ITEM 2. PROPERTIES
Descriptions of properties owned or utilized by the Partnership are contained in Item 1 of this report and such descriptions are hereby incorporated by reference into this Item 2. Under the captioned "Leases" in notes to the Partnership's financial statements included in Item 8 herein below, additional information is presented concerning obligations for lease and rental commitments. Said additional information is hereby incorporated by reference into this Item 2.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary course of business. Subject to certain deductibles and self-insurance retentions, substantially all the claims made in these lawsuits are covered by insurance policies.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any matter to a vote of security holders in the fourth quarter of 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND RELATED UNITHOLDER MATTERS
The Partnership's senior preference limited partner interests ("Senior Preference Units") and Preference Units are listed and traded on the New York Stock Exchange. At March 15, 1996, there were approximately 1,081 Senior Preference Unitholders of record and approximately 200 Preference Unitholders of record. Set forth below are prices for Senior Preference Units and Preference Units, respectively, on the New York Stock Exchange and cash distributions per Senior Preference Unit and Preference Unit, respectively, paid for the periods indicated.
The Partnership has paid the Minimum Quarterly Distribution on each outstanding Senior Preference Unit for each quarter since the Partnership's inception. The Partnership has also paid the Minimum Quarterly Distribution on Preference Units with respect to all quarters since inception of the Partnership, except for the failure to pay distributions in the second, third and fourth quarters of 1991 totaling $9,323,000. All such arrearages have since been satisfied and none remain as of December 31, 1995. Prior to 1994, no distributions were paid on the outstanding Common Units, which are not entitled to arrearages in the payment of the Minimum Quarterly. In 1994, distributions totaling $1,738,000 were paid and in 1995, distributions totaling $4,582,000 were paid.
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) Includes the operations of ST since its acquisition on March 2, 1993. (b) Includes the operations of the West Pipeline since its acquisition in February 1995 and the operations of Steuart since its acquisition in December 1995. (c) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in taxable entities. (d) Net income of the Partnership for each reporting period is allocated to the Senior Preference Units ("SPU") and Preference Units ("PU") in an amount equal to the cash distributions to the SPU and PU declared for that reporting period.
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 and pro forma 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 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 Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was financed by the issuance of $27 million of first mortgage notes due February 24, 2002, which bear interest at the rate of 8.37% per annum. 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"). ST is the third largest independent terminaling company in the United States. With the acquisition of Steuart (see below), ST operates 31 facilities in 16 states and the District of Columbia with an aggregate tankage capacity of approximately 16.8 million barrels. The Texas City terminal is a deep-water facility primarily serving the Gulf Coast petrochemical industry. The Westwego terminal, purchased in June 1994 and located on the West bank of the Mississippi River across from New Orleans, handles molasses, animal and vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore terminal is the largest independent terminal facility in the Baltimore area and handles asphalt, fructose, latex, caustic solutions and other liquids.
ST acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") in December 1995 for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was financed with a $68 million bridge loan from a bank. The Steuart terminaling assets consist of seven petroleum product terminal facilities located in the District of Columbia, Florida, Georgia, Maryland and Virginia and the pipeline and terminaling facilities serving Andrews Air Force Base in Maryland. The Piney Point, Maryland terminal is the closest petroleum storage facility to Washington D.C. which has access to deep water. The Jacksonville terminal has 28 tanks with approximately 2.1 million barrels of aggregate storage capacity, which are currently used to store petroleum products. The remainder of ST's terminals primarily handle petroleum products.
The Partnership acquired ST in March 1993 for approximately $65 million (including $2 million in acquisition costs). In connection with the acquisition, the Partnership borrowed $65 million from a group of banks. In April 1993, the Partnership completed a public offering of 2.25 million Senior Preference Units at $25.25 per unit. The bank loan was partially repaid with $50.8 million of the proceeds from the offering, and the balance was refinanced in December 1994. The Partnership continually evaluates other potential acquisitions.
The Pipelines' revenues are based on volumes shipped and the distances over which such volumes are transported. Revenues increased $14.1 million and $2.0 million in 1995 and 1994, respectively. The increase in 1995 is primarily due to the acquisition of the West Pipeline. The Partnership implemented a tariff increase of approximately 5.5% in April 1994, which accounted for more than one-half of its increase in revenues in 1994 over 1993. 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 increased 15% to 16.6 billion barrel miles in 1995 from 14.5 billion barrel miles in 1994, due primarily to the acquisition of the West Pipeline.
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 $4.8 million in 1995 and $1.3 million in 1994. The 1995 increase is a result of the West Pipeline acquiaition and the 1994 increase is due to increased barrel miles and utility rates, property taxes and materials, supplies and outside services due to unusually high repair and maintenance expenditures. The 1995 increase in depreciation and amortization is a direct result of the February 1995 acquisition of the West Pipeline. General and administrative costs include managerial, accounting and administrative personnel costs, office rental and expense, legal and professional costs and other non-operating costs.
TERMINALING OPERATIONS
The increases in revenues are attributable to increases in prices charged for storage and tankage volumes utilized. Revenues increased 13% in 1995 and 9% in 1994. Average annual tankage utilized increased 600,000 barrels to 6.7 million barrels compared to 6.1 million barrels in 1994 primarily as a direct result of terminal acquisitions in 1994 and 1995 and increased 200,000 barrels in 1994 over 1993. Average annual revenues per barrel of tankage utilized increased by $0.13 in 1995 to $5.46 per barrel and increased $0.26 per barrel in 1994 over 1993. Total tankage capacity (16.8 million barrels at December 31, 1995) 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. Operating costs increased $2.2 million and $.7 million and depreciation and amortization increased $.4 and $.5 in 1995 and 1994, respectively, as a result of the terminal acquisitions in 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 0.9 to 1 at December 31, 1995 and 0.8 to 1 at December 31, 1994. Cash provided by operating activities was $44.5 million, $37.9 million and $37.2 million for the years 1995, 1994 and 1993 respectively. The increase in cash flow from operating activities in 1995 was primarily a result of the West Pipeline and the Westwego terminal acquisitions.
Capital expenditures were $8.9 million, $7.1 million and $8.1 million for 1995, 1994 and 1993, 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, material. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages. Capital expenditures of the Partnership for maintenance of existing operations during 1996 are expected to be approximately $7.5 million. Capital expenditures for expansionary purposes during 1996 are expected to be approximately $2.0 million.
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. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1995, 1994 and 1993. During 1995, 1994 and 1993, the Partnership paid distributions of $12.4 million, ($2.20 per unit), $12.3 million ($2.20 per unit) and $19.3 million ($2.20 per unit and $1.20 per unit in arrearages) to the holders of Preference Units. During 1995 and 1994, the Partnership paid distributions of $4.6 million ($1.45 per unit) and $1.7 million ($0.55 per unit) to the holders of Common Units.
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures and some environmental expenditures are expected to be funded through additional Partnership borrowings.
In 1994, a subsidiary of the Partnership issued $33 million of first mortgage notes ("Notes") to a group of insurance companies. Proceeds from these notes were used to refinance existing debt of the Partnership that was incurred in connection with the ST acquisition in 1993 and the terminal acquisitions in 1994. The notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, the Partnership entered into the Credit Agreement with a group of banks that provides a $15 million revolving credit facility for working capital and other partnership purposes. Borrowings under the Credit Agreement bear interest at variable rates and are due and payable in November 1997. The Credit Agreement has a commitment fee of 0.2% per annum of the unused credit facility. No amounts were drawn under this credit facility at December 31, 1995. The notes and credit facility are secured by a mortgage on the East Pipeline.
The Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the issuance of $27 million of Notes due February 24, 2002, which bear interest at the rate of 8.37% per annum.
The acquisition of the Steuart terminaling assets has been initially financed by a $68 million bank bridge loan. The bridge loan bears interest at a variable rate based on the LIBOR rate plus 50 to 100 basis points and its' maturity has been extended until March 1997. The Partnership expects to refinance this loan under terms similar to the Notes discussed above. The loan is secured, pari passu with the existing Notes and credit facility, by a mortgage on the East Pipeline.
In the FERC's Lakehead decision issued June 15, 1995, the FERC partially disallowed Lakehead's inclusion of income taxes in its cost of service. Specifically, the FERC held that Lakehead was entitled to receive an income tax allowance with respect to income attributable to its corporate partners, but was not entitled to receive such an allowance for income attributable to the partnership interests held by individuals. Both Lakehead and representatives of its customers have filed motions for rehearing. It is possible that either Lakehead or its customers may ultimately seek judicial review of the FERC decision. It is difficult to predict what position would be adopted by a reviewing court on the income tax issue. In another FERC proceeding that has not yet reached the hearing stage, involving a different oil pipeline limited partnership, various shippers have challenged such pipeline's inclusion of an income tax allowance in its cost of service. The FERC Staff has also filed testimony that supports the disallowance of income taxes. If the FERC were to disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, the General Partner believes that the Partnership's ability to pay the Minimum Quarterly Distribution to the holders of the Senior Preference Units, Preference Units and Preference B Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, The Financial Accounting Standards Board issued 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 (SFAS 121). SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995 and requires the write-down to market of certain long-lived assets. The Partnership will adopt SFAS 121 in the first quarter of 1996 and such adoption will not have a material effect on the Partnership's financial position or results of operations.
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.
Not applicable.
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 the Company as general partner. Set forth below is certain information concerning the directors and executive officers of the Company. All directors of the Company are elected annually by Kaneb, as its sole stockholder. All officers serve at the discretion of the Board of Directors of the Company.
(1) Mr. Doherty, Chairman of the Board of the Company since September 1989, is also Senior Vice President of Kaneb. In addition to the Senior Preference Units and Preference Units set forth above, Mr. Doherty owns 75,000 Common Units representing an aggregate limited partnership interest of less than one percent. (2) 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. (3) Mr. Easum has served the Company as Vice President of Business Development since August 1988, prior to which he was Director of Purchasing with Union Pacific Railroad Company since August 1980.
(4) Mr. Wadsworth serves as an officer of Kaneb. Mr. Wadsworth, currently Vice President, Treasurer and Secretary, joined Kaneb in October, 1990, prior to which he served as general manager of Dorchester Hugoton, Ltd. for more than five years. (5) 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. (6) Mr. Barnes, a director of the Company, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. In addition to the Senior Preference Units and Preference Units set forth above, Mr. Barnes owns 79,000 Common Units representing an aggregate limited partner interest of approximately 1%. (7) Mr. Cox, a director of the Company since September 1995, is also a director of Kaneb. Mr. Cox has held senior executive level positions for more than the past five years of his twenty-six year career with Fluor Daniel, Inc. (8) Mr. Ahn, a director of the Company since July 1989, is also a director of Kaneb. Mr. Ahn has been a partner of Morgan Lewis Githens & Ahn, L.P., an investment banking firm, since 1982 and currently serves as a director of Haynes International, Inc., ITI Technologies, Inc., PAR Technology Corporation, Quaker Fabric Corporation, and Stuart Entertainment, Inc. (9) Mr. Peak, a director of the Company since July 1989, is also a director of Kaneb. Mr. Peak has been General Partner of Dorchester Hugoton, Ltd., an oil and gas exploration and production partnership, for more than the past five years. (10) Mr. Whatley, a director of the Company since July 1989, is also a director of Kaneb. In addition to serving as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989, Mr. Whatley was elected and served in the additional offices of President and Chief Executive Officer of Kaneb from June until October 1986. (11) Mr. Ralph Rehm, who is also a director of Kaneb, is President of Northlake Consulting Company, which provides financial consulting services. Mr. Rehm provided consulting services on behalf of one of Kaneb's subsidiaries in 1993 and 1994. Mr. Rehm previously was engaged in financial consulting services for Northlake Consultants from June 1989 to May 1990, prior to which he served as Senior Vice President of Finance and Administration of Kaneb from December 1986. (12) Mr. Biles joined the Company in November 1953 and served as President from January 1985 until his retirement at the close of 1993. (13) Units of the Partnership listed are those which are owned by the person indicated, his spouse or children living at home. None of the directors of the Company owns more than two percent of the outstanding Senior Preference Units or Preference Units, respectively, of the Partnership. Each director had sole power with respect to all or substantially all of the Units attributed to him.
AUDIT COMMITTEE
Messrs. Sangwoo Ahn, Ralph A. Rehm and Preston A. Peak currently serve as the members of the Audit Committee of the Company. Such Committee will, on an annual basis, or more frequently as such Committee may determine to be appropriate, review policies and practices of the Company and the Partnership and deal with various matters as to which conflicts of interest may arise.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company'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, 1995, none of the Company's officers or employees participated in the deliberations of the Company's Board of Directors concerning executive officer compensation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no executive officers, but is obligated to reimburse the Company for compensation paid to the Company'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 the Company during the fiscal years 1995, 1994 and 1993, to the President and each of the most highly compensated executive officers and other key policy making personnel of the Company whose aggregate cash compensation exceeded $100,000.
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(1) Does not include the values of the personal use of Company paid club memberships, nor the personal use of assets, facilities and services of Company employees. The aggregate amount of additional benefits or compensation to any of the individuals listed in the Summary Compensation Table above did not exceed 10% of the reported compensation.
(2) Represents the Company's annual contributions in 1995 to Kaneb's defined thrift plan and the imputed value of Company-paid group term life insurance.
(3) Represents a lump sum payment in lieu of cost-of-living salary increases in 1992 and 1993.
(4) The Compensation for this individual is paid by Kaneb and Kaneb is reimbursed for all or substantially all of such compensation by the Company.
Retirement Plan
Effective April 1, 1991, Kaneb established a defined contribution thrift plan applicable to the Company that permits all full-time employees who have completed one year of service to contribute 2% to 12% of base compensation, on a pre-tax basis, into participant accounts. In addition to mandatory contribution equal to 2% of base compensation per year for each plan participant, the Company makes matching contributions from 25% to 50% of up to the first 6% of base pay contributed by a plan participant. Employee contributions, together with earnings thereon, are not subject to forfeiture. That portion of a participant's account balance attributable to Company contributions, together with earnings thereon, is vested over a five year period at 20% per year. Participants are credited with their prior years of service for vesting purposes, however, no amounts are accrued for the accounts of participants, including the Company's executive officers, for years of service previous to the plan commencement date. Participants may direct the investment of their contributions into a variety of investments, including Kaneb common stock. Plan assets are held and distributed pursuant to a trust arrangement. Because levels of future compensation, participant contributions and investment yields cannot be reliably predicted over the span of time contemplated by a plan of this nature, it is impractical to estimate the annual benefits payable at retirement to the individuals listed in the Summary Cash Compensation Table above.
Director's Fees. During 1995, each member of the Company's Board of Directors who was not also an employee of the Company or Kaneb was paid an annual retainer of $4,000 in lieu of all attendance fees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 15, 1996, the Company owned a combined 2% General Partner interest in the Partnership and the Operating Partnership, and owned Preference Units, Preference B Units and Common Units representing an aggregate limited partner interest of approximately 31%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Notes 4 and 5 to the Partnership's financial statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
(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, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference.
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. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference.
10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lenders. Said document is on file as Exhibit 10.3 of the exhibits to Registrant's report on Form 10-K filed for the year ended December 31, 1994, and said exhibit is hereby incorporated by reference.
10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.5 Asset Purchase Agreement by and among Steuart Petroleum Company, SPC Terminals, Inc., Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. dated August 27, 1995; Piney Point Pipeline Asset Purchase Agreement by and among Piney Point Industries, Inc., Support
Teminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. dated August 27, 1995; Purchase Agreement by and among Steuart Investment Company, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. for Cockpit Point dated August 27, 1995; Amendment to Asset Purchase Agreements by and among Steuart Petroleum Company, SPC Terminals, Inc. Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. Said documents are on file as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on January 3, 1996, and said exhibits are hereby incorporated by reference.
10.6 Bridge Financing Agreement between Kaneb Pipe Line Operating Partnership, L.P., as Borrower, Texas Commerce Bank National Association, as Agent and Texas Commerce Bank National Association, as initial Lender, as amended, dated December 18, 1995, filed herewith.
21 List of Subsidiaries, filed herewith.
24 Powers of Attorney, filed herewith.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K - NONE.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME DECEMBER 31, 1995 AND 1994
See notes to consolidated financial statements.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
See notes to consolidated financial statements.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(a) Kaneb Pipe Line Company owns a combined 2% interest in Kaneb Pipe Line Partners, L.P. as General Partner. (b) The Partnership Agreement allows for an additional issuance of up to 7.8 million senior preference units.
See notes to consolidated financial statements.
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. (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 (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1% general partner interest in both the Partnership and KPOP. The Company's 1% interest in KPOP is reflected as the minority interest in the financial statements.
In April 1993, the Partnership completed a public offering of 2.25 million Senior Performance Units ("SPU") at $25.25 per unit. The net proceeds from the offering of $52.8 million was allocated among the equity accounts of the unitholders, general partner and minority interest based on the ownership percentages of the partnership subsequent to the offering. The Partnership believes this allocation approximates the distribution of the net assets upon liquidation, assuming the Partnership was liquidated at net book value. However, the actual distribution of the net assets upon liquidation could be significantly different as a result of the fair market value of the net assets being substantially different than the net book value of the Partnership's assets in the accompanying financial statements.
In September 1995, a subsidiary of the Company sold 3.5 million of the Preference Units ("PU") it held in a public offering and exchanged 1.0 million of its PU's for 1.0 million Preference B Units, which are subordinate to the PU's. At December 31, 1995, the Company owns an approximate 31% interest as a limited partner in the form of Preference Units, Preference B Units and Common Units, and as a general partner owns a combined 2% interest. The SPU's represent an approximate 44% interest in the Partnership and the 3.5 million publicly held Preference Units represent an approximate 22% interest. An approximate 1% ownership interest in the form of 60,500 PU's and 154,000 Common Units is held by officers of Kaneb.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements. The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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.
CASH AND CASH EQUIVALENTS
The Partnership's policy is to invest cash in highly liquid investments with maturities of three months or less, upon purchase. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents.
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. 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.
REVENUE AND INCOME RECOGNITION
KPOP provides pipeline transportation of refined petroleum products and liquified petroleum gases. Revenue is recognized upon receipt of the products into the pipeline system.
ST provides terminaling and other ancillary services. Fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided.
ENVIRONMENTAL MATTERS
The operations of the Partnership are subject to federal, state and local laws and regulations 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 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.
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. The Partnership has recorded a reserve for environmental claims in the amount of $5.2 million (including $4.4 million relating to the acquisitions of the West Pipeline and Steuart - see Note 3) at December 31, 1995 in other liabilities on the accompanying balance sheet.
The Company has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (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 addition, ST's former owner has agreed to indemnify the Partnership against liabilities for damages to the environment from operations conducted by the former owner prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited in amount to 60% of any claim exceeding $0.1 million, up to a maximum of $10 million.
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, 1995, 1994 and 1993 consists of deferred U.S. federal income taxes of $.6 million, $.6 million and $.4 million, respectively, and current federal income taxes of $.2 million in 1994. The net deferred tax liability of $1.7 million and $1.1 million at December 31, 1995 and 1994, respectively, consists of deferred tax liabilities of $6.3 million and $4.3 million, respectively, and deferred tax assets of $4.6 million and $3.2 million, respectively. The deferred tax liabilites consists primarily of tax depreciation in excess of book depreciation and the deferred tax assets consists primarily of net operating losses. The corporate operations have net operating losses for tax purposes totaling approximately $12.9 million which expire in years 2008 and 2010.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax return 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 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. Statement of Financial Accounting Standards 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.
ALLOCATION OF NET INCOME AND EARNINGS
Net income is allocated to the limited partnership units in an amount equal to the cash distributions declared for each reporting period and any remaining income or loss is allocated to the class of units that did not receive full distributions (if any). If full distributions are declared to all classes of units, income will be allocated pro rata based on the aggregate amount of distributions declared.
Earnings per SPU and PU are calculated by dividing the amount of net income allocated to the SPU's and PU's by the weighted average number of SPUs and PUs outstanding, respectively.
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 Company. 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 Available Cash for each quarter of not less than $.55 per Unit (the "Minimum Quarterly Distribution"), or $2.20 per Unit on an annualized basis, for the foreseeable future, although no assurance is given regarding such distributions. The Partnership expects to make distributions of all Available Cash within 45 days after the end of each quarter to holders of record on the applicable record date. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1995, 1994 and 1993. During 1995, 1994 and 1993, the Partnership paid distributions of $2.20, $2.20, and $3.41 (includes $1.21 of arrearage payments), respectively, to the Preference Unitholders. During 1995 and 1994, the Partnership paid distributions of $1.45 and $.55, respectively, per unit to the Common Unitholders. As of December 31, 1995, no arrearages existed on any class of partnership interest.
Distributions by the Partnership of its Available Cash are made 99% to Unitholders and 1% to the Company, 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 within the Preference Period, as defined, is subject to the preferential rights of the holders of the Senior Preference Units 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 is made to holders of Preference Units, Preference B Units or Common Units for such quarter. In addition, for each quarter within the Preference Period, the distribution of any amounts to holders of Common Units is subject to the preferential rights of the holders of the Preference B Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters. The Common Units are not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period will continue indefinitely until the Minimum Distribution has been paid to the holders of the Senior Preference Units, the Preference Units, the Preference B Units and the Common Units for twelve consecutive quarters. The Minimum Quarterly distribution has been paid to all classes of Unitholders for the quarters ended September 30 and December 31, 1995. Prior to the end of the Preference Period, up to 2,650,000 of the Preference Units and the Preference B Units may be converted into Senior Preference Units on a one-for-one basis if the Third Target Distribution, as defined, is paid to all Unitholders for four full consecutive quarters. The Third Target distribution is reached when distributions of Available Cash equals $2.80 per Limited Partner ("LP") Unit on an annualized basis. After the Preference Period ends all differences and distinctions between the three classes of units for the purposes of cash distributions will cease.
CHANGE IN PRESENTATION
Certain financial statement items for 1994 and 1993 have been reclassified to conform with the 1995 presentation.
3. ACQUISITIONS
Effective March 1, 1993, the Partnership acquired Support Terminal Services, Inc. ("ST"), a petroleum products and specialty liquids storage and terminaling company headquartered in Dallas, Texas, for approximately $65 million, including transaction costs. The acquisition was accounted for as a purchase and, accordingly, the Partnership's consolidated statements of income include the results of operations of ST since March 1, 1993. In connection with the acquisition, the Partnership borrowed $65 million from a group of banks, which was partially repaid with $50.8 million of the proceeds from a SPU offering. The remaining bank debt was refinanced in December 1994 with the issuance of first mortgage notes.
In February 1995, the Partnership acquired, through KPOP, the refined petroleum product pipeline assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The West Pipeline was owned 60% by a subsidiary of GATX Terminals Corporation and 40% by a subsidiary of Amoco Pipe Line Company. The acquisition was financed by the issuance of $27 million of first mortgage notes. The assets acquired from Wyco Pipe Line Company did not include certain assets that were leased to Amoco Pipe Line Company and the purchase agreement did not provide for either (i) the continuation of an arrangement with Amoco Pipe Line Company for the monitoring and control of pipeline flows or (ii) the extension or assumption of certain credit agreements that Wyco Pipe Line Company had with its shareholders.
In December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition price was financed by a $68 million bank bridge loan. 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 beginning in January 1996. The contracts also include a provision for the continuation of all terminaling contracts in place at the time of the acquisition, including those contracts with Steuart.
The acquisitions have been accounted for using the purchase method of accounting. The total purchase price has been allocated to the assets and liabilities based on their respective fair values based on valuations and other studies. The allocation of the Steuart purchase price presented in the consolidated financial statements is preliminary and subject to adjustment.
The following summarized unaudited pro forma consolidated results of operations for the years ended December 31, 1995 and 1994, assume the acquisitions occurred as of the beginning of each period presented. The unaudited pro forma financial results have been prepared for comparative purposes only and may not be indicative of the results that would have occurred if the Partnership had acquired the pipeline assets of the West Pipeline and the liquids terminaling assets of Steuart on the dates indicated or which will be obtained in the future.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
5. LONG-TERM DEBT AND LEASES
In 1994, a wholly-owned subsidiary of the Partnership issued $33 million of first mortgage notes ("Notes") to a group of insurance companies. The Notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. Also in 1994, another wholly-owned subsidiary entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through November 30, 1997. The credit facility bears interest at variable interest rates and has a commitment fee of .2% per annum of the unused credit facility. No amounts were drawn under the credit facility at December 31, 1995 or 1994. In 1995, the Partnership financed the acquisition of the West Pipeline with the issuance of $27 million of Notes due February 24, 2002 which bear interest at the rate of 8.37% per annum. The Notes and the credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership and contain certain financial and operational covenants. The acquisition of the Steuart terminaling assets has been initially financed by a $68 million bridge loan from a bank. The bridge loan bears interest at a variable rate based on the LIBOR rate plus 50 to 100 basis points and its maturity has been extended until March 1997. The Partnership expects to refinance this obligation under terms similar to the Notes discussed above. The bridge loan is secured, pari passu with the existing Notes and credit facility, by a mortgage on the East Pipeline.
The following is a schedule by years of future minimum lease payments under capital and operating leases together with the present value of net minimum lease payments for capital leases as of December 31, 1995:
(a) The capital lease is secured by certain pipeline equipment and the Partnership has accrued its option to purchase this equipment for approximately $4.1 million at the termination of the lease.
Total rent expense under operating leases amounted to $.9 million for each of the years ended December 31, 1995, 1994 and 1993.
KPOP and the Company entered into a payment priority agreement related to the capital lease obligation for pipeline equipment under which the Company is primarily liable for rental payments of approximately $2.9 million per year through April 1997 and KPOP is primarily liable for the remaining rental payments. KPOP has recorded a receivable of $3.5 million at December 31, 1995 from the Company for the present value of these future lease payments. This receivable bears interest at an annual rate of 13.8%, which reflects the imputed interest rate on the capital lease. KPOP recorded interest income of $.7 million, $.9 million and $1.2 million from the Company on this receivable balance for the periods ended December 31, 1995, 1994 and 1993, respectively. The amount of the capital lease obligation that exceeds the receivable from the Company ($6.7 million at December 31, 1995) represents the present value of the lease obligation and purchase option due subsequent to April 1997.
The Partnership believes the carrying value of the Notes and the bank bridge loan represent their estimated fair value and it is not practicable to estimate the fair value of the capital lease obligation and the associated receivable from the general partner.
6. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by the Company. The Company and Kaneb are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $9.5 million, $9.0 million and $8.7 million for the years ended December 31, 1995, 1994 and 1993, respectively, include compensation and benefits paid to officers and employees of the Company and Kaneb, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $7.7 million, $7.0 million and $7.0 million of compensation and benefits, including pension costs, paid to officers and employees of the Company for the periods ended December 31, 1995, 1994 and 1993, respectively, which represent the actual amounts paid by the Company or Kaneb. In addition, the Partnership paid $.2 million during each of these respective periods for an allocable portion of the Company's overhead expenses. At December 31, 1995 and 1994, the Partnership owed the Company $1.0 million and $.8 million, respectively, for these expenses which are due under normal invoice terms.
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1995 and 1994 are summarized as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 34 present fairly, in all material respects, the financial position of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas February 27, 1996
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 ------------------------- (Edward D. Doherty) Chairman of the Board and Chief Executive Officer Date: March 28, 1996
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 - ---------------------------- (Edward D. Doherty) Chairman of the Board and March 28, 1996 Chief Executive Officer
Principal Accounting Officer JIMMY L. HARRISON - ---------------------------- (Jimmy L. Harrison) Controller March 28, 1996
Directors SANGWOO AHN - ---------------------------- (Sangwoo Ahn) Director March 28, 1996
JOHN R. BARNES - ---------------------------- (John R. Barnes) Director March 28, 1996
M.R. BILES - ---------------------------- (M.R. Biles) Director March 28, 1996
CHARLES R. COX - ---------------------------- (Charles R. Cox) Director March 28, 1996
EDWARD D. DOHERTY - ---------------------------- (Edward D. Doherty) Director March 28, 1996
PRESTON A. PEAK - ---------------------------- (Preston A. Peak) Director March 28, 1996
RALPH A. REHM - ---------------------------- (Ralph A. Rehm) Director March 28, 1996
JAMES R. WHATLEY - ---------------------------- (James R. Whatley) Director March 28, 1996
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- -----------
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference.
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. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference.
10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lenders. Said document is on file as Exhibit 10.3 of the exhibits to Registrant's report on Form 10-K filed for the year ended December 31, 1994, and said exhibit is hereby incorporated by reference.
10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.5 Asset Purchase Agreement by and among Steuart Petroleum Company, SPC Terminals, Inc., Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. dated August 27, 1995; Piney Point Pipeline Asset Purchase Agreement by and among Piney Point Industries, Inc., Support Teminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. dated August 27, 1995; Purchase Agreement by and among Steuart Investment Company, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. for Cockpit Point dated August 27, 1995; Amendment to Asset Purchase Agreements by and among Steuart Petroleum Company, SPC Terminals, Inc. Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Operating Partnership, L.P. Said documents are on file as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on January 3, 1996, and said exhibits are hereby incorporated by reference.
10.6 Bridge Financing Agreement between Kaneb Pipe Line Operating Partnership, L.P., as Borrower, Texas Commerce Bank National Association, as Agent and Texas Commerce Bank National Association, as initial Lender, as amended, dated December 18, 1995, filed herewith.
21 List of Subsidiaries, filed herewith.
24 Powers of Attorney, filed herewith.
27 Financial Data Schedule