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, 2000 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, 2000: 18,310,000.
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -- Three Months Ended
March 31, 2000 and 1999 1
Condensed Consolidated Balance Sheets -- March 31, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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,
---------------------
2000 1999
-------- --------
Revenues $ 36,680 $ 36,845
-------- --------
Costs and expenses:
Operating costs 17,280 16,183
Depreciation and amortization 3,975 3,615
General and administrative 2,503 1,903
-------- --------
Total costs and expenses 23,758 21,701
-------- --------
Operating income 12,922 15,144
Interest and other income, net 59 244
Interest expense (3,019) (3,509)
-------- --------
Income before minority interest and income taxes 9,962 11,879
Minority interest in net income (97) (115)
Income tax provision (298) (408)
-------- --------
Net income 9,567 11,356
General partner's interest in net income (390) (370)
-------- --------
Limited partners' interest in net income $ 9,177 $ 10,986
======== ========
Allocation of net income per Unit $ .50 $ .68
======== ========
Weighted average number of Partnership
Units outstanding 18,310 16,060
======== ========
See notes to consolidated financial statements.
1
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KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
--------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,398 $ 5,127
Accounts receivable 16,818 16,929
Prepaid expenses and other 4,683 5,036
-------- --------
Total current assets 28,899 27,092
-------- --------
Property and equipment 441,907 439,537
Less accumulated depreciation 126,413 122,654
-------- --------
Net property and equipment 315,494 316,883
-------- --------
Investment in affiliate 20,571 21,978
-------- --------
$364,964 $365,953
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 2,000 $ --
Accounts payable and accrued expenses 17,379 14,980
Accrued distributions payable 13,372 13,372
Payable to general partner 1,548 1,411
-------- --------
Total current liabilities 34,299 29,763
-------- --------
Long-term debt, less current portion 154,005 155,987
Other liabilities and deferred taxes 10,890 10,882
Minority interest 1,000 1,033
Commitments and contingencies
Partners' capital 164,770 168,288
-------- --------
$364,964 $365,953
======== ========
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,
--------------------
2000 1999
-------- --------
Operating activities:
Net income $ 9,567 $ 11,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,975 3,615
Minority interest in net income 97 115
Equity in earnings of affiliate,
net of distributions 1,175 --
Deferred income taxes 298 404
Changes in working capital components 3,000 722
-------- --------
Net cash provided by operating activities 18,112 16,212
-------- --------
Investing activities:
Capital expenditures (2,336) (2,255)
Acquisitions of terminals -- (37,206)
Other, net (151) (199)
-------- --------
Net cash used in investing activities (2,487) (39,660)
-------- --------
Financing activities:
Changes in payable to general partner -- (5,000)
Issuance of debt 2,000 49,220
Payment of debt (1,982) --
Distributions, including minority interest (13,372) (11,728)
-------- --------
Net cash provided by (used in)
financing activities (13,354) 32,492
-------- --------
Increase in cash and cash equivalents 2,271 9,044
Cash and cash equivalents at beginning of period 5,127 849
-------- --------
Cash and cash equivalents at end of period $ 7,398 $ 9,893
======== ========
Supplemental cash flow information -
cash paid for interest $ 1,957 $ 1,693
======== ========
See notes to consolidated financial statements.
3
<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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, 2000 and 1999, 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, 1999. 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, 2000 and the consolidated
results of their operations and cash flows for the periods ended March 31,
2000 and 1999. Operating results for the three months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
2. ACQUISITION OF TERMINALS
On February 1, 1999, the Partnership, through two wholly-owned indirect
subsidiaries, acquired six terminals in the United Kingdom from GATX
Terminals Limited for (pound)22.6 million (approximately $37.2 million)
plus transaction costs and the assumption of certain liabilities. The
acquisition, which was initially financed by term loans from a bank, has
been accounted for using the purchase method of accounting. $13.3 million
of the term loans were repaid in July 1999 with the proceeds from a public
unit offering (see Note 3). The remaining portion ($25.9 million) is due in
January 2002.
3. PUBLIC OFFERING OF UNITS
In July 1999, the Partnership issued 2.25 million limited partnership units
in a public offering at $30.75 per unit, generating approximately $65.6
million in net proceeds. A portion of the proceeds was used to repay in
full the Partnership's $15.0 million promissory note, the $25.0 million
revolving credit facility and $18.3 million in term loans (including $13.3
million in term loans resulting from the United Kingdom terminal
acquisition referred to in Note 2).
4. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2000 and 1999 is
as follows:
Three Months Ended
March 31,
--------------------
2000 1999
-------- --------
(in thousands)
Net income $ 9,567 $ 11,356
Other comprehensive income - foreign
currency translation adjustment 155 (309)
-------- --------
Comprehensive income $ 9,722 $ 11,047
======== ========
5. 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 $0.70 per unit for the
fourth quarter of 1999 was paid on February 14, 2000. A cash distribution
of $0.70 per unit for the first quarter of 2000 was declared to holders of
record on April 28, 2000 and is payable on May 15, 2000.
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 which the Partnership acquired ST Services in 1993. The lawsuit
involves environmental response and remediation allegedly resulting from
jet fuel leaks in the early 1970's from a pipeline. The pipeline, which
connected a former Grace terminal with Otis Air Force Base, was abandoned
in 1973, and the connecting terminal was sold to an unrelated entity in
1976. Grace alleges that it has incurred since 1996 expenses of
approximately $3 million for response and remediation required by the State
of Massachusetts and that it expects to incur additional expenses in the
future. On January 20, 2000, the Massachusetts Department of Environmental
Protection notified the Partnership's subsidiary that it had reason to
believe that the subsidiary was also a Potentially Responsible Party. The
subsidiary has replied to that letter denying any responsibility for the
Massachusetts response and/or remediation. Future expenses could
potentially include claims by the United States Government, as described
below. Grace alleges that subsidiaries of the Partnership acquired the
abandoned pipeline, as part of the acquisition of ST Services in 1993, and
assumed responsibility for environmental damages caused by the jet fuel
leaks from the pipeline. Grace is seeking a ruling that these subsidiaries
are responsible for all present and future remediation expenses for these
leaks and that Grace has no obligation to indemnify these subsidiaries for
these expenses. The case is set for trial in May 2000.
The consistent position of the Partnership's subsidiaries is that they did
not acquire the abandoned pipeline as part of the 1993 ST transaction and
did not assume any responsibility for the environmental damage. In an order
granting partial summary judgment, the trial judge has ruled that the
pipeline was an asset of the company acquired by the subsidiary. The
subsidiaries are continuing with their defense that the pipeline had been
abandoned prior to the acquisition of ST Services and could not have been
included in the assets they acquired. The defendants have also
counter-claimed against Grace for fraud and mutual mistake, among other
defenses. If they are successful at trial with their defenses and/or
counterclaims, the judge's partial summary judgment order will be moot. The
defendants believe they have certain rights to indemnification from Grace
under the acquisition agreement with Grace. These rights include claims
against Grace for breaches of numerous representations in the agreement
including the environmental representations. The acquisition agreement
includes Grace's agreement to indemnify the subsidiaries against 60% of
post-closing environmental remediation costs, subject to a maximum
indemnity payment of $10 million.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, has been responding to the Government remediation demand for
most of the contamination problems at the MMR Site. Grace and others have
also received and responded to formal inquiries from the United States
Government in connection with the environmental damages allegedly resulting
from the jet fuel leaks. The Partnership's subsidiaries have voluntarily
responded to an invitation from the Government to provide information
indicating that they do not own the pipeline. In connection with a
court-ordered mediation between Grace and the subsidiaries, the Government
advised the parties in April 1999 that it has identified the two spill
areas that it believes to be related to the pipeline that is the subject of
the Grace suit. The Government advised the parties that it believes it has
incurred costs of approximately $34 million, and expects in the future to
incur costs of approximately $55 million, for remediation of one of the
spill areas. This amount was not intended to be a final accounting of costs
or to include all categories of costs. The Government also advised the
parties that it could not at that time allocate its costs attributable to
the second spill area. The Partnership believes that the ultimate cost of
the remediation, while substantial, will be considerably less than the
Government has indicated. The Partnership also believes that, even if the
lawsuit determines that the subsidiary is the owner of the pipeline, the
defendants have defenses to any claim of the Government. Any claims by the
Government could be material in amount and, if made and ultimately
sustained against the Partnership's subsidiaries, could adversely affect
the Partnership's ability to pay cash distributions to its Unitholders.
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. 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,
----------------------
2000 1999
--------- ---------
(in thousands)
Business segment revenues:
Pipeline operations $ 15,248 $ 15,164
Terminaling operations 21,432 21,681
--------- ---------
$ 36,680 $ 36,845
========= =========
Business segment profit:
Pipeline operations $ 7,237 $ 7,356
Terminaling operations 5,685 7,788
--------- ---------
Operating income 12,922 15,144
Interest and other income, net 59 244
Interest expense (3,019) (3,509)
--------- ---------
Income before minority interest
and income taxes $ 9,962 $ 11,879
========= =========
March 31, December 31
2000 1999
--------- ---------
Total assets:
Pipeline operations $ 104,085 $ 104,774
Terminaling operations 260,879 261,179
--------- ---------
$ 364,964 $ 365,953
========= =========
<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,
--------------------------
2000 1999
--------- ---------
(in thousands)
Revenues $ 15,248 $ 15,164
Operating costs 5,814 5,792
Depreciation and amortization 1,293 1,264
General and administrative 904 752
--------- ---------
Operating income $ 7,237 $ 7,356
========= =========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three months ended March 31, 2000,
pipeline revenues were flat when compared to the same 1999 period. Barrel
miles totaled 4.0 billion for each of the three month periods ended March
31, 2000 and 1999.
For the three months ended March 31, 2000, 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, were
consistent with the comparable 1999 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, increased slightly over the first quarter of 1999.
Terminaling Operations
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ---------
(in thousands)
Revenues $ 21,432 $ 21,681
Operating costs 11,466 10,391
Depreciation and amortization 2,682 2,351
General and administrative 1,599 1,151
--------- ---------
Operating income $ 5,685 $ 7,788
========= =========
On February 1, 1999, the Partnership acquired six terminals in the United
Kingdom from GATX Terminals Limited for approximately $37.2 million plus
transaction costs and the assumption of certain liabilities (the "United
Kingdom Terminal Acquisition"). The acquisition of the six locations, which
have an aggregate tankage capacity of 5.4 million barrels, was initially
financed by term loans from a bank. $13.3 million of the term loans were
repaid in July 1999 with the proceeds from a public unit offering (See
Liquidity and Capital Resources). Three of the terminals, handling
petroleum products, chemicals and molten sulfur, respectively, operate in
England. The remaining three facilities, two in Scotland and one in
Northern Ireland, are primarily petroleum terminals. All six terminals are
served by deepwater marine docks.
Terminaling revenues decreased by $0.2 million for the three month period
ended March 31, 2000, compared to the same 1999 period. Revenue increases
resulting from the United Kingdom and other 1999 terminal acquisitions were
more than offset by decreases in tank utilization due to unfavorable market
conditions. Average annual tankage utilized for the three months ended
March 31, 2000 decreased to 21.0 million barrels from 21.9 million barrels
for the comparable prior year period, primarily the result of unusually
high utilization at the Partnership's largest petroleum storage facility in
1999. For the three months ended March 31, 2000, average annualized
revenues per barrel of tankage utilized increased to $4.09 per barrel,
compared to $3.95 per barrel for the same prior year period, the result of
the storage of a higher proportionate volume of specialty chemicals, which
are historically at higher per barrel rates than petroleum products.
For the three month period ended March 31, 2000, operating costs increased
by $1.1 million when compared to the same 1999 period, primarily the result
of the February 1999 United Kingdom Terminal Acquisition. General and
administrative costs for the three months ended March 31, 2000 increased by
$0.4 million when compared to 1999, due also to the United Kingdom Terminal
Acquisition and unusually high litigation costs.
Total tankage capacity (28.8 million barrels at March 31, 2000) 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 2000, the Partnership's working capital
requirements for operations, capital expenditures and cash distributions
were funded through the use of internally generated funds.
Cash provided by operations was $18.1 million and $16.2 million for the
periods ended March 31, 2000 and 1999, respectively. Capital expenditures
(excluding acquisitions) were $2.3 million for each of the three month
periods ended March 31, 2000 and 1999. The Partnership anticipates that
routine maintenance capital expenditures will total approximately $12
million to $15 million (excluding acquisitions) for the year ending
December 31, 2000.
In July 1999, the Partnership issued 2.25 million limited partnership units
in a public offering at $30.75 per unit, generating approximately $65.6
million in net proceeds. A portion of the proceeds was used to repay in
full the Partnership's $15.0 million promissory note, the $25.0 million
revolving credit facility and $18.3 million in term loans (including $13.3
million in term loans resulting from the United Kingdom Terminal
Acquisition).
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 2000 and $2.80 per unit was declared in the calendar year
1999.
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.
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
$0.52 and $0.69 for the three months ended March 31, 2000 and 1999,
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
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB PIPE LINE PARTNERS, L.P.
(Registrant)
By KANEB PIPE LINE COMPANY
(Managing General Partner)
Date: May 5, 2000 //s//
Jimmy L. Harrison
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<CASH> 7,398
<SECURITIES> 0
<RECEIVABLES> 17,096
<ALLOWANCES> 278
<INVENTORY> 0
<CURRENT-ASSETS> 28,899
<PP&E> 441,907
<DEPRECIATION> 126,413
<TOTAL-ASSETS> 364,964
<CURRENT-LIABILITIES> 34,299
<BONDS> 154,005
0
0
<COMMON> 0
<OTHER-SE> 164,770
<TOTAL-LIABILITY-AND-EQUITY> 364,964
<SALES> 0
<TOTAL-REVENUES> 36,680
<CGS> 0
<TOTAL-COSTS> 23,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,019
<INCOME-PRETAX> 9,865
<INCOME-TAX> 298
<INCOME-CONTINUING> 9,567
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 9,567
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