-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AxJk/AWtxoXHoYElEZAjFxumbn9cwyA3AaZZIulmRCImPNgtUSyYyx560FbYUPb6 c5IUBfoiUOntj4/ZRpTavA== 0000853890-01-500003.txt : 20010815 0000853890-01-500003.hdr.sgml : 20010815 ACCESSION NUMBER: 0000853890-01-500003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANEB PIPE LINE PARTNERS L P CENTRAL INDEX KEY: 0000853890 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM BULK STATIONS & TERMINALS [5171] IRS NUMBER: 752287571 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-30330 FILM NUMBER: 1712026 BUSINESS ADDRESS: STREET 1: 2435 NORTH CENTRAL EXPRESSWAY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 9726994031 10-Q 1 kpp.txt KANEB PIPE LINE PARTNERS FORM 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-10311 KANEB PIPE LINE PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 75-2287571 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2435 North Central Expressway Richardson, Texas 75080 (Address of principal executive offices, including zip code) (972) 699-4000 (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 Number of Units of the Registrant outstanding at July 31, 2001: 20,285,090 - -------------------------------------------------------------------------------- KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED JUNE 30, 2001 - -------------------------------------------------------------------------------- Page No. Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 1 Condensed Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands - Except Per Unit Amounts) (Unaudited) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 -------------- ------------- ------------- -------------- Revenues $ 52,952 $ 38,438 $ 101,021 $ 75,118 -------------- ------------- ------------- -------------- Costs and expenses: Operating costs 22,282 17,004 43,937 34,284 Depreciation and amortization 5,951 3,961 11,702 7,936 General and administrative 2,848 2,514 5,176 5,017 -------------- ------------- ------------- -------------- Total costs and expenses 31,081 23,479 60,815 47,237 -------------- ------------- ------------- -------------- Operating income 21,871 14,959 40,206 27,881 Interest and other income, net 3,388 82 4,096 141 Interest expense (4,043) (2,961) (8,764) (5,980) -------------- ------------- ------------- --------------- Income before minority interest, income taxes and extraordinary item 21,216 12,080 35,538 22,042 Minority interest in net income (211) (120) (352) (217) Income tax provision (72) (78) (307) (376) -------------- ------------- ------------- -------------- Income before extraordinary item 20,933 11,882 34,879 21,449 Extraordinary item - loss on debt extinguishment, net of minority interest and income taxes - - (5,757) - -------------- ------------- ------------- -------------- Net income 20,933 11,882 29,122 21,449 General partner's interest in net income (536) (413) (944) (803) -------------- ------------- ------------- -------------- Limited partners' interest in net income $ 20,397 $ 11,469 $ 28,178 $ 20,646 ============== ============= ============= ============== Allocation of net income per unit: Before extraordinary item $ 1.01 $ .63 $ 1.68 $ 1.13 Extraordinary item - - (.29) - -------------- ------------- ------------- -------------- $ 1.01 $ .63 $ 1.39 $ 1.13 ============== ============= ============= ============== Weighted average number of limited partnership units outstanding 20,285 18,310 20,285 18,310 ============== ============= ============= ==============
See notes to consolidated financial statements. 1 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) - --------------------------------------------------------------------------------
June 30, December 31, 2001 2000 ------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 21,308 $ 4,758 Accounts receivable 24,350 21,091 Prepaid expenses and other 4,759 5,291 ------------- -------------- Total current assets 50,417 31,140 ------------- -------------- Property and equipment 633,300 458,926 Less accumulated depreciation 154,654 137,571 ------------- -------------- Net property and equipment 478,646 321,355 ------------- -------------- Investment in affiliates 20,769 22,568 ------------- -------------- $ 549,832 $ 375,063 ============= ============== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt $ 22,926 $ - Accounts payable and accrued expenses 23,720 17,491 Accrued distributions payable 14,814 13,372 Payable to general partner 1,989 1,889 ------------- -------------- Total current liabilities 63,449 32,752 ------------- -------------- Long-term debt, less current portion 253,700 166,900 Other liabilities and deferred taxes 15,541 13,676 Minority interest 963 968 Commitments and contingencies Partners' capital 216,179 160,767 ------------- -------------- $ 549,832 $ 375,063 ============= ==============
See notes to consolidated financial statements. 2 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) - --------------------------------------------------------------------------------
Six Months Ended June 30, ---------------------------------------- 2001 2000 ------------- -------------- Operating activities: Net income $ 29,122 $ 21,449 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,702 7,936 Minority interest 352 217 Equity in earnings of affiliates, net of distributions 1,639 662 Deferred income taxes 307 376 Extraordinary item 5,757 - Changes in other liabilities (1,114) - Changes in working capital components 5,499 1,973 ------------- -------------- Net cash provided by operating activities 53,264 32,613 ------------- -------------- Investing activities: Capital expenditures (6,196) (2,883) Acquisition of terminals, net of cash acquired (106,810) - Proceeds from sale of assets 2,807 - Other, net (71) (2,152) ------------- -------------- Net cash used in investing activities (110,270) (5,035) ------------- -------------- Financing activities: Issuance of debt 257,500 4,500 Payments of debt (154,314) (3,309) Distributions, including minority interest (29,630) (26,744) ------------- -------------- Net cash provided by (used in) financing activities 73,556 (25,553) ------------- -------------- Increase in cash and cash equivalents 16,550 2,025 Cash and cash equivalents at beginning of period 4,758 5,127 ------------- -------------- Cash and cash equivalents at end of period $ 21,308 $ 7,152 ============= ============== Supplemental cash flow information: Cash paid for interest $ 7,781 $ 6,279 ============= ============== Non-cash investing and financing activities - Issuance of units for acquisition of terminals $ 56,488 $ - ============= ==============
See notes to consolidated financial statements. 3 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES The unaudited condensed consolidated financial statements of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") for the three and six month periods ended June 30, 2001 and 2000, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. Significant accounting policies followed by the Partnership are disclosed in the notes to the consolidated financial statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of the Partnership's management, the accompanying condensed consolidated financial statements contain the adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position of the Partnership and its consolidated subsidiaries at June 30, 2001 and the consolidated results of their operations and cash flows for the periods ended June 30, 2001 and 2000. Operating results for the three and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 2. ACQUISITION AND FINANCING On January 3, 2001, the Partnership, through a wholly-owned subsidiary, acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090 Partnership units (valued at $56.5 million on the date of agreement and its announcement). Financing for the cash portion of the purchase price was supplied under a new $275 million unsecured revolving credit agreement with a group of banks. The acquisition has been accounted for using the purchase method of accounting. Assuming the acquisition occurred on January 1, 2000, unaudited pro forma revenues, net income and net income per unit would be $46.6 million, $13.2 million and $0.63, respectively, for the three months ended June 30, 2000, and $90.9 million, $24.0 million and $1.14, respectively, for the six months ended June 30, 2000. The $128 million of first mortgage notes outstanding at December 31, 2000 which were due in varying amounts from 2001 to 2016, were repaid in full in January of 2001 with the proceeds from the $275 million revolving credit facility. Under the provisions of the mortgage notes, the Partnership incurred a $6.5 million prepayment penalty, before minority interest and income taxes, which has been recognized as an extraordinary expense in the first quarter of 2001. 3. COMPREHENSIVE INCOME Comprehensive income for the three and six months ended June 30, 2001 and 2000 is as follows:
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (in thousands) Net income $ 20,933 $ 11,882 $ 29,122 $ 21,449 Other comprehensive income (loss) - foreign currency translation adjustment (163) (1,080) (858) (925) ----------- ----------- ----------- ----------- Comprehensive income $ 20,770 $ 10,802 $ 28,264 $ 20,524 =========== =========== =========== ===========
4. CASH DISTRIBUTIONS The Partnership makes quarterly distributions of 100% of its Available Cash, as defined in the Partnership Agreement, to holders of limited partnership units ("Unitholders") and the general partner. Available Cash consists generally of all the cash receipts of the Partnership, plus the beginning cash balance less all of its cash disbursements and reserves. The Partnership expects to make distributions of all Available Cash within 45 days after the end of each quarter to Unitholders of record on the applicable record date. A cash distribution of $0.70 per unit for the first quarter of 2001 was paid on May 15, 2001. A cash distribution of $0.70 per unit for the second quarter of 2001 was declared to holders of record on July 31, 2001 and was paid on August 14, 2001. 5. CONTINGENCIES The operations of the Partnership are subject to Federal, state and local laws and regulations in the United States and the United Kingdom relating to protection of the environment. Although the Partnership believes its operations are in general compliance with applicable environmental regulations, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership. On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a partnership of which ST Services, a wholly-owned subsidiary of the Partnership, is general partner. PEPCO has reported that, through December 2000, it incurred approximately $66 million in clean-up costs and expects to incur total cleanup costs of $70 million to $75 million. Since May 2000, ST Services has participated provisionally in a minority share of the cleanup expense, which has been funded by ST Services' insurance carriers. The Partnership cannot predict the amount, if any, that ultimately may be determined to be ST Services' share of the remediation expense, but it believes that such amount will be covered by insurance and will not materially affect the Partnership's financial condition. As a result of the rupture, purported class actions have been filed in federal and state court in Maryland by property and/or business owners alleging damages in unspecified amounts against PEPCO and ST Services under various theories, including the federal Oil Pollution Act. The court has ordered a consolidated complaint to be filed in this action. ST Services' insurance carriers have assumed the defense of these actions. While the Partnership cannot predict the amount, if any, of any liability it may have in these suits, it believes that such amounts will be covered by insurance and that these actions will not have a material adverse effect on its financial condition. PEPCO and ST Services have agreed with the State of Maryland to pay costs of assessing natural resource damages under the federal Oil Pollution Act, but they cannot predict at this time the amount of any damages that may be claimed by Maryland. The Partnership believes that both the assessment costs and such damages are covered by insurance and will not materially affect the Partnership's financial condition. The U.S. Department of Transportation 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 $674,000. ST Services and PEPCO have contested the allegations of violations and the proposed penalty. The ultimate amount of any penalty attributable to ST Services cannot be determined at this time, but the Partnership believes that this matter will not have a material effect on the Partnership's financial condition. Certain subsidiaries of the Partnership were sued in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from which the Partnership acquired ST Services in 1993. The lawsuit involves environmental response and remediation 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, was abandoned in 1976, when the connecting terminal was sold to an unrelated entity. Grace alleged that subsidiaries of the Partnership acquired the abandoned pipeline, as part of the acquisition of ST Services in 1993, and assumed responsibility for environmental damages allegedly caused by the jet fuel leaks. Grace sought a ruling that these subsidiaries are responsible for all present and future remediation and expenses for these leaks and that Grace has no obligation to indemnify these subsidiaries for these expenses. In the lawsuit, Grace also sought indemnification for expenses that it has incurred since 1996 of approximately $3.5 million for response and remediation required by the State of Massachusetts and for additional expenses that it expects to incur in the future. The consistent position of the Partnership's subsidiaries is 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 Grace had breached a provision of the 1993 acquisition agreement and that the pipeline was abandoned before 1978. On August 30, 2000, the Judge entered final judgment in the case, which is now on appeal to the Dallas Court of Appeals, that Grace take nothing from the subsidiaries on its claims, including claims for future expenses. Although the Partnership's subsidiaries have not incurred any expenses in connection with the remediation, the court also ruled, in effect, that the subsidiaries would not be entitled to an indemnification from Grace if any such expenses were incurred in the future. However, the Judge let stand a prior summary judgment ruling that the pipeline was an asset of the company acquired as part of the 1993 ST Services transaction. The Judge also awarded attorney fees to Grace. While the judgment means that the subsidiaries have no obligation to reimburse Grace for the approximately $3.5 million it has incurred, as required by the State of Massachusetts, the Partnership's subsidiaries have filed an appeal of the judgment finding that the Otis Pipeline was transferred to them and the award of attorney fees. On April 2, 2001, Grace filed a petition in bankruptcy, which created an automatic stay against actions against Grace. This automatic stay will affect the appeal of this matter. The Texas court of appeals has issued an order staying all proceedings of the appeal because of the bankruptcy. Once that stay is lifted, the Partnership's subsidiaries that are party to the lawsuit intend to resume vigorous prosecution of the appeal. The Otis Air Force Base is a part of the Massachusetts Military Reservation ("MMR"), which has been declared a Superfund Site pursuant to the Comprehensive Environmental Response, Compensation and Liability Act. The MMR Site contains nine groundwater contamination plumes, two of which are allegedly associated with the pipeline, and various other waste management areas of concern, such as landfills. The United States Department of Defense and the United States Coast Guard, pursuant to a Federal Facilities Agreement, have been responding to the Government remediation demand for most of the contamination problems at the MMR Site. Grace and others have also received and responded to formal inquiries from the United States Government in connection with the environmental damages allegedly resulting from the jet fuel leaks. The Partnership's subsidiaries voluntarily responded to an invitation from the Government to provide information indicating that they do not own the pipeline. In connection with a court-ordered mediation between Grace and the subsidiaries, the Government advised the parties in April 1999 that it has identified the 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 advised ST Services that the Government intends to seek reimbursement from it 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. The Government advised ST Services that it believes it has incurred costs exceeding $40 million and expects in the future to incur costs exceeding an additional $22 million, for remediation of the two spill areas. The Partnership believes that its subsidiaries have substantial defenses to the Government's claims and intends to assert such defenses in a responsive letter to the Department of Justice. The response letter is due on or before September 10, 2001. The Partnership does not believe that either the Grace litigation or the claims made by the Government will adversely affect its ability to make cash distributions to its unitholders, but there can be no assurances in that regard. The Partnership has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of the Partnership. 6. BUSINESS SEGMENT DATA The Partnership conducts business through two principal operations; the "Pipeline Operations," which consists primarily of the transportation of refined petroleum products in the Midwestern states as a common carrier, and the "Terminaling Operations," which provide storage for petroleum products, specialty chemicals and other liquids. The Partnership measures segment profit as operating income. Total assets are those controlled by each reportable segment. Business segment data is as follows:
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (in thousands) Business segment revenues: Pipeline operations $ 18,791 $ 17,483 $ 34,960 $ 32,731 Terminaling operations 34,161 20,955 66,061 42,387 ----------- ----------- ----------- ----------- $ 52,952 $ 38,438 $ 101,021 $ 75,118 =========== =========== =========== =========== Business segment profit: Pipeline operations $ 9,545 $ 9,230 $ 16,813 $ 16,467 Terminaling operations 12,326 5,729 23,393 11,414 ----------- ----------- ----------- ----------- Operating income 21,871 14,959 40,206 27,881 Interest and other income, net 3,388 82 4,096 141 Interest expense (4,043) (2,961) (8,764) (5,980) ----------- ----------- ----------- ----------- Income before minority interest, income taxes and extraordinary item $ 21,216 $ 12,080 $ 35,538 $ 22,042 =========== =========== =========== ===========
June 30, December 31, 2001 2000 ------------ ------------ (in thousands) Total assets: Pipeline operations $ 107,962 $ 102,656 Terminaling operations 441,870 272,407 ------------ ----------- $ 549,832 $ 375,063 ============ ===========
7. DERIVATIVE INSTRUMENTS Effective January 1, 2001, the Partnership adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging Activities", which establishes the accounting and reporting standards for such activities. Under SFAS No. 133, companies must recognize all derivative instruments on their balance sheet at fair value. Changes in the value of derivative instruments, which are considered hedges, are offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. SFAS No. 133 requires that unrealized gains and losses on derivatives not qualifying for hedge accounting be recognized currently in earnings. On January 1, 2001, the Partnership was not a party to any derivative contracts; accordingly, initial adoption of SFAS No. 133 at that date did not have any effect on the Partnership's result of operations or financial position. In March of 2001, a wholly-owned subsidiary of the Partnership entered into two contracts for the purpose of locking in interest rates on $100 million of anticipated ten-year public debt offerings. As the interest rate locks were not designated as hedging instruments pursuant to the requirements of SFAS No. 133, increases or decreases in the fair value of the contracts are included as a component of interest and other income, net. On May 22, 2001, the contracts were settled resulting in an aggregate gain of $3.8 million. For the three and six months ended June 30, 2001, gains of $3.2 million and $3.8 million, respectively, were recorded on these contracts. KANEB PIPE LINE PARTNERS, L.P. 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 Pipe Line Partners, L.P. (the "Partnership") and notes thereto included elsewhere in this report. Operating Results:
Pipeline Operations Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (in thousands) Revenues $ 18,791 $ 17,483 $ 34,960 $ 32,731 Operating costs 7,105 6,028 13,908 11,842 Depreciation and amortization 1,314 1,291 2,613 2,584 General and administrative 827 934 1,626 1,838 ----------- ----------- ----------- ----------- Operating income $ 9,545 $ 9,230 $ 16,813 $ 16,467 =========== =========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which such volumes are transported. For each of the three and six month periods ended June 30, 2001, revenues increased 7%, compared to the same 2000 periods, due to increases in barrel miles shipped and increases in terminaling charges. Barrel miles totaled 4.8 billion and 4.5 billion for the three months ended June 30, 2001 and 2000, respectively, and 8.9 billion and 8.4 billion for the six months ended June 30, 2001 and 2000, respectively. Operating costs, which include fuel and power costs, materials and supplies, maintenance and repair costs, salaries, wages and employee benefits, and property and other taxes, increased by $1.1 million and $2.1 million for the three and six month periods ended June 30, 2001, respectively, when compared to 2000, due primarily to increases in fuel and power costs and expenses from pipeline relocation projects. General and administrative costs, which include managerial, accounting, and administrative personnel costs, office rental and expense, legal and professional costs and other non-operating costs, remained relatively flat for the three and six month periods ended June 30, 2001, when compared to the same prior year periods. Terminaling Operations
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (in thousands) Revenues $ 34,161 $ 20,955 $ 66,061 $ 42,387 Operating costs 15,177 10,976 30,029 22,442 Depreciation and amortization 4,637 2,670 9,089 5,352 General and administrative 2,021 1,580 3,550 3,179 ----------- ----------- ----------- ----------- Operating income $ 12,326 $ 5,729 $ 23,393 $ 11,414 =========== =========== =========== ===========
On January 3, 2001, the Partnership, through a wholly-owned subsidiary, acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090 Partnership units (valued at $56.5 million on the date of agreement and its announcement). Financing for the cash portion of the purchase price was supplied under a new $275 million unsecured revolving credit agreement with a group of banks. See "Liquidity and Capital Resources". Shore owns seven terminals, located in four states, with a total tankage capacity of 7.8 million barrels. All of the terminals handle petroleum products and, with the exception of one, have deep water access. Terminaling revenues increased by $13.2 million and $23.7 million, respectively, for the three and six month periods ended June 30, 2001, compared to the same 2000 periods due to the Shore acquisition and overall increases in utilization at existing locations, the result of relatively favorable market conditions. Average annual tankage utilized for the six months ended June 30, 2001 increased to 30.1 million barrels, up from 20.8 million barrels for the comparable prior year period. For the six months ended June 30, 2001, average annualized revenues per barrel of tankage utilized increased to $4.42 per barrel, compared to $4.10 per barrel for the same prior year period, also the result of favorable market conditions, when compared to the first six months of 2000. For the three and six months ended June 30, 2001, operating costs increased by $4.2 million and $7.6 million, respectively, when compared to the same 2000 periods, the result of the Shore acquisition and increases in volumes stored. General and administrative costs for each of the three and six month periods ended June 30, 2001, increased by $0.4 million, when compared to the same 2000 periods due to the Shore acquisition. Total tankage capacity (38.3 million barrels at June 30, 2001) has been, and is expected to remain, adequate to meet existing customer storage requirements. Customers consider factors such as location, access to cost effective transportation and quality of service, in addition to pricing, when selecting terminal storage. Interest Expense For the three and six months ended June 30, 2001, interest expense increased by $1.1 million and $2.8 million, respectively, compared to the same 2000 periods, due to increases in debt resulting from the Shore acquisition (see "Liquidity and Capital Resources"), partially offset by overall declines in interest rates. Liquidity and Capital Resources During the first six months of 2001, the Partnership's working capital requirements for operations, capital expenditures (excluding acquisitions) and cash distributions were funded through the use of internally generated funds. Cash provided by operations was $53.3 million and $32.6 million for the six months ended June 30, 2001 and 2000, respectively. Capital expenditures (excluding acquisitions) were $6.2 million for the six months ended June 30, 2001, compared to $2.9 million during the same 2000 period. The Partnership anticipates that routine maintenance capital expenditures will total approximately $12 million to $15 million (excluding acquisitions) for the year ending December 31, 2001. In December of 2000, the Partnership entered into a credit agreement with a group of banks that provides for a $275 million unsecured revolving credit facility through December 2003. The credit facility bears interest at variable rates and has a variable commitment fee on the unutilized amounts. The credit facility contains operational and financial covenants, including limitations on investments, sales of assets and transactions with affiliates. Absent an event of default, the covenants do not restrict distributions to unitholders. At June 30, 2001, $253.7 million was drawn on the facility at an interest rate of 4.81%, which is due in December of 2003. The $128 million of first mortgage notes outstanding at December 31, 2000, which were due in varying amounts from 2001 to 2016, were repaid in full in January of 2001 with the proceeds from the $275 million revolving credit facility. Under the provisions of the mortgage notes, the Partnership incurred a $6.5 million prepayment penalty, before minority interest and income taxes, which was recognized as an extraordinary expense in the first quarter of 2001. In August of 2000, a wholly-owned subsidiary of the Partnership filed a shelf registration statement on Form S-3 for the issuance of up to $500 million of public debt securities. In March of 2001, this subsidiary entered into two contracts for the purpose of locking in interest rates on $100 million of the anticipated ten-year public debt offerings. In May of 2001, the Partnership announced that, due to increases in ten-year Treasury rates, coupled with the declines in floating interest rates, it has elected to defer issuance of the public debt securities. On May 22, 2001, the contracts were settled resulting in an aggregate gain of $3.8 million. For the three and six months ended June 30, 2001, gains of $3.2 million and $3.8 million, respectively, were recorded on these contracts. The Partnership makes distributions of 100% of its Available Cash to Unitholders and the general partner. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. Distributions of $0.70 per unit were declared to all Unitholders in the first and second quarters of 2001 and $2.80 per unit was declared in the calendar year 2000. The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and anticipated cash flows from operations. Expansionary capital expenditures are expected to be funded through additional Partnership borrowings and/or future public unit offerings. Additional information relative to sources and uses of cash is presented in the financial statements included in this report. Allocation of Net Income and Earnings Net income or loss is allocated between limited partner interests and the general partner pro rata based on the aggregate amount of cash distributions declared (including general partner incentive distributions). Beginning in 1997, distributions by the Partnership of Available Cash reached the Second Target Distribution, as defined in the Partnership Agreement, which entitled the general partner to receive certain incentive distributions at different levels of cash distributions. Net income per Unit shown on the consolidated statements of income are calculated by dividing the limited partners' interest in net income by the weighted average number of Units outstanding. If the allocation of income had been made as if all income had been distributed in cash, net income per Unit would have been $0.99 and $0.64 for the three months and $1.39 and $1.16 for the six months ended June 30, 2001 and 2000, respectively. Recent Accounting Pronouncements In July of 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations", which requires that all business combinations initiated after June 30, 2001 be accounted under the purchase method of accounting. Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Partnership is currently assessing the impact of SFAS No. 142, which must be adopted in the first quarter of 2002. Also, the FASB has voted to issue SFAS No. 143 "Accounting for Asset Retirement Obligations", which establishes requirements for the removal-type costs associated with asset retirements. The Partnership is currently assessing the impact of SFAS No. 143, which must be adopted in the first quarter of 2003. KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Quantitative and Qualitative Disclosure About Market Risk In March of 2001, a wholly-owned subsidiary of the Partnership entered into two contracts for the purpose of locking in interest rates on $100 million of anticipated ten-year public debt offerings. As the interest rate locks were not designated as hedging instruments pursuant to the requirements of SFAS No. 133, increases or decreases in the fair value of the contracts are included as a component of interest and other income, net. On May 22, 2001, the contracts were settled resulting in an aggregate gain of $3.8 million. For the three and six months ended June 30, 2001, gains of $3.2 million and $3.8 million, respectively, were recorded on these contracts. Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K None. 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 PIPE LINE PARTNERS, L.P. (Registrant) By KANEB PIPE LINE COMPANY (Managing General Partner) Date: August 14, 2001 //s// Howard C. Wadsworth Vice President -----END PRIVACY-ENHANCED MESSAGE-----