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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
For the Quarterly Period Commission File
Ended September 30, 1998 Number 001-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2287571
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(972) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of Units of the Registrant outstanding at November 13, 1998: 16,060,000.
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<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signature 9
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Unit Amounts)
(Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ............................... $ 33,709 $ 31,465 $ 92,332 $ 89,837
-------- -------- -------- --------
Costs and expenses:
Operating costs ................... 13,176 12,967 37,781 37,926
Depreciation and amortization ..... 3,075 2,946 9,040 8,744
General and administrative ........ 1,748 1,596 4,955 4,263
-------- -------- -------- --------
Total costs and expenses ........ 17,999 17,509 51,776 50,933
-------- -------- -------- --------
Operating income ....................... 15,710 13,956 40,556 38,904
Interest and other income, net ......... 20 143 107 418
Interest expense ....................... (2,816) (2,858) (8,283) (8,561)
-------- -------- -------- --------
Income before minority interest
and income taxes .................. 12,914 11,241 32,380 30,761
Minority interest in net income ........ (127) (148) (319) (338)
Income tax provision ................... (189) (118) (473) (592)
-------- -------- -------- --------
Net income ............................. 12,598 10,975 31,588 29,831
General partner's interest in net income (205) (148) (539) (338)
-------- -------- -------- --------
Limited partners' interest in net income $ 12,393 $ 10,827 $ 31,049 $ 29,493
======== ======== ======== ========
Allocation of net income per Unit ...... $ .77 $ .68 $ 1.93 $ 1.84
======== ======== ======== ========
Weighted average number of Partnership
Units outstanding ................... 16,060 16,060 16,060 16,060
======== ======== ======== ========
</TABLE>
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................. $ 5,710 $ 6,376
Accounts receivable ....................... 13,989 11,503
Prepaid expenses .......................... 3,683 4,021
------------ -----------
Total current assets .................... 23,382 21,900
------------ -----------
Property and equipment ...................... 368,730 345,802
Less accumulated depreciation and amortization 107,342 98,670
------------ -----------
Net property and equipment .............. 261,388 247,132
------------ -----------
$ 284,770 $ 269,032
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt ......... $ 5,762 $ 2,335
Accounts payable and accrued expenses ..... 14,674 10,546
Distributions payable ..................... 10,725 10,725
Payable to general partner ................ 1,045 1,143
------------ -----------
Total current liabilities ............... 32,206 24,749
------------ -----------
Long-term debt, less current portion ......... 139,300 132,118
Other liabilities and deferred taxes ......... 8,302 6,935
Minority interest ............................ 1,034 1,034
Commitments and contingencies
Partners' capital ............................ 103,928 104,196
------------ -----------
$ 284,770 $ 269,032
============ ===========
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Nine Months Ended
September 30,
---------------------
1998 1997
-------- ---------
Operating activities:
Net income ...................................... $ 31,588 $ 29,831
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............... 9,040 8,744
Minority interest in net income ............. 319 338
Deferred income taxes ....................... 292 592
Changes in working capital components ....... 1,980 4,076
-------- --------
Net cash provided by operating activities 43,219 43,581
-------- --------
Investing activities:
Capital expenditures ............................ (8,048) (7,162)
Acquisitions of terminals ....................... (14,673) --
Other, net ...................................... 500 631
-------- --------
Net cash used in investing activities ... (22,221) (6,531)
-------- --------
Financing activities:
Changes in payable to general partner ........... (98) 975
Issuance of long-term debt ...................... 11,736 --
Payments of long-term debt ...................... (1,127) (1,500)
Distributions to partners ....................... (32,175) (30,390)
-------- --------
Net cash used in financing activities ... (21,664) (30,915)
-------- --------
Increase (decrease) in cash and cash equivalents ... (666) 6,135
Cash and cash equivalents at beginning of period ... 6,376 8,196
-------- --------
Cash and cash equivalents at end of period ......... $ 5,710 $ 14,331
======== ========
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Kaneb Pipe Line
Partners, L.P. and its subsidiaries (the "Partnership") for the three and
nine month periods ended September 30, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the
Partnership were disclosed in the notes to the consolidated financial
statements included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1997. In the opinion of the Partnership's
management, the accompanying consolidated financial statements contain the
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Partnership and its
consolidated subsidiaries at September 30, 1998 and the consolidated
results of their operations and cash flows for the periods ended September
30, 1998 and 1997. Operating results for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
2. NEW ACCOUNTING PRONOUNCEMENT
The Partnership has adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
There were no items to report for the three and nine months ended September
30, 1998 or 1997.
3. 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. The Partnership expects
to make distributions of Available Cash for each quarter of not less than
$0.55 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. A cash distribution of $0.65 per unit
for the fourth quarter of 1997 was made on February 14, 1998. A cash
distribution of $0.65 for each of the first three quarters of 1998 was paid
on May 15, 1998, August 14, 1998 and November 13, 1998, respectively.
Payment of the August 14, 1998, regular cash distribution represented the
12th consecutive quarterly distribution of Available Cash constituting Cash
from Operations in an amount equal to or exceeding the $0.55 Minimum
Quarterly Distribution specified in the Partnership Agreement. Accordingly,
pursuant to the terms of the Partnership Agreement, distinctions between
Senior Preference Units, Preference Units and Common Units automatically
ceased as of such date. At that time, all outstanding units of limited
partnership interest in the Partnership became "Units" constituting a
single class of equity securities. The Units now trade on the New York
Stock Exchange under the symbol "KPP".
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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This discussion should be read in conjunction with the consolidated
financials statements of Kaneb Pipe Line Partners, L.P. (the "Partnership")
and notes thereto included elsewhere in this report.
Operating Results:
Pipeline Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands)
Revenues $ 17,406 $ 16,312 $ 46,858 $ 45,180
Operating costs 6,055 5,773 16,816 16,644
Depreciation and amortization 1,192 1,228 3,569 3,648
General and administrative 813 816 2,365 2,154
--------- --------- --------- ---------
Operating income $ 9,346 $ 8,495 $ 24,108 $ 22,734
========= ========= ========= =========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three and nine month period ended
September 30, 1998, revenues increased 7% and 4%, respectively, compared to
the same 1997 periods, due to an overall increase in volumes shipped,
primarily on the East Pipeline. Barrel miles totaled 4.8 billion and 12.5
billion for the three and nine months ended September 30, 1998, compared to
4.2 billion and 11.9 billion for the respective prior year periods.
Operating costs, which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee
benefits, and property and other taxes, increased slightly over the
comparable prior year periods due primarily to the increase in volumes
shipped. General and administrative costs which include managerial,
accounting, and administrative personnel costs, office rental and expense,
legal and professional costs and other non-operating costs remained
constant for the three months ended September 30, 1998 and increased $0.2
million for the nine months ended September 30, 1998, over the comparable
1997 periods.
Terminaling Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands)
Revenues $ 16,303 $ 15,153 $ 45,474 $ 44,657
Operating costs 7,121 7,194 20,965 21,282
Depreciation and amortization 1,883 1,718 5,471 5,096
General and administrative 935 780 2,590 2,109
--------- --------- --------- ---------
Operating income $ 6,364 $ 5,461 $ 16,448 $ 16,170
========= ========= ========= =========
In March 1998, the Partnership completed the acquisition of certain liquids
terminaling assets located in Chicago, Illinois which included 19 storage
tanks with an aggregate capacity of 752 thousand barrels. In September
1998, the Partnership acquired 31 liquid chemical storage tanks, dry bulk
fertilizer storage and a liquid packaging line located in Vancouver,
Washington (collectively referred to as the "Acquisitions"). The
Acquisitions were funded by the Partnership's existing revolving credit
facility.
Revenues increased 8% and 2% for the three and nine month periods ended
September 30, 1998, respectively, compared to the same 1997 periods, due
primarily to an increase in tank utilization due to favorable market
conditions and the Acquisitions, partially offset by a decrease in the
overall average price realized for storage. For the three and nine months
ended September 30, 1998, average annualized revenues per barrel of tankage
utilized decreased to $3.97 and $4.23, compared to $4.87 and 4.85 per
barrel for the same prior year periods, primarily the result of the storage
of a larger proportionate volume of petroleum products, which are
historically at lower per barrel rates than specialty chemicals. Average
annual tankage utilized for the nine months ended September 30, 1998
increased to 14.3 million barrels from 12.3 million barrels for the
comparable prior year period, primarily as a result of increased
utilization at the Partnership's largest petroleum storage facility and the
Acquisitions.
For the three and nine month periods ended September 30, 1998, operating
costs decreased by $0.1 million and $0.3 million respectively, when
compared to the same 1997 periods, as the result of variances in the mix of
products stored, partially offset by an increase in tank utilization.
General and administrative expense for the three and nine months ended
September 30, 1998, increased by $0.2 million and $0.5 million, when
compared to the same period in 1997, due primarily to the Acquisitions.
Total tankage capacity (18.0 million barrels at September 30, 1998) has
been, and is expected to remain, adequate to meet existing customer storage
requirements. Customers consider factors such as location, access to cost
effective transportation and quality of service, in addition to pricing,
when selecting terminal storage.
Liquidity and Capital Resources
During the first nine months of 1998, the Partnership's working capital
requirements for operations, capital expenditures (excluding acquisitions)
and cash distributions were funded through the use of internally generated
funds.
Cash provided by operations was $43.2 million and $43.6 million for the
nine months ended September 30, 1998 and 1997, respectively. Capital
expenditures (excluding acquisitions) were $8.0 million for the nine months
ended September 30, 1998, compared to $7.2 million in 1997.
The Partnership makes distributions of 100% of its Available Cash to
Unitholders and the General Partner. Available Cash consists generally of
all cash receipts less all cash disbursements and reserves. Distributions
of $0.65 per unit were declared to Unitholders in the first three quarters
of 1998 and $2.50 per unit was declared in the calendar year 1997.
The Partnership expects to fund future cash distributions and maintenance
capital expenditures with cash and cash flows from operating activities.
Expansionary capital expenditures are expected to be funded through
additional Partnership borrowings.
Additional information relative to sources and uses of cash is presented in
the financial statements included in this report.
Year 2000 Issue
Although the Partnership believes that most of its activities and
operations are not materially impacted by Year 2000 Issues ("Y2K"), the
Partnership recognizes the challenges associated with Y2K and has
undertaken a review and testing of its computer systems to identify
Y2K-related issues associated with any items of software or hardward used
in its business operations. Most of the software systems used by the
Partnership are licensed from third parties and are Y2K compliant or will
be upgraded to Y2K compliant releases over the next year. This issue is
being addressed by the Partnership in multiple phases, including
assessment, remediation, testing and implementation, and progress is being
monitored by the Partnership's senior management. All material systems,
including non-information technology systems which may house non-compliant,
imbedded technology, such as office machines, are being evaluated.
In addition to addressing the Partnership's own systems, as described
above, the Partnership must assess the state of readiness of the systems of
other entities with which it does business. Failure by these third parties
to adequately resolve their Y2K problems could have a material adverse
effect on the Partnership's operations.
The Partnership believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached. Although
failure by one or more of the Partnership's own systems could result in
lost revenues and/or additional expenses required to carry out manual
processing of transactions, the Partnership cannot predict the effect that
external forces could have on its business. Failures by banking
institutions, the telecommunications industry and others could have
far-reaching effects on the Partnership and the entire economy.
The Partnership expects to complete its Y2K program in a timely manner.
However, the Partnership believes that it is not possible to determine with
certainty that all Y2K problems affecting the Partnership have been
identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition,
the Partnership cannot accurately predict how many failures related to the
Y2K problem will occur or the severity, duration or financial consequences
of such failures. The Partnership is in the process of evaluating and
hiring an outside Y2K consultant to assist the Partnership in meeting its
goals and in developing contingency plans to define and address the
worst-case scenario likely to be faced by the Partnership. The plan is
expected to be in place in by the end of the first quarter of 1999.
Expenses incurred by the Partnership during 1997, and the first three
quarters of 1998, related to assessing, remediating and testing its
information technology systems, which was not material, have been expensed
as incurred and funded from operations. The Partnership does not anticipate
that the cost to become fully Y2K compliant will be material.
This entire section is hereby designated a "Year 2000 Readiness
Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
Allocation of Net Income and Earnings
Net income is allocated to the limited partnership units pro rata on the
aggregate amount of distributions declared. Prior to June 30, 1998, the
Partnership had three classes of partnership interests designated Senior
Preference Units, Preference Units and Common Units, respectively. Pursuant
to the Partnership Agreement, on August 14, 1998, each such class of units
were converted into a single class designated "Units", effective June 30,
1998. The allocation of net income per Unit reflected in the Consolidated
Statements of Income was allocated to each class of partnership interest.
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 Unit 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 Units, by
the weighted average number of Units outstanding. If the allocation of
income had been made as if all income had been distributed in cash,
earnings per Unit would have been $0.76 and $0.67 for the three months, and
$1.93 and $1.83 for the nine months ended September 30, 1998 and 1997,
respectively.
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
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PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
Registrant's Current Report on Form 8-K, dated August 14,
1998, (SEC File No. 001-10311).
Registrant's Current Report on Form 8-K, dated November 6,
1998, (SEC File No. 001-10311).
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB PIPE LINE PARTNERS, L.P.
(Registrant)
By: KANEB PIPE LINE COMPANY
(Managing General Partner)
Date: November 16, 1998 //s//
----------------------
Jimmy L. Harrison
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 5,710
<SECURITIES> 0
<RECEIVABLES> 14,071
<ALLOWANCES> 82
<INVENTORY> 0
<CURRENT-ASSETS> 23,382
<PP&E> 368,730
<DEPRECIATION> 107,342
<TOTAL-ASSETS> 284,770
<CURRENT-LIABILITIES> 32,206
<BONDS> 139,300
0
0
<COMMON> 0
<OTHER-SE> 103,928
<TOTAL-LIABILITY-AND-EQUITY> 284,770
<SALES> 0
<TOTAL-REVENUES> 92,332
<CGS> 0
<TOTAL-COSTS> 51,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,283
<INCOME-PRETAX> 32,061
<INCOME-TAX> 473
<INCOME-CONTINUING> 31,588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,588
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.93
</TABLE>
