Item 2. Properties
The properties owned or utilized by the Partnership and its subsidiaries are generally described in Item 1 of this Report. Additional information concerning the obligations of the Partnership and its subsidiaries for lease and rental commitments is presented under the caption "Commitments and Contingencies" in Note 6 to the Partnership's consolidated financial statements. Such descriptions and information are hereby incorporated by reference into this Item 2.
The properties used in the operations of the Pipelines are owned by the Partnership, through its subsidiary entities, except for KPL's operational headquarters, located in Wichita, Kansas, which is held under a lease that expires in 2004. The majority of ST's facilities are owned, while the remainder, including most of its terminal facilities located in port areas and its operational headquarters, located in Dallas, Texas, are held pursuant to lease agreements having various expiration dates, rental rates and other terms.
Item 3.
Item 3. Legal Proceedings
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 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 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.
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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Partnership did not hold a meeting of Unitholders or otherwise submit any matter to a vote of security holders in the fourth quarter of 2000.
PART II
Item 5.
Item 5. Market for the Registrant's Units and Related Unitholder Matters
The Partnership's limited partnership interests ("Units") are listed and traded on the New York Stock Exchange (the "NYSE"), under the symbol "KPP." At March 6, 2001, there were approximately 1,100 Unitholders. Set forth below are prices on the NYSE and cash distributions for the periods indicated for such Units.
Under the terms of its financing agreements, the Partnership is prohibited from declaring or paying any distribution if a default exists thereunder.
Item 6.
Item 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates indicated, selected historical financial and operating data for Kaneb Pipe Line Partners, L.P. and subsidiaries (the "Partnership"). The data in the table (in thousands, except per unit amounts) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(a) Prior to the third quarter of 1998, the Partnership had three classes of partnership interests designated as Senior Preference Units, Preference Units and Common Units, respectively. Pursuant to the Partnership Agreement, on August 14, 1998, each such class of units were converted into a single class designated as "Units", effective July 1, 1998. Allocations of net income and cash distributions declared were equal for all classes of units for all periods presented.
Item 7
Item 7 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. and notes thereto and the summary historical financial and operating data included elsewhere in this report.
General
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and operate its refined petroleum products pipeline business. The Partnership operates through KPOP, a limited partnership in which the Partnership holds a 99% interest as limited partner and KPL owns a 1% interest as general partner in both the Partnership and KPOP. The Partnership is engaged through operating subsidiaries in the refined petroleum products pipeline business and, since 1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the transportation through the East Pipeline and the West Pipeline, as common carriers, of refined petroleum products. The East Pipeline and the West Pipeline are collectively referred to as the "Pipelines." The Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The products are transported from refineries connected to the Pipeline, directly or through other pipelines, to agricultural users, railroads and wholesale customers in the states in which the Pipelines are located and in portions of other states. Substantially all of the Pipelines' operations constitute common carrier operations that are subject to Federal or state tariff regulations. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products.
The Partnership's business of terminaling petroleum products and specialty liquids is conducted under the name ST Services ("ST").
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 KPP 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.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million) plus transaction costs and the assumption of certain liabilities. The acquisition of the six locations, which have an aggregate tankage capacity of 5.4 million barrels, was initially financed by term loans from a bank. $13.3 million of the term loans were repaid in July 1999 with the proceeds from a public unit offering. See "Liquidity and Capital Resources". Three of the terminals, handling petroleum products, chemicals and molten sulfur, respectively, operate in England. The remaining three facilities, two in Scotland and one in Northern Ireland, are primarily petroleum terminals. All six terminals are served by deepwater marine docks.
On October 30, 1998, the Partnership, through a wholly-owned subsidiary, entered into acquisition and joint venture agreements with Northville Industries Corp. ("Northville") to acquire and manage the former Northville terminal located in Linden, New Jersey. Under the agreements, the Partnership acquired a 50% interest in the newly-formed ST Linden Terminal LLC for $20.5 million plus transaction costs. The petroleum storage facility, which has capacity of 3.9 million barrels in 22 tanks, was funded by bank financing which was repaid using proceeds from a public unit offering in July 1999. See "Liquidity and Capital Resources".
The Partnership is the third largest independent liquids terminaling company in the United States. Following the Shore acquisition on January 3, 2001, ST operated 42 facilities in 24 states, the District of Columbia and six facilities in the United Kingdom with an aggregate tankage capacity of approximately 38.3 million barrels.
Pipeline Operations
Year Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (in thousands)
Revenues..................................... $ 70,685 $ 67,607 $ 63,421 Operating costs ............................. 25,223 23,579 22,057 Depreciation and amortization ............... 5,180 5,090 4,619 General and administrative .................. 4,069 3,102 3,115 -------- -------- -------- Operating income............................. $ 36,213 $ 35,836 $ 33,630 ======== ======== ========
Pipelines revenues are based on volumes shipped and the distances over which such volumes are transported. For the year ended December 31, 2000, revenues increased by $3.1 million due primarily to an increase in terminaling charges. For the year ended December 31, 1999, revenues increased by $4.2 million due to overall increases in total volumes shipped, primarily on the East Pipeline. Because tariff rates are regulated by the FERC, the Pipelines compete primarily on the basis of quality of service, including delivering products at convenient locations on a timely basis to meet the needs of its customers. Barrel miles totaled 17.8 billion, 18.4 billion and 17.0 billion for the years ended December 31, 2000, 1999 and 1998, 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 $1.6 million in 2000 and $1.5 million in 1999, respectively. The increase in both years was due to increases in materials and supplies costs, including additives, that are volume related. General and administrative costs, which include managerial, accounting and administrative personnel costs, office rental expense, legal and professional costs and other non-operating costs increased by $1.0 million in 2000, compared to 1999, when the Partnership booked a one-time benefit resulting from the favorable elimination of a contingency.
Terminaling Operations
Year Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (in thousands)
Revenues..................................... $ 85,547 $ 90,421 $ 62,391 Operating costs.............................. 44,430 45,569 30,143 Depreciation and amortization................ 11,073 9,953 7,529 General and administrative................... 7,812 6,322 3,146 -------- -------- -------- Operating income........................... $ 22,232 $ 28,577 $ 21,573 ======== ======== ========
For the year ended December 31, 2000, revenues decreased by $4.9 million, compared to 1999. Revenue increases resulting from the United Kingdom and other 1999 terminal acquisitions were more than offset by decreases in tank utilization due to unfavorable domestic market conditions resulting from declines in forward product pricing. For the year ended December 31, 1999, revenues increased by $28.0 million, due to terminal acquisitions and increased utilization of existing terminals due to favorable market conditions, partially offset by a decrease in the overall price realized for storage. Average annual tankage utilized for the years ended December 31, 2000, 1999 and 1998 aggregated 21.0 million barrels, 22.6 million barrels and 15.2 million barrels, respectively. The 2000 decrease in average annual tankage utilized resulted from the unfavorable domestic market conditions. The 1999 increase resulted from the acquisitions and increased storage at the Partnership's largest petroleum storage facility. Average revenues per barrel of tankage utilized for the years ended December 31, 2000, 1999 and 1998 was $4.12, $4.00 and $4.11, respectively. The increase in 2000 average revenues per barrel of tankage utilized, when compared to 1999, was due to the storage of a larger proportionate volume of specialty chemicals, which are historically at higher per barrel rates than petroleum products. The unusually low 1999 average revenues per barrel of tankage utilized was due to the 1999 temporary increase in storage at the Partnership's largest petroleum storage facility.
Operating costs decreased by $1.1 million in 2000, when compared to 1999, due to lower costs resulting from the overall decline in volumes stored. The 1999 increase of $15.4 million in operating costs was due to the terminal acquisitions and increases in tank utilization. General and administrative expense increased by $1.5 million in 2000 and by $3.2 million in 1999. The increase in 2000 is due entirely to extraordinarily high litigation costs. Approximately one-half of the increase in 1999 was due to the terminal acquisitions with the remaining portion of the 1999 increase due to the extraordinarily high litigation costs. In 2000, KPP sold land and other Terminaling business assets for approximately $2.0 million in net proceeds, recognizing a gain on disposition of assets of $1.1 million.
Total tankage capacity (38.3 million barrels, including 7.8 million barrels acquired in the Shore acquisition on January 3, 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.
Liquidity and Capital Resources
Cash provided by operating activities was $62.0 million, $63.6 million and $58.8 million for the years 2000, 1999 and 1998, respectively. The decrease in cash provided by operations in 2000 is a result of the decrease in terminaling revenues and operating income due to unfavorable domestic market conditions. The increase in 1999 resulted from increases in revenues and operating income in the terminaling operations resulting from terminal acquisitions and improvements in pipeline operations from increases in volumes shipped.
Capital expenditures, excluding expansion capital expenditures, were $9.5 million, $14.6 million and $9.4 million for 2000, 1999 and 1998, respectively. During all periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not, and are not expected in the future to be, significant. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages (subject to deductible and limits). The Partnership anticipates that routine maintenance capital expenditures (excluding acquisitions) will total approximately $12 million to $15 million in 2001. Such future expenditures, however, will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and Federal governmental 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 the Partnership will have the ability to finance such expenditures through borrowings or choose to do so.
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures are expected to be funded through additional Partnership bank borrowings and/or future public unit or debt offerings.
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 KPL. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. Distributions of $2.80 per unit were declared to Unitholders in 2000 and 1999 and $2.60 per unit was declared in 1998.
In December 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. No amounts were drawn on the facility at December 31, 2000. The credit facility bears interest at variable rates, has a variable commitment fee on unutilized amounts and contains certain financial and operational covenants. Proceeds from the facility were used to repay in full the Partnership's $128 million of mortgage notes and $15 million outstanding under its $25 million revolving credit facility in January 2001. An additional $107 million was used to finance the cash portion of the Shore acquisition. Under the provisions of the mortgage notes, the Partnership incurred a $6.3 million prepayment penalty, which will be recognized as an extraordinary expense in the first quarter of 2001. At January 3, 2001, $257.5 million was drawn on the facility, at an interest rate of 6.31%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned subsidiaries, entered into a credit agreement with a bank that provided for the issuance of $39.2 million of term loans in connection with the United Kingdom terminal acquisition and $5.0 million for general Partnership purposes. $18.3 million of the term loans were repaid in July 1999 with the proceeds from the public unit offering. The remaining portion ($23.9 million), with a fixed rate of 7.14%, is due in January 2002. The term loans under the credit agreement, as amended, are unsecured and are pari passu with the $275 million revolving credit facility. The term loans also contain certain financial and operational covenants.
In July 1999, the Partnership issued 2.25 million limited partnership units in a public offering at $30.75 per unit, generating approximately $65.6 million in net proceeds. A portion of the proceeds was used to repay in full the Partnership's $15.0 million promissory note, the $25.0 million revolving credit facility and $18.3 million in term loans (including $13.3 million in term loans resulting from the United Kingdom terminal acquisition).
See also "Item 1 - Regulation", regarding the FERC's Lakehead decision.
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. 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 $2.49, $2.81 and $2.66 for the years ended December 31, 2000, 1999 and 1998, respectively.
Recent Accounting Pronouncements
The Partnership has assessed the reporting and disclosure requirements 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, will either be 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. The Partnership will adopt SFAS No. 133, as amended, in the first quarter of 2001. Currently, the Partnership is not a party to any derivative contracts, and does not anticipate that adoption will have a material effect on the Partnership's results of operations or financial position.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse changes in market rates and prices) to which the Partnership is exposed are interest rates on the Partnership's debt and investment portfolios. The Partnership centrally manages its debt and investment portfolios considering investment opportunities and risks and overall financing strategies. The Partnership's investment portfolio consists of cash equivalents; accordingly, the carrying amounts approximate fair value. The Partnership's investments are not material to its financial position or performance. Assuming variable rate debt of $257.5 million at January 3, 2001, a one percent increase in interest rates would increase net interest expense by approximately $2.6 million.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Partnership begin on page of this report. Such information is hereby incorporated by reference into this Item 8.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Partnership is a limited partnership and has no directors. The Partnership is managed by KPL as general partner. Set forth below is certain information concerning the directors and executive officers of KPL. All directors of KPL are elected annually by Kaneb, as its sole stockholder. All officers serve at the discretion of the Board of Directors of KPL.
(a) Mr. Doherty, Chairman of the Board and Chief Executive Officer of KPL since September 1989, is also Senior Vice President of Kaneb. (b) Mr. Hutchens assumed his current position in January 1994, having been with KPL since January 1960. Mr. Hutchens had been Vice President since January 1981. Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981. (c) Mr. Scoggins became an executive officer of KPL in August 1997, prior to which he served in senior level positions for ST for more than 10 years. (d) Mr. Harrison assumed his present position in November 1992, prior to which he served in a variety of financial positions including Assistant Secretary and Treasurer with ARCO Pipe Line Company for approximately 19 years. (e) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary for Kaneb. Mr. Wadsworth joined Kaneb in October 1990. (f) Mr. Ahn, a director of KPL since July 1989, is also a director of Kaneb. Mr. Ahn has been a general partner of Morgan Lewis Githens & Ahn, an investment banking firm, since 1982 and currently serves as a director of PAR Technology Corporation and Quaker Fabric Corporation. (g) Mr. Barnes, a director of KPL, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. (h) Mr. Biles joined KPL in November 1953 and served as President from January 1985 until his retirement at the close of 1993. (i) Mr. Burke, a director of KPL since January 1997, is also a director of Kaneb. Mr. Burke has been Chairman and Managing General Partner of Burke, Mayborn Company, Ltd., a private investment company, for more than the past five years. Mr. Burke also currently serves as a Director of Avidyn, Inc. and Arch Coal, Inc. (j) Mr. Cox, a director of KPL since September 1995, is also a director of Kaneb. Mr. Cox has been a private business consultant since retiring in January 1998 from Fluor Daniel, Inc., an international services company, where he served in senior executive level positions during a 29 year career with that organization. (k) Mr. Kessler, elected to the Board on February 19, 1998, is also a director of Kaneb. Mr. Kessler has served as Chairman and Managing Director of KMB Kessler + Partner GmbH since 1992. He was previously a Managing Director and Vice President of a European Division of Tyco International Ltd. (l) Mr. Whatley, a director of KPL since July 1989, is also a director of Kaneb and served as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989. (m) Partnership Units listed are those beneficially owned by the person indicated, his spouse or children living at home and do not include Units in which the person has disclaimed any beneficial interest.
Audit Committee
Messrs. Sangwoo Ahn, Frank M. Burke, Jr. and James R. Whatley serve as the members of the Audit Committee of KPL. Such Committee will, on an annual basis, or more frequently as such Committee may determine to be appropriate, review policies and practices of KPL and the Partnership and deal with various matters as to which potential conflicts of interest may arise.
Committee Interlocks and Insider Participation
KPL's Board of Directors does not have a compensation committee or any other committee that performs the equivalent functions. During the fiscal year ended December 31, 2000, none of KPL's officers or employees participated in the deliberations of KPL's Board of Directors concerning executive officer compensation.
Section 16(a) Beneficial Ownership Reporting Compliance Statement
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16(a)") requires KPL's officers and directors, among others, to file reports of ownership and changes of ownership in the Partnership's equity securities with the Securities and Exchange Commission and the New York Stock Exchange. Such persons are also required by related regulations to furnish KPL with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, KPL believes that, since January 1, 2000, its officers and directors have complied with all applicable filing requirements with respect to the Partnership's equity securities.
Item 11.
Item 11. Executive Compensation
The Partnership has no executive officers, but is obligated to reimburse KPL for compensation paid to KPL's executive officers in connection with their operation of the Partnership's business.
The following table sets forth information with respect to the aggregate compensation paid or accrued by KPL during the fiscal years 2000, 1999 and 1998, to the Chief Executive Officer and each of the other most highly compensated executive officers of KPL.
(a) Amounts for 2000, 1999 and 1998, respectively, include deferred compensation for Mr. Doherty ($6,762, $14,720 and $13,692); Mr. Hutchens ($1,608, $8,416 and $4,869); and Mr. Scoggins ($11,464, $11,212 and $10,600). (b) Amounts earned in year shown and paid the following year. (c) Represents KPL's contributions to Kaneb's Savings Investment Plan (a 401(k) plan) and the imputed value of Company-paid group term life insurance. (d) The compensation for these individuals is paid by Kaneb, which is reimbursed for all or substantially all of such compensation by KPL. (e) Amounts for 2000, 1999 and 1998, respectively, include $24,058, $24,016 and $31,131 in the form of Partnership Units (434, 378 and 412) and Kaneb Services, Inc. Common Stock (1,314, 969 and 1,322).
Director's Fees
During 2000, each member of KPL's Board of Directors who was not also an employee of KPL or Kaneb was paid an annual retainer of $10,000 in lieu of all attendance fees.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
At March 6, 2001, KPL owned a combined 2% General Partner interest in the Partnership and KPOP and, together with its affiliates, owned Units representing an aggregate limited partner interest of approximately 25%.
Item 13.
Item 13. Certain Relationships and Related Transactions
KPL is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Note 7 to the Partnership's consolidated financial statements.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
Beginning Page Set forth below is a list of financial statements appearing in this report.
Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements: Consolidated Statements of Income - Three Years Ended December 31, 2000............................... F - 1 Consolidated Balance Sheets - December 31, 2000 and 1999.. F - 2 Consolidated Statements of Cash Flows - Three Years Ended December 31, 2000............................... F - 3 Consolidated Statements of Partners' Capital - Three Years ended December 31, 2000......................... F - 4 Notes to Consolidated Financial Statements.................. F - 5 Independent Auditors' Report................................ F - 15
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) List of Exhibits
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, as revised July 23, 1998, filed herewith.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993, filed as Exhibit 10.1 of the exhibits to Registrant's Current Report on Form 8-K ("Form 8-K"), dated March 16, 1993, which exhibit is hereby incorporated by reference.
10.2 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to the Registrant's March 1995 Form 8-K, which exhibit is hereby incorporated by reference.
10.3 Asset Purchase Agreements between and among Steuart Petroleum Company, SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and KPOP, as amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's Current Report on Form 8-K dated January 3, 1996, which exhibits are hereby incorporated by reference.
10.4 Formation and Purchase Agreement, between and among Support Terminal Operating Partnership, L.P., Northville Industries Corp. and AFFCO, Corp., dated October 30, 1998, filed as exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.5 Agreement, between and among, GATX Terminals Limited, ST Services, Ltd., ST Eastham, Ltd., GATX Termianls Corporation, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated January 26, 1999, filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.6 Credit Agreement, between and among, Kaneb Pipe Line Operating Partnership, L.P., ST Services, Ltd. and SunTrust Bank, Atlanta, dated January 27, 1999, filed as Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1998, which exhibit is hereby incorporated by reference.
10.7 Revolving Credit Agreement, dated as of December 28, 2000 among Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners, L.P., The Lenders From Time To Time Party Hereto, and SunTrust Bank, as Administrative Agent, filed herewith.
10.8 Securities Purchase Agreement Among Shore Terminals LLC, Kaneb Pipe Line Partners, L.P. and the Sellers Named Therein, dated as of September 22, 2000, Amendment No. 1 To Securities Purchase Agreement, dated as of November 28, 2000 and Registration Rights Agreement, dated as of January 3, 2001, filed as Exhibits 10.1, 10.2 and 10.3 of the exhibits to Registrant's Current Report on Form 8-K dated January 3, 2001, which exhibits are hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
23 Consent of KPMG LLP, filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K regarding the decision of Kaneb Services, Inc.'s ("Kaneb Services") Board of Directors to distribute its pipeline, terminaling and product marketing business to Kaneb Services' stockholders in the form of a new limited liability company, dated November 29, 2000, (Registrant is a Delaware limited partnership of which Kaneb Pipe Line Company, a Delaware corporation ("KPL"), is the general partner. KPL is a wholly owned subsidiary of Kaneb Services).
Current Report on Form 8-K regarding the Acquisition of Shore Terminals LLC, located in California, Washington, Oregon and Nevada, dated January 3, 2001.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
F - 1
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 2000 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ................. $ 4,758,000 $ 5,127,000 Accounts receivable ....................... 21,091,000 16,929,000 Prepaid expenses .......................... 5,291,000 5,036,000 ------------- ------------- Total current assets ................... 31,140,000 27,092,000 ------------- ------------- Property and equipment ....................... 458,926,000 439,537,000 Less accumulated depreciation ................ 137,571,000 122,654,000 ------------- ------------- Net property and equipment ............. 321,355,000 316,883,000 ------------- ------------- Investment in affiliates ..................... 22,568,000 21,978,000 ------------- ------------- $ 375,063,000 $ 365,953,000 ============= =============
LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable .......................... $ 3,706,000 $ 3,288,000 Accrued expenses .......................... 7,705,000 6,350,000 Accrued distributions payable ............. 13,372,000 13,372,000 Accrued taxes, other than income taxes .... 2,363,000 2,267,000 Deferred terminaling fees ................. 3,717,000 3,075,000 Payable to general partner ................ 1,889,000 1,411,000 ------------- ------------- Total current liabilities .............. 32,752,000 29,763,000 ------------- ------------- Long-term debt ............................... 166,900,000 155,987,000
Other liabilities and deferred taxes ......... 13,676,000 10,882,000
Minority interest ............................ 968,000 1,033,000
Commitments and contingencies
Partners' capital: Limited partners .......................... 161,307,000 168,019,000 General partner ........................... 981,000 1,037,000 Accumulated other comprehensive income (loss) - foreign currency translation adjustment .. (1,521,000) (768,000) ------------- ------------- Total partners' capital ................ 160,767,000 168,288,000 ------------- ------------- $ 375,063,000 $ 365,953,000 ============= =============
See notes to consolidated financial statements.
F - 2
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
F - 3
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(a) Prior to the third quarter of 1998, the Partnership had three classes of partnership interests designated Senior Preference Units, Preference Units and Common Units, respectively. Pursuant to the Partnership Agreement, on August 14, 1998, each such class of units were converted into a single class designated "Units", effective July 1, 1998. See Note 2.
(b) KPL owns a combined 2% interest in the Partnership as General Partner.
See notes to consolidated financial statements.
F - 4
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("KPP" or the "Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. Kaneb Pipe Line Company ("KPL"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner, holds a 1% general partner interest in both the Partnership and KPOP. KPL's 1% interest in KPOP is reflected as the minority interest in the financial statements. At December 31, 2000, KPL, together with its affiliates, owned an approximate 28% interest as a limited partner and as a general partner owned a combined 2% interest.
In July 1999, the Partnership issued 2.25 million limited partnership units in a public offering at $30.75 per unit, generating approximately $65.6 million in net proceeds. A portion of the proceeds was used to repay in full the Partnership's $15.0 million promissory note, the $25.0 million revolving credit facility and $18.3 million in term loans (including $13.3 million in term loans resulting from the United Kingdom terminal acquisition referred to in Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements.
Cash and cash equivalents
The Partnership's policy is to invest cash in highly liquid investments with original maturities of three months or less. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents. The Partnership does not have any derivative financial instruments.
Property and equipment
Property and equipment are carried at historical cost. Certain leases have been capitalized and the leased assets have been included in property and equipment. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets, as disclosed in Note 4. The rates used for pipeline and storage facilities of KPOP are the same as those which have been promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically evaluated using undiscounted future cash flows as the basis for determining if impairment exists under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". To the extent impairment is indicated to exist, an impairment loss will be recognized under SFAS No. 121 based on fair value.
Revenue and income recognition
KPOP provides pipeline transportation of refined petroleum products and liquified petroleum gases. Revenue is recognized as services are provided.
The Partnership's Support Terminal Services operation ("ST") provides terminaling and other ancillary services. Storage fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided.
Foreign currency translation
The Partnership translates the balance sheet of its foreign subsidiary using year-end exchange rates and translates income statement amounts using the average exchange rates in effect during the year. The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive income (loss) in Partners' Capital. Gains and losses resulting from foreign currency transactions are included in the statements of income.
Environmental matters
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 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 the Partnership's commitment to a formal plan of action.
Comprehensive income
The Partnership follows the provisions of SFAS No. 130, "Reporting Comprehensive Income", for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 only requires additional disclosure and does not affect the Partnership's financial position or results of operations.
Estimates
The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles 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.
Income tax considerations
Income before income tax expense is made up of the following components:
Partnership operations are not subject to Federal or state income taxes. However, certain operations of ST are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 2000, 1999 and 1998 primarily consists of deferred U.S. and foreign income taxes of $0.9 million, $1.5 million and $.5 million, respectively. The net deferred tax liability of $5.9 million and $5.1 million at December 31, 2000 and 1999, respectively, consists of deferred tax liabilities of $12.0 million and $12.0 million, respectively, and deferred tax assets of $6.1 million and $6.9 million, respectively. The deferred tax liabilities consist primarily of tax depreciation in excess of book depreciation and the deferred tax assets consist primarily of net operating losses. The U.S. corporate operations have net operating loss carryforwards for tax purposes totaling approximately $15.4 million which expire in years 2008 through 2020. Additionally, the Partnership's foreign operations have net operating loss carryforwards for tax purposes totaling approximately $4.4 million which do not have an expiration date.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If any such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of Partnership units. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. SFAS No. 109, "Accounting for Income Taxes," requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. Management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
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 KPL. 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. Distributions of $2.80, $2.80 and $2.60 per Unit were declared to all classes of Units in 2000, 1999 and 1998, respectively.
Distributions by the Partnership of its Available Cash are made 99% to Unitholders and 1% to KPL, subject to the payment of incentive distributions to the General Partner if certain target levels of cash distributions to the Unitholders are achieved. The distribution of Available Cash for each quarter during the Preference Period, as defined, was subject to the preferential rights of the holders of the Senior Preference Units ("SPUs") to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters, before any distribution of Available Cash was made to holders of Preference Units ("PUs") or Common Units ("CUs") for such quarter. The CUs were not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period continued until such time as the Minimum Quarterly Distribution had been paid to the holders of the SPUs, the PUs and the CUs for twelve consecutive quarters. Payment of the August 14, 1998 regular cash distribution represented the twelfth consecutive quarterly distribution of Available Cash constituting Cash from Operations in an amount equal to or exceeding the $.55 Minimum Quarterly Distribution specified in the Partnership Agreement. Accordingly, pursuant to the terms of the Partnership Agreement, all differences and distinctions between SPUs, PUs and CUs automatically ceased as of such date. At that time, all outstanding units of limited partnership interest in the Partnership became "Units," constituting a single class of equity securities, which trade on the New York Stock Exchange under the symbol "KPP".
Allocation of net income and earnings
For the periods presented, net income or loss has been 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 certain incentive distributions at different levels of cash distributions. Earnings per Unit shown on the consolidated statements of income are calculated by dividing the amount of 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 $2.49, $2.81 and $2.66 for the years ended December 31, 2000, 1999 and 1998, respectively.
Change in presentation
Certain prior year financial statement items have been reclassified to conform with the 2000 presentation.
Recent accounting pronouncements
The Partnership has assessed the reporting and disclosure requirements 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, will either be 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. The Partnership will adopt SFAS No. 133, as amended, in the first quarter of 2001. Currently, the Partnership is not a party to any derivative contracts, and does not anticipate that adoption will have a material effect on the Partnership's results of operations or financial position.
3. ACQUISITIONS
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 KPP Units. 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 Note 5). The acquisition will be accounted for, beginning January 2001, using the purchase method of accounting.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million) plus transaction costs and the assumption of certain liabilities. The acquisition, which was initially financed with term loans from a bank, has been accounted for using the purchase method of accounting. $13.3 million of the term loans were repaid in July 1999 with the proceeds from a public unit offering (see Notes 1 and 5). The pro forma effect of the acquisition was not material to the results of operations.
On October 30, 1998, the Partnership, through a wholly-owned subsidiary, entered into acquisition and joint venture agreements with Northville Industries Corp. ("Northville") to acquire and manage the former Northville terminal located in Linden, New Jersey. Under the agreements, the Partnership acquired a 50% interest in the newly-formed ST Linden Terminal LLC for $20.5 million plus transaction costs. The investment was funded by bank financing which was repaid using proceeds from the public unit offering in July 1999 (See Note 1). The investment is being accounted for by the equity method of accounting, with the excess cost over net book value of the equity investment being amortized over the life of the underlying assets. During 1998, the Partnership acquired other terminals and pipelines for aggregate consideration of $23.9 million.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
5. LONG-TERM DEBT Long-term debt is summarized as follows:
In December 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 facility bears interest at variable interest rates, and has a variable commitment fee on the unutilized amounts and contains certain operational and financial covenants. No amounts were drawn under the facility at December 31, 2000. At January 3, 2001 $257.5 million was drawn on the facility at a interest rate of 6.31%, which is due in December of 2003.
In January 1999, the Partnership, through two wholly-owned subsidiaries, entered into a credit agreement with a bank that provided for the issuance of $39.2 million in term loans in connection with the United Kingdom terminal acquisition and $5.0 million for general Partnership purposes. $18.3 million of the term loans were repaid in July 1999 with the proceeds from the public unit offering. The remaining portion ($23.9 million), with a fixed rate of 7.14%, is due in January 2002. The term loans under the credit agreement, as amended, are unsecured and are pari passu with the $275 million revolving credit facility. The term loans also contain certain financial and operational covenants.
In 1994, a wholly-owned subsidiary entered into a restated credit agreement with a group of banks that, as amended, provided for a $25 million revolving credit facility through January 31, 2001. At December 31, 2000, $15.0 million was drawn under the credit facility. In January 2001, the credit facility was repaid in full with the proceeds from the new $275 million credit facility.
The $128 million of first mortgage notes outstanding at December 31, 2000 and 1999, which were due in varying amounts from 2001 to 2016, were repaid in full in January of 2001 with the proceeds from the new $275 million revolving credit facility. Under the provisions of the mortgage notes, the Partnership incurred a $6.3 million prepayment penalty, which will be recognized as an extraordinary expense in the first quarter of 2001.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under operating leases as of December 31, 2000:
Year ending December 31:
2001........................................... $ 2,027,000 2002........................................... 1,440,000 2003........................................... 907,000 2004........................................... 640,000 2005........................................... 320,000 ------------- Total minimum lease payments................... $ 5,334,000 =============
Total rent expense under operating leases amounted to $3.1 million, $2.2 million and $1.1 million for the years ended December 31, 2000, 1999 and 1998, respectively.
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. The Partnership has recorded an undiscounted reserve for environmental claims in the amount of $8.0 million at December 31, 2000, including $7.3 million related to acquisitions of pipelines and terminals. During 2000 and 1999, respectively, the Partnership incurred $2.3 million and $0.9 million of costs related to such acquisition reserves and reduced the liability accordingly.
KPL has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (the date of formation of the Partnership). The indemnification does not extend to any liabilities that arise after such date to the extent that the liabilities result from changes in environmental laws and regulations.
In December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates. The asset purchase agreement includes a provision for an earn-out payment based upon revenues of one of the terminals exceeding a specified amount for a seven-year period ending in December 2002. No amount was payable under the earn-out provision in 1998, 1999 or 2000.
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 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 has participated provisionally in a minority share of the cleanup expense, which has been funded by ST's insurance carriers. KPP cannot predict the amount, if any, that ultimately may be determined to be ST's share of the remediation expense, but it believes that such amount will be covered by insurance and will not materially affect KPP'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 under various theories, including the federal Oil Pollution Act. The court has ordered a consolidated complaint to be filed in this action. ST's insurance carriers have assumed the defense of these actions. While KPP 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 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. KPL believes that both the assessment costs and such damages are covered by insurance and will not materially affect KPP's financial condition.
The U.S. Department of Transportation has issued a Notice of Proposed Violation to PEPCO and ST alleging violations over several years of pipeline safety regulations and proposing a civil penalty of $674,000. ST and PEPCO intend to contest the allegations of violations and the proposed penalty. The ultimate amount of any penalty attributable to ST cannot be determined at this time, but KPL believes that this matter will not have a material effect on KPP'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 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 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.
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. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by KPL. KPL and Kaneb are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $13.0 million, $11.9 million and $11.3 million for the years ended December 31, 2000, 1999 and 1998, respectively, include compensation and benefits paid to officers and employees of KPL and Kaneb, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $11.0 million, $10.3 million and $9.3 million of compensation and benefits, paid to officers and employees of KPL for the years ended December 31, 2000, 1999 and 1998, respectively, which represent the actual amounts paid by KPL or Kaneb. In addition, the Partnership paid $.2 million during each of these respective years for an allocable portion of KPL's overhead expenses. At December 31, 2000 and 1999, the Partnership owed KPL $1.9 million and $1.4 million, respectively, for these expenses which are due under normal invoice terms.
8. 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 assets controlled by each reportable segment.
The following geographical area data includes revenues based on location of the operating segment and net property and equipment based on physical location.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all debt as of December 31, 2000 and 1999 was approximately $174 million and $163 million, as compared to the carrying value of $167 million and $156 million, respectively. These fair values were estimated using discounted cash flow analysis, based on the Partnership's current incremental borrowing rates for similar types of borrowing arrangements. These estimates are not necessarily indicative of the amounts that would be realized in a current market exchange. The Partnership has no derivative financial instruments.
The Partnership markets and sells its services to a broad base of customers and performs ongoing credit evaluations of its customers. The Partnership does not believe it has a significant concentration of credit risk at December 31, 2000. No customer constituted 10 percent or more of consolidated revenues in 2000, 1999 or 1998.
10. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 2000 and 1999 are summarized as follows:
(a) Includes approximately $1.9 million of accrued litigation costs.
INDEPENDENT AUDITORS' REPORT
To the Partners of Kaneb Pipe Line Partners, L.P.
We have audited the consolidated financial statements of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") as listed in the index appearing under Item 14(a)(1) on page 29. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Partnership and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP Dallas, Texas March 2, 2001
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P. By: Kaneb Pipe Line Company General Partner
By: EDWARD D. DOHERTY Chairman of the Board and Chief Executive Officer Date: March 16, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Kaneb Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line Company and on the date indicated.
Signature Title Date
Principal Executive Officer EDWARD D. DOHERTY Chairman of the Board March 16, 2001 and Chief Executive Officer
Principal Accounting Officer JIMMY L. HARRISON Executive Vice President March 16, 2001 and Controller
Directors
SANGWOO AHN Director March 16, 2001
JOHN R. BARNES Director March 16, 2001
M.R. BILES Director March 16, 2001
FRANK M. BURKE, JR. Director March 16, 2001
CHARLES R. COX Director March 16, 2001
HANS KESSLER Director March 16, 2001
JAMES R. WHATLEY Director March 16, 2001
Exhibit Index
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, as revised July 23, 1998.
10.7 Revolving Credit Agreement, dated as of December 28, 2000 among Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners, L.P., The Lenders From Time To Time Party Hereto, and SunTrust Bank, as Administrative Agent.
22 List of Subsidiaries.
23 Consent of KPMG LLP.