SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of Registrant as specified in its Charter)
Delaware 75-2287571
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
---------------------------- --------------------------
Senior Preference Units New York Stock Exchange
Preference Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ ]
Aggregate market value of the voting units held by non-affiliates of
the registrant: $372,155,103. This figure is estimated as of March 16, 1998, at
which date the closing price of the Registrant's Senior Preference Units on the
New York Stock Exchange was $35.50 per unit and the closing price of the
Registrant's Preference Units on the New York Stock Exchange was $34.25, and
assumes that only the General Partner of the Registrant (the "General Partner"),
officers and directors of the General Partner and its parent and wholly owned
subsidiaries of the General Partner and its parent were affiliates.
Number of Senior Preference Units of the Registrant outstanding at
March 16, 1998: 7,250,000. Number of Preference Units of the Registrant
outstanding at March 16, 1998: 5,650,000.
<PAGE>
PART I
ITEM I. BUSINESS
GENERAL
The pipeline system of Kaneb Pipe Line Company was initially created in
1953. In September 1989, Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership (the "Partnership"), was formed to acquire, own and operate the
refined petroleum products pipeline business (the "East Pipeline") previously
conducted by Kaneb Pipe Line Company, a Delaware corporation ("KPL" or the
"Company"), a wholly owned subsidiary of Kaneb Services, Inc., a Delaware
corporation ("Kaneb"). KPL owns a combined 2% interest as general partner of the
Partnership and of Kaneb Pipe Line Operating Partnership, L.P., a Delaware
limited partnership ("KPOP"). The pipeline operations of the Partnership are
conducted through KPOP, of which the Partnership is the sole limited partner and
KPL is the sole general partner. The terminaling business of the Partnership is
conducted through (i) Support Terminals Operating Partnership, L.P. ("STOP"),
(ii) Support Terminal Services, Inc., (iii) StanTrans, Inc., (iv) StanTrans
Partners L.P. ("STPP"), and (v) StanTrans Holdings, Inc. KPOP, STOP and STPP are
collectively referred to as the "Operating Partnerships".
The Partnership is engaged, through its Operating Partnerships, in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids.
PRODUCTS PIPELINE BUSINESS
Introduction
The Partnership's pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
Partnership owns and operates two common carrier pipelines (the "Pipelines") as
shown on the map below:
[SYSTEM MAP]
East Pipeline
Construction of the East Pipeline commenced in the 1950s with a line
from southern Kansas to Geneva, Nebraska. During the 1960s, the East Pipeline
was extended north to its present terminus at Jamestown, North Dakota. In the
1980's, the lines from Geneva, Nebraska to North Platte, Nebraska and the 16"
line from McPherson, Kansas to Geneva, Nebraska were built and the Partnership
acquired a 6" pipeline from Champlin Oil Company, a portion of which runs south
from Shickley, Nebraska through Superior, Nebraska, to Hutchinson, Kansas. In
1997, the Partnership completed construction of a new 6" pipeline from Conway,
Kansas to Windom, Kansas (approximately 22 miles north of Hutchinson) that
allows the Hutchinson Terminal to be supplied directly from McPherson; a
significantly shorter route than was previously used. As a result of this new
pipeline becoming operational, the segment of the old Champlin line between
Windom and Shickley was shut down, including the Superior terminal. The other
end of the line runs northeast approximately 175 miles crossing the main
pipeline at Osceola, Nebraska, through a terminal at Columbus, Nebraska, and
later crossing and interconnecting with the Partnership's Yankton/Milford line
to terminate at Rock Rapids, Iowa.
The East Pipeline system also consists of 15 product terminals in
Kansas, Nebraska, Iowa, South Dakota and North Dakota (with total storage
capacity of approximately 3.1 million barrels) and an additional 23 product
tanks with total storage capacity of approximately 922,000 barrels at its tank
farm installations at McPherson and El Dorado, Kansas. The system also has six
origin pump stations at refineries in Kansas and 38 booster pump stations
situated along the system in Kansas, Nebraska, Iowa, South Dakota and North
Dakota. Additionally, the system maintains various office and warehouse
facilities, and an extensive quality control laboratory. KPOP owns the entire
2,075 mile East Pipeline, except for the 203-mile North Platte line, which is
held under a capitalized lease that expires at the end of 1998. KPOP has
exercised its option to purchase the North Platte line for approximately $5
million at the end of the lease. KPOP leases office space for its operating
headquarters in Wichita, Kansas.
The East Pipeline transports refined petroleum products, including
propane, received from refineries in southeast Kansas and other connecting
pipelines to terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota
and to receiving pipeline connections in Kansas. Shippers on the East Pipeline
obtain refined petroleum products from refineries connected to the East Pipeline
directly or through other pipelines. These refineries obtain their crude oil
primarily from producing areas in Kansas, Oklahoma and Texas. Five connecting
pipelines can deliver propane for shipment through the East Pipeline from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas.
West Pipeline
KPOP acquired the West Pipeline in February 1995 through an asset
purchase from WYCO Pipe Line Company for a purchase price of $27.1 million. The
acquisition of the West Pipeline increased the Partnership's pipeline business
in South Dakota and expanded it into Wyoming and Colorado. The West Pipeline
system includes approximately 550 miles of underground pipeline in Wyoming,
Colorado and South Dakota, four truck loading terminals and numerous pump
stations situated along the system. The system's four product terminals have a
total storage capacity of over 1.7 million barrels.
The West Pipeline originates at Casper, Wyoming and travels east to the
Strouds station, which is located in Evansville, Wyoming, where it serves as a
connecting point with Sinclair's Little America refinery and the Seminoe
pipeline that transports product from Billings, Montana area refineries. From
Strouds, the West Pipeline continues easterly through its 8" line to Douglas,
Wyoming, where a 6" pipeline branches off to serve the Partnership's Rapid City,
South Dakota terminal approximately 190 miles away. The Rapid City terminal has
a three bay bottom loading truck rack and storage tank capacity of 256,000
barrels. The 6" pipeline also receives product from Wyoming Refining's pipeline
at a connection located near the Wyoming/South Dakota border approximately 30
miles south of Wyoming Refining's Newcastle refinery. From Douglas, the
Partnership's 8" pipeline continues southward through a delivery point at the
Burlington Northern Junction to the Cheyenne terminal. The Cheyenne terminal has
a two bay bottom loading truck rack and storage tank capacity of 345,000 barrels
and serves as a receiving point for products from the Frontier refinery, as well
as product delivery point to the Cheyenne pipeline. From the Cheyenne terminal,
the pipeline extends south into Colorado to the Dupont terminal located in the
Denver metropolitan area. The Dupont terminal is the largest terminal on the
West Pipeline system, with a six bay bottom loading truck rack and tankage
capacity of 692,000 barrels. The 8" pipeline continues to the Commerce City
station, where the West Pipeline can receive from and transfer product to the
Total Petroleum (now Ultramar Diamond Shamrock) and Conoco refineries and the
Phillips Petroleum terminal. From the Commerce City station, a 6" line continues
south 90 miles where the system terminates at the Fountain, Colorado terminal
serving the Colorado Springs area. The Fountain terminal has a five bay bottom
loading truck rack and storage tank capacity of 366,000 barrels.
The West Pipeline system parallels the Partnership's East Pipeline to
the west. The East Pipeline's North Platte line terminates in western Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne, Wyoming terminal.
The small Cheyenne pipeline moves products from west to east from the West
Pipeline's Cheyenne terminal to near the East Pipeline's North Platte terminal,
although that line has been deactivated from Sidney, Nebraska (approximately 100
miles from Cheyenne) to North Platte. The West Pipeline serves Denver and other
eastern Colorado markets and supplies jet fuel to Ellsworth Air Force Base at
Rapid City, South Dakota, as compared to the East Pipeline's largely
agricultural service area. The West Pipeline has a relatively small number of
shippers, who, with a few exceptions, are also shippers on the Partnership's
East Pipeline system.
Other Systems
The Partnership also owns three single-use pipelines, located in
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington. Each system supplies
diesel fuel to a railroad fueling facility under contracts. The Oregon and
Washington lines are fully automated and the Wyoming line requires minimal
start-up assistance, which is provided by the railroad. For the year ended
December 31, 1997, the three systems combined transported a total of 3.5 million
barrels of diesel fuel, representing an aggregate of $1.3 million in revenues.
Pipelines Products and Activities
The Pipelines' revenues are based on volumes and distances of product
shipped. The following table reflects the total volume and barrel miles of
refined petroleum products shipped and total operating revenues earned by the
Pipelines for each of the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995(4) 1994 1993
------- ------- -------- ------- -------
Volume (1) ........... 69,984 73,839 74,965 54,546 56,234
Barrel miles(2)....... 16,144 16,735 16,594 14,460 14,160
Revenues(3) .......... $61,320 $63,441 $60,192 $46,117 $44,107
(1) Volumes are expressed in thousands of barrels of refined petroleum
product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of
one barrel of refined petroleum product one mile.
(3) Revenues are expressed in thousands of dollars.
(4) Amounts for 1995 and subsequent periods also include amounts
attributable to the West Pipeline, acquired by the Partnership in
February 1995.
The following table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:
YEAR ENDED DECEMBER 31,
(THOUSANDS OF BARRELS)
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Gasoline .............. 32,237 36,063 37,348 23,958 25,407
Diesel and fuel oil.... 33,541 32,934 33,411 26,340 25,308
Propane ............... 4,206 4,842 4,146 4,204 4,153
Other ................. -- -- 60 44 1,366
------ ------ ------ ------ ------
Total ............ 69,984 73,839 74,965 54,546 56,234
====== ====== ====== ====== ======
Diesel and fuel oil are used in farm machinery and equipment,
over-the-road transportation, railroad fueling and residential fuel oil.
Gasoline is primarily used in over-the-road transportation and propane is used
for crop drying, residential heating and to power irrigation equipment. The mix
of refined petroleum products delivered varies seasonally, with gasoline demand
peaking in early summer, diesel fuel demand peaking in late summer and propane
demand higher in the fall. In addition, weather conditions in the areas served
by the East Pipeline affect both the demand for and the mix of the refined
petroleum products delivered through the East Pipeline, although historically
any overall impact on the total volumes shipped has been short-term. Tariffs
charged shippers for transportation do not vary according to the type of product
delivered.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained consistent with
applicable Federal, state and local laws and regulations, standards prescribed
by the American Petroleum Institute and accepted industry practice. Further, to
prolong the useful lives of the Pipelines, protective measures are taken and
routine preventive maintenance is performed on the Pipelines. Such measures
includes cathodic protection to prevent external corrosion, inhibitors to
prevent internal corrosion and periodic inspection of the Pipelines.
Additionally, the Pipelines are patrolled at regular intervals to identify
equipment or activities by third parties that, if left unchecked, could result
in encroachment upon the rights-of-way for the Pipelines and possible damage to
the Pipelines.
The Partnership uses a state-of-the-art Supervisory Control and Data
Acquisition remote supervisory control software program to continuously monitor
and control the Pipelines from the Wichita, Kansas headquarters. The system
monitors quantities of refined petroleum products injected in and delivered
through the Pipelines and automatically signals the Wichita headquarters upon
any deviation from normal operations that requires attention.
Pipeline Operations
Both the East Pipeline and the West Pipeline are interstate pipelines
and thus subject to Federal regulation by such governmental agencies as the
Federal Energy Regulatory Commission ("FERC") and the Department of
Transportation, as well as the Environmental Protection Agency. Additionally,
the West Pipeline is subject to state regulation of certain intrastate rates in
Colorado and Wyoming and the East Pipeline is subject to state regulation in
Kansas. See "Regulation."
Except for the three single-use pipelines and certain ethanol
facilities, all of the Partnership's pipeline operations constitute common
carrier operations and are subject to Federal tariff regulation. Also, certain
of its intrastate common carrier operations are subject to state tariff
regulation. Common carrier activities are those under which transportation
through the Pipelines is available at published tariffs filed with the FERC, in
the case of interstate shipments, or the relevant state authority, in the case
of intrastate shipments in Kansas, Colorado and Wyoming, to any shipper of
refined petroleum products who requests such services and satisfies the
conditions and specifications for transportation.
In general, a shipper on one of the Pipelines acquires refined
petroleum products from refineries connected to such Pipeline, or, if the
shipper already owns the refined petroleum products, delivers such products to
the Pipeline from those refineries or from pipelines that connect with such
Pipeline. Tariffs for transportation are charged to shippers based upon
transportation from the origination point on the Pipeline to the point of
delivery. Such tariffs also include charges for terminaling and storage of
product at the Pipeline's terminals. Pipelines are generally the lowest cost
method for intermediate and long-haul overland transportation of refined
petroleum products.
Each shipper transporting product on a Pipeline is required to supply
KPOP with a notice of shipment indicating sources of products and destinations.
All shipments are tested or receive refinery certifications to ensure compliance
with KPOP's specifications. Shippers are generally invoiced by KPOP immediately
upon the product entering one of the Pipelines. The operations of the Pipelines
also include 19 truck loading terminals through which refined petroleum products
are delivered to storage tanks and then loaded into petroleum transport trucks.
The following table shows, with respect to each of such terminals, its
location, the number of tanks owned by KPOP, its storage capacity in barrels and
truck capacity. Except as indicated, each terminal is owned by KPOP at December
31, 1997.
LOCATION OF NUMBER TANKAGE TRUCK
TERMINALS OF TANKS CAPACITY CAPACITY(A)
---------------------------- -------- -------- -----------
COLORADO:
Dupont 18 692,000 6
Fountain 13 366,000 5
IOWA:
LeMars 9 103,000 2
Milford(b) 11 172,000 2
Rock Rapids 12 366,000 2
KANSAS:
Concordia(c) 7 79,000 2
Hutchinson 9 162,000 1
NEBRASKA:
Columbus(d) 12 191,000 2
Geneva 39 678,000 8
Norfolk 16 187,000 4
North Platte 22 198,000 5
Osceola 8 79,000 2
Superior(e) 11 192,000 1
NORTH DAKOTA:
Jamestown 13 188,000 2
SOUTH DAKOTA:
Aberdeen 12 181,000 2
Mitchell 8 72,000 2
Rapid City 13 256,000 3
Wolsey 21 149,000 4
Yankton 25 246,000 4
WYOMING:
Cheyenne 15 345,000 2
------ -----------
TOTALS 294 4,902,000
====== ===========
(a) Number of trucks that may be simultaneously loaded.
(b) The Milford terminal is situated on land leased through August 7, 2007
at an annual rental of $2,400. KPOP has the right to renew the lease
upon its expiration for an additional term of 20 years at the same
annual rental rate.
(c) The Concordia terminal is situated on land leased through the year 2060
for a total rental of $2,000. (d) Also loads rail tank cars. (e) Out of
service as of March 15, 1997.
The East Pipeline also has intermediate storage facilities consisting
of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas with aggregate capacities of approximately 388,000 and 534,000 barrels,
respectively. During 1997, approximately 63% and 89% of the deliveries of the
East Pipeline and the West Pipeline, respectively, were made through their
terminals, and approximately 37% and 11% the remainder of the respective
deliveries of such lines were made to other pipelines and customer owned storage
tanks.
Storage of product at terminals pending delivery is considered by the
Partnership to be an integral part of the product delivery service of the
Pipelines. Shippers generally store refined petroleum products for less than one
week. Ancillary services, including injection of shipper-furnished and generic
additives, are available at each terminal.
<PAGE>
Demand for and Sources of Refined Petroleum Products
The Partnership's pipeline business depends in large part on (i) the
level of demand for refined petroleum products in the markets served by the
Pipelines and (ii) the ability and willingness of refiners and marketers having
access to the Pipelines to supply such demand by deliveries through the
Pipelines.
Most of the refined petroleum products delivered through the East
Pipeline are ultimately used as fuel for railroads or in agricultural
operations, including fuel for farm equipment, irrigation systems, trucks
transporting crops and crop drying facilities. Demand for refined petroleum
products for agricultural use, and the relative mix of products required, is
affected by weather conditions in the markets served by the East Pipeline. The
agricultural sector is also affected by government agricultural policies and
crop prices. Although periods of drought suppress agricultural demand for some
refined petroleum products, particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.
While there is some agricultural demand for the refined petroleum
products delivered through the West Pipeline, as well as military jet fuel
volumes, most of the demand is centered in the Denver and Colorado
Springs/Fountain areas. Because demand on the West Pipeline is significantly
weighted toward urban and suburban areas, the product mix on the West Pipeline
includes a substantially higher percentage of gasoline than the product mix on
the East Pipeline.
The Pipelines are also dependent upon adequate levels of production of
refined petroleum products by refineries connected to the Pipelines, directly or
through connecting pipelines. The refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. The refineries connected
directly to the East Pipeline obtain crude oil from producing fields located
primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from
other domestic or foreign sources. Refineries in Kansas, Oklahoma and Texas are
connected to the East Pipeline through other pipelines. These refineries obtain
their supplies of crude oil from a variety of sources. The refineries connected
directly to the West Pipeline are located in Casper and Cheyenne, Wyoming and
Denver, Colorado. Refineries in Billings and Laurel, Montana are connected to
the West Pipeline through other pipelines. These refineries obtain their
supplies of crude oil primarily from Rocky mountain sources. If operations at
any one refinery were discontinued, the Partnership believes (assuming unchanged
demand for refined petroleum products in markets served by the Pipelines) that
the effects thereof would be short-term in nature, and the Partnership's
business would not be materially adversely affected over the long term because
such discontinued production could be replaced by other refineries or by other
sources.
The majority of the refined petroleum product transported through the
East Pipeline was produced at four refineries located at McPherson, El Dorado
and Arkansas City, Kansas and Ponca City, Oklahoma, and operated by National
Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco"), Total
Petroleum (now Ultramar Diamond Shamrock) and Conoco, Inc. respectively. The
NCRA and Texaco refineries are connected directly to the East Pipeline, as is
the Total Petroleum refinery, which was permanently shut down on September 1,
1996. One of such refineries, the McPherson, Kansas refinery operated by NCRA,
accounted for approximately 35% of the total amount of product shipped over the
East Pipeline in 1997. The East Pipeline also has direct access by third party
pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf
Coast supplies of products through connecting pipelines that receive products
from a pipeline originating on the Gulf Coast. Five connecting pipelines can
deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and
Kansas to the East Pipeline for shipment.
The majority of the refined petroleum products transported through the
West Pipeline is produced at the Frontier Oil & Refining Company refinery
located at Cheyenne, Wyoming, the Total Petroleum (now Ultramar Diamond
Shamrock) and Conoco Oil refineries located at Denver, Colorado and Sinclair's
Little America refinery located at Casper, Wyoming, all of which are connected
directly to the West Pipeline. The West Pipeline also has access to three
Billings, Montana area refineries through a connecting pipeline.
<PAGE>
Principal Customers
KPOP had a total of approximately 50 shippers in 1997. The principal
shippers include four integrated oil companies, three refining companies, two
large farm cooperatives and one railroad. Transportation revenues attributable
to the top 10 shippers of the Pipelines were $43.8 million, $46.5 million and
$43.7 million, which accounted for 74%, 76% and 75% of total revenues shipped
for each of the years 1997, 1996 and 1995, respectively.
Competition and Business Considerations
The East Pipeline's major competitor is an independent regulated common
carrier pipeline system owned by The Williams Companies, Inc. that operates
approximately 100 miles east of and parallel to the East Pipeline. The Williams
system is a substantially more extensive system than the East Pipeline.
Furthermore, Williams and its affiliates have capital and financial resources
that are substantially greater than those of the Partnership. Competition with
Williams is based primarily on transportation charges, quality of customer
service and proximity to end users, although refined product pricing at either
the origin or terminal point on a pipeline may outweigh transportation costs.
Fourteen of the East Pipeline's 15 delivery terminals are in direct competition
with Williams' terminals, as they are located within 2 to 145 miles of one
another.
The West Pipeline competes with the truck loading racks of the Cheyenne
and Denver refineries and the Denver terminals of the Chase Pipeline Company and
Phillips Petroleum pipelines. Diamond Shamrock terminals in Denver and Colorado
Springs, connected to a Diamond Shamrock pipeline from their Texas Panhandle
refinery, are major competitors to the West Pipeline's Denver and Fountain
terminals, respectively.
Because pipelines are generally the lowest cost method for intermediate
and long-haul movement of refined petroleum products, the Pipelines' more
significant competitors are common carrier and proprietary pipelines owned and
operated by major integrated and large independent oil companies and other
companies in the areas where the Pipelines deliver products. Competition between
common carrier pipelines is based primarily on transportation charges, quality
of customer service and proximity to end users. The Partnership believes high
capital costs, tariff regulation, environmental considerations and problems in
acquiring rights-of-way make it unlikely that other competing pipeline systems
comparable in size and scope to the Pipelines will be built in the near future,
provided the Pipelines have available capacity to satisfy demand and its tariffs
remain at reasonable levels.
The costs associated with transporting products from a loading terminal
to end users limit the geographic size of the market that can be served
economically by any terminal. Transportation to end users from the loading
terminals of the Partnership is conducted principally by trucking operations of
unrelated third parties. Trucks may competitively deliver products in some of
the areas served by the Pipelines. However, trucking costs render that mode of
transportation not competitive for longer hauls or larger volumes. The
Partnership does not believe that trucks are, or will be, effective competition
to its long-haul volumes over the long term.
LIQUIDS TERMINALING
Introduction
The Partnership's Support Terminal Services operation ("ST") is one of
the largest independent petroleum products and specialty liquids terminaling
companies in the United States. For the year ended December 31, 1997, the
Partnership's terminaling business accounted for approximately 49% of the
Partnership's revenues. As of December 31, 1997, ST operated 31 facilities in 16
states and the District of Columbia, with a total storage capacity of
approximately 17.2 million barrels. ST and its predecessors have been in the
terminaling business for over 40 years and handle a wide variety of liquids from
petroleum products to specialty chemicals to edible liquids.
ST's terminal facilities provide storage on a fee basis for petroleum
products, specialty chemicals and other liquids. ST's five largest terminal
facilities are located in Piney Point, Maryland; Jacksonville, Florida; Texas
City, Texas; Baltimore, Maryland; and, Westwego, Louisiana. These facilities
accounted for approximately 72% of ST's revenues and 65% of its tankage capacity
in 1997.
<PAGE>
Description of Terminals
Piney Point, Maryland. The largest terminal currently owned by ST is
located on approximately 400 acres on the Potomac River. The facility was
acquired as part of the purchase of the liquids terminaling assets of Steuart
Petroleum Company and certain of its affiliates (collectively "Steuart") in
December 1995. The Piney Point terminal has approximately 5.4 million barrels of
storage capacity in 28 tanks and is the closest deep water facility to
Washington, D.C. This terminal competes with other large petroleum terminals in
the East Coast water-borne market extending from New York Harbor to Norfolk,
Virginia. The terminal currently stores petroleum products, consisting primarily
of fuel oils, asphalt and caustic soda solution. The terminal has a dock with a
36-foot draft for tankers and four berths for barges. It also has truck loading
facilities, product blending capabilities and is connected to a pipeline which
supplies residual fuel oil to two power generating stations.
Jacksonville, Florida. The Jacksonville terminal, also acquired as part
of the Steuart transaction, is located on approximately 86 acres on the St.
John's River and consists of a main terminal and two annexes with combined
storage capacity of approximately 2.1 million barrels in 30 tanks. The terminal
is currently used to store petroleum products including gasoline, No. 2 oil, No.
6 oil, diesel and kerosene. This terminal has a tanker berth with a 38-foot
draft and four barge berths and also offers truck and rail car loading
facilities and facilities to blend residual fuels for ship bunkering.
Texas City, Texas. The Texas City facility is situated on 39 acres of
land leased from the Texas City Terminal Railway Company ("TCTRC") with
long-term renewal options. It is located on Galveston Bay near the mouth of the
Houston Ship Channel, approximately sixteen miles from open water. The eastern
end of the Texas City site is adjacent to three deep-water docking facilities,
which are also owned by TCTRC. The three deep-water docks include two 36-foot
draft docks and a 40-foot draft dock. The docking facilities can accommodate any
ship or barge capable of navigating the 40-foot draft of the Houston Ship
Channel. ST is charged dockage and wharfage fees on a per vessel and per unit
basis, respectively, by TCTRC, which it passes on to its customers.
The Texas City facility is designed to accommodate a diverse product
mix, including specialty chemicals, such as petrochemicals and has tanks
equipped for the specific storage needs of the various products handled; piping
and pumping equipment for moving the product between the tanks and the
transportation modes; and, an extensive infrastructure of support equipment. The
tankage at Texas City is constructed of either mild carbon steel, stainless
steel or aluminum. Certain of the tanks, piping and pumping equipment are
equipped for special product needs, including among other things, linings and/or
equipment that can control temperature, air pressure, air mixture or moisture.
ST receives or delivers the majority of the specialty chemicals that it handles
via ship or barge at Texas City. ST also receives and delivers liquids via rail
tank cars and transport trucks and has direct pipeline connections to refineries
in Texas City.
The Texas City terminal consists of 124 tanks with a total capacity of
approximately 2 million barrels. ST's facility has been designed with engineered
structural measures to minimize the possibility of the occurrence and the level
of damage in the event of a spill or fire. All loading areas, tanks, pipes and
pumping areas are "contained" to collect any spillage and insure that only
properly treated water is discharged from the site.
Baltimore, Maryland. The Baltimore facility is situated on 18 acres of
owned land, located just south of Baltimore near the Harbor Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft channel
and berth at the facility. The dock gives ST the ability to receive and deliver
shipments of product from and to barge and ship. Additionally, the terminal can
receive products by pipeline, truck and rail and deliver them via truck and
rail. Similar to the Texas City facility, Baltimore is a specialty liquids
terminal. The primary products stored at the Baltimore facility include asphalt,
fructose, caustic solutions, military jet fuel, latex and other chemicals. The
Baltimore tank facility consists of 49 tanks with a total capacity of
approximately 821,000 barrels. All of the utilized tanks are dedicated to
specific products of customers under contract. The tanks are specifically
equipped to handle the requirements of the products they store.
Westwego, Louisiana. The Westwego facility is situated on 27 acres of
owned land on the west bank of the Mississippi River across from New Orleans.
Its dock is capable of handling ocean-going vessels and barges. The terminal has
multiple facilities for receiving and shipping by rail and tank truck, as well
as vessels and barges. The facility consists of 54 tanks with a total capacity
of approximately 858,000 barrels. The facility also includes a blending plant
for the formulation of certain molasses-based feeds which has additional smaller
tanks for blending and formulation of the liquid feeds. The Westwego terminal
historically has been primarily a terminal for molasses and animal and vegetable
fats and oils. In recent years, the terminal has broadened its product mix to
include fertilizer, herbicides, latex and caustic solutions. The former owner of
the facility has contracted with ST until June 1999 for terminaling in five
large molasses tanks located at the facility.
Other Terminal Sites. In addition to the five major facilities
described above, ST has 26 other terminal facilities located throughout the
United States. The 26 facilities represented approximately 35% of ST's total
tankage capacity and approximately 28% of its total revenue for 1997. With the
exception of the facilities in Columbus, Georgia, which handles aviation
gasoline and specialty chemicals; Winona, Minnesota, which handles nitrogen
fertilizer solutions; and, Savannah, Georgia, which handles chemicals and
caustic solutions, these facilities primarily store petroleum products for a
variety of customers. These facilities provide ST with a geographically diverse
base of customers and revenue.
The storage and transport of jet fuel for the U.S. Department of
Defense is also an important part of ST's business. Eleven of ST's terminal
sites are involved in the terminaling or transport (via pipeline) of jet fuel
for the Department of Defense and seven of the eleven locations have been
utilized solely by the U.S. Government. Two of these locations are presently
without government business. Of the eleven locations, six include pipelines
which deliver jet fuel directly to nearby military bases, while another location
supplies Andrews Air Force Base, Maryland and consists of a barge receiving
dock, an 11.3 mile pipeline, three 24,000 barrel double-bottomed tanks and an
administration building located on the base. This facility provides the barge
receipt, pipeline transportation and terminaling services for jet fuel to
Andrews Air Force Base on a tariff basis for the Defense Fuel Supply Center and
has served the base for the past 30 years.
The following table outlines ST's terminal locations, capacities, tanks
and primary products handled:
TANKAGE NO. OF PRIMARY PRODUCTS
FACILITY CAPACITY TANKS HANDLED
---------------------- ---------- ------ ------------------------------
PRIMARY TERMINALS:
Piney Point, MD 5,403,000 28 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Westwego, LA 858,000 54 Molasses, Fertilizer, Caustic
Baltimore, MD 821,000 49 Chemicals, Asphalt, Jet Fuel
OTHER TERMINALS:
Montgomery, AL(a) 162,000 7 Petroleum, Jet Fuel
Moundville, AL 310,000 6 Jet Fuel
Tuscon, AZ(b) 181,000 7 Petroleum
Imperial, CA 124,000 6 Petroleum
Stockton, CA 314,000 18 Petroleum
Farragut St., DC 176,000 5 Petroleum
M Street, DC 133,000 3 Petroleum
Homestead, FL(a) 72,000 2 Jet Fuel
Augusta, GA 110,000 8 Petroleum
Bremen, GA 180,000 8 Petroleum, Jet Fuel
Brunswick, GA 302,000 3 Petroleum, Pulp Liquor
Columbus, GA 180,000 25 Petroleum, Chemicals
Macon, GA(a) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 699,000 17 Petroleum, Chemicals
Chillicothe, IL 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Salina, KS 98,000 10 Petroleum
Andrews AFB Pipeline, MD 72,000 3 Jet Fuel
Winona, MN 229,000 7 Fertilizer
Alamogordo, NM(a) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Jet Fuel
San Antonio, TX 207,000 4 Jet Fuel
Cockpit Point, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(a) 40,000 2 Jet Fuel
Milwaukee, WI 308,000 7 Petroleum
----------- -----
17,244,000 500
=========== =====
(a) Facility also includes pipelines to U.S. government military base
locations.
(b) The terminal is 50% owned by ST.
<PAGE>
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators,
such as ST, many major energy and chemical companies own extensive terminal
storage facilities. Although such terminals often have the same capabilities as
terminals owned by independent operators, they generally do not provide
terminaling services to third parties. In many instances, major energy and
chemical companies that own storage and terminaling facilities are also
significant customers of independent terminal operators. Such companies
typically have strong demand for terminals owned by independent operators when
independent terminals have more cost effective locations near key transportation
links, such as deep-water ports. Major energy and chemical companies also need
independent terminal storage when their owned storage facilities are inadequate,
either because of size constraints, the nature of the stored material or
specialized handling requirements.
Independent terminal owners generally compete on the basis of the
location and versatility of terminals, service and price. A favorably located
terminal will have access to various cost effective transportation modes both to
and from the terminal. Possible transportation modes include waterways,
railroads, roadways and pipelines. Terminals located near deep-water port
facilities are referred to as "deep-water terminals" and terminals without such
facilities are referred to as "inland terminals"; though some inland facilities
are served by barges on navigable rivers.
Terminal versatility is a function of the operator's ability to offer
handling for diverse products with complex handling requirements. The service
function typically provided by the terminal includes, among other things, the
safe storage of the product at specified temperature, moisture and other
conditions, as well as receipt at and delivery from the terminal. An
increasingly important aspect of versatility and the service function is an
operator's ability to offer product handling and storage in compliance with
environmental regulations. A terminal operator's ability to obtain attractive
pricing is often dependent on the quality, versatility and reputation of the
facilities owned by the operator. Although many products require modest terminal
modification, operators with a greater diversity of terminals with versatile
storage capabilities typically require less modification prior to usage,
ultimately making the storage cost to the customer more attractive.
Several companies offering liquid terminaling facilities have
significantly more capacity than ST. However, the majority of ST's tankage can
be described as "niche" facilities that are equipped to properly handle
"specialty" liquids or provide facilities or services where management believes
they enjoy an advantage over competitors. Most of the larger operators,
including GATX Terminals Corporation, Williams Company, Northville Industries
Corporation and Petroleum Fuel & Terminal Company, have facilities used
primarily for petroleum related products. As a result, many of ST's terminals
compete against other large petroleum products terminals, rather than specialty
liquids facilities. Such specialty or "niche" tankage is less abundant in the
U.S. and "specialty" liquids typically command higher terminal fees than
lower-price bulk terminaling for petroleum products.
CAPITAL EXPENDITURES
Capital expenditures by the Pipelines, were $4.5 million, $3.4 million
and $3.4 million for 1997, 1996 and 1995, respectively. During these periods,
adequate capacity existed on the Pipelines to accommodate volume growth and the
expenditures required for environmental and safety improvements were not
material in amount. Capital expenditures, excluding acquisitions, by ST were
$6.1 million, $3.6 million and $5.6 million, for 1997, 1996 and 1995,
respectively.
Capital expenditures of the Partnership during 1998 are expected to be
approximately $7 million to $10 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Additional expansion-related capital expenditures will
depend on future opportunities to expand the Partnership's operation. The
General Partner intends to finance future expansion capital expenditures
primarily through Partnership borrowings. Such future expenditures, however,
will depend on many factors beyond the Partnership's control, including, without
limitation, demand for refined petroleum products and terminaling services in
the Partnership's market areas, local, state and Federal governmental
regulations, fuel conservation efforts and the availability of financing on
acceptable terms. No assurance can be given that required capital expenditures
will not exceed anticipated amounts during the year or thereafter or that the
Partnership will have the ability to finance such expenditures through borrowing
or choose to do so.
REGULATION
Interstate Regulation. The interstate common carrier pipeline
operations of the Partnership are subject to rate regulation by FERC under the
Interstate Commerce Act. The Interstate Commerce Act provides, among other
things, that to be lawful the rates of common carrier petroleum pipelines must
be "just and reasonable" and not unduly discriminatory. New and changed rates
must be filed with the FERC, which may investigate their lawfulness on protest
or its own motion. The FERC may suspend the effectiveness of such rates for up
to seven months. If the suspension expires before completion of the
investigation, the rates go into effect, but the pipeline can be required to
refund to shippers, with interest, any difference between the level the FERC
determines to be lawful and the filed rates under investigation. Rates that have
become final and effective may be challenged by complaint to FERC filed by a
shipper or on the FERC's own initiative and reparations may be recovered by the
party filing the complaint for the two year period prior to the complaint, if
FERC finds the rate to be unlawful.
In general, petroleum product pipeline rates are cost-based. Such rates
are permitted to generate operating revenues, based on projected volumes, not
greater than the total of the following components: (i) operating expenses, (ii)
depreciation and amortization, (iii) Federal and state income taxes (determined
on a separate company basis and adjusted or "normalized" to avoid year to year
variations in rates due to the effect of timing differences between book and tax
accounting for certain expenses, primarily depreciation) and (iv) an overall
allowed rate of return on the pipeline's "rate base". Generally, the "rate base"
is a measure of the investment in, or value of, the common carrier assets of a
petroleum products pipeline which should be calculated by the net depreciated
"trended original cost" ("TOC") methodology. Under the TOC methodology, after a
starting rate base has been determined, a pipeline's rate base is to be (i)
increased by property additions at cost plus an amount equal to the equity
portion of the rate base multiplied or "trended" by an inflation factor and (ii)
decreased by property retirements, depreciation and amortization of rate base
write-ups reflecting inflation.
The FERC allows for a rate of return for petroleum products pipelines
determined by adding (i) the product of a rate of return equal to the nominal
cost of debt multiplied by the portion of the rate base that is deemed to be
financed with debt and (ii) the product of a rate of return equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity. The appropriate rate of return for a
petroleum pipeline is determined on a case-by-case basis, taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.
The Partnership has not attempted to depart from cost-based rates.
Instead, it has continued to rely on the traditional, cost-based TOC
methodology. The TOC methodology has not been subject to judicial review.
Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"),
rates that were in effect on October 24, 1991 that were not subject to a
protest, investigation or complaint are deemed to be just and reasonable. Such
rates are subject to challenge only for limited reasons, relating to (i)
substantially changed circumstances in either the economic circumstances of the
subject pipeline or the nature of the services, (ii) a contractual bar that
prevented the complainant from previously challenging the rates or (iii) a claim
that such rates are unduly discriminatory or preferential. Any relief granted
pursuant to such challenges may be prospective only. Because the Partnership's
rates that were in effect on October 24, 1991, were subject to investigation and
protest at that time, its rates were not deemed to be just and reasonable
pursuant to the EP Act. The Partnership's current rates became final and
effective in April 1994, and the Partnership believes that its currently
effective tariffs are just and reasonable and would withstand challenge under
the FERC's cost-based rate standards. Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.
On October 22, 1993, the FERC issued Order No. 561 implementing the EP
Act. Order No. 561, among other things, adopted a simplified and generally
acceptable rate making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for such rate increases, there will be no need to file cost-of-service or
supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline
may make a limitless number of rate change filings.
The pipeline rates in effect at December 31, 1994, which are determined
to be just and reasonable, become the "Base Rates" for application of the
indexing mechanism. This indexing mechanism calculates a ceiling rate. The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.
Shippers may still be permitted to protest pipeline rates, even if the rate
change does not exceed the index ceiling, if the shipper can demonstrate that
the "increase is so substantially in excess of the actual cost increase incurred
by the pipeline" that the proposed rate would be unjust and unreasonable. The
index is cumulative, attaching to the applicable ceiling rate and not to the
actual rate charged. Thus, a rate that is not increased to the ceiling level in
a given year may still be increased to the ceiling level in the following year.
The pipeline may be required to decrease the current rate if the rate being
charged exceeds the ceiling level.
The index underlying Order No. 561 is to serve as the principal basis
for the establishment of oil pipeline rate changes in the future. As explained
by the FERC in Order Nos. 561 and 561-A, however, there may be circumstances
where the indexing mechanism will not apply. Specifically, the FERC determined
that a pipeline may utilize any one of the following three alternative
methodologies to indexing: (i) a cost-of-service methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate that its
increased costs are prudently incurred and that there is a substantial
divergence between such increased costs and the rate that would be produced by
application of the index; (ii) a pipeline may file a rate change as part of a
settlement when it secures the agreement of all of its existing shippers; and
(iii) a pipeline may base its rates upon a "light-handed" market-based form of
regulation if it is able to demonstrate a lack of significant market power in
the relevant markets.
On October 28, 1994, after hearings and public comment period, the FERC
issued Order Nos. 571 and 572, intended as procedural follow-ups to Order No.
561. In Order No. 571, the FERC (i) articulated cost-of-service and reporting
requirements to be applicable to pipeline initial rates and to situations where
indexing is determined to be inappropriate; (ii) adopted rules for the
establishment of revised depreciation rates; and (iii) revised the information
required to be reported by pipelines in their Form No. 6, "Annual Report for Oil
Pipelines". Order No. 572 establishes the filing requirements and procedures
that must be followed when a pipeline seeks to charge market-based rates. On
September 15, 1997, the Partnership filed an Application for Market Power
Determination with the FERC seeking market based rates for approximately half of
its markets. The application is pending before the FERC.
In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the Partnership interests held by individuals. Lakehead's motion
for rehearing was denied by the FERC and Lakehead appealed the decision to the
U.S. Court of Appeals. Subsequently the case was settled by Lakehead and the
appeal was withdrawn. In another FERC proceeding involving a different oil
pipeline limited partnership, various shippers challenged such pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the disallowance of income taxes. The FERC recently decided this case
on the same basis as the Lakehead case. If the FERC were to disallow the income
tax allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's ability
to pay the Minimum Quarterly Distribution to the holders of the Senior
Preference Units and Preference Units would not be impaired; however, in view of
the uncertainties involved in this issue, there can be no assurance in this
regard.
Intrastate Regulation. The intrastate operations of the East Pipeline
in Kansas are subject to regulation by the Kansas Corporation Commission, and
the intrastate operations of the West Pipeline in Colorado and Wyoming are
subject to regulation by the Colorado Public Utility Commission and the Wyoming
Public Service Commission, respectively. Like the FERC, the state regulatory
authorities require that shippers be notified of proposed intrastate tariff
increases and have an opportunity to protest such increases. KPOP also files
with such state authorities copies of interstate tariff changes filed with the
FERC. In addition to challenges to new or proposed rates, challenges to
intrastate rates that have already become effective are permitted by complaint
of an interested person or by independent action of the appropriate regulatory
authority.
ENVIRONMENTAL MATTERS
General. The operations of the Partnership are subject to Federal,
state and local laws and regulations relating to the protection of the
environment. Although the Partnership believes that its operations are in
general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance that significant costs and liabilities
will not be incurred by the Partnership. Moreover, it is possible that other
developments, such as increasingly strict environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, past and present, could result
in substantial costs and liabilities to the Partnership.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other statutes
as they pertain to prevention and response to oil spills. The OPA subjects
owners of facilities to strict, joint and potentially unlimited liability for
removal costs and certain other consequences of an oil spill, where such spill
is into navigable waters, along shorelines or in the exclusive economic zone. In
the event of an oil spill into such waters, substantial liabilities could be
imposed upon the Partnership. Regulations concerning the environment are
continually being developed and revised in ways that may impose additional
regulatory burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products are not unusual within the petroleum pipeline industry. The East
Pipeline has experienced limited groundwater contamination at five terminal
sites (Milford, Iowa; Norfolk and Columbus, Nebraska; and Aberdeen and Yankton,
South Dakota) resulting from spills of refined petroleum products. Regulatory
authorities have been notified of these findings and remediation projects are
underway or under construction using various remediation techniques. The
Partnership estimates that $1,084,000 has been expended to date for remediation
at these five sites and that ongoing remediation expenses at each site will not
have a material effect on the East Pipeline. Groundwater contamination is also
known to exist at East Pipeline sites in Augusta, Kansas and in Potwin, Kansas,
but no remediation has been required. Although no assurances can be made, if
remediation is required, the Partnership believes that the resulting cost would
not be material.
During January 1994, the East Pipeline experienced a seam rupture of
its 8" northbound line in Nebraska and another similar rupture on the same line
in April 1994. As a result of these ruptures, KPOP reduced the maximum operating
pressure on this line to 60% of the Maximum Allowable Operating Pressure
("MAOP") and, on May 24, 1994, commenced a hydrostatic test to determine the
integrity of over 80 miles of that line. The test was completed on the entire 80
miles on May 29, 1994, and the line was authorized to return to approximately
80% of MAOP pending review by the Department of Transportation ("DOT") of the
hydrostatic test results. On July 29, 1994, the DOT authorized most of the line
to return to the historical MAOP. Approximately 30 miles of the line was
authorized to return to slightly less than historical MAOP. Although the
Partnership has expended approximately $250,000 to date for remediation at these
rupture sites, the total amount of remediation expenses that will be required
has not yet been determined. These expenses are not expected to have a material
effect upon the results of the Partnership.
ST has experienced groundwater contamination at its terminal sites at
Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have
been notified of these findings and cleanup is underway using extraction wells
and air strippers. Groundwater contamination also exists at the ST terminal site
in Stockton, California and in the areas surrounding this site as a result of
the past operations of five of the facilities operating in this area. ST has
entered into an agreement with three of these other companies to allocate
responsibility for the clean up of the contaminated area. Under the current
approach, clean up will not be required, however based on risk assessment, the
site will continue to be monitored and tested. In addition, ST is responsible
for up to two-thirds of the costs associated with existing groundwater
contamination at a formerly owned terminal at Marcy, New York, which also is
being remediated through extraction wells and air strippers. The Partnership has
expended approximately $830,000 through 1997 for remediation at these four sites
and estimates that on-going remediation expenses will aggregate approximately
$200,000 to $300,000 over the next three years.
Groundwater contamination has been identified at ST terminal sites at
Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken
place. Shell Oil Company has indemnified ST for any contamination at the
Milwaukee site prior to ST's acquisition of the facility. Star Enterprises, the
former owner of the Montgomery terminal, has indemnified ST for contamination at
a portion of the Montgomery site where contamination was identified prior to
ST's acquisition of the facility. A remediation system is in place to address
groundwater contamination at the ST terminal facility in Augusta, Georgia. Star
Enterprises, the former owner of the Augusta terminal, has indemnified ST for
this contamination and has retained responsibility for the remediation system.
There is also a possibility that groundwater contamination may exist at other
facilities. Although no assurance in this regard can be given, the Partnership
believes that such contamination, if present, could be remedied with extraction
wells and air strippers similar to those that are currently in use and that
resulting costs would not be material.
In 1991, the Environmental Protection Agency (the "EPA") implemented
regulations expanding the definition of hazardous waste. The Toxicity
Characteristic Leaching Procedure ("TCLP") has broadened the definition of
hazardous waste by including 25 constituents that were not previously included
in determining that a waste is hazardous. Water that comes in contact with
petroleum may fail the TCLP procedure and require additional treatment prior to
its disposal. The Partnership has installed totally enclosed wastewater
treatment systems at all East Pipeline terminal sites to treat such petroleum
contaminated water, especially tank bottom water.
The EPA has also promulgated regulations that may require the
Partnership to apply for permits to discharge storm water runoff. Storm water
discharge permits also may be required in certain states in which the
Partnership operates. Where such requirements are applicable, the Partnership
has applied for such permits and, after the permits are received, will be
required to sample storm water effluent before releasing it. The Partnership
believes that effluent limitations could be met, if necessary, with minor
modifications to existing facilities and operations. Although no assurance in
this regard can be given, the Partnership believes that the changes will not
have a material effect on the Partnership's financial condition or results of
operations.
Groundwater remediation efforts are ongoing at the West Pipeline's
Dupont and Fountain, Colorado terminals and at the Cheyenne, Wyoming terminal
and Bear Creek, Wyoming station and will be required at one other West Pipeline
terminal. Regulatory officials have been consulted in the development of
remediation plans. In the course of acquisition negotiations for this terminal,
KPOP's regulatory group and its outside environmental consultants agreed upon
the expense and costs of these required remediations. In connection with the
purchase of the West Pipeline, KPOP agreed to implement the agreed remediation
plans at these specific sites over the succeeding five years following the
acquisition in return for the payment by the seller, Wyco Pipe Line Company, of
$1,312,000 to KPOP to cover the discounted estimated future costs of these
remediations. In conjunction with the acquisition, the Partnership accrued $1.8
million for these future remediation expenses.
Groundwater contamination has been experienced at ST's Piney Point,
Maryland, Jacksonville, Florida and each of the Washington, D.C. facilities.
Foreseeable remediation expenses are estimated not to exceed $1.6 million. In
connection with its acquisition of these facilities from Steuart, the
Partnership agreed to assume the existing remediation and the costs thereof up
to $1.8 million and the Asset Purchase Agreements provided, with respect to
unknown environmental damages that are discovered after the closing of the
transaction and that were caused by operations conducted by the former owner
prior to the closing, that the Partnership and Steuart will share those expenses
at a ratio of 20% for the Partnership and 80% for Steuart until a total of $2.5
million has been expended. Thereafter, such expenses will be the Partnership's
responsibility. This indemnity will expire in December, 1998. In conjunction
with the acquisition, the Partnership accrued $2.3 million for potential
environmental liabilities arising from the Steuart acquisition.
Aboveground Storage Tank Acts. A number of the states in which the
Partnership operates have passed statutes regulating aboveground tanks
containing liquid substances. Generally, these statutes require that such tanks
include secondary containment systems or that the operators take certain
alternative precautions to ensure that no contamination results from any leaks
or spills from the tanks. Although there is not currently a Federal statute
regulating these above ground tanks, there is a possibility that such a law will
be passed within the next couple of years. The Partnership is in substantial
compliance with all above ground storage tank laws in the states with such laws.
Although no assurance can be given, the Partnership believes that the future
implementation of above ground storage tank laws by either additional states or
by the Federal government will not have a material adverse effect on the
Partnership's financial condition or results of operations.
Air Emissions. The operations of the Partnership are subject to the
Federal Clean Air Act and comparable state and local statutes. The Partnership
believes that the operations of the Pipelines are in substantial compliance with
such statues in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 will require
most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that have been
and are to be developed and implemented by the EPA and state environmental
agencies. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides will
be subject to increasingly stringent regulations, including requirements that
certain sources install maximum or reasonably available control technology. The
EPA is also required to promulgate new regulations governing the emissions of
hazardous air pollutants. Some of the Partnership's facilities are included
within the categories of hazardous air pollutant sources that will be affected
by these regulations. Additionally, new dockside loading facilities owned or
operated by the Partnership will be subject to the New Source Performance
Standards that were proposed in May 1994. These regulations will control VOC
emissions from the loading and unloading of tank vessels.
Although the Partnership is in substantial compliance with applicable
air pollution laws, in anticipation of the implementation of stricter air
control regulations, the Partnership is taking actions to substantially reduce
its air emissions. The Partnership plans to install bottom loading and vapor
recovery equipment on the loading racks at selected terminal sites along the
East Pipeline that do not already have such emissions control equipment. These
modifications will substantially reduce the total air emissions from each of
these facilities. Having begun in 1993, this project is being phased in over a
period of years.
Solid Waste. The Partnership generates non-hazardous solid waste that
is subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. The EPA is considering the adoption
of stricter disposal standards for non-hazardous wastes. RCRA also governs the
disposal of hazardous wastes. At present, the Partnership is not required to
comply with a substantial portion of the RCRA requirements because the
Partnership's operations generate minimal quantities of hazardous wastes.
However, it is anticipated that additional wastes, which could include wastes
currently generated during pipeline operations, will in the future be designated
as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly
disposal requirements than are non-hazardous wastes. Such changes in the
regulations may result in additional capital expenditures or operating expenses
by the Partnership.
At the terminal sites at which groundwater contamination is present,
there is also limited soil contamination as a result of the aforementioned
spills. The Partnership is under no present requirements to remove these
contaminated soils, but the Partnership may be required to do so in the future.
Soil contamination also may be present at other Partnership facilities at which
spills or releases have occurred. Under certain circumstances, the Partnership
may be required to clean up such contaminated soils. Although these costs should
not have a material adverse effect on the Partnership, no assurance can be given
in this regard.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. CERCLA also authorizes the EPA and, in some instances, third parties to
act in response to threats to the public health or the environment and to seek
to recover from the responsible classes of persons the costs they incur. In the
course of its ordinary operations, the Partnership may generate waste that may
fall within CERCLA's definition of a "hazardous substance". The Partnership may
be responsible under CERCLA for all or part of the costs required to clean up
sites at which such wastes have been disposed.
ST has been named a potentially responsible party for a site located at
Elkton, Maryland, operated by Spectron, Inc. until August 1988. This site is
presently under the oversight of the EPA and is listed as a Federal "Superfund"
site. A small amount of material handled by Spectron was attributed to ST. The
Partnership believes that ST will be able to settle its potential obligation in
connection with this matter for an aggregate cost of approximately $10,000.
However, until a final settlement agreement is signed with the EPA, there is a
possibility that the EPA could bring additional claims against ST.
Environmental Impact Statement. The National Environmental Policy Act
of 1969 (the "NEPA") applies to certain extensions or additions to a pipeline
system. Under NEPA, if any project that would significantly affect the quality
of the environment requires a permit or approval from any Federal agency, a
detailed environmental impact statement must be prepared. The effect of the NEPA
may be to delay or prevent construction of new facilities or to alter their
location, design or method of construction.
Indemnification. KPL has agreed to indemnify the Partnership against
liabilities for damage to the environment resulting from operations of the East
Pipeline prior to October 3, 1989. Such indemnification does not extend to any
liabilities that arise after such date to the extent such liabilities result
from change in environmental laws or regulations. Under such indemnity, KPL is
presently liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and storage
site referred to under "Water" to the standards that are in effect at the time
such remediation operations are concluded. In addition, ST's former owner has
agreed to indemnify the Partnership against liabilities for damages to the
environment from operations conducted by such former owners prior to March 2,
1993. The indemnity, which expired March 1, 1998, is limited in amount to 60% of
any claim exceeding $100,000 until an aggregate amount of $10 million has been
paid by ST's former owner. In addition, with respect to unknown environmental
expenses from operations conducted by Wyco Pipe Line Company prior to the
closing of the Partnership's acquisition of the West Pipeline, KPOP has agreed
to pay the first $150,000 of such expenses, KPOP and Wyco Pipe Line Company will
share, on an equal basis, the next $900,000 of such expenses and Wyco Pipe Line
Company will indemnify KPOP for up to $2,950,000 of such expenses thereafter.
The indemnity expires in August 1999. To the extent that environmental
liabilities exceed the amount of such indemnity, KPOP has affirmatively assumed
the excess environmental liabilities. Also, the Steuart terminals Asset Purchase
Agreements provide, with respect to unknown environmental damages that are
discovered after the closing of the Steuart terminals acquisition and that were
caused by operations conducted by Steuart prior to the closing, that the
Partnership and Steuart will share expenses associated with such environmental
damages at a ratio of 20% for the Partnership and 80% for Steuart until a total
of $2.5 million has been expended. Thereafter, such expenses will be the
Partnership's responsibility. This indemnity will expire in December 1998.
SAFETY REGULATION
The Pipelines are subject to regulation by the Department of
Transportation under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA")
relating to the design, installation, testing, construction, operation,
replacement and management of their pipeline facilities. The HLPSA covers
petroleum and petroleum products pipelines and requires any entity that owns or
operates pipeline facilities to comply with such safety regulations and to
permit access to and copying of records and to make certain reports and provide
information as required by the Secretary to Transportation. The Federal Pipeline
Safety Act of 1992 amended the HLPSA to include requirements of the future use
of internal inspection devices. The Partnership does not believe that it will be
required to make any substantial capital expenditures to comply with the
requirements of HLPSA as so amended.
The Partnership is subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
Partnership believes that it is in general compliance with OSHA requirements,
including general industry standards, record keeping requirements and monitoring
of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize information about the hazardous materials used in its operations.
Certain parts of this information must be reported to employees, state and local
governmental authorities, and local citizens upon request. In general, the
Partnership expects to increase its expenditures during the next decade to
comply with higher industry and regulatory safety standards such as those
described above. Such expenditures cannot be accurately estimated at this time,
although they are not expected to have a material adverse impact on the
Partnership.
EMPLOYEES
The Partnership has no employees. The business of the Partnership is
conducted by the General Partner, KPL, which at December 31, 1997, employed 427
persons. Approximately 151 of the persons employed by KPL were subject to
representation by unions for collective bargaining purposes; however, only 53
persons employed by the terminal division of KPL were represented by the Oil,
Chemical and Atomic Workers International Union AFL-CIO ("OCAW"). The terminal
division has agreements with OCAW for 35 and 17 of the above employees, which
are in effect through June 28, 1999 and November 1, 2000, respectively. The
agreements are subject to automatic renewal for successive one-year periods
unless one of the parties serves written notice to terminate such agreement in a
timely manner.
ITEM 2. PROPERTIES
Descriptions of properties owned or utilized by the Partnership are
contained in Item 1 of this report and such descriptions are hereby incorporated
by reference into this Item 2. Under the caption "Commitments and Contingencies"
in Note 6 to the Partnership's financial statements included in Item 8 herein
below, additional information is presented concerning obligations for lease and
rental commitments. Said additional information is hereby incorporated by
reference into this Item 2.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary
course of business. Subject to certain deductibles and self-insurance
retentions, substantially all the claims made in these lawsuits are covered by
insurance policies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership did not hold a meeting of unitholders or otherwise
submit any matter to a vote of security holders in the fourth quarter of 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND PREFERENCE
UNITS AND RELATED UNITHOLDER MATTERS
The Partnership's senior preference limited partner interests ("Senior
Preference Units") and Preference Units are listed and traded on the New York
Stock Exchange. At March 16, 1998, there were approximately 900 Senior
Preference Unitholders of record and approximately 200 Preference Unitholders of
record. Set forth below are prices and cash distributions for Senior Preference
Units and Preference Units, respectively, on the New York Stock Exchange.
<TABLE>
<CAPTION>
SENIOR PREFERENCE PREFERENCE
UNIT PRICES UNIT PRICES CASH
------------------------ ------------------------ DISTRIBUTION
YEAR HIGH LOW HIGH LOW DECLARED
- ----------------------- ---------- --------- --------- --------- ------------
1996:
<S> <C> <C> <C> <C> <C>
First Quarter 26 1/2 23 7/8 24 5/8 22 1/4 $ .55
Second Quarter 26 5/8 24 1/4 24 5/8 23 1/8 .55
Third Quarter 26 5/8 24 3/4 25 7/8 22 7/8 .60
Fourth Quarter 30 25 5/8 28 1/8 25 .60
1997:
First Quarter 31 1/4 28 28 5/8 26 1/2 .60
Second Quarter 30 1/4 27 1/8 28 3/8 26 1/4 .60
Third Quarter 31 13/16 29 30 7/8 27 7/8 .65
Fourth Quarter 36 11/16 29 13/16 36 1/2 29 5/8 .65
1998:
First Quarter 37 1/2 34 11/16 35 1/2 33 1/4
(through March 16, 1998)
</TABLE>
The Partnership has paid the Minimum Quarterly Distribution on each
outstanding Senior Preference Unit for each quarter since the Partnership's
inception. The Partnership has also paid the Minimum Quarterly Distribution on
Preference Units with respect to all quarters since inception of the
Partnership, except for distributions in the second, third and fourth quarters
of 1991 totaling $9,323,000 which have since been satisfied and no arrearages
remain as of December 31, 1997. Prior to 1994, no distributions were paid on the
outstanding Common Units, which are not entitled to arrearages in the payment of
the Minimum Quarterly Distribution. Distributions paid on the Common Units were
$7,742,000; $7,110,000; and $4,582,000 for 1997, 1996 and 1995, respectively.
Assuming that distributions of at least $.55 for every Unit are made on May 15
and August 14, 1998, the preference period will end on August 14, 1998 and there
will be no distinction thereafter between the Units.
Under the terms of its financing agreements, the Partnership is
prohibited from declaring or paying any distribution if a default exists
thereunder.
<PAGE>
ITEM 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates
indicated, selected historical financial and operating data for Kaneb Pipe Line
Partners, L.P. and Subsidiaries (the "Partnership"). The data in the table (in
thousands, except per unit amounts) is derived from the historical financial
statements of the Partnership and should be read in conjunction with the
Partnership's audited financial statements. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995(a) 1994 1993(b)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................ $ 121,156 $ 117,554 $ 96,928 $ 78,745 $ 69,235
---------- ---------- --------- ---------- ----------
Operating costs..................... 50,183 49,925 40,617 33,586 29,012
Depreciation and amortization....... 11,711 10,981 8,261 7,257 6,135
General and administrative.......... 5,793 5,259 5,472 4,924 4,673
--------- ---------- --------- ---------- ----------
Total costs and expenses........ 67,687 66,165 54,350 45,767 39,820
--------- ---------- --------- ---------- ----------
Operating income.................... 53,469 51,389 42,578 32,978 29,415
Interest and other income........... 562 776 894 1,299 1,331
Interest expense.................... (11,332) (11,033) (6,437) (3,706) (3,376)
Minority interest................... (420) (403) (360) (295) (266)
---------- ----------- ---------- ----------- -----------
Income before income taxes.......... 42,279 40,729 36,675 30,276 27,104
Income taxes (c).................... (718) (822) (627) (818) (450)
---------- ----------- ---------- ----------- -----------
Net income.......................... $ 41,561 $ 39,907 $ 36,048 $ 29,458 $ 26,654
========== ========== ========= ========== ==========
Allocation of net income(d) per:
Senior Preference Unit ......... $ 2.55 $ 2.46 $ 2.20 $ 2.20 $ 2.20
========== ========== ========= ========= ==========
Preference Unit................. $ 2.55 $ 2.46 $ 2.20 $ 2.20 $ 2.20
========== ========== ========= ========= ==========
Preference Unit arrearages...... $ - $ - $ - $ - $ 1.20
========== ========== ========= ========= ==========
Cash Distributions declared per:
Senior Preference Unit.......... $ 2.50 $ 2.30 $ 2.20 $ 2.20 $ 2.20
========== ========== ========= ========= ==========
Preference Unit................. $ 2.50 $ 2.30 $ 2.20 $ 2.20 $ 2.20
========== ========== ========= ========= ==========
Preference Unit arrearages...... $ - $ - $ - $ - $ 1.20
========== ========== ========= ========= ==========
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net......... $ 247,132 $ 249,733 $ 246,471 $ 145,646 $ 133,436
Total assets........................ 269,032 274,765 267,787 163,105 162,407
Long-term debt...................... 132,118 139,453 136,489 43,265 41,814
Partners' capital................... 104,196 103,340 100,748 99,754 100,598
<FN>
(a) Includes the operations of the West Pipeline since its acquisition
in February 1995 and the operations of Steuart since its acquisition
in December 1995.
(b) Includes the operations of ST since its acquisition on March 2, 1993.
(c) Subsequent to the acquisition of ST in March 1993, certain operations
are conducted in taxable entities. (d) Net income is allocated to the
limited partnership units in an amount equal to the cash distributions
declared for each reporting period and any remaining income or loss is
allocated to any class of units that did not receive the same amount of
cash distributions per unit (if any). If the same cash distributions
per unit are declared for all classes of units, income or loss is
allocated pro rata based on the aggregate amount of distributions
declared.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the
summary historical financial and operating data included elsewhere in this
report.
GENERAL
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and
operate its refined petroleum products pipeline business. The Partnership
operates through KPOP, a limited partnership in which the Partnership holds a
99% interest as limited partner and KPL owns a 1% interest as general partner in
both the Partnership and KPOP. The Partnership is engaged through operating
subsidiaries in the refined petroleum products pipeline business and, since
1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the
transportation through the East Pipeline and the West Pipeline, as common
carriers, of refined petroleum products. The East Pipeline was constructed by
KPL commencing in the 1950s. The Partnership acquired the West Pipeline in
February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX
Terminals Corporation and Amoco Pipeline Company, for $27.1 million plus
transaction costs and the assumption of certain environmental liabilities. The
acquisition was financed by the issuance of $27 million of first mortgage notes
to a group of insurance companies due February 24, 2002, which bear interest at
the rate of 8.37% per annum. The East Pipeline and the West Pipeline are
collectively referred to as the "Pipelines." The Pipelines primarily transport
gasoline, diesel oil, fuel oil and propane. The products are transported from
refineries connected to the Pipeline, directly or through other pipelines, to
agricultural users, railroads and wholesale customers in the states in which the
Pipelines are located and in portions of other states. Substantially all of the
Pipelines' operations constitute common carrier operations that are subject to
Federal or state tariff regulations. The Partnership has not engaged, nor does
it currently intend to engage, in the merchant function of buying and selling
refined petroleum products.
The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). ST acquired
the liquids terminaling assets of Steuart Petroleum Company and certain of its
affiliates (collectively, "Steuart") in December 1995 for $68 million plus
transaction costs and the assumption of certain environmental liabilities. The
acquisition was initially financed with a $68 million bridge loan from a bank.
The Partnership refinanced this bridge loan in June 1996 with a series of first
mortgage notes (the "Steuart Notes") to a group of insurance companies bearing
interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in
June 2001, 2003, 2006 and 2016. The Steuart terminaling assets consist of seven
petroleum product terminal facilities located in the District of Columbia,
Florida, Georgia, Maryland and Virginia and the pipeline and terminaling
facilities serving Andrews Air Force Base in Maryland.
The Partnership is the third largest independent liquids terminaling
company in the United States. With the acquisition of Steuart, ST operates 31
facilities in 16 states and the District of Columbia with an aggregate tankage
capacity of approximately 17.2 million barrels.
<PAGE>
PIPELINE OPERATIONS
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
--------- -------- ---------
(in millions)
Revenues....................... $61,320 $63,441 $60,192
Operating costs................ 21,696 23,692 22,564
Depreciation and amortization.. 4,885 4,817 4,843
General and administrative..... 2,912 2,711 3,038
------- ------- -------
Operating income............... $31,827 $32,221 $29,747
======= ======= =======
Pipelines revenues are based on volumes shipped and the distances over
which such volumes are transported. Revenues decreased $2.1 million in 1997
primarily as a result of adverse effects on product demand caused by abnormal
weather patterns in the Midwest and shifts in the distribution of product
supplies in the Rocky Mountain area. The increase in revenues of $3.2 million in
1996 is primarily due to the acquisition of the West Pipeline in February 1995.
Because tariff rates are regulated by the FERC, the Pipelines compete primarily
on the basis of quality of service, including delivering products at convenient
locations on a timely basis to meet the needs of its customers. Barrel miles
totaled 16.1 billion in 1997 compared to 16.7 billion in 1996.
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, decreased $2.0 million in 1997 and increased $1.1
million in 1996. The changes in both years were primarily in materials and
supplies, including additives, that are volume related and in outside services.
General and administrative costs include managerial, accounting and
administrative personnel costs, office rental and expense, legal and
professional costs and other non-operating costs. Legal and professional and
other non-operating costs were abnormally low in 1996.
TERMINALING OPERATIONS
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---------- ---------- ----------
(in millions)
Revenues....................... $59,836 $54,113 $36,736
Operating costs ............... 28,487 26,233 18,053
Depreciation and amortization . 6,826 6,164 3,418
General and administrative .... 2,881 2,548 2,434
------- ------- -------
Operating income............... $21,642 $19,168 $12,831
======= ======= =======
Revenues increased 11% in 1997 due to terminal acquisitions and
increased utilization of existing terminals. The revenue increase of 47% in 1996
was primarily as a result of the acquisition of the former Steuart Petroleum
terminals by the Partnership in December 1995. Average annual tankage utilized
increased .5 million barrels in 1997 to 12.4 million barrels, compared to 11.9
million barrels in 1996. Average annual revenues per barrel of tankage utilized
was $4.83 per barrel in 1997, compared to $4.55 per barrel in 1996. The average
revenue per barrel in 1995 was $5.46 per barrel, which was higher than 1996 due
to the large proportionate volumes of petroleum products being stored at the
former Steuart terminals in 1996 with lower rates per barrel than specialty
chemicals with higher rates per barrel that are stored at other terminals.
Total tankage capacity (17.2 million barrels at December 31, 1997) has
been, and is expected to remain, adequate to meet existing customer storage
requirements. Customers consider factors such as location, access to cost
effective transportation and quality of service in addition to pricing when
selecting terminal storage. Operating costs increased $2.3 million and $8.2
million and depreciation and amortization increased $ .7 million and $2.7
million in 1997 and 1996, respectively, primarily as a result of terminal
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 0.9 to 1 at
December 31, 1997 and 1.0 to 1 at December 31, 1996. Cash provided by operating
activities was $54.8 million, $49.2 million and $44.5 million for the years
1997, 1996 and 1995, respectively. The increase in cash provided by operations
in 1997 resulted primarily from overall improvements in revenues and operating
income in the terminaling operations. The increase in 1996 was primarily a
result of the acquisition of the Steuart terminaling assets.
<PAGE>
Capital expenditures, excluding expansion capital expenditures, were
$10.6 million, $7.1 million and $8.9 million for 1997, 1996 and 1995,
respectively. During all periods, adequate pipeline capacity existed to
accommodate volume growth, and the expenditures required for environmental and
safety improvements were not, and are not expected in the future to be,
material. Environmental damages caused by sudden and accidental occurrences are
included under the Partnership's insurance coverages. Capital expenditures of
the Partnership during 1998 are expected to be approximately $7 million to $10
million.
The Partnership makes distributions of 100% of its Available Cash to
Unitholders and the General Partner. Available Cash consists generally of all
the cash receipts less all cash disbursements and reserves. Distributions of
$2.50 per unit were declared to Senior Preference Unitholders and Preference
Unitholders in 1997, $2.30 per unit was declared in 1996 and $2.20 per unit was
declared in 1995. During 1997, 1996 and 1995, the Partnership declared
distributions of $7.9 million ($2.50 per unit); $7.3 million ($2.30 per unit);
and $6.3 million ($2.00 per unit), respectively, to the holders of Common Units.
Most of the software systems used by the Partnership are licensed from
third party vendors and are Year 2000 compliant or will be upgraded to Year 2000
compliant releases over the next year. The Partnership does not anticipate that
the incremental costs to become fully Year 2000 compliant will be material.
The Partnership expects to fund future cash distributions and
maintenance capital expenditures with existing cash and cash flows from
operating activities. Expansionary capital expenditures are expected to be
funded through additional Partnership borrowings.
The Partnership has a Credit Agreement with two banks that currently
provides a $25 million revolving credit facility for working capital and other
partnership purposes. Borrowings under the Credit Agreement bear interest at
variable rates and are due and payable in January 2001. The Credit Agreement has
a commitment fee of 0.15% per annum of the unused credit facility. No amounts
were drawn under this credit facility at December 31, 1997 and $5 million that
was outstanding at December 31, 1996 was repaid during 1997.
The Partnership acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company, a company jointly owned by GATX Terminals Corporation and
Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the
issuance of $27 million of notes due February 24, 2002, which bear interest at
the rate of 8.37% per annum (the "Notes"). The Notes and credit facility are
secured by a mortgage on the East Pipeline.
The acquisition of the Steuart terminaling assets was initially
financed by a $68 million bank bridge loan. The Partnership refinanced this
bridge loan in June 1996 with a series of first mortgage notes (the "Steuart
Notes") bearing interest at rates ranging from 7.08% to 7.98% and maturing in
varying amounts in June 2001, 2003, 2006 and 2016. The Steuart Notes are
secured, pari passu with the Notes and credit facility, by a mortgage on the
East Pipeline.
In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the partnership interests held by individuals. Lakehead's motion
for rehearing was denied by the FERC and Lakehead appealed the decision to the
U. S. Court of Appeals. Subsequently, the case was settled by Lakehead and the
appeal was withdrawn. In another FERC proceeding involving a different oil
pipeline limited partnership, various shippers challenged such pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the disallowance of income taxes. The FERC recently decided the case
on the same basis as the Lakehead case. If the FERC were to disallow the income
tax allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's ability
to pay the Minimum Quarterly Distribution to the holders of the Senior
Preference Units ("SPU"s) and Preference Units ("PU"s) would not be impaired;
however, in view of the uncertainties involved in this issue, there can be no
assurance in this regard.
<PAGE>
ALLOCATION OF NET INCOME AND EARNINGS
Net income is allocated to the limited partnership units in an amount
equal to the cash distributions declared for each reporting period and any
remaining income or loss is allocated to any class of units that did not receive
the same amount of cash distributions per unit (if any). If the same cash
distributions per unit are declared for all classes of units, income or loss is
allocated pro rata on the aggregate amount of distributions declared.
In 1997, distributions by the Partnership of Available Cash reached the
Second Target Distribution, as defined in the Partnership Agreement, which
entitled the general partner to receive certain incentive distributions.
Earnings per SPU and PU shown on the consolidated statements of income are
calculated by dividing the amount of net income, allocated on the above basis
with incentives calculated on distributions declared to the SPUs and PUs, by the
weighted average number of SPUs and PUs outstanding, respectively. If the
allocation of income had been made as if all income had been distributed in
cash, earnings per SPU and PU would have been $2.53 for the year ended December
31, 1997.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The provisions of SFAS 130 must be adopted in fiscal year
1998. The Partnership expects to comply with the provisions of SFAS 130 in the
Consolidated Statements of Partners' Capital, when adopted.
Also, in June 1997, the FASB issued SFAS 131, "Disclosure About
Segments of an Enterprise and Other Information," which requires segment
information to be reported on a basis consistent with that used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The provisions of SFAS 131 must be adopted in fiscal year 1998. The
Partnership is evaluating the impact of adopting SFAS 131 on the method it
currently uses to report segment information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Partnership
begin on page F-1 of this report. Such information is hereby incorporated by
reference into this item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership and has no directors. The
Partnership is managed by the Company as general partner. Set forth below is
certain information concerning the directors and executive officers of the
Company. All directors of the Company are elected annually by Kaneb, as its sole
stockholder.
All officers serve at the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
YEARS OF UNITS BENEFICIALLY OWNED AT MARCH 16, 1998(m)
SERVICE -------------------------------------------------------------
POSITION WITH WITH THE SENIOR % OF PREFERENCE % OF COMMON % OF
NAME AGE THE COMPANY COMPANY PREFERENCE CLASS UNITS CLASS UNITS CLASS
- -------------------- ------- ----------------- ----------- ------------ ------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Edward D. Doherty 62 Chairman of 8 (a) 8,326 * 1,300 * 75,000 2.4%
the Board and
Chief
Executive
Officer
Leon E. Hutchens 63 President 38 (b) 500 * -0- * -0- *
Ronald D. Scoggins 43 Senior Vice 1 (c) -0- * 454 * -0- *
President
Howard C. Wadsworth 53 Vice President 4 (d) -0- * -0- * -0- *
Treasurer and
Secretary
Jimmy L. Harrison 44 Controller 6 (e) -0- * -0- * -0- *
John R. Barnes 53 Directr 11 (f) 76,600 1% 60,500 1% 79,000 2.5%
Charles R. Cox 55 Director 3 (g) 500 * -0- * -0- *
Sangwoo Ahn 59 Director 9 (h) 33,000 * -0- * -0- *
Frank M. Burke, Jr. 58 Director 1 (i) -0- * -0- * -0- *
James R. Whatley 71 Director 9 (j) 22,400 * -0- * -0- *
Hans Kessler 48 Director 1 (k) -0- * -0- * -0- *
Murray A. Biles 67 Director 44 (l) 500 * -0- * -0- *
All Officers and Directors as a group (12 persons) 141,826 2.0% 62,254 1.1% 154,000 4.9%
*Less than one percent
<FN>
(a) Mr. Doherty, Chairman of the Board of the Company since September 1989,
is also Senior Vice President of Kaneb.
(b) Mr. Hutchens assumed his current position in January 1994, having been
with KPL since January 1960. Mr. Hutchens had been Vice President since
January 1981. Mr. Hutchens was Manager of Product Movement from July
1976 to January 1981.
(c) Mr. Scoggins became an executive officer of the Company in August 1997,
prior to which he served in senior level positions for the Company for
more than 10 years.
(d) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary
for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.
(e) Mr. Harrison assumed his present position in November 1992, prior to
which he served in a variety of financial positions including Assistant
Secretary and Treasurer with ARCO Pipe Line Company for approximately
19 years.
(f) Mr. Barnes, a director of the Company, is also Chairman of the Board,
President and Chief Executive Officer of Kaneb.
(g) Mr. Cox, a director of the Company since September 1995, is also a
director of Kaneb. Mr. Cox has been a private business consultant since
retiring in January 1998 from Fluor Daniel, Inc., an international
services company, where he served in senior executive level positions
during a 27 year career with that organization.
(h) Mr. Ahn, a director of the Company since July 1989, is also a director
of Kaneb. Mr. Ahn has been a general partner of Morgan Lewis Githens &
Ahn, an investment banking firm, since 1982 and currently serves as a
director of Gradall Industries, Inc., ITI Technologies, Inc., PAR
Technology Corporation, Quaker Fabric Corporation, and Stuart
Entertainment, Inc.
(i) Mr. Burke, elected as a director of the Company in January 1997, is
also a director of Kaneb. Mr. Burke has been Chairman and Managing
General Partner of Burke, Mayborn Company, Ltd., a private investment
company, for more than the past five years. He was previously
associated with Peat, Marwick, Mitchell & Co. (now KPMG Peat Marwick,
LLP), an international firm of certified public accountants, for
twenty-four years.
(j) Mr. Whatley, a director of the Company since July 1989, is also a
director of Kaneb and served as Chairman of the Board of Directors of
Kaneb from February 1981 until April 1989.
(k) Mr. Kessler was elected to the Board on February 19, 1998 to fill a
vacancy. Mr. Kessler has served as Chairman and Managing Director of
KMB Kessler + Partner GmbH since 1992. He was previously a Managing
Director and Vice President of a European Division of Tyco
International Ltd., the largest contractor in the world for the design,
manufacturing and installation of fire detection, suppression and
sprinkler systems and manufacturer and distributor of flow control
products in North America, Europe and Asia-Pacific from 1990 to 1992.
He was Managing Director and Executive Vice President of a division of
ABB Asea Brown Boveri Ltd., a Zurich, Switzerland based company
involved in power generation, power transmission and distribution, and
industrial and building systems around the world prior to 1990.
(l) Mr. Biles joined the Company in November 1953 and served as President
from January 1985 until his retirement at the close of 1993.
(m) Units of the Partnership listed are those beneficially owned by the
person indicated, his spouse or children living at home and do not
include Units in which the person has disclaimed any beneficial
interest.
</FN>
</TABLE>
AUDIT COMMITTEE
Messrs. Sangwoo Ahn and Frank M. Burke, Jr. serve as the members of the
Audit Committee of the Company. Such Committee will, on an annual basis, or more
frequently as such Committee may determine to be appropriate, review policies
and practices of the Company and the Partnership and deal with various matters
as to which conflicts of interest may arise.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation committee
or any other committee that performs the equivalent functions. During the fiscal
year ended December 31, 1997, none of the Company's officers or employees
participated in the deliberations of the Company's Board of Directors concerning
executive officer compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE STATEMENT
Section 16(a) of the Securities and Exchange Act of 1934, as amended
("Section 16(a)") requires the Company's officers and directors, among others,
to file reports of ownership and changes of ownership in the Partnership's
equity securities with the Securities and Exchange Commission and the New York
Stock Exchange. Such persons are also required by related regulations to furnish
the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it,
the Company believes that, since January 1, 1997, its officers and directors
have complied with all applicable filing requirements with respect to the
Partnership's equity securities.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no executive officers, but is obligated to
reimburse the Company for compensation paid to the Company's executive officers
in connection with their operation of the Partnership's business.
The following table sets forth information with respect to the
aggregate compensation paid or accrued by the Company during the fiscal years
1997, 1996 and 1995, to the Chief Executive Officer and each of the other most
highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Principal Annual Compensation All Other
Position Year Salary Bonus(a) Compensation(b)
------------------------ -------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Edward D. Doherty(c) 1997 $ 208,350 $ 18,420(f) $ 6,541
Chairman of the 1996 200,333(d) 93,040 6,832
Board and Chief 1995 190,833 133,100 6,096
Executive Officer
Leon E. Hutchens 1997 180,617 -0- 7,338
President 1996 173,700 15,000 7,051
1995 164,644 30,000 7,278
Ronald D. Scoggins(c) 1997 139,899(e) 9,210(g) 5,003
Senior Vice President
Jimmy L. Harrison 1997 110,532 -0- 2,854
Controller 1996 105,532 4,000 3,775
1995 100,670 8,500 5,450
<FN>
(a) Amounts earned in year shown and paid the following year.
(b) Represents the Company's contributions to Kaneb's Savings Investment
Plan (a 401(k) plan) and the imputed value of Company-paid group term
life insurance.
(c) The Compensation for these individuals is paid by Kaneb, which is
reimbursed for all or substantially all of such compensation by the
Company.
(d) Includes deferred compensation of $14,901.
(e) Includes $13,608 paid in the form of 454 Partnership Preference Units
and 1,566 shares of Kaneb Services, Inc. common stock.
(f) Includes deferred compensation of $18,420.
(g) Includes deferred compensation of $9,210.
</FN>
</TABLE>
Retirement Plan
Effective April 1, 1991, Kaneb established the Savings Investment Plan,
a defined contribution 401(k) plan, that permits all full-time employees of the
Company who have completed one year of service to contribute 2% to 12% of base
compensation, on a pre-tax basis, into participant accounts. In addition to
mandatory contribution equal to 2% of base compensation per year for each plan
participant, the Company makes matching contributions from 25% to 50% of up to
the first 6% of base pay contributed by a plan participant. Employee
contributions, together with earnings thereon, are not subject to forfeiture.
That portion of a participant's account balance attributable to Company
contributions, together with earnings thereon, is vested over a five year period
at 20% per year. Participants are credited with their prior years of service for
vesting purposes, however, no amounts are accrued for the accounts of
participants, including the Company's executive officers, for years of service
previous to the plan commencement date. Participants may direct the investment
of their contributions into a variety of investments, including Kaneb common
stock. Plan assets are held and distributed pursuant to a trust arrangement.
Because levels of future compensation, participant contributions and investment
yields cannot be reliably predicted over the span of time contemplated by a plan
of this nature, it is impractical to estimate the annual benefits payable at
retirement to the individuals listed in the Summary Cash Compensation Table
above.
<PAGE>
Director's Fees
During 1997, each member of the Company's Board of Directors who was
not also an employee of the Company or Kaneb was paid an annual retainer of
$10,000 in lieu of all attendance fees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 16, 1998, the Company owned a combined 2% General Partner
interest in the Partnership and the Operating Partnership and, together with its
affiliates, owned Preference Units and Common Units representing an aggregate
limited partner interest of approximately 31%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is entitled to certain reimbursements under the Partnership
Agreement. For additional information regarding the nature and amount of such
reimbursements, see Note 7 to the Partnership's consolidated financial
statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1)FINANCIAL STATEMENTS
Set forth below is a list of financial statements appearing in this
report.
Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements:
Page
Consolidated Statements of Income
- Three Years Ended December 31, 1997................... F - 1
Consolidated Balance Sheets - December 31, 1997 and 1996.... F - 2
Consolidated Statements of Cash Flows
- Three Years Ended December 31, 1997................... F - 3
Consolidated Statements of Partners' Capital
Three Years ended December 31, 1997...................... F - 4
Notes to Consolidated Financial Statements.................... F - 5
Report of Independent Accountants............................. F -13
(A) (2)FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
<PAGE>
(A) (3)LIST OF EXHIBITS
3.1 Amended and Restated Agreement of Limited Partnership dated September
27, 1989, filed as Appendix A to the Registrant's Prospectus, dated
September 25, 1989, in connection with the Registrant's Registration
Statement on Form S-1 (S.E.C. File No. 33-30330) which exhibit is
hereby incorporated by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between
Grace Energy Corporation, Support Terminal Services, Inc., Standard
Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc.
and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated
March 2, 1993, filed as Exhibit 10.1 of the exhibits to Registrant's
Current Report on Form 8-K, dated March 16, 1993, which exhibit is
hereby incorporated by reference.
10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P.
("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other
Lenders, dated December 22, 1994 (the "TCB Loan Agreement"), filed as
Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, which exhibit is hereby
incorporated by reference.
10.3 Amendment to the TCB Loan Agreement, dated January 30, 1998, filed
herewith.
10.4 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL")
and TCB, dated October 11, 1993, filed as Exhibit 10.3 of the exhibits
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is hereby incorporated by reference.
10.5 Note Purchase Agreement, dated December 22, 1994, filed as Exhibit 10.2
of the exhibits to Registrant's Current Report on Form 8-K, dated March
13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby
incorporated by reference.
10.6 Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
the exhibits to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, which exhibit is hereby incorporated by
reference.
10.7 Agreement for Sale and Purchase of Assets between Wyco Pipe Line
Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
exhibits to the Registrant's March 1995 Form 8-K, which exhibit is
hereby incorporated by reference.
10.8 Asset Purchase Agreements between and among Steuart Petroleum Company,
SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment
Company, Support Terminals Operating Partnership, L.P. and KPOP, as
amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
10.4 of the exhibits to Registrant's Current Report on Form 8-K dated
January 3, 1996, which exhibits are hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
(B) REPORTS ON FORM 8-K - NONE.
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues ................................................ $ 121,156,000 $ 117,554,000 $ 96,928,000
------------- ------------- -------------
Costs and expenses:
Operating costs ...................................... 50,183,000 49,925,000 40,617,000
Depreciation and amortization ........................ 11,711,000 10,981,000 8,261,000
General and administrative ........................... 5,793,000 5,259,000 5,472,000
------------- ------------- -------------
Total costs and expenses .......................... 67,687,000 66,165,000 54,350,000
------------- ------------- -------------
Operating income ........................................ 53,469,000 51,389,000 42,578,000
Interest and other income ............................... 562,000 776,000 894,000
Interest expense ........................................ (11,332,000) (11,033,000) (6,437,000)
------------- ------------- -------------
Income before minority
interest and income taxes ............................ 42,699,000 41,132,000 37,035,000
Minority interest in net income ......................... (420,000) (403,000) (360,000)
Income tax provision .................................... (718,000) (822,000) (627,000)
------------- ------------- -------------
Net income .............................................. 41,561,000 39,907,000 36,048,000
General partner's interest
in net income ........................................ (560,000) (403,000) (360,000)
------------- ------------- -------------
Limited partners' interest
in net income ........................................ $ 41,001,000 $ 39,504,000 $ 35,688,000
============= ============= =============
Allocation of net income per
Senior Preference Unit and
Preference Unit as described in Note 2 ............... $ 2.55 $ 2.46 $ 2.20
============= ============= =============
Weighted average number of Partnership units outstanding:
Senior Preference Units .............................. 7,250,000 7,250,000 7,250,000
Preference Units ..................................... 5,650,000 4,650,000 5,400,000
</TABLE>
See notes to consolidated financial statements.
F - 1
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 6,376,000 $ 8,196,000
Accounts receivable..................................................... 11,503,000 11,540,000
Current portion of receivable from general partner...................... - 975,000
Prepaid expenses........................................................ 4,021,000 4,321,000
------------- --------------
Total current assets................................................. 21,900,000 25,032,000
------------- --------------
Property and equipment..................................................... 345,802,000 337,202,000
Less accumulated depreciation.............................................. 98,670,000 87,469,000
------------- --------------
Net property and equipment........................................... 247,132,000 249,733,000
------------- --------------
$ 269,032,000 $ 274,765,000
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt....................................... $ 2,335,000 $ 2,036,000
Accounts payable........................................................ 2,400,000 2,764,000
Accrued expenses........................................................ 3,297,000 4,355,000
Accrued distributions payable........................................... 10,725,000 9,833,000
Accrued taxes, other than income taxes.................................. 1,957,000 1,763,000
Deferred terminaling fees............................................... 2,892,000 2,874,000
Payable to general partner.............................................. 1,143,000 711,000
------------- --------------
Total current liabilities............................................ 24,749,000 24,336,000
------------- --------------
Long-term debt, less current portion....................................... 132,118,000 139,453,000
Other liabilities and deferred taxes....................................... 6,935,000 6,612,000
Minority interest.......................................................... 1,034,000 1,024,000
Commitments and Contingencies
Partners' capital:
Senior preference unitholders........................................... 48,830,000 48,446,000
Preference unitholders.................................................. 46,449,000 37,982,000
Preference B unitholders................................................ - 8,168,000
Common unitholders...................................................... 7,888,000 7,720,000
General partner......................................................... 1,029,000 1,024,000
------------- --------------
Total partners' capital.............................................. 104,196,000 103,340,000
------------- --------------
$ 269,032,000 $ 274,765,000
============= ==============
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income ........................................ $ 41,561,000 $ 39,907,000 $ 36,048,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 11,711,000 10,981,000 8,261,000
Minority interest in net income................. 420,000 403,000 360,000
Deferred income taxes........................... 651,000 601,000 624,000
Changes in working capital components:
Accounts receivable........................... 37,000 (1,330,000) (4,605,000)
Prepaid expenses.............................. 300,000 (3,067,000) 670,000
Accounts payable and accrued expenses......... (336,000) 1,697,000 1,943,000
Deferred terminaling fees..................... 18,000 240,000 993,000
Payable to general partner.................... 432,000 (252,000) 177,000
------------- -------------- --------------
Net cash provided by operating activities.. 54,794,000 49,180,000 44,471,000
------------- ------------- --------------
Investing activities:
Capital expenditures............................... (10,641,000) (7,075,000) (8,946,000)
Acquisitions of pipelines and terminals............ - (8,507,000) (97,850,000)
Other.............................................. 313,000 (630,000) 2,429,000
------------- ------------- --------------
Net cash used in investing activities...... (10,328,000) (16,212,000) (104,367,000)
------------- ------------- --------------
Financing activities:
Changes in receivable from general partner......... 975,000 2,570,000 2,240,000
Issuance of long-term debt......................... - 73,000,000 96,500,000
Payments of long-term debt......................... (7,036,000) (69,777,000) (3,047,000)
Distributions:
Senior preference unitholders................... (17,763,000) (16,313,000) (15,950,000)
Preference unitholders.......................... (13,842,000) (12,712,000) (12,430,000)
Common unitholders.............................. (7,742,000) (7,110,000) (4,582,000)
General partner and minority interest........... (878,000) (737,000) (673,000)
------------- ------------- -------------
Net cash provided by (used in) financing
activities.............................. (46,286,000) (31,079,000) 62,058,000
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents...... (1,820,000) 1,889,000 2,162,000
Cash and cash equivalents at beginning of period...... 8,196,000 6,307,000 4,145,000
------------- ------------- --------------
Cash and cash equivalents at end of period............ $ 6,376,000 $ 8,196,000 $ 6,307,000
============= ============= ==============
Supplemental information - Cash paid for interest..... $ 11,346,000 $ 10,368,000 $ 5,479,000
============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
SENIOR
PREFERENCE PREFERENCE PREFERENCE B COMMON GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER TOTAL
------------- -------------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Partners' capital at
January 1, 1995..........$ 47,288,000 $ 45,247,000 $ - $ 6,227,000 $ 992,000 $ 99,754,000
Unit Conversion............ - (8,008,000) 8,008,000 - - -
1995 income allocation..... 15,950,000 11,880,000 550,000 7,308,000 360,000 36,048,000
Distributions declared..... (15,950,000) (11,880,000) (550,000) (6,320,000) (354,000) (35,054,000)
------------- ------------- ----------- ------------ ----------- -------------
Partners' capital at
December 31, 1995........ 47,288,000 37,239,000 8,008,000 7,215,000 998,000 100,748,000
1996 income allocation..... 17,833,000 11,438,000 2,460,000 7,773,000 403,000 39,907,000
Distributions declared..... (16,675,000) (10,695,000) (2,300,000) (7,268,000) (377,000) (37,315,000)
------------- ------------- ----------- ------------ ----------- -------------
Partners' capital at
December 31, 1996........ 48,446,000 37,982,000 8,168,000 7,720,000 1,024,000 103,340,000
1997 income allocation..... 18,509,000 12,587,000 1,837,000 8,068,000 560,000 41,561,000
Distributions declared..... (18,125,000) (12,275,000) (1,850,000) (7,900,000) (555,000) (40,705,000)
Unit Conversion............ - 8,155,000 (8,155,000) - - -
------------- ------------- ------------ ------------ ----------- ------------
Partners' capital at
December 31, 1997........$ 48,830,000 $ 46,449,000 $ - $ 7,888,000 $ 1,029,000 $ 104,196,000
============= ============= ============ ============ =========== =============
Limited Partnership
Units outstanding at
January 1, 1995.......... 7,250,000 5,650,000 - 3,160,000 (a) 16,060,000
Unit Conversion in 1995.... - (1,000,000) 1,000,000 - - -
------------- -------------- ----------- ----------- -------------- -----------
Limited Partnership
Units outstanding at
December 31, 1995
and 1996................. 7,250,000 4,650,000 1,000,000 3,160,000 (a) 16,060,000
Unit Conversion in 1997.... - 1,000,000 (1,000,000) - - -
------------- ------------- ------------ ----------- -------------- ------------
Limited Partnership
Units outstanding at
December 31, 1997........ 7,250,000(b) 5,650,000 - 3,160,000 (a) 16,060,000
================ ============= ============ =========== ============== ===========
<FN>
(a) Kaneb Pipe Line Company owns a combined 2% interest in Kaneb Pipe Line
Partners, L.P. as General Partner.
(b) The Partnership Agreement allows for an additional issuance of up to
7.75 million senior preference units.
</FN>
</TABLE>
F-4
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. (the "Partnership"), a master
limited partnership, owns and operates a refined petroleum products
pipeline business and a petroleum products and specialty liquids storage
and terminaling business. The Partnership operates through Kaneb Pipe Line
Operating Partnership, L.P. ("KPOP"), a limited partnership in which the
Partnership holds a 99% interest as limited partner. Kaneb Pipe Line
Company (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc.
("Kaneb"), as general partner holds a 1% general partner interest in both
the Partnership and KPOP. The Company's 1% interest in KPOP is reflected
as the minority interest in the financial statements.
In September 1995, a subsidiary of the Company sold 3.5 million
of the Preference Units ("PU") it held in a public offering and exchanged
1.0 million of its PU's for 1.0 million Preference B Units, which were
subordinate to the PU's until September 30, 1997. Effective October 1,
1997, the 1.0 million Preference B Units were exchanged for an equal
number of PUs. At December 31, 1997, the Company, together with its
affiliates, owns an approximate 31% interest as a limited partner in the
form of PU's and Common Units ("CU"), and as a general partner owns a
combined 2% interest. The Senior Preference Units ("SPU") represent an
approximate 44% interest in the Partnership and the 3.5 million publicly
held PU's represent an approximate 21% interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the
Partnership in the preparation of the consolidated financial statements.
The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect 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.
CASH AND CASH EQUIVALENTS
The Partnership's policy is to invest cash in highly liquid
investments with maturities of three months or less, upon purchase.
Accordingly, uninvested cash balances are kept at minimum levels. Such
investments are valued at cost, which approximates market, and are
classified as cash equivalents. The Partnership does not have any
derivative financial instruments.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Certain
leases have been capitalized and the leased assets have been included in
property and equipment. Additions of new equipment and major renewals and
replacements of existing equipment are capitalized. Repairs and minor
replacements that do not materially increase values or extend useful lives
are expensed. Depreciation of property and equipment is provided on a
straight-line basis at rates based upon expected useful lives of various
classes of assets, as disclosed in Note 4. The rates used for pipeline and
storage facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.
REVENUE AND INCOME RECOGNITION
KPOP provides pipeline transportation of refined petroleum
products and liquified petroleum gases. Revenue is recognized upon receipt
of the products into the pipeline system.
ST provides terminaling and other ancillary services. Storage
fees are billed one month in advance and are reported as deferred income.
Revenue is recognized in the month services are provided.
F-5
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are
recorded when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the timing
of these accruals coincides with the completion of a feasibility study or
the Partnership's commitment to a formal plan of action.
INCOME TAX CONSIDERATIONS
Income before income tax expense is made up of the following components:
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Partnership operations..... $40,317,000 $37,950,000 $35,269,000
Corporate operations....... 1,962,000 2,779,000 1,406,000
----------- ----------- -----------
$42,279,000 $40,729,000 $36,675,000
=========== =========== ===========
Partnership operations are not subject to Federal or state income
taxes. However, certain operations of ST are conducted through
wholly-owned corporate subsidiaries which are taxable entities. The
provision for income taxes for the periods ended December 31, 1997, 1996
and 1995 consists of deferred U.S. Federal income taxes of $.7 million,
$.6 million and $.6 million, respectively, and current Federal income
taxes of $.2 million in 1996. The net deferred tax liability of $3.1
million and $2.3 million at December 31, 1997 and 1996, respectively,
consists of deferred tax liabilities of $8.2 million and $7.4 million,
respectively, and deferred tax assets of $5.2 million and $5.1 million,
respectively. The deferred tax liabilities consist primarily of tax
depreciation in excess of book depreciation and the deferred tax assets
consist primarily of net operating losses. The corporate operations have
net operating losses for tax purposes totaling approximately $13.8 million
which expire in years 2008 through 2012.
Since the income or loss of the operations which are conducted
through limited partnerships will be included in the tax returns of the
individual partners of the Partnership, no provision for income taxes has
been recorded in the accompanying financial statements on these earnings.
The tax returns of the Partnership are subject to examination by Federal
and state taxing authorities. If any such examination results in
adjustments to distributive shares of taxable income or loss, the tax
liability of the partners would be adjusted accordingly.
F-6
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax attributes of the Partnership's net assets flow directly
to each individual partner. Individual partners will have different
investment bases depending upon the timing and prices of acquisition of
partnership units. Further, each partner's tax accounting, which is
partially dependent upon their individual tax position, may differ from
the accounting followed in the financial statements. Accordingly, there
could be significant differences between each individual partner's tax
basis and their proportionate share of the net assets reported in the
financial statements. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," requires disclosure by a publicly held
partnership of the aggregate difference in the basis of its net assets for
financial and tax reporting purposes. Management does not believe that, in
the Partnership's circumstances, the aggregate difference would be
meaningful information.
ALLOCATION OF NET INCOME AND EARNINGS
Net income is allocated to the limited partnership units in an
amount equal to the cash distributions declared for each reporting period
and any remaining income or loss is allocated to any class of units that
did not receive the same amount of cash distributions per unit (if any).
If the same cash distributions per unit are declared for all classes of
units, income or loss is allocated pro rata based on the aggregate amount
of distributions declared.
In 1997, distributions by the Partnership of Available Cash
reached the Second Target Distribution, as defined in the Partnership
Agreement, which entitled the general partner to certain incentive
distributions at different levels of cash distributions. Earnings per SPU
and PU shown on the consolidated statements of income are calculated by
dividing the amount of net income, allocated on the above basis with
incentives calculated on distributions declared to the SPU's and PU's, by
the weighted average number of SPU's and PU's outstanding, respectively.
If the allocation of income had been made as if all income had been
distributed in cash, earnings per SPU and PU would have been $2.53 for the
year ended December 31, 1997.
CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its
Available Cash, as defined in the Partnership Agreement, to holders of
limited partnership units ("Unitholders") and the Company. Available Cash
consists generally of all the cash receipts of the Partnership plus the
beginning cash balance less all of its cash disbursements and reserves.
The Partnership expects to make distributions of Available Cash for each
quarter of not less than $.55 per Unit (the "Minimum Quarterly
Distribution"), or $2.20 per Unit on an annualized basis, for the
foreseeable future, although no assurance is given regarding such
distributions. The Partnership expects to make distributions of all
Available Cash within 45 days after the end of each quarter to holders of
record on the applicable record date. Distributions of $2.50, $2.30 and
$2.20 per unit were declared to Senior Preference and Preference
Unitholders in 1997, 1996 and 1995, respectively. During 1997, 1996 and
1995, the Partnership declared distributions of $2.50, $2.30 and $1.45,
respectively, per unit to the Common Unitholders. As of December 31, 1997,
no arrearages existed on any class of partnership interest.
Distributions by the Partnership of its Available Cash are made
99% to Unitholders and 1% to the Company, subject to the payment of
incentive distributions to the General Partner if certain target levels of
cash distributions to the Unitholders are achieved. The distribution of
Available Cash for each quarter during the Preference Period, as defined,
is subject to the preferential rights of the holders of the SPU's to
receive the Minimum Quarterly Distribution for such quarter, plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters, before any distribution of Available Cash is made to holders of
PU's or CU's for such quarter. In addition, for each quarter within the
Preference Period, the distribution of any amounts to holders of CU's was
subject to the preferential rights of the holders of the Preference B
Units, to the extent outstanding, if any, to receive the Minimum Quarterly
Distribution for such quarter, plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters. The CU's are not
entitled to arrearages in the payment of the Minimum Quarterly
Distribution. In general, the Preference Period will continue indefinitely
until the Minimum Distribution has been paid to the holders of the SPU's,
the PU's, the Preference B Units, to the extent outstanding, and the CU's
for twelve consecutive quarters. The Minimum Quarterly Distribution has
been paid to all classes of Unitholders for all four quarters in 1997 and
1996 and for the quarters ended September 30 and December 31, 1995. Prior
to the end of the Preference Period, up to 2,650,000 of the PU's may be
converted into SPU's on a one-for-one basis if the Third Target
Distribution, as defined, is paid to all Unitholders for four full
consecutive quarters. The Third Target distribution is reached when
distributions of Available Cash equals $2.80 per Limited Partner ("LP")
Unit on an annualized basis. After the Preference Period ends, all
differences and distinctions between the classes of units for the purposes
of cash distributions will cease. It is anticipated that the Preference
Period will end upon the payment of the twelfth consecutive quarterly
distribution on August 14, 1998.
F-7
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHANGE IN PRESENTATION
Certain financial statement items have been reclassified to
conform with 1997 presentation.
3. ACQUISITIONS
In February 1995, the Partnership acquired, through KPOP, the
refined petroleum product pipeline assets (the "West Pipeline") of Wyco
Pipe Line Company for $27.1 million plus transaction costs and the
assumption of certain environmental liabilities. The West Pipeline was
owned 60% by a subsidiary of GATX Terminals Corporation and 40% by a
subsidiary of Amoco Pipe Line Company. The acquisition was financed by the
issuance of $27 million of first mortgage notes.
In December 1995, the Partnership acquired the liquids
terminaling assets of Steuart Petroleum Company and certain of its
affiliates (collectively, "Steuart") for $68 million plus transaction
costs and the assumption of certain environmental liabilities. The
acquisition price was initially financed by the issuance of a $68 million
bank bridge loan which was refinanced during 1996 for $68 million of first
mortgage notes. The asset purchase agreement includes a provision for an
earn-out payment based upon revenues of one of the terminals exceeding a
specified amount for a seven-year period beginning in January 1996. No
amount was payable under the earn-out provision in 1997 or 1996. The
contracts also included a provision for the continuation of all
terminaling contracts in place at the time of the acquisition, including
those contracts with Steuart.
The acquisitions have been accounted for using the purchase
method of accounting. The total purchase price has been allocated to the
assets and liabilities based on their respective fair values based on
valuations and other studies. Assuming the above acquisitions in 1995
occurred as of the beginning of the year ended December 31, 1995, the
summarized unaudited pro forma revenues, net income and allocation of net
income per SPU and PU for 1995 would be $117.9 million, $35.7 million and
$2.20, respectively.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful December 31,
Life ------------------------------
(Years) 1997 1996
--------- ------------- --------------
<S> <C> <C> <C>
Land ............................... -- $ 18,663,000 $ 18,514,000
Buildings .......................... 35 6,728,000 6,493,000
Furniture and fixtures ............. 16 2,509,000 2,281,000
Transportation equipment ........... 6 3,687,000 3,452,000
Machinery and equipment ............ 20 - 40 28,507,000 28,113,000
Pipeline and terminaling equipment.. 20 - 40 259,467,000 252,319,000
Pipeline equipment under
capitalized lease ................ 20 - 40 22,513,000 22,270,000
Construction work-in-progress ...... -- 3,728,000 3,760,000
------------- -------------
Total property and equipment ....... 345,802,000 337,202,000
Accumulated depreciation ........... (98,670,000) (87,469,000)
------------- -------------
Net property and equipment ......... $ 247,132,000 $ 249,733,000
============= =============
</TABLE>
F-8
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
First mortgage notes due 2001 and 2002 ........... $ 60,000,000 $ 60,000,000
First mortgage notes due 2001 through 2016 ....... 68,000,000 68,000,000
Obligation under capital lease ................... 6,453,000 8,489,000
Revolving credit facility ........................ -- 5,000,000
------------- -------------
Total long-term debt ............................. 134,453,000 141,489,000
Less current portion ............................. 2,335,000 2,036,000
------------- -------------
Long-term debt, less current portion ............. $ 132,118,000 $ 139,453,000
============= =============
</TABLE>
In 1994, a wholly-owned subsidiary of the Partnership issued $33
million of first mortgage notes ("Notes") to a group of insurance
companies. The Notes bear interest at the rate of 8.05% per annum and are
due on December 22, 2001. Also in 1994, another wholly-owned subsidiary
entered into a Restated Credit Agreement with a group of banks that, as
subsequently amended, provides a $25 million revolving credit facility
through January 31, 2001. The credit facility bears interest at variable
interest rates and has a commitment fee of 0.15% per annum of the unused
credit facility. At December 31, 1997, no amounts were drawn under the
credit facility. In 1995, the Partnership financed the acquisition of the
West Pipeline with the issuance of $27 million of Notes due February 24,
2002 which bear interest at the rate of 8.37% per annum. The Notes and the
credit facility are secured by a mortgage on the East Pipeline and contain
certain financial and operational covenants.
The acquisition of the Steuart terminaling assets was initially
financed by a $68 million bridge loan from a bank. In June 1996, the
Partnership refinanced this obligation with $68.0 million of new first
mortgage notes (the "Steuart notes") bearing interest at rates ranging
from 7.08% to 7.98%. $35 million of the Steuart notes is due June 2001,
$8.0 million is due June 2003, $10.0 million is due June 2006 and $15.0
million is due June 2016. The loan is secured, pari passu with the
existing Notes and credit facility, by a mortgage on the East Pipeline.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease
payments under capital and operating leases together with the present
value of net minimum lease payments for capital leases as of December 31,
1997:
Capital Operating
Year ending December 31: Lease (a) Leases
----------------------- ---------- ----------
1998 ..................................... $3,080,000 $1,578,000
1999 ..................................... 4,118,000 1,017,000
2000 ..................................... -- 940,000
2001 ..................................... -- 824,000
2002 ..................................... -- 785,000
Thereafter ............................... -- 2,576,000
---------- ----------
Total minimum lease payments ................ 7,198,000 $7,720,000
==========
Less amount representing interest ........... 745,000
----------
Present value of net minimum lease payments.. $6,453,000
==========
(a) The capital lease is secured by certain pipeline equipment and the
Partnership has accrued its obligation to purchase this equipment for
approximately $4.1 million at the termination of the lease.
F-9
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense under operating leases amounted to $1.3
million, $1.2 million and $.9 million for each of the years ended
December 31, 1997, 1996 and 1995, respectively.
The operations of the Partnership are subject to Federal,
state and local laws and regulations relating to protection of the
environment. Although the Partnership believes its operations are in
general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and
liabilities will not be incurred by the Partnership. Moreover, it is
possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the
operations of the Partnership, could result in substantial costs and
liabilities to the Partnership. The Partnership has recorded a reserve
in other liabilities for environmental claims in the amount of $3.1
million at December 31, 1997, including $2.2 million relating to the
acquisitions of the West Pipeline and Steuart.
The Company has indemnified the Partnership against
liabilities for damage to the environment resulting from operations of
the pipeline prior to October 3, 1989 (date of formation of the
Partnership). The indemnification does not extend to any liabilities
that arise after such date to the extent that the liabilities result
from changes in environmental laws and regulations. In addition, ST's
former owner has agreed to indemnify the Partnership against
liabilities for damages to the environment from operations conducted by
the former owner prior to March 2, 1993. The indemnity, which expires
March 1, 1998, is limited in amount to 60% of any claim exceeding $0.1
million, up to a maximum of $10 million.
The Partnership has other contingent liabilities resulting
from litigation, claims and commitments incident to the ordinary course
of business. Management believes, based on the advice of counsel, that
the ultimate resolution of such contingencies will not have a
materially adverse effect on the financial position or results of
operations of the Partnership.
7. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled
by the Company. The Company and Kaneb are entitled to reimbursement of
all direct and indirect costs related to the business activities of the
Partnership. These costs, which totaled $10.8 million, $10.5 million
and $9.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively, include compensation and benefits paid to officers and
employees of the Company and Kaneb, insurance premiums, general and
administrative costs, tax information and reporting costs, legal and
audit fees. Included in this amount is $9.0 million, $8.4 million and
$7.7 million of compensation and benefits, paid to officers and
employees of the Company for the periods ended December 31, 1997, 1996
and 1995, respectively, which represent the actual amounts paid by the
Company or Kaneb. In addition, the Partnership paid $.2 million during
each of these respective periods for an allocable portion of the
Company's overhead expenses. At December 31, 1997 and 1996, the
Partnership owed the Company $1.1 million and $.7 million,
respectively, for these expenses which are due under normal invoice
terms.
F-10
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BUSINESS SEGMENT DATA
Selected financial data pertaining to the operations of the Partnership's
business segments is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Pipeline operations.................................... $ 61,320,000 $ 63,441,000 $ 60,192,000
Terminaling operations................................. 59,836,000 54,113,000 36,736,000
---------------- --------------- --------------
$ 121,156,000 $ 117,554,000 $ 96,928,000
================ =============== ==============
Operating Income:
Pipeline operations.................................... $ 31,827,000 $ 32,221,000 $ 29,747,000
Terminaling operations................................. 21,642,000 19,168,000 12,831,000
---------------- --------------- --------------
$ 53,469,000 $ 51,389,000 $ 42,578,000
================ =============== ==============
Depreciation and Amortization:
Pipeline operations.................................... $ 4,885,000 $ 4,817,000 $ 4,843,000
Terminaling operations................................. 6,826,000 6,164,000 3,418,000
---------------- --------------- --------------
$ 11,711,000 $ 10,981,000 $ 8,261,000
================ =============== ==============
Capital Expenditures (including capitalized leases
and excluding acquisitions):
Pipeline operations.................................... $ 4,496,000 $ 3,446,000 $ 3,381,000
Terminaling operations................................. 6,145,000 3,629,000 5,565,000
---------------- --------------- --------------
$ 10,641,000 $ 7,075,000 $ 8,946,000
================ =============== ==============
Identifiable Assets:
Pipeline operations.................................... $ 97,666,000 $ 102,391,000 $ 105,464,000
Terminaling operations................................. 171,366,000 172,374,000 162,323,000
---------------- --------------- --------------
$ 269,032,000 $ 274,765,000 $ 267,787,000
================ =============== ==============
</TABLE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all long term debt (excluding capital
leases) as of December 31, 1997 was approximately $134 million as compared
to the carrying value of $128 million. These fair values were estimated
using discounted cash flow analysis, based on the Partnership's current
incremental borrowing rates for similar types of borrowing arrangements.
The Partnership has not determined the fair value of its capital leases as
it is not practicable. These estimates are not necessarily indicative of
the amounts that would be realized in a current market exchange. The
Partnership has no derivative financial instruments.
The Partnership markets and sells its services to a broad base of
customers and performs ongoing credit evaluations of its customers. The
Partnership does not believe it has a significant concentration of credit
risk at December 31, 1997. No customer constituted 10 percent or more of
consolidated revenues in 1997, 1996 or 1995.
F-11
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- ---------------- ---------------
1997:
<S> <C> <C> <C> <C>
Revenues...................... $ 28,579,000 $ 29,793,000 $ 31,465,000 $ 31,319,000
================ ================ =============== ==============
Operating income.............. $ 12,029,000 $ 12,919,000 $ 13,956,000 $ 14,565,000
================ ================ =============== ==============
Net income.................... $ 8,907,000 $ 9,949,000 $ 10,975,000 $ 11,730,000
================ ================ =============== ==============
Allocation of net income
per SPU and PU.............. $ .55 $ .61 $ .68 $ .71
================ ================ =============== ==============
1996:
Revenues...................... $ 27,826,000 $ 28,795,000 $ 29,963,000 $ 30,970,000
================ ================ =============== ==============
Operating income.............. $ 11,600,000 $ 12,841,000 $ 12,832,000 $ 14,116,000
================ ================ =============== ==============
Net income.................... $ 8,677,000 $ 10,007,000 $ 9,872,000 $ 11,351,000
================ ================ =============== ==============
Allocation of net income
per SPU and PU.............. $ .55 $ .62 $ .61 $ .70
================ ================ =============== ==============
</TABLE>
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material
respects, the financial position of Kaneb Pipe Line Partners, L.P. and its
subsidiaries (the "Partnership") at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 19, 1998
F-13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P.
By: Kaneb Pipe Line Company
General Partner
By: EDWARD D. DOHERTY
Chairman of the Board and
Chief Executive Officer
Date: March 23, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Kaneb Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line
Company and on the date indicated.
SIGNATURE TITLE DATE
- ---------------------------- --------------------------- -------------
Principal Executive Officer Chairman of the Board March 23 1998
EDWARD D. DOHERTY and Chief Executive Officer
Principal Accounting Officer
JIMMY L. HARRISON Controller March 23, 1998
Directors
SANGWOO AHN Director March 23, 1998
JOHN R. BARNES Director March 23, 1998
M.R. BILES Director March 23, 1998
FRANK M. BURKE, JR. Director March 23, 1998
CHARLES R. COX Director March 23, 1998
HANS KESSLER Director March 23, 1998
JAMES R. WHATLEY Director March 23, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
3.1 Amended and Restated Agreement of Limited Partnership dated September
27, 1989, filed as Appendix A to the Registrant's Prospectus, dated
September 25, 1989, in connection with the Registrant's Registration
Statement on Form S-1 (S.E.C. File No. 33-30330) which exhibit is
hereby incorporated by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between
Grace Energy Corporation, Support Terminal Services, Inc., Standard
Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc.
and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated
March 2, 1993, filed as Exhibit 10.1 of the exhibits to Registrant's
Current Report on Form 8-K, dated March 16, 1993, which exhibit is
hereby incorporated by reference.
10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P.
("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other
Lenders, dated December 22, 1994 (the "TCB Loan Agreement"), filed as
Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, which exhibit is hereby
incorporated by reference.
10.3 Amendment to the TCB Loan Agreement, dated January 30, 1998, filed
herewith.
10.4 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL")
and TCB, dated October 11, 1993, filed as Exhibit 10.3 of the exhibits
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is hereby incorporated by reference.
10.5 Note Purchase Agreement, dated December 22, 1994, filed as Exhibit 10.2
of the exhibits to Registrant's Current Report on Form 8-K, dated March
13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby
incorporated by reference.
10.6 Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
the exhibits to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, which exhibit is hereby incorporated by
reference.
10.7 Agreement for Sale and Purchase of Assets between Wyco Pipe Line
Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
exhibits to the Registrant's March 1995 Form 8-K, which exhibit is
hereby incorporated by reference.
10.8 Asset Purchase Agreements between and among Steuart Petroleum Company,
SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment
Company, Support Terminals Operating Partnership, L.P. and KPOP, as
amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
10.4 of the exhibits to Registrant's Current Report on Form 8-K dated
January 3, 1996, which exhibits are hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
THIRD AMENDMENT TO RESTATED CREDIT AGREEMENT
THIS DOCUMENT is entered into to be effective as of January 30, 1998,
between KANEB PIPE LINE OPERATING PARTNERSHIP, a Delaware limited partnership
('BORROWER'), Lenders, and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION (formerly
known as Texas Commerce Bank National Association, ('AGENT') as Agent for
Lenders.
Borrower, Agent, and Lenders are party to the Restated Credit Agreement
(as amended through the date of this document and as further renewed, extended,
amended, and restated, the ('CREDIT AGREEMENT') dated as of December 22, 1994
providing for a $15,000,000 revolving credit facility (the 'REVOLVING FACILITY')
and the issuance of letters of credit up to an aggregate face amount of
$4,118,000. Borrower, Agent, and Lenders have agreed, upon the following terms
and conditions, to amend the Credit Agreement to provide for (a) an extension of
the stated date of maturity for the Revolving Facility, (b) an increase in the
maximum amount available under the Revolving Facility, and (c) modification of
certain pricing terms. Accordingly, for adequate and sufficient consideration,
Borrower, Agent, and Lenders agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this document, terms
defined in the Credit Agreement have the same meanings when used in
this document.
2. AMENDMENT TO CREDIT AGREEMENT. The Credit Agreement is amended as
follows:
(A) CLAUSE (B) in the definition of LIBOR RATE in SECTION 1 is amended as
follows:
(b) A margin of interest that, for any day, is determined on
the basis of the ratio of the KPP Companies consolidated Funded Debt
to EBITDA, as follows:
RATIO OF FUNDED DEBT TO EBITDA MARGIN
3.00 to 1.00 or more 0.875%
Less than 3.00 to 1.00, but 2.50 to 1.00 or more 0.625%
Less than 2.50 to 1.00, but 2.00 to 1.00 or more 0.500%
Less than 2.00 0.375%
For purposes of calculating that ratio, EBITDA is calculated
for the KPP Companies' most recently-completed-four-fiscal quarters,
and Funded Debt is determined as of the day the margin of interest is
determined. EBITDA is determined from the Current Financials and
related Compliance Certificate then most recently delivered to Agent,
effective as of the date received by Agent. If Borrower fails to timely
furnish to Agent any Financial Statements and related Compliance
Certificates required by this agreement, then the margin of 1.125%
shall apply and remain in effect until Borrower furnishes them to
Agent.
(B) SECTION 1.1 is further amended by entirely amending the definition of
STATED TERMINATION DATE, as follows: STATED TERMINATION DATE means
January 31, 2001.
<PAGE>
(C) SECTION 2.1(B) is entirely amended, as follows:
(b) the Principal Debt (other than for payments under LCs) may
never exceed $25,000,000,
(D) SECTION 4.3 is entirely amended, as follows:
4.3 Commitment Fee. Borrower shall pay to Agent for the
account of Lenders (based on their respective Commitment Percentages) a
commitment fee, payable as it accrues from the date of this agreement
as of the last day of each February, May, August, and November
(commencing February 28, 1998), and on the Termination Date, equal to
the Applicable Percentage (per annum) of the amount by which (a) the
total Commitments exceeds (b) the average-daily Commitment Usage,
determined for the calendar quarter (or portion of a calendar quarter
commencing on the date of this agreement or ending on the Termination
Date) preceding and including the date it is due.
For purposes of this SECTION 4.3, the term, 'APPLICABLE
PERCENTAGE' means, for any day, a commitment fee percentage subject to
adjustment (upwards or downwards, as appropriate), based on the ratio
of the KPP Companies' Funded Debt to EBITDA, as follows:
RATIO OF FUNDED DEBT TO EBITDA PERCENTAGE
Greater than 2.50 to 1.00 0.20%
Less than or equal to 2.50 to 1.00 0.15%
For purposes of calculating that ratio, EBITDA is calculated
for the KPP Companies' most recently-completed-four-fiscal quarters,
and Funded Debt is determined as of the day the commitment fee is due.
EBITDA is determined from the Current Financials and related Compliance
Certificate then most recently delivered to Agent, effective as of the
date received by Agent. If Borrower fails to timely furnish to Agent
any Financial Statements and related Compliance Certificates required
by this agreement, then the percentage of .20% shall apply and remain
in effect until Borrower furnishes them to Agent.
3. CANCELLATION OF LC AVAILABILITY. As of the date of this
document, the LC Exposure is $0.00. Notwithstanding anything in the
Loan Documents to the contrary, Lenders= Commitments with respect to
LCs are hereby cancelled, and commencing on the date of this document
neither Agent nor any of its Affiliates shall, under any circumstances,
issue LCs under the Credit Agreement.
4. CONDITIONS PRECEDENT. Notwithstanding any contrary
provision, PARAGRAPH 2 of this document is not effective unless and
until (A) the representations and warranties in this document are true
and correct and (B) Agent receives (1) counterparts of this document
executed by each party named on the signature page or pages of this
document, and (2) each item described on ANNEX 1 attached to this
document, each in form and substance satisfactory to Agent.
<PAGE>
5. RATIFICATIONS. Borrower (A) ratifies and confirms all
provisions of the Loan Papers as amended by this document, (B) ratifies
and confirms that all guaranties, assurances, and Liens granted,
conveyed, or assigned to Agent under the Loan Papers are not released,
reduced, or otherwise adversely affected by this document and continue
to guarantee, assure, and secure full payment and performance of the
present and future Obligation, and (C) agrees to perform such acts and
duly authorize, execute, acknowledge, deliver, file, and record such
additional documents and certificates as Agent may request in order to
create, perfect, preserve, and protect those guaranties, assurances,
and Liens.
6. REPRESENTATIONS. Borrower represents and warrants to Agent
that as of the date of this document (A) all representations and
warranties in the Loan Papers are true and correct in all material
respects except to the extent that (1) any of them speak to a different
specific date or (2) the facts on which any of them were based have
been changed by transactions contemplated or permitted by the Credit
Agreement, and (B) no Material Adverse Event, Default or Potential
Default exists.
7. EXPENSES. Borrower shall pay all costs, fees, and expenses
paid or incurred by Agent incident to this document, including, without
limitation, the reasonable fees and expenses of Agent=s counsel in
connection with the negotiation, preparation, delivery, and execution
of this document and any related documents.
8. MISCELLANEOUS. This document is a 'Loan Paper' referred to
in the Credit Agreement, and the provisions relating to Loan Papers in
SECTIONS 1 and 14 of the Credit Agreement are incorporated in this
document by reference. Unless stated otherwise (A) the singular number
includes the plural and vice versa and words of any gender include each
other gender, in each case, as appropriate, (B) headings and captions
may not be construed in interpreting provisions, (C) this document must
be construed, and its performance enforced, under Texas law, (D) if any
part of this document is for any reason found to be unenforceable, all
other portions of it nevertheless remain enforceable, and (E) this
document may be executed in any number of counterparts with the same
effect as if all signatories had signed the same document, and all of
those counterparts must be construed together to constitute the same
document.
9. ENTIRETIES. THIS DOCUMENT REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THIS DOCUMENT AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
10. PARTIES. This document binds and inures to Borrower,
Agent, Lenders, and their respective successors and assigns.
<PAGE>
THIRD AMENDMENT SIGNATURE PAGE
EXECUTED to be effective as of the date first stated above.
KANEB PIPE LINE OPERATING CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
PARTNERSHIP, as Borrower formerly known as Texas Commerce Bank N.A.,
as Agent and Lender
By KANEB PIPE LINE COMPANY,
General Partner
By Edward D. Doherty By Donna German, Senior Vice President
BANK OF MONTREAL, as a Lender
By Donald G. Skipper, Director,
U.S. Corporate Banking
To induce Agent and Lenders to enter into this document, the
undersigned consent and agree (A) to its execution and delivery, (B) that this
document in no way releases, diminishes, impairs, reduces, or otherwise
adversely affects any Liens, guaranties, assurances, or other obligations or
undertakings of any of the undersigned under any Loan Papers, and (C) waive
notice of acceptance of this consent and agreement, which consent and agreement
binds the undersigned and their successors and permitted assigns and inures to
Agent and their respective successors and permitted assigns.
KANEB PIPE LINE PARTNERS, L.P. SUPPORT TERMINALS OPERATING
PARTNERSHIP, L.P., as a Guarantor
By KANEB PIPE LINE COMPANY, By SUPPORT TERMINAL SERVICES INC.
General Partner General Partner
By Edward D. Doherty, Chairman By Edward D. Doherty, Chairman
STANTRANS, INC., AND SUPPORT STANTRANS PARTNERS, L.P.,
TERMINAL SERVICES, INC., as Guarantors as a Guarantor
By STANTRANS, INC.,
General Partner
By Edward D. Doherty, Chairman By Edward D. Doherty, Chairman
of both the above corporations
STANTRANS HOLDING, INC.,
as a Guarantor
LIST OF SUBSIDIARIES
KANEB PIPE LINE COMPANY
Kaneb Pipe Line Partners, L.P.
Kaneb Pipe Line Operating Partnership, L.P.
Support Terminal Operating Partnership, L.P.
Support Terminal Services, Inc.
StanTrans, Inc.
StanTrans Holding, Inc.
StanTrans Partners, L.P.
Kaneb Management Company, Inc.
Diamond K Limited
Kaneb Management, L.L.C.
Martin Oil Corporation
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
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<PP&E> 345,802
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0
0
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