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 March 31, 1999 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 principle executive offices, including zip code)
(972) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of Units of the Registrant outstanding at April 30, 1999: 16,060,000.
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -- Three Months Ended
March 31, 1999 and 1998 1
Condensed Consolidated Balance Sheets -- March 31, 1999
and December 31, 1998 2
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Unit Amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
Revenues $ 36,845 $ 28,070
-------- --------
Costs and expenses:
Operating costs 16,183 11,688
Depreciation and amortization 3,615 2,947
General and administrative 1,903 1,535
-------- --------
Total costs and expenses 21,701 16,170
-------- --------
Operating income 15,144 11,900
Interest and other income, net 244 48
Interest expense (3,509) (2,707)
-------- --------
Income before minority interest and income taxes 11,879 9,241
Minority interest in net income (115) (91)
Income tax provision (408) (190)
-------- --------
Net income 11,356 8,960
General partner's interest in net income (370) (90)
-------- --------
Limited partners' interest in net income $ 10,986 $ 8,870
======== ========
Allocation of net income per Unit $ .68 $ .55
======== ========
Weighted average number of Partnership
Units outstanding 16,060 16,060
======== ========
See notes to consolidated financial statements.
1
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31 December 31
1999 1998
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,893 $ 849
Accounts receivable 14,725 13,917
Prepaid expenses and other 4,768 4,035
-------- --------
Total current assets 29,386 18,801
-------- --------
Property and equipment 440,881 398,253
Less accumulated depreciation 112,034 108,622
-------- --------
Net property and equipment 328,847 289,631
-------- --------
$358,233 $308,432
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term and current portion of long-term debt $ 33,300 $ 10,000
Accounts payable and accrued expenses 16,617 14,354
Accrued distributions payable 11,728 10,725
Payable to general partner 1,112 6,785
-------- --------
Total current liabilities 62,757 41,864
-------- --------
Long-term debt, less current portion 178,920 153,000
Other liabilities and deferred taxes 10,689 7,131
Minority interest 1,046 1,049
Commitments and contingencies
Partners' capital 104,821 105,388
-------- --------
$358,233 $308,432
======== ========
See notes to consolidated financial statements
2
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
Operating activities:
Net income $ 11,356 $ 8,960
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,615 2,947
Minority interest in net income 115 91
Deferred income taxes 404 187
Changes in working capital components 722 580
-------- --------
Net cash provided by operating activities 16,212 12,765
-------- --------
Investing activities:
Capital expenditures (2,255) (2,350)
Acquisitions of terminals (37,206) (5,030)
Other, net (199) (1,438)
-------- --------
Net cash used in investing activities (39,660) (8,818)
-------- --------
Financing activities:
Changes in payable to general partner (5,000) (103)
Issuance of short-term and long-term debt 49,220 5,000
Payments of long-term debt -- (554)
Distributions to partners, including minority interest (11,728) (10,725)
-------- --------
Net cash provided by (used in)
financing activities 32,492 (6,382)
-------- --------
Increase (decrease) in cash and cash equivalents 9,044 (2,435)
Cash and cash equivalents at beginning of period 849 6,376
-------- --------
Cash and cash equivalents at end of period $ 9,893 $ 3,941
======== ========
Supplemental cash flow information-cash paid for interest $ 1,693 $ 1,349
======== ========
See notes to consolidated financial statements.
3
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
4
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb Pipe
Line Partners, L.P. and its subsidiaries (the "Partnership") for the three
month periods ended March 31, 1999 and 1998, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the
Partnership are disclosed in the notes to the consolidated financial
statements included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998. In the opinion of the Partnership's
management, the accompanying condensed consolidated financial statements
contain the adjustments, consisting of normal recurring accruals, necessary
to present fairly the consolidated financial position of the Partnership
and its consolidated subsidiaries at March 31, 1999 and the consolidated
results of their operations and cash flows for the periods ended March 31,
1999 and 1998. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. ACQUISITION
On February 1, 1999, the Partnership, through two wholly-owned indirect
subsidiaries, acquired six terminals in the United Kingdom from GATX
Terminal Limited for (pound)22.6 million (approximately $37.2 million) plus
the assumption of certain liabilities. The acquisition, which was financed
with term loans from a bank, has been accounted for using the purchase
method of accounting. The pro forma effect of the acquisition was not
material to the results of operations.
3. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 1999 and 1998 is
as follows:
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
(in thousands)
Net income $ 11,356 $ 8,960
Other comprehensive income - foreign
currency translation adjustment (309) --
-------- --------
Comprehensive income $ 11,047 $ 8,960
======== ========
4. 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 General Partner. 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 all Available Cash within 45
days after the end of each quarter to Unitholders of record on the
applicable record date. A cash distribution of $0.65 per unit for the
fourth quarter of 1998 was paid on February 12, 1999. A cash distribution
of $0.70 per unit for the first quarter of 1999 was declared to holders of
record on April 30, 1999 and is payable on May 14, 1999.
5. DEBT
In January 1999, the Partnership, through two wholly-owned subsidiaries,
entered into a credit agreement with a bank that provides for the issuance
of $39.2 million of term loans in connection with the United Kingdom
terminal acquisition and $5.0 million for general Partnership purposes. The
term loans, which bear interest in varying amounts, are secured by the
capital stock of the subsidiaries that acquired the United Kingdom
terminals, and pari passu with the existing mortgage notes and credit
facility, by a mortgage on the East Pipeline. The term loans contain
certain financial and operational covenants and are due in June 1999 ($18.3
million) and in January 2002 ($25.9 million).
6. CONTINGENCIES
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 that significant costs and liabilities will not be incurred
by the Partnership. Moreover, it is possible that other developments, such
as increasingly stringent environmental laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, could result in
substantial costs and liabilities to the Partnership.
Certain subsidiaries of the Partnership are defendants in a lawsuit filed
in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the
entity from whom the Partnership acquired its Support Terminal Services
operation ("ST") in 1993, involving certain issues allegedly arising out of
the Partnership's acquisition of ST. Grace alleges that the defendants
assumed responsibility for certain environmental damages to a former ST
facility located in Massachusetts that occurred at a time prior to the
Partnership's acquisition of ST. The defendants have also received and
responded to inquiries from two governmental authorities in connection with
the same allegation by Grace. The defendants' consistent position is that
it did not acquire the facility in question as part of the 1993 ST
transaction and, consequently, did not assume any responsibility for the
environmental damage. The case is set for trial in June, 1999.
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, including the Grace litigation described
above, will not have a materially adverse effect on the financial position
or results of operations of the Partnership.
7. BUSINESS SEGMENT DATA
The Partnership conducts business through two principal operations; the
"Pipeline Operations," which consists primarily of the transportation of
refined petroleum products in the Midwestern states as a common carrier,
and the "Terminaling Operations," which provide storage for petroleum
products, specialty chemicals and other liquids.
The Partnership measures segment profit as operating income. Total assets
are those controlled by each reportable segment.
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
(in thousands)
Business segment revenues:
Pipeline operations $ 15,164 $ 14,101
Terminaling operations 21,681 13,969
-------- --------
$ 36,845 $ 28,070
======== ========
Business segment profit:
Pipeline operations $ 7,356 $ 6,774
Terminaling operations 7,788 5,126
-------- --------
Operating income 15,144 11,900
Interest and other income, net 244 48
Interest expense (3,509) (2,707)
-------- --------
Income before minority interest
and income taxes $ 11,879 $ 9,241
======== ========
March 31 December 31
1999 1998
-------- --------
Total assets:
Pipeline operations $104,984 $103,966
Terminaling operations 253,249 204,466
-------- --------
$358,233 $308,432
======== ========
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Pipe Line Partners, L.P. (the "Partnership")
and notes thereto included elsewhere in this report.
Operating Results:
Pipeline Operations
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
(in thousands)
Revenues $ 15,164 $ 14,101
Operating costs 5,792 5,402
Depreciation and amortization 1,264 1,186
General and administrative 752 739
-------- --------
Operating income $ 7,356 $ 6,774
======== ========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three months ended March 31, 1999,
revenues increased 8%, compared to the same 1998 period, due to an overall
increase in volumes shipped, primarily on the East Pipeline. Barrel miles
totaled 4.0 billion for the three months ended March 31, 1999, compared to
3.7 billion for the respective 1998 period.
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 by 7% over the comparable
prior year period. 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 March 31, 1999, when compared
to the same 1998 period.
Terminaling Operations
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
(in thousands)
Revenues $ 21,681 $ 13,969
Operating costs 10,391 6,286
Depreciation and amortization 2,351 1,761
General and administrative 1,151 796
-------- --------
Operating income $ 7,788 $ 5,126
======== ========
On October 30, 1998, the Partnership, through a wholly-owned subsidiary,
entered into acquisition and joint venture agreements with Northville
Industries Corp. to acquire and manage the former Northville terminal
located in Linden, New Jersey. Under the agreements, the Partnership
acquired a 50% interest in the newly formed ST Linden Terminal LLC for
$20.5 million plus transaction costs. During the year ended December 31,
1998, the Partnership acquired other terminals for aggregate consideration
of $15.9 million. On February 1, 1999, the Partnership acquired six
terminals in the United Kingdom from GATX Terminal Limited for
approximately $37.2 million plus the assumption of certain liabilities. The
acquisitions (the "Acquisitions") were funded with bank financing.
Terminaling revenues increased 55% for the three month period ended March
31, 1999, compared to the same 1998 period, due primarily to the
Acquisitions and an increase in tank utilization due to favorable market
conditions, partially offset by a decrease in the overall average price
realized for storage. For the three months ended March 31, 1999, average
annualized revenues per barrel of tankage utilized decreased to $3.95,
compared to $4.51 per barrel for the same prior year period, 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 three months ended March
31, 1999 increased to 21.9 million barrels from 12.4 million barrels for
the comparable prior year period, primarily as a result of the Acquisitions
and increased utilization at the Partnership's largest petroleum storage
facility.
For the three month period ended March 31, 1999, operating costs increased
by $4.1 million, when compared to the same 1998 period, as the result of
the increase in tank utilization resulting primarily from the Acquisitions.
General and administrative expense for the three months ended March 31,
1999, increased by $0.4 million, when compared to 1998, due to the
Acquisitions.
Total tankage capacity (27.7 million barrels at March 31, 1999) 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 quarter of 1999, 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 $16.2 million and $12.8 million for the
periods ended March 31, 1999 and 1998, respectively. Capital expenditures
(excluding acquisitions) were $2.3 million for the three months ended March
31, 1999, compared to $2.4 million during the same 1998 period. The
Partnership anticipates that capital expenditures will total approximately
$12 million to $16 million (excluding acquisitions) for the year ending
December 31, 1999.
At March 31, 1999, the Partnership had a net working capital deficit of
approximately $33.4 million resulting from, among other factors, cash paid
and short-term debt incurred for acquisitions which closed near the end of
1998 and in early 1999. The general partner believes that the Partnership
will be able to meet its ongoing obligations with cash flows from
operations, along with the Partnership's ability to refinance and/or issue
additional debt, and that the Partnership's ability to pay distributions to
the holders of Units has not been impaired; however, there can be no
assurance in this regard.
In January 1999, the Partnership, through two wholly-owned subsidiaries,
entered into a credit agreement with a bank that provides for the issuance
of $39.2 million of term loans in connection with the United Kingdom
terminal acquisition and $5.0 million for general Partnership purposes. The
term loans, which bear interest in varying amounts, are secured by the
capital stock of the subsidiaries that acquired the United Kingdom
terminals, and pari passu with the existing mortgage notes and credit
facility, by a mortgage on the East Pipeline. The term loans contain
certain financial and operational covenants and are due in June 1999 ($18.3
million) and in January 2002 ($25.9 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 $0.70 per unit were declared to all Unitholders in the
first quarter of 1999 and $2.60 per unit was declared in the calendar year
1998.
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 and/or future public unit offerings.
Additional information relative to sources and uses of cash is presented in
the financial statements included in this report.
Year 2000 Issue
The Partnership recognizes the challenges associated with Year 2000 Issues
("Y2K") and has undertaken a review and testing of its computer systems to
identify Y2K-related issues associated with any items of software or
hardware used in its business operations. Most of the software systems used
by the Partnership are licensed from third parties and are Y2K compliant or
will be upgraded to Y2K compliant releases before the end of 1999. This
issue is being addressed by the Partnership in multiple phases, including
assessment, remediation, testing and implementation, and progress is being
monitored by the general partner's senior management. All material systems,
including non-information technology systems that may house non-compliant,
embedded technology 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. With respect to its third-party
relationships, the Partnership has contacted its primary suppliers and
service providers to assess their state of Y2K readiness. The Partnership
has received information from its critical suppliers and service providers
and anticipates receiving additional information in the near future that
will assist the Partnership in assessing the Y2K readiness of these
parties. Failure by these third parties to adequately resolve their Y2K
problems could have a material adverse effect on the 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 entire economy and the Partnership.
At March 31, 1999, the initial assessment phase has been completed for the
Partnership's information technology systems. The major information
technology systems on which the pipeline and the terminaling operations
depend have been updated, tested and certified to be Y2K compliant. The
Partnership continues to assess Y2K compliance and evaluate the appropriate
courses of action of its non-information technology systems, including
embedded chips located in pipeline and terminaling hardware. The
Partnership expects to complete its assessment of non-information
technology systems by the end of the second quarter of 1999 and complete
all phases of its Y2K program prior to December 31, 1999.
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 has hired 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 by the end of the
second quarter of 1999.
Through March 31, 1999, the Partnership has incurred approximately $0.2
million of costs related to assessing, remediating and testing its
information technology and non-information technology systems. A portion of
these costs would have been incurred as part of normal system and
application upgrades. In certain cases, the timing of these expenditures
has been accelerated due to Y2K considerations. The Partnership does not
anticipate that future costs to become fully Y2K compliant will be
material.
Allocation of Net Income and Earnings
Net income or loss is allocated between limited partner interests and the
general partner pro rata based on the aggregate amount of cash
distributions declared (including general partner incentive distributions).
Beginning 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 at different levels of cash distributions. Earnings per Unit
shown on the consolidated statements of income are calculated by dividing
the limited partners' interest in net income 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
$0.69 and $0.55 for the three month periods ended March 31, 1999 and 1998,
respectively.
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
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 February 12,
1999 (SEC File No. 001-10311).
Registrant's Current Report on Form 8-K/A, dated March 9,
1999 (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: May 14, 1999 //s//
Jimmy L. Harrison
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 9,893
<SECURITIES> 0
<RECEIVABLES> 14,733
<ALLOWANCES> 8
<INVENTORY> 0
<CURRENT-ASSETS> 29,386
<PP&E> 440,881
<DEPRECIATION> 112,034
<TOTAL-ASSETS> 358,233
<CURRENT-LIABILITIES> 62,757
<BONDS> 178,920
0
0
<COMMON> 0
<OTHER-SE> 104,821
<TOTAL-LIABILITY-AND-EQUITY> 358,233
<SALES> 0
<TOTAL-REVENUES> 36,845
<CGS> 0
<TOTAL-COSTS> 21,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,509
<INCOME-PRETAX> 11,764
<INCOME-TAX> 408
<INCOME-CONTINUING> 11,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,356
<EPS-PRIMARY> 0.68
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</TABLE>
