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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 June 30, 2004
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 333-44634
KANEB PIPE LINE OPERATING
PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2287683
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
----- ------
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KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2004
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Six Months Ended
June 30, 2004 and 2003 1
Condensed Consolidated Balance Sheets - June 30, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2004 and 2003 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Revenues:
Services $ 94,058 $ 89,461 $ 184,756 $ 176,155
Products 59,900 57,487 115,615 111,550
-------------- ------------- ------------- --------------
Total revenues 153,958 146,948 300,371 287,705
-------------- ------------- ------------- --------------
Costs and expenses:
Cost of products sold 55,167 51,314 106,206 99,200
Operating costs 43,105 42,740 86,315 83,198
Depreciation and amortization 13,729 13,604 27,627 26,626
General and administrative 6,307 6,249 12,011 12,042
-------------- ------------- ------------- --------------
Total costs and expenses 118,308 113,907 232,159 221,066
-------------- ------------- ------------- --------------
Operating income 35,650 33,041 68,212 66,639
Interest and other income 35 1 40 89
Interest expense (10,512) (8,903) (20,948) (17,518)
-------------- ------------- ------------- --------------
Income before income taxes and cumulative
effect of change in accounting principle 25,173 24,139 47,304 49,210
Income tax expense (642) (1,310) (1,794) (2,739)
-------------- ------------- ------------- --------------
Income before cumulative effect of change
in accounting principle 24,531 22,829 45,510 46,471
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for asset retirement obligations - - - (1,593)
-------------- ------------- ------------- --------------
Net income $ 24,531 $ 22,829 $ 45,510 $ 44,878
============== ============= ============= ==============
See notes to consolidated financial statements.
1
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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June 30, December 31,
2004 2003
----------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39,596 $ 38,626
Accounts receivable 59,295 51,864
Inventories 14,167 9,324
Prepaid expenses and other 11,637 9,205
--------------- ---------------
Total current assets 124,695 109,019
--------------- ---------------
Property and equipment 1,385,315 1,360,319
Less accumulated depreciation 272,486 247,349
--------------- ---------------
Net property and equipment 1,112,829 1,112,970
--------------- ---------------
Investment in affiliates 25,953 25,456
Excess of cost over fair value of net assets of
acquired businesses and other assets 17,299 17,237
--------------- ---------------
$ 1,280,776 $ 1,264,682
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 38,572 $ 27,941
Accrued expenses 38,257 35,673
Accrued distributions payable 26,950 26,344
Accrued interest payable 8,403 9,297
Deferred terminaling fees 8,067 7,061
Payable to general partner 3,048 3,630
--------------- ---------------
Total current liabilities 123,297 109,946
--------------- ---------------
Long-term debt 629,887 617,696
Other liabilities and deferred taxes 43,996 43,451
Commitments and contingencies
Partners' capital 483,596 493,589
--------------- ---------------
$ 1,280,776 $ 1,264,682
=============== ===============
See notes to consolidated financial statements.
2
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Six Months Ended
June 30,
----------------------------------------
2004 2003
------------- --------------
Operating activities:
Net income $ 45,510 $ 44,878
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,627 26,626
Equity in earnings of affiliates, net of distributions (497) (343)
Deferred income taxes (230) 1,916
Gain on sale of assets (792) -
Cumulative effect of change in accounting principle - 1,593
Changes in working capital components (1,905) 148
------------- --------------
Net cash provided by operating activities 69,713 74,818
------------- --------------
Investing activities:
Capital expenditures (17,340) (22,512)
Acquisitions (12,478) -
Other (737) 154
------------- --------------
Net cash used in investing activities (30,555) (22,358)
------------- --------------
Financing activities:
Issuance of debt 14,500 286,377
Payments of debt - (382,831)
Distributions (52,688) (46,769)
Net proceeds from issuance of units by KPP - 109,056
------------- --------------
Net cash used in financing activities (38,188) (34,167)
------------- --------------
Increase in cash and cash equivalents 970 18,293
Cash and cash equivalents at beginning of period 38,626 22,028
------------- --------------
Cash and cash equivalents at end of period $ 39,596 $ 40,321
============= ==============
Supplemental cash flow information - cash paid for interest $ 20,558 $ 14,269
============= ==============
See notes to consolidated financial statements.
3
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb Pipe
Line Operating Partnership, L.P. and its subsidiaries (the "Partnership")
for the three and six month periods ended June 30, 2004 and 2003, 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, 2003. 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 June 30, 2004, and the
consolidated results of their operations and cash flows for the periods
ended June 30, 2004 and 2003. Operating results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. Certain prior
year financial statement items have been reclassified to conform with the
2004 presentation.
2. FINANCINGS
In March of 2003, Kaneb Pipe Line Partners, L.P. ("KPP"), which holds a 99%
interest in 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 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 partners. At June 30, 2004, 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 June 30, 2004,
$68.7 million was outstanding under the 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
partners. At June 30, 2004, 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
Statement of Financial Accounting Standards ("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 six months ended June 30, 2004 and
2003, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Net income $ 24,531 $ 22,829 $ 45,510 $ 44,878
Foreign currency translation
adjustment (2,056) 4,129 (2,292) 6,949
Unamoritized loss on interest rate
hedging transaction (Note 2) 37 (1,789) 83 (1,789)
----------- ----------- ----------- -----------
Comprehensive income $ 22,512 $ 25,169 $ 43,301 $ 50,038
=========== =========== =========== ===========
Accumulated other comprehensive income aggregated $10.2 million and $12.4
million at June 30, 2004 and December 31, 2003, respectively.
4. CASH DISTRIBUTIONS
The Partnership makes regular cash distributions in accordance with its
partnership agreement within 45 days after the end of each quarter to
holders of limited partner and general partner interests. Aggregate cash
distributions of $52.7 million and $46.8 million were paid to limited
partner and general partner interests for the six month periods ended June
30, 2004 and 2003, respectively.
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 had 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 of 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. The Partnership does not believe this matter will have a
materially adverse effect on its financial condition, although there can be
no assurances as to the ultimate outcome.
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 costs of $70
million to $75 million. PEPCO probably will 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 Services 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 has been consummated and the fund, to which PEPCO
and ST Services contributed equal amounts, has been distributed.
Participating claimants' claims have been 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.
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 Services 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.
The U.S. Department of Transportation ("DOT") has 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. In June of
2004, the DOT issued a final order reducing the penalty to $256,250 jointly
against ST Services and PEPCO and $74,000 against ST Services. The DOT
granted ST Services' request to extend the time to file a motion to
reconsider the final order. ST Services has moved for reconsideration of
the order based on facts which were not previously available to the DOT and
ST Services.
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 has 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 things, 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 and response to the oil spill. Pursuant
to an agreement between ST Services and PEPCO, ST Services' suit was
dismissed, subject to refiling. ST Services has moved to dismiss PEPCO's
suit. ST Services is vigorously defending against PEPCO's claims and is
pursuing its own counterclaims for return of monies ST Services has
advanced to PEPCO for settlements and cleanup costs. The Partnership
believes that any costs or damages resulting from these lawsuits will be
covered by insurance and therefore will not materially adversely affect the
Partnership's financial condition. The amounts claimed by PEPCO, if
recovered, would trigger an excess insurance policy which has a $600,000
retention, but the Partnership does not believe that such retention, if
incurred, would 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, after consulting with counsel, that
the ultimate resolution of such contingencies will not have a materially
adverse effect on the financial position, results of operations or
liquidity 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Business segment revenues:
Pipeline operations $ 30,610 $ 29,350 $ 58,513 $ 57,358
Terminaling operations 63,448 60,111 126,243 118,797
Product sales operations 59,900 57,487 115,615 111,550
----------- ----------- ----------- -----------
$ 153,958 $ 146,948 $ 300,371 $ 287,705
=========== =========== =========== ===========
Business segment profit:
Pipeline operations $ 12,024 $ 12,220 $ 23,234 $ 24,197
Terminaling operations 20,876 17,795 39,360 35,835
Product sales operations 2,750 3,026 5,618 6,607
----------- ----------- ----------- -----------
Operating income 35,650 33,041 68,212 66,639
Interest and other income 35 1 40 89
Interest expense (10,512) (8,903) (20,948) (17,518)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of change in
accounting principle $ 25,173 $ 24,139 $ 47,304 $ 49,210
=========== =========== =========== ===========
June 30, December 31,
2004 2003
------------- ---------------
(in thousands)
Total assets:
Pipeline operations $ 351,553 $ 352,901
Terminaling operations 871,785 874,185
Product sales operations 57,438 37,596
------------- -------------
$ 1,280,776 $ 1,264,682
============= =============
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 $5.5 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. The Partnership did not record a
retirement obligation for certain of its pipeline and terminaling assets
because sufficient information is presently not available to estimate a
range of potential settlement dates for the obligation. In these cases, the
obligation will be initially recognized in the period in which sufficient
information exists to estimate the obligation. At June 30, 2004, the
Partnership had no assets which were legally restricted for purposes of
settling asset retirement obligations. The application of SFAS No. 143 did
not have a material impact on the results of operations of the Partnership
for the three and six months ended June 30, 2004 or 2003.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities (FIN 46R), primarily to clarify the required accounting
for interests in variable interest entities (VIEs). This standard replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003 to address certain situations in which a
company should include in its financial statements the assets, liabilities
and activities of another entity. For the Partnership, application of FIN
46R is required for interests in certain VIEs that are commonly referred to
as special-purpose entities, or SPEs, as of December 31, 2003, and for
interests in all other types of VIEs as of March 31, 2004. The application
of FIN 46R did not have a material impact on the consolidated financial
statements of the Partnership.
KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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This discussion should be read in conjunction with the condensed
consolidated financial statements of Kaneb Pipe Line Operating Partnership,
L.P. (the "Partnership") and notes thereto included elsewhere in this
report.
Overview
The Partnership, a limited partnership, is engaged in the refined petroleum
products and anhydrous ammonia pipeline business and the terminaling of
petroleum products and specialty liquids. Kaneb Pipe Line Partners, L.P.
("KPP"), a master limited partnership, holds a 99% interest as limited
partner in the Partnership. Kaneb Pipe Line Company LLC ("KPL"), now a
wholly owned subsidiary of Kaneb Services LLC ("KSL"), manages and controls
the operations of KPP through its general partner interest and an 18% (at
June 30, 2004) limited partner interest. KPL owns a 1% interest as general
partner of the Partnership and a 1% interest as general partner of KPP.
The Partnership's petroleum pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in
Kansas, Nebraska, Iowa, South Dakota, North Dakota, Colorado, Wyoming and
Minnesota. 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 Federal Energy Regulatory Commission (the
"FERC"), or in the case of intrastate shipments, with the relevant state
authority, to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for
transportation. The petroleum pipelines primarily transport gasoline,
diesel oil, fuel oil and propane. Substantially all of the petroleum
pipeline operations constitute common carrier operations that are subject
to federal or state tariff regulations. The Partnership also owns an
approximately 2,000-mile anhydrous ammonia pipeline system acquired from
Koch Pipeline Company, L.P. in November of 2002. The fertilizer pipeline
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 Partnership's petroleum pipeline business
depends on the level of demand for refined petroleum products in the
markets served by the pipelines and the ability and willingness of
refineries and marketers having access to the pipelines to supply such
demand by deliveries through the pipelines. The Partnership's pipeline
revenues are based on volumes shipped and the distance over which such
volumes are transported.
The Partnership's terminaling business is one of the largest independent
petroleum products and specialty liquids terminaling businesses in the
United States. In the United States, the Partnership operates 37 facilities
in 20 states. The Partnership also owns and operates six terminals located
in the United Kingdom, eight terminals in Australia and New Zealand, a
terminal on the Island of St. Eustatius, Netherlands Antilles, and a
terminal at Point Tupper, Nova Scotia, Canada. Independent terminal owners
generally compete on the basis of the location and versatility of the
terminals, service and price. 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 the safe storage of product at specified temperatures and
other conditions, as well as receipt and delivery from the terminal. The
ability to obtain attractive pricing is dependent largely on the quality,
versatility and reputation of the facility. Terminaling revenues are earned
based on fees for the storage and handling of products.
The Partnership's product sales business delivers bunker fuels to ships in
the Caribbean and Nova Scotia, Canada, and sells bulk petroleum products to
various commercial customers at those locations. In the bunkering business,
the Partnership competes with ports offering bunker fuels along the route
of the vessel. Vessel owners or charterers are charged berthing and other
fees for associated services such as pilotage, tug assistance, line
handling, launch service and emergency response services.
Consolidated Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 153,958 $ 146,948 $ 300,371 $ 287,705
=========== =========== =========== ===========
Operating Income $ 35,650 $ 33,041 $ 68,212 $ 66,639
=========== =========== =========== ===========
Income before cumulative effect of
change in accounting principle $ 24,531 $ 22,829 $ 45,510 $ 46,471
Cumulative effect of change in
accounting principle - - - (1,593)
----------- ----------- ----------- -----------
Net income $ 24,531 $ 22,829 $ 45,510 $ 44,828
=========== =========== =========== ===========
Capital expenditures, excluding
acquisitions $ 9,993 $ 10,778 $ 17,340 $ 22,512
=========== =========== =========== ===========
For the three months ended June 30, 2004, revenues increased by $7.0
million, or 5%, when compared to the second quarter of 2003, due to a $3.3
million increase in terminaling business revenues, a $2.4 million increase
in product sales revenues and a $1.3 million increase in pipeline revenues.
Operating income for the three months ended June 30, 2004 increased by $2.6
million, or 8%, when compared to the same period in 2003, due to a $3.1
million increase in terminaling operating income, partially offset by a
$0.3 million decrease in product sales operating income and a $0.2 million
decrease in pipeline operating income. For the three months ended June 30,
2004, interest expense increased by $1.6 million, when compared to the same
period in 2003. Overall, net income for the three months ended June 30,
2004 increased by $1.7 million, or 7%, when compared to the three months
ended June 30, 2003.
For the six months ended June 30, 2004, revenues increased by $12.7
million, or 4%, when compared to the same 2003 period, due to a $7.4
million increase in terminaling business revenues, a $4.1 million increase
in product sales revenues and a $1.2 million increase in pipeline revenues.
Operating income for the six months ended June 30, 2004 increased by $1.6
million, or 2%, when compared to the same period in 2003, due to a $3.5
million increase in terminaling operating income, partially offset by a
$1.0 million decrease in product sales operating income and a $1.0 million
decrease in pipeline operating income. Interest expense for the six months
ended June 30, 2004 increased by $3.4 million, when compared to the six
months ended June 30, 2003. Income before cumulative effect of change in
accounting principle for the six months ended June 30, 2004 decreased by
$1.0 million, or 2%, when compared to the first six months of 2003.
Overall, net income for the six months ended June 30, 2004 increased by
$0.7 million, when compared to the six months ended June 30, 2003, which
included a charge of $1.6 million for the cumulative effect of change in
accounting principle-adoption of new accounting standard for asset
retirement obligations.
Pipeline Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 30,610 $ 29,350 $ 58,513 $ 57,358
Operating costs 13,180 12,066 24,667 23,307
Depreciation and amortization 3,624 3,511 7,223 7,008
General and administrative 1,782 1,553 3,389 2,846
----------- ----------- ----------- -----------
Operating income $ 12,024 $ 12,220 $ 23,234 $ 24,197
=========== =========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. Because tariff rates are regulated by the
FERC or the Surface Transportation Board, the pipelines compete primarily
on the basis of quality of service, including delivery of products at
convenient locations on a timely basis to meet the needs of their
customers. For the three and six month periods ended June 30, 2004,
revenues increased by $1.3 million and $1.2 million, respectively, when
compared to the same 2003 periods, due to increases in barrel miles of
petroleum products shipped, partially offset by a decrease in the volumes
shipped on the anhydrous ammonia pipeline. Barrel miles on petroleum
pipelines totaled 5.7 billion and 5.2 billion for the three months ended
June 30, 2004 and 2003, respectively, and 10.8 billion and 10.4 billion for
the six months ended June 30, 2004 and 2003, respectively. Total volumes
shipped on the anhydrous ammonia pipeline aggregated 279,000 and 284,000
tons for the three months ended June 30, 2004 and 2003, respectively, and
576,000 and 588,000 tons for the six months ended June 30, 2004 and 2003,
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 $1.1 million and $1.4
million, respectively, for the three and six month periods ended June 30,
2004, when compared to the same 2003 periods, due to unusually high
expenses relating to preventive and other maintenance and repairs,
including those required by government regulation, and increases in power
and fuel costs. For the three and six months ended June 30, 2004,
depreciation and amortization increased by $0.1 million and $0.2 million,
respectively, when compared to the same 2003 periods, due primarily to
routine maintenance capital expenditures. 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 $0.2 million and $0.5 million for the
three and six month periods ended June 30, 2004, respectively, when
compared to the same 2003 periods, due primarily to increases in
personnel-related costs.
Terminaling Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 63,448 $ 60,111 $ 126,243 $ 118,797
Operating costs 28,598 28,058 58,941 55,335
Depreciation and amortization 9,896 9,856 19,980 19,100
General and administrative 4,078 4,402 7,962 8,527
----------- ----------- ----------- -----------
Operating income $ 20,876 $ 17,795 $ 39,360 $ 35,835
=========== =========== =========== ===========
For the three and six month periods ended June 30, 2004, terminaling
revenues increased by $3.3 million, or 6%, and $7.4 million, or 6%,
respectively, when compared to the same 2003 periods, due to increases in
the average price realized per barrel of tankage utilized. Average tankage
utilized for the three and six month periods ended June 30, 2004 was 48.1
million and 48.1 million, respectively, compared to 47.9 million and 47.7
million, respectively, for the same prior year periods. For the three and
six month periods ended June 30, 2004, average annualized revenues per
barrel of tankage utilized increased to $5.31 per barrel and $5.28 per
barrel, respectively, compared to $5.04 per barrel and $5.02 per barrel,
respectively, for the same prior year periods, due primarily to favorable
market conditions domestically and in Australia and New Zealand.
For the three and six month periods ended June 30, 2004, operating costs
increased by $0.5 million and $3.6 million, respectively, when compared to
the same 2003 periods, a result of overall increases in planned terminal
maintenance. For the six months ended June 30, 2004, depreciation and
amortization increased by $0.9 million, when compared to the same 2003
period, due to expansion and routine maintenance capital expenditures.
General and administrative costs for the three and six month periods ended
June 30, 2004, decreased by $0.3 million and $0.6 million, respectively,
when compared to the same 2003 periods.
Product Sales
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 59,900 $ 57,487 $ 115,615 $ 111,550
Cost of products sold 55,167 51,314 106,206 99,200
----------- ----------- ----------- -----------
Gross margin $ 4,733 $ 6,173 $ 9,409 $ 12,350
=========== =========== =========== ===========
Operating income $ 2,750 $ 3,026 $ 5,618 $ 6,607
=========== =========== =========== ===========
For the three and six months ended June 30, 2004, product sales revenues
increased by $2.4 million and $4.1 million, respectively, when compared to
the same 2003 periods, due to a general increase in price, as well as an
overall increase in volumes sold. For the three and six months ended June
30, 2004, gross margin decreased by $1.4 million and $2.9 million,
respectively, when compared to the same 2003 periods, due to variations in
prices resulting from the timing of purchases and sales. Operating income
for the three and six months ended June 30, 2004 decreased by $0.3 million
and $1.0 million, respectively, when compared to the same 2003 periods, due
to a decrease in the per unit margin realized, partially offset by higher
volumes and overall lower operating costs. 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 months ended June 30, 2004, interest expense increased by
$1.6 million, when compared to the same 2003 period, due primarily to the
May 2003 refinancing of variable rate bank debt with $250 million of 5.875%
senior unsecured notes (see "Liquidity and Capital Resources").
For the six months ended June 30, 2004, interest expense increased by $3.4
million, when compared to the same 2003 period, due to the May 2003
refinancing of variable rate bank debt with $250 million of 5.875% senior
unsecured notes, partially offset by overall declines in debt levels
outstanding due to the March 2003 issuance of limited partnership units
(see "Liquidity and Capital Resources").
Income Taxes
Partnership operations are not subject to federal or state income taxes.
However, certain operations are conducted through separate taxable
wholly-owned U.S. and foreign corporate subsidiaries. The income tax
expense for these subsidiaries was $0.6 million and $1.3 million for the
three month periods ended June 30, 2004 and 2003, respectively, and $1.8
million and $2.7 million for the six months ended June 30, 2004 and 2003,
respectively.
On June 1, 1989, the governments of the Netherlands Antilles and St.
Eustatius approved a Free Zone and Profit Tax Agreement retroactive to
January 1, 1989, which expired on December 31, 2000. This agreement
requires a subsidiary of the Partnership, which was acquired on February
28, 2002, to pay a 2% rate on taxable income, as defined therein, or a
minimum payment of 500,000 Netherlands Antilles guilders ($0.3 million) per
year. The agreement further provides that any amounts paid in order to meet
the minimum annual payment will be available to offset future tax
liabilities under the agreement to the extent that the minimum annual
payment is greater than 2% of taxable income. The subsidiary is currently
engaged in discussions with representatives appointed by the Island
Territory of St. Eustatius regarding the renewal or modification of the
agreement, but the ultimate outcome cannot be predicted at this time. The
subsidiary has accrued amounts assuming a new agreement becomes effective,
and continues to make payments, as required, under the previous agreement.
Liquidity and Capital Resources
Cash provided by operations was $69.7 million and $74.8 million for the six
months ended June 30, 2004 and 2003, respectively. The decrease in
operating cash flows was due primarily to changes in working capital
components resulting from the timing of cash receipts and disbursements and
the overall decrease in net income before cumulative effect of change in
accounting principle, when compared to the same 2003 period.
Capital expenditures were $17.3 million for the six months ended June 30,
2004, compared to $22.5 million during the same 2003 period. Such
expenditures included $11.6 million and $12.1 million in maintenance and
environmental expenditures and $5.7 million and $10.4 million in expansion
expenditures for the six months ended June 30, 2004 and 2003, respectively.
The decrease in capital expenditures for the first six months of 2004, when
compared to the same 2003 period, is primarily the result of decreases in
planned maintenance and expansion capital expenditures related to the
terminaling business. 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 to be,
significant. The Partnership anticipates that capital expenditures
(including routine maintenance and expansion expenditures, but excluding
acquisitions) will total approximately $28 million to $32 million in 2004.
Future capital 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 regular cash distributions in accordance with its
partnership agreement within 45 days after the end of each quarter to
holders of limited partner and general partner interests. Aggregate cash
distributions of $52.7 million and $46.8 million were paid to limited
partner and general partner interests for the six month periods ended June
30, 2004 and 2003, respectively.
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 debt
offerings or KPP public equity offerings.
In March of 2003, KPP 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 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 partners. At June 30, 2004, 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 June 30, 2004,
$68.7 million was outstanding under the 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
partners. At June 30, 2004, 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
Statement of Financial Accounting Standards ("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.
The following is a schedule by period of the Partnership's debt repayment
obligations and material contractual commitments as of June 30, 2004:
Less than After
Total 1 year 1 -3 years 4 -5 years 5 years
---------- ---------- ---------- ----------- --------------
(in thousands)
Debt:
Revolving credit facility $ 68,669 $ - $ 68,669 $ - $ -
7.75% senior unsecured
notes 250,000 - - - 250,000
5.875% senior unsecured
notes 250,000 - - - 250,000
Other bank debt 61,218 - 61,218 - -
---------- ------------ ----------- ------------ --------------
Debt subtotal 629,887 - 129,887 - 500,000
---------- ------------ ----------- ------------ --------------
Contractual commitments:
Operating leases 23,647 8,399 13,916 1,332 -
---------- ------------ ----------- ------------ --------------
Contractual commitments
subtotal 23,647 8,399 13,916 1,332 -
---------- ------------ ----------- ------------ --------------
Total $ 653,534 $ 8,399 $ 143,803 $ 1,332 $ 500,000
========== ============ =========== ============ ==============
Additional information relative to sources and uses of cash is presented in
the consolidated financial statements included in this report.
Off-Balance Sheet Transactions
The Partnership was not a party to any off-balance sheet transactions at
June 30, 2004.
Critical Accounting Policies and Estimates
The preparation of the Partnership's financial statements in conformity
with accounting principles generally accepted in the United States of
America 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. Significant
accounting policies are included in the Notes to the Consolidated Financial
Statements of the Partnership's Annual Report on Form 10-K for the year
ended December 31, 2003.
Critical accounting policies are those that are most important to the
portrayal of the Partnership's financial position and results of
operations. These policies require management's most difficult, subjective
or complex judgments, often employing the use of estimates about the effect
of matters that are inherently uncertain. The Partnership's most critical
accounting policies pertain to impairment of property and equipment and
environmental costs.
The carrying value of property and equipment is periodically evaluated
using management's estimates of undiscounted future cash flows, or, in some
cases, third-party appraisals, as the basis for determining if impairment
exists under the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which was adopted effective January 1,
2002. To the extent that impairment is indicated to exist, an impairment
loss is recognized under SFAS No. 144 based on fair value. The application
of SFAS No. 144 did not have a material impact on the results of operations
of the Partnership for the three and six month periods ended June 30, 2004
and 2003. However, future evaluations of carrying value are dependent on
many factors, several of which are out of the Partnership's control,
including demand for refined petroleum products and terminaling services in
the Partnership's market areas, and local, state and federal governmental
regulations. To the extent that such factors or conditions change, it is
possible that future impairments might occur, which could have a material
effect on the results of operations of the Partnership.
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. The application of the Partnership's
environmental accounting policies did not have a material impact on the
results of operations of the Partnership for the three and six month
periods ended June 30, 2004 and 2003. 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 terminaling operations. Moreover, it is possible that other
developments, such as increasingly strict environmental laws, regulations
and enforcement policies thereunder, and legal claims for damages to
property or persons resulting from the operations of the Partnership could
result in substantial costs and liabilities, any of which could have a
material effect on the results of operations of the Partnership.
Recent Accounting Pronouncement
In December 2003, the Financial Accounting Standards Board ("FSAB") issued
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities (FIN 46R), primarily to clarify the required accounting
for interests in variable interest entities (VIEs). This standard replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003 to address certain situations in which a
company should include in its financial statements the assets, liabilities
and activities of another entity. For the Partnership, application of FIN
46R is required for interests in certain VIEs that are commonly referred to
as special-purpose entities, or SPEs, as of December 31, 2003, and for
interests in all other types of VIEs as of March 31, 2004. The application
of FIN 46R did not have a material impact on the consolidated financial
statements of the Partnership.
KANEB PIPE LINE OPERATING PARTNERSHIP, 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,
fluctuations of petroleum product prices on inventories held for resale, and
fluctuations in foreign currency.
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 $129.9 million at June 30, 2004, a one percent increase in
interest rates would increase annual net interest expense by approximately $1.3
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.
A portion of the terminaling business is exposed to fluctuations in foreign
currency exchange rates. Such fluctuations were not significant for the three
and six months ended June 30, 2004 or 2003.
Item 4. Controls and Procedures
Kaneb Pipe Line Company LLC's principal executive officer and principal
financial officer, after evaluating, as of June 30, 2004, 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.
During the quarter ended June 30, 2004, there have been no changes in the
Partnership's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the evaluation. As a result, no corrective actions
were required or undertaken.
KANEB PIPE LINE OPERATING PARTNERSHIP, 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, filed as Exhibit 3.1 to Registrant's Form
10-K for the year ended December 31, 2001, 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 August 9, 2004.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed April 22, 2004.
Current Report on Form 8-K, filed May 3, 2004.
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 OPERATING
PARTNERSHIP, L.P.
(Registrant)
By KANEB PIPE LINE COMPANY LLC
(General Partner)
Date: August 9, 2004 //s// HOWARD C. WADSWORTH
--------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Principal Financial Officer and
Duly Authorized Officer)
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward D. Doherty, Chief Executive Officer of Kaneb Pipe Line Company LLC, as
General Partner for Kaneb Pipe Line Operating Partnership, L.P. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Pipe Line
Operating Partnership, L.P.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: August 9, 2004
//s// EDWARD D. DOHERTY
-----------------------------------
Edward D. Doherty
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Kaneb Pipe Line Company LLC,
as General Partner for Kaneb Pipe Line Operating Partnership, L.P. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Pipe Line
Operating Partnership, L.P.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: August 9, 2004
//s// HOWARD C. WADSWORTH
-----------------------------------
Howard C. Wadsworth
Chief Financial Officer
Exhibit 32.1
CERTIFICATION 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 Operating Partnership, L.P. (the
"Partnership"), hereby certifies that, to his knowledge, the Partnership's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004,
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.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Pipe Line Operating
Partnership, L.P. and will be retained by Kaneb Pipe Line Operating Partnership,
L.P. and furnished to the Securities and Exchange Commission or its staff upon
request.
Date: August 9, 2004
//s// EDWARD D. DOHERTY
-----------------------------------
Edward D. Doherty
Chief Executive Officer
Exhibit 32.2
CERTIFICATION 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 Operating Partnership, L.P. (the
"Partnership"), hereby certifies that, to his knowledge, the Partnership's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004,
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.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Pipe Line Operating
Partnership, L.P. and will be retained by Kaneb Pipe Line Operating Partnership,
L.P. and furnished to the Securities and Exchange Commission or its staff upon
request.
Date: August 9, 2004
//s// HOWARD C. WADSWORTH
-----------------------------------
Howard C. Wadsworth
Chief Financial Officer