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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 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 October 29, 2004
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No par value 11,692,328 shares
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KANEB SERVICES LLC AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
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Page No.
Part I. Financial Information
Item 1 (a) (1). Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 2004 and 2003 1
Condensed Consolidated Balance Sheets - September 30, 2004
and December 31, 2003 3
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
(a)(2). Financial Statement Schedules (Unaudited)
Schedule I - Kaneb Services LLC (Parent Company)
Condensed Financial Statements:
Statements of Income - Three and Nine Months
Ended September 30, 2004 and 2003 16
Balance Sheets - September 30, 2004 and December 31, 2003 17
Statements of Cash Flows - Nine Months Ended
September 30, 2004 and 2003 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 32
Item 4. Controls and Procedures 32
Part II. Other Information
Item 6. Exhibits 33
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Revenues:
Services $ 95,898 $ 89,539 $ 280,654 $ 265,694
Products 176,344 125,053 478,969 386,021
-------------- ------------- ------------- --------------
Total revenues 272,242 214,592 759,623 651,715
-------------- ------------- ------------- --------------
Costs and expenses:
Cost of products sold 168,458 119,767 458,253 366,531
Operating costs 46,648 42,577 133,443 126,190
Depreciation and amortization 14,056 13,198 41,701 39,845
General and administrative 8,153 6,799 21,850 20,469
-------------- ------------- ------------- --------------
Total costs and expenses 237,315 182,341 655,247 553,035
-------------- ------------- ------------- --------------
Operating income 34,927 32,251 104,376 98,680
Interest and other income 148 69 241 208
Interest expense (10,930) (10,855) (32,279) (28,816)
-------------- ------------- ------------- --------------
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 24,145 21,465 72,338 70,072
Gain on issuance of units by KPP - - - 10,898
Income tax expense (1,259) (969) (3,028) (3,597)
Interest of outside non-controlling
partners in KPP's net income (16,075) (14,634) (49,109) (49,151)
-------------- ------------- ------------- --------------
Income before cumulative effect of
change in accounting principle 6,811 5,862 20,201 28,222
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for asset retirement obligations - - - (313)
-------------- ------------- ------------- --------------
Net income $ 6,811 $ 5,862 $ 20,201 $ 27,909
============== ============= ============= ==============
See notes to consolidated financial statements.
1
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - Continued
(In Thousands -- Except Per Share Amounts)
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Earnings per share:
Basic:
Before cumulative effect of change
in accounting principle $ .58 $ .50 $ 1.72 $ 2.45
Cumulative effect of change in
accounting principle - - - (.03)
-------------- ------------- ------------- -------------
$ .58 $ .50 $ 1.72 $ 2.42
============== ============= ============= =============
Diluted:
Before cumulative effect of change
in accounting principle $ .57 $ .49 $ 1.70 $ 2.41
Cumulative effect of change in
accounting principle - - - (.03)
-------------- ------------- ------------- -------------
$ .57 $ .49 $ 1.70 $ 2.38
============== ============= ============= =============
See notes to consolidated financial statements.
2
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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September 30, December 31,
2004 2003
--------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 50,019 $ 43,457
Accounts receivable 84,940 60,684
Inventories 22,101 18,637
Prepaid expenses and other 8,933 9,650
--------------- ---------------
Total current assets 165,993 132,428
--------------- ---------------
Property and equipment 1,422,132 1,360,523
Less accumulated depreciation 286,447 247,503
--------------- ---------------
Net property and equipment 1,135,685 1,113,020
--------------- ---------------
Investment in affiliates 26,277 25,456
Excess of cost over fair value of net assets of
acquired business and other assets 22,332 20,663
--------------- ---------------
$ 1,350,287 $ 1,291,567
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,857 $ 36,916
Accrued expenses 38,582 39,307
Accrued interest payable 8,729 9,303
Accrued distributions payable to shareholders 5,801 5,567
Accrued distributions payable to outside non-controlling
partners in KPP 19,863 19,507
Deferred terminaling fees 8,669 7,061
--------------- ---------------
Total current liabilities 133,501 117,661
--------------- ---------------
Long-term debt 685,775 636,308
Other liabilities and deferred taxes 52,746 52,242
Interest of outside non-controlling partners in KPP 397,305 407,635
Commitments and contingencies
Shareholders' equity 80,960 77,721
--------------- ---------------
$ 1,350,287 $ 1,291,567
=============== ===============
See notes to consolidated financial statements.
3
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Nine Months Ended
September 30,
----------------------------------------
2004 2003
------------- --------------
Operating activities:
Net income $ 20,201 $ 27,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 41,701 39,845
Equity in earnings of affiliates, net of distributions (821) 123
Interest of outside non-controlling partners
in KPP's net income 49,109 49,151
Gain on issuance of units by KPP - (10,898)
Deferred income taxes 112 2,361
Cumulative effect of change in accounting principle - 313
Changes in working capital components (11,697) 6,512
------------- --------------
Net cash provided by operating activities 98,605 115,316
------------- --------------
Investing activities:
Acquisitions by KPP, net of cash acquired (41,066) (1,644)
Capital expenditures (25,754) (32,059)
Other, net 16 (2,196)
------------- --------------
Net cash used in investing activities (66,804) (35,899)
------------- --------------
Financing activities:
Issuance of debt 53,017 286,360
Payment of debt (2,500) (387,055)
Distributions to shareholders (16,985) (14,915)
Distributions to outside non-controlling
partners in KPP (58,869) (53,498)
Net proceeds from issuance of units by KPP - 109,056
Other 98 170
------------- --------------
Net cash used in financing activities (25,239) (59,882)
------------- --------------
Increase in cash and cash equivalents 6,562 19,535
Cash and cash equivalents at beginning of period 43,457 24,477
------------- --------------
Cash and cash equivalents at end of period $ 50,019 $ 44,012
============= ==============
Supplemental cash flow information - cash paid for interest $ 31,900 $ 26,489
============= ==============
See notes to consolidated financial statements.
4
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 as of September 30, 2004. All significant intercompany
transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements of the Company
for the three and nine month periods ended September 30, 2004 and 2003,
have been prepared in accordance with accounting principles generally
accepted in the United States of America. Significant accounting policies
followed by the 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, 2003. 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 September 30, 2004, and the
consolidated results of their operations and cash flows for the periods
ended September 30, 2004 and 2003. Operating results for the three and nine
months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. Certain
prior year financial statement items have been reclassified to conform with
the 2004 presentation.
In December of 2002, the Financial Accounting Standards Board ("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, 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------ ------------- --------------
(in thousands - except per share data)
Reported net income $ 6,811 $ 5,862 $ 20,201 $ 27,909
Share-based employee compensation
expense determined under the fair
value based method (74) (21) (108) (63)
-------------- ------------ ------------- --------------
Pro forma net income $ 6,737 $ 5,841 $ 20,093 $ 27,846
============== ============ ============= ==============
Earning per share:
Basic - as reported $ .58 $ .50 $ 1.72 $ 2.42
============== ============ ============= ==============
Basic - pro forma $ .57 $ .50 $ 1.71 $ 2.42
============== ============ ============= ==============
Diluted - as reported $ .57 $ .49 $ 1.70 $ 2.38
============== ============ ============= ==============
Diluted - pro forma $ .56 $ .49 $ 1.67 $ 2.37
============== ============ ============= ==============
2. KPP FINANCINGS
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.
In April of 2003, KPP entered into a credit agreement with a group of banks
that provides for a $400 million unsecured revolving credit facility
through April of 2006. The credit facility, which provides for an increase
in the commitment up to an aggregate of $450 million by mutual agreement
between 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. At September
30, 2004, KPP was in compliance with all covenants. Initial borrowings 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. At September 30, 2004, $90.7 million was outstanding
under the credit agreement.
On May 19, 2003, KPP issued $250 million of 5.875% senior unsecured notes
due June 1, 2013. The net proceeds from the public offering, $247.6
million, were used to reduce amounts due under KPP's revolving credit
agreement. Under the note indenture, interest is payable semi-annually in
arrears on June 1 and December 1 of each year. The notes are redeemable, as
a whole or in part, at the option of 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 other partners.
At September 30, 2004, KPP was in compliance with all covenants. In
connection with the offering, on May 8, 2003, KPP entered into a treasury
lock contract for the purpose of locking in the US Treasury interest rate
component on $100 million of the debt. The treasury lock contract, which
qualified as a cash flow hedging instrument under SFAS No. 133, was settled
on May 19, 2003 with a cash payment by KPP of $1.8 million. The settlement
cost of the contract has been recorded as a component of accumulated other
comprehensive income and is being amortized, as interest expense, over the
life of the debt.
3. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2004
and 2003, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------ ------------- --------------
(in thousands)
Net income $ 6,811 $ 5,862 $ 20,201 $ 27,909
Foreign currency translation
adjustment 370 72 (81) 1,404
KPP interest rate hedging transactions 10 10 27 (341)
---------------- ------------- ------------- --------------
Comprehensive income $ 7,191 $ 5,944 $ 20,147 $ 28,972
================ ============= ============= ==============
Accumulated other comprehensive income aggregated $2.4 million at September
30, 2004 and $2.4 million at December 31, 2003, respectively.
4. CASH 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, less all cash disbursements and reserves. Excess cash flow of
the Company's wholly-owned product marketing operations is being used to
reduce working capital borrowings. Cash distributions of $0.475 and $0.495
per share with respect to the first and second quarters of 2004 were paid
on May 14, 2004 and August 13, 2004, respectively. A cash distribution of
$0.495 per share with respect to the third quarter of 2004 was declared to
holders of record on October 31, 2004 and will be paid on November 12,
2004.
5. EARNINGS PER SHARE
Earnings per share for the three and nine months ended September 30, 2004
and 2003, is calculated using the Company's basic and diluted weighted
average shares outstanding for the period. For the three months ended
September 30, 2004 and 2003, basic weighted average shares outstanding were
11,785,000 and 11,635,000, respectively, and diluted weighted average
shares outstanding were 11,968,000 and 11,889,000, respectively. For the
nine months ended September 30, 2004 and 2003, basic weighted average
shares outstanding were 11,716,000 and 11,521,000, respectively, and
diluted weighted average shares outstanding were 11,902,000 and 11,751,000,
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 had
incurred since 1996 for response and remediation required by the State of
Massachusetts and for additional expenses that it expects to incur in the
future. The consistent position of 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 of actions against Grace. This automatic stay covers the
appeal of the Dallas litigation, and the Texas Court of Appeals has issued
an order staying all proceedings of the appeal because of the bankruptcy.
Once that stay is lifted, 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. KPP does not believe this matter will have a materially adverse
effect on its financial condition, although there can be no assurances as
to the ultimate outcome.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
Power Company ("PEPCO") ruptured. Work performed with regard to the
pipeline was conducted by a partnership of which ST Services is general
partner. PEPCO has reported that it has incurred total cleanup costs of $70
million to $75 million. PEPCO probably will continue to incur some cleanup
related costs for the foreseeable future, primarily in connection with EPA
requirements for monitoring the condition of some of the impacted areas.
Since May 2000, ST Services has provisionally contributed a minority share
of the cleanup expense, which has been funded by ST Services' insurance
carriers. ST Services and PEPCO have not, however, reached a final
agreement regarding ST Services' proportionate responsibility for this
cleanup effort, if any, and cannot predict the amount, if any, that
ultimately may be determined to be ST Services' share of the remediation
expense, but ST Services believes that such amount will be covered by
insurance and therefore will not materially adversely affect 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 have been settled for
immaterial amounts with ST Services' portion of such settlements provided
by its insurance carrier.
PEPCO and ST Services agreed with the federal government and the State of
Maryland to pay costs of assessing natural resource damages arising from
the Swanson Creek oil spill under OPA and of selecting restoration
projects. This process was completed in mid-2002. ST Services' insurer has
paid ST Services' agreed 50 percent share of these assessment costs. In
late November 2002, PEPCO and ST Services entered into a Consent Decree
resolving the federal and state trustees' claims for natural resource
damages. The decree required payments by ST Services and PEPCO of a total
of approximately $3 million to fund the restoration projects and for
remaining damage assessment costs. The federal court entered the Consent
Decree as a final judgment on December 31, 2002. PEPCO and ST Services have
each paid their 50% share and thus fully performed their payment
obligations under the Consent Decree. ST Services' insurance carrier funded
ST Services' payment.
The U.S. Department of Transportation ("DOT") has issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over
several years of pipeline safety regulations and proposing a civil penalty
of $647,000 jointly against the two companies. ST Services and PEPCO have
contested the DOT allegations and the proposed penalty. A hearing was held
before the Office of Pipeline Safety at the DOT in late 2001. In June of
2004, the DOT issued a final order reducing the penalty to $256,250 jointly
against ST Services and PEPCO and $74,000 against ST Services. The DOT
granted ST Services' request to extend the time to file a motion to
reconsider the final order. ST Services has moved for reconsideration of
the order based on facts which were not previously available to the DOT and
ST Services.
By letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it intended to seek penalties
from ST Services in connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties against ST
Services and PEPCO totaling up to $12 million. A settlement of this claim
was reached in mid-2002 under which ST Services' insurer will pay a total
of slightly more than $1 million in installments over a five year period.
PEPCO has also reached a settlement of these claims with the State of
Maryland. Accordingly, 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 things, a declaratory judgment as to
ST Services' legal obligations, if any, to reimburse PEPCO for costs of the
oil spill. On December 16, 2002, PEPCO sued ST Services in the United
States District Court for the District of Maryland, seeking recovery of all
its costs for remediation of and response to the oil spill. Pursuant to an
agreement between ST Services and PEPCO, ST Services' suit was dismissed,
subject to refiling. ST Services has moved to dismiss PEPCO's suit. ST
Services is vigorously defending against PEPCO's claims and is pursuing its
own counterclaims for return of monies ST Services has advanced to PEPCO
for settlements and cleanup costs. 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 amounts
claimed by PEPCO, if recovered, would trigger an excess insurance policy
which has a $600,000 retention, but KPP does not believe that such
retention, if incurred, would 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, after consulting with counsel, that the
ultimate resolution of such contingencies will not have a materially
adverse effect on the financial position, results of operations or
liquidity of the 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 provides 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, 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------ ------------- --------------
(in thousands)
Business segment revenues:
Pipeline operations $ 30,589 $ 31,449 $ 89,102 $ 88,807
Terminaling operations 65,309 58,090 191,552 176,887
Product marketing operations 176,344 125,053 478,969 386,021
-------------- ------------- ------------- --------------
$ 272,242 $ 214,592 $ 759,623 $ 651,715
============== ============= ============= ==============
Business segment profit:
Pipeline operations $ 11,569 $ 14,839 $ 34,803 $ 39,036
Terminaling operations 19,181 15,732 58,541 51,567
Product marketing operations 4,877 2,219 12,787 9,634
General corporate (700) (539) (1,755) (1,557)
-------------- ------------- ------------- --------------
Operating income 34,927 32,251 104,376 98,680
Interest and other income 148 69 241 208
Interest expense (10,930) (10,855) (32,279) (28,816)
-------------- ------------- ------------- --------------
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 $ 24,145 $ 21,465 $ 72,338 $ 70,072
============== ============= ============= ==============
September 30, December 31,
2004 2003
------------- -----------------
(in thousands)
Total assets:
Pipeline operations $ 358,474 $ 352,901
Terminaling operations 898,600 874,185
Product marketing operations 88,300 58,161
General corporate 4,913 6,320
------------- --------------
$ 1,350,287 $ 1,291,567
============= ==============
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 $5.5 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 leased KPP
pipeline and terminaling facilities, including petroleum and chemical
storage tanks, terminaling facilities and barges. The Company did not
record a retirement obligation for certain of KPP's pipeline and
terminaling assets because sufficient information is presently not
available to estimate a range of potential settlement dates for the
obligation. In these cases, the obligation will be initially recognized in
the period in which sufficient information exists to estimate the
obligation. At September 30, 2004, the Company had no assets that were
legally restricted for purposes of settling asset retirement obligations.
The application of SFAS No. 143 did not have a material impact on the
results of operations of the Company for the three and nine months ended
September 30, 2004 or 2003.
In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN 46R"), primarily
to clarify the required accounting for interests in variable interest
entities ("VIEs"). This standard replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January
2003 to address certain situations in which a company should include in its
financial statements the assets, liabilities and activities of another
entity. For the Company, application of FIN 46R is required for interests
in certain VIEs that are commonly referred to as special-purpose entities,
or SPEs, as of December 31, 2003, and for interests in all other types of
VIEs as of March 31, 2004. The application of FIN 46R did not have a
material impact on the consolidated financial statements of the Company.
9. SUBSEQUENT EVENT
On October 31, 2004, Valero L.P. agreed to acquire by merger (the "KSL
Merger") all of the outstanding common shares of the Company for cash.
Under the terms of that agreement, Valero L.P. is offering to purchase all
of the outstanding shares of the Company at $43.31 per share.
In a separate definitive agreement, on October 31, 2004, Valero L.P. and
KPP agreed to merge (the "KPP Merger"). Under the terms of that agreement,
each holder of units of limited partnership interests in KPP will receive a
number of Valero L.P. common units based on an exchange ratio that
fluctuates within a fixed range to provide $61.50 in value of Valero L.P.
units for each unit of KPP. The actual exchange ratio will be determined at
the time of the closing of the proposed merger and is subject to a fixed
value collar of plus or minus five percent of Valero L.P.'s per unit price
of $57.25 as of October 7, 2004. Should Valero L.P.'s per unit price fall
below $54.39 per unit, the exchange ratio will remain fixed at 1.1307
Valero L.P. units for each unit of KPP. Likewise, should Valero L.P.'s per
unit price exceed $60.11 per unit, the exchange ratio will remain fixed at
1.0231 Valero L.P. units for each unit of KPP.
The completion of the KSL Merger is subject to the approval of the
unitholders of Valero L.P. and the shareholders of the Company, as well as
customary regulatory approvals including those under the Hart-Scott-Rodino
Antitrust Improvements Act. The completion of the KSL Merger is also
subject to completion of the KPP Merger, which requires the approval of its
unitholders. The Company and KPP will become wholly owned subsidiaries of
Valero L.P.
Schedule I
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- --------------
General and administrative expenses $ (652) $ (509) $ (1,593) $ (1,462)
Interest expense (143) (147) (417) (474)
Interest and other income 1 3 2 9
Equity in earnings of subsidiaries 7,605 6,515 22,209 19,271
Equity in earnings of subsidiaries - gain
on issuance of units by KPP - - - 10,878
-------------- ------------- ------------- --------------
Income before cumulative effect of change
in accounting principle 6,811 5,862 20,201 28,222
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for asset retirement obligations - - - (313)
-------------- ------------- ------------- --------------
Net income $ 6,811 $ 5,862 $ 20,201 $ 27,909
============== ============= ============= ==============
Earnings per share:
Basic:
Before cumulative effect of change
in accounting principle $ .58 $ .50 $ 1.72 $ 2.45
Cumulative effect of change in
accounting principle - - - (.03)
-------------- ------------- ------------- --------------
$ .58 $ .50 $ 1.72 $ 2.42
============== ============= ============= ==============
Diluted:
Before cumulative effect of change
in accounting principle $ .57 $ .49 $ 1.70 $ 2.41
Cumulative effect of change in
accounting principle - - - (.03)
-------------- ------------- ------------- --------------
$ .57 $ .49 $ 1.70 $ 2.38
============== ============= ============= ==============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
16
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
--------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,127 $ 1,544
Prepaid expenses and other 239 149
-------------- -------------
Total current assets 1,366 1,693
-------------- -------------
Investments in and advances to subsidiaries 107,514 106,068
Other assets 415 498
-------------- -------------
$ 109,295 $ 108,259
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 990 $ 1,112
Accrued distributions payable to shareholders 5,801 5,567
-------------- -------------
Total current liabilities 6,791 6,679
-------------- -------------
Long-term debt 14,000 16,500
Long-term payables and other liabilities 7,544 7,359
Commitments and contingencies
Shareholders' equity 80,960 77,721
-------------- -------------
$ 109,295 $ 108,259
============== =============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
17
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------------------------
2004 2003
------------- --------------
Operating activities:
Net income $ 20,201 $ 27,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries, net of
distributions (1,499) (11,958)
Cumulative effect of change in accounting
principle - 313
Changes in current assets and liabilities (212) 664
------------- --------------
Net cash provided by operating activities 18,490 16,928
------------- --------------
Investing activities:
Changes in other assets 83 83
------------- --------------
Net cash provided by investing activities 83 83
------------- --------------
Financing activities:
Payments on debt (2,500) (2,625)
Distributions to shareholders (16,985) (14,915)
Changes in long-term payables and other liabilities 185 344
Other 310 170
------------- --------------
Net cash used in financing activities (18,990) (17,026)
------------- --------------
Decrease in cash and cash equivalents (417) (15)
Cash and cash equivalents at beginning of period 1,544 1,695
------------- --------------
Cash and cash equivalents at end of period $ 1,127 $ 1,680
============= ==============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
18
KANEB SERVICES LLC AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
This discussion should be read in conjunction with the condensed
consolidated financial statements of Kaneb 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").
Overview
In September 1989, Kaneb Pipe Line Company LLC ("KPL"), now a wholly owned
subsidiary of the Company, formed KPP to own and operate its refined
petroleum products pipeline business. KPL manages and controls the
operations of KPP through its general partner interests and an 18% (at
September 30, 2004) limited partner interest. KPP operates through Kaneb
Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in
which KPP holds a 99% interest as limited partner. KPL owns a 1% interest
as general partner of KPP and a 1% interest as general partner of KPOP.
KPP's petroleum pipeline business consists primarily of the transportation,
as a common carrier, of refined petroleum products in Kansas, Nebraska,
Iowa, South Dakota, North Dakota, Colorado, Wyoming and Minnesota. Common
carrier activities are those under which transportation through the
pipelines is available at published tariffs filed, in the case of
interstate shipments, with the Federal Energy Regulatory Commission (the
"FERC"), or in the case of intrastate shipments, with the relevant state
authority, to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for
transportation. The petroleum pipelines primarily transport gasoline,
diesel oil, fuel oil and propane. Substantially all of the petroleum
pipeline operations constitute common carrier operations that are subject
to federal or state tariff regulations. KPP also owns an approximately
2,000-mile anhydrous ammonia pipeline system acquired from Koch Pipeline
Company, L.P. in November of 2002. The fertilizer pipeline originates in
southern Louisiana, proceeds north through Arkansas and Missouri, and then
branches east into Illinois and Indiana and north and west into Iowa and
Nebraska. KPP's petroleum pipeline business depends on the level of demand
for refined petroleum products in the markets served by the pipelines and
the ability and willingness of refineries and marketers having access to
the pipelines to supply such demand by deliveries through the pipelines.
KPP's pipeline revenues are based on volumes shipped and the distance over
which such volumes are transported.
KPP's terminaling business is one of the largest independent petroleum
products and specialty liquids terminaling businesses in the United States.
In the United States, KPP operates 37 facilities in 20 states. KPP also
owns and operates six terminals located in the United Kingdom, eight
terminals in Australia and New Zealand, a terminal on the Island of St.
Eustatius, Netherlands Antilles, and a terminal at Point Tupper, Nova
Scotia, Canada. Independent terminal owners generally compete on the basis
of the location and versatility of the terminals, service and price.
Terminal versatility is a function of the operator's ability to offer
handling for diverse products with complex handling requirements. The
service functions typically provided by the terminal include the safe
storage of product at specified temperatures and other conditions, as well
as receipt and delivery from the terminal. The ability to obtain attractive
pricing is dependent largely on the quality, versatility and reputation of
the facility. Terminaling revenues are earned based on fees for the storage
and handling of products.
KPL owns a petroleum product marketing business which provides wholesale
motor fuel marketing services in the Great Lakes and Rocky Mountain regions
of the United States. KPP's product sales business delivers bunker fuels to
ships in the Caribbean and Nova Scotia, Canada, and sells bulk petroleum
products to various commercial customers at those locations. In the
bunkering business, KPP competes with ports offering bunker fuels along the
route of the vessel. Vessel owners or charterers are charged berthing and
other fees for associated services such as pilotage, tug assistance, line
handling, launch service and emergency response services.
Consolidated Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
(in thousands - except per share amounts)
Consolidated revenues $ 272,242 $ 214,592 $ 759,623 $ 651,715
=========== =========== =========== ===========
Consolidated operating income $ 34,927 $ 32,251 $ 104,376 $ 98,680
=========== =========== =========== ===========
Consolidated income before gain
on issuance of units by KPP and
cumulative effect of change in
accounting principle $ 6,811 $ 5,862 $ 20,201 $ 17,324
=========== =========== =========== ===========
Consolidated net income $ 6,811 $ 5,862 $ 20,201 $ 27,909
=========== =========== =========== ===========
Earnings per share:
Basic:
Before cumulative effect of
change in accounting
principle $ 0.58 $ 0.50 $ 1.72 $ 2.45
Cumulative effect of change
in accounting principle - - - (0.03)
----------- ----------- ----------- -----------
$ 0.58 $ 0.50 $ 1.72 $ 2.42
=========== =========== =========== ===========
Diluted:
Before cumulative effect of
change in accounting
principle $ 0.57 $ 0.49 $ 1.70 $ 2.41
Cumulative effect of change
in accounting principle - - - (0.03)
----------- ----------- ----------- -----------
$ 0.57 $ 0.49 $ 1.70 $ 2.38
=========== =========== =========== ===========
Cash distributions declared per share $ 0.495 $ 0.475 $ 1.465 $ 1.35
=========== =========== =========== ===========
Consolidated capital expenditures,
excluding acquisitions $ 8,414 $ 9,543 $ 25,754 $ 32,059
=========== =========== =========== ===========
For the three months ended September 30, 2004, consolidated revenues
increased by $57.7 million, or 27%, when compared to the third quarter of
2003, due to a $51.3 million increase in product marketing revenues and a
$7.2 million increase in terminaling business revenues, partially offset by
a $0.9 million decrease in pipeline revenues. Consolidated operating income
for the three months ended September 30, 2004 increased by $2.7 million, or
8%, when compared to the same period in 2003, due to a $3.4 million
increase in terminaling operating income and a $2.7 million increase in
product marketing operating income, partially offset by a $3.3 million
decrease in pipeline operating income. Overall, net income for the three
months ended September 30, 2004 increased by $0.9 million, or 16%, when
compared to the three month period ended September 30, 2003.
For the nine months ended September 30, 2004, consolidated revenues
increased by $107.9 million, or 17%, when compared to the same 2003 period,
due to a $92.9 million increase in product marketing revenues, a $14.7
million increase in terminaling business revenues and a $0.3 million
increase in pipeline revenues. Consolidated operating income for the nine
months ended September 30, 2004 increased by $5.7 million, or 6%, when
compared to the same period in 2003, due to a $7.0 million increase in
terminaling operating income and a $3.2 million increase in product
marketing operating income, partially offset by a $4.2 million decrease in
pipeline operating income. Interest expense for the nine months ended
September 30, 2004 increased by $3.5 million, when compared to the nine
months ended September 30, 2003. Income for the nine months ended September
30, 2004, before gain on issuance of units by KPP and cumulative effect of
change in accounting principle, increased by $2.9 million, or 17%, when
compared to the nine months ended September 30, 2003. Overall, net income
for the nine months ended September 30, 2004 decreased by $7.7 million,
when compared to the nine month period ended September 30, 2003, which
includes a $10.9 million gain on issuance of units by KPP (see "Liquidity
and Capital Resources").
Pipeline Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
(in thousands)
Revenues $ 30,589 $ 31,449 $ 89,102 $ 88,807
Operating costs 13,534 11,067 38,201 34,374
Depreciation and amortization 3,649 3,540 10,872 10,548
General and administrative 1,837 2,003 5,226 4,849
----------- ----------- ----------- -----------
Operating income $ 11,569 $ 14,839 $ 34,803 $ 39,036
=========== =========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. Because tariff rates are regulated by the
FERC or the Surface Transportation Board, the pipelines compete primarily
on the basis of quality of service, including delivery of products at
convenient locations on a timely basis to meet the needs of their
customers. For the three and nine month periods ended September 30, 2004,
revenues decreased by $0.9 million and increased by $0.3 million,
respectively, when compared to the same 2003 periods. The decrease for the
three months ended September 30, 2004, when compared to the same period in
2003, is due to decreases both in volumes shipped and the price per ton
received on the anhydrous ammonia pipeline, partially offset by increases
in barrel miles of products shipped on petroleum pipelines. The revenue
increase for the nine months ended September 30, 2004, is due to increases
in barrel miles of products shipped on the petroleum pipelines, partially
offset by a decrease in volumes shipped on the anhydrous ammonia pipeline.
Barrel miles on petroleum pipelines totaled 5.9 billion and 5.4 billion for
the three months ended September 30, 2004 and 2003, respectively, and 16.7
billion and 15.8 billion for the nine months ended September 30, 2004 and
2003, respectively. Total volumes shipped on the anhydrous ammonia pipeline
aggregated 246 tons and 288 tons for the three months ended September 30,
2004 and 2003, respectively, and 822 tons and 876 tons for the nine months
ended September 30, 2004 and 2003, respectively.
Operating costs, which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee
benefits, and property and other taxes, increased by $2.5 million and $3.8
million, respectively, for the three and nine month periods ended September
30, 2004, when compared to the same 2003 periods, due to unusually high
expenses relating to preventive and other maintenance and repairs,
including those required by government regulation, and increases in power
and fuel costs. For the three and nine months ended September 30, 2004,
depreciation and amortization increased by $0.1 million and $0.3 million,
respectively, when compared to the same 2003 periods, due primarily to
routine maintenance capital expenditures. General and administrative costs,
which include managerial, accounting and administrative personnel costs,
office rent and expense, legal and professional costs and other
non-operating costs, decreased by $0.2 million and increased by $0.4
million for the three and nine month periods ended September 30, 2004,
respectively, when compared to the same 2003 periods.
Terminaling Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
(in thousands)
Revenues $ 65,309 $ 58,090 $ 191,552 $ 176,887
Operating costs 31,272 29,338 90,213 84,673
Depreciation and amortization 10,182 9,433 30,162 28,533
General and administrative 4,674 3,587 12,636 12,114
----------- ----------- ----------- -----------
Operating income $ 19,181 $ 15,732 $ 58,541 $ 51,567
=========== =========== =========== ===========
For the three and nine month periods ended September 30, 2004, terminaling
revenues increased by $7.2 million, or 12%, and $14.7 million, or 8%,
respectively, when compared to the same 2003 periods, due to increases in
both tankage utilized and the average price realized per barrel of tankage
utilized. Average tankage utilization for the three and nine month periods
ended September 30, 2004 was 48.7 million and 48.2 million, respectively,
compared to 45.9 million and 47.1 million, respectively, for the same prior
year periods. For the three and nine month periods ended September 30,
2004, average annualized revenues per barrel of tankage utilized increased
to $5.33 per barrel and $5.31 per barrel, respectively, compared to $5.02
per barrel and $5.02 per barrel, respectively, for the same prior year
periods, due primarily to favorable market conditions domestically and in
Australia and New Zealand.
For the three and nine month periods ended September 30, 2004, operating
costs increased by $1.9 million and $5.5 million, respectively, when
compared to the same 2003 periods, a result of overall increases in planned
terminal maintenance. For the three and nine months ended September 30,
2004, depreciation and amortization increased by $0.7 million and $1.6
million, respectively, when compared to the same 2003 periods, due to
expansion and routine maintenance capital expenditures. General and
administrative costs for the three and nine month periods ended September
30, 2004, increased by $1.1 million and $0.5 million, respectively, when
compared to the same 2003 periods, due primarily to increases in
personnel-related costs.
Product Marketing Operations
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
(in thousands)
Revenues $ 176,344 $ 125,053 $ 478,969 $ 386,021
Cost of products sold 168,458 119,767 458,253 366,531
----------- ----------- ----------- -----------
Gross margin $ 7,886 $ 5,286 $ 20,716 $ 19,490
=========== =========== =========== ===========
Operating income $ 4,877 $ 2,219 $ 12,787 $ 9,634
=========== =========== =========== ===========
For the three and nine month periods ended September 30, 2004, revenues for
the product marketing business increased by $51.3 million, or 41%, and
$92.9 million, or 24%, respectively, when compared to the same 2003
periods. The increase in 2004 revenues, when compared to the same 2003
periods, was the result of increases in both volumes sold and the overall
increase in sales price realized. Gallons sold totaled 179 million and 151
million, respectively, for the three months ended September 30, 2004 and
2003, and 510 million and 463 million, respectively, for the nine months
ended September 30, 2004 and 2003. For the three and nine month periods
ended September 30, 2004, the average price realized per gallon of product
sold increased to $0.99 and $0.94 per gallon, respectively, compared to
$0.83 and $0.83 per gallon, respectively, for the same 2003 periods. For
the three and nine months ended September 30, 2004, gross margin increased
by $2.6 million and $1.2 million, respectively, when compared to the same
2003 periods, due to the increase in volumes sold and favorable variations
in prices resulting from the timing of purchases and sales. For the three
and nine months ended September 30, 2004, operating income increased by
$2.7 million and $3.2 million, respectively, when compared to the same 2003
periods, due to the higher sales volumes. 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 nine months ended September 30, 2004, interest expense increased by
$3.5 million, when compared to the same 2003 period, due to KPP's May 2003
refinancing of variable rate bank debt with $250 million of 5.875% senior
unsecured notes, partially offset by overall declines in debt levels
outstanding due to KPP's March 2003 issuance of limited partnership units
(see "Liquidity and Capital Resources").
Income Taxes
KPP's partnership operations are not subject to federal or state income
taxes. However, certain KPP operations are conducted through separate
taxable wholly-owned U.S. and foreign corporate subsidiaries. The income
tax expense for these subsidiaries was $1.3 million and $1.1 million for
the three month periods ended September 30, 2004 and 2003, respectively,
and $3.1 million and $3.8 million for the nine months ended September 30,
2004 and 2003, respectively.
On June 1, 1989, the governments of the Netherlands Antilles and St.
Eustatius approved a Free Zone and Profit Tax Agreement retroactive to
January 1, 1989, which expired on December 31, 2000. This agreement
required a subsidiary of KPP, which was acquired on February 28, 2002, to
pay a 2% rate on taxable income, as defined therein, or a minimum payment
of 500,000 Netherlands Antilles guilders ($0.3 million) per year. The
agreement further provided that any amounts paid in order to meet the
minimum annual payment were available to offset future tax liabilities
under the agreement to the extent that the minimum annual payment is
greater than 2% of taxable income. The subsidiary is currently engaged in
discussions with representatives appointed by the Island Territory of St.
Eustatius regarding the renewal or modification of the agreement, but the
ultimate outcome cannot be predicted at this time. The subsidiary has
accrued amounts assuming a new agreement becomes effective, and continues
to make payments, as required, under the previous agreement.
Liquidity and Capital Resources
Cash provided by operations, including the operations of KPP, was $98.6
million and $115.3 million for the nine months ended September 30, 2004 and
2003, respectively. The decrease in operating cash flows for the first nine
months of 2004, when compared to the same 2003 period, was due primarily to
changes in working capital components resulting from the timing of cash
receipts and disbursements, primarily in the Company's product marketing
business.
Capital expenditures (related primarily to KPP) were $25.8 million for the
nine months ended September 30, 2004, compared to $32.1 million for the
same 2003 period. Such expenditures included $17.4 million and $13.6
million in maintenance and environmental expenditures and $8.3 million and
$18.5 million in expansion expenditures for the nine months ended September
30, 2004 and 2003, respectively. The decrease in capital expenditures for
the first nine months of 2004, when compared to the same 2003 period, is
the result of decreases in planned expansion capital expenditures related
to KPP's terminaling business. During all periods, adequate pipeline
capacity existed to accommodate volume growth, and the expenditures
required for environmental and safety improvements were not, and are not
expected to be, significant. KPP anticipates that capital expenditures
(including routine maintenance and expansion expenditures, but excluding
acquisitions) will total approximately $30 million to $35 million in 2004.
Future capital 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, less all cash disbursements and reserves. Excess cash flow of
the Company's wholly-owned product marketing operations is being used to
reduce working capital borrowings. Cash distributions of $0.475 and $0.495
per share with respect to the first and second quarters of 2004 were paid
on May 14, 2004 and August 13, 2004, respectively. A cash distribution of
$0.495 per share with respect to the third quarter of 2004 was declared to
holders of record on October 31, 2004 and will be paid on November 12,
2004.
The Company expects to fund future cash distributions with anticipated cash
flows from KPP distributions. 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, has a variable rate
commitment fee on unused amounts and contains certain financial and
operational covenants. At September 30, 2004, the Company was in compliance
with all covenants. The credit facility is secured by 4.6 million KPP
limited partnership units. At September 30, 2004, $14.0 million was drawn
on the credit facility.
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.
In April of 2003, KPP entered into a credit agreement with a group of banks
that provides for a $400 million unsecured revolving credit facility
through April of 2006. The credit facility, which provides for an increase
in the commitment up to an aggregate of $450 million by mutual agreement
between 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. At September
30, 2004, KPP was in compliance with all covenants. Initial borrowings 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. At September 30, 2004, $90.7 million was outstanding
under the credit agreement.
On May 19, 2003, KPP issued $250 million of 5.875% senior unsecured notes
due June 1, 2013. The net proceeds from the public offering, $247.6
million, were used to reduce amounts due under KPP's revolving credit
agreement. Under the note indenture, interest is payable semi-annually in
arrears on June 1 and December 1 of each year. The notes are redeemable, as
a whole or in part, at the option of 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 and other partners.
At September 30, 2004, KPP was in compliance with all covenants. In
connection with the offering, on May 8, 2003, KPP entered into a treasury
lock contract for the purpose of locking in the US Treasury interest rate
component on $100 million of the debt. The treasury lock contract, which
qualified as a cash flow hedging instrument under Statement of Financial
Accounting Standards ("SFAS") No. 133, was settled on May 19, 2003 with a
cash payment by KPP of $1.8 million. The settlement cost of the contract
has been recorded as a component of accumulated other comprehensive income
and is being amortized, as interest expense, over the life of the debt.
The following is a schedule by period of the Company's (including KPP's)
debt repayment obligations and material contractual commitments as of
September 30, 2004:
Less than After
Total 1 year 1 -3 years 4 -5 years 5 years
---------- ------------ ----------- ------------- --------------
(in thousands)
Debt:
Revolving credit facility $ 14,000 $ - $ - $ 14,000 $ -
Revolving credit facility
of subsidiary 9,584 - 9,584 - -
KPP revolving credit facility 90,669 - 90,669 - -
KPP 7.75% senior unsecured
notes 250,000 - - - 250,000
KPP 5.875% senior unsecured
notes 250,000 - - - 250,000
Other KPP bank debt 71,522 - 71,522 - -
---------- ------------ ----------- ------------ --------------
Debt subtotal 685,775 - 171,775 14,000 500,000
---------- ------------ ----------- ------------ --------------
Contractual commitments:
Operating leases, primarily KPP 16,478 5,696 9,424 1,075 283
---------- ------------ ----------- ------------ --------------
Contractual commitments
subtotal 16,478 5,696 9,424 1,075 283
---------- ------------ ----------- ------------ --------------
Total $ 702,253 $ 5,696 $ 181,199 $ 15,075 $ 500,283
========== ============ =========== ============ ==============
Additional information relative to sources and uses of cash is presented in
the consolidated financial statements included in this report.
Off-Balance Sheet Transactions
The Company was not a party to any off-balance sheet transactions at
September 30, 2004.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant accounting
policies are presented in the Notes to the Consolidated Financial
Statements of the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. Critical accounting policies are those that are most
important to the portrayal of the Company's financial position and results
of operations. These policies require management's most difficult,
subjective or complex judgments, often employing the use of estimates about
the effect of matters that are inherently uncertain. The Company's most
critical accounting policies pertain to impairment of KPP's property and
equipment and environmental costs.
The carrying value of KPP's property and equipment is periodically
evaluated using management's estimates of undiscounted future cash flows,
or, in some cases, third-party appraisals, as the basis for determining if
impairment exists under the provisions of SFAS No. 144, "Accounting for the
Impairment or the Disposal of Long-Lived Assets", which was adopted
effective January 1, 2002. To the extent that impairment is indicated to
exist, an impairment loss is recognized by KPP under SFAS No. 144 based on
fair value. The application of SFAS No. 144 did not have a material impact
on the results of operations of KPP for the three and nine month periods
ended September 30, 2004 and 2003. However, future evaluations of carrying
value are dependent on many factors, several of which are out of KPP's
control, including demand for refined petroleum products and terminaling
services in KPP's market areas, and local, state and federal governmental
regulations. To the extent that such factors or conditions change, it is
possible that future impairments might occur, which could have a material
effect on the results of operations of KPP.
KPP environmental expenditures that relate to current operations are
expensed or capitalized, as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are
recorded by KPP when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the timing
of these accruals coincides with the completion of a feasibility study or
KPP's commitment to a formal plan of action. The application of KPP's
environmental accounting policies did not have a material impact on the
results of operations of KPP for the three and nine month periods ended
September 30, 2004 and 2003. Although KPP believes that its operations are
in general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in pipeline and terminaling
operations. Moreover, it is possible that other developments, such as
increasingly strict environmental laws, regulations and enforcement
policies thereunder, and legal claims for damages to property or persons
resulting from the operations of KPP could result in substantial costs and
liabilities, any of which could have a material effect on the results of
operations of KPP.
Recent Accounting Pronouncement
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46R"), primarily to clarify the required
accounting for interests in variable interest entities ("VIEs"). This
standard replaces FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," which was issued in January 2003 to address certain
situations in which a company should include in its financial statements
the assets, liabilities and activities of another entity. For the Company,
application of FIN 46R is required for interests in certain VIEs that are
commonly referred to as special-purpose entities, or SPEs, as of December
31, 2003, and for interests in all other types of VIEs as of March 31,
2004. The application of FIN 46R did not have a material impact on the
consolidated financial statements of the Company.
Subsequent Event
On October 31, 2004, Valero L.P. agreed to acquire by merger (the "KSL
Merger") all of the outstanding common shares of the Company for cash.
Under the terms of that agreement, Valero L.P. is offering to purchase all
of the outstanding shares of the Company at a fixed cash price of $525
million, or $43.31 per share.
In a separate definitive agreement, on October 31, 2004, Valero L.P. and
KPP agreed to merge (the "KPP Merger"). Under the terms of that agreement,
each holder of units of limited partnership interests in KPP will receive a
number of Valero L.P. common units based on an exchange ratio that
fluctuates within a fixed range to provide $61.50 in value of Valero L.P.
units for each unit of KPP. The actual exchange ratio will be determined at
the time of the closing of the proposed merger and is subject to a fixed
value collar of plus or minus five percent of Valero L.P.'s per unit price
of $57.25 as of October 7, 2004. Should Valero L.P.'s per unit price fall
below $54.39 per unit, the exchange ratio will remain fixed at 1.1307
Valero L.P. units for each unit of KPP. Likewise, should Valero L.P.'s per
unit price exceed $60.11 per unit, the exchange ratio will remain fixed at
1.0231 Valero L.P. units for each unit of KPP.
The completion of the KSL Merger is subject to the approval of the
unitholders of Valero L.P. and the shareholders of the Company, as well as
customary regulatory approvals including those under the Hart-Scott-Rodino
Antitrust Improvements Act. The completion of the KSL Merger is also
subject to completion of the KPP Merger, which requires the approval of its
unitholders. The Company and KPP will become wholly owned subsidiaries of
Valero L.P.
The above description of the Company's definitive agreement with Valero
L.P. does not purport to be a complete statement of the parties' rights and
obligations under that agreement and the transactions contemplated by it.
The above description is qualified in its entirety by reference to the
definitive agreement, a copy of which is attached as Exhibit 2.1 to the
Company's Current Report on Form 8-K and is incorporated herein by
reference.
KANEB SERVICES LLC AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks pursuant to this Item (i.e., the risk of loss arising
from adverse changes in market rates and prices) to which the Company is exposed
are interest rates on the Company's and KPP's debt and investment portfolios,
fluctuations in petroleum product prices on inventories held for resale and
fluctuations in foreign currency.
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 $185.8 million (including KPP's debt) at September 30, 2004, a one percent
increase in interest rates would increase annual net interest expense by
approximately $1.9 million.
The product marketing business purchases refined petroleum products for resale
as motor fuel, bunker fuel and sales to commercial interests. Petroleum
inventories are generally held for short periods of time, not exceeding 90 days.
As the Company and KPP do not engage in derivative transactions to hedge the
value of the inventory, they are subject to market risk from changes in global
oil markets.
A portion of KPP's terminaling business is exposed to fluctuations in foreign
currency exchange rates. Such fluctuations were not significant for the three
and nine months ended September 30, 2004 or 2003.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer, after
evaluating, as of September 30, 2004, the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934), have concluded that, as of such date,
the 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.
During the quarter ended September 30, 2004, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the evaluation. As a result, no corrective actions
were required or undertaken.
KANEB SERVICES LLC AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
Item 6. Exhibits
3.1 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.
10.1 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and Michael L. Rose.
10.2 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and Rebecca Dorshorst.
10.3 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and Max A. Elghandour.
10.4 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and Robert A. McElroy.
10.5 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and Mary F. Morgan.
10.6 Change of Control Agreement, dated as of August 31, 2004, between the
Registrant and James L. Tidmore.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated November 8, 2004.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated November 8, 2004.
32.1 Certification of Chief Executive Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated November 8, 2004.
32.2 Certification of Chief Financial Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated November 8, 2004.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANEB SERVICES LLC
(Registrant)
Date: November 8, 2004 //s// HOWARD C. WADSWORTH
----------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Principal Financial Officer and
Duly Authorized Officer)
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 8, 2004
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Kaneb 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report, based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 8, 2004
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Executive Officer of Kaneb Services LLC (the
"Company"), hereby certifies that, to his knowledge, the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004, filed
with the United States Securities and Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Quarterly Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Services LLC and
will be retained by Kaneb Services LLC and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: November 8, 2004
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Financial Officer of Kaneb Services LLC (the
"Company"), hereby certifies that, to his knowledge, the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004, filed
with the United States Securities and Exchange Commission pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Quarterly Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original of this written
statement required by Section 906 has been provided to Kaneb Services LLC and
will be retained by Kaneb Services LLC and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: November 8, 2004
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)