7 million in rate refunds, should it be
successful. The Partnership believes, however, that Dyno's claims are
without merit.
The Partnership has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management of the Partnership believes, after consulting with counsel, that
the ultimate resolution of such contingencies will not have a materially
adverse effect on the financial position, results of operations or
liquidity of the Partnership.
6. BUSINESS SEGMENT DATA
The Partnership conducts business through three principal operations: the
"Pipeline Operations," which consists primarily of the transportation of
refined petroleum products and fertilizer in the Midwestern states as a
common carrier; the "Terminaling Operations," which provides storage for
petroleum products, specialty chemicals and other liquids; and the "Product
Sales Operations," which delivers bunker fuels to ships in the Caribbean
and Nova Scotia, Canada, and sells bulk petroleum products to various
commercial interests.
The Partnership measures segment profit as operating income. Total assets
are those controlled by each reportable segment. Business segment data is
as follows:
Three Months Ended
March 31,
---------------------------------
2005 2004
------------- -------------
Business segment revenues:
Pipeline operations $ 30,092 $ 27,903
Terminaling operations 69,130 62,795
Product sales operations 83,796 55,715
------------- --------------
$ 183,018 $ 146,413
============= ==============
Business segment profit:
Pipeline operations $ 11,737 $ 11,210
Terminaling operations 18,727 18,484
Product sales operations 3,968 2,868
------------- --------------
Operating income 34,432 32,562
Interest and other income 204 5
Interest expense (11,105) (10,436)
------------- --------------
Income before income taxes $ 23,531 $ 22,131
============= ==============
March 31, December 31,
2005 2004
------------- -------------
(in thousands)
Total assets:
Pipeline operations $ 353,781 $ 351,195
Terminaling operations 895,500 917,966
Product sales 60,540 56,155
------------- -------------
$ 1,309,821 $ 1,325,316
============= =============
7. RECENT ACCOUNTING PRONOUNCEMENT
In March of 2005, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 47, "Accounting for Conditional Retirement
Obligations" ("FIN 47"), which requires companies to recognize a liability
for the fair value of a legal obligation to perform asset-retirement
activities that are conditional on a future event, if the amount can be
reasonably estimated. FIN 47 must be adopted by the Partnership by the end
of fiscal 2005. The impact of adoption on the Partnership's consolidated
financial statements is still being evaluated.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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This discussion should be read in conjunction with the condensed
consolidated financial statements of Kaneb Pipe Line Operating Partnership,
L.P. (the "Partnership") and notes thereto included elsewhere in this
report.
Overview
The Partnership, a limited partnership, is engaged in the refined petroleum
products and anhydrous ammonia pipeline business and the terminaling of
petroleum products and specialty liquids. Kaneb Pipe Line Partners, L.P.
("KPP"), a master limited partnership, holds a 99% interest as limited
partner in the Partnership. Kaneb Pipe Line Company LLC ("KPL"), now a
wholly owned subsidiary of Kaneb Services LLC ("KSL"), manages and controls
the operations of KPP through its general partner interest and an 18% (at
March 31, 2005) limited partner interest. KPL owns a 1% interest as general
partner of the Partnership and a 1% interest as general partner of KPP.
On October 31, 2004, Valero L.P. and KPP entered into a definitive
agreement to merge (the "KPP Merger") Valero L.P. and KPP. Under the terms
of the agreement, each holder of units of limited partnership interests in
KPP will receive a number of Valero L.P. common units based on an exchange
ratio that fluctuates within a fixed range to provide $61.50 in value of
Valero L.P. units for each unit of KPP. The actual exchange ratio will be
determined at the time of the closing of the proposed merger and is subject
to a fixed value collar of plus or minus five percent of Valero L.P.'s per
unit price of $57.25 as of October 7, 2004. Should Valero L.P.'s per unit
price fall below $54.39 per unit, the exchange ratio will remain fixed at
1.1307 Valero L.P. units for each unit of KPP. Likewise, should Valero
L.P.'s per unit price exceed $60.11 per unit of KPP, the exchange ratio
will remain fixed at 1.0231 Valero L.P. units for each unit of KPP.
In a separate definitive agreement, on October 31, 2004, Valero L.P. agreed
to acquire by merger (the "KSL Merger") all of the outstanding common
shares of KSL for cash. Under the terms of that agreement, Valero L.P. is
offering to purchase all of the outstanding shares of KSL at $43.31 per
share.
The completion of the KPP Merger is subject to the customary regulatory
approvals including those under the Hart-Scott-Rodino Antitrust
Improvements Act. The completion of the KPP Merger is also subject to
completion of the KSL Merger. All required unitholder and shareholder
approvals have been obtained. Upon completion of the mergers, the general
partner of the combined partnership will be owned by affiliates of Valero
Energy Corporation and KPP and KSL will become wholly owned subsidiaries of
Valero L.P.
The Partnership's petroleum pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in
Kansas, Nebraska, Iowa, South Dakota, North Dakota, Colorado, Wyoming and
Minnesota. 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 Federal Energy Regulatory Commission (the
"FERC"), or, in the case of intrastate shipments, with the relevant state
authority, to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for
transportation. The petroleum pipelines primarily transport gasoline,
diesel oil, fuel oil and propane. Substantially all of the petroleum
pipeline operations constitute common carrier operations that are subject
to federal or state tariff regulations. The Partnership also owns an
approximately 2,000-mile anhydrous ammonia pipeline system acquired from
Koch Pipeline Company, L.P. in November of 2002. The fertilizer pipeline
originates in southern Louisiana, proceeds north through Arkansas and
Missouri, and then branches east into Illinois and Indiana and north and
west into Iowa and Nebraska. The Partnership's petroleum pipeline business
depends on the level of demand for refined petroleum products in the
markets served by the pipelines and the ability and willingness of
refineries and marketers having access to the pipelines to supply such
demand by deliveries through the pipelines. The Partnership's pipeline
revenues are based on volumes shipped and the distance over which such
volumes are transported.
The Partnership's terminaling business is one of the largest independent
petroleum products and specialty liquids terminaling companies in the
United States. In the United States, ST Services operates 41 facilities in
20 states. ST Services also owns and operates seven terminals located in
the United Kingdom and eight terminals in Australia and New Zealand. ST
Services and its predecessors have a long history in the terminaling
business and handle a wide variety of liquids, from petroleum products to
specialty chemicals to edible liquids. Statia, acquired in 2002, owns a
terminal on the Island of St. Eustatius, Netherlands Antilles, and a
terminal at Point Tupper, Nova Scotia, Canada. Independent terminal owners
generally compete on the basis of the location and versatility of the
terminals, service and price. 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 the safe storage of product at specified temperatures and
other conditions, as well as receipt and delivery from the terminal. The
ability to obtain attractive pricing is dependent largely on the quality,
versatility and reputation of the facility. Terminaling revenues are earned
based on fees for the storage and handling of products.
The Partnership's product sales business delivers bunker fuels to ships in
the Caribbean and Nova Scotia, Canada, and sells bulk petroleum products to
various commercial customers at those locations. In the bunkering business,
the Partnership competes with ports offering bunker fuels along the route
of the vessel. Vessel owners or charterers are charged berthing and other
fees for associated services such as pilotage, tug assistance, line
handling, launch service and emergency response services.
Consolidated Results of Operations
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- ------------
Revenues $ 183,018 $ 146,413
============= =============
Operating Income $ 34,432 $ 32,562
============= =============
Net income $ 22,017 $ 20,979
============= =============
Capital expenditures, excluding acquisitions $ 8,743 $ 7,347
============= =============
For the three months ended March 31, 2005, revenues increased by $36.6
million, or 25%, when compared to the first quarter of 2004, due to a $28.1
million increase in product sales revenues (see "Product Sales" below), a
$6.3 million increase in terminaling business revenues (see "Terminaling
Operations" below), and a $2.2 million increase in pipeline revenues (see
"Pipeline Operations" below). Operating income for the three months ended
March 31, 2005 increased by $1.9 million, or 6%, when compared to the same
period in 2004, due to a $1.1 million increase in product sales operating
income, a $0.5 million increase in pipeline operating income, and a $0.3
million increase in terminaling operating income. Operating income for the
three months ended March 31, 2005 includes $2.1 million of costs associated
with the Valero L.P. merger agreement. Overall, net income for the three
months ended March 31, 2005 increased by $1.0 million, or 5%, when compared
to the three months ended March 31, 2004.
Pipeline Operations
Three Months Ended
March 31,
---------------------------------
2005 2004
------------- -------------
Revenues $ 30,092 $ 27,903
Operating costs 11,499 11,487
Depreciation and amortization 3,792 3,599
General and administrative 3,064 1,607
------------- --------------
Operating income $ 11,737 $ 11,210
============= ==============
The Partnership's pipeline revenues are based on volumes shipped and the
distances over which such volumes are transported. Because tariff rates are
regulated by the FERC or the STB, the pipelines compete primarily on the
basis of quality of service, including delivery of products at convenient
locations on a timely basis to meet the needs of their customers. For the
three month period ended March 31, 2005, revenues increased by $2.2
million, or 8%, when compared to the first quarter of 2004, due to
increases in barrel miles of petroleum products shipped on petroleum
pipelines and increases in the average price received per barrel mile
shipped. Barrel miles on petroleum pipelines totaled 5.2 billion and 5.1
billion for the three months ended March 31, 2005 and 2004, respectively.
Total volumes shipped on the anhydrous ammonia pipeline aggregated 297
thousand tons for each of the three month periods ended March 31, 2005 and
2004.
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, was flat for the three month period
ended March 31, 2005, when compared to the first quarter of 2004. For the
three months ended March 31, 2005, depreciation and amortization increased
by $0.2 million, when compared to the same 2004 period, due primarily to
routine maintenance capital expenditures. General and administrative costs,
which include managerial, accounting and administrative personnel costs,
office rent and expense, legal and professional costs and other
non-operating costs, increased by $1.5 million for the three month period
ended March 31, 2005, when compared to the first quarter of 2004, due
primarily to costs associated with the Valero L.P. merger agreement and
increases in personnel-related costs. Terminaling Operations
Three Months Ended
March 31,
---------------------------------
2005 2004
------------- -------------
Revenues $ 69,130 $ 62,795
Operating costs 33,360 30,343
Depreciation and amortization 10,824 10,084
General and administrative 6,219 3,884
------------- --------------
Operating income $ 18,727 $ 18,484
============= ==============
For the three month period ended March 31, 2005, terminaling revenues
increased by $6.3 million, or 10%, when compared to the three month period
ended March 31, 2004, due to increases in both the average tankage utilized
and the average price realized per barrel of tankage utilized. Average
tankage utilized for the three month period ended March 31, 2005 was 50.5
million barrels, compared to 48.2 million barrels for the same prior year
period. For the three month period ended March 31, 2005, average annualized
revenues per barrel of tankage utilized increased to $5.55 per barrel,
compared to $5.24 per barrel for the same prior year period, due to
favorable domestic and foreign market conditions.
For the three month period ended March 31, 2005, operating costs increased
by $3.0 million, when compared to the same 2004 period, a result of overall
increases in tank utilization and planned maintenance. For the three months
ended March 31, 2005, depreciation and amortization increased by $0.7
million, when compared to the first quarter of 2004, due to terminal
acquisitions in 2004 and routine maintenance capital expenditures. General
and administrative costs increased by $2.3 million for the three months
ended March 31, 2005, when compared to the first quarter of 2004, due
primarily to costs associated with the Valero L.P. merger agreement and
increases in personnel-related costs.
Product Sales
Three Months Ended
March 31,
---------------------------------
2005 2004
------------- -------------
Revenues $ 83,796 $ 55,715
Cost of products sold 77,085 51,039
------------- --------------
Gross margin $ 6,711 $ 4,676
============= ==============
Operating income $ 3,968 $ 2,868
============= ==============
The product sales business, which was acquired with Statia in 2002,
delivers bunker fuels to ships in the Caribbean and Nova Scotia, Canada and
sells bulk petroleum products to various commercial interests. For the
three months ended March 31, 2005, product sales revenues increased by
$28.1 million, or 50%, when compared to the three months ended March 31,
2004, due to a general increase in prices, as well as an overall increase
in volumes sold. Approximately $15.1 million of the first quarter of 2005
revenue increase was due to volume increases and $13.0 million was due to
price increases, when compared to the first quarter of 2004. Gross margin
for the three months ended March 31, 2005 increased by $2.0 million, when
compared to the first quarter of 2004, due to the increase in volumes sold.
Operating income for the three months ended March 31, 2005 increased by
$1.1 million, when compared to the first quarter of 2004, due to higher
sales volumes and favorable product margins.
Interest Expense
For the three months ended March 31, 2005, interest expense increased by
$0.7 million, when compared to the same 2004 period, due to overall
increases in debt levels resulting from terminal acquisitions in 2004 and
increases in interest rates on variable rate debt.
Income Taxes
Partnership operations are not subject to federal or state income taxes.
However, certain operations are conducted through separate taxable
wholly-owned U.S. and foreign corporate subsidiaries. The income tax
expense for these subsidiaries was $1.5 million and $1.2 million for the
three month periods ended March 31, 2005 and 2004, respectively.
On June 1, 1989, the governments of the Netherlands Antilles and St.
Eustatius approved a Free Zone and Profit Tax Agreement retroactive to
January 1, 1989, which expired on December 31, 2000. This agreement
required a subsidiary of the Partnership, which was acquired with Statia in
2002, to pay a 2% rate on taxable income, as defined therein, or a minimum
payment of 500,000 Netherlands Antilles guilders ($0.3 million) per year.
The agreement further provided that any amounts paid in order to meet the
minimum annual payment were available to offset future tax liabilities
under the agreement to the extent that the minimum annual payment is
greater than 2% of taxable income. The subsidiary is currently engaged in
discussions with representatives appointed by the Island Territory of St.
Eustatius regarding the renewal or modification of the agreement, but the
ultimate outcome cannot be predicted at this time. The subsidiary has
accrued amounts assuming a new agreement becomes effective, and continues
to make payments, as required, under the previous agreement.
Liquidity and Capital Resources
Cash provided by operations was $41.3 million and $32.5 million for the
three months ended March 31, 2005 and 2004, respectively. The first quarter
2005 increase was due primarily to overall increases in revenues and
operating income and changes in working capital components resulting from
the timing of cash receipts and disbursements, when compared to the first
quarter of 2004.
Capital expenditures were $8.7 million for the three months ended March 31,
2005, compared to $7.3 million during the same 2004 period. Such
expenditures included $7.3 million and $5.7 million in maintenance and
environmental expenditures and $1.4 million and $1.6 million in expansion
expenditures for the three month periods ended March 31, 2005 and 2004,
respectively. The increase in first quarter 2005 capital expenditures, when
compared to the same 2004 period, was primarily the result of increases in
planned maintenance capital expenditures related to the terminaling
business. 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 to be, significant.
The Partnership anticipates that capital expenditures (including routine
maintenance and expansion expenditures, but excluding acquisitions) will
total approximately $40 to $44 million in 2005. 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 government 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 will choose to
do so.
The Partnership makes regular cash distributions in accordance with its
partnership agreement within 45 days after the end of each quarter to
holders of limited partner and general partner interests. Aggregate cash
distributions of $27.0 million and $26.3 million were paid to limited
partner and general partner interests for the three month periods ended
March 31, 2005 and 2004, respectively.
The Partnership expects to fund future cash distributions and maintenance
capital expenditures with existing cash and anticipated cash flows from
operations. Expansionary capital expenditures are expected to be funded
through additional Partnership bank borrowings and/or future public debt
offerings or KPP public equity offerings.
The Partnership has a credit agreement with a group of banks that provides
for a $400 million unsecured revolving credit facility through April of
2006. The credit facility, which provides for an increase in the commitment
up to an aggregate of $450 million by mutual agreement between the
Partnership and the banks, bears interest at variable rates and has a
variable commitment fee on unused amounts. The credit facility contains
certain financial and operating covenants, including limitations on
investments, sales of assets and transactions with affiliates and, absent
an event of default, does not restrict distributions to partners. At March
31, 2005, the Partnership was in compliance with all covenants. At March
31, 2005, $95.7 million was outstanding under the credit agreement.
In May of 2003, the Partnership issued $250 million of 5.875% senior
unsecured notes due June 1, 2013. Under the note indenture, interest is
payable semi-annually in arrears on June 1 and December 1 of each year. The
notes are redeemable, as a whole or in part, at the option of the
Partnership, at any time, at a redemption price equal to the greater of
100% of the principal amount of the notes, or the sum of the present value
of the remaining scheduled payments of principal and interest, discounted
to the redemption date at the applicable U.S. Treasury rate, as defined in
the indenture, plus 30 basis points. The note indenture contains certain
financial and operational covenants, including certain limitations on
investments, sales of assets and transactions with affiliates and, absent
an event of default, such covenants do not restrict distributions to
partners. At March 31, 2005, the Partnership was in compliance with all
covenants.
In February of 2002, the Partnership issued $250 million of 7.75% senior
unsecured notes due February 15, 2012. Under the note indenture, interest
is payable semi-annually in arrears on February 15 and August 15 of each
year. The notes are redeemable, as a whole or in part, at the option of the
Partnership, at any time, at a redemption price equal to the greater of
100% of the principal amount of the notes, or the sum of the present value
of the remaining scheduled payments of principal and interest, discounted
to the redemption date at the applicable U.S. Treasury rate, as defined in
the indenture, plus 30 basis points. The note indenture contains certain
financial and operational covenants, including certain limitations on
investments, sales of assets and transactions with affiliates and, absent
an event of default, such covenants do not restrict distributions to
partners. At March 31, 2005, the Partnership was in compliance with all
covenants.
The following is a schedule by period of the Partnership's debt repayment
obligations and material contractual commitments as of March 31, 2005:
Less than After
Total 1 year 1 -3 years 4 -5 years 5 years
---------- ------------ ----------- ------------ ---------------
(in thousands)
Debt:
Revolving credit facility $ 95,669 $ - $ 95,669 $ - $ -
7.75% senior unsecured
notes 250,000 - - - 250,000
5.875% senior unsecured
notes 250,000 - - - 250,000
Other bank debt 75,347 - 75,347 - -
---------- ------------ ----------- ------------ --------------
Debt subtotal 671,016 - 171,016 - 500,000
---------- ------------ ----------- ------------ --------------
Contractual commitments -
Operating leases 66,574 11,416 17,050 13,795 24,313
---------- ------------ ----------- ------------ --------------
Total $ 737,590 $ 11,416 $ 188,066 $ 13,795 $ 524,313
========== ============ =========== ============ ==============
Additional information relative to sources and uses of cash is presented in
the consolidated financial statements included in this report.
Off-Balance Sheet Transactions
The Partnership was not a party to any off-balance sheet transactions at
March 31, 2005, or for the three month periods ended March 31, 2005 and
2004.
Critical Accounting Policies and Estimates
The preparation of the Partnership's financial statements in conformity
with accounting principles generally accepted in the United States of
America 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. Significant
accounting policies are included in the Notes to the Consolidated Financial
Statements of the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2004.
Critical accounting policies are those that are most important to the
portrayal of the Partnership's financial position and results of
operations. These policies require management's most difficult, subjective
or complex judgments, often employing the use of estimates about the effect
of matters that are inherently uncertain. The Partnership's most critical
accounting policies pertain to impairment of property and equipment and
environmental costs.
The carrying value of property and equipment is periodically evaluated
using management's estimates of undiscounted future cash flows, or, in some
cases, third-party appraisals, as the basis for determining if impairment
exists under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". To the extent that impairment is indicated to exist, an impairment
loss is recognized under SFAS No. 144 based on fair value. The application
of SFAS No. 144 did not have a material impact on the results of operations
of the Partnership for the three month periods ended March 31, 2005 and
2004. However, future evaluations of carrying value are dependent on many
factors, several of which are out of the Partnership's control, including
demand for refined petroleum products and terminaling services in the
Partnership's market areas, and local, state and federal governmental
regulations. To the extent that such factors or conditions change, it is
possible that future impairments might occur, which could have a material
effect on the results of operations of the Partnership.
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. The application of the Partnership's
environmental accounting policies did not have a material impact on the
results of operations of the Partnership for the three month periods ended
March 31, 2005 and 2004. 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 terminaling operations. Moreover, it is possible that other
developments, such as increasingly strict environmental laws, regulations
and enforcement policies thereunder, and legal claims for damages to
property or persons resulting from the operations of the Partnership, could
result in substantial costs and liabilities, any of which could have a
material effect on the results of operations of the Partnership.
Recent Accounting Pronouncement
In March of 2005, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 47, "Accounting for Conditional Retirement
Obligations" ("FIN 47"), which requires companies to recognize a liability
for the fair value of a legal obligation to perform asset-retirement
activities that are conditional on a future event, if the amount can be
reasonably estimated. FIN 47 must be adopted by the Partnership by the end
of fiscal 2005. The impact of adoption on the Partnership's consolidated
financial statements is still being evaluated.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks pursuant to this Item (i.e., the risk of loss
arising from adverse changes in market rates and prices) to which the
Partnership is exposed are interest rates on the Partnership's debt and
investment portfolios and fluctuations of petroleum product prices on
inventories held for resale.
The Partnership's investment portfolio consists of cash equivalents;
accordingly, the carrying amounts approximate fair value. The Partnership's
investments are not material to its financial position or performance. Assuming
variable rate debt of $130.8 million at March 31, 2005, a one percent increase
in interest rates would increase annual net interest expense by approximately
$1.3 million.
The product sales business periodically purchases refined petroleum
products for resale as bunker fuel and sales to commercial interests. Petroleum
inventories are generally held for short periods of time, not exceeding 90 days.
As the Partnership does not engage in derivative transactions to hedge the value
of the inventory, it is subject to market risk from changes in global oil
markets.
Item 4. Controls and Procedures
Kaneb Pipe Line Company LLC's principal executive officer and principal
financial officer, after evaluating, as of March 31, 2005, the effectiveness of
the Partnership's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), have concluded
that, as of such date, the Partnership's disclosure controls and procedures are
adequate and effective to ensure that material information relating to the
Partnership and its consolidated subsidiaries would be made known to them by
others within those entities.
During the first quarter of 2005, there have been no changes in the
Partnership's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, those internal controls
over financial reporting subsequent to the date of the evaluation. As a result,
no corrective actions were required or undertaken.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
Item 6. Exhibits
(a) Exhibits.
3.1 Amended and Restated Agreement of Limited Partnership, dated
September 27, 1989, filed as Exhibit 3.1 to the Registrant's Form
10-K for the year ended December 31, 2001, which exhibit is
hereby incorporated by reference.
3.2 Amendment to Amended and Restated Agreement of Limited
Partnership dated October 27, 2003, filed as Exhibit 3.2 to the
Registrant's Form 10-K for the year ended December 31, 2003,
which exhibit is hereby incorporated by reference.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANEB PIPE LINE OPERATING
PARTNERSHIP, L.P.
(Registrant)
By KANEB PIPE LINE COMPANY LLC
--------------------------------
(General Partner)
Date: May 10, 2005 //s// HOWARD C. WADSWORTH
--------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Principal Financial Officer and
Duly Authorized Officer)
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward D. Doherty, Chief Executive Officer of Kaneb Pipe Line Company LLC, as
General Partner for Kaneb Pipe Line Operating Partnership, L.P., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Pipe Line
Operating Partnership, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2005
//s// EDWARD D. DOHERTY
-----------------------------------
Edward D. Doherty
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Kaneb Pipe Line Company LLC,
as General Partner for Kaneb Pipe Line Operating Partnership, L.P., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Pipe Line
Operating Partnership, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2005
//s// HOWARD C. WADSWORTH
-----------------------------------
Howard C. Wadsworth
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Executive Officer of Kaneb Pipe Line Company
LLC, as General Partner of Kaneb Pipe Line Operating Partnership, L.P. (the
"Partnership"), hereby certifies that, to his knowledge, the Partnership's
Quarterly Report on Form 10-Q for the three months ended March 31, 2005, filed
with the United States Securities and Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Quarterly Report
fairly presents, in all material respects, the financial condition and results
of operations of the Partnership.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Pipe Line Operating
Partnership, L.P. and will be retained by Kaneb Pipe Line Operating Partnership,
L.P. and furnished to the Securities and Exchange Commission or its staff upon
request.
Date: May 10, 2005
//s// EDWARD D. DOHERTY
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Edward D. Doherty
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Financial Officer of Kaneb Pipe Line Company
LLC, as General Partner of Kaneb Pipe Line Operating Partnership, L.P. (the
"Partnership"), hereby certifies that, to his knowledge, the Partnership's
Quarterly Report on Form 10-Q for the three months ended March 31, 2005, filed
with the United States Securities and Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Quarterly Report
fairly presents, in all material respects, the financial condition and results
of operations of the Partnership.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Pipe Line Operating
Partnership, L.P. and will be retained by Kaneb Pipe Line Operating Partnership,
L.P. and furnished to the Securities and Exchange Commission or its staff upon
request.
Date: May 10, 2005
//s// HOWARD C. WADSWORTH
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Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)