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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, 2002
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 001-16405
KANEB SERVICES LLC
(Exact name of registrant as specified in its charter)
DELAWARE 75-2931295
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principle executive offices, including zip code)
(972) 699-4062
(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Shares Outstanding at July 31, 2002
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No par value 11,313,317 shares
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KANEB SERVICES LLC AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
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Page No.
Part I. Financial Information
Item 1(a)(1). Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Six Months
Ended June 30, 2002 and 2001 1
Condensed Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
(a)(2). Financial Statement Schedules (Unaudited)
Schedule I - Kaneb Services LLC (Parent Company)
Condensed Financial Statements:
Statements of Income - Three and Six Months
Ended June 30, 2002 14
Balance Sheets - June 30, 2002 and December 31, 2001 15
Statements of Cash Flows - Six Months Ended June 30, 2002 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
-------------- ------------- ------------- --------------
Revenues:
Services $ 73,674 $ 52,952 $ 132,762 $ 101,021
Products 105,572 98,879 168,893 187,231
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Total revenues 179,246 151,831 301,655 288,252
-------------- ------------- ------------- --------------
Costs and expenses:
Cost of products sold 102,125 97,852 163,668 186,523
Operating costs 32,874 22,582 58,252 44,511
Depreciation and amortization 10,003 5,970 17,127 11,739
General and administrative 5,988 3,303 11,096 6,036
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Total costs and expenses 150,990 129,707 250,143 248,809
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Operating income 28,256 22,124 51,512 39,443
Interest and other income 132 3,392 223 4,107
Interest expense (7,935) (4,208) (13,466) (9,166)
-------------- ------------- ------------- --------------
Income before gain on issuance of units by KPP,
income taxes, interest of outside
non-controlling partners in KPP's
net income and extraordinary item 20,453 21,308 38,269 34,384
Gain on issuance of units by KPP 8,770 - 17,332 9,859
Income tax provision (1,001) 6,182 (1,440) 1,096
Interest of outside non-controlling
partners in KPP's net income (13,632) (15,273) (25,911) (25,367)
-------------- ------------- ------------- --------------
Income before extraordinary item 14,590 12,217 28,250 19,972
Extraordinary item - loss on extinguishment of debt
by KPP, net of income taxes and interest of
outside non-controlling partners in
KPP's net income (462) - (502) (859)
-------------- ------------- ------------- --------------
Net income $ 14,128 $ 12,217 $ 27,748 $ 19,113
============== ============= ============= ==============
Earnings per share:
Basic:
Before extraordinary item $ 1.27 $ 1.14 $ 2.47 $ 1.88
Extraordinary item (.04) - (.04) (.08)
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$ 1.23 $ 1.14 $ 2.43 $ 1.80
============== ============= ============= ==============
Diluted:
Before extraordinary item $ 1.24 $ 1.08 $ 2.40 $ 1.76
Extraordinary item (.04) - (.04) (.08)
-------------- ------------- ------------- --------------
$ 1.20 $ 1.08 $ 2.36 $ 1.68
============== ============= ============= ==============
See notes to consolidated financial statements.
1
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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June 30, December 31,
2002 2001
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 75,360 $ 10,004
Accounts receivable 51,032 32,890
Inventories 9,235 8,402
Prepaid expenses and other 11,295 3,378
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Total current assets 146,922 54,674
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Property and equipment 965,716 639,291
Less accumulated depreciation 174,915 157,895
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Net property and equipment 790,801 481,396
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Investments in affiliates 21,717 22,252
Excess of cost over fair value of net assets
of acquired business and other assets 16,360 13,445
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$ 975,800 $ 571,767
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,001 $ -
Accounts payable 21,422 15,152
Accrued expenses 41,898 18,753
Accrued distributions payable to shareholders 4,749 4,131
Accrued distributions payable to outside
non-controlling partners in KPP 14,224 11,392
Deferred terminaling fees 6,682 6,515
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Total current liabilities 97,976 55,943
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Long-term debt, less current portion 537,019 277,302
Long-term payables and other liabilities 30,671 36,371
Interest of outside non-controlling partners in KPP 257,193 168,219
Commitments and contingencies
Shareholders' equity 52,941 33,932
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$ 975,800 $ 571,767
============= ==============
See notes to consolidated financial statements.
2
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Six Months Ended
June 30,
----------------------------------------
2002 2001
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Operating activities:
Net income $ 27,748 $ 19,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,127 11,739
Equity in earnings of affiliates, net of distributions 375 1,639
Interest of outside non-controlling partners
in KPP's net income 25,911 25,367
Gain on issuance of units by KPP (17,332) (9,859)
Deferred income taxes 1,196 (1,766)
Extraordinary item 502 859
Changes in working capital components (16,645) 11,499
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Net cash provided by operating activities 38,882 58,591
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Investing activities:
Acquisitions by KPP, net of cash acquired (181,682) (106,810)
Capital expenditures (14,222) (6,203)
Proceeds from sale of assets - 2,807
Other 1,025 31
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Net cash used in investing activities (194,879) (110,175)
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Financing activities:
Issuance of debt 509,535 257,500
Payments on debt (353,759) (161,489)
Distributions to shareholders (8,853) -
Distributions to outside non-controlling
partners in KPP (24,379) (21,265)
Issuance of common shares 527 -
Net of proceeds from issuance of units by KPP 108,790 -
Changes in long-term payables and other liabilities (10,508) (4,897)
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Net cash provided by financing activities 221,353 69,849
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Increase in cash and cash equivalents 65,356 18,265
Cash and cash equivalents at beginning of period 10,004 6,394
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Cash and cash equivalents at end of period $ 75,360 $ 24,659
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Supplemental cash flow information:
Cash paid for interest $ 8,911 $ 8,285
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Non-cash investing and financing activities-
Issuance of units for acquisition of terminals by KPP $ - $ 56,488
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See notes to consolidated financial statements.
3
KANEB SERVICES LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
On June 29, 2001, Xanser Corporation ("Xanser"), formerly Kaneb Services,
Inc., distributed its Pipeline, Terminaling and Product Marketing
businesses (the "Distribution") to its stockholders in the form of a
limited liability company, Kaneb Services LLC (the "Company"). The
consolidated financial statements reflect the results of operations of the
Company and its subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP").
The Company controls the operations of KPP through its 2% general partner
interest and 22% limited partner interest at June 30, 2002. All significant
intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements of the Company
for the three and six month periods ended June 30, 2002 and 2001, have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Significant accounting policies followed by the
Company are disclosed in the notes to the consolidated financial statements
for the year ended December 31, 2001 and are included in the Company's
Annual Report on From 10-K for the year ended December 31, 2001. In the
opinion of the Company's management, the accompanying condensed
consolidated financial statements contain the adjustments, consisting of
normal recurring accruals, necessary to present fairly the consolidated
financial position of the Company and its consolidated subsidiaries at June
30, 2002 and the consolidated results of their operations and cash flows
for the periods ended June 30, 2002 and 2001. Operating results for the
three and six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002.
2. ACQUISITIONS AND FINANCINGS BY KPP
In January 2001, KPP used proceeds from its $275 million revolving credit
agreement to repay in full its $128 million of mortgage notes. Under the
provisions of the mortgage notes, KPP incurred a $6.5 million prepayment
penalty which, net of income taxes and interest of outside non-controlling
partners in KPP's net income, was recognized as an extraordinary expense in
the first quarter of 2001.
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired Shore
Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (valued at $56.5 million on the date of agreement and its
announcement). Financing for the cash portion of the purchase price was
supplied under KPP's revolving credit agreement. The acquisition was
accounted for using the purchase method of accounting. As a result of KPP
issuing additional units to unrelated parties, the Company's share of net
assets of KPP increased by $9.9 million. Accordingly, the Company
recognized a $9.9 million gain, before deferred income taxes of $3.8
million, in the first quarter of 2001.
In January of 2002, KPP 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 KPP's revolving credit agreement. As a
result of KPP issuing additional units to unrelated parties, the Company's
share of net assets of KPP increased by $8.6 million. Accordingly, the
Company recognized a $8.6 million gain in the first quarter of 2002.
In February 2002, Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), an
operating subsidiary of KPP, 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 KPP's revolving credit agreement and to
partially fund the acquisition of all of the liquids terminaling
subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, KPP 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 KPP's revolving credit agreement and proceeds from KPOP's
February 2002 public debt offering. Assuming the acquisition occurred on
January 1, 2001, unaudited pro forma revenues, net income, basic earnings
per share and diluted earnings per share would have been $326.3 million,
$27.5 million, $2.40 and $2.34, respectively, for the six months ended June
30, 2002. Unaudited pro forma revenues, net income, basic earnings per
share and diluted earnings per share would have been $205.7 million, $12.4
million, $1.16 and $1.09, respectively, for the three months ended June 30,
2001 and $392.3 million, $19.4 million, $1.83 and $1.71, respectively for
the six months ended June 30, 2001.
In connection with the acquisition of Statia, KPP is in the process of
finalizing and implementing a plan to integrate Statia's businesses with
KPP's existing operations. The plan, when finalized, is expected to provide
for the termination and relocation of certain administrative and operating
employees and activities. Costs associated with implementation, which will
be recorded in the final allocation of the Statia purchase price, will
include employee termination benefits, relocation costs and lease costs.
The plan is expected to be finalized and implemented by December 31, 2002.
On April 5, 2002, KPP redeemed all of Statia's 11.75% notes at 102.938% of
the principal amount, plus accrued interest. The redemption was funded by
KPP's revolving credit facility. Under the provisions of the 11.75% notes,
KPP incurred a $3.0 million prepayment penalty, of which $2.0 million, net
of interest of outside non-controlling partners in KPP's net income, was
recognized as an extraordinary expense in the second quarter of 2002.
In May of 2002, KPP 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. The offering proceeds are expected to be used to
reduce the amount of indebtedness outstanding under KPP's revolving credit
agreement upon maturity of the interest rate periods currently selected. As
a result of KPP issuing additional units to unrelated parties, the
Company's share of net assets of KPP increased by $8.8 million.
Accordingly, the Company recognized a $8.8 million gain in the second
quarter of 2002.
3. COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 2002 and
2001 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
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(in thousands)
Net income $ 14,128 $ 12,217 $ 27,748 $ 19,113
Foreign currency translation
adjustment 283 (104) 205 (235)
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Comprehensive income $ 14,411 $ 12,113 $ 27,953 $ 18,878
================ ============= ============= ==============
4. CASH DISTRIBUTIONS
The Company expects to make quarterly distributions of 100% of its
available cash, as defined in its limited liability company agreement, to
common shareholders of record on the applicable record date, within 45 days
after the end of each quarter. Available cash consists generally of all of
the cash receipts of the Company, plus the beginning cash balance less all
of its cash disbursements and reserves. Excess cash flow from the Company's
Product Marketing Operations is being used to reduce working capital
borrowings. A cash distribution of $0.4125 per share for the first quarter
of 2002 was paid on May 15, 2002 and a cash distribution of $0.4125 per
share for the second quarter of 2002 was declared to holders of record on
July 31, 2002 and will be paid on August 14, 2002.
5. EARNINGS PER SHARE
Earnings per share for the three and six month periods ended June 30, 2002,
has been calculated using the Company's basic and diluted weighted average
shares outstanding for the period. For the three and six month periods
ended June 30, 2001, the basic weighted average shares were calculated by
adjusting Xanser's historical basic weighted average shares outstanding for
the applicable period to reflect the number of the Company's shares that
would have been outstanding at the time assuming the distribution of one
Company common share for each three shares of Xanser common stock. The
diluted weighted average shares used for the six months ended June 30,
2001, reflect an estimate of the potential dilutive effect of common stock
equivalents, based on Xanser's dilutive effect of common stock equivalents.
For the three and six month periods ended June 30, 2002, basic and diluted
weighted average shares outstanding were 11,450,000 and 11,786,000, and
11,440,000 and 11,756,000, respectively. For the three and six month
periods ended June 30, 2001, basic and diluted weighted average shares
outstanding were 10,691,000 and 11,354,000, and 10,637,000 and 11,343,000,
respectively.
6. COMMITMENTS AND CONTINGENCIES
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with Xanser whereby the Company is obligated to
pay Xanser an amount equal to certain expenses and tax liabilities incurred
by Xanser in connection with the Distribution. The distribution of the
Company's common shares is taxable to Xanser, which will recognize taxable
income to the extent of the excess of the value of the Company's common
shares distributed over the tax basis of the Company's assets in the hands
of Xanser. Xanser will use all of its available net operating loss
carryforwards to reduce that taxable income, but the total amount of
taxable income is expected to exceed such net operating loss carryforwards,
and the Distribution Agreement obligates the Company to pay Xanser amounts
calculated based on whatever tax is due on the net amount of income. The
Company cannot currently determine exactly what this amount will be and
what the tax will be. The Distribution Agreement also requires the Company
to pay Xanser an amount calculated based on any income tax liability of
Xanser that, in the sole judgement of Xanser, (i) is attributable to
increases in income tax from past years arising out of adjustments required
by Federal and state tax authorities, to the extent that such increases are
properly allocable to the businesses that became part of the Company, or
(ii) is attributable to the distribution of the Company's common shares and
the operations of the Company's businesses in the current year and the
preceding years. In the event of an examination of Xanser by Federal or
state tax authorities, Xanser will have unfettered control over the
examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that the Company has agreed to pay any additional
tax.
The operations of KPP 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 KPP 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 KPP. 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 KPP, could result in
substantial costs and liabilities to KPP.
Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace Energy Corporation ("Grace"), the entity from which KPP 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 not later than
1976, when the connecting terminal was sold to an unrelated entity. Grace
alleged that subsidiaries of KPP 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 KPP'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 KPP'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 KPP'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 KPP'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 KPP'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, KPP'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 nine 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 and the United States Coast Guard, pursuant to a
Federal Facilities Agreement, have been responding to the Government
remediation demand for most of the contamination problems at the MMR Site.
Grace and others have also received and responded to formal inquiries from
the United States Government in connection with the environmental damages
allegedly resulting from the jet fuel leaks. KPP'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 KPP'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 judgment by the Texas state court
that, in the view of the DOJ, 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. KPP 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 two occasions
since September 6, 2001 to discuss the Government's claims and to exchange
information related to such claims. ST Services and the Government have
also exchanged further correspondence related to the Government's 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 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 it believes that such amount will be covered by insurance and
therefore will not materially adversely affect KPP'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/or 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. Those electing not to participate in
the settlement include 23 plaintiffs in a lawsuit in Maryland state court
who allege damage to their property from the oil spill, as well as a small
number of other individuals who have not filed lawsuits and whose
intentions are currently unknown to ST Services. ST Services' insurance
carrier has assumed the defense of the sole continuing action 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 KPP cannot predict the amount, if any, of
any liability it may have in the continuing action or in other potential
suits relating to this matter, it believes that the current and potential
plaintiffs' claims will be covered by insurance and therefore these actions
will not have a material adverse effect on its financial condition.
PEPCO and ST Services have 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. ST Services' insurer has paid ST
Services' agreed 50 percent share of these assessment costs. The assessment
process is substantially complete and ST Services anticipates that the
federal government and the state of Maryland will conclude that a total of
approximately $2.7 million of compensable natural resource damages occurred
as a result of the oil spill. ST Services has no agreement at this time
with the federal government or the State of Maryland, nor with PEPCO,
concerning payment for natural resource damages or restoration of damaged
resources. KPP believes that both the assessment costs and such damages are
covered by insurance and therefore will not materially adversely affect
KPP's financial condition.
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, and ST
Services anticipates that the DOT will rule during the third quarter of
2002.
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
has been reached in principle 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 MDE.
Accordingly, KPP believes that this matter will not have a material adverse
effect on its financial condition.
The Company, primarily KPP, has other contingent liabilities resulting from
litigation, claims and commitments incident to the ordinary course of
business. Management believes, based on the advice of counsel, that the
ultimate resolution of such contingencies will not have a materially
adverse effect on the financial position or results of operations of the
Company.
7. BUSINESS SEGMENT DATA
The Company conducts business through three principal segments; the
"Pipeline Operations" of KPP, which consists primarily of the
transportation of refined petroleum products in the Midwestern states as a
common carrier, the "Terminaling Operations" of KPP, which provide storage
for petroleum products, specialty chemicals and other liquids, and the
"Product Marketing Operations," which provides wholesale motor fuel
marketing services throughout the Midwest and Rocky Mountain regions and,
since KPP's acquisition of Statia (see Note 2), delivers bunker fuels to
ships in the Caribbean and Nova Scotia, Canada and sells bulk petroleum
products to various commercial interests. General corporate includes
accounting, tax, finance, legal, investor relations and other corporate
expenses not related to the segments. General corporate assets include
cash, receivables from affiliates of the Company and other assets not
related to the segments.
The Company measures segment profit as operating income. Total assets are
those assets controlled by each reportable segment. Business segment data
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
(in thousands)
Business segment revenues:
Pipeline operations $ 19,322 $ 18,791 $ 36,948 $ 34,960
Terminaling operations 54,352 34,161 95,814 66,061
Product marketing operations 105,572 98,879 168,893 187,231
------------- -------------- ------------- --------------
$ 179,246 $ 151,831 $ 301,655 $ 288,252
============= ============== ============= ==============
Business segment profit:
Pipeline operations $ 9,483 $ 9,545 $ 17,934 $ 16,813
Terminaling operations 17,848 12,326 32,484 23,393
Product marketing operations 1,430 511 2,134 (264)
General corporate (505) (258) (1,040) (499)
------------- -------------- ------------- --------------
Operating income 28,256 22,124 51,512 39,443
Interest and other income 132 3,392 223 4,107
Interest expense (7,935) (4,208) (13,466) (9,166)
------------- -------------- ------------- --------------
Income before gain on issuance
of units by KPP, income taxes,
interest of outside non-
controlling partners in
KPP's net income and
extraordinary item $ 20,453 $ 21,308 $ 38,269 $ 34,384
============= ============== ============= ==============
June 30, December 31,
2002 2001
------------- --------------
(in thousands)
Total assets:
Pipeline operations $ 163,463 $ 105,156
Terminaling operations 764,394 443,215
Product marketing operations 39,129 19,313
General corporate 8,814 4,083
------------- --------------
$ 975,800 $ 571,767
============= ==============
8. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"), which eliminates the amortization for goodwill and other
intangible assets with indefinite lives. Under SFAS No. 142, intangible
assets with lives restricted by contractual, legal, or other means will
continue to be amortized over their useful lives. As of June 30, 2002, the
Company had no intangible assets subject to amortization under SFAS No.
142. Goodwill and other intangible assets not subject to amortization are
tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. SFAS No. 142
requires a two-step process for testing impairment. First, the fair value
of each reporting unit is compared to its carrying value to determine
whether an indication of impairment exists. If an impairment is indicated,
then the fair value of the reporting unit's goodwill is determined by
allocating the unit's fair value to its assets and liabilities (including
any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The amount of impairment for goodwill
is measured as the excess of its carrying value over its fair value. Based
on valuations and analysis performed by independent valuation consultants
and the Company in the second quarter of 2002, the Company determined that
the implied fair value of its goodwill exceeded carrying value, and
therefore, no impairment charge was necessary. Goodwill amortization
included in the results of operations of the Company for the three and six
months ended June 30, 2001 was not material.
Additionally, effective January 1, 2002, the Company adopted SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The adoption of SFAS No. 144, which superceded SFAS
No. 121, did not have a material impact on the consolidated financial
statements of the Company.
KANEB SERVICES LLC (PARENT COMPANY) Schedule I
CONDENSED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Six Months
Ended Ended
June 30, 2002 June 30, 2002
--------------------- --------------------
General and administrative expenses $ (460) $ (941)
Interest expense (178) (338)
Interest and other income 3 4
Equity in earnings of subsidiaries 14,763 29,023
------------- ------------
Net income $ 14,128 $ 27,748
============= ============
Earnings per share:
Basic $ 1.23 $ 2.43
============= ============
Diluted $ 1.20 $ 2.36
============= ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
16
KANEB SERVICES LLC (PARENT COMPANY) Schedule I
(Continued)
CONDENSED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,029 $ 1,369
Prepaid expenses and other 5,313 601
------------- -------------
Total current assets 7,342 1,970
------------- -------------
Investments in and advances to subsidiaries 81,628 62,358
Other assets 663 719
------------- -------------
$ 89,633 $ 65,047
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,920 $ 904
Accrued distributions payable to shareholders 4,749 4,131
------------- -------------
Total current liabilities 10,669 5,035
------------- -------------
Long-term debt 19,125 9,125
Long-term payables and other liabilities 6,898 16,955
Commitments and contingencies
Shareholders' equity 52,941 33,932
------------- -------------
$ 89,633 $ 65,047
============= =============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
17
KANEB SERVICES LLC (PARENT COMPANY) Schedule I
(Continued)
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
June 30, 2002
----------------
Operating activities:
Net income $ 27,748
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiaries, net of distributions (19,270)
Changes in current assets and liabilities 304
------------
Net cash provided by operating activities 8,782
------------
Investing activities:
Changes in other assets 56
------------
Net cash provided by investing activities 56
------------
Financing activities:
Issuance of debt 10,000
Issuance of common shares 527
Distributions to shareholders (8,853)
Changes in long-term payables and other liabilities (9,852)
------------
Net cash used in financing activities (8,178)
------------
Increase in cash and cash equivalents 660
Cash and cash equivalents at beginning of period 1,369
------------
Cash and cash equivalents at end of period $ 2,029
============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
18
KANEB SERVICES LLC AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Services LLC (the "Company") and notes
thereto included elsewhere in this report.
Operating Results:
Pipeline Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 19,322 $ 18,791 $ 36,948 $ 34,960
Operating costs 7,615 7,105 14,091 13,908
Depreciation and amortization 1,374 1,314 2,747 2,613
General and administrative 850 827 2,176 1,626
----------- ----------- ----------- -----------
Operating income $ 9,483 $ 9,545 $ 17,934 $ 16,813
=========== =========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three and six month periods ended
June 30, 2002, revenues increased by 3% and 6%, respectively, compared to
the same 2001 periods, due to increases in short-haul volumes shipped and
increases in tarrif rates. Barrel miles totaled 4.6 billion and 4.8 billion
for the three months ended June 30, 2002 and 2001, respectively, and 8.8
billion and 8.9 billion for the six months ended June 30, 2002 and 2001,
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 $0.5 million and $0.2
million for the three and six month periods ended June 30, 2002,
respectively, when compared to 2001, due primarily to second quarter 2002
expenditures for routine repairs and maintenance. General and
administrative costs, which include managerial, accounting, and
administrative personnel costs, office rental and expense, legal and
professional costs and other non-operating costs, remained relatively flat
for the three month period ended June 30, 2002, and increased by $0.6
million for the six months ended June 30, 2002, due to first quarter 2002
increases in professional services and personnel related costs.
Terminaling Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 54,352 $ 34,161 $ 95,814 $ 66,061
Operating costs 24,070 15,177 42,388 30,029
Depreciation and amortization 8,412 4,637 14,085 9,089
General and administrative 4,022 2,021 6,857 3,550
----------- ----------- ----------- -----------
Operating income $ 17,848 $ 12,326 $ 32,484 $ 23,393
=========== =========== =========== ===========
Terminaling revenues increased by $20.2 million and $29.8 million,
respectively, for the three and six month periods ended June 30, 2002,
compared to the same 2001 periods due to the Statia acquisition and overall
increases in utilization at existing locations. Average annual tankage
utilized for the three and six month periods ended June 30, 2002 increased
to 49.1 million and 44.0 million barrels, up from 30.2 million and 30.1
million barrels for the comparable prior year periods. For the three and
six month periods ended June 30, 2002, average annualized revenues per
barrel of tankage utilized decreased to $4.44 and $4.39 per barrel,
compared to $4.54 and $4.42 per barrel for the same prior year period, due
to the storage of a larger proportionate volume of petroleum products,
which are historically at lower per barrel rates than specialty chemicals.
For the three and six month periods ended June 30, 2002, operating costs
increased by $8.9 million and $12.4 million, respectively, when compared to
the same 2001 periods, the result of the Statia acquisition and increases
in volumes stored. General and administrative costs for the three and six
month periods ended June 30, 2002, increased by $2.0 million and $3.3
million, when compared to the same 2001 periods due to the Statia
acquisition.
Product Marketing Operations
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands)
Revenues $ 105,572 $ 98,879 $ 168,893 $ 187,231
Cost of products sold 102,125 97,852 163,668 186,523
----------- ----------- ----------- -----------
Gross margin $ 3,447 $ 1,027 $ 5,225 $ 708
=========== =========== =========== ===========
Operating income (loss) $ 1,430 $ 511 $ 2,134 $ (264)
=========== =========== =========== ===========
For the three and six month periods ended June 30, 2002, revenues for the
product marketing business increased by $6.7 million, or 7%, and decreased
by $18.3 million, or 10%, respectively, when compared to the same 2001
periods. Included in revenues for the three and six month periods ended
June 30, 2002 is $27.0 million and $35.6 million, respectively, from the
product marketing business acquired with Statia on February 28, 2002 ("See
Liquidity and Capital Resources"). The increase in revenues for the three
months ended June 30, 2002 compared to the same 2001 period, was the result
of increases in sales volumes, a result of the Statia acquisition,
partially offset by a decrease in sales price. The decrease in revenues for
the six months ended June 30, 2002, was the result of sharply lower product
prices, partially offset by the sales volume increase. Total gallons sold
totaled 144 million and 94 million for the three months ended June 30, 2002
and 2001, respectively, and 245 million and 191 million for the six months
ended June 30, 2002 and 2001, respectively. For the six months ended June
30, 2002, the average price realized per gallon of product sold decreased
to $0.69, compared to $0.98 for the same period in 2001. Gross margin and
operating income increased by $2.4 million and $0.9 million for the three
months ended June 30, 2002, respectively, and $4.5 million and $2.4 million
for the six months ended June 30, 2002, respectively, when compared to the
same 2001 periods, due to the increase in volumes sold and favorable
product margins, partially offset by the decrease in sales price. Product
inventories are maintained at minimum levels to meet customers' needs;
however, market prices for petroleum products can fluctuate significantly
in short periods of time.
Interest and Other Income
In March of 2001, a wholly-owned subsidiary of KPP entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings. As the interest rate locks were
not designated as hedging instruments pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 133, increases or
decreases in the fair value of the contracts are included as a component of
interest and other income. On May 22, 2001, the contracts were settled
resulting in an aggregate gain of $3.8 million.
Interest Expense
For the three and six months ended June 30, 2002, interest expense
increased by $3.7 million and $4.3 million, respectively, when compared to
the same 2001 periods, due primarily to increases in KPP debt resulting
from the Statia acquisition (see "Liquidity and Capital Resources"),
partially offset by overall declines in variable interest rates.
Income Tax Provision
Tax expense reported in the consolidated financial statements for the three
and six month periods ended June 30, 2001 represents the tax expense of the
Company and its subsidiaries as if they had filed on a separate return
basis. As a result of the Distribution on June 29, 2001 (See "Note 1 to
Consolidated Financial Statements"), the Company no longer participates
with Xanser Corporation in filing a consolidated Federal income tax return.
Effective with the Distribution on June 29, 2001, the Company became a
pass-through entity with its income, for Federal and, generally, for state
purposes, taxed at the shareholder level instead of the Company paying such
taxes. As a result of the change in tax status of the Company, all deferred
income tax assets and liabilities relating to temporary differences (a net
$8.6 million deferred tax liability) were eliminated, resulting in a credit
to income tax expense in the second quarter of 2001.
Certain KPP terminaling operations are conducted through separate taxable
wholly-owned corporate subsidiaries. The income tax expense for these
subsidiaries, including those acquired from Statia, for the three months
ended June 30, 2002 and 2001 was $1.1 million and $0.1 million,
respectively. For the six months ended June 30, 2002 and 2001, income tax
expense for KPP's taxable subsidiaries was $1.6 million and $0.3 million,
respectively.
Liquidity and Capital Resources
During the first six months of 2002, the Company's working capital
requirements for its and KPP's operations and capital expenditures
(excluding acquisitions) were funded through the use of internally
generated funds.
Cash provided by operating activities, including the operations of KPP, was
$38.9 million and $58.6 million for the six months ended June 30, 2002 and
2001, respectively. The decrease in cash provided by operations for the six
months ended June 30, 2002, compared to the same 2001 period, was due to
normal changes in working capital components resulting from the timing of
cash receipts and disbursements. Consolidated capital expenditures
(excluding acquisitions) were $14.2 million for the six months ended June
30, 2002, compared to $6.2 million during the same 2001 period. KPP
anticipates that routine maintenance capital expenditures will total
approximately $20 million to $25 million (excluding acquisitions) for the
year ending December 31, 2002.
In July of 2001, the Company entered into an agreement with a bank that
provides for a $50 million revolving credit facility through July 1, 2008.
The credit facility, which bears interest at variable rates, is secured by
4.6 million KPP limited partnership units and has a variable rate
commitment fee on unused amounts. At June 30, 2002, $19.1 million was drawn
on the credit facility, at an interest rate of 3.03%.
KPP has a credit agreement with a group of banks that provides for a $275
million unsecured revolving credit facility through December 2003. The
credit facility, which is without recourse to the Company, bears interest
at variable rates and has a variable commitment fee on unutilized amounts.
The credit facility contains financial and operational covenants, including
limitations on investments, sales of assets and transactions with
affiliates, and absent an event of default, those covenants do not restrict
distributions to the Company or the other partners. At June 30, 2002,
$243.0 million was drawn on the facility, at an interest rate of 3.12%.
In January 2001, KPP used proceeds from its $275 million revolving credit
agreement to repay in full its $128 million of mortgage notes. Under the
provisions of the mortgage notes, KPP incurred a $6.5 million prepayment
penalty which, net of income taxes and interest of outside non-controlling
partners in KPP's net income, was recognized as an extraordinary expense in
the first quarter of 2001.
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired Shore
Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (valued at $56.5 million on the date of agreement and its
announcement). Financing for the cash portion of the purchase price was
supplied under KPP's revolving credit agreement. The acquisition was
accounted for using the purchase method of accounting. As a result of KPP
issuing additional units to unrelated parties, the Company's share of net
assets of KPP increased by $9.9 million. Accordingly, the Company
recognized a $9.9 million gain, before deferred income taxes of $3.8
million, in the first quarter of 2001.
In January of 2002, KPP 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 KPP's revolving credit agreement. As a
result of KPP issuing additional units to unrelated parties, the Company's
share of net assets of KPP increased by $8.6 million. Accordingly, the
Company recognized a $8.6 million gain in the first quarter of 2002.
In February 2002, Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), an
operating subsidiary of KPP, 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 KPP's revolving credit agreement and to
partially fund the acquisition of all of the liquids terminaling
subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, KPP 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 KPP's revolving credit agreement and proceeds from KPOP's
February 2002 public debt offering.
On April 5, 2002, KPP redeemed all of Statia's 11.75% notes at 102.938% of
the principal amount, plus accrued interest. The redemption was funded by
KPP's revolving credit facility. Under the provisions of the 11.75% notes,
KPP incurred a $3.0 million prepayment penalty, of which $2.0 million, net
of interest of outside non-controlling partners in KPP's net income, was
recognized as an extraordinary expense in the second quarter of 2002.
In May of 2002, KPP 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. The offering proceeds are expected to be used to
reduce the amount of indebtedness outstanding under KPP's revolving credit
agreement upon maturity of the interest rate periods currently selected. As
a result of KPP issuing additional units to unrelated parties, the
Company's share of net assets of KPP increased by $8.8 million.
Accordingly, the Company recognized a $8.8 million gain in the second
quarter of 2002.
The Company expects to make quarterly distributions of 100% of its
available cash, as defined in its limited liability company agreement, to
common shareholders of record on the applicable record date, within 45 days
after the end of each quarter. Available cash consists generally of all of
the cash receipts of the Company, plus the beginning cash balance less all
of its cash disbursements and reserves. Excess cash flow from the Company's
Product Marketing Operations is being used to reduce working capital
borrowings. A cash distribution of $0.4125 per share for the first quarter
of 2002 was paid on May 15, 2002 and a cash distribution of $0.4125 per
share for the second quarter of 2002 was declared to holders of record on
July 31, 2002 and will be paid on August 14, 2002.
The Company expects to fund its future cash distributions with existing
cash and anticipated cash flows from operations. KPP expects to fund future
cash distributions and maintenance capital expenditures with existing cash
and anticipated cash flows from operations. Expansionary capital
expenditures of KPP are expected to be funded through additional KPP bank
borrowings and/or future KPP unit or debt offerings.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
Information regarding the Company's Critical Accounting Policies is
included in Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
Recent Accounting Pronouncements
The FASB has issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which establishes requirements for the removal-type costs
associated with asset retirements. The Company is currently assessing the
impact of SFAS No. 143, which must be adopted in the first quarter of 2003.
In April of 2002, the FASB issued SFAS No. 145, which, among other items,
affects the income statement classification of gains and losses from early
extinguishment of debt. Under SFAS No. 145, which must be adopted by the
first quarter of 2003, early extinguishment of debt is now considered a
risk management strategy, with resulting gains and losses no longer
classified an extraordinary item, unless the debt extinguishment meets
certain unusual in nature and infrequency of occurrence criteria, which is
expected to be rare. Upon adoption, companies must reclassify prior items
that do not meet the new extraordinary item classification criteria as a
component of operating income. Had the provisions of SFAS No. 145 been
applied at June 30, 2002, the extraordinary items (before interest of
outside non-controlling partners in KPP's net income and income taxes)
recorded for the three and six month periods ended June 30, 2002 and 2001,
respectively, would be reclassified as components of operating income.
Adoption of SFAS No. 145 will have no effect on the net income of the
Company.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities", which requires all restructurings
initiated after December 31, 2002 be recorded when they are incurred and
can be measured at fair value. The Company is currently assessing the
impact of SFAS No. 146, which must be adopted in the first quarter of 2003.
KANEB SERVICES LLC AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios. The Company's investment
portfolio consists of cash equivalents; accordingly, the carrying amounts
approximate fair value. The Company's investments are not material to its
financial position or performance. Assuming variable rate debt of $271 million
(including KPP's debt) at June 30, 2002, a one percent increase in interest
rates would increase annual net interest expense by approximately $2.7 million.
Part II - Other Information
Item 1. Legal Proceedings
The information contained in Note 6 of the Notes to Consolidated Financial
Statements included in this report is hereby incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.01 Amended and Restated Limited Liability Company Agreement of
Registrant, filed as Exhibit 3.1 to the exhibits to Registrant's
Form 10-Q, for the period ended June 30, 2001, which exhibit is
hereby incorporated by reference.
10.01 Distribution Agreement by and between the Registrant and Kaneb
Services, Inc., filed as Exhibit 10.1 to the exhibits to
Registrant's Form 10-Q, for the period ended June 30, 2001, which
exhibit is hereby incorporated by reference.
10.02 Administrative Services Agreement by and between the Registrant
and Kaneb Services, Inc., filed as Exhibit 10.2 to the exhibits
to Registrant's Form 10-Q, for the period ended June 30, 2001,
which exhibit is hereby incorporated by reference.
10.03 Rights Agreement by and between the Registrant and The Chase
Manhattan Bank, filed as Exhibit 10.3 to the exhibits to
Registrant's Form 10-Q, for the period ended June 30, 2001, which
exhibit is hereby incorporated by reference.
10.04 Employee Benefits Agreement by and between the Registrant and
Kaneb Services, Inc., filed as Exhibit 10.04 to the exhibits to
Registrant's Form 10/A, dated May 24, 2001, which exhibit is
hereby incorporated by reference.
10.05 ST Agreement and Plan of Merger dated December 21, 1992 by and
among Grace Energy Corporation, Support Terminal Services, Inc.,
Standard Transpipe Corp., and Kaneb Pipe Line Operating
Partnership, NSTS, Inc. and NSTI, Inc., as amended by Amendment
of STS Merger Agreement dated March 2, 1993, filed as Exhibit
10.1 of the exhibits to Kaneb Pipe Line Partners, L.P.'s Current
Report on Form 8-K, dated March 16, 1993, which exhibit is hereby
incorporated by reference.
10.06 Agreement for Sale and Purchase of Assets between Wyco Pipe Line
Company and Kaneb Pipe Line Operating Partnership, L.P., dated
February 19, 1995, filed as Exhibit 10.1 of the exhibits to the
Kaneb Pipe Line Partners, L.P.'s March 1995 Form 8-K, which
exhibit is hereby incorporated by reference.
10.07 Asset Purchase Agreements between and among Steuart Petroleum
Company, SPC Terminals, Inc., Piney Point Industries, Inc.,
Steuart Investment Company, Support Terminals Operating
Partnership, L.P. and Kaneb Pipe Line Operating Partnership,
L.P., as amended, dated August 27, 1995, filed as Exhibits 10.1,
10.2, 10.3, and 10.4 of the exhibits to Kaneb Pipe Line Partners,
L.P's Current Report on Form 8-K dated January 3, 1996, which
exhibits are hereby incorporated by reference.
10.08 Credit Agreement dated March 25, 1998 between Martin Oil
Corporation and Harris Trust & Savings Bank, filed as Exhibit
10.08 to the exhibits to Registrant's Form 10/A, dated May 1,
2001, which exhibit is hereby incorporated by reference.
10.09 First Amendment to Credit Agreement dated March 18, 1999 between
Martin Oil Corporation and Harris Trust & Savings Bank, filed as
Exhibit 10.09 to the exhibits to Registrant's Form 10/A, dated
May 1, 2001, which exhibit is hereby incorporated by reference.
10.10 Second Amendment to Credit Agreement dated February 11, 2000
between Martin Oil Corporation and Harris Trust & Savings Bank,
filed as Exhibit 10.10 to the exhibits to Registrant's Form 10/A,
dated May 1, 2001, which exhibit is hereby incorporated by
reference.
10.11 Formation and Purchase Agreement, by and among Support Terminal
Operating Partnership, L.P., Northville Industries Corp. and
AFFCO, Corp., dated October 30, 1998, filed as Exhibit 10.9 to
the Kaneb Pipe Line Partners, L.P.'s Form 10-K for the year ended
December 31, 1998, which exhibit is hereby incorporated by
reference.
10.12 Agreement, by and among, GATX Terminals Limited, ST Services
Ltd., ST Eastham, Ltd., GATX Terminals Corporation, Support
Terminals Operating Partnership, L.P. and Kaneb Pipe Line
Partners, L.P., dated January 26, 1999, filed as Exhibit 10.10 to
the Kaneb Pipe Line Partners, L.P.'s Form 10-K for the year ended
December 31, 1998, which exhibit is hereby incorporated by
reference.
10.13 Credit Agreement, by and among, Kaneb Pipe Line Operating
Partnership, L.P., ST Services, Ltd. and SunTrust Bank, Atlanta,
dated January 27, 1999, filed as Exhibit 10.11 to the Kaneb Pipe
Line Partners, L.P.'s Form 10-K for the year ended December 31,
1998, which exhibit is hereby incorporated by reference.
10.14 Revolving Credit Agreement, dated as of December 28, 2000 by and
among Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe
Line Partners, L.P., the Lenders party thereto, and SunTrust
Bank, as Administrative Agent, filed as Exhibit 10.11 to Kaneb
Pipe Line Partners, L.P.'s Form 10-K for the year ended December
31, 2000, which exhibit is hereby incorporated by reference.
10.15 Securities Purchase Agreement by and among Shore Terminals LLC,
Kaneb Pipe Line Partners, L.P. and the Sellers Named Therein,
dated as of September 22, 2000, Amendment No. 1 To Securities
Purchase Agreement, dated as of November 28, 2000 and
Registration Rights Agreement, dated as of January 3, 2001, filed
as Exhibits 10.1, 10.2 and 10.3 of the exhibits to Kaneb Pipe
Line Partners, L.P.'s Current Report on Form 8-K dated January 3,
2001, which exhibits are hereby incorporated by reference.
10.16 Kaneb Services LLC 401(k) Savings Plan, filed as Exhibit 10.16
to the exhibits to Registrant's Form 10/A, dated May 24, 2001,
which exhibit is hereby incorporated by reference.
10.17 Credit Agreement by and between the Registrant and Kaneb
Services, Inc., filed as Exhibit 10.5 to the exhibits to
Registrant's Form 10-Q, for the period ended June 30, 2001, which
exhibit is hereby incorporated by reference. This credit
commitment was permanently terminated effective December 10,
2001.
10.18 Loan Agreement by and between the Registrant, Kaneb Pipe Line
Company LLC and the Bank of Scotland, filed as Exhibit 10.6 to
the exhibits to Registrant's Form 10-Q, for the period ended June
30, 2001, which exhibit is hereby incorporated by reference.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed May 9, 2002.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB SERVICES LLC
(Registrant)
Date: August 13, 2002 //s//
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Howard C. Wadsworth
Vice President, Treasurer and Secretary
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 Services LLC (the
"Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2002, 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
Company.
Date: August 13, 2002.
//s//
---------------------------------------
John R. Barnes
President and Chief Executive Officer
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 Services LLC (the
"Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2002, 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
Company.
Date: August 13, 2002.
//s//
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)