-----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, TzU45UIoNn5p11bMRzpD5foTPxDyZYRGPyJcZhbb88VNQlh11ukJmj6ioRNrGGe0 b6468ys1XYaNcPFgniF1gA== 0000950134-01-501918.txt : 20010516 0000950134-01-501918.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950134-01-501918 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: SEC FILE NUMBER: 033-30330 FILM NUMBER: 1636549 BUSINESS ADDRESS: STREET 1: 2435 NORTH CENTRAL EXPRESSWAY CITY: RICHARDSON STATE: TX ZIP: 75080 BUSINESS PHONE: 9726994031 10-Q 1 d87334e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 Identification No.) Incorporation or Organization) 2435 NORTH CENTRAL EXPRESSWAY RICHARDSON, TEXAS 75080 (Address of principle 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 April 30, 2001: 20,285,090. ================================================================================ 2 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2001
- ------------------------------------------------------------------------------------------------------------------- Page No. -------- Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income -- Three Months Ended March 31, 2001 and 2000 1 Condensed Consolidated Balance Sheets -- March 31, 2001 and December 31, 2000 2 Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2001 and 2000 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13
3 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS -- EXCEPT PER UNIT AMOUNTS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- Revenues $ 48,069 $ 36,680 ------------- -------------- Costs and expenses: Operating costs 21,655 17,280 Depreciation and amortization 5,751 3,975 General and administrative 2,328 2,503 ------------- -------------- Total costs and expenses 29,734 23,758 ------------- -------------- Operating income 18,335 12,922 Interest and other income, net 114 59 Interest expense (4,721) (3,019) ------------- -------------- Income before minority interest, income taxes and extraordinary item 13,728 9,962 Minority interest (135) (97) Income tax provision (235) (298) ------------- -------------- Income before extraordinary item 13,358 9,567 Extraordinary item - loss on debt extinguishment, net of minority interest and income taxes (5,757) -- ------------- -------------- Net income 7,601 9,567 General partner's interest in net income (402) (390) ------------- -------------- Limited partners' interest in net income $ 7,199 $ 9,177 ============= ============== Allocation of net income per unit: Before extraordinary item $ .64 $ .50 Extraordinary item (.29) -- ------------- -------------- $ .35 $ .50 ============= ============== Weighted average number of Partnership units outstanding 20,285 18,310 ============= ==============
See notes to consolidated financial statements. 1 4 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, 2001 2000 ------------- --------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 14,498 $ 4,758 Accounts receivable 21,108 21,091 Prepaid expenses and other 5,037 5,291 ------------- -------------- Total current assets 40,643 31,140 ------------- -------------- Property and equipment 633,938 458,926 Less accumulated depreciation 149,788 137,571 ------------- -------------- Net property and equipment 484,150 321,355 ------------- -------------- Investment in affiliates 22,031 22,568 ------------- -------------- $ 546,824 $ 375,063 ============= ============== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current portion of long-term debt $ 22,725 $ -- Accounts payable and accrued expenses 22,888 17,491 Accrued distributions payable 14,814 13,372 Payable to general partner 1,913 1,889 ------------- -------------- Total current liabilities 62,340 32,752 ------------- -------------- Long-term debt, less current portion 257,500 166,900 Other liabilities and deferred taxes 16,600 13,676 Minority interest 893 968 Commitments and contingencies Partners' capital 209,491 160,767 ------------- -------------- $ 546,824 $ 375,063 ============= ==============
See notes to consolidated financial statements. 2 5 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- Operating activities: Net income $ 7,601 $ 9,567 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,751 3,975 Minority interest 135 97 Equity in earnings of affiliates, net of distributions 114 1,175 Deferred income taxes 235 298 Extraordinary item 5,757 -- Changes in working capital components 7,898 3,000 ------------- -------------- Net cash provided by operating activities 27,491 18,112 ------------- -------------- Investing activities: Capital expenditures (3,037) (2,336) Acquisition of terminals, net of cash acquired (106,810) -- Other, net 125 (151) ------------- -------------- Net cash used in investing activities (109,722) (2,487) ------------- -------------- Financing activities: Issuance of debt 257,500 2,000 Payment of debt (150,715) (1,982) Distributions, including minority interest (14,814) (13,372) ------------- -------------- Net cash provided by (used in) financing activities 91,971 (13,354) ------------- -------------- Increase in cash and cash equivalents 9,740 2,271 Cash and cash equivalents at beginning of period 4,758 5,127 ------------- -------------- Cash and cash equivalents at end of period $ 14,498 $ 7,398 ============= ============== Supplemental cash flow information: Cash paid for interest $ 3,623 $ 1,957 ============= ============== Non-cash investing and financing activities - Issuance of units for acquisition of terminals $ 56,488 $ -- ============= ==============
See notes to consolidated financial statements. 3 6 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 month periods ended March 31, 2001 and 2000, have been prepared in accordance with generally accepted accounting principles. 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 March 31, 2001 and the consolidated results of their operations and cash flows for the periods ended March 31, 2001 and 2000. Operating results for the three months ended March 31, 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 contract and 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 for the three months ended March 31, 2000 would be $44.4 million, $10.4 million and $0.51, respectively. 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 months ended March 31, 2001 and 2000 is as follows:
THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- (IN THOUSANDS) Net income $ 7,601 $ 9,567 Other comprehensive income - foreign currency translation adjustment (695) 155 ------------- -------------- Comprehensive income $ 6,906 $ 9,722 ============= ==============
4 7 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 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 fourth quarter of 2000 was paid on February 14, 2001. A cash distribution of $0.70 per unit for the first quarter of 2001 was declared to holders of record on April 30, 2001 and is payable on May 15, 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. 5 8 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 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 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 on May 19, 2000, the jury returned a verdict including findings that Grace had breached a provision of the 1993 acquisition agreement and that the pipeline was abandoned prior to 1978. On July 17, 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 Partnership acquired as part of the 1993 ST Services transaction. The Judge also awarded attorney fees to Grace. 6 9 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 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 the 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 have 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 advised the parties that it believes it has incurred costs of approximately $34 million, and expects 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. The Partnership believes that the ultimate cost of the remediation, while substantial, will be considerably less than the Government has indicated. The Government has made no claims against the Partnership or any other person on account of this matter. The Partnership believes that if any such claims were made, its subsidiaries would have substantial defenses to such claims. Under Massachusetts law, the party responsible for remediation of a facility is the last owner before the abandonment, which was a Grace company. The Partnership does not believe that either the Grace litigation or any claims that may be 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, based on the advice of counsel, that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of the Partnership. 7 10 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 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.
THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- (IN THOUSANDS) Business segment revenues: Pipeline operations $ 16,169 $ 15,248 Terminaling operations 31,900 21,432 ------------- -------------- $ 48,069 $ 36,680 ============= ============== Business segment profit: Pipeline operations $ 7,268 $ 7,237 Terminaling operations 11,067 5,685 ------------- -------------- Operating income 18,335 12,922 ------------- -------------- Interest and other income, net 114 59 Interest expense (4,721) (3,019) ------------- -------------- Income before minority interest, income taxes and extraordinary item $ 13,728 $ 9,962 ============= ============== MARCH 31, DECEMBER 31, 2001 2000 ------------- -------------- Total assets: Pipeline operations $ 107,375 $ 102,656 Terminaling operations 439,449 272,407 ------------- -------------- $ 546,824 $ 375,063 ============= ==============
7. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Partnership adopted the provisions of SFAS No. 133, "Accounting and 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 its 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. As the Partnership is not a party to any derivative contracts, adoption did not have any effect on the Partnership's results of operations or financial position. 8 11 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 MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- (IN THOUSANDS) Revenues $ 16,169 $ 15,248 Operating costs 6,803 5,814 Depreciation and amortization 1,299 1,293 General and administrative 799 904 ------------- -------------- Operating income $ 7,268 $ 7,237 ============= ==============
Pipeline revenues are based on volumes shipped and the distances over which such volumes are transported. For the three months ended March 31, 2001, pipeline revenues increased by $0.9 million when compared to the same 2000 period, due to increases in barrel miles shipped and increases in terminaling charges. Barrel miles totaled 4.1 billion for the three month period ended March 31, 2001, compared to 4.0 billion for the first quarter of 2000. For the three months ended March 31, 2001, 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 $1.0 million, when compared to the three months ended March 31, 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, when compared to the first quarter of 2000. TERMINALING OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------- -------------- (IN THOUSANDS) Revenues $ 31,900 $ 21,432 Operating costs 14,852 11,466 Depreciation and amortization 4,452 2,682 General and administrative 1,529 1,599 ------------- -------------- Operating income $ 11,067 $ 5,685 ============= ==============
9 12 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 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. Financing for the cash portion of the purchase price was supplied under a new $275 million unsecured revolving credit agreement with a bank. 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 $10.5 million for the three month period ended March 31, 2001, compared to the same 2000 period, 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 three months ended March 31, 2001 increased to 30.0 million barrels from 21.0 million barrels for the comparable prior year period. Approximately 85% of the increase in both revenues and average annual tankage utilized was attributable to Shore. For the three months ended March 31, 2001, average annualized revenues per barrel of tankage utilized increased to $4.25 per barrel, compared to $4.09 per barrel for the same prior year period, the result of favorable market conditions, when compared to the first quarter of 2000. For the three month period ended March 31, 2001, operating costs increased by $3.4 million when compared to the same 2000 period, primarily the result of the Shore acquisition. General and administrative costs for the three months ended March 31, 2001 remained flat when compared to the first quarter of 2000. Total tankage capacity (38.3 million barrels at March 31, 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 months ended March 31, 2001, interest expense increased by $1.7 million, compared to the three months ended March 31, 2000, due to increases in debt resulting from the Shore acquisition. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 2001, the Partnership's working capital requirements for operations, capital expenditures and cash distributions were funded through the use of internally generated funds. 10 13 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Cash provided by operations was $27.5 million and $18.1 million for the periods ended March 31, 2001 and 2000, respectively. Capital expenditures (excluding acquisitions) were $3.0 million and $2.3 million for the three month period ended March 31, 2001 and 2000, respectively. 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 March 31, 2001 $257.5 million was drawn on the facility at an interest rate of 6.04%, 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 has been recognized as an extraordinary expense in the first quarter of 2001. 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 quarter 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 cash and cash flows from operating activities. 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 11 14 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- entitled the general partner to receive certain incentive distributions at different levels of cash distributions. Earnings 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, earnings per unit would have been $0.37 and $0.52 for the three months ended March 31, 2001 and 2000, respectively. 12 15 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K Current Report on Form 8-K regarding the Acquisition of Shore Terminals LLC, located in California, Washington, Oregon and Nevada, filed January 18, 2001. Current Report on Form 8-K/A updating the Acquisition of Shore Terminals LLC, located in California, Washington, Oregon and Nevada, filed March 19, 2001. 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: May 14, 2001 /s/ JIMMY L. HARRISON ------------------------------- Jimmy L. Harrison Executive Vice President 13 -----END PRIVACY-ENHANCED MESSAGE-----