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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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number 001-16405
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 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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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 April 30, 2003
- ---------------------- --------------------------------
No par value 11,331,855 shares
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KANEB SERVICES LLC AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
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Page No.
Part I. Financial Information
Item 1 (a) (1). Financial Statements (Unaudited)
Consolidated Statements of Income - Three Months Ended
March 31, 2003 and 2002 1
Condensed Consolidated Balance Sheets - March 31, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2003 and 2002 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 Months Ended
March 31, 2003 and 2002 15
Balance Sheets - March 31, 2003 and December 31, 2002 16
Statements of Cash Flows - Three Months Ended
March 31, 2003 and 2002 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 25
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
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Three Months Ended
March 31,
----------------------------
2003 2002
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Revenues:
Services $ 86,694 $ 59,088
Products 131,775 63,321
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Total revenues 218,469 122,409
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Costs and expenses:
Cost of products sold 124,327 61,543
Operating costs 40,674 25,378
Depreciation and amortization 13,032 7,124
General and administrative 6,712 5,108
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Total costs and expenses 184,745 99,153
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Operating income 33,724 23,256
Interest and other income 109 91
Interest expense (8,844) (5,531)
Loss on debt extinguishment - (155)
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Income before gain on issuance of units by KPP, income taxes, interest of
outside non-controlling partners in KPP's net income
and cumulative effect of change in accounting principle 24,989 17,661
Gain on issuance of units by KPP 10,898 8,562
Income tax expense (1,429) (439)
Interest of outside non-controlling partners in KPP's net income (17,586) (12,164)
------------ -------------
Income before cumulative effect of change in accounting
principle 16,872 13,620
Cumulative effect of change in accounting principle - adoption
of new accounting standard for asset retirement obligations (313) -
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Net income $ 16,559 $ 13,620
============ =============
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle $ 1.47 $ 1.19
Cumulative effect of change in accounting principle (0.03) -
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$ 1.44 $ 1.19
=========== =============
Diluted:
Before cumulative effect of change in accounting principle $ 1.44 $ 1.16
Cumulative effect of change in accounting principle (0.03) -
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$ 1.41 $ 1.16
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See notes to consolidated financial statements.
1
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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March 31, December 31,
2003 2002
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 37,892 $ 24,477
Accounts receivable 65,290 61,835
Inventories 13,080 12,863
Prepaid expenses and other 11,978 10,658
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Total current assets 128,240 109,833
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Property and equipment 1,307,000 1,288,960
Less accumulated depreciation 209,706 196,684
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Net property and equipment 1,097,294 1,092,276
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Investment in affiliates 25,901 25,604
Excess of cost over fair value of net assets of
acquired business and other assets 16,132 16,388
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$ 1,267,567 $ 1,244,101
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 25,843 $ -
Accounts payable 34,529 32,629
Accrued expenses 35,698 38,076
Accrued interest payable 3,089 7,997
Accrued distributions payable to shareholders 5,039 4,734
Accrued distributions payable to outside non-controlling
partners in KPP 18,810 15,878
Deferred terminaling fees 6,693 6,246
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Total current liabilities 129,701 105,560
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Long-term debt 600,125 718,162
Other liabilities and deferred taxes 47,403 40,094
Interest of outside non-controlling partners in KPP 414,581 316,631
Commitments and contingencies
Shareholders' equity 75,757 63,654
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$ 1,267,567 $ 1,244,101
=============== ===============
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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Three Months Ended
March 31,
----------------------------
2003 2002
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Operating activities:
Net income $ 16,559 $ 13,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,032 7,124
Equity in earnings of affiliates, net of distributions (297) 10
Interest of outside non-controlling partners in
KPP's net income 17,586 12,164
Gain on issuance of units by KPP (10,898) (8,562)
Deferred income taxes 1,049 374
Cumulative effect of change in accounting principle 313 -
Changes in working capital components (4,745) (10,937)
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Net cash provided by operating activities 32,599 13,793
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Investing activities:
Acquisitions by KPP, net of cash acquired - (177,692)
Capital expenditures (11,738) (5,165)
Other 65 1,139
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Net cash used in investing activities (11,673) (181,718)
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Financing activities:
Issuance of debt 14,000 401,487
Payments on debt (105,707) (245,148)
Distributions to shareholders (4,756) (4,131)
Distributions to outside non-controlling
partners in KPP (15,878) (11,392)
Changes in long-term payables and other liabilities - (10,451)
Net proceeds from issuance of units by KPP 104,770 49,650
Other 60 387
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Net cash provided by (used in) financing activities (7,511) 180,402
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Increase in cash and cash equivalents 13,415 12,477
Cash and cash equivalents at beginning of period 24,477 10,004
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Cash and cash equivalents at end of period $ 37,892 $ 22,481
============ =============
Supplemental cash flow information:
Cash paid for interest $ 13,455 $ 2,430
============ =============
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
The consolidated financial statements reflect the results of operations of
Kaneb Services LLC (the "Company"), its wholly-owned subsidiaries and Kaneb
Pipe Line Partners, L.P. ("KPP"). The Company controls the operations of
KPP through its 2% general partner interest and 18% limited partner
interest at March 31, 2003. All significant intercompany transactions and
balances have been eliminated.
The unaudited condensed consolidated financial statements of the Company
for the three month periods ended March 31, 2003 and 2002, have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Significant accounting policies followed by the
Company are disclosed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. In the opinion of the Company'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 Company and its
consolidated subsidiaries at March 31, 2003 and the consolidated results of
their operations and cash flows for the periods ended March 31, 2003 and
2002. Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
In December of 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148, which amends SFAS
No. 123, provides for alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation and requires additional disclosures in annual and
interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on
financial results.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company applies APB Opinion 25 and related
interpretations in accounting for its share option plans and, accordingly,
does not recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS 123. The Black-Scholes option
pricing model has been used to estimate the fair value of share options
issued.
The following illustrates the effect on net income and basic and diluted
earnings per share if the fair value based method had been applied:
Three Months Ended
March 31,
---------------------------------
2003 2002
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(in thousands)
Reported net income $ 16,559 $ 13,620
Share-based employee compensation expense determined
under the fair value based method (12) (12)
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Pro forma net income $ 16,547 $ 13,608
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Earning per share:
Basic - as reported $ 1.44 $ 1.19
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Basic - pro forma $ 1.41 $ 1.16
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Diluted - as reported $ 1.41 $ 1.16
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Diluted - pro forma $ 1.38 $ 1.13
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2. ACQUISITIONS AND FINANCINGS
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.
On February 28, 2002, KPP acquired all of the liquids terminaling
subsidiaries of Statia Terminals Group NV ("Statia") for approximately $178
million in cash (net of acquired cash). The acquired Statia subsidiaries
had approximately $107 million in outstanding debt, including $101 million
of 11.75% notes due in November 2003. The cash portion of the purchase
price was funded by KPP's revolving credit agreement and proceeds from
KPP's February 2002 public debt offering. In April of 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. Assuming the acquisition occurred on January 1, 2002, unaudited
pro forma revenues, net income, basic earning per share and diluted
earnings per share would have been $147.1 million, $13.4 million, $1.17 and
$1.14, respectively, for the three months ended March 31, 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. A portion of the offering proceeds were used to
fund KPP's September 2002 acquisition of the Australia and New Zealand
terminals. 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.
On September 18, 2002, KPP acquired eight bulk liquid storage terminals in
Australia and New Zealand from Burns Philp & Co. Ltd. for approximately $47
million in cash. The results of operations and cash flows of the acquired
business are included in the consolidated financial statements of the
Company since the date of acquisition. At March 31, 2003, the final
valuation of the acquired assets and liabilities has not been completed
and, accordingly, the Company has recorded a preliminary allocation of the
purchase price based on the estimated fair value. Based on the preliminary
purchase price allocation, no amounts are assigned to goodwill or to other
intangible assets.
On November 1, 2002, KPP acquired an approximately 2,000-mile anhydrous
ammonia pipeline system from Koch Pipeline Company, L.P. for approximately
$139 million in cash. This fertilizer pipeline system originates in
southern Louisiana, proceeds north through Arkansas and Missouri, and then
branches east into Illinois and Indiana and north and west into Iowa and
Nebraska. The acquisition was financed by KPP bank debt. The results of
operations and cash flows of the acquired business are included in the
consolidated financial statements of the Company since the date of
acquisition. At March 31, 2003, the final valuation of the acquired assets
and liabilities has not been completed and, accordingly, the Company has
recorded a preliminary allocation of the purchase price based on the
estimated fair value. Based on the preliminary purchase price allocation,
no amounts are assigned to goodwill or to other intangible assets.
In November of 2002, KPP issued 2,095,000 limited partnership units in a
public offering at $33.36 per unit, generating approximately $66.7 million
in net proceeds. The offering proceeds were used to reduce KPP's bank
borrowings for the fertilizer pipeline acquisition. As a result of KPP
issuing additional units to unrelated parties, the Company's share of net
assets of KPP increased by $7.5 million. Accordingly, the Company
recognized a $7.5 million gain in the fourth quarter of 2002.
On December 24, 2002, KPP acquired a 400-mile petroleum products pipeline
and four terminals in North Dakota and Minnesota from Tesoro Refining and
Marketing Company for approximately $100 million in cash. The acquisition
was funded with KPP bank debt. The results of operations and cash flows of
the acquired business are included in the consolidated financial statements
of the Company since the date of acquisition. At March 31, 2003, the final
valuation of the acquired assets and liabilities has not been completed
and, accordingly, the Company has recorded a preliminary allocation of the
purchase price based on the estimated fair value. Based on the preliminary
purchase price allocation, no amounts are assigned to goodwill or to other
intangible assets.
In March of 2003, 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 KPP's bridge facility. As a result of KPP issuing
additional units to unrelated parties, the Company's share of net assets of
KPP increased by $10.9 million. Accordingly, the Company recognized a $10.9
million gain in the first quarter of 2003.
On April 24, 2003, KPP entered into a new credit agreement with a group of
banks that provides for a $400 million unsecured revolving credit facility
through April of 2006. The credit facility, which provides for an increase
in the commitment up to an aggregate of $450 million by mutual agreement
between KPP and the banks, bears interest at variable rates and has a
variable commitment fee on unused amounts. The credit facility is without
recourse to the Company and 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 the Company or to other partners. Proceeds from
the initial draw on the credit agreement ($324.2 million) were used to
repay all amounts outstanding under KPP's $275 million credit agreement and
$175 million bridge loan agreement.
3. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2003 and 2002 is
as follows:
Three Months Ended
March 31,
---------------------------------
2003 2002
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(in thousands)
Net income $ 16,559 $ 13,620
Other comprehensive income (loss)
- foreign currency translation adjustment 522 (78)
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Comprehensive income $ 17,081 $ 13,542
============= ==============
Accumulated other comprehensive income aggregated $0.8 million and $0.3
million at March 31, 2003 and December 31, 2002, respectively.
4. DISTRIBUTIONS
The Company makes quarterly distributions of 100% of its available cash, as
defined in the 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 the cash receipts of
the Company, plus the beginning cash balance, less all cash disbursements
and reserves. Excess cash flow of the Company's wholly-owned marketing
operations is being used to reduce working capital borrowings. A cash
distribution of $.4125 per share for the fourth quarter of 2002 was paid on
February 14, 2003. A cash distribution of $.4375 per share for the first
quarter of 2003 was declared to holders of record on April 30, 2003 and
will be paid on May 15, 2003.
5. EARNINGS PER SHARE
Earnings per share for the three months ended March 31, 2003 and 2002, has
been calculated using the Company's basic and diluted weighted average
shares outstanding for the period. For the three months ended March 31,
2003 and 2002, basic weighted average shares outstanding were 11,462,000
and 11,437,000, respectively and diluted weighted average shares
outstanding were 11,760,000 and 11,728,000, respectively.
6. CONTINGENCIES
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 before 1978,
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 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. 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 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. 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 several
occasions since September 6, 2001 to discuss the Government's claims and to
exchange information related to such claims. Additional exchanges of
information are expected to occur in the future and additional meetings may
be held to discuss possible resolution of the Government's claims without
litigation.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
Power Company ("PEPCO") ruptured. Work performed with regard to the
pipeline was conducted by a partnership of which ST Services is general
partner. PEPCO has reported that it has incurred total cleanup 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 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 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 except one have been
settled for immaterial amounts with ST Services' portion of such
settlements provided by its insurance carrier. ST Services' insurance
carrier has assumed the defense of the 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 agreed with the federal government and the State of
Maryland to pay costs of assessing natural resource damages arising from
the Swanson Creek oil spill under OPA and of selecting restoration
projects. This process was completed in mid-2002. ST Services' insurer has
paid ST Services' agreed 50 percent share of these assessment costs. In
late November 2002, PEPCO and ST Services entered into a Consent Decree
resolving the federal and state trustees' claims for natural resource
damages. The decree required payments by ST Services and PEPCO of a total
of approximately $3 million to fund the restoration projects and for
remaining damage assessment costs. The federal court entered the Consent
Decree as a final judgment on December 31, 2002. PEPCO and ST have each
paid their 50% share and thus fully performed their payment obligations
under the Consent Decree. ST Services' insurance carrier funded ST
Services' payment.
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. ST Services
does not anticipate any further hearings on the subject and is still
awaiting the DOT's ruling.
By letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it intended to seek penalties
from ST Services in connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties against ST
Services and PEPCO totaling up to $12 million. A settlement of this claim
was reached in mid-2002 under which ST Services' insurer will pay a total
of slightly more than $1 million in installments over a five year period.
PEPCO also reached a settlement of these claims with the State of Maryland.
Accordingly, KPP believes that this matter will not have a material adverse
effect on its financial condition.
On December 13, 2002, ST Services sued PEPCO in the Superior Court,
District of Columbia, seeking, among other causes of action, a declaratory
judgment as to ST Services' legal obligations, if any, to reimburse PEPCO
for costs of the oil spill. On December 16, 2002, PEPCO sued ST Services in
the United States District Court for the District of Maryland, seeking
recovery of all its costs for remediation of the oil spill. Both parties
have pending motions to dismiss the other party's suit. KPP believes that
any costs or damages resulting from these lawsuits will be covered by
insurance and therefore will not materially adversely affect KPP's
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 operations; the
"Pipeline Operations" of KPP, which consists primarily of the
transportation of refined petroleum products and fertilizer 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 Services," 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, receivable 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
March 31,
---------------------------------
2003 2002
------------- --------------
(in thousands)
Business segment revenues:
Pipeline operations $ 28,008 $ 17,626
Terminaling operations 58,686 41,462
Product marketing 131,775 63,321
------------- --------------
$ 218,469 $ 122,409
============= ==============
Business segment profit:
Pipeline operations $ 11,977 $ 8,451
Terminaling operations 18,040 14,636
Product marketing operations 4,205 704
General corporate (498) (535)
------------- --------------
Operating income 33,724 23,256
Interest and other income 109 91
Interest expense (8,844) (5,531)
Loss on debt extinguishment - (155)
------------- --------------
Income before gain on issuance of units by KPP,
income taxes, interest of outside non-controlling
partners in KPP's net income and cumulative effect
of change in accounting principle $ 24,989 $ 17,661
============= ==============
March 31, December 31,
2003 2002
-------------- --------------
(in thousands)
Total assets:
Pipeline operations $ 355,762 $ 352,657
Terminaling operations 836,361 844,321
Product marketing operations 69,978 41,297
General corporate 5,466 5,826
------------- --------------
$ 1,267,567 $ 1,244,101
============= ==============
8. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company 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 Company recorded an asset retirement
obligation of approximately $6.7 million and recognized a cumulative effect
of change in accounting principle of $0.3 million, after interest of
outside non-controlling partners in KPP's net income, for its legal
obligations to dismantle, dispose of, and restore certain KPP leased
pipeline and terminaling facilities, including petroleum and chemical
storage tanks, terminaling facilities and barges. At March 31, 2003, the
Company had no assets which were legally restricted for purposes of
settling asset retirement obligations. The effect of adopting SFAS No. 143
was not material to the results of operations of the Company for the three
month periods ended March 31, 2003 and 2002, respectively.
Effective January 1, 2003 the Company adopted 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 initial adoption of SFAS
No. 146 had no effect on the consolidated financial statements of the
Company.
The Company has adopted the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements of Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57, and 107, and a rescission of FASB
Interpretation No. 34." This interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under guarantees issued. The interpretation also
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
initial application of this interpretation had no effect on the
consolidated financial statements of the Company.
The Company has adopted the provisions of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51." This interpretation addressed the consolidation by business
enterprises of variable interest entities as defined in the interpretation.
The interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
interpretation requires certain disclosures in financial statements issued
after January 31, 2003. The initial application of this interpretation had
no effect on the consolidated financial statements of the Company.
Schedule I
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- -------------
General and administrative expenses $ (462) $ (481)
Interest expense (168) (160)
Interest and other income 2 1
Equity in earnings of subsidiaries 17,500 14,260
------------- ------------
Income before cumulative effect of change in accounting
principle 16,872 13,620
Cumulative effect of change in accounting principle - adoption
of new accounting standard for asset retirement obligations (313) -
------------- ------------
Net income $ 16,559 $ 13,620
============= ============
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle $ 1.47 $ 1.19
Cumulative effect of change in accounting principle (0.03) -
----------- ------------
$ 1.44 $ 1.19
=========== ============
Diluted:
Before cumulative effect of change in accounting principle $ 1.44 $ 1.16
Cumulative effect of change in accounting principle (0.03) -
----------- ------------
$ 1.41 $ 1.16
=========== ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
15
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
--------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,788 $ 1,695
Prepaid expenses and other 715 2,060
-------------- -------------
Total current assets 2,503 3,755
-------------- -------------
Investments in and advances to subsidiaries 104,636 92,316
Other assets 578 608
-------------- -------------
$ 107,717 $ 96,679
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 838 $ 2,325
Accrued distributions payable to shareholders 5,039 4,734
-------------- -------------
Total current liabilities 5,877 7,059
-------------- -------------
Long-term debt 19,125 19,125
Long-term payables and other liabilities 6,958 6,841
Commitments and contingencies
Shareholders' equity 75,757 63,654
-------------- -------------
$ 107,717 $ 96,679
============== =============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
16
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
2003 2002
------------- -------------
Operating activities:
Net income $ 16,559 $ 13,620
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiaries, net of distributions (12,110) (9,769)
Cumulative effect of change in accounting principle 313 -
Changes in current assets and liabilities (142) 452
------------ ------------
Net cash provided by operating activities 4,620 4,303
------------ ------------
Investing activities:
Changes in other assets 52 28
------------ ------------
Net cash provided by investing activities 52 28
------------ ------------
Financing activities:
Issuance of debt - 10,000
Distributions to shareholders (4,756) (4,131)
Changes in long-term payables and other liabilities 117 (10,051)
Other 60 387
------------ ------------
Net cash used in financing activities (4,579) (3,795)
------------ ------------
Increase in cash and cash equivalents 93 536
Cash and cash equivalents at beginning of period 1,695 1,369
------------ ------------
Cash and cash equivalents at end of period $ 1,788 $ 1,905
============ ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
17
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. The consolidated financial
information reflects the results of operations of the Company, its
wholly-owned subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP"). The
Company controls the operations of KPP through its 2% general partner
interest and 18% limited partner interest at March 31, 2003. All
significant intercompany transactions and balances have been eliminated.
Operating Results:
Pipeline Operations
Three Months Ended
March 31,
---------------------------------
2003 2002
------------- --------------
(in thousands)
Revenues $ 28,008 $ 17,626
Operating costs 11,241 6,476
Depreciation and amortization 3,497 1,373
General and administrative 1,293 1,326
------------- --------------
Operating income $ 11,977 $ 8,451
============= ==============
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the three months ended March 31, 2003,
revenues increased by $10.4 million, or 59%, compared to the same 2002
period, due to the November and December 2002 pipeline acquisitions (see
"Liquidity and Capital Resources"). Because tariff rates are regulated, the
pipelines compete primarily on the basis of quality of services, including
delivering products at convenient locations on a timely basis to meet the
needs of its customers. Barrel miles on petroleum pipelines totaled 5.4
billion for the three months ended March 31, 2003, compared to 4.2 billion
for the three months ended March 31, 2002.
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 $4.8 million for the
three months ended March 31, 2003, when compared to the three months ended
March 31, 2002, due to the pipeline acquisitions and increases in power and
fuel costs. For the three months ended March 31, 2003, depreciation and
amortization increased by $2.1 million, when compared to the same 2002
period, due primarily to the pipeline acquisitions. General and
administrative costs include managerial, accounting, and administrative
personnel costs, office rental and expense, legal and professional costs
and other non-operating costs.
Terminaling Operations
Three Months Ended
March 31,
---------------------------------
2003 2002
------------- --------------
(in thousands)
Revenues $ 58,686 $ 41,462
Operating costs 27,277 18,318
Depreciation and amortization 9,244 5,673
General and administrative 4,125 2,835
------------- --------------
Operating income $ 18,040 $ 14,636
============= ==============
Terminaling revenues for the three month period ended March 31, 2003
increased by $17.2 million, or 42%, when compared to the same 2002 period,
due to the 2002 terminal acquisitions (see "Liquidity and Capital
Resources") and overall increases in utilization at existing locations.
Approximately $15.4 million of the revenue increase was a result of the
terminal acquisitions. Average annual tankage utilized for the three months
ended March 31, 2003 increased to 47.4 million barrels, up from 39.0
million barrels for the three months ended March 31, 2002. For the three
months ended March 31, 2003, average annualized revenues per barrel of
tankage utilized increased to $5.02 per barrel, compared to $4.32 per
barrel for the three months ended March 31, 2002, due to changes in product
mix resulting from the terminal acquisitions and more favorable domestic
market conditions.
For the three month period ended March 31, 2003, operating costs increased
by $9.0 million, when compared to the same 2002 period, the result of the
terminal acquisitions and increases in volumes stored at existing
locations. For the three months ended March 31, 2003, depreciation and
amortization increased by $3.6 million, when compared to the same 2002
period, due primarily to the terminal acquisitions. General and
administrative costs for the three month period ended March 31, 2003,
increased by $1.3 million, when compared to the same 2002 period, also a
result of the terminal acquisitions.
Product Marketing Services
Three Months Ended
March 31,
---------------------------------
2003 2002
------------- --------------
(in thousands)
Revenues $ 131,775 $ 63,321
Cost of products sold 124,327 61,543
------------- --------------
Gross margin $ 7,448 $ 1,778
============= ==============
Operating income $ 4,205 $ 704
============= ==============
For the three month period ended March 31, 2003, revenues for the product
marketing business increased by $68.5 million, or 108%, when compared to
the three months ended March 31, 2002, due to increases in both volumes
sold and the average sales price per gallon. Total volumes sold and average
sales price per gallon for the three months ended March 31, 2003 aggregated
152.0 million gallons and $0.87, respectively, compared to 101.4 million
gallons and $0.62 for the three months ended March 31, 2002. The volume
increase is due primarily to the product sales operations acquired with
Statia on February 28, 2002 (see "Liquidity and Capital Resources"). Gross
margin and operating income increased by $5.7 million and $3.5 million,
respectively, for the three months ended March 31, 2003, compared to the
same 2002 period, due to the increase in volumes sold and higher product
margins. The increase in product margins is due to changes in product mix
as a result of the Statia acquisition and the overall increase in average
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 Expense
For the three months ended March 31, 2003, interest expense increased by
$3.3 million, compared to the three months ended March 31, 2002, due to
increases in KPP debt resulting from the 2002 KPP pipeline and terminaling
acquisitions (see "Liquidity and Capital Resources"), partially offset by
overall declines in interest rates on variable rate debt.
Income Taxes
Certain KPP operations are conducted through separate taxable wholly-owned
corporate subsidiaries. The income tax expense for these subsidiaries for
the three months ended March 31, 2003 and 2002 was $1.4 million and $0.4
million, respectively.
Liquidity and Capital Resources
Cash provided by operations, including the operations of KPP, was $32.6
million and $13.8 million for the three months ended March 31, 2003 and
2002, respectively. The increase in cash provided by operations for the
three months ended March 31, 2003, compared to the same 2002 period, was
due to the 2002 KPP pipeline and terminal acquisitions, and changes in
working capital components resulting from the timing of cash receipts and
disbursements.
Capital expenditures, including routine maintenance and expansion
expenditures but excluding acquisitions, were $11.7 million for the three
months ended March 31, 2003, compared to $5.2 million during the same 2002
period, and almost exclusively relate to KPP. The increase in capital
expenditures for the three months ended March 31, 2003, when compared to
the same 2002 period, is the result of planned maintenance and expansion
capital expenditures related to the KPP pipeline and terminaling operations
acquired in 2002 and higher maintenance capital expenditures in the
existing pipeline and terminaling businesses. During all periods, adequate
pipeline capacity existed to accommodate volume growth, and the
expenditures required for environmental and safety improvements were not,
and are not expected in the future to be, significant. KPP anticipates that
capital expenditures (including routine maintenance and expansion
expenditures, but excluding acquisitions) will total approximately $40
million in 2003. Such future expenditures of KPP, however, will depend on
many factors beyond KPP's control, including, without limitation, demand
for refined petroleum products and terminaling services in KPP'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 KPP will have the ability to
finance such expenditures through borrowings, or will choose to do so.
The Company makes quarterly distributions of 100% of its available cash, as
defined in the 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 the cash receipts of
the Company, plus the beginning cash balance, less all cash disbursements
and reserves. Excess cash flow of the Company's wholly-owned marketing
operations is being used to reduce working capital borrowings. A cash
distribution of $.4125 per share for the fourth quarter of 2002 was paid on
February 14, 2003. A cash distribution of $.4375 per share for the first
quarter of 2003 was declared to holders of record on April 30, 2003 and
will be paid on May 15, 2003.
KPP 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 KPP bank borrowings and/or future KPP public equity or debt
offerings. The Company has a credit 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 March 31, 2003, $19.1 million was drawn on the credit
facility, at an average annual interest rate of 2.27%.
The Company's product marketing subsidiary has a credit agreement with a
bank that, as amended, provides for a $20 million revolving credit facility
through April of 2005. The credit facility bears interest at variable
rates, has a commitment fee of 0.25% per annum on unutilized amounts and
contains certain financial and operational covenants. At March 31, 2003,
the subsidiary was in compliance with all covenants. The credit facility,
which is without recourse to the Company, is secured by essentially all of
the tangible and intangible assets of the Company's wholly-owned products
marketing business and by 500,000 KPP limited partnership units held by the
product marketing subsidiary. At March 31, 2003, $4.0 million was drawn on
the facility.
On April 24, 2003, KPP entered into a new credit agreement with a group of
banks that provides for a $400 million unsecured revolving credit facility
through April of 2006. The credit facility, which provides for an increase
in the commitment up to an aggregate of $450 million by mutual agreement
between KPP and the banks, bears interest at variable rates and has a
variable commitment fee on unused amounts. The credit facility is without
recourse to the Company and 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 the Company or to other partners. Proceeds from
the initial draw on the credit agreement ($324.2 million) were used to
repay all amounts outstanding under KPP's $275 million credit agreement and
$175 million bridge loan agreement.
KPP had a credit agreement with a group of banks that, as amended, provided
for a $275 million unsecured revolving credit facility through January 2,
2004. At March 31, 2003, $257.0 million was drawn on the facility, at an
average annual interest rate of 2.07%. The credit agreement was repaid in
April of 2003 with proceeds from KPP's new $400 million credit agreement.
On December 24, 2002, KPP entered into a $175 million unsecured bridge loan
agreement with a bank in connection with its 2002 pipeline acquisitions.
The bridge loan agreement, as amended, was scheduled to expire in January
of 2004. At March 31, 2003, $70.0 million was outstanding on the bridge
agreement, at an average annual interest rate of 2.84%. The bridge loan was
repaid in April of 2003 with proceeds from KPP's new $400 million credit
agreement.
In January of 2002, the 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 of 2002, 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"). Under the note
indenture, interest is payable semi-annually in arrears on February 15 and
August 15 of each year. The notes are redeemable, as a whole or in part, at
the option of KPP, 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
the Company or to other partners. At March 31, 2003, KPP was in compliance
with all covenants.
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 its
February 2002 public debt offering. In April of 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.
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. A portion of the offering proceeds were used to
fund KPP's September 2002 acquisition of the Australia and New Zealand
terminals. 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.
On September 18, 2002, KPP acquired eight bulk liquid storage terminals in
Australia and New Zealand from Burns Philp & Co. Ltd. for approximately $47
million in cash.
On November 1, 2002, KPP acquired an approximately 2,000-mile anhydrous
ammonia pipeline system from Koch Pipeline Company, L.P. for approximately
$139 million in cash. This fertilizer pipeline system originates in
southern Louisiana, proceeds north through Arkansas and Missouri, and then
branches east into Illinois and Indiana and north and west into Iowa and
Nebraska. The acquisition was financed by KPP bank debt.
In November of 2002, KPP issued 2,095,000 limited partnership units in a
public offering at $33.36 per unit, generating approximately $66.7 million
in net proceeds. The offering proceeds were used to reduce KPP's bank
borrowings for the fertilizer pipeline acquisition. As a result of KPP
issuing additional units to unrelated parties, the Company's share of net
assets of KPP increased by $7.5 million. Accordingly, the Company
recognized a $7.5 million gain in the fourth quarter of 2002.
On December 24, 2002, KPP acquired a 400-mile petroleum products pipeline
and four terminals in North Dakota and Minnesota from Tesoro Refining and
Marketing Company for approximately $100 million in cash. The acquisition
was funded with KPP bank debt.
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 KPP's bridge facility. As a result of KPP issuing
additional units to unrelated parties, the Company's share of net assets of
KPP increased by $10.9 million. Accordingly, the Company recognized a $10.9
million gain in the first quarter of 2003.
Additional information relative to 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, 2002.
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 adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on the Company's and KPP's debt and investment portfolios and fluctuations in
petroleum product prices on inventories held for sale.
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 $350.1 million (including KPP's debt) at March 31, 2003, a one percent
increase in interest rates would increase annual net interest expense by
approximately $3.5 million.
The product marketing business periodically purchases refined petroleum products
for resale as bunker fuel, for small volume sales to commercial interests and to
maintain an inventory of blendstocks for customers. Such petroleum inventories
are generally held for short periods of time, not exceeding 90 days. As the
Company 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.
Increases or decreases in the market value of inventory are reflected in the
product marketing operations cost of the products sold.
Item 4. Controls and Procedures.
Included in its Release No. 34-46427, effective August 29, 2002, the Securities
and Exchange Commission adopted rules requiring reporting companies to maintain
disclosure controls and procedures to provide reasonable assurance that a
registrant is able to record, process, summarize and report the information
required in the registrant's quarterly and annual reports under the Securities
Exchange Act of 1934 (the "Exchange Act"). While management believes that the
Company's existing disclosure controls and procedures have been effective to
accomplish these objectives, it intends to continue to examine, refine and
formalize the Company's disclosure controls and procedures and to monitor
ongoing developments in this area.
The Company's principal executive officer and principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and Rule 15d-14(c)) as of a date
within 90 days before the filing date of this Report, have concluded that, as of
such date, the Company's disclosure controls and procedures are adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities.
There have been no changes in the Company's internal controls or in other
factors known to management that could significantly affect those internal
controls subsequent to the date of the evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
KANEB SERVICES LLC AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
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.
10.19 Revolving Credit Agreement, dated as of April 24, 2003 among
Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe Line
Partners, L.P., The Lenders From Time To Time Party Hereto, and
SunTrust Bank, as Administrative Agent, filed as Exhibit 10.11 to
the exhibits of Kaneb Pipe Line Partners, L.P.'s Form 10-Q for
the period ended March 31, 2003, which exhibit is hereby
incorporated by reference.
99.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 14,
2003, filed herewith.
99.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of May 14,
2003, filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed January 8, 2003
Current Report on Form 8-K, filed March 18, 2003
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB SERVICES LLC
(Registrant)
Date: May 15, 2003 //s//
-----------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John R. Barnes, Chief Executive Officer of Kaneb Services LLC certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;
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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
//s//
-------------------------------------
John R. Barnes
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Howard C. Wadsworth, Chief Financial Officer of Kaneb Services certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;
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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 14, 2003
//s//
-----------------------------------------
Howard C. Wadsworth
Chief Financial Officer