- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number 001-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2287571
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(972) 699-4062
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
----- ------
Number of Units of the Registrant outstanding at October 31, 2003: 28,317,590
- --------------------------------------------------------------------------------
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 2003 and 2002 1
Condensed Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Unit Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Revenues:
Services $ 89,539 $ 75,184 $ 265,694 $ 207,946
Products 50,865 28,120 162,415 63,702
-------------- ------------- ------------ --------------
Total revenues 140,404 103,304 428,109 271,648
-------------- ------------- ------------ --------------
Costs and expenses:
Cost of products sold 46,835 26,501 146,035 59,433
Operating costs 42,366 34,082 126,339 91,845
Depreciation and amortization 13,188 10,302 39,814 27,408
General and administrative 5,999 4,549 17,266 14,111
-------------- ------------- ------------- --------------
Total costs and expenses 108,388 75,434 329,454 192,797
-------------- ------------- ------------- --------------
Operating income 32,016 27,870 98,655 78,851
Interest and other income 43 233 132 414
Interest expense (10,660) (7,202) (28,178) (20,132)
Loss on debt extinguishment - - - (2,112)
-------------- ------------- ------------- --------------
Income before minority interest, income
taxes and cumulative effect of change
in accounting principle 21,399 20,901 70,609 57,021
Minority interest in net income (203) (195) (668) (540)
Income tax expense (1,076) (1,410) (3,815) (2,981)
-------------- ------------- ------------- --------------
Income before cumulative effect of change
in accounting principle 20,120 19,296 66,126 53,500
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for asset retirement obligations - - (1,577) -
-------------- ------------- ------------- --------------
Net income 20,120 19,296 64,549 53,500
General partner's interest in net income (2,275) (1,414) (6,174) (4,112)
-------------- ------------- ------------- --------------
Limited partners' interest in net income $ 17,845 $ 17,882 $ 58,375 $ 49,388
============== ============= ============= ==============
Allocation of net income per unit:
Before cumulative effect of change
in accounting principle $ .63 $ .77 $ 2.19 $ 2.22
Cumulative effect of change in
accounting principle - - (.06) -
-------------- ------------- ------------- --------------
$ .63 $ .77 $ 2.13 $ 2.22
============== ============= ============= ==============
Weighted average number of limited
partnership units outstanding 28,318 23,100 27,403 22,237
============== ============= ============= ==============
See notes to consolidated financial statements.
1
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 41,407 $ 22,028
Accounts receivable 51,104 48,926
Inventories 6,321 4,922
Prepaid expenses and other 8,599 8,498
------------- --------------
Total current assets 107,431 84,374
------------- --------------
Property and equipment 1,340,046 1,288,762
Less accumulated depreciation 233,487 196,570
------------- --------------
Net property and equipment 1,106,559 1,092,192
------------- --------------
Investment in affiliates 25,481 25,604
Excess of cost over fair value of net assets of
acquired businesses and other assets 17,469 13,240
------------- --------------
$ 1,256,940 $ 1,215,410
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 27,143 $ -
Accounts payable 21,117 22,064
Accrued expenses 45,321 32,937
Accrued distributions payable 26,344 21,639
Accrued interest payable 8,601 7,896
Accrued terminaling fees 6,735 6,246
Payable to general partner 5,145 5,403
------------- --------------
Total current liabilities 140,406 96,185
------------- --------------
Long-term debt, less current portion 579,882 694,330
Other liabilities and deferred taxes 40,113 31,581
Minority interest 1,027 1,030
Commitments and contingencies
Partners' capital 495,512 392,284
------------- --------------
$ 1,256,940 $ 1,215,410
============= ==============
See notes to consolidated financial statements.
2
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------------------------
2003 2002
------------- --------------
Operating activities:
Net income $ 64,549 $ 53,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,814 27,408
Minority interest in net income 668 540
Equity in earnings of affiliates, net of distributions 123 (1,331)
Deferred income taxes 2,361 2,323
Cumulative effect of change in accounting principle 1,577 -
Changes in working capital components 5,540 (13,710)
------------- --------------
Net cash provided by operating activities 114,632 68,730
------------- --------------
Investing activities:
Acquisitions, net of cash acquired (1,644) (225,406)
Capital expenditures (32,053) (21,929)
Other (2,242) (529)
------------- --------------
Net cash used in investing activities (35,939) (247,864)
------------- --------------
Financing activities:
Issuance of debt 286,360 496,087
Payment of debt (382,831) (351,647)
Distributions, including minority interest (71,899) (54,600)
Net proceeds from issuance of limited
partnership units 109,056 108,790
------------- --------------
Net cash provided by (used in) financing activities (59,314) 198,630
------------- --------------
Increase in cash and cash equivalents 19,379 19,496
Cash and cash equivalents at beginning of period 22,028 7,903
------------- --------------
Cash and cash equivalents at end of period $ 41,407 $ 27,399
============= ==============
Supplemental cash flow information:
Cash paid for interest $ 25,891 $ 20,143
============= ==============
See notes to consolidated financial statements.
3
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb Pipe
Line Partners, L.P. and its subsidiaries (the "Partnership") for the three
and nine month periods ended September 30, 2003 and 2002, have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Significant accounting policies followed by the
Partnership are disclosed in the notes to the consolidated financial
statements included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2002. In the opinion of the Partnership's
management, the accompanying condensed consolidated financial statements
contain all of the adjustments, consisting of normal recurring accruals,
necessary to present fairly the consolidated financial position of the
Partnership and its consolidated subsidiaries at September 30, 2003 and the
consolidated results of their operations and cash flows for the periods
ended September 30, 2003 and 2002. Operating results for the three and nine
months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
2. ACQUISITIONS AND FINANCINGS
In January of 2002, the Partnership issued 1,250,000 limited Partnership
units in a public offering at $41.65 per unit, generating approximately
$49.7 million in net proceeds. The proceeds were used to reduce the amount
of indebtedness outstanding under the Partnership's revolving credit
agreement.
In February of 2002, the Partnership issued $250 million of 7.75% senior
unsecured notes due February 15, 2012. The net proceeds from the public
offering, $248.2 million, were used to repay the Partnership's revolving
credit agreement and to partially fund the acquisition of all of the
liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
Under the note indenture, interest is payable semi-annually in arrears on
February 15 and August 15 of each year. The notes are redeemable, as a
whole or in part, at the option of the Partnership, at any time, at a
redemption price equal to the greater of 100% of the principal amount of
the notes, or the sum of the present value of the remaining scheduled
payments of principal and interest, discounted to the redemption date at
the applicable U.S. Treasury rate, as defined in the indenture, plus 30
basis points. The note indenture contains certain financial and operational
covenants, including certain limitations on investments, sales of assets
and transactions with affiliates and, absent an event of default, such
covenants do not restrict distributions to unitholders. At September 30,
2003, the Partnership was in compliance with all covenants.
On February 28, 2002, the Partnership acquired all of the liquids
terminaling subsidiaries of Statia Terminals Group NV ("Statia") for
approximately $178 million in cash (net of acquired cash). The acquired
Statia subsidiaries had approximately $107 million in outstanding debt,
including $101 million of 11.75% notes due in November 2003. The cash
portion of the purchase price was funded by the Partnership's revolving
credit agreement and proceeds from its February 2002 public debt offering.
In April of 2002, the Partnership redeemed all of Statia's 11.75% notes at
102.938% of the principal amount, plus accrued interest. The redemption was
funded by the Partnership's revolving credit facility. Assuming the
acquisition occurred on January 1, 2002, unaudited pro forma revenues, net
income and net income per unit would have been $296.3 million, $52.6
million and $2.16, respectively, for the nine months ended September 30,
2002.
In May of 2002, the Partnership issued 1,565,000 limited Partnership units
in a public offering at a price of $39.60 per unit, generating
approximately $59.1 million in net proceeds. A portion of the offering
proceeds was used to fund its September 2002 acquisition of the Australia
and New Zealand terminals.
On September 18, 2002, the Partnership acquired eight bulk liquid storage
terminals in Australia and New Zealand from Burns Philp & Co. Ltd. for
approximately $47 million in cash. The results of operations and cash flows
of the acquired business are included in the consolidated financial
statements of the Partnership since the date of acquisition.
On November 1, 2002, the Partnership acquired an approximately 2,000-mile
anhydrous ammonia pipeline system from Koch Pipeline Company, L.P. for
approximately $139 million in cash. This fertilizer pipeline system
originates in southern Louisiana, proceeds north through Arkansas and
Missouri, and then branches east into Illinois and Indiana and north and
west into Iowa and Nebraska. The acquisition was financed by bank debt. The
results of operations and cash flows of the acquired business are included
in the consolidated financial statements of the Partnership since the date
of acquisition. At September 30, 2003, the final valuation of the acquired
assets and liabilities had not been completed and, accordingly, the
Partnership has recorded a preliminary allocation of the purchase price
based on the estimated fair value. Based on the preliminary purchase price
allocation, no amounts are assigned to goodwill or to other intangible
assets.
In November of 2002, the Partnership issued 2,095,000 limited Partnership
units in a public offering at $33.36 per unit, generating approximately
$66.7 million in net proceeds. The offering proceeds were used to reduce
bank borrowings for the fertilizer pipeline acquisition.
On December 24, 2002, the Partnership acquired a 400-mile petroleum
products pipeline and four terminals in North Dakota and Minnesota from
Tesoro Refining and Marketing Company for approximately $100 million in
cash. The acquisition was funded with bank debt. The results of operations
and cash flows of the acquired business are included in the consolidated
financial statements of the Partnership since the date of acquisition. At
September 30, 2003, the final valuation of the acquired assets and
liabilities had not been completed and, accordingly, the Partnership has
recorded a preliminary allocation of the purchase price based on the
estimated fair value. Based on the preliminary purchase price allocation,
no amounts are assigned to goodwill or to other intangible assets.
In March of 2003, the Partnership issued 3,122,500 limited Partnership
units in a public offering at $36.54 per unit, generating approximately
$109.1 million in net proceeds. The proceeds were used to reduce the amount
of indebtedness under the Partnership's bridge facility.
In April of 2003, the Partnership entered into a new credit agreement with
a group of banks that provides for a $400 million unsecured revolving
credit facility through April of 2006. The credit facility, which provides
for an increase in the commitment up to an aggregate of $450 million by
mutual agreement between the Partnership and the banks, bears interest at
variable rates and has a variable commitment fee on unused amounts. The
credit facility contains certain financial and operating covenants,
including limitations on investments, sales of assets and transactions with
affiliates and, absent an event of default, does not restrict distributions
to unitholders. At September 30, 2003, the Partnership was in compliance
with all covenants. Initial borrowings on the credit agreement ($324.2
million) were used to repay all amounts outstanding under the Partnership's
$275 million credit agreement and $175 million bridge loan agreement. At
September 30, 2003, $49.2 million was outstanding under the new credit
agreement.
On May 19, 2003, the Partnership issued $250 million of 5.875% senior
unsecured notes due June 1, 2013. The net proceeds from the public
offering, $247.6 million, were used to reduce amounts due under the
revolving credit agreement. Under the note indenture, interest is payable
semi-annually in arrears on June 1 and December 1 of each year. The notes
are redeemable, as a whole or in part, at the option of the Partnership, at
any time, at a redemption price equal to the greater of 100% of the
principal amount of the notes, or the sum of the present value of the
remaining scheduled payments of principal and interest, discounted to the
redemption date at the applicable U.S. Treasury rate, as defined in the
indenture, plus 30 basis points. The note indenture contains certain
financial and operational covenants, including certain limitations on
investments, sales of assets and transactions with affiliates and, absent
an event of default, such covenants do not restrict distributions to
unitholders. At September 30, 2003, the Partnership was in compliance with
all covenants. In connection with the offering, on May 8, 2003, the
Partnership entered into a treasury lock contract for the purpose of
locking in the US Treasury interest rate component on $100 million of the
debt. The treasury lock contract, which qualified as a cash flow hedging
instrument under SFAS No. 133, was settled on May 19, 2003 with a cash
payment by the Partnership of $1.8 million. The settlement cost of the
contract has been recorded as a component of accumulated other
comprehensive income and is being amortized, as interest expense, over the
life of the debt.
3. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2003
and 2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Net income $ 20,120 $ 19,296 $ 64,549 $ 53,500
Foreign currency translation
adjustment 355 314 7,235 941
Interest rate hedging transactions 52 (5,198) (1,719) (5,198)
----------- ----------- ----------- -----------
Comprehensive income $ 20,527 $ 14,412 $ 70,065 $ 49,243
=========== =========== =========== ===========
Accumulated other comprehensive income aggregated $6.9 million and $1.4
million at September 30, 2003 and December 31, 2002, respectively.
4. CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its available
cash, as defined in the Partnership agreement, to holders of limited
Partnership units and the general partner. Available cash consists
generally of all the cash receipts of the Partnership, plus the beginning
cash balance, less all of its cash disbursements and reserves. The
Partnership expects to make distributions of all available cash within 45
days after the end of each quarter to unitholders of record on the
applicable record date. Cash distributions of $0.81 per unit with respect
to the first and second quarters of 2003 were paid on May 15, 2003 and
August 14, 2003, respectively. A cash distribution of $0.84 per unit with
respect to the third quarter of 2003 was declared to holders of record on
November 3, 2003 and will be paid on November 14, 2003.
5. CONTINGENCIES
The operations of the Partnership are subject to Federal, state and local
laws and regulations in the United States and various foreign locations
relating to protection of the environment. Although the Partnership
believes its operations are in general compliance with applicable
environmental regulations, risks of additional costs and liabilities are
inherent in pipeline and terminal operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the
Partnership. Moreover, it is possible that other developments, such as
increasingly stringent environmental laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, could result in
substantial costs and liabilities to the Partnership.
Certain subsidiaries of the Partnership 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 costs 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
(the "Otis pipeline" or the "pipeline"), ceased operations in 1973 and was
abandoned before 1978, 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 from the Texas court
that these subsidiaries are responsible for all liabilities, including all
present and future remediation expenses, associated with these leaks and
that Grace has no obligation to indemnify these subsidiaries for these
expenses. In the lawsuit, Grace also sought indemnification for expenses of
approximately $3.5 million that it incurred since 1996 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 has been that they did not acquire the
abandoned pipeline as part of the 1993 ST Services 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, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition agreement
by failing to disclose matters related to the pipeline, and (2) the
pipeline was abandoned before 1978 -- 15 years before the Partnership's
subsidiaries acquired ST Services. On August 30, 2000, the Judge entered
final judgment in the case that Grace take nothing from the subsidiaries on
its claims seeking recovery of remediation costs. 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 indemnification from Grace if any
such expenses were incurred in the future. Moreover, the Judge let stand a
prior summary judgment ruling that the pipeline was an asset acquired by
the Partnership's subsidiaries as part of the 1993 ST Services transaction
and that any liabilities associated with the pipeline would have become
liabilities of the subsidiaries. Based on that ruling, the Massachusetts
Department of Environmental Protection and Samson Hydrocarbons Company
(successor to Grace Petroleum Company) wrote letters to ST Services
alleging its responsibility for the remediation, and ST Services responded
denying any liability in connection with this matter. The Judge also
awarded attorney fees to Grace of more than $1.5 million. Both the
Partnership's subsidiaries and Grace have appealed the trial court's final
judgment to the Texas Court of Appeals in Dallas. In particular, the
subsidiaries have filed an appeal of the judgment finding that the Otis
pipeline and any liabilities associated with the pipeline were transferred
to them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an
automatic stay against actions against Grace. This automatic stay covers
the appeal of the Dallas litigation, and the Texas Court of Appeals has
issued an order staying all proceedings of the appeal because of the
bankruptcy. Once that stay is lifted, the Partnership's subsidiaries that
are party to the lawsuit intend to resume vigorous prosecution of the
appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA.
The MMR Site contains a number of groundwater contamination plumes, two of
which are allegedly associated with the Otis pipeline, and various other
waste management areas of concern, such as landfills. The United States
Department of Defense, pursuant to a Federal Facilities Agreement, has been
responding to the Government remediation demand for most of the
contamination problems at the MMR Site. Grace and others have also received
and responded to formal inquiries from the United States Government in
connection with the environmental damages allegedly resulting from the jet
fuel leaks. The Partnership's subsidiaries 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 Partnership's subsidiaries, the Government advised
the parties in April 1999 that it has identified two spill areas that it
believes to be related to the pipeline that is the subject of the Grace
suit. The Government at that time advised the parties that it believed it
had incurred costs of approximately $34 million, and expected 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.
By letter dated July 26, 2001, the United States Department of Justice
("DOJ") advised ST Services that the Government intends to seek
reimbursement from ST Services under the Massachusetts Oil and Hazardous
Material Release Prevention and Response Act and the Declaratory Judgment
Act for the Government's response costs at the two spill areas discussed
above. The DOJ relied in part on the Texas state court judgment which, in
the DOJ's view, held that ST Services was the current owner of the pipeline
and the successor-in-interest of the prior owner and operator. The
Government advised ST Services that it believes it has incurred costs
exceeding $40 million, and expects to incur future costs exceeding an
additional $22 million, for remediation of the two spill areas. The
Partnership believes that its subsidiaries have substantial defenses. ST
Services responded to the DOJ on September 6, 2001, contesting the
Government's positions and declining to reimburse any response costs. The
DOJ has not filed a lawsuit against ST Services seeking cost recovery for
its environmental investigation and response costs. Representatives of ST
Services have met with representatives of the Government on several
occasions since September 6, 2001 to discuss the Government's claims and to
exchange information related to such claims. Additional exchanges of
information are expected to occur in the future and additional meetings may
be held to discuss possible resolution of the Government's claims without
litigation.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
Power Company ("PEPCO") ruptured. Work performed with regard to the
pipeline was conducted by a partnership of which ST Services is general
partner. PEPCO has reported that it has incurred total cleanup-related
costs of $70 million to $75 million. PEPCO may continue to incur some
cleanup related costs for the foreseeable future, primarily in connection
with EPA requirements for monitoring the condition of some of the impacted
areas. Since May 2000, ST Services has provisionally contributed a minority
share of the cleanup expense, which has been funded by ST Services'
insurance carriers. ST Services and PEPCO have not, however, reached a
final agreement regarding ST Services' proportionate responsibility for
this cleanup effort, if any, and cannot predict the amount, if any, that
ultimately may be determined to be ST Services' share of the remediation
expense, but ST believes that such amount will be covered by insurance and
therefore will not materially adversely affect the Partnership's financial
condition.
As a result of the rupture, purported class actions were filed against
PEPCO and ST Services in federal and state court in Maryland by property
and business owners alleging damages in unspecified amounts under various
theories, including under the Oil Pollution Act ("OPA") and Maryland common
law. The federal court consolidated all of the federal cases in a case
styled as In re Swanson Creek Oil Spill Litigation. A settlement of the
consolidated class action, and a companion state-court class action, was
reached and approved by the federal judge. The settlement involved creation
and funding by PEPCO and ST Services of a $2,250,000 class settlement fund,
from which all participating claimants would be paid according to a
court-approved formula, as well as a court-approved payment to plaintiffs'
attorneys. The settlement was consummated in 2002 and the fund, to which
PEPCO and ST Services contributed equal amounts, has been distributed.
Participating claimants' claims were settled and dismissed with prejudice.
A number of class members elected not to participate in the settlement,
i.e., to "opt out," thereby preserving their claims against PEPCO and ST
Services. All non-participant claims have been settled for immaterial
amounts with ST Services' portion of such settlements provided by its
insurance carrier. ST Services' insurance carrier assumed the defense of
all of these actions and ST Services believes that the carrier would assume
the defense of any new litigation by a non-participant in the settlement,
should any such litigation be commenced. While the Partnership cannot
predict the amount, if any, of any liability it may have in other potential
suits relating to this matter, it believes that such potential plaintiffs'
claims would be covered by insurance and therefore these actions would not
have a material adverse effect on its financial condition.
PEPCO and ST Services agreed with the federal government and the State of
Maryland to pay costs of assessing natural resource damages arising from
the Swanson Creek oil spill under OPA and of selecting restoration
projects. This process was completed in mid-2002. ST Services' insurer has
paid ST Services' agreed 50 percent share of these assessment costs. In
late November 2002, PEPCO and ST Services entered into a Consent Decree
resolving the Federal and State trustees' claims for natural resource
damages. The decree required payments by ST Services and PEPCO of a total
of approximately $3 million to fund the restoration projects and for
remaining damage assessment costs. The federal court entered the Consent
Decree as a final judgment on December 31, 2002. PEPCO and ST have each
paid their 50% share and thus fully performed their payment obligations
under the Consent Decree. ST Services' insurance carrier funded ST
Services' payment.
In 2001 the U.S. Department of Transportation ("DOT") issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over
several years of pipeline safety regulations and proposing a civil penalty
of $647,000 jointly against the two companies. ST Services and PEPCO have
contested the DOT allegations and the proposed penalty. A hearing was held
before the Office of Pipeline Safety at the DOT in late 2001. ST Services
does not anticipate any further hearings on the subject and is still
awaiting the DOT's ruling.
By letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it intended to seek penalties
from ST Services in connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties against ST
Services and PEPCO totaling up to $12 million. A settlement of this claim
was reached in mid-2002 under which ST Services' insurer will pay a total
of slightly more than $1 million in installments over a five year period.
PEPCO also reached a settlement of these claims with the State of Maryland.
Accordingly, the Partnership believes that this matter will not have a
material adverse effect on its financial condition.
On December 13, 2002, ST Services sued PEPCO in the Superior Court,
District of Columbia, seeking, among other causes of action, a declaratory
judgment as to ST Services' legal obligations, if any, to reimburse PEPCO
for costs of the oil spill. On December 16, 2002, PEPCO sued ST Services in
the United States District Court for the District of Maryland, seeking
recovery of all its costs for remediation of the oil spill and other
alleged spill-related costs, which PEPCO alleges are in excess of $75
million. Pursuant to a court-approved stipulation between ST Services and
PEPCO, the District of Columbia action has been dismissed without
prejudice, such that the federal case in Maryland is the operative
litigation for resolution of the parties' liabilities to each other. ST
Services' insurer is paying for the cost of defending PEPCO's claims
against ST Services. The Partnership believes that any costs or damages
resulting from this lawsuit will be covered by insurance and therefore will
not materially adversely affect the Partnership's financial condition.
The Partnership has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management of the Partnership believes, based on the advice of counsel,
that the ultimate resolution of such other contingencies will not have a
materially adverse effect on the financial position or results of
operations of the Partnership.
6. BUSINESS SEGMENT DATA
The Partnership conducts business through three principal operations: the
"Pipeline Operations," which consists primarily of the transportation of
refined petroleum products and fertilizer in the Midwestern states as a
common carrier; the "Terminaling Operations," which provides storage for
petroleum products, specialty chemicals and other liquids; and the "Product
Sales Operations", which delivers bunker fuels to ships in the Caribbean
and Nova Scotia, Canada, and sells bulk petroleum products to various
commercial interests.
The Partnership measures segment profit as operating income. Total assets
are those controlled by each reportable segment. Business segment data is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Business segment revenues:
Pipeline operations $ 31,449 $ 20,998 $ 88,807 $ 57,946
Terminaling operations 58,090 54,186 176,887 150,000
Product sales operations 50,865 28,120 162,415 63,702
----------- ----------- ----------- -----------
$ 140,404 $ 103,304 $ 428,109 $ 271,648
=========== =========== =========== ===========
Business segment profit:
Pipeline operations $ 14,839 $ 9,487 $ 39,036 $ 27,421
Terminaling operations 15,732 18,478 51,567 50,962
Product sales operations 1,445 (95) 8,052 468
----------- ----------- ----------- -----------
Operating income 32,016 27,870 98,655 78,851
Interest and other income 43 233 132 414
Interest expense (10,660) (7,202) (28,178) (20,132)
Loss on debt extinguishment - - - (2,112)
----------- ----------- ----------- -----------
Income before minority interest,
income taxes and cumulative
effect of change in accounting
principle $ 21,399 $ 20,901 $ 70,609 $ 57,021
=========== =========== =========== ===========
September 30, December 31,
2003 2002
--------------- --------------
(in thousands)
Total assets:
Pipeline operations $ 357,480 $ 352,657
Terminaling operations 868,046 844,321
Product sales operations 31,414 18,432
------------- -------------
$ 1,256,940 $ 1,215,410
============= =============
7. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Partnership adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations", which establishes
requirements for the removal-type costs associated with asset retirements.
At the initial adoption date of SFAS No. 143, the Partnership recorded an
asset retirement obligation of approximately $5.7 million and recognized a
cumulative effect of change in accounting principle of $1.6 million for its
legal obligations to dismantle, dispose of, and restore certain leased
pipeline and terminaling facilities, including petroleum and chemical
storage tanks, terminaling facilities and barges. At September 30, 2003,
the Partnership had no assets which were legally restricted for purposes of
settling asset retirement obligations. The effect of SFAS No. 143, assuming
adoption on January 1, 2002, was not material to the results of operations
of the Partnership for the three and nine month periods ended September 30,
2003 and 2002, respectively.
Effective January 1, 2003, the Partnership adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", which
requires that all restructurings initiated after December 31, 2002 be
recorded when they are incurred and can be measured at fair value. The
initial adoption of SFAS No. 146 had no effect on the consolidated
financial statements of the Partnership.
The Partnership has adopted the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements of Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57, and 107, and a rescission of FASB
Interpretation No. 34." This interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under guarantees issued. The interpretation also
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
initial application of this interpretation had no effect on the
consolidated financial statements of the Partnership.
The Partnership has adopted the provisions of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51." This interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the interpretation.
The interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
interpretation requires certain disclosures in financial statements issued
after January 31, 2003. The initial application of this interpretation had
no effect on the consolidated financial statements of the Partnership.
The Partnership has adopted the provisions of SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which
amends and clarifies financial accounting and reporting for derivative
instruments and hedging activities. The adoption of SFAS No. 149, which was
effective for derivative contracts and hedging relationships entered into
or modified after June 30, 2003, had no impact on the Partnership's
consolidated financial statements.
On July 1, 2003, the Partnership adopted SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", which requires certain financial instruments, which were
previously accounted for as equity, to be classified as liabilities. The
adoption of SFAS No. 150 had no effect on the consolidated financial
statements of the Partnership.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
This discussion should be read in conjunction with the condensed
consolidated financial statements of Kaneb Pipe Line Partners, L.P. (the
"Partnership") and notes thereto included elsewhere in this report.
Operating Results:
Pipeline Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 31,449 $ 20,998 $ 88,807 $ 57,946
Operating costs 11,067 9,511 35,149 23,602
Depreciation and amortization 3,540 1,385 10,548 4,132
General and administrative 2,003 615 4,074 2,791
----------- ----------- ----------- -----------
Operating income $ 14,839 $ 9,487 $ 39,036 $ 27,421
=========== =========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three and nine month periods ended
September 30, 2003, revenues increased by $10.5 million, or 50%, and $30.9
million, or 53%, respectively, compared to the same 2002 periods, due
primarily to the November and December 2002 pipeline acquisitions (see
"Liquidity and Capital Resources"). Because tariff rates are regulated, the
pipelines compete primarily on the basis of quality of services, including
delivery of products at convenient locations on a timely basis to meet the
needs of its customers. Barrel miles on petroleum pipelines totaled 5.4
billion and 5.0 billion for the three months ended September 30, 2003 and
2002, respectively, and 15.8 billion and 13.7 billion for the nine months
ended September 30, 2003 and 2002, 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 and $11.5
million for the three and nine month periods ended September 30, 2003,
respectively, when compared to 2002, due to the pipeline acquisitions and
increases in planned maintenance. For the three and nine months ended
September 30, 2003, depreciation and amortization increased by $2.2 million
and $6.4 million, respectively, when compared to the same 2002 periods, due
primarily to the pipeline acquisitions. General and administrative costs,
which include managerial, accounting and administrative personnel costs,
office rent and expense, legal and professional costs and other
non-operating costs, increased by $1.4 million and $1.3 million for the
three and nine month periods ended September 30, 2003, when compared to the
same 2002 periods, due to the acquisitions, increases in personnel-related
costs and certain reclassifications from operating expense.
Terminaling Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 58,090 $ 54,186 $ 176,887 $ 150,000
Operating costs 29,338 23,445 84,673 65,833
Depreciation and amortization 9,433 8,728 28,533 22,813
General and administrative 3,587 3,535 12,114 10,392
----------- ----------- ----------- -----------
Operating income $ 15,732 $ 18,478 $ 51,567 $ 50,962
=========== =========== =========== ===========
For the three and nine month periods ended September 30, 2003, terminaling
revenues increased by $3.9 million, or 7%, and $26.9 million, or 18%,
respectively, when compared to the same 2002 periods, due to the 2002
terminal acquisitions (see "Liquidity and Capital Resources") and increases
in the average price realized per barrel of tankage utilized. Average
annual tankage utilized for the three and nine month periods ended
September 30, 2003 was 45.9 million and 47.1 million barrels, respectively,
compared to 47.8 million and 45.3 million barrels, respectively, for the
same prior year periods. For the three and nine month periods ended
September 30, 2003, average annualized revenues per barrel of tankage
utilized increased to $5.02 per barrel, compared to $4.50 and $4.43 per
barrel, respectively, for the same prior year periods, due primarily to
changes in product mix resulting from the terminal acquisitions.
For the three and nine month periods ended September 30, 2003, operating
costs increased by $5.9 million and $18.8 million, respectively, when
compared to the same 2002 periods, a result of the terminal acquisitions,
repair costs associated with hurricane Isabel and increases in planned
maintenance. For the three and nine months ended September 30, 2003,
depreciation and amortization increased by $0.7 million and $5.7 million,
respectively, when compared to the same 2002 periods, due also to the
terminal acquisitions. General and administrative costs for the three and
nine month periods ended September 30, 2003, increased by $0.1 million and
$1.7 million, respectively, when compared to the same 2002 period, a result
of the acquisitions and increases in personnel-related costs.
Product Sales Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 50,865 $ 28,120 $ 162,415 $ 63,702
Cost of products sold 46,835 26,501 146,035 59,433
----------- ----------- ----------- -----------
Gross margin $ 4,030 $ 1,619 $ 16,380 $ 4,269
=========== =========== =========== ===========
Operating income (loss) $ 1,445 $ (95) $ 8,052 $ 468
=========== =========== =========== ===========
The product sales business, which was acquired with Statia (see "Liquidity
and Capital Resources"), delivers bunker fuels to ships in the Caribbean
and Nova Scotia, Canada, and sells bulk petroleum products to various
commercial interests. For the three months ended September 30, 2003,
product sales revenues, gross margin and operating income increased by
$22.7 million, $2.4 million and $1.5 million, respectively, when compared
to the same 2002 period, due to increases in both sales price and volumes
sold. For the nine months ended September 30, 2003, product sales revenues,
gross margin and operating income increased $98.7 million, $12.1 million
and $7.6 million, respectively, when compared to the same 2002 period, also
a result of increases in sales price and volumes sold. The results of
operations for the comparable periods ended September 30, 2002 include the
operations of the product sales business since the date of acquisition,
February 28, 2002. Product inventories are maintained at minimum levels to
meet customer's needs; however, market prices for petroleum products can
fluctuate significantly in short periods of time.
Interest Expense
For the three and nine months ended September 30, 2003, interest expense
increased by $3.5 million and $8.0 million, respectively, compared to the
same 2002 periods, due to increases in fixed rate debt resulting from the
2002 pipeline and terminal acquisitions (see "Liquidity and Capital
Resources"), partially offset by overall declines in interest rates on
variable rate debt.
Income Taxes
Certain operations are conducted through separate taxable wholly-owned U.S.
and foreign corporate subsidiaries. The income tax expense for these
subsidiaries was $1.1 million and $1.4 million for the three months ended
September 30, 2003 and 2002, respectively, and $3.8 million and $3.0
million, for the nine months ended September 30, 2003 and 2002,
respectively.
Liquidity and Capital Resources
Cash provided by operations was $114.6 million and $68.7 million for the
nine months ended September 30, 2003 and 2002, respectively. The increase
in cash provided by operations for the nine months ended September 30,
2003, compared to the same 2002 period, was due primarily to the 2002
acquisitions and changes in working capital components resulting from the
timing of cash receipts and disbursements.
Capital expenditures, including routine maintenance and expansion
expenditures but excluding acquisitions, were $32.1 million for the nine
months ended September 30, 2003, compared to $21.9 million during the same
2002 period. The increase in capital expenditures for the nine months ended
September 30, 2003, when compared to the same 2002 period, is the result of
planned maintenance and expansion capital expenditures related to the
pipeline and terminaling operations acquired in 2002 and higher maintenance
capital expenditures in the existing pipeline and terminaling businesses.
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. The Partnership anticipates that capital expenditures
(including routine maintenance and expansion expenditures, but excluding
acquisitions) will total approximately $40 to $45 million in 2003. 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 government 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 will choose
to do so.
The Partnership makes quarterly distributions of 100% of its available
cash, as defined in the Partnership agreement, to holders of limited
Partnership units and the general partner. Available cash consists
generally of all the cash receipts of the Partnership, plus the beginning
cash balance, less all of its cash disbursements and reserves. The
Partnership expects to make distributions of all available cash within 45
days after the end of each quarter to unitholders of record on the
applicable record date. Cash distributions of $0.81 per unit with respect
to the first and second quarters of 2003 were paid on May 15, 2003 and
August 14, 2003, respectively. A cash distribution of $0.84 per unit with
respect to the third quarter of 2003 was declared to holders of record on
November 3, 2003 and will be paid on November 14, 2003.
The Partnership expects to fund future cash distributions and maintenance
capital expenditures with existing cash and anticipated cash flows from
operations. Expansionary capital expenditures are expected to be funded
through additional Partnership bank borrowings and/or future public equity
or debt offerings.
In January of 2002, the Partnership issued 1,250,000 limited Partnership
units in a public offering at $41.65 per unit, generating approximately
$49.7 million in net proceeds. The proceeds were used to reduce the amount
of indebtedness outstanding under the Partnership's revolving credit
agreement.
In February of 2002, the Partnership issued $250 million of 7.75% senior
unsecured notes due February 15, 2012. The net proceeds from the public
offering, $248.2 million, were used to repay the Partnership's revolving
credit agreement and to partially fund the acquisition of all of the
liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
Under the note indenture, interest is payable semi-annually in arrears on
February 15 and August 15 of each year. The notes are redeemable, as a
whole or in part, at the option of the Partnership, at any time, at a
redemption price equal to the greater of 100% of the principal amount of
the notes, or the sum of the present value of the remaining scheduled
payments of principal and interest, discounted to the redemption date at
the applicable U.S. Treasury rate, as defined in the indenture, plus 30
basis points. The note indenture contains certain financial and operational
covenants, including certain limitations on investments, sales of assets
and transactions with affiliates and, absent an event of default, such
covenants do not restrict distributions to unitholders. At September 30,
2003, the Partnership was in compliance with all covenants.
On February 28, 2002, the Partnership acquired Statia for approximately
$178 million in cash (net of acquired cash). The acquired Statia
subsidiaries had approximately $107 million in outstanding debt, including
$101 million of 11.75% notes due in November 2003. The cash portion of the
purchase price was funded by the Partnership's revolving credit agreement
and proceeds from its February 2002 public debt offering. In April of 2002,
the Partnership redeemed all of Statia's 11.75% notes at 102.938% of the
principal amount, plus accrued interest. The redemption was funded by the
Partnership's revolving credit facility.
In May of 2002, the Partnership issued 1,565,000 limited Partnership units
in a public offering at a price of $39.60 per unit, generating
approximately $59.1 million in net proceeds. A portion of the offering
proceeds was used to fund its September 2002 acquisition of the Australia
and New Zealand terminals.
On September 18, 2002, the Partnership acquired eight bulk liquid storage
terminals in Australia and New Zealand from Burns Philp & Co. Ltd. for
approximately $47 million in cash.
On November 1, 2002, the Partnership acquired an approximately 2,000-mile
anhydrous ammonia pipeline system from Koch Pipeline Company, L.P. for
approximately $139 million in cash. This fertilizer pipeline system
originates in southern Louisiana, proceeds north through Arkansas and
Missouri, and then branches east into Illinois and Indiana and north and
west into Iowa and Nebraska. The acquisition was financed by bank debt.
In November of 2002, the Partnership issued 2,095,000 limited Partnership
units in a public offering at $33.36 per unit, generating approximately
$66.7 million in net proceeds. The offering proceeds were used to reduce
bank borrowings for the fertilizer pipeline acquisition.
On December 24, 2002, the Partnership acquired a 400-mile petroleum
products pipeline and four terminals in North Dakota and Minnesota from
Tesoro Refining and Marketing Company for approximately $100 million in
cash. The acquisition was funded with bank debt.
In March of 2003, the Partnership issued 3,122,500 limited Partnership
units in a public offering at $36.54 per unit, generating approximately
$109.1 million in net proceeds. The proceeds were used to reduce the amount
of indebtedness under the Partnership's bridge facility.
In April of 2003, the Partnership entered into a new credit agreement with
a group of banks that provides for a $400 million unsecured revolving
credit facility through April of 2006. The credit facility, which provides
for an increase in the commitment up to an aggregate of $450 million by
mutual agreement between the Partnership and the banks, bears interest at
variable rates and has a variable commitment fee on unused amounts. The
credit facility contains certain financial and operating covenants,
including limitations on investments, sales of assets and transactions with
affiliates and, absent an event of default, does not restrict distributions
to unitholders. At September 30, 2003, the Partnership was in compliance
with all covenants. Initial borrowings on the credit agreement ($324.2
million) were used to repay all amounts outstanding under the Partnership's
$275 million credit agreement and $175 million bridge loan agreement. At
September 30, 2003, $49.2 million was outstanding under the new credit
agreement.
On May 19, 2003, the Partnership issued $250 million of 5.875% senior
unsecured notes due June 1, 2013. The net proceeds from the public
offering, $247.6 million, were used to reduce amounts due under the
revolving credit agreement. Under the note indenture, interest is payable
semi-annually in arrears on June 1 and December 1 of each year. The notes
are redeemable, as a whole or in part, at the option of the Partnership, at
any time, at a redemption price equal to the greater of 100% of the
principal amount of the notes, or the sum of the present value of the
remaining scheduled payments of principal and interest, discounted to the
redemption date at the applicable U.S. Treasury rate, as defined in the
indenture, plus 30 basis points. The note indenture contains certain
financial and operational covenants, including certain limitations on
investments, sales of assets and transactions with affiliates and, absent
an event of default, such covenants do not restrict distributions to
unitholders. At September 30, 2003, the Partnership was in compliance with
all covenants. In connection with the offering, on May 8, 2003, the
Partnership entered into a treasury lock contract for the purpose of
locking in the US Treasury interest rate component on $100 million of the
debt. The treasury lock contract, which qualified as a cash flow hedging
instrument under SFAS No. 133, was settled on May 19, 2003 with a cash
payment by the Partnership of $1.8 million. The settlement cost of the
contract has been recorded as a component of accumulated other
comprehensive income and is being amortized, as interest expense, over the
life of the debt.
Additional information relative to sources and uses of cash is presented in
the financial statements included in this report.
Information regarding the Partnership's Critical Accounting Policies is
included in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2002.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks pursuant to this Item (i.e., the risk of loss arising
from adverse changes in market rates and prices) to which the Partnership is
exposed are interest rates on the Partnership's debt and investment portfolios
and fluctuations of petroleum product prices on inventories held for resale.
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 $79.9 million at September 30, 2003, a one percent
increase in interest rates would increase annual net interest expense by
approximately $0.8 million.
The product sales business purchases refined petroleum products for resale as
bunker fuel and sales to commercial interests. Petroleum inventories are
generally held for short periods of time, not exceeding 90 days. As the
Partnership does not engage in derivative transactions to hedge the value of the
inventory, it is subject to market risk from changes in global oil markets.
Item 4. Controls and Procedures.
Kaneb Pipe Line Company LLC's principal executive officer and principal
financial officer, after evaluating as of September 30, 2003, the effectiveness
of the Partnership's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), have concluded
that, as of such date, the Partnership's disclosure controls and procedures are
adequate and effective to ensure that material information relating to the
Partnership and its consolidated subsidiaries would be made known to them by
others within those entities.
There have been no changes in the Partnership's internal controls or in other
factors known to management that could significantly affect those internal
controls subsequent to the date of the evaluation, nor were there any
significant deficiencies or material weaknesses in the Partnership's internal
controls. As a result, no corrective actions were required or undertaken.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Amended and Restated Agreement of Limited Partnership dated
September 27, 1989, as revised July 23, 1998, filed as Exhibit
3.1 to Registrant's Form 10-K for the year ended December 31,
2000, which exhibit is hereby incorporated by reference.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of November
13, 2003.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of November
13, 2003.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed August 1, 2003
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P.
(Registrant)
By KANEB PIPE LINE COMPANY LLC
(Managing General Partner)
Date: November 13, 2003 //s//
-------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Edward D. Doherty, Chief Executive Officer of Kaneb Pipe Line Company LLC, as
General Partner for Kaneb Pipe Line Partners, L.P. certify that:
1. I have reviewed this report on Form 10-Q of Kaneb Pipe Line Partners, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 13, 2003
//s//
-------------------------------------
Edward D. Doherty
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Howard C. Wadsworth, Chief Financial Officer of Kaneb Pipe Line Company LLC,
as General Partner for Kaneb Pipe Line Partners, L.P. certify that:
1. I have reviewed this report on Form 10-Q of Kaneb Pipe Line Partners, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 13, 2003
//s//
----------------------------------------
Howard C. Wadsworth
Chief Financial Officer
Exhibit 32.1
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Executive Officer of Kaneb Pipe Line Company
LLC, as General Partner of Kaneb Pipe Line Partners, L.P. (the "Partnership"),
hereby certifies that the Partnership's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Partnership.
Date: November 13, 2003
//s//
--------------------------------------------
Edward D. Doherty
Chief Executive Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Kaneb Pipe Line Partners, L.P. and
will be retained by Kaneb Pipe Line Partners, L.P. and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATE OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Financial Officer of Kaneb Pipe Line Company
LLC, as General Partner of Kaneb Pipe Line Partners, L.P. (the "Partnership"),
hereby certifies that the Partnership's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Partnership.
Date: November 13, 2003
//s//
--------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Kaneb Pipe Line Partners, L.P. and
will be retained by Kaneb Pipe Line Partners, L.P. and furnished to the
Securities and Exchange Commission or its staff upon request.