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, 2000 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, 2000
No par value 31,146,660 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2000 and 1999 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,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 69,373 $ 69,409 $ 200,230 $ 201,679
Products 99,448 64,871 285,869 154,908
------------- ------------- ------------- --------------
168,821 134,280 486,099 356,587
------------- ------------- ------------- --------------
Costs and expenses:
Operating costs 44,242 45,786 133,367 137,840
Cost of sales 98,254 63,158 280,367 150,632
Depreciation and amortization 4,775 4,682 14,122 13,745
General and administrative 1,013 1,403 3,779 3,788
------------- ------------- ------------- --------------
Total costs and expenses 148,284 115,029 431,635 306,005
------------- ------------- ------------- --------------
Operating income 20,537 19,251 54,464 50,582
Other income 463 225 908 672
Interest expense (4,308) (4,214) (12,660) (13,538)
Amortization of excess of cost over fair
value of net assets of acquired businesses (548) (551) (1,644) (1,617)
------------- ------------- ------------- --------------
Income before gain on issuance of units by KPP,
income taxes and interest of outside
non-controlling partners in KPP's net income 16,144 14,711 41,068 36,099
Gain on issuance of units by KPP - 16,764 - 16,764
Income tax expense (1,688) (6,320) (5,577) (6,685)
Interest of outside non-controlling
partners in KPP's net income (9,871) (9,608) (25,195) (24,310)
------------- ------------- ------------- --------------
Net income 4,585 15,547 10,296 21,868
Dividends applicable to preferred stock 127 124 393 346
------------- ------------- ------------- --------------
Net income applicable to common stock $ 4,458 $ 15,423 $ 9,903 $ 21,522
============= ============= ============= ==============
Earnings per common share:
Basic $ .14 $ .49 $ .32 $ .68
============= ============= ============= ==============
Diluted $ .14 $ .47 $ .31 $ .66
============= ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
September 30, December 31,
2000 1999
---------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 29,777 $ 20,766
Accounts receivable, trade 75,925 66,991
Inventories 19,909 18,063
Prepaid expenses and other current assets 12,555 14,957
--------- ---------
Total current assets 138,166 120,777
--------- ---------
Property and equipment 485,796 470,351
Less accumulated depreciation and amortization 153,339 142,207
--------- ---------
Net property and equipment 332,457 328,144
--------- ---------
Investment in affiliate 22,168 21,978
Excess of cost over fair value of net assets
of acquired businesses 61,288 62,657
Deferred tax assets 18,143 22,754
Other assets 3,423 4,005
--------- ---------
$ 575,645 $ 560,315
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt (including
$48,000 of KPP debt at September 30, 2000) $ 49,991 $ 2,471
Accounts payable 22,092 20,146
Accrued expenses 39,913 41,170
--------- ---------
Total current liabilities 111,996 63,787
--------- ---------
Long-term debt, less current portion:
Pipeline and terminaling services 117,101 155,987
Product marketing services 16,347 11,041
Industrial services 17,704 20,557
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 174,818 211,251
--------- ---------
Deferred income taxes and other liabilities 9,999 10,791
Interest of outside non-controlling partners in KPP 121,642 124,820
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,250 4,249
Additional paid-in-capital 197,187 197,313
Treasury stock, at cost (31,440) (30,278)
Accumulated deficit (15,235) (25,138)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment (3,364) (2,272)
--------- ---------
Total stockholders' equity 157,190 149,666
--------- ---------
$ 575,645 $ 560,315
========= =========
See notes to consolidated financial statements.
2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 10,296 $ 21,868
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of affiliate, net of distributions (285) (2,515)
Interest of outside non-controlling partners in KPP 25,195 24,310
Gain on issuance of units by KPP -- (16,764)
Amortization of excess of cost over fair
value of net assets of acquired businesses 1,644 1,617
Deferred income taxes 5,066 7,480
Depreciation and amortization 14,122 13,745
Changes in other liabilities (1,525) --
Changes in working capital components (7,689) (8,817)
Net cash provided by operating activities 46,824 40,924
-------- --------
Investing activities:
Capital expenditures (8,509) (13,183)
Acquisitions, net of cash acquired (12,332) (48,439)
Change in other assets, net (1,137) (2,882)
-------- --------
Net cash used in investing activities (21,978) (64,504)
-------- --------
Financing activities:
Issuance of debt 22,619 55,480
Payments on debt (9,024) (57,491)
Distributions to outside non-controlling partners in KPP (27,750) (26,175)
Preferred stock dividends (393) (346)
Common stock issued 243 233
Purchase of treasury stock (1,530) --
Net proceeds from issuance of units by KPP -- 65,574
-------- --------
Net cash provided by (used in) financing activities (15,835) 37,275
-------- --------
Increase in cash and cash equivalents 9,011 13,695
Cash and cash equivalents at beginning of period 20,766 9,134
-------- --------
Cash and cash equivalents at end of period $ 29,777 $ 22,829
======== ========
Supplemental cash flow information:
Cash paid for interest $ 14,185 $ 12,401
======== ========
Cash paid for income taxes $ 1,624 $ 956
======== ========
</TABLE>
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, 2000 and 1999, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the Company
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, 1999. 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 at September 30,
2000 and the consolidated results of operations and cash flows for the
periods ended September 30, 2000 and 1999. Operating results for the three
and nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
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 transaction costs and the
assumption of certain liabilities. The acquisition, which was initially
financed by term loans from a bank, has been accounted for using the
purchase method of accounting. $13.3 million of the term loans were repaid
in July 1999 with the proceeds from a public offering of KPP units (see
Note 3). The remaining portion ($24.1 million) is due in January 2002.
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, in the third quarter of 1999, the Company recognized
a $16.8 million gain before deferred income taxes of $6.4 million. The
transaction reduced the Company's limited partner interest in KPP from 31%
to 28%.
4. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 4,585 $ 15,547 $ 10,296 $ 21,868
Other comprehensive income (loss)
- foreign currency translation
adjustment (509) 3 (1,092) (522)
------------- ------------- ------------- --------------
Comprehensive income $ 4,076 $ 15,550 $ 9,204 $ 21,346
============= ============= ============= ==============
</TABLE>
<PAGE>
5. EARNINGS PER SHARE
The following is a reconciliation of Basic and Diluted earnings per share
(in thousands, except for per share amounts):
<TABLE>
<CAPTION>
Weighted
Average
Net Common Per-Share
Income Shares Amount
------------ -------------- -------------
<S> <C> <C> <C>
Three Months Ended September 30, 2000
Net income $ 4,585
Dividends applicable to preferred stock (127)
------------
Basic earnings per share -
Income applicable to common stock 4,458 31,138 $ .14
=============
Effect of dilutive securities -
Common stock options and DSUs - 1,108
------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 4,458 32,246 $ .14
============= =============== =============
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
============== ============== =============
Nine Months Ended September 30, 2000
Net income $ 10,296
Dividends applicable to preferred stock (393)
--------------
Basic earnings per share -
Income applicable to common stock 9,903 31,183 $ .32
=============
Effect of dilutive securities -
Common stock options and DSUs - 1,202
-------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 9,903 32,385 $ .31
============= ============== =============
Nine Months Ended September 30, 1999
Net income $ 21,868
Dividends applicable to preferred stock (346)
-------------
Basic earnings per share -
Income applicable to common stock 21,522 31,439 $ .68
=============
Effect of dilutive securities -
Common stock options and DSUs - 1,101
------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 21,522 32,540 $ .66
============== ============== =============
</TABLE>
Options to purchase 237,597 and 68,501 shares of common stock at weighted
average prices of $5.27 and $5.14, were outstanding at September 30, 2000
and 1999, 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.
6. CONTINGENCIES
Certain 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 regulation, 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.
It is possible that other developments could result in substantial costs
and liabilities to the Company. These include but are not limited to
increasingly stringent environmental laws, regulations, enforcement
policies thereunder, and claims for damages to property or persons
resulting from the operations of the Company.
Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace Energy Corporation ("Grace"), the entity from which 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 in Massachusetts, was abandoned in 1976, when the
connecting terminal was sold to an unrelated entity.
The lawsuit involves environmental response and remediation required by the
State of Massachusetts. Grace alleged that subsidiaries of KPP 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 that these subsidiaries are
responsible for all present and future remediation expenses for these leaks
and that Grace has no obligation to indemnify these subsidiaries for these
expenses.
In the lawsuit, Grace also sought indemnification for expenses that it has
incurred since 1996 of approximately $3.5 million 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
KPP's subsidiaries is that they did not acquire the abandoned pipeline as
part of the 1993 ST 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 on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993
acquisition agreement and that the pipeline was abandoned prior to 1978. On
July 17, 2000, the Judge entered final judgment in the case, which is now
on appeal to the Dallas County Court of Appeals, that Grace take nothing
from the subsidiaries on its claims, including claims for future expenses.
Although KPP'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 an indemnification from Grace if any
such expenses were incurred in the future. However, the Judge let stand a
prior summary judgment ruling that the pipeline was an asset of the company
acquired as part of the 1993 ST transaction. The Judge also awarded
attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as
required by the State of Massachusetts, KPP's subsidiaries have filed an
appeal of the judgment finding that the Otis Pipeline was transferred to
them and the award of attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, have 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's subsidiaries have voluntarily responded to
an invitation from the Government to provide information indicating that
they do not own the pipeline. In connection with a court-ordered mediation
between Grace and the subsidiaries, the Government advised the parties in
April 1999 that it has identified the two spill areas that it believes to
be related to the pipeline that is the subject of the Grace suit. The
Government advised the parties that it believes it has incurred costs of
approximately $34 million, and expects in the future to incur costs of
approximately $55 million, for remediation of one of the spill areas. This
amount was not intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties that it could
not at that time allocate its costs attributable to the second spill area.
KPP believes that the ultimate cost of the remediation, while substantial,
will be considerably less than the Government has indicated.
The Government has made no claims against KPP or any other person on
account of this matter. KPP believes that if any such claims were made, its
subsidiaries would have substantial defenses to such claims. Under
Massachusetts law, the party responsible for remediation of a facility is
the last owner before the abandonment, which was a Grace company. KPP does
not believe that either the Grace litigation or any claims that may be made
by the Government will adversely affect its ability to make cash
distributions to its unitholders, but there can be no assurances in that
regard.
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.
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 Technology 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.
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,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Business segment revenues:
Pipeline and terminaling services $ 41,051 $ 41,573 $ 116,169 $ 117,589
Product marketing services 94,007 59,776 271,493 142,316
Information technology services 10,025 9,488 27,389 24,058
Industrial services 23,738 23,443 71,048 72,624
------------- ------------- ------------- --------------
$ 168,821 $ 134,280 $ 486,099 $ 356,587
============= ============= ============= ==============
Pipeline and terminaling services segment
revenues:
Pipeline operations $ 19,567 $ 18,708 $ 52,298 $ 50,054
Terminaling operations 21,484 22,865 63,871 67,535
------------- ------------- ------------- --------------
$ 41,051 $ 41,573 $ 116,169 $ 117,589
============= ============= ============= ==============
Industrial services segment
revenues:
Underpressure services $ 9,929 $ 9,230 $ 29,546 $ 28,455
Turnaround services 11,478 11,265 34,269 34,790
Other services 2,331 2,948 7,233 9,379
------------- ------------- ------------- --------------
$ 23,738 $ 23,443 $ 71,048 $ 72,624
============= ============= ============= ==============
<PAGE>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- ---------------
(in thousands)
Business segment profit:
Pipeline and terminaling services $ 17,438 $ 17,429 $ 45,268 $ 47,995
Product marketing services 428 559 3,067 1,251
Information technology services 1,192 2,065 3,530 4,143
Industrial services 2,493 601 6,379 981
General corporate (1,014) (1,403) (3,780) (3,788)
------------- ------------- ------------- --------------
Operating income 20,537 19,251 54,464 50,582
Other income 463 225 908 672
Interest expense (4,308) (4,214) (12,660) (13,538)
Amortization of excess of cost
over fair value of net assets
of acquired businesses (548) (551) (1,644) (1,617)
------------- ------------- ------------- --------------
Income before gain on issuance of
units by KPP, income taxes and
interest of outside non-controlling
partners in KPP's net income $ 16,144 $ 14,711 $ 41,068 $ 36,099
============= ============= ============= ==============
September 30, December 31,
2000 1999
------------- --------------
Total assets:
Pipeline and terminaling services $ 375,096 $ 366,935
Product marketing services 38,141 28,101
Information technology services 16,678 17,911
Industrial services 104,716 108,094
General corporate 41,014 39,274
------------- --------------
$ 575,645 $ 560,315
============= ==============
</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 28% limited partner
interest in the partnership.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 41,051 $ 41,573 $ 116,169 $ 117,589
============= ============= ============= ==============
Operating income $ 17,438 $ 17,429 $ 45,268 $ 47,995
============= ============= ============= ==============
Capital expenditures,
excluding acquisitions $ 3,551 $ 7,169 $ 6,434 $ 11,243
============= ============= ============= ==============
</TABLE>
On February 1, 1999, KPP acquired six terminals in the United Kingdom from
GATX Terminals Limited for approximately $37.2 million plus transaction
costs and the assumption of certain liabilities. The acquisition of the six
locations, which have an aggregate tankage capacity of 5.4 million barrels,
was initially financed by term loans from a bank. $13.3 million of the term
loans were repaid in July 1999 with the proceeds from a public unit
offering (See Liquidity and Capital Resources). Three of the terminals,
handling petroleum products, chemical and molten sulfur, respectively,
operate in England. The remaining three facilities, two in Scotland and one
in Northern Ireland, are primarily petroleum terminals. All six terminals
are served by deepwater marine docks.
For the three months ended September 30, 2000, revenues for the Pipeline
and Terminaling business decreased by $0.5 million, when compared to 1999,
due to a $1.4 million decrease in revenues in the terminaling business,
partially offset by a $0.9 million increase in pipeline revenues, when
compared to the same 1999 period. The $1.4 million decrease in Pipeline and
Terminaling revenues for the nine months ended September 30, 2000 is due to
a $3.7 million decrease in revenues in the terminaling business, partially
offset by a $2.3 million increase in the pipeline revenues, when compared
to 1999. For the three and nine month periods ended September 30, 2000,
terminaling revenue increases resulting from the United Kingdom and other
1999 acquisitions were more than offset by decreases in tank utilization
due to unfavorable domestic market conditions. Average annual tankage
utilized for the nine months ended September 30, 2000 decreased to 20.8
million barrels, down from 22.5 million barrels for the comparable prior
year period, primarily the result of unusually high utilization at KPP's
largest petroleum storage facility in 1999. For the nine months ended
September 30, 2000, average annualized revenues per barrel of tankage
utilized increased to $4.09 per barrel, compared to $4.00 per barrel for
the same prior year period, the result of the storage of a higher
proportionate volume of specialty chemicals, which are historically at
higher per barrel rates than petroleum products. Pipeline revenue increases
for the three and nine month periods ended September 30, 2000 are due to an
overall increase in short-haul volumes shipped. Barrel miles totaled 4.7
billion and 5.1 billion for the three months ended September 30, 2000 and
1999, respectively, and 13.1 billion and 13.7 billion for the nine months
ended September 30, 2000 and 1999, respectively.
Pipeline and Terminaling operating income remained flat for the quarter
ended September 30, 2000, compared to 1999, due to a $0.2 million increase
in pipeline operating income, offset by a $0.2 million decrease in
terminaling operating income. For the nine month period ended September 30,
2000, operating income decreased by $2.7 million, compared to 1999, due to
a $3.3 million decrease in terminaling operating income and a $0.6 million
increase in pipeline operating income. The decrease in terminaling
operating income for the three and nine month periods is a result of the
decrease in tank utilization. The increase in pipeline operating income for
the three and nine month periods is due to the increase in short-haul
volumes shipped.
The interest of outside non-controlling partners in KPP's net income was
$9.9 million and $9.6 million for the three month periods ended September
30, 2000 and 1999, and $25.2 million and $24.3 million for the nine month
periods ended September 30, 2000 and 1999, respectively. Distributions paid
to the outside non-controlling unitholders of KPP aggregated approximately
$27.8 million and $26.2 million for the nine month periods ended September
30, 2000 and 1999, respectively.
Capital expenditures of $3.6 million and $6.4 million for the three and
nine months ended September 30, 2000, relate to the maintenance of existing
operations. Routine maintenance capital expenditures for 2000 are currently
estimated to be between $8 million and $12 million.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 94,007 $ 59,776 $ 271,493 $ 142,316
=========== =========== =========== =============
Operating income $ 428 $ 559 $ 3,067 $ 1,251
=========== =========== =========== =============
</TABLE>
For the three and nine month periods ended September 30, 2000, revenues
increased by $34.2 million, or 57%, and $129.2 million or 91%,
respectively, when compared to the same 1999 periods, due to an increase in
both sales volumes and sales price. Total gallons sold increased to 99
million for the three months ended September 30, 2000, compared to 90
million in 1999, and to 296 million for the nine months ended September 30,
2000, compared to 250 million in 1999, due to a combination of increasing
the number of terminals through which products are sold and increasing
volumes at existing locations. The average price realized per gallon of
product sold totaled $0.95 and $0.66 for the three months ended September
30, 2000 and 1999, respectively, and $0.92 and $0.57 for the nine months
ended September 30, 2000 and 1999, respectively, due to changes in market
conditions resulting from sharp price fluctuations over short periods of
time in the segment's operating area.
For the three months ended September 30, 2000, operating income decreased
by $0.1 million, or 23%, when compared to 1999, due to an overall decrease
in the gross margin also resulting from third quarter 2000 price
fluctuations. For the nine months ended September 30, 2000, operating
income increased $1.8 million, or 145%, when compared to 1999, due to an
overall increase in the gross margin also resulting from sharp price
fluctuations, primarily in the second quarter of 2000.
<PAGE>
Information Technology Services
The Company's information technology services business is conducted through
a variety of wholly-owned subsidiaries. The information technology 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. The medical services division
provides system integration and open architecture based telemedicine
solutions, including assessment and planning, installation assistance,
clinical systems integration, acceptance testing, and systems maintenance
and management of telemedicine applications.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 10,025 $ 9,488 $ 27,389 $ 24,058
=========== =========== =========== =============
Operating income $ 1,192 $ 2,065 $ 3,530 $ 4,143
=========== =========== =========== =============
</TABLE>
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 and nine month periods ended September 30, 2000, revenues
increased by $0.5 million, or 6%, and $3.3 million, or 14%, respectively,
when compared to the same 1999 periods, due to increases in services
revenues and computer hardware sales to government agencies. Operating
income for the three and nine month periods decreased by $0.9 million, or
42%, and $0.6 million, or 15%, respectively, when compared to 1999, due
primarily to the recognition of $0.8 million of non-recurring income in the
third quarter of 1999 resulting from the favorable resolution of certain
contract issues.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
United States $ 8,102 $ 6,506 $ 24,834 $ 22,012
Europe 13,534 14,262 39,156 42,173
Asia-Pacific 2,102 2,675 7,058 8,439
----------- ----------- ----------- --------------
Total revenues $ 23,738 $ 23,443 $ 71,048 $ 72,624
=========== =========== =========== ==============
Operating income:
United States $ 448 $ 144 $ 1,932 $ 592
Europe 2,299 1,347 4,796 2,661
Asia-Pacific 91 151 586 570
Headquarters (345) (292) (935) (1,035)
----------- ---------- ----------- --------------
Operating income before
severance and other costs 2,493 1,350 6,379 2,788
Severance and other costs - (749) - (1,807)
----------- ---------- ----------- --------------
Total operating income $ 2,493 $ 601 $ 6,379 $ 981
=========== ========== =========== ==============
Capital expenditures,
excluding acquisitions $ 700 $ 694 $ 1,643 $ 1,665
=========== ========== =========== ==============
</TABLE>
For the three and nine month periods ended September 30, 2000, revenues for
the Industrial Services segment increased by $0.3 million and decreased by
$1.6 million, respectively, when compared to the same 1999 periods. The
increase in revenues for the three months ended September 30, 2000 is due
to increases in underpressure and turnaround services in the United States,
partially offset by an overall decrease in revenues in Continental Europe
and the Asia-Pacific region. The decrease in revenues for the nine months
ended September 30, 2000 is the result of decreases in Continental Europe
and Asia-Pacific more than offsetting overall gains achieved in the United
States. In the United States, revenues increased by 25% and 13%,
respectively, for the three and nine month periods ended September 30,
2000, compared to the same periods in 1999, due to improvements in
underpressure and turnaround services. In Europe, revenues decreased by 5%
and 7%, respectively, for the three and nine month periods ended September
30, 2000, due primarily to devaluations of European currencies and
decreases in turnaround and other services in Continental Europe, which
more than offset increased business levels in the United Kingdom.
Asia-Pacific revenues decreased by 21% and 16%, respectively, for the three
and nine month periods ended September 30, 2000, when compared to 1999, due
also to decreases in turnaround and other services.
Overall, Industrial Services operating income, before severance and other
costs, increased by $1.1 million and $3.6 million for the three and nine
months ended September 30, 2000, respectively, when compared to the same
1999 periods, due to improved general market conditions in the United
States and Europe and overall operating efficiencies realized as a result
of streamlining the segment's workforce in 1999 to match the market
conditions in each of the operating regions. Severance and other costs
incurred and paid in 1999 were the result of the streamlining effort.
Income Taxes
In the fourth quarter of 1999, the Company recognized $37.1 million in
expected benefits from prior years' tax losses (change in valuation
allowance) that are available to offset future taxable income. The Company
reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations. The Company
considered positive evidence supported by recent historical levels of
taxable income, the scheduled reversal of deferred tax liabilities, tax
planning strategies, revised estimates of future taxable income growth, and
expiration periods of NOLs ($67.4 million expires in 2002), among other
things, in making this evaluation and concluding that it is more likely
than not that the Company will realize the benefit of its net deferred tax
assets. Ultimate realization of the deferred tax asset is dependent upon,
among other factors, the Company's ability to generate sufficient taxable
income within the carryforward periods (2000 to 2007) and is subject to
change depending on the tax laws in effect in the years in which the
carryforwards are used. As a result of the 1999 recognition of expected
future income tax benefits, the results of operations for the three and
nine month periods ended September 30, 2000 reflects (and subsequent
periods will reflect) a full effective tax rate provision.
Income tax expense for the three and nine months ended September 30, 2000
include benefits of $0.6 million and $0.7 million, respectively, compared
to $0.9 million and $1.9 million, respectively, for the three and nine
months ended September 30, 1999, relating to favorable developments
pertaining to the resolution of certain state and foreign income tax
issues.
Liquidity and Capital Resources
During the first nine months of 2000, 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 $46.8 million and $40.9 million for the
nine months ended September 30, 2000 and 1999, respectively. Capital
expenditures (excluding acquisitions) were $8.5 million for the nine months
ended September 30, 2000, compared to $13.2 million in 1999. Routine
maintenance capital expenditures in 2000 are expected to be funded by
internally generated funds. At September 30, 2000, current liabilities
include $35.0 million of KPP mortgage notes due in June 2001 and $13.0 of
bank debt due in January 2001. KPP management expects to refinance the
mortgage notes and bank debt prior to maturity with long-term bank
financing or through a public debt or unit offering.
On September 22, 2000, KPP entered into a definitive agreement to acquire
Shore Terminals LLC, the owner of seven terminals with a total tankage
capacity of approximately 7.8 million barrels, for $106 million in cash and
2 million partnership units. The cash portion of the purchase price will be
funded with long-term KPP bank financing. Four of the terminals are located
in California, with the remaining three being located in Washington, Oregon
and Nevada. The closing of the acquisition, which is subject to certain
regulatory approvals, is expected to occur in late December or early
January 2001.
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).
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
Recent Accounting Pronouncement
The Company has assessed the reporting and disclosure requirements of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes the accounting and reporting standards for such
activities. Under SFAS No. 133, companies must recognize all derivative
instruments on its balance sheet at fair value. Changes in the value of
derivative instruments which are considered hedges, will either be offset
against the change in fair value of the hedged item through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings, depending on the nature of the hedge. The Company
will adopt SFAS No. 133, as amended, in the first quarter of 2001.
Currently the Company is not a party to any derivative contracts, and does
not anticipate that adoption will have a material effect on the Company's
results of operations or financial position.
<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 14, 2000 //s//
------------------------------------
Michael R. Bakke
Controller
