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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For the Quarterly Period Commission File
Ended September 30, 1999 Number 001-05083
KANEB SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principle executive offices, including zip code)
(972) 699-4000
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at November 1, 1999
No par value 31,501,193 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1999 and 1998 1
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 134,280 $ 105,476 $ 356,587 $ 265,469
--------- --------- --------- ---------
Costs and expenses:
Operating costs 45,786 42,412 137,840 123,687
Cost of sales 63,158 39,499 150,632 79,954
Depreciation and amortization 4,682 4,192 13,745 12,441
General and administrative 1,403 1,466 3,788 3,892
--------- --------- --------- ---------
Total costs and expenses 115,029 87,569 306,005 219,974
--------- --------- --------- ---------
Operating income 19,251 17,907 50,582 45,495
Other income 225 30 672 55
Interest expense (4,214) (3,918) (13,538) (11,554)
Amortization of excess of cost over fair
value of net assets of acquired businesses (551) (500) (1,617) (1,470)
--------- --------- --------- ---------
Income before interest of outside
non-controlling partners in KPP's
net income, gain on issuance of units
by KPP and income tax expense 14,711 13,519 36,099 32,526
Interest of outside non-controlling
partners in KPP's net income (9,608) (8,101) (24,310) (20,918)
Gain on issuance of units by KPP 16,764 -- 16,764 --
Income tax expense (6,320) (984) (6,685) (1,973)
--------- --------- --------- ---------
Net income 15,547 4,434 21,868 9,635
Dividends applicable to preferred stock 124 131 346 439
--------- --------- --------- ---------
Net income applicable to common stock $ 15,423 $ 4,303 $ 21,522 $ 9,196
========= ========= ========= =========
Earnings per common share -
Basic $ .49 $ .14 $ .68 $ .29
========= ========= ========= =========
Diluted $ .47 $ .13 $ .66 $ .28
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30 December 31
1999 1998
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,829 $ 9,134
Accounts receivable, trade 59,396 47,540
Inventories 15,900 13,465
Prepaid expenses and other current assets 7,928 6,615
--------- ---------
Total current assets 106,053 76,754
--------- ---------
Property and equipment 470,136 411,285
Less accumulated depreciation and amortization 141,411 130,759
--------- ---------
Net property and equipment 328,725 280,526
--------- ---------
Investment in affiliate 23,466 21,005
Excess of cost over fair value of net assets
of acquired businesses 63,212 62,521
Other assets 7,464 7,239
--------- ---------
$ 528,920 $ 448,045
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Short-term and current portion of long-term debt $ 2,392 $ 15,293
Accounts payable 17,516 14,520
Accrued expenses 44,120 41,309
--------- ---------
Total current liabilities 64,028 71,122
--------- ---------
Long-term debt, less current portion:
Pipeline and terminaling services 156,472 153,000
Product marketing services 6,575 --
Industrial services 21,135 20,292
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 207,848 196,958
--------- ---------
Deferred income taxes and other liabilities 23,051 15,626
Interest of outside non-controlling partners in KPP 125,315 76,894
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,247 4,239
Additional paid-in-capital 197,246 197,122
Accumulated deficit (66,901) (88,423)
Treasury stock, at cost (29,674) (29,775)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment (2,032) (1,510)
--------- ---------
Total stockholders' equity 108,678 87,445
--------- ---------
$ 528,920 $ 448,045
========= =========
See notes to consolidated financial statements.
2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30
--------------------
1999 1998
-------- --------
Operating activities:
Net income $ 21,868 $ 9,635
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,745 12,441
Equity in earnings of affiliate (2,515) --
Interest of outside non-controlling
partners in KPP 24,310 20,918
Amortization of excess of cost over fair
value of net assets of acquired businesses 1,617 1,470
Gain on issuance of units by KPP (16,764) --
Deferred income taxes 7,480 491
Changes in working capital components (8,817) (5,652)
-------- --------
Net cash provided by operating activities 40,924 39,303
-------- --------
Investing activities:
Capital expenditures (13,183) (10,207)
Acquisitions, net of cash acquired (48,439) (16,174)
Change in other assets, net (2,882) (2,623)
-------- --------
Net cash used in investing activities (64,504) (29,004)
-------- --------
Financing activities:
Issuance of short-term and long-term debt 55,480 21,547
Payments on long-term debt (57,491) (10,203)
Preferred stock dividends (346) (439)
Distributions to outside non-controlling
partners in KPP (26,175) (21,382)
Common stock issued 233 133
Purchase of treasury stock -- (4,736)
Net proceeds from issuance of units by KPP 65,574 --
-------- --------
Net cash provided by (used in)
financing activities 37,275 (15,080)
-------- --------
Increase (decrease) in cash and cash equivalents 13,695 (4,781)
Cash and cash equivalents at beginning of period 9,134 23,025
-------- --------
Cash and cash equivalents at end of period $ 22,829 $ 18,244
======== ========
Supplemental cash flow information:
Cash paid for interest $ 12,401 $ 10,503
======== ========
Cash paid for income taxes $ 956 $ 2,041
======== ========
See notes to consolidated financial statements.
3
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb
Services, Inc. and its subsidiaries (the "Company") for the three and nine
month periods ended September 30, 1999 and 1998, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the Company
and its subsidiaries are disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements
contain the adjustments, consisting of normal recurring accruals, necessary
to present fairly the consolidated financial position of the Company and
its consolidated subsidiaries at September 30, 1999 and the consolidated
results of their operations and cash flows for the periods ended September
30, 1999 and 1998. Operating results for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
2. ACQUISITION BY KPP
On February 1, 1999, Kaneb Pipe Line Partners, L.P. ("KPP") acquired six
terminals in the United Kingdom from GATX Terminals Limited for (pound)22.6
million (approximately $37.2 million) plus the assumption of certain
liabilities. The acquisition, which was financed by KPP's term loans from a
bank, has been accounted for using the purchase method of accounting. 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 pari passu with the existing mortgage notes and credit
facility, by a mortgage on the East Pipeline. The term loans, which are
without recourse to the Company, contain certain financial and operational
covenants. $13.3 million of the term loans were repaid in July 1999 with
the proceeds from a public offering of KPP units (see Note 3). The
remaining portion ($25.9 million) is due in January 2002. The pro forma
effect of the acquisition was not material to the results of operations.
3. PUBLIC OFFERING OF KPP UNITS
In July 1999, KPP 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 KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans (including $13.3 million in term loans
resulting from the United Kingdom terminal acquisition referred to in Note
2). As a result of KPP issuing additional units to unrelated parties, the
Company's pro-rata share of the net assets of KPP increased by $16.8
million. Accordingly, the Company recognized a $16.8 million gain before
deferred income taxes of $6.4 million.
4. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 1999
and 1998 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Net income $ 15,547 $ 4,434 $ 21,868 $ 9,635
Other comprehensive
income(loss)
- foreign currency
translation adjustment 3 750 (522) 777
-------- -------- -------- --------
Comprehensive income $ 15,550 $ 5,184 $ 21,346 $ 10,412
======== ======== ======== ========
<PAGE>
5. EARNINGS PER SHARE
The following is a reconciliation of Basic and Diluted earnings per share
(in thousands, except for per share amounts):
Weighted
Average
Net Common Per-Share
Income Shares Amount
-------- -------- ---------
Three Months Ended September 30, 1999
-------------------------------------
Net income $15,547
Dividends applicable to preferred stock (124)
-------
Basic earnings per share -
Income applicable to common stock 15,423 31,465 $ .49
=======
Effect of dilutive securities -
Common stock options and DSUs -- 1,135
------- -------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $15,423 32,600 $ .47
======= ======= =======
Three Months Ended September 30, 1998
-------------------------------------
Net income $ 4,434
Dividends applicable to preferred stock (131)
-------
Basic earnings per share -
Income applicable to common stock 4,303 31,443 $ .14
=======
Effect of dilutive securities -
Common stock options and DSUs -- 841
------- -------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 4,303 32,284 $ .13
======= ======= =======
Nine Months Ended September 30, 1999
-----------------------------------
Net income $21,868
Dividends applicable to preferred stock (346)
-------
Basic earnings per share -
Income available to common stock 21,522 31,439 $ .68
========
Effect of dilutive securities -
Common stock options -- 1,101
------- --------
Diluted earnings per share -
Income available to common stock
and assumed options exercised $21,522 32,540 $ .66
======= ======= ========
Nine Months Ended September 30, 1998
------------------------------------
Net income $ 9,635
Dividends applicable to preferred stock (439)
-------
Basic earnings per share -
Income available to common stock 9,196 31,856 $ 0.29
========
Effect of dilutive securities -
Common stock options -- 904
------- --------
Diluted earnings per share -
Income available to common stock
and assumed options exercised $ 9,196 32,760 $ 0.28
======= ======= ========
Options to purchase 68,501 and 5,521 shares of common stock at weighted
average prices of $5.14 and $5.58, were outstanding at September 30, 1999
and 1998, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common stock. Additionally, the Company's 8.75%
convertible subordinated debentures were excluded from the computation of
diluted earnings per share because the effect of assumed conversion is
anti-dilutive.
<PAGE>
6. CONTINGENCIES
The operations of the Company are subject to Federal, state and local laws
and regulations relating to protection of the environment. Although the
Company believes that its operations are in general compliance with
applicable environmental regulations, risks of additional costs and
liabilities are inherent in its operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the Company.
Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations
of the Company, could result in substantial costs and liabilities to the
Company.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a Texas
state court in 1997 by Grace Energy Corporation, the entity from whom KPP
acquired ST Services in 1993. The lawsuit involves environmental response
and remediation allegedly resulting from jet fuel leaks in the early 1970's
from a pipeline. The pipeline, which connected a former Grace terminal with
Otis Air Force Base, was abandoned in 1973, and the connecting terminal was
sold to an unrelated entity in 1976. Grace alleges that it has incurred
since 1996 expenses of approximately $3 million for response and
remediation required by the State of Massachusetts and that it expects to
incur additional expenses in the future. Future expenses could potentially
include claims by the United States Government, as described below. Grace
alleges that KPP 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 KPP's subsidiaries are responsible for all present and future
remediation expenses for these leaks and that Grace has no obligation to
indemnify KPP for these expenses. The case is set for trial in January
2000.
KPP's consistent position is that they did not acquire the abandoned
pipeline as part of the 1993 ST transaction and did not assume any
responsibility for the environmental damage. In a motion for partial
summary judgment, the trial judge has ruled that the pipeline was an asset
of the company KPP acquired. KPP intends to seek a rehearing on this issue
from the trial judge. In addition, KPP is continuing with its defense that
the pipeline had been abandoned prior to the acquisition of ST Services and
could not have been included in the assets KPP acquired. The defendants
also believe that they have certain rights to indemnification from Grace
under the acquisition agreement with Grace. These rights include claims
against Grace for fraud and breach of environmental representations in the
acquisition agreement. The acquisition agreement also includes Grace's
agreement to indemnify KPP against 60% of post-closing environmental
remediation costs, subject to a maximum indemnity payment of $10 million.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation, which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, has been responding to the Government remediation demand for
most of the contamination problems at the MMR Site. Grace and others have
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. KPP has voluntarily responded to an invitation
from the Government to provide information indicating that it does not own
the pipeline. In connection with a court-ordered mediation between Grace
and KPP, 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. Any claims
by the Government could be material in amount and, if made and ultimately
sustained against KPP, could adversely affect KPP's ability to pay cash
distributions to its unitholders including the Company.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect
on the financial position or results of operations of the Company.
<PAGE>
7. BUSINESS SEGMENT DATA
The Pipeline and Terminaling Segment includes the pipeline and terminaling
operations of KPP which consist of the transportation of refined petroleum
products in the Midwestern states as a common carrier and the storage of
petroleum products, specialty chemicals and other liquids. The Company's
Product Marketing Segment provides wholesale motor fuel marketing services
throughout the Midwest and Rocky Mountain regions, as well as California.
The Company's Information Services Segment provides consulting services,
hardware sales and other related information management and processing
services to governmental, insurance and financial institutions.
Additionally, the Company provides Industrial Services to an international
client base that includes refineries, chemical plants, pipelines, offshore
drilling and production platforms, steel mills, food and drink processing
facilities, power generation, and other process industries.
General Corporate includes compensation and benefits paid to officers and
employees of the Parent Company, insurance premiums, general and
administrative costs, tax and financial reporting costs, legal and audit
fees not reasonably allocable to specific business segments. Effective July
1, 1999, the responsibilities of certain officers of the Industrial
Services and Information Services segments were expanded and their
compensation and benefit costs (which totaled approximately $0.1 million
for the third quarter for each of these segments) were transferred to
General Corporate and no longer considered by the Company in assessing the
measurement of such segment's results.
During the second quarter of 1999, the Company changed the composition of
its segments to report Product Marketing Services as a separate segment.
Comparable prior year amounts have been restated to conform to the current
presentation.
The Company measures segment profit as operating income. Total assets are
those controlled by each reportable segment.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Business segment revenues:
Pipeline and terminaling services $ 41,573 $ 33,709 $117,589 $ 92,332
Product marketing services 59,776 36,027 142,316 75,653
Information services 9,488 7,436 24,058 12,182
Industrial services 23,443 28,304 72,624 85,302
-------- -------- -------- --------
$134,280 $105,476 $356,587 $265,469
======== ======== ======== ========
Pipeline and terminaling services segment revenues:
Pipeline operations $ 18,708 $ 17,406 $ 50,054 $ 46,858
Terminaling operations 22,865 16,303 67,535 45,474
-------- -------- -------- --------
$ 41,573 $ 33,709 $117,589 $ 92,332
======== ======== ======== ========
Industrial services segment revenues:
Underpressure services $ 9,230 $ 10,253 $ 28,455 $ 30,901
Turnaround services 11,265 13,791 34,790 39,364
Other services 2,948 4,260 9,379 15,037
-------- -------- -------- --------
$ 23,443 $ 28,304 $ 72,624 $ 85,302
======== ======== ======== ========
Business segment profit:
Pipeline and terminaling services $ 17,429 $ 15,686 $ 47,995 $ 40,494
Product marketing services 559 210 1,251 528
Information services 2,065 1,176 4,143 2,856
Industrial services 601 2,301 981 5,509
General corporate (1,403) (1,466) (3,788) (3,892)
-------- -------- -------- --------
Operating income 19,251 17,907 50,582 45,495
Other income 225 30 672 55
Interest expense (4,214) (3,918) 13,538) (11,554)
Amortization of excess of cost
over fair value of net assets
of acquired businesses (551) (500) (1,617) (1,470)
-------- -------- ------- --------
Income before interest of outside
non-controlling partners of
KPP's net income, gain on
issuance of units by KPP and
income tax expense $ 14,711 $ 13,519 $ 36,099 $ 32,526
======== ======== ======== ========
<PAGE>
Sept. 30, Dec. 31,
1999 1998
-------- --------
Total assets:
Pipeline and terminaling services $371,505 $310,825
Product marketing services 21,572 12,233
Information services 15,939 11,082
Industrial services 108,240 110,603
General corporate 11,664 3,302
-------- --------
$528,920 $448,045
======== ========
</TABLE>
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
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 Services, Inc. (the "Company") and notes
thereto included elsewhere in this report.
Operating Results:
Pipeline and Terminaling Services
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP"). KPP provides transportation services of refined petroleum
products through a pipeline system that extends through the Midwestern
states as a common carrier and provides terminaling and storage services
for petroleum products, specialty chemicals and other liquids. The Company
operates, manages and controls the pipeline and terminaling operations of
KPP through its 2% general partner interest and a 31% limited partner
interest (28% after KPP's July 1999 public unit offering - See "Liquidity
and Capital Resources") in the partnership.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Revenues $ 41,573 $ 33,709 $117,589 $ 92,332
======== ======== ======== ========
Operating income $ 17,429 $ 15,686 $ 47,995 $ 40,494
======== ======== ======== ========
Capital expenditures,
excluding acquisitions $ 7,169 $ 2,274 $ 11,243 $ 8,048
======== ======== ======== ========
On October 30, 1998, KPP, through a wholly-owned subsidiary, entered into
acquisition and joint venture agreements with Northville Industries Corp.
to acquire and manage the former Northville terminal located in Linden, New
Jersey. Under the agreements, KPP acquired a 50% interest in the newly
formed ST Linden Terminal LLC for $20.5 million plus transaction costs.
During the year ended December 31, 1998, the Partnership acquired other
terminals for aggregate consideration of $15.9 million. On February 1,
1999, KPP acquired six terminals in the United Kingdom from GATX Terminals
Limited for approximately $37.2 million plus the assumption of certain
liabilities. The acquisitions (the "Acquisitions") were funded by KPP with
bank financing, a portion of which were paid off using proceeds from KPP's
public unit offering in July 1999 (see "Liquidity and Capital Resources").
For the three months ended September 30, 1999, revenues for the Pipeline
and Terminaling business increased by $7.9 million, or 23% when compared to
1998, due to a $1.3 million increase in revenues in the pipeline business
and $6.6 million increase in terminaling revenues, when compared to the
same 1998 period. The $25.3 million, or 27%, increase in Pipeline and
Terminaling revenues for the nine month period ended September 30, 1999 is
due to a $3.2 million increase in revenues in the pipeline business and a
$22.1 million increase in the terminaling revenues, when compared to the
same 1998 period. The increase in pipeline revenues for the three and nine
months ended September 30, 1999 is due to overall increases in volumes
shipped when compared to the same periods in 1998. Over 90% of the
year-to-date increase in volumes shipped was on the East Pipeline. Barrel
miles totaled 5.1 billion and 4.8 billion for the three months ended
September 30, 1999 and 1998, respectively, and 13.7 billion and 12.5
billion for the nine months ended September 30, 1999 and 1998,
respectively. The increase in terminaling revenues for the three and nine
months ended September 30, 1999 is due to the Acquisitions and an increase
in tank utilization resulting from favorable market conditions, partially
offset by a decrease in the overall average price realized for storage. For
the nine months ended September 30, 1999, average annualized revenues per
barrel of tankage utilized decreased to $4.00, compared to $4.23 per barrel
for the same prior year period, the result of the storage of a larger
proportionate volume of petroleum products, which are historically at lower
per barrel rates than specialty chemicals. Average annual tankage utilized
for the nine months ended September 30, 1999 increased to 22.5 million
barrels from 14.3 barrels for the comparable prior year period, as a result
of the Acquisitions and increased utilization at KPP's largest petroleum
storage facility.
The $1.7 million increase in operating income for the quarter ended
September 30, 1999, compared to 1998, is due to a $0.7 million increase in
pipeline operating income and a $1.0 million increase in terminaling
operating income. For the nine month period ended September 30, 1999,
operating income increased $7.5 million, compared to 1998, due to a $2.0
million increase in pipeline operating income and a $5.5 million increase
in terminaling operating income. The increase in pipeline operating income
for the three and nine months ended September 30, 1999, is due to the
increase in volumes shipped. The increase in terminaling operating income
for the three and nine months ended September 30, 1999, compared to 1998,
is a result of the Acquisitions and the increase in tank utilization.
The interest of outside non-controlling partners in KPP's net income was
$9.6 million and $8.1 million for the three month periods ended September
30, 1999 and 1998, respectively, and $24.3 million and $20.9 million for
the nine month periods ended September 30, 1999 and 1998, respectively.
Distributions paid to the outside non-controlling unitholders of KPP
aggregated approximately $26.2 million and $21.4 million for the nine month
periods ended September 30, 1999 and 1998, respectively.
Capital expenditures of $7.2 million and $11.2 million for the three and
nine months ended September 30, 1999, relate to the maintenance of existing
operations. Routine maintenance capital expenditures for 1999 are currently
estimated to be between $12 million and $16 million.
Product Marketing Services
The Company's petroleum products marketing business provides wholesale
motor fuel marketing services throughout the Great Lakes and Rocky Mountain
regions, as well as California.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Revenues $ 59,776 $ 36,027 $142,316 $ 75,653
======== ======== ======== ========
Operating income $ 559 $ 210 $ 1,251 $ 528
======== ======== ======== ========
For the three months ended September 30, 1999, revenues increased by $23.7
million, or 66% and operating income increased by $0.3 million, or 166%,
when compared to the same 1998 period. For the nine months ended September
30, 1999, revenues increased by $66.7 million, or 88%, and operating income
increased by $0.7 million, or 137%, when compared to 1998. The increase in
revenues and operating income for the three month period is primarily a
result of an increase in both sales volumes and sales price when compared
to the same 1998 period. The incremental increase for the nine months ended
September 30, 1999, when compared to 1998, is due to the products marketing
business being acquired in late March 1998.
Information Services
The Company's information services business is conducted through a variety
of wholly-owned subsidiaries. The information services group provides
network design and installation services, database management and
processing services, specialized medical technology services, insurance
tracking services, hardware distribution and other related information
technology services primarily for governmental, insurance and financial
institutions.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Revenues $ 9,488 $ 7,436 $ 24,058 $ 12,182
======== ======== ======== ========
Operating income $ 2,065 $ 1,176 $ 4,143 $ 2,856
======== ======== ======== ========
On March 23, 1999, the Company, through a wholly-owned subsidiary, acquired
the capital stock of Ellsworth Associates, Inc. ("Ellsworth"). Ellsworth
provides information technology services, including network, database and
systems design, and application programming, primarily to government
agencies.
For the three months ended September 30, 1999, revenues increased by $2.1
million, or 28%, and operating income increased by $0.9 million, or 76%,
when compared to the same 1998 period. For the nine months ended September
30, 1999, revenues increased by $11.9 million, or 97%, and operating income
increased by $1.3 million, or 45%, when compared to 1998. The increase in
revenues and operating income for the three and nine month periods is
primarily the result of the Ellsworth acquisition and increases in computer
hardware sales and consulting services provided to various federal
government agencies.
Industrial Services
This business segment provides specialized industrial services, including
underpressure leak sealing, on-site machining, safety and relief valve
testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industry worldwide.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Revenues:
United States $ 6,506 $ 9,070 $ 22,012 $ 26,910
Europe 14,262 16,338 42,173 50,139
Asia-Pacific 2,675 2,896 8,439 8,253
-------- -------- -------- --------
Total Revenues $ 23,443 $ 28,304 $ 72,624 $ 85,302
======== ======== ======== ========
Operating income:
United States $ 144 $ 775 $ 592 $ 1,584
Europe 1,347 1,551 2,661 3,956
Asia-Pacific 151 442 570 815
Headquarters (292 (467) (1,035) (846)
-------- ------- -------- --------
Operating income before
severance and other costs 1,350 2,301 2,788 5,509
Severance and other costs (749) - (1,807) -
------- ------- -------- --------
Total operating income $ 601 $ 2,301 $ 981 $ 5,509
======= ======= ======== ========
Capital expenditures,
excluding acquisitions $ 694 $ 602 $ 1,665 $ 1,950
======= ======= ======== ========
For the three and nine months ended September 30, 1999, revenues for the
Industrial Services segment decreased by 17% and 15%, respectively, when
compared to the same 1998 periods, due to adverse market conditions in the
United States and Europe. In the United States, revenues decreased by 28%
and 18%, respectively, for the three and nine month period ended September
30, 1999, compared to the same periods in 1998, due to declines in
turnaround services and other process plant services resulting from the
adverse market conditions. In Europe, revenues decreased by 13% and 16%,
respectively, for the three and nine month periods ended September 30, 1999
due to lower turnaround and other process plant services in the United
Kingdom, also the result of adverse market conditions. Asia-Pacific
revenues decreased by 8% in the third quarter of 1999 and increased by 2%
for the nine month period of 1999, compared to the same periods in 1998.
The third quarter 1999 decrease is due to a decline in turnaround services
and product sales in most of the Asia-Pacific region, partially offset by
increases in Australia turnaround services.
Overall, Industrial Services operating income, before severance and other
costs, decreased by $1.0 million and $2.7 million for the three and nine
months ended September 30, 1999, respectively, when compared to the same
1998 periods, due to the adverse market conditions in the United States and
Europe. Severance and other costs result from matching the segment's
workforce to the current market conditions in these regions. As of
September 30, 1999, substantially all of such costs had been paid.
The Company's income tax expense for the three and nine months ended
September 30, 1999 includes benefits of $1.0 million and $1.9 million,
respectively, related to favorable developments pertaining to certain state
and foreign income tax issues.
Liquidity and Capital Resources
During the first nine months of 1999, the Company's working capital
requirements for operations and capital expenditures (excluding
acquisitions) were funded through the use of internally generated funds.
Cash provided by operations was $40.9 million and $39.3 million for the
nine months ended September 30, 1999 and 1998, respectively. Capital
expenditures (excluding acquisitions) were $13.2 million for the nine
months ended September 30, 1999, compared to $10.2 million in 1998. Routine
maintenance capital expenditures in 1999 have been funded by internally
generated funds.
In January 1999, KPP 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 pari passu with the existing mortgage
notes and credit facility, by a mortgage on the East Pipeline. The term
loans, which are without recourse to the Company, contain certain financial
and operational covenants. $18.3 million of the term loans were repaid in
July 1999 with the proceeds from a public offering of KPP units. The
remaining portion ($25.9 million) is due in January 2002.
In July 1999, KPP 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 KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans (including $13.3 million in term loans
resulting from the United Kingdom terminal acquisition). As a result of KPP
issuing additional units to unrelated parties, the Company's pro-rata share
of the net assets of KPP increased by $16.8 million. Accordingly, the
Company recognized a $16.8 million gain before deferred income taxes of
$6.4 million.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
Year 2000 Issue
The Company recognizes the challenges associated with Year 2000 Issues
("Y2K") and has undertaken a review and testing of its computer systems to
identify Y2K-related issues associated with any items of software or
hardware used in its business operations. Most of the software systems used
by the Company are licensed from third parties and are Y2K compliant or
will be upgraded to Y2K compliant releases before the end of 1999. This
issue is being addressed by the Company in multiple phases, including
assessment, remediation, testing and implementation, and progress is being
monitored by the Company's senior management. All material systems, on a
world-wide basis, including non-information technology systems that may
house non-compliant, embedded technology are being evaluated.
In addition to addressing the Company's own systems, as described above,
the Company must assess the state of readiness of the systems of other
entities with which it does business. With respect to its third-party
relationships, the Company has contacted its primary suppliers and service
providers to assess their state of Y2K readiness. The Company continues to
receive information from its critical suppliers and service providers to
assist the Company in assessing the Y2K readiness of these parties. Failure
by these third parties to adequately resolve their Y2K problems could have
a material adverse effect on the Company's operations.
The Company believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached. Although
failure by one or more of the Company's own systems could result in lost
revenues and/or additional expenses required to carry out manual processing
of transactions, the Company cannot predict the effect that external forces
could have on its business. Failures by banking institutions, the
telecommunications industry and others could have far-reaching effects on
the entire economy and the Company.
At September 30, 1999, the major information technology and non-information
technology systems on which the Company's operations depend have been
evaluated and updated, where necessary, and are believed to be Y2K
compliant. The Company continues to evaluate and remediate certain of its
less significant information technology and non-information technology
systems. The Company expects to complete all phases of its Y2K program
prior to December 31, 1999.
The Company believes that it is not possible to determine with certainty
that all Y2K problems affecting the Company have been identified or
corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how many failures related to the Y2K
problem will occur or the severity, duration or financial consequences of
such failures. The Company has hired an outside Y2K consultant to assist
the Company in meeting its goals and in developing contingency plans to
define and address the worst-case scenario likely to be faced by the
Company. At September 30, 1999, Y2K contingency plans were substantially
complete and in place for the Company's pipeline and terminaling, product
marketing and information services divisions. A comprehensive worldwide
contingency plan for the industrial services division is expected to be in
place by December 31, 1999.
Through September 30, 1999, the Company has incurred approximately $1.0
million of costs related to assessing, remediating and testing its
information technology and non-information technology systems. A portion of
these costs would have been incurred as part of normal system and
application upgrades. In certain cases, the timing of these expenditures
has been accelerated due to Y2K considerations. The Company does not
anticipate that future costs to become fully Y2K compliant will be
material.
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
[None.]
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.
KANEB SERVICES, INC.
(Registrant)
Date: November 15, 1999 //s//
----------------------------------
Michael R. Bakke
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 22,829
<SECURITIES> 0
<RECEIVABLES> 60,538
<ALLOWANCES> 1,142
<INVENTORY> 15,900
<CURRENT-ASSETS> 106,053
<PP&E> 470,136
<DEPRECIATION> 141,411
<TOTAL-ASSETS> 528,920
<CURRENT-LIABILITIES> 64,028
<BONDS> 207,848
0
5,792
<COMMON> 4,247
<OTHER-SE> 98,639
<TOTAL-LIABILITY-AND-EQUITY> 528,920
<SALES> 0
<TOTAL-REVENUES> 356,587
<CGS> 150,632
<TOTAL-COSTS> 306,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,538
<INCOME-PRETAX> 28,553
<INCOME-TAX> 6,685
<INCOME-CONTINUING> 21,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.66
</TABLE>
