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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, 2000
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 of (IRS Employer
incorporation or organization) Identification No.)
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
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.[X]
Aggregate market value of the voting Units held by non-affiliates of the
registrant: $494,132,366. This figure is estimated as of March 6, 2001, at which
date the closing price of the Registrant's Units on the New York Stock Exchange
was $33.39 per Unit 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 Units of the Registrant outstanding at March 6, 2001: 20,285,090.
Item I. Business
General
Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (the
"Partnership"), is engaged in the refined petroleum products pipeline business
and the terminaling of petroleum products and specialty liquids. The Partnership
was formed in September 1989 to acquire, own and operate the pipeline system and
operations that had been previously conducted by Kaneb Pipe Line Company, a
Delaware corporation ("KPL"), since 1953. 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 Partnership's pipeline
operations 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 Support Terminals Operating Partnership,
L.P. ("STOP"), and its affiliated partnerships and corporate entities, which
operate under the trade names "ST Services" and "StanTrans," among others. KPOP
and STOP are, collectively with their subsidiaries, referred to as the
"Operating Partnerships." KPL is a wholly-owned subsidiary of Kaneb Services,
Inc., a Delaware corporation ("Kaneb") (NYSE: KAB).
Products Pipeline Business
Introduction
The Partnership's pipeline business consists primarily of the
transportation of refined petroleum products as a common carrier in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
Partnership owns and operates two common carrier pipelines (the "Pipelines")
described below.
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 8" line 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 originally
ran south from Geneva, Nebraska through Windom, Kansas terminating in
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 pipeline becoming operational, a 158 mile segment of the former Champlin
line was shut down, including a terminal located at Superior, Nebraska. The
other end of the line runs northeast approximately 175 miles, crossing the main
pipeline near Osceola, Nebraska, continuing through a terminal at Columbus,
Nebraska, and later interconnecting with the Partnership's Yankton/Milford line
to terminate at Rock Rapids, Iowa. In December 1998, KPOP acquired from Amoco
Oil Company a 175 mile pipeline that runs from Council Bluffs, Iowa to Sioux
Falls, South Dakota and the terminal at Sioux Falls. On December 31, 1998 KPOP,
pursuant to its option, purchased the 203 mile North Platte line for
approximately $5 million at the end of a lease. In January 1999, a connection
was completed to service the Sioux Falls terminal through the main East
Pipeline.
The East Pipeline system also consists of 16 product terminals in
Kansas, Nebraska, Iowa, South Dakota and North Dakota with total storage
capacity of approximately 3.5 million barrels and an additional 22 product tanks
with total storage capacity of approximately 1,006,000 barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump stations in Kansas and 38 booster pump stations throughout the system.
Additionally, the system maintains various office and warehouse facilities, and
an extensive quality control laboratory. KPOP owns the entire 2,090 mile East
Pipeline. 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 its terminals along the system and to receiving pipeline
connections in Kansas. Shippers on the East Pipeline obtain refined petroleum
products from refineries connected to the East Pipeline or through other
pipelines directly connected to the pipeline system. 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,
increasing the Partnership's pipeline business in South Dakota and expanding it
into Wyoming and Colorado. The West Pipeline system includes approximately 550
miles of 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, 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, Wyoming Refinery. From Douglas, the Partnership's 8" pipeline
continues southward through a delivery point at the Burlington Northern junction
to the terminal at Cheyenne, Wyoming. The Cheyenne terminal has a two bay,
bottom-loading truck rack, storage tank capacity of 345,000 barrels and serves
as a receiving point for products from the Frontier Oil & Refining Company
refinery at Cheyenne, as well as a product delivery point to Conoco's Cheyenne
Pipeline. From the Cheyenne terminal, the 8" 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 Ultramar Diamond Shamrock and Conoco
refineries and the Phillips Petroleum Terminal. From Commerce City, 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.
Conoco's Cheyenne Pipeline runs from west to east from the Cheyenne Terminal to
near the East Pipeline's North Platte Terminal, although a portion of the line
from Sidney, Nebraska (approximately 100 miles from Cheyenne) to North Platte
has been deactivated. 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 near
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies
diesel fuel to a railroad fueling facility. The Oregon and Washington lines are
fully automated, however the Wyoming line utilizes a coordinated startup
procedure between the refinery and the railroad. For the year ended December 31,
2000, these three systems combined transported a total of 3.7 million barrels of
diesel fuel, representing an aggregate of $1.5 million in revenues.
Pipelines Products and Activities
The Pipelines' revenues are based upon 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,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------- --------------
Volume (1)............... 89,192 85,356 77,965 69,984 73,839
Barrel miles (2)............ 17,843 18,440 17,007 16,144 16,735
Revenues (3)................ $70,685 $67,607 $63,421 $61,320 $63,441
(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.
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)
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------- --------------
Gasoline.................... 44,215 41,472 37,983 32,237 36,063
Diesel and fuel oil......... 41,087 40,435 36,237 33,541 32,934
Propane..................... 3,890 3,449 3,745 4,206 4,842
------------- ------------- -------------- ------------- --------------
Total....................... 89,192 85,356 77,965 69,984 73,839
============= ============= ============== ============= ==============
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 to shippers for transportation of products do not vary according to the
type of product delivered.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained in a manner
consistent with applicable Federal, state and local laws and regulations,
standards prescribed by the American Petroleum Institute and accepted industry
practice. Further, protective measures are taken and routine preventive
maintenance is performed on the Pipelines, in order to prolong the useful lives
of 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 Pipeline's rights-of-way 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
personnel upon deviations 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"), the Department of Transportation,
and 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. In May 1998,
KPOP was authorized by the FERC to adopt market-based rates in approximately
one-half of its markets. 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, in the case of interstate shipments, with the FERC, or in the
case of intrastate shipments in Kansas, Colorado and Wyoming, with the relevant
state authority, 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 delivers products to the
pipeline from refineries or third party pipelines that connect to the Pipelines.
The Pipelines' operations also include 20 truck loading terminals through which
refined petroleum products are delivered to storage tanks and then loaded into
petroleum transport trucks. Five of the 20 terminals also receive propane into
storage tanks and then load it into transport trucks. 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 following table shows the number of tanks owned by KPOP at each
terminal location at December 31, 2000, the storage capacity in barrels and
truck capacity of each terminal location.
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
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
Sioux Falls 9 394,000 2
Wolsey 21 149,000 4
Yankton 25 246,000 4
Wyoming:
Cheyenne 15 345,000 2
------ -----------
Totals 292 5,104,000
====== ===========
(a) Number of trucks that may be simultaneously loaded.
(b) This 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) This terminal is situated on land leased through the year 2060 for a total
rental of $2,000.
(d) Also loads rail tank cars.
The East Pipeline also has intermediate storage facilities consisting
of 12 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas, with aggregate capacities of approximately 472,000 and 534,000 barrels,
respectively. During 2000, approximately 50.4% and 91.5% of the deliveries of
the East Pipeline and the West Pipeline, respectively, were made through their
terminals, and 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.
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 used
for 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 area.
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. In addition, refineries in Kansas, Oklahoma
and Texas are also 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 in 2000 was produced at three refineries located at McPherson and
El Dorado, Kansas and Ponca City, Oklahoma, and operated by Cooperative Refining
Association ("CRA"), Frontier Refining and Conoco, Inc. respectively. The CRA
and Frontier Refining refineries are connected directly to the East Pipeline.
The McPherson, Kansas refinery operated by CRA accounted for approximately 27%
of the total amount of product shipped over the East Pipeline in 2000. 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 pipelines 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 Refinery located at Cheyenne, Wyoming,
the Ultramar Diamond Shamrock and Conoco 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.
Principal Customers
KPOP had a total of approximately 52 shippers in 2000. 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 $48.7 million, $42.7 million and
$48.3 million, which accounted for 69%, 63% and 76% of total revenues shipped
for each of the years 2000, 1999 and 1998, 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.
("Williams") 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. Fifteen of the East Pipeline's 16 delivery
terminals are located within 2 to 145 miles of, and in direct competition with
Williams' terminals.
The West Pipeline competes with the truck loading racks of the Cheyenne
and Denver refineries and the Denver terminals of the Chase Terminal Company and
Phillips Petroleum Company. Ultramar Diamond Shamrock terminals in Denver and
Colorado Springs, connected to a Ultramar 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, 2000, the
Partnership's terminaling business accounted for approximately 55% of the
Partnership's revenues. As of December 31, 2000, and excluding the Shore
acquisition described in the next paragraph, ST operated 35 facilities in 19
states and the District of Columbia, with a total storage capacity of
approximately 25.0 million barrels. In addition, in February 1999, ST made its
first significant international acquisition, with the purchase of six terminals
located in the United Kingdom, having a total capacity of approximately 5.4
million barrels. In September 2000, ST acquired a 1.6 million barrel petroleum
terminal in Paulsboro, New Jersey. ST and its predecessors have a long history
in the terminaling business and handle a wide variety of liquids from petroleum
products to specialty chemicals to edible liquids.
On January 3, 2001, the Partnership completed the acquisition of Shore
Terminals LLC. Shore Terminals owns seven terminals, four in California (three
in the San Francisco Bay area and one in Los Angeles) and one each in Tacoma,
Washington, Portland, Oregon and Reno, Nevada, with a total storage capacity of
7.8 million barrels. All of the terminals handle petroleum products and, with
the exception of the Nevada terminal, have deep water access. The purchase price
was approximately $107,000,000 in cash and 1,975,090 units of limited
partnership in the Partnership. The acquisition, which will become a part of the
ST Services terminaling operations, will significantly increase ST Services'
presence on the West Coast.
ST's terminal facilities provide storage on a fee basis for petroleum
products, specialty chemicals and other liquids. ST's five largest domestic
terminal facilities are located in Piney Point, Maryland; Linden, New Jersey
(50% owned joint venture); Jacksonville, Florida; Texas City, Texas; and,
Paulsboro, New Jersey. These facilities accounted for approximately 38.0% of
ST's revenues and 49.1% of its tankage capacity in 2000 (excluding the Paulsboro
facility, which was acquired by ST in September 2000). Upon their acquisition,
the Shore terminals at Crockett and Martinez, California became the third and
fourth largest ST terminals.
Description of Largest Domestic Terminal Facilities
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 and asphalt. 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.
Linden, New Jersey. In October 1998, ST entered into a joint venture
relationship with Northville Industries Corp. ("Northville") to acquire a 50%
ownership interest in and the management of the terminal facility at Linden, New
Jersey that was previously owned by Northville. The 44 acre facility provides ST
with deep-water terminaling capabilities at New York Harbor and primarily stores
petroleum products, including gasoline, jet fuel and fuel oils. The facility has
a total capacity of approximately 3.9 million barrels in 22 tanks, can receive
products via ship, barge and pipeline and delivers product by ship, barge,
pipeline and truck. The terminal has two docks (and leases a third) with draft
limits of 35 and 24 feet, respectively.
Jacksonville, Florida. The Jacksonville terminal, also acquired as part
of the Steuart transaction in 1995, 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. Located on Galveston Bay near the mouth of the
Houston Ship Channel, approximately sixteen miles from open water, the Texas
City terminal consists of 124 tanks with a total capacity of approximately 2
million barrels. 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. ST
receives and 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.
Paulsboro, New Jersey. The Paulsboro terminal was acquired from GATX in
September of 2000. The facility has 18 tanks with a combined storage capacity of
approximately 1.6 million barrels on the east bank of the Delaware river across
from Philadelphia, Pennsylvania. The terminal has one ship dock and two barge
berths, is connected to Colonial pipeline and has a truck loading rack for
receipt and delivery of petroleum products.
ST's facilities have 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.
Other Terminal Sites. In addition to the five major facilities
described above, ST now has 37 other terminal facilities located throughout the
United States and six facilities in the United Kingdom. The Paulsboro facility
was acquired during 2000 and the seven Shore terminals in January 2001. The 30
facilities (excluding the seven Shore terminals acquired in January 2001, but
including the Paulsboro terminal) represented approximately 50.9% of ST's total
tankage capacity and approximately 60.5% of its total revenue for 2000. With the
exception of the facilities in Columbus, Georgia, which handles aviation
gasoline and specialty chemicals; Winona, Minnesota, which handles nitrogen
fertilizer solutions; Savannah, Georgia, which handles chemicals and caustic
solutions, as well as petroleum products; Vancouver, Washington, which handles
chemicals and bulk fertilizer; Eastham, United Kingdom which handles chemicals
and animal fats; and Runcorn, United Kingdom, which handles molten sulphur,
these facilities primarily store petroleum products for a variety of customers.
Overall, these facilities provide ST locations which are diverse geographically,
in products handled and in customers served.
The following table outlines ST's terminal locations, capacities, tanks
and primary products handled:
Tankage No. of Primary Products
Facility Capacity Tanks Handled
------------------------------- ------------- ---------- ------------------------------
Major U.S. Terminals:
Piney Point, MD 5,403,000 28 Petroleum
Linden, NJ(a) 3,884,000 22 Petroleum
Crockett, CA(d) 3,048,000 24 Petroleum
Martinez, CA(d) 2,783,000 16 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Other U.S. Terminals:
Montgomery, AL(b) 162,000 7 Petroleum, Jet Fuel
Moundville, AL(b) 310,000 6 Jet Fuel
Tuscon, AZ(a) 181,000 7 Petroleum
Los Angeles, CA(d) 597,000 20 Petroleum
Richmond, CA(d) 617,000 25 Petroleum
Stockton, CA 706,000 32 Petroleum
M Street, DC 133,000 3 Petroleum
Homestead, FL(b) 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(b) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 861,000 19 Petroleum, Chemicals
Blue Island, IL 752,000 19 Petroleum
Chillicothe, IL(a) 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Westwego, LA 858,000 54 Molasses, Fertilizer, Caustic
Salina, KS(c) 98,000 10 Petroleum
Andrews AFB Pipeline, MD(b) 72,000 3 Jet Fuel
Baltimore, MD 821,000 49 Chemicals, Asphalt, Jet Fuel
Salisbury, MD 177,000 14 Petroleum
Winona, MN 229,000 7 Fertilizer
Reno, NV(d) 107,000 7 Petroleum
Paulsboro, NJ 1,580,000 18 Petroleum
Alamogordo, NM(b) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Petroleum, Jet Fuel
Portland, OR(d) 343,000 11 Petroleum
Philadelphia, PA 1,044,000 12 Petroleum
San Antonio, TX 207,000 4 Jet Fuel
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Dumfries, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(b) 40,000 2 Jet Fuel
Tacoma, WA(d) 367,000 15 Petroleum
Vancouver, WA 94,000 31 Chemicals, Fertilizer
Milwaukee, WI 308,000 7 Petroleum
Foreign Terminals:
Grays, England 1,945,000 53 Petroleum
Eastham, England 2,185,000 162 Chemicals, Animal Fats
Runcorn, England 146,000 4 Molten sulphur
Glasgow, Scotland 344,000 16 Petroleum
Leith, Scotland 459,000 34 Petroleum, Chemicals
Belfast, Northern Ireland 315,000 38 Petroleum
-------------- ----------
38,285,000 1,046
============== ==========
(a) The terminal is 50% owned by ST.
(b) Facility also includes pipelines to U.S. government military base
locations.
(c) Transferred to Kaneb Pipe Line Operating Partnership, L.P. effective
January 1, 2001.
(d) Acquired in the Shore acquisition on January 3, 2001.
Customers
The storage and transport of jet fuel for the U.S. Department of
Defense is 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 six 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, five 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, and an 11.3 mile
pipeline, with three 24,000 barrel double-bottomed tanks and an administration
building located on the base.
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 as ST. 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, all of which
must be in compliance with applicable 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, much 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 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, excluding acquisitions, were
$3.4 million, $3.6 million and $5.0 million for 2000, 1999 and 1998,
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, $11.0 million and $4.4 million for 2000,
1999 and 1998, respectively.
Capital expenditures of the Partnership during 2001 are expected to be
approximately $12 million to $15 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 operations. KPL
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 borrowings 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. 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.
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.
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, commonly referred to as grandfathered rates, are subject to challenge
only for limited reasons. 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 not subject to investigation and protest at that time, those
rates could be deemed to be just and reasonable pursuant to the EP Act. The
Partnership's current rates became final and effective in July 2000, 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 which adopted a
simplified 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. This indexing mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the ceiling rate below a pipeline's existing rates. 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.
The indexation method is to serve as the principal basis for the
establishment of oil pipeline rate changes in the future. However, the FERC
determined that a pipeline may utilize any one of the following 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; and (ii) 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 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. In May 1998, the FERC granted the Partnership's application
and approximately half of the Pipelines markets subsequently became subject to
market force regulation.
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 decided
this case on the same basis as its holding in the Lakehead case. If the FERC
were to partially or completely disallow the income tax allowance in the cost of
service of the Pipelines on the basis set forth in the Lakehead order, KPL
believes that the Partnership's ability to pay distributions to the holders of
the 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 in the United States and, since February 1999, the environmental
laws and regulations of the United Kingdom in regard to the terminals acquired
from GATX Terminals, Limited, in the United Kingdom. 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.
See "Item 3 - Legal Proceedings" for information concerning a lawsuit
against certain subsidiaries of the Partnership involving jet fuel leaks from a
pipeline.
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 and liquids terminaling
industries. The East Pipeline and ST Services have experienced limited
groundwater contamination at various terminal and pipeline sites resulting from
various causes including activities of previous owners. Remediation projects are
underway or under construction using various remediation techniques. The costs
to remediate contamination at several ST terminal locations is being borne by
the former owners under indemnification agreements. Although no assurances can
be made, the Partnership believes that the aggregate cost of these remediation
efforts will not be material.
Groundwater remediation efforts are ongoing at all four of the West
Pipeline's terminals and at a Wyoming pump station. Regulatory officials have
been consulted in the development of remediation plans. In connection with the
purchase of the West Pipeline, KPOP agreed to implement 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. The
Partnership has accrued $2.1 million for these future remediation expenses.
In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain, Colorado ruptured, and approximately 1,000 barrels of product was
released. Containment and remedial action was immediately commenced. Upon
investigation, it appeared that the failure of the pipeline was due to damage
caused by third party excavations. The Partnership has made claim to the third
party as well as to its insurance carriers. The Partnership has entered into a
Compliance Order on Consent with the State of Colorado with respect to the
remediation. As of December 31, 2000, the Partnership has incurred $1.2 million
of costs in connection with this incident. Future costs are not anticipated to
be significant. The Partnership has recovered substantially all of its costs
from its insurance carrier.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac
Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a
partnership of which ST is general partner. PEPCO has reported that, through
December 2000, it incurred approximately $66 million in clean-up costs and
expects to incur total cleanup costs of $70 million to $75 million. Since May
2000, ST has participated provisionally in a minority share of the cleanup
expense, which has been funded by ST's insurance carriers. KPP cannot predict
the amount, if any, that ultimately may be determined to be ST's share of the
remediation expense, but it believes that such amount will be covered by
insurance and will not materially affect KPP's financial condition.
As a result of the rupture, purported class actions have been filed in
federal and state court in Maryland by property and/or business owners alleging
damages in unspecified amounts against PEPCO and ST under various theories,
including the federal Oil Pollution Act. The court has ordered a consolidated
complaint to be filed in this action. ST's insurance carriers have assumed the
defense of these actions. While KPP cannot predict the amount, if any, of any
liability it may have in these suits, it believes that such amounts will be
covered by insurance and that these actions will not have a material adverse
effect on its financial condition.
PEPCO and ST have agreed with the State of Maryland to pay costs of
assessing natural resource damages under the federal Oil Pollution Act, but they
cannot predict at this time the amount of any damages that may be claimed by
Maryland. KPL believes that both the assessment costs and such damages are
covered by insurance and will not materially affect KPP's financial condition.
The U.S. Department of Transportation has issued a Notice of Proposed
Violation to PEPCO and ST alleging violations over several years of pipeline
safety regulations and proposing a civil penalty of $674,000. ST and PEPCO
intend to contest the allegations of violations and the proposed penalty. The
ultimate amount of any penalty attributable to ST cannot be determined at this
time, but KPL believes that this matter will not have a material effect on KPP's
financial condition.
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.
Aboveground Storage Tank Acts. A number of the states in which the
Partnership operates in the United States 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 in the United States within the next few 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 and Terminals are in substantial
compliance with such statutes in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 require or 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 are
subject to increasingly stringent regulations, including requirements that
certain sources install maximum or reasonably available control technology. In
addition, the 1999 Federal Clean Air Act Amendments include a new operating
permit for major sources ("Title V Permits"), which applies to some of the
Partnership's facilities. Additionally, new dockside loading facilities owned or
operated by the Partnership in the United States will be subject to the New
Source Performance Standards that were proposed in May 1994. These regulations
require control of 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 in the United States. 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.
Environmental Impact Statement. The United States 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 United States 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 contamination at certain East Pipeline
sites. In addition, both KPOP and ST was wholly or partially indemnified under
certain acquisition contracts for some environmental costs. Most of such
contracts contain time and amount limitations on the indemnities. To the extent
that environmental liabilities exceed the amount of such indemnity, KPOP has
affirmatively assumed the excess environmental liabilities.
Safety Regulation
The Pipelines are subject to regulation by the United States Department
of Transportation (the "DOT") 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.
On November 3, 2000, the DOT issued new regulations intended by the DOT
to assess the integrity of hazardous liquid pipeline segments that, in the event
of a leak or failure, could adversely affect highly populated areas, areas
unusually sensitive to environmental impact and commercially navigable
waterways. Under the regulations, an operator is required, among other things,
to conduct baseline integrity assessment tests (such as internal inspections)
within seven years, conduct future integrity tests at typically five year
intervals and develop and follow a written risk-based integrity management
program covering the designated high consequence areas. KPL does not believe
that any increased costs of compliance with these regulations will materially
affect the Partnership's results of operations.
The Partnership is subject to the requirements of the United States
Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes that regulate the protection of the health and safety of workers. In
addition, the OSHA hazard communication standard requires that certain
information be maintained about hazardous materials used or produced in
operations and that this information be provided to employees, state and local
authorities and citizens. 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, 2000, employed
approximately 600 persons. Approximately 114 of the persons employed by KPL were
subject to representation by unions for collective bargaining purposes; however,
only 86 persons employed at 5 of KPL's terminal unit locations were subject to
collective bargaining or similar contracts at that date. Union contracts
regarding conditions of employment for 18, 6, 16, 30 and 16 employees are in
effect through June 30, 2001, September 1, 2001, February 28, 2002, June 29,
2002, and November 1, 2003, respectively. All such contracts are subject to
automatic renewal for successive one year periods unless either party provides
written notice in a timely manner to terminate or modify such agreement.
Item 2. Properties
The properties owned or utilized by the Partnership and its
subsidiaries are generally described in Item 1 of this Report. Additional
information concerning the obligations of the Partnership and its subsidiaries
for lease and rental commitments is presented under the caption "Commitments and
Contingencies" in Note 6 to the Partnership's consolidated financial statements.
Such descriptions and information are hereby incorporated by reference into this
Item 2.
The properties used in the operations of the Pipelines are owned by the
Partnership, through its subsidiary entities, except for KPL's operational
headquarters, located in Wichita, Kansas, which is held under a lease that
expires in 2004. The majority of ST's facilities are owned, while the remainder,
including most of its terminal facilities located in port areas and its
operational headquarters, located in Dallas, Texas, are held pursuant to lease
agreements having various expiration dates, rental rates and other terms.
Item 3. Legal Proceedings
Certain subsidiaries of the Partnership were sued 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 in Massachusetts, was abandoned in 1976, when the
connecting terminal was sold to an unrelated entity.
Grace alleged 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 allegedly caused by the jet
fuel leaks. Grace sought a ruling that these subsidiaries are responsible for
all present and future remediation expenses for these leaks and that Grace has
no obligation to indemnify these subsidiaries for these expenses.
In the lawsuit, Grace also sought indemnification for expenses that it
has incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional expenses
that it expects to incur in the future. The consistent position of the
Partnership's subsidiaries is that they did not acquire the abandoned pipeline
as part of the 1993 ST transaction, and therefore did not assume any
responsibility for the environmental damage nor any liability to Grace for the
pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993 acquisition
agreement and that the pipeline was abandoned prior to 1978. On July 17, 2000,
the Judge entered final judgment in the case, which is now on appeal to the
Dallas Court of Appeals, that Grace take nothing from the subsidiaries on its
claims, including claims for future expenses. Although the Partnership's
subsidiaries have not incurred any expenses in connection with the remediation,
the court also ruled, in effect, that the subsidiaries would not be entitled to
an indemnification from Grace if any such expenses were incurred in the future.
However, the Judge let stand a prior summary judgment ruling that the pipeline
was an asset of the Partnership acquired as part of the 1993 ST transaction. The
Judge also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as required
by the State of Massachusetts, the Partnership's subsidiaries have filed an
appeal of the judgment finding that the Otis Pipeline was transferred to them
and the award of attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have also received and responded to
formal inquiries from the United States Government in connection with the
environmental damages allegedly resulting from the jet fuel leaks. 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 Government has made no claims against the Partnership or any other
person on account of this matter. The Partnership believes that if any such
claims were made, its subsidiaries would have substantial defenses to such
claims. Under Massachusetts law, the party responsible for remediation of a
facility is the last owner before the abandonment, which was a Grace company.
The Partnership does not believe that either the Grace litigation or any claims
that may be made by the Government will adversely affect its ability to make
cash distributions to its unitholders, but there can be no assurances in that
regard.
The 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.
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 2000.
PART II
Item 5. Market for the Registrant's Units and Related Unitholder Matters
The Partnership's limited partnership interests ("Units") are listed
and traded on the New York Stock Exchange (the "NYSE"), under the symbol "KPP."
At March 6, 2001, there were approximately 1,100 Unitholders. Set forth below
are prices on the NYSE and cash distributions for the periods indicated for such
Units.
Unit Prices Cash
---------------------- Distributions
Year High Low Declared
----------------------------- -------- -------- -------------
1999:
First Quarter 29 3/16 26 1/4 $ .70
Second Quarter 29 3/4 27 1/4 .70
Third Quarter 29 3/4 26 1/2 .70
Fourth Quarter 26 15/16 21 5/16 .70
2000:
First Quarter 28 1/4 24 3/16 .70
Second Quarter 27 1/8 23 3/8 .70
Third Quarter 29 15/16 24 11/16 .70
Fourth Quarter 31 3/4 26 1/16 .70
2001:
First quarter 34.09 29.88 .70
(through March 6, 2001)
Under the terms of its financing agreements, the Partnership is
prohibited from declaring or paying any distribution if a default exists
thereunder.
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."
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Revenues............................ $ 156,232 $ 158,028 $ 125,812 $ 121,156 $ 117,554
---------- ---------- --------- ---------- ----------
Operating costs..................... 69,653 69,148 52,200 50,183 49,925
Depreciation and amortization....... 16,253 15,043 12,148 11,711 10,981
General and administrative.......... 11,881 9,424 6,261 5,793 5,259
--------- ---------- --------- ---------- ----------
Total costs and expenses........ 97,787 93,615 70,609 67,687 66,165
--------- ---------- --------- ---------- ----------
Operating income.................... 58,445 64,413 55,203 53,469 51,389
Interest and other income........... 1,442 408 626 562 776
Interest expense.................... (12,283) (13,390) (11,304) (11,332) (11,033)
Minority interest in net income..... (467) (499) (441) (420) (403)
--------- ---------- --------- ----------- -----------
Income before income taxes.......... 47,137 50,932 44,084 42,279 40,729
Income tax provision................ (943) (1,496) (418) (718) (822)
--------- ---------- --------- ----------- -----------
Net income.......................... $ 46,194 $ 49,436 $ 43,666 $ 41,561 $ 39,907
========== ========== ========= ========== ==========
Allocation of net income per
Unit (a)........................ $ 2.43 $ 2.81 $ 2.67 $ 2.55 $ 2.46
========== ========== ========= ========== ==========
Cash Distributions declared per
Unit (a)........................ $ 2.80 $ 2.80 $ 2.60 $ 2.50 $ 2.30
========== ========== ========= ========== ==========
Balance Sheet Data (at period end):
Property and equipment, net......... $ 321,355 $ 316,883 $ 268,626 $ 247,132 $ 249,733
Total assets........................ 375,063 365,953 308,432 269,032 274,765
Long-term debt...................... 166,900 155,987 153,000 132,118 139,453
Partners' capital................... 160,767 168,288 105,388 104,196 103,340
(a) Prior to the third quarter of 1998, the Partnership had three classes of
partnership interests designated as 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 as "Units", effective July 1, 1998. Allocations
of net income and cash distributions declared were equal for all classes of
units for all periods presented.
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 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").
On January 3, 2001, the Partnership, through a wholly-owned subsidiary,
acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
KPP Units. Financing for the cash portion of the purchase price was supplied
under a new $275 million unsecured revolving credit agreement with a bank. See
"Liquidity and Capital Resources". Shore owns seven terminals, located in four
states, with a total tankage capacity of 7.8 million barrels. All of the
terminals handle petroleum products and, with the exception of one, have deep
water access.
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 transaction
costs and the assumption of certain liabilities. The acquisition of the six
locations, which have an aggregate tankage capacity of 5.4 million barrels, was
initially financed by term loans from a bank. $13.3 million of the term loans
were repaid in July 1999 with the proceeds from a public unit offering. See
"Liquidity and Capital Resources". Three of the terminals, handling petroleum
products, 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.
On October 30, 1998, the Partnership, through a wholly-owned
subsidiary, entered into acquisition and joint venture agreements with
Northville Industries Corp. ("Northville") 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. The petroleum storage facility, which
has capacity of 3.9 million barrels in 22 tanks, was funded by bank financing
which was repaid using proceeds from a public unit offering in July 1999. See
"Liquidity and Capital Resources".
The Partnership is the third largest independent liquids terminaling
company in the United States. Following the Shore acquisition on January 3,
2001, ST operated 42 facilities in 24 states, the District of Columbia and six
facilities in the United Kingdom with an aggregate tankage capacity of
approximately 38.3 million barrels.
Pipeline Operations
Year Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Revenues..................................... $ 70,685 $ 67,607 $ 63,421
Operating costs ............................. 25,223 23,579 22,057
Depreciation and amortization ............... 5,180 5,090 4,619
General and administrative .................. 4,069 3,102 3,115
-------- -------- --------
Operating income............................. $ 36,213 $ 35,836 $ 33,630
======== ======== ========
Pipelines revenues are based on volumes shipped and the distances over
which such volumes are transported. For the year ended December 31, 2000,
revenues increased by $3.1 million due primarily to an increase in terminaling
charges. For the year ended December 31, 1999, revenues increased by $4.2
million due to overall increases in total volumes shipped, primarily on the East
Pipeline. 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 17.8 billion, 18.4 billion and 17.0 billion for the years
ended December 31, 2000, 1999 and 1998, respectively.
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 $1.6 million in 2000 and $1.5 million
in 1999, respectively. The increase in both years was due to increases in
materials and supplies costs, including additives, that are volume related.
General and administrative costs, which include managerial, accounting and
administrative personnel costs, office rental expense, legal and professional
costs and other non-operating costs increased by $1.0 million in 2000, compared
to 1999, when the Partnership booked a one-time benefit resulting from the
favorable elimination of a contingency.
Terminaling Operations
Year Ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Revenues..................................... $ 85,547 $ 90,421 $ 62,391
Operating costs.............................. 44,430 45,569 30,143
Depreciation and amortization................ 11,073 9,953 7,529
General and administrative................... 7,812 6,322 3,146
-------- -------- --------
Operating income........................... $ 22,232 $ 28,577 $ 21,573
======== ======== ========
For the year ended December 31, 2000, revenues decreased by $4.9
million, compared to 1999. Revenue increases resulting from the United Kingdom
and other 1999 terminal acquisitions were more than offset by decreases in tank
utilization due to unfavorable domestic market conditions resulting from
declines in forward product pricing. For the year ended December 31, 1999,
revenues increased by $28.0 million, due to terminal acquisitions and increased
utilization of existing terminals due to favorable market conditions, partially
offset by a decrease in the overall price realized for storage. Average annual
tankage utilized for the years ended December 31, 2000, 1999 and 1998 aggregated
21.0 million barrels, 22.6 million barrels and 15.2 million barrels,
respectively. The 2000 decrease in average annual tankage utilized resulted from
the unfavorable domestic market conditions. The 1999 increase resulted from the
acquisitions and increased storage at the Partnership's largest petroleum
storage facility. Average revenues per barrel of tankage utilized for the years
ended December 31, 2000, 1999 and 1998 was $4.12, $4.00 and $4.11, respectively.
The increase in 2000 average revenues per barrel of tankage utilized, when
compared to 1999, was due to the storage of a larger proportionate volume of
specialty chemicals, which are historically at higher per barrel rates than
petroleum products. The unusually low 1999 average revenues per barrel of
tankage utilized was due to the 1999 temporary increase in storage at the
Partnership's largest petroleum storage facility.
Operating costs decreased by $1.1 million in 2000, when compared to
1999, due to lower costs resulting from the overall decline in volumes stored.
The 1999 increase of $15.4 million in operating costs was due to the terminal
acquisitions and increases in tank utilization. General and administrative
expense increased by $1.5 million in 2000 and by $3.2 million in 1999. The
increase in 2000 is due entirely to extraordinarily high litigation costs.
Approximately one-half of the increase in 1999 was due to the terminal
acquisitions with the remaining portion of the 1999 increase due to the
extraordinarily high litigation costs. In 2000, KPP sold land and other
Terminaling business assets for approximately $2.0 million in net proceeds,
recognizing a gain on disposition of assets of $1.1 million.
Total tankage capacity (38.3 million barrels, including 7.8 million
barrels acquired in the Shore acquisition on January 3, 2001) 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
Cash provided by operating activities was $62.0 million, $63.6 million
and $58.8 million for the years 2000, 1999 and 1998, respectively. The decrease
in cash provided by operations in 2000 is a result of the decrease in
terminaling revenues and operating income due to unfavorable domestic market
conditions. The increase in 1999 resulted from increases in revenues and
operating income in the terminaling operations resulting from terminal
acquisitions and improvements in pipeline operations from increases in volumes
shipped.
Capital expenditures, excluding expansion capital expenditures, were
$9.5 million, $14.6 million and $9.4 million for 2000, 1999 and 1998,
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,
significant. Environmental damages caused by sudden and accidental occurrences
are included under the Partnership's insurance coverages (subject to deductible
and limits). The Partnership anticipates that routine maintenance capital
expenditures (excluding acquisitions) will total approximately $12 million to
$15 million in 2001. 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 borrowings or choose to do
so.
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 bank borrowings and/or future public unit
or debt offerings.
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 KPL. Available Cash consists generally of all the cash
receipts less all cash disbursements and reserves. Distributions of $2.80 per
unit were declared to Unitholders in 2000 and 1999 and $2.60 per unit was
declared in 1998.
In December 2000, the Partnership entered into a credit agreement with
a group of banks that provides for a $275 million unsecured revolving credit
facility through December 2003. No amounts were drawn on the facility at
December 31, 2000. The credit facility bears interest at variable rates, has a
variable commitment fee on unutilized amounts and contains certain financial and
operational covenants. Proceeds from the facility were used to repay in full the
Partnership's $128 million of mortgage notes and $15 million outstanding under
its $25 million revolving credit facility in January 2001. An additional $107
million was used to finance the cash portion of the Shore acquisition. Under the
provisions of the mortgage notes, the Partnership incurred a $6.3 million
prepayment penalty, which will be recognized as an extraordinary expense in the
first quarter of 2001. At January 3, 2001, $257.5 million was drawn on the
facility, at an interest rate of 6.31%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned
subsidiaries, entered into a credit agreement with a bank that provided 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. $18.3
million of the term loans were repaid in July 1999 with the proceeds from the
public unit offering. The remaining portion ($23.9 million), with a fixed rate
of 7.14%, is due in January 2002. The term loans under the credit agreement, as
amended, are unsecured and are pari passu with the $275 million revolving credit
facility. The term loans also contain certain financial and operational
covenants.
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).
See also "Item 1 - Regulation", regarding the FERC's Lakehead decision.
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 $2.49, $2.81 and $2.66 for the years ended December 31, 2000,
1999 and 1998, respectively.
Recent Accounting Pronouncements
The Partnership has assessed the reporting and disclosure requirements
of SFAS No. 133, "Accounting and Derivative Instruments and Hedging Activities",
which establishes the accounting and reporting standards for such activities.
Under SFAS No. 133, companies must recognize all derivative instruments on its
balance sheet at fair value. Changes in the value of derivative instruments
which are considered hedges, will either be offset against the change in fair
value of the hedged item through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings, depending on the nature
of the hedge. The Partnership will adopt SFAS No. 133, as amended, in the first
quarter of 2001. Currently, the Partnership is not a party to any derivative
contracts, and does not anticipate that adoption will have a material effect on
the Partnership's results of operations or financial position.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the
adverse changes in market rates and prices) to which the Partnership is exposed
are interest rates on the Partnership's debt and investment portfolios. The
Partnership centrally manages its debt and investment portfolios considering
investment opportunities and risks and overall financing strategies. The
Partnership's investment portfolio consists of cash equivalents; accordingly,
the carrying amounts approximate fair value. The Partnership's investments are
not material to its financial position or performance. Assuming variable rate
debt of $257.5 million at January 3, 2001, a one percent increase in interest
rates would increase net interest expense by approximately $2.6 million.
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.
None.
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 KPL as general partner. Set forth below is certain
information concerning the directors and executive officers of KPL. All
directors of KPL are elected annually by Kaneb, as its sole stockholder. All
officers serve at the discretion of the Board of Directors of KPL.
Position with Years of Service % of
Name Age KPL With KPL Units(m) O/S
- ------------------------ ------- ---------------------------------- ------------------------- --------------- ----------
Edward D. Doherty 65 Chairman of the Board and 11 (a) 87,526 *
Chief Executive Officer
Leon E. Hutchens 66 President 41 (b) 500 *
Jimmy L. Harrison 47 Executive Vice President 8 (d) -0- *
and Controller
Ronald D. Scoggins 46 Senior Vice President 4 (c) 1,451 *
Howard C. Wadsworth 56 Vice President,Treasurer 7 (e) -0- *
and Secretary
Sangwoo Ahn 62 Director 12 (f) 34,000 *
John R. Barnes 56 Director 14 (g) 230,900 1.14%
Murray R. Biles 70 Director 47 (h) 500 *
Frank M. Burke, Jr. 61 Director 4 (i) -0- *
Charles R. Cox 58 Director 6 (j) 8,500 *
Hans Kessler 51 Director 4 (k) -0- *
James R. Whatley 74 Director 12 (l) 27,400 *
All Officers and Directors as a group (12 persons) 390,777 1.93%
*Less than one percent
(a) Mr. Doherty, Chairman of the Board and Chief Executive Officer of KPL
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 KPL in August 1997, prior
to which he served in senior level positions for ST for more than 10
years.
(d) 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.
(e) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary
for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.
(f) Mr. Ahn, a director of KPL 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 PAR Technology Corporation and Quaker Fabric Corporation.
(g) Mr. Barnes, a director of KPL, is also Chairman of the Board, President
and Chief Executive Officer of Kaneb.
(h) Mr. Biles joined KPL in November 1953 and served as President from
January 1985 until his retirement at the close of 1993.
(i) Mr. Burke, a director of KPL since 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. Mr. Burke also currently serves as a Director
of Avidyn, Inc. and Arch Coal, Inc.
(j) Mr. Cox, a director of KPL 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
29 year career with that organization.
(k) Mr. Kessler, elected to the Board on February 19, 1998, is also a
director of Kaneb. 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.
(l) Mr. Whatley, a director of KPL 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.
(m) Partnership Units 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.
Audit Committee
Messrs. Sangwoo Ahn, Frank M. Burke, Jr. and James R. Whatley serve as
the members of the Audit Committee of KPL. Such Committee will, on an annual
basis, or more frequently as such Committee may determine to be appropriate,
review policies and practices of KPL and the Partnership and deal with various
matters as to which potential conflicts of interest may arise.
Committee Interlocks and Insider Participation
KPL'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, 2000, none of KPL's officers or employees participated in the
deliberations of KPL's Board of Directors concerning executive officer
compensation.
Section 16(a) Beneficial Ownership Reporting Compliance Statement
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)") requires KPL'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 KPL
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,
KPL believes that, since January 1, 2000, its officers and directors have
complied with all applicable filing requirements with respect to the
Partnership's equity securities.
Item 11. Executive Compensation
The Partnership has no executive officers, but is obligated to
reimburse KPL for compensation paid to KPL'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 KPL during the fiscal years 2000, 1999
and 1998, to the Chief Executive Officer and each of the other most highly
compensated executive officers of KPL.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal ------------------------------- All Other
Position Year Salary(a) Bonus(b) Compensation(c)
--------------------------- ----- --------------- ---------- ---------------
Edward D. Doherty(d) 2000 $ 234,392 $ -0- $ 6,787
Chairman of the 1999 225,375 -0- 6,249
Board and Chief 1998 216,758 -0- 6,402
Executive Officer
Leon E. Hutchens 2000 203,383 -0- 7,443
President 1999 195,550 13,600 7,336
1998 188,083 10,000 7,027
Jimmy L. Harrison 2000 128,820 -0- 2,666
Executive Vice President 1999 123,720 6,800 3,844
1998 117,000 5,000 3,120
Ronald D. Scoggins(d) 2000 164,658(e) -0- 6,457
Senior Vice President 1999 159,441(e) -0- 6,343
1998 161,348(e) -0- 6,100
(a) Amounts for 2000, 1999 and 1998, respectively, include deferred
compensation for Mr. Doherty ($6,762, $14,720 and $13,692); Mr.
Hutchens ($1,608, $8,416 and $4,869); and Mr. Scoggins ($11,464,
$11,212 and $10,600).
(b) Amounts earned in year shown and paid the following year.
(c) Represents KPL's contributions to Kaneb's Savings Investment Plan (a
401(k) plan) and the imputed value of Company-paid group term life
insurance.
(d) The compensation for these individuals is paid by Kaneb, which is
reimbursed for all or substantially all of such compensation by KPL.
(e) Amounts for 2000, 1999 and 1998, respectively, include $24,058, $24,016
and $31,131 in the form of Partnership Units (434, 378 and 412) and
Kaneb Services, Inc. Common Stock (1,314, 969 and 1,322).
Director's Fees
During 2000, each member of KPL's Board of Directors who was not also
an employee of KPL 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 6, 2001, KPL owned a combined 2% General Partner interest in
the Partnership and KPOP and, together with its affiliates, owned Units
representing an aggregate limited partner interest of approximately 25%.
Item 13. Certain Relationships and Related Transactions
KPL 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
Beginning Page Set forth below is a list of financial statements
appearing in this report.
Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements:
Consolidated Statements of Income - Three Years
Ended December 31, 2000............................... F - 1
Consolidated Balance Sheets - December 31, 2000 and 1999.. F - 2
Consolidated Statements of Cash Flows - Three Years
Ended December 31, 2000............................... F - 3
Consolidated Statements of Partners' Capital - Three
Years ended December 31, 2000......................... F - 4
Notes to Consolidated Financial Statements.................. F - 5
Independent Auditors' Report................................ F - 15
(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.
(a)(3) List of Exhibits
3.1 Amended and Restated Agreement of Limited Partnership dated September
27, 1989, as revised July 23, 1998, filed herewith.
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 ("Form 8-K"), dated March 16, 1993, which
exhibit is hereby incorporated by reference.
10.2 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.
10.3 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.
10.4 Formation and Purchase Agreement, between and among Support Terminal
Operating Partnership, L.P., Northville Industries Corp. and AFFCO,
Corp., dated October 30, 1998, filed as exhibit 10.9 to the
Registrant's Form 10-K for the year ended December 31, 1998, which
exhibit is hereby incorporated by reference.
10.5 Agreement, between and among, GATX Terminals Limited, ST Services,
Ltd., ST Eastham, Ltd., GATX Termianls Corporation, Support Terminals
Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated
January 26, 1999, filed as Exhibit 10.10 to the Registrant's Form 10-K
for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
10.6 Credit Agreement, between and among, Kaneb Pipe Line Operating
Partnership, L.P., ST Services, Ltd. and SunTrust Bank, Atlanta, dated
January 27, 1999, filed as Exhibit 10.11 to the Registrant's Form 10-K
for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
10.7 Revolving Credit Agreement, dated as of December 28, 2000 among Kaneb
Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners, L.P.,
The Lenders From Time To Time Party Hereto, and SunTrust Bank, as
Administrative Agent, filed herewith.
10.8 Securities Purchase Agreement Among Shore Terminals LLC, Kaneb Pipe
Line Partners, L.P. and the Sellers Named Therein, dated as of
September 22, 2000, Amendment No. 1 To Securities Purchase Agreement,
dated as of November 28, 2000 and Registration Rights Agreement, dated
as of January 3, 2001, filed as Exhibits 10.1, 10.2 and 10.3 of the
exhibits to Registrant's Current Report on Form 8-K dated January 3,
2001, which exhibits are hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
23 Consent of KPMG LLP, filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K regarding the decision of Kaneb Services,
Inc.'s ("Kaneb Services") Board of Directors to distribute its
pipeline, terminaling and product marketing business to Kaneb Services'
stockholders in the form of a new limited liability company, dated
November 29, 2000, (Registrant is a Delaware limited partnership of
which Kaneb Pipe Line Company, a Delaware corporation ("KPL"), is the
general partner. KPL is a wholly owned subsidiary of Kaneb Services).
Current Report on Form 8-K regarding the Acquisition of Shore Terminals
LLC, located in California, Washington, Oregon and Nevada, dated
January 3, 2001.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Revenues ............................. $ 156,232,000 $ 158,028,000 $ 125,812,000
------------- ------------- -------------
Costs and expenses:
Operating costs ................... 69,653,000 69,148,000 52,200,000
Depreciation and amortization ..... 16,253,000 15,043,000 12,148,000
General and administrative ........ 11,881,000 9,424,000 6,261,000
------------- ------------- -------------
Total costs and expenses ....... 97,787,000 93,615,000 70,609,000
------------- ------------- -------------
Operating income ..................... 58,445,000 64,413,000 55,203,000
Interest and other income ............ 1,442,000 408,000 626,000
Interest expense ..................... (12,283,000) (13,390,000) (11,304,000)
------------- ------------- -------------
Income before minority
interest and income taxes ......... 47,604,000 51,431,000 44,525,000
Minority interest in net income ...... (467,000) (499,000) (441,000)
Income tax provision ................. (943,000) (1,496,000) (418,000)
------------- ------------- -------------
Net income ........................... 46,194,000 49,436,000 43,666,000
General partner's interest
in net income ..................... (1,639,000) (1,640,000) (735,000)
------------- ------------- -------------
Limited partners' interest
in net income ..................... $ 44,555,000 $ 47,796,000 $ 42,931,000
============= ============= =============
Allocation of net income per
Unit as described in Note 2 ....... $ 2.43 $ 2.81 $ 2.67
============= ============= =============
Weighted average number of Partnership
units outstanding ................. 18,310,000 16,997,500 16,060,000
============= ============= =============
See notes to consolidated financial statements.
F - 1
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................. $ 4,758,000 $ 5,127,000
Accounts receivable ....................... 21,091,000 16,929,000
Prepaid expenses .......................... 5,291,000 5,036,000
------------- -------------
Total current assets ................... 31,140,000 27,092,000
------------- -------------
Property and equipment ....................... 458,926,000 439,537,000
Less accumulated depreciation ................ 137,571,000 122,654,000
------------- -------------
Net property and equipment ............. 321,355,000 316,883,000
------------- -------------
Investment in affiliates ..................... 22,568,000 21,978,000
------------- -------------
$ 375,063,000 $ 365,953,000
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable .......................... $ 3,706,000 $ 3,288,000
Accrued expenses .......................... 7,705,000 6,350,000
Accrued distributions payable ............. 13,372,000 13,372,000
Accrued taxes, other than income taxes .... 2,363,000 2,267,000
Deferred terminaling fees ................. 3,717,000 3,075,000
Payable to general partner ................ 1,889,000 1,411,000
------------- -------------
Total current liabilities .............. 32,752,000 29,763,000
------------- -------------
Long-term debt ............................... 166,900,000 155,987,000
Other liabilities and deferred taxes ......... 13,676,000 10,882,000
Minority interest ............................ 968,000 1,033,000
Commitments and contingencies
Partners' capital:
Limited partners .......................... 161,307,000 168,019,000
General partner ........................... 981,000 1,037,000
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment .. (1,521,000) (768,000)
------------- -------------
Total partners' capital ................ 160,767,000 168,288,000
------------- -------------
$ 375,063,000 $ 365,953,000
============= =============
See notes to consolidated financial statements.
F - 2
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998
------------- ------------- --------------
Operating activities:
Net income ........................................ $ 46,194,000 $ 49,436,000 $ 43,666,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 16,253,000 15,043,000 12,148,000
Minority interest in net income................. 467,000 499,000 441,000
Equity in earnings of affiliates, net
of distribution............................... (154,000) (1,072,000) -
Gain on sale of assets.......................... (1,126,000) - -
Deferred income taxes........................... 943,000 1,487,000 481,000
Other liabilities............................... 841,000 - -
Changes in working capital components:
Accounts receivable........................... (4,162,000) (3,012,000) (2,414,000)
Prepaid expenses.............................. (255,000) (995,000) (14,000)
Accounts payable and accrued expenses......... 1,869,000 3,028,000 3,174,000
Deferred terminaling fees..................... 642,000 (451,000) 634,000
Payable to general partner.................... 478,000 (374,000) 642,000
------------- ------------- --------------
Net cash provided by operating activities.. 61,990,000 63,589,000 58,758,000
------------- ------------- --------------
Investing activities:
Capital expenditures............................... (9,483,000) (14,568,000) (9,401,000)
Acquisitions of pipelines and terminals............ (12,053,000) (44,390,000) (44,410,000)
Proceeds from sale of assets....................... 1,961,000 - -
Other.............................................. (212,000) (2,064,000) (1,121,000)
------------- --------------- --------------
Net cash used in investing activities...... (19,787,000) (61,022,000) (54,932,000)
-------------- -------------- ---------------
Financing activities:
Changes in amounts due to/from
general partner................................. - (5,000,000) 5,000,000
Issuance of debt................................... 14,613,000 51,319,000 35,000,000
Payments of debt and capital lease................. (3,700,000) (58,332,000) (6,453,000)
Distributions, including minority interest......... (53,485,000) (51,850,000) (42,900,000)
Net proceeds from issuance of KPP units............ - 65,574,000 -
------------- ------------- --------------
Net cash provided by (used in) financing
activities............................. (42,572,000) 1,711,000 (9,353,000)
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents...... (369,000) 4,278,000 (5,527,000)
Cash and cash equivalents at beginning of period...... 5,127,000 849,000 6,376,000
------------- ------------- --------------
Cash and cash equivalents at end of period............ $ 4,758,000 $ 5,127,000 $ 849,000
============= ============= ==============
Supplemental information - Cash paid for interest..... $ 12,438,000 $ 12,881,000 $ 11,156,000
============= ============= ==============
See notes to consolidated financial statements.
F - 3
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Accumulated
Other
Limited General Comprehensive Comprehensive
Partners (a) Partner Income (Loss) Total Income
-------------- ----------- ------------- ------------- ----------------
Partners' capital at January 1, 1998..... $ 103,167,000 $ 1,029,000 $ - $ 104,196,000 $ -
1998 income allocation................. 42,931,000 735,000 - 43,666,000 43,666,000
Distributions declared................. (41,756,000) (718,000) - (42,474,000) -
-------------- ------------ ----------- ------------- ---------------
Comprehensive income for the year...... $ 43,666,000
===============
Partners' capital at December 31, 1998... 104,342,000 1,046,000 - 105,388,000 -
1999 income allocation................. 47,796,000 1,640,000 - 49,436,000 49,436,000
Distributions declared................. (49,693,000) (1,649,000) - (51,342,000) -
Issuance of units...................... 65,574,000 - - 65,574,000 -
Foreign currency translation adjustment - - (768,000) (768,000) (768,000)
-------------- ----------- ----------- ------------- ---------------
Comprehensive income for the year...... $ 48,668,000
===============
Partners' capital at December 31, 1999... 168,019,000 1,037,000 (768,000) 168,288,000
2000 income allocation................. 44,555,000 1,639,000 - 46,194,000 46,194,000
Distributions declared................. (51,267,000) (1,695,000) - (52,962,000) -
Foreign currency translation adjustment - - (753,000) (753,000) (753,000)
-------------- ------------ ----------- ------------- ---------------
Comprehensive income for the year...... $ 45,441,000
===============
Partners' capital at December 31, 2000... $ 161,307,000 $ 981,000 $(1,521,000) $ 160,767,000
============== ============ =========== =============
Limited partnership units outstanding at
December 31, 1998...................... 16,060,000 (b) - 16,060,000
Units issued in 1999..................... 2,250,000 - - 2,250,000
-------------- ----------- ----------- -------------
Limited partnership units outstanding at
December 31, 1999 and 2000............. 18,310,000 (b) - 18,310,000
============== ============ =========== =============
(a) Prior to the third quarter of 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 July 1, 1998. See Note 2.
(b) KPL owns a combined 2% interest in the Partnership as General Partner.
See notes to consolidated financial statements.
F - 4
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("KPP" or 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 ("KPL"), a
wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner,
holds a 1% general partner interest in both the Partnership and KPOP. KPL's 1%
interest in KPOP is reflected as the minority interest in the financial
statements. At December 31, 2000, KPL, together with its affiliates, owned an
approximate 28% interest as a limited partner and as a general partner owned a
combined 2% interest.
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 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the
Partnership in the preparation of the consolidated financial statements.
Cash and cash equivalents
The Partnership's policy is to invest cash in highly liquid investments
with original maturities of three months or less. 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.
The carrying value of property and equipment is periodically evaluated
using undiscounted future cash flows as the basis for determining if impairment
exists under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". To the extent impairment is indicated to
exist, an impairment loss will be recognized under SFAS No. 121 based on fair
value.
Revenue and income recognition
KPOP provides pipeline transportation of refined petroleum products and
liquified petroleum gases. Revenue is recognized as services are provided.
The Partnership's Support Terminal Services operation ("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.
Foreign currency translation
The Partnership translates the balance sheet of its foreign subsidiary
using year-end exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from the change in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive income (loss) in
Partners' Capital. Gains and losses resulting from foreign currency transactions
are included in the statements of income.
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.
Comprehensive income
The Partnership follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
130 only requires additional disclosure and does not affect the Partnership's
financial position or results of operations.
Estimates
The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect 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.
Income tax considerations
Income before income tax expense is made up of the following
components:
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998
------------- ------------- --------------
Partnership operations...................... $ 43,071,000 $ 46,242,000 $ 42,827,000
Corporate operations:
Domestic............................... 510,000 501,000 1,257,000
Foreign................................ 3,556,000 4,189,000 -
------------- ------------- --------------
$ 47,137,000 $ 50,932,000 $ 44,084,000
============= ============= ==============
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, 2000, 1999 and 1998 primarily consists
of deferred U.S. and foreign income taxes of $0.9 million, $1.5 million and $.5
million, respectively. The net deferred tax liability of $5.9 million and $5.1
million at December 31, 2000 and 1999, respectively, consists of deferred tax
liabilities of $12.0 million and $12.0 million, respectively, and deferred tax
assets of $6.1 million and $6.9 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 U.S.
corporate operations have net operating loss carryforwards for tax purposes
totaling approximately $15.4 million which expire in years 2008 through 2020.
Additionally, the Partnership's foreign operations have net operating loss
carryforwards for tax purposes totaling approximately $4.4 million which do not
have an expiration date.
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.
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. SFAS 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.
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 KPL. 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. Distributions of $2.80, $2.80 and $2.60
per Unit were declared to all classes of Units in 2000, 1999 and 1998,
respectively.
Distributions by the Partnership of its Available Cash are made 99% to
Unitholders and 1% to KPL, 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, was subject to the preferential rights
of the holders of the Senior Preference Units ("SPUs") 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 was made to holders of Preference Units ("PUs") or Common
Units ("CUs") for such quarter. The CUs were not entitled to arrearages in the
payment of the Minimum Quarterly Distribution. In general, the Preference Period
continued until such time as the Minimum Quarterly Distribution had been paid to
the holders of the SPUs, the PUs and the CUs for twelve consecutive quarters.
Payment of the August 14, 1998 regular cash distribution represented the twelfth
consecutive quarterly distribution of Available Cash constituting Cash from
Operations in an amount equal to or exceeding the $.55 Minimum Quarterly
Distribution specified in the Partnership Agreement. Accordingly, pursuant to
the terms of the Partnership Agreement, all differences and distinctions between
SPUs, PUs and CUs 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, which trade on the
New York Stock Exchange under the symbol "KPP".
Allocation of net income and earnings
For the periods presented, net income or loss has been 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 certain incentive
distributions at different levels of cash distributions. Earnings per Unit shown
on the consolidated statements of income are calculated by dividing the amount
of 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 $2.49, $2.81 and
$2.66 for the years ended December 31, 2000, 1999 and 1998, respectively.
Change in presentation
Certain prior year financial statement items have been reclassified to
conform with the 2000 presentation.
Recent accounting pronouncements
The Partnership has assessed the reporting and disclosure requirements
of SFAS No. 133, "Accounting and Derivative Instruments and Hedging Activities",
which establishes the accounting and reporting standards for such activities.
Under SFAS No. 133, companies must recognize all derivative instruments on its
balance sheet at fair value. Changes in the value of derivative instruments
which are considered hedges, will either be offset against the change in fair
value of the hedged item through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings, depending on the nature
of the hedge. The Partnership will adopt SFAS No. 133, as amended, in the first
quarter of 2001. Currently, the Partnership is not a party to any derivative
contracts, and does not anticipate that adoption will have a material effect on
the Partnership's results of operations or financial position.
3. ACQUISITIONS
On January 3, 2001, the Partnership, through a wholly-owned subsidiary,
acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
KPP Units. Financing for the cash portion of the purchase price was supplied
under a new $275 million unsecured revolving credit agreement with a group of
banks (see Note 5). The acquisition will be accounted for, beginning January
2001, using the purchase method of accounting.
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 transaction
costs and the assumption of certain liabilities. The acquisition, which was
initially financed with 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 Notes 1 and 5). The
pro forma effect of the acquisition was not material to the results of
operations.
On October 30, 1998, the Partnership, through a wholly-owned
subsidiary, entered into acquisition and joint venture agreements with
Northville Industries Corp. ("Northville") 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. The investment was funded by bank
financing which was repaid using proceeds from the public unit offering in July
1999 (See Note 1). The investment is being accounted for by the equity method of
accounting, with the excess cost over net book value of the equity investment
being amortized over the life of the underlying assets. During 1998, the
Partnership acquired other terminals and pipelines for aggregate consideration
of $23.9 million.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
Estimated
Useful
Life December 31,
-----------------------------------
(Years) 2000 1999
-------------- --------------- ------------
Land.................................... - $ 23,360,000 $ 21,585,000
Buildings............................... 35 9,144,000 8,568,000
Furniture and fixtures.................. 16 3,445,000 2,947,000
Transportation equipment................ 6 4,469,000 4,469,000
Machinery and equipment................. 20 - 40 32,996,000 32,939,000
Pipeline and terminaling equipment...... 20 - 40 378,123,000 364,396,000
Construction work-in-progress........... - 7,389,000 4,633,000
------------- --------------
Total property and equipment............ 458,926,000 439,537,000
Less accumulated depreciation......... 137,571,000 122,654,000
------------- --------------
Net property and equipment.............. $ 321,355,000 $ 316,883,000
============= ==============
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
-------------------------------------
2000 1999
--------------- --------------
First mortgage notes, repaid in January 2001.................... $ 128,000,000 $ 128,000,000
$25 million revolving credit facility, repaid in January 2001... 15,000,000 2,200,000
Term loan, due in January 2002.................................. 23,900,000 25,787,000
$275 million revolving credit facility, due in December 2003.... - -
--------------- --------------
Total long-term debt............................................ $ 166,900,000 $ 155,987,000
=============== ==============
In December 2000, the Partnership entered into a credit agreement with
a group of banks that provides for a $275 million unsecured revolving credit
facility through December 2003. The facility bears interest at variable interest
rates, and has a variable commitment fee on the unutilized amounts and contains
certain operational and financial covenants. No amounts were drawn under the
facility at December 31, 2000. At January 3, 2001 $257.5 million was drawn on
the facility at a interest rate of 6.31%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned
subsidiaries, entered into a credit agreement with a bank that provided for the
issuance of $39.2 million in term loans in connection with the United Kingdom
terminal acquisition and $5.0 million for general Partnership purposes. $18.3
million of the term loans were repaid in July 1999 with the proceeds from the
public unit offering. The remaining portion ($23.9 million), with a fixed rate
of 7.14%, is due in January 2002. The term loans under the credit agreement, as
amended, are unsecured and are pari passu with the $275 million revolving credit
facility. The term loans also contain certain financial and operational
covenants.
In 1994, a wholly-owned subsidiary entered into a restated credit
agreement with a group of banks that, as amended, provided for a $25 million
revolving credit facility through January 31, 2001. At December 31, 2000, $15.0
million was drawn under the credit facility. In January 2001, the credit
facility was repaid in full with the proceeds from the new $275 million credit
facility.
The $128 million of first mortgage notes outstanding at December 31,
2000 and 1999, which were due in varying amounts from 2001 to 2016, were repaid
in full in January of 2001 with the proceeds from the new $275 million revolving
credit facility. Under the provisions of the mortgage notes, the Partnership
incurred a $6.3 million prepayment penalty, which will be recognized as an
extraordinary expense in the first quarter of 2001.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments
under operating leases as of December 31, 2000:
Year ending December 31:
2001........................................... $ 2,027,000
2002........................................... 1,440,000
2003........................................... 907,000
2004........................................... 640,000
2005........................................... 320,000
-------------
Total minimum lease payments................... $ 5,334,000
=============
Total rent expense under operating leases amounted to $3.1 million,
$2.2 million and $1.1 million for the years ended December 31, 2000, 1999 and
1998, respectively.
The operations of the Partnership are subject to Federal, state and
local laws and regulations in the United States and the United Kingdom 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. The Partnership has recorded an
undiscounted reserve for environmental claims in the amount of $8.0 million at
December 31, 2000, including $7.3 million related to acquisitions of pipelines
and terminals. During 2000 and 1999, respectively, the Partnership incurred $2.3
million and $0.9 million of costs related to such acquisition reserves and
reduced the liability accordingly.
KPL has indemnified the Partnership against liabilities for damage to
the environment resulting from operations of the pipeline prior to October 3,
1989 (the 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 December 1995, the Partnership acquired the liquids terminaling
assets of Steuart Petroleum Company and certain of its affiliates. 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 ending in December 2002. No amount was payable under the earn-out
provision in 1998, 1999 or 2000.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac
Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a
partnership of which ST is general partner. PEPCO has reported that, through
December 2000, it incurred approximately $66 million in clean-up costs and
expects to incur total cleanup costs of $70 million to $75 million. Since May
2000, ST has participated provisionally in a minority share of the cleanup
expense, which has been funded by ST's insurance carriers. KPP cannot predict
the amount, if any, that ultimately may be determined to be ST's share of the
remediation expense, but it believes that such amount will be covered by
insurance and will not materially affect KPP's financial condition.
As a result of the rupture, purported class actions have been filed in
federal and state court in Maryland by property and/or business owners alleging
damages in unspecified amounts against PEPCO and ST under various theories,
including the federal Oil Pollution Act. The court has ordered a consolidated
complaint to be filed in this action. ST's insurance carriers have assumed the
defense of these actions. While KPP cannot predict the amount, if any, of any
liability it may have in these suits, it believes that such amounts will be
covered by insurance and that these actions will not have a material adverse
effect on its financial condition.
PEPCO and ST have agreed with the State of Maryland to pay costs of
assessing natural resource damages under the federal Oil Pollution Act, but they
cannot predict at this time the amount of any damages that may be claimed by
Maryland. KPL believes that both the assessment costs and such damages are
covered by insurance and will not materially affect KPP's financial condition.
The U.S. Department of Transportation has issued a Notice of Proposed
Violation to PEPCO and ST alleging violations over several years of pipeline
safety regulations and proposing a civil penalty of $674,000. ST and PEPCO
intend to contest the allegations of violations and the proposed penalty. The
ultimate amount of any penalty attributable to ST cannot be determined at this
time, but KPL believes that this matter will not have a material effect on KPP's
financial condition.
Certain subsidiaries of the Partnership were sued 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 in Massachusetts, was abandoned in 1976, when the
connecting terminal was sold to an unrelated entity.
Grace alleged 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 allegedly caused by the jet
fuel leaks. Grace sought a ruling that these subsidiaries are responsible for
all present and future remediation expenses for these leaks and that Grace has
no obligation to indemnify these subsidiaries for these expenses.
In the lawsuit, Grace also sought indemnification for expenses that it
has incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional expenses
that it expects to incur in the future. The consistent position of the
Partnership's subsidiaries is that they did not acquire the abandoned pipeline
as part of the 1993 ST transaction, and therefore did not assume any
responsibility for the environmental damage nor any liability to Grace for the
pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993 acquisition
agreement and that the pipeline was abandoned prior to 1978. On July 17, 2000,
the Judge entered final judgment in the case, which is now on appeal to the
Dallas Court of Appeals, that Grace take nothing from the subsidiaries on its
claims, including claims for future expenses. Although the Partnership's
subsidiaries have not incurred any expenses in connection with the remediation,
the court also ruled, in effect, that the subsidiaries would not be entitled to
an indemnification from Grace if any such expenses were incurred in the future.
However, the Judge let stand a prior summary judgment ruling that the pipeline
was an asset of the Partnership acquired as part of the 1993 ST transaction. The
Judge also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as required
by the State of Massachusetts, the Partnership's subsidiaries have filed an
appeal of the judgment finding that the Otis Pipeline was transferred to them
and the award of attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have also received and responded to
formal inquiries from the United States Government in connection with the
environmental damages allegedly resulting from the jet fuel leaks. 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 Government has made no claims against the Partnership or any other
person on account of this matter. The Partnership believes that if any such
claims were made, its subsidiaries would have substantial defenses to such
claims. Under Massachusetts law, the party responsible for remediation of a
facility is the last owner before the abandonment, which was a Grace company.
The Partnership does not believe that either the Grace litigation or any claims
that may be made by the Government will adversely affect its ability to make
cash distributions to its unitholders, but there can be no assurances in that
regard.
The 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 KPL.
KPL and Kaneb are entitled to reimbursement of all direct and indirect costs
related to the business activities of the Partnership. These costs, which
totaled $13.0 million, $11.9 million and $11.3 million for the years ended
December 31, 2000, 1999 and 1998, respectively, include compensation and
benefits paid to officers and employees of KPL and Kaneb, insurance premiums,
general and administrative costs, tax information and reporting costs, legal and
audit fees. Included in this amount is $11.0 million, $10.3 million and $9.3
million of compensation and benefits, paid to officers and employees of KPL for
the years ended December 31, 2000, 1999 and 1998, respectively, which represent
the actual amounts paid by KPL or Kaneb. In addition, the Partnership paid $.2
million during each of these respective years for an allocable portion of KPL's
overhead expenses. At December 31, 2000 and 1999, the Partnership owed KPL $1.9
million and $1.4 million, respectively, for these expenses which are due under
normal invoice terms.
8. 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 assets controlled by each reportable segment.
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
Business segment revenues:
Pipeline operations................................ $ 70,685,000 $ 67,607,000 $ 63,421,000
Terminaling operations............................. 85,547,000 90,421,000 62,391,000
---------------- --------------- --------------
$ 156,232,000 $ 158,028,000 $ 125,812,000
================ =============== ==============
Business segment profit:
Pipeline operations................................ $ 36,213,000 $ 35,836,000 $ 33,630,000
Terminaling operations............................. 22,232,000 28,577,000 21,573,000
---------------- --------------- --------------
Operating income................................ 58,445,000 64,413,000 55,203,000
Interest expense................................... (12,283,000) (13,390,000) (11,304,000)
Interest and other income ......................... 1,442,000 408,000 626,000
---------------- --------------- --------------
Income before minority interest and
income taxes.................................. $ 47,604,000 $ 51,431,000 $ 44,525,000
================ =============== ==============
Business segment assets:
Depreciation and amortization:
Pipeline operations............................. $ 5,180,000 $ 5,090,000 $ 4,619,000
Terminaling operations.......................... 11,073,000 9,953,000 7,529,000
---------------- --------------- --------------
$ 16,253,000 $ 15,043,000 $ 12,148,000
================ =============== ==============
Capital expenditures (excluding acquisitions):
Pipeline operations................................ $ 3,439,000 $ 3,547,000 $ 5,020,000
Terminaling operations............................. 6,044,000 11,021,000 4,381,000
---------------- --------------- --------------
$ 9,483,000 $ 14,568,000 $ 9,401,000
================ =============== ==============
December 31,
------------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
Total assets:
Pipeline operations................................ $ 102,656,000 $ 104,774,000 $ 103,966,000
Terminaling operations............................. 272,407,000 261,179,000 204,466,000
---------------- --------------- --------------
$ 375,063,000 $ 365,953,000 $ 308,432,000
================ =============== ==============
The following geographical area data includes revenues based on
location of the operating segment and net property and equipment based on
physical location.
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
Geographical area revenues:
United States...................................... $ 136,729,000 $ 136,197,000 $ 125,812,000
United Kingdom..................................... 19,503,000 21,831,000 -
---------------- --------------- --------------
$ 156,232,000 $ 158,028,000 $ 125,812,000
================ =============== ==============
Geographical area operating income:
United States...................................... $ 53,996,000 $ 58,539,000 $ 55,203,000
United Kingdom..................................... 4,449,000 5,874,000 -
---------------- ---------------- --------------
$ 58,445,000 $ 64,413,000 $ 55,203,000
================ =============== ==============
Geographical area net property and equipment:
United States...................................... $ 282,685,000 $ 275,178,000 $ 268,626,000
United Kingdom..................................... 38,670,000 41,705,000 -
---------------- --------------- --------------
$ 321,355,000 $ 316,883,000 $ 268,626,000
================ =============== ==============
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all debt as of December 31, 2000 and 1999
was approximately $174 million and $163 million, as compared to the carrying
value of $167 million and $156 million, respectively. 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.
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, 2000. No customer constituted 10 percent or more of consolidated
revenues in 2000, 1999 or 1998.
10. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 2000 and 1999 are summarized as
follows:
Quarter Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- --------------- --------------
2000:
Revenues..................... $ 36,680,000 $ 38,438,000 $ 41,051,000 $ 40,063,000
================ ================ =============== ==============
Operating income............. $ 12,922,000 $ 14,959,000 $ 17,466,000 $ 13,098,000
================ ================ =============== ==============
Net income................... $ 9,567,000 $ 11,882,000 $ 14,119,000 $ 10,626,000 (a)
================ ================ =============== ==============
Allocation of net income
per Unit................... $ .50 $ .63 $ .75 $ .55
================ ================ =============== ==============
1999:
Revenues..................... $ 36,845,000 $ 39,171,000 $ 41,573,000 $ 40,439,000
================ ================ =============== ==============
Operating income............. $ 15,144,000 $ 15,467,000 $ 17,451,000 $ 16,351,000
================ ================ =============== ==============
Net income................... $ 11,356,000 $ 11,413,000 $ 13,835,000 $ 12,832,000
================ ================ =============== ==============
Allocation of net income
per Unit................... $ .68 $ .69 $ .76 $ .68
================ ================ =============== ==============
(a) Includes approximately $1.9 million of accrued litigation costs.
INDEPENDENT AUDITORS' REPORT
To the Partners of
Kaneb Pipe Line Partners, L.P.
We have audited the consolidated financial statements of Kaneb Pipe Line
Partners, L.P. and its subsidiaries (the "Partnership") as listed in the index
appearing under Item 14(a)(1) on page 29. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Partnership and
its subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Dallas, Texas
March 2, 2001
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 16, 2001
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
EDWARD D. DOHERTY Chairman of the Board March 16, 2001
and Chief Executive Officer
Principal Accounting Officer
JIMMY L. HARRISON Executive Vice President March 16, 2001
and Controller
Directors
SANGWOO AHN Director March 16, 2001
JOHN R. BARNES Director March 16, 2001
M.R. BILES Director March 16, 2001
FRANK M. BURKE, JR. Director March 16, 2001
CHARLES R. COX Director March 16, 2001
HANS KESSLER Director March 16, 2001
JAMES R. WHATLEY Director March 16, 2001
Exhibit Index
3.1 Amended and Restated Agreement of Limited Partnership dated September
27, 1989, as revised July 23, 1998.
10.7 Revolving Credit Agreement, dated as of December 28, 2000 among Kaneb
Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners, L.P.,
The Lenders From Time To Time Party Hereto, and SunTrust Bank, as
Administrative Agent.
22 List of Subsidiaries.
23 Consent of KPMG LLP.