ITEM 3. LEGAL PROCEEDINGS.
We are a party to various suits in the ordinary course of business for monetary relief arising principally from personal injuries, collision or other casualty and to claims arising under vessel charters. All of these personal injury, collision and casualty claims against us are fully covered by insurance, subject to deductibles ranging from $10,000 to $100,000 in amount. We reserve on a current basis for amounts we expect to pay. Although the outcome of any individual claim or action cannot be predicted with certainty, we believe that any adverse outcome, individually or in the aggregate, would be substantially mitigated by applicable insurance or indemnification from previous owners of our assets, and would not have a material adverse effect on our financial position, results of operations or cash flows.
EW Transportation LLC and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by various parties, including former employees, alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with our initial public offering. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately
$47,000, and are seeking to settle the other case. We may be subject to litigation in the future from these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate or remove friable asbestos on our vessels, as well as for exposure to second-hand smoke and other matters. For a related discussion of insurance coverage, please read “Business and Properties-Insurance Program” in Items 1 and 2 of this report.
One of our predecessors has also received notice that it is a potentially responsible party in a proceeding for the cleanup of hazardous substances at a site in Port Arthur, Texas. For more information, please read “Business and Properties-Regulation-Environmental-Solid Waste” in Items 1 and 2 of this report.
Our predecessors have agreed to indemnify us for certain liabilities. For more information, please read “Certain Relationships and Related Transactions-Omnibus Agreement-Indemnification” in Item 13 of this report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matters were submitted to a vote of securityholders during the quarter ended June 30, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SECURITYHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price of Common Units, Distributions and Related Unitholder Matters
Our common units have been listed on the New York Stock Exchange under the symbol “KSP” since January 9, 2004. Prior to January 9, 2004, our equity securities were not publicly traded. As of September 12, 2005, there were 4,667,250 outstanding common units, representing an aggregate 52.8% limited partner interest in us. As of September 12, 2005, there were 21 holders of record of our common units, representing approximately 6,000 beneficial owners. The following table sets forth, for the periods indicated, the high and low sales prices per common unit, as reported on the New York Stock Exchange, and the amount of cash distributions declared per common unit:
(1) Distributions are shown for the quarter with respect to which they were declared. For each of the indicated quarters for which distributions have been made, an identical per unit cash distribution was paid on the subordinated units.
(2) For the period from January 14, 2004, the closing date of our initial public offering, through March 31, 2004.
The aggregate amount of distributions declared in respect of the 2005 and 2004 fiscal years on common units, the general partner interests, and subordinated units, totaled $18.8 million and $8.1 million, respectively.
Cash Distribution Policy
Within 45 days after the end of each quarter, we will distribute all of our available cash from operating surplus to unitholders of record on the applicable record date. Our available cash from operating surplus consists generally of all cash on hand at the end of the fiscal quarter, plus all cash on hand resulting from working capital borrowings made after the end of the quarter up to the date of determination of available cash, less the amount of cash that our general partner determines is necessary or appropriate to, among others:
· provide for the proper conduct of our business, including reserves for future capital and maintenance expenditures;
· comply with applicable law, any of our debt instruments, or other agreements; or
· provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters.
Our ability to distribute available cash is contractually restricted by the terms of our Title XI debt and our other credit facilities, which require us to maintain certain financial ratios and generally prohibit
distributions to unitholders if the distribution would cause an event of default, or an event of default is existing, under our Title XI debt or a credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Title XI Borrowings” and “-Credit Agreement” in Item 7 of this report.
Subordination Period
During the subordination period, the common units have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.50 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will participate pro rata with the other common units in distributions of available cash.
Definition of Subordination Period. The subordination period will extend until the first day of any quarter, beginning after December 31, 2008, that each of the following tests are met:
· distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
· the “adjusted operating surplus,” as defined in our partnership agreement, generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the general partner interest during those periods; and
there are no arrearages in payment of the minimum quarterly distribution on the common units.
Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods.
Early Conversion of Subordinated Units. Before the end of the subordination period, 50% of the subordinated units, or up to 2,082,500 subordinated units, may convert into common units on a one-for-one basis immediately after the distribution of available cash to the partners in respect of any quarter ending on or after:
· December 31, 2006 with respect to 25% of the subordinated units; and
· December 31, 2007 with respect to 25% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter each of the following occurs:
· distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
· the adjusted operating surplus generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the general partner interest during those periods; and
· there are no arrearages in payment of the minimum quarterly distribution on the common units.
However, the second early conversion of the subordinated units may not occur until at least one year following the first early conversion of the subordinated units.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and certain target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.
If for any quarter, we have distributed available cash from operating surplus a) to the common and subordinated unitholders an amount equal to the minimum quarterly distribution, and b) on the common units an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution, then we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:
· first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives a total of $0.55 per unit for that quarter;
· second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $0.625 per unit for that quarter;
· third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives a total of $0.75 per unit for that quarter; and
· thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.
The percentage interests set forth above for our general partner include its 2% general partner interest and assume the general partner has not transferred the incentive distribution rights.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial and operating data of K-Sea Transportation Partners L.P. and its predecessors. On January 14, 2004, EW Transportation LLC contributed assets and liabilities constituting its business to us in connection with our initial public offering of common units. Therefore, the historical financial and operating data presented below are for EW Transportation LLC for all periods prior to January 14, 2004. The following table should be read in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the historical consolidated financial condition and results of operations of K-Sea Transportation Partners L.P. and, prior to our January 14, 2004 initial public offering, of our predecessor company, EW Transportation LLC, and should be read in conjunction with our historical consolidated financial statements and notes thereto included elsewhere in this report.
GENERAL
We are a leading provider of refined petroleum product marine transportation, distribution and logistics services in the United States domestic marine transportation business. We currently operate a fleet of 44 tank barges, 2 tankers and 25 tugboats that serves a wide range of customers, including major oil companies, oil traders and refiners. With approximately 2.6 million barrels of capacity, we believe we currently own and operate the third-largest coastwise tank barge fleet in the United States, as measured by barrel-carrying capacity.
Demand for our services is driven primarily by demand for refined petroleum products in the East Coast and Gulf of Mexico regions of the United States. We generate revenue by charging customers for the transportation and distribution of their products utilizing our tank vessels and tugboats. These services are generally provided under the following four basic types of contractual relationships:
· time charters, which are contracts to charter a vessel for a fixed period of time, generally one year or more, at a set daily rate;
· contracts of affreightment, which are contracts to provide transportation services for products over a specific trade route, generally for one or more years, at a negotiated per barrel rate;
· voyage charters, which are charters for shorter intervals, usually a single round-trip, that are made on either a current market rate or advance contractual basis; and
· bareboat charters, which are longer-term agreements that allow a customer to operate one of our vessels and utilize its own operating staff without taking ownership of the vessel.
In addition, a variation of a voyage charter is known as a “consecutive voyage charter.” Under this arrangement, consecutive voyages are performed for a specified period of time.
The table below illustrates the primary distinctions among these types of contracts:
(1) Under a consecutive voyage charter, the customer pays for idle time.
(2) See “Definitions” below.
For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred.
One of the principal distinctions among these types of contracts is whether the vessel operator or the customer pays for voyage expenses, which include fuel, port charges, pilot fees, tank cleaning costs and canal tolls. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the vessel operator, pay the voyage expenses, we typically pass these expenses on to our customers by charging higher rates under the contract or re-billing such expenses to them. As a result, although voyage revenue from different types of contracts may vary, the net revenue that remains after subtracting voyage expenses, which we call net voyage revenue, is comparable across the different types of contracts. Therefore, we principally use net voyage revenue, rather than voyage revenue, when comparing performance between different periods. Since net voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement, voyage revenue, under “Results of Operations” below.
RECENT EVENTS
On August 23, 2005, we entered into a definitive purchase agreement with Marine Resources Group, Inc. and Saltchuk Resources, Inc. to acquire, through our operating partnership, all of the outstanding capital stock of Sea Coast Towing, Inc. (“Sea Coast”), a wholly owned subsidiary of Marine Resources Group based in Seattle, Washington. Sea Coast is engaged in the maritime transportation of refined petroleum products and related businesses along the West Coast of the United States and Alaska. Sea Coast operates 15 tank barges and 15 tugboats, representing approximately 705,000 barrels of capacity, of which 321,000 barrels are double-hulled. Of the remaining single-hull capacity, approximately 80% is eligible to operate in the Jones Act trades until January 2015, with the remaining capacity (one vessel) eligible until January 2008. The addition of these tank barges will represent a 27.5% increase in our barrel-carrying capacity to approximately 3.3 million barrels, which we believe will make us the largest coastwise tank barge operator (measured by barrel-carrying capacity) in the United States, with approximately 66% double-hull capacity.
The purchase price for Sea Coast consists of $77 million in cash and 125,000 common units representing limited partner interests in us. We expect to finance the cash portion of the purchase price through additional borrowings. The purchase agreement contains customary representations, warranties and covenants. The acquisition is scheduled to close in October 2005 and is subject to customary conditions, including, among others, the following: (1) the absence of any legal proceeding, law or order preventing the closing or prohibiting our ownership or operation of all or a material portion of Sea Coast’s assets or capital stock, or compelling us to dispose of or hold separate all or a material portion of our or Sea Coast’s business or assets, (2) obtaining certain consents and approvals, (3) the removal of liens on Sea Coast’s assets, (4) the accuracy of the representations and warranties of each party, (5) compliance of each party with its covenants and agreements, (6) the absence of any material adverse change in the value of Sea Coast’s capital stock or its business or financial condition, and (7) the receipt by us of audited and unaudited financial statements with respect to Sea Coast that are required by Rule 3-05 of Regulation S-X of the Securities Exchange Act of 1934, as amended. The purchase agreement contains customary termination rights.
SIGNIFICANT EVENTS DURING FISCAL YEAR 2005
On June 28, 2005, we acquired an 80,000-barrel capacity double-hull tank barge for a purchase price of approximately $12.0 million, including certain modifications made to the barge. This acquisition was financed using borrowings under a new term loan. This new agreement is described in further detail under “Liquidity and Capital Resources-Other Term Loans” below. From December 2004 until its acquisition, we operated the tank barge under a bareboat charter agreement.
On June 1, 2005, we issued and sold 500,000 common units to Tortoise Energy Infrastructure Corporation, or Tortoise, in a private placement for proceeds of $16.0 million, before expenses associated with the offering. The offer and sale of the common units were made pursuant to an exemption from registration under section 4(2) of the Securities Act of 1933, as amended. Pursuant to the terms of a registration rights agreement, we have agreed to register the resale of the common units with the Securities and Exchange Commission. Tortoise has agreed not to sell any of the common units until December 1, 2005.
On March 24, 2005, we entered into a new, five-year $80 million revolving credit agreement with a syndicate of banks. The new credit agreement replaced our then-existing $47 million credit agreement, which was repaid and terminated. The new credit agreement contains a $20 million sublimit for letters of credit and allows us to request an increase in the total availability thereunder by up to $20 million, to a maximum of $100 million, so long as no default or event of default has occurred and is continuing. This new credit agreement is described in further detail under “Liquidity and Capital Resources-Credit Agreement” below.
On December 8, 2004, we acquired ten tank barges and seven tugboats from Bay Gulf Trading Company, Ltd. of Norfolk, Virginia and its affiliates. The addition of these vessels represented a 10.6% increase in our aggregate barrel-carrying capacity at the time of acquisition. The purchase price of $21 million (excluding acquisition-related costs), included a water treatment facility in Norfolk, Virginia. The transaction was financed using our available credit lines, and the purchase price was allocated to the individual assets acquired based on independent appraisals.
DEFINITIONS
In order to understand our discussion of our results of operations, it is important to understand the meaning of the following terms used in our analysis and the factors that influence our results of operations:
· Voyage revenue. Voyage revenue includes revenue from time charters, contracts of affreightment and voyage charters, where we, as vessel operator, pay the vessel operating expenses. Voyage revenue is impacted by changes in charter and utilization rates and by the mix of business among the types of contracts described in the preceding sentence.
· Voyage expenses. Voyage expenses include items such as fuel, port charges, pilot fees, tank cleaning costs and canal tolls, which are unique to a particular voyage. Depending on the form of contract and customer preference, voyage expenses may be paid directly by customers or by us. If we pay voyage expenses, they are included in our results of operations when they are incurred. Typically when we pay voyage expenses, we add them to our freight rates at an approximate cost.
· Net voyage revenue. Net voyage revenue is equal to voyage revenue less voyage expenses. As explained above, the amount of voyage expenses we incur for a particular contract depends upon the form of the contract. Therefore, in comparing revenues between reporting periods, we use net voyage revenue to improve the comparability of reported revenues that are generated by the different forms of contracts. Since net voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement, voyage revenue, under “Results of Operations” below.
· Bareboat charter and other revenue. Bareboat charter and other revenue includes revenue from bareboat charters and from towing and other miscellaneous services.
· Vessel operating expenses. The most significant direct vessel operating expenses are wages paid to vessel crews, routine maintenance and repairs and marine insurance. We may also incur outside towing expenses during periods of peak demand and in order to maintain our operating capacity while our tugs are drydocked or otherwise out of service for scheduled and unscheduled maintenance.
· Depreciation and amortization. We incur fixed charges related to the depreciation of the historical cost of our fleet and the amortization of expenditures for drydockings. The aggregate number of drydockings undertaken in a given period, the size of the vessels and the nature of the work performed determine the level of drydocking expenditures. We capitalize expenditures incurred for drydocking and amortize these expenditures over 36 months.
· General and administrative expenses. General and administrative expenses consist of employment costs of shoreside staff and the cost of facilities, as well as legal, audit, insurance and other administrative costs.
· Total tank vessel days. Total tank vessel days is equal to the number of calendar days in the period multiplied by the total number of tank vessels operating or in drydock during that period.
· Scheduled drydocking days. Scheduled drydocking days are days designated for the inspection and survey of tank vessels, and identification and completion of required refurbishment work, as required by the U.S. Coast Guard and the American Bureau of Shipping to maintain the vessels’ qualification to work in the U.S. coastwise trade. Generally, drydockings are required twice every five years and last between 30 and 60 days, based upon the size of the vessel and the type and extent of work required.
· Net utilization. Net utilization is a primary measure of operating performance in our business. Net utilization is a percentage equal to the total number of days worked by a tank vessel or group of tank vessels during a defined period, divided by total tank vessel days for that tank vessel or group of tank vessels. Net utilization is adversely impacted by scheduled drydocking, scheduled and unscheduled maintenance and idle time not paid for by the customer.
· Average daily rate. Average daily rate, another key measure of our operating performance, is equal to the net voyage revenue earned by a tank vessel or group of tank vessels during a defined period, divided by the total number of days actually worked by that tank vessel or group of tank vessels during that period. Fluctuations in average daily rates result not only from changes in charter rates charged to our customers, but also from changes in vessel utilization and efficiency, which could result from internal factors, such as newer and more efficient tank vessels, and from external factors such as weather or other delays.
· Coastwise and local trades. Our business is segregated into coastwise trade and local trade. Our coastwise trade generally comprises voyages of between 200 and 1,000 miles by vessels with greater than 40,000 barrels of barrel-carrying capacity. These voyages originate from the middle Atlantic states to points as far north as Canada and as far south as Cape Hatteras and from points within the Gulf Coast region to other points within that region or to the Northeast. We also own a non-Jones Act tank barge that transports petroleum products internationally. Our local trade generally comprises voyages by smaller vessels of less than 200 miles. The term U.S. coastwise trade, as used generally for Jones Act purposes, would include our coastwise and local trades.
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the periods presented (dollars in thousands, except average daily rates):
Fiscal Year Ended June 30, 2005 Compared to the Fiscal Year Ended June 30,
Net Voyage Revenue
Voyage revenue was $118.8 million for the fiscal year ended June 30, 2005, an increase of $24.9 million, or 27%, as compared to voyage revenue of $93.9 million for the fiscal year ended June 30, 2004. Voyage expenses were $24.2 million for the fiscal year ended June 30, 2005, an increase of $7.9 million, or 48%, as compared to voyage expenses of $16.3 million for the fiscal year ended June 30, 2004.
Net voyage revenue was $94.6 million for the fiscal year ended June 30, 2005, an increase of $17.0 million, or 22%, as compared to net voyage revenue of $77.6 million for the fiscal year ended June 30, 2004. In our coastwise trade, net voyage revenue was $68.6 million for the fiscal year ended June 30, 2005, an increase of $13.9 million, or 25%, as compared to $54.7 million for the fiscal year ended June 30, 2004. Net utilization in our coastwise trade increased to 90% for the fiscal year ended June 30, 2005 compared to 88% for the fiscal year ended June 30, 2004, due mainly to a decrease in scheduled drydocking days. Increases totaling $13.2 million in coastwise net voyage revenue in fiscal 2005 resulted from an increase in days worked by the following vessels during fiscal 2005 as compared to fiscal 2004: (1) the DBL 102, which was placed in service in January 2004, (2) the DBL 140, which was purchased in January 2004, (3) the DBL 105, which completed its modification for petroleum transportation and was placed in service in May 2004, (4) the DBL 155, which completed its double-hull retrofitting in September 2004, and (5) the return of the KTC 80 from bareboat charter in November 2003. These increases were partially offset by an aggregate $4.2 million decrease in net voyage revenue during fiscal 2005 resulting from the sale of the KTC 135 in April 2004 in anticipation of its OPA 90 phase-out, and the OPA 90 phase-out of the KTC 90 and KTC 96 in December 2004. Coastwise net voyage revenue also benefited from a 11% increase in average daily rates to $11,369 for the fiscal year ended June 30, 2005 from $10,230 for the fiscal year ended June 30, 2004, which accounted for approximately $6.1 million of increased net voyage revenue. Average daily rates were positively impacted by the continuing strong demand for petroleum products, increasing oil prices, and the addition of the several larger vessels described above, which generate higher average daily rates.
Net voyage revenue in our local trade for the fiscal year ended June 30, 2005 was $26.0 million, an increase of $3.1 million, or 14%, as compared to $22.9 million for the fiscal year ended June 30, 2004. The increase was mainly attributable to the barges acquired as part of our December 2004 vessel acquisition, which accounted for $2.4 million of the increase. Net utilization in our local trade was 79% for the fiscal year ended June 30, 2005 compared to 84% for the fiscal year ended June 30, 2004. Net utilization in fiscal 2005 was adversely impacted by higher unscheduled repair days for one of our small tankers and by low utilization on certain tank barges acquired in the December 2004 vessel acquisition. Average daily rates in our local trade improved slightly to $5,418 for the fiscal year ended June 30, 2005 from $5,400 for the fiscal year ended June 30, 2004.
Bareboat Charter and Other Revenue
Bareboat charter and other revenue was $2.6 million for the fiscal year ended June 30, 2005, compared to $1.9 million for the fiscal year ended June 30, 2004. Amounts for the fiscal 2005 period increased by $0.5 million due to revenue generated from chartering out of a chartered-in barge.
Vessel Operating Expenses
Vessel operating expenses were $49.3 million for the fiscal year ended June 30, 2005, an increase of $10.5 million, or 27%, as compared to $38.8 million for the fiscal year ended June 30, 2004. Vessel operating expenses as a percentage of net voyage revenue increased to 52.1% for the fiscal year ended June 30, 2005 from 50.0% for the fiscal year ended June 30, 2004. Vessel labor and related costs increased
as a result of contractual labor rate increases and a higher average number of employees due to the operation of the additional barges described under “-Net Voyage Revenue” above, an additional tugboat purchased in January 2004, and integration of the additional vessels purchased in December 2004. Insurance costs and vessel repairs and supplies also increased as a result of the operation of the larger number of vessels. Outside towing expense increased by $2.5 million due to the need for additional tugboats to satisfy increased demand for our tank vessels, and to replace certain of our tugboats during coupling and re-powering projects. Fiscal 2005 vessel operating expenses also increased by $0.4 million for charter costs in connection with the bareboat charter revenue discussed above in “-Bareboat Charter and Other Revenue.”
Depreciation and Amortization
Depreciation and amortization was $21.4 million for the fiscal year ended June 30, 2005, an increase of $2.8 million, or 15%, as compared to $18.6 million for the fiscal year ended June 30, 2004. The increase resulted from additional depreciation on our newbuild and purchased vessels described above, plus additional depreciation recorded in the first quarter of fiscal 2005 to reduce the salvage value for the two single-hull vessels which phased out on December 31, 2004.
General and Administrative Expenses
General and administrative expenses were $11.2 million for the fiscal year ended June 30, 2005, an increase of $3.1 million, or 38%, as compared to general and administrative expenses of $8.1 million for the fiscal year ended June 30, 2004. As a percentage of net voyage revenue, general and administrative expenses increased to 11.8% for the fiscal year ended June 30, 2005 from 10.5% for the fiscal year ended June 30, 2004. The fiscal year ended June 30, 2005 included $1.9 million of additional professional fees and other costs incurred in connection with being a public company. These increased professional fees included $0.6 million in costs for compliance with the Sarbanes-Oxley Act of 2002, and $0.4 million of costs incurred in fiscal 2005 to provide income tax compliance information to our unitholders, neither of which were incurred in the prior year’s period.
Interest Expense, Net
Net interest expense was $5.9 million for the fiscal year ended June 30, 2005, $0.5 million lower than the fiscal year ended June 30, 2004. The decrease resulted from the significant reduction of higher cost borrowings in connection with the repayment of debt using the proceeds of our initial public offering in January 2004.
Loss on Reduction of Debt
In connection with the refinancing of our revolving credit facility and repayment of certain term loans in March 2005 as described below in “Liquidity and Capital Resources-Credit Agreement” and “-Other Term Loans,” we incurred $1.4 million in loss on reduction of debt. Included in this amount was $1.1 million in deferred financing costs related to the repaid debt that were written off, and $0.3 million of prepayment costs.
In connection with our initial public offering in fiscal 2004, $73.9 million in predecessor company debt was repaid. Included in this amount was $6.3 million in prepayment and make-whole amounts, of which $3.3 million had previously been accrued by our predecessor as supplemental interest that would have been payable upon maturity of certain of these loans, resulting in a loss on prepayment of $3.0 million. In addition, $0.2 million in deferred financing costs related to the debt was also written off.
Provision (Benefit) For Income Taxes
For fiscal 2005, our effective tax rate was 2.0%, as compared to 16.5% (exclusive of the benefit discussed in the following paragraph) in fiscal 2004. The periods prior to our initial public offering on January 14, 2004 relate to our predecessor. Our effective tax rate comprises the New York City Unincorporated Business Tax on our operating partnership, plus federal, state, local and foreign corporate income taxes on the taxable income of the operating partnership’s corporate subsidiaries. Our effective tax rate for the fiscal year ended June 30, 2005 was lower than the rate for the fiscal year ended June 30, 2004 because a smaller portion of our pretax income was provided by our operating partnership’s corporate subsidiaries.
Certain net assets contributed to us in connection with our January 2004 initial public offering were transferred by our predecessor’s corporate subsidiaries. These net assets had tax bases that were lower than their carrying value for financial reporting purposes, which resulted in deferred tax liabilities relating to these temporary differences. Upon transfer to us, the future reversal of these differences will be subject to our effective tax rate, which is significantly lower than the effective tax rate of our predecessor’s corporate subsidiaries. The effect of the change in tax rates applicable to these differences is reflected as a one-time deferred tax benefit of $17.6 million for the fiscal year ended June 30, 2004.
Net Income
Net income was $8.1 million for the fiscal year ended June 30, 2005, a decrease of $13.1 million compared to net income of $21.2 million for the fiscal year ended June 30, 2004. The decrease resulted primarily from recognition in the 2004 period of the $17.6 million deferred tax benefit described in the preceding paragraph, partially offset by a $0.5 million decrease in interest expense, net, a $1.8 million decrease in loss on reduction of debt, and a $2.0 million increase in operating income.
Fiscal Year Ended June 30, 2004 Compared to the Fiscal Year Ended June 30,
Net Voyage Revenue
Voyage revenue was $93.9 million for the fiscal year ended June 30, 2004, an increase of $10.0 million, or 12%, as compared to voyage revenue of $83.9 million for the fiscal year ended June 30, 2003. Voyage expenses were $16.3 million for the fiscal year ended June 30, 2004, an increase of $2.1 million, or 15%, as compared to voyage expenses of $14.2 million for the fiscal year ended June 30, 2003.
Net voyage revenue was $77.6 million for the fiscal year ended June 30, 2004, an increase of $7.8 million, or 11%, as compared to net voyage revenue of $69.8 million for the fiscal year ended June 30, 2003. Our coastwise trade net voyage revenue increased by approximately $6.7 million. This increase is primarily due to the addition of two new vessels, the DBL 82 and DBL 102, which were delivered in June 2003 and January 2004, respectively, the acquisition of the DBL 140 in January 2004, and the delivery, after modification, of the DBL 105 in May 2004. These vessel additions were partially offset by the phase-out, as required under OPA 90, of the single-hull vessels KTC 115 and KTC 135. Coastwise vessel utilization decreased from 90% in fiscal 2003 to 88% in fiscal 2004 due to an increase in scheduled drydocking days. Coastwise average daily rates increased 4%, to $10,230 from $9,844 in fiscal 2003; these average daily rates benefited from the addition of larger vessels, including the DBL 140 and DBL 105 described above.
Net voyage revenue in our local trade increased by $1.1 million, or 5%, in fiscal 2004 compared to fiscal 2003. Net utilization in our local trade improved to 84% in fiscal 2004 from 83% in fiscal 2003. Average daily rates in our local trade improved 11% to $5,400 per day for fiscal 2004 from $4,878 per day for the prior year, reflecting higher rates for short-term work with a customer in the northeastern United States, and by higher bunkering rates.
Bareboat Charter and Other Revenue
Bareboat charter and other revenue was $1.9 million in fiscal 2004, a decrease of $1.9 million, or 50%, as compared to $3.8 million in fiscal 2003. Fiscal 2003 included $1.2 million in revenue recorded from chartering out a chartered-in barge. Also, two vessels were returned from bareboat charter in fiscal 2004 for operation by us, reducing bareboat charter revenue by $0.6 million compared to fiscal 2003.
Vessel Operating Expenses
Vessel operating expenses were $38.8 million for the fiscal year ended June 30, 2004, an increase of $2.5 million, or 7%, as compared to vessel operating expenses of $36.3 million for fiscal 2003. Vessel operating expenses as a percentage of net voyage revenue decreased to 50.0% for fiscal 2004 from 52.0% for fiscal 2003. Vessel labor and related costs increased $2.2 million as a result of a scheduled contractual wage increase for our unionized employees and a higher average number of vessel employees due to the operation of two additional tugboats, which were purchased in May 2003 and January 2004. Operation of these additional tugboats also resulted in increased insurance, routine maintenance and other operating costs. Fiscal 2003 costs were increased by $0.9 million in charter costs in connection with the bareboat charter revenue discussed above.
Depreciation and Amortization
Depreciation and amortization was $18.6 million for the fiscal year ended June 30, 2004, an increase of $2.3 million, or 14%, as compared to $16.3 million recorded in fiscal 2003. New vessel additions, net of retirements, added $2.0 million in depreciation, while amortization of drydocking expenditures increased $0.3 million. Drydocking expenditures are amortized over 36 months.
General and Administrative Expenses
General and administrative expenses were $8.1 million for fiscal 2004, an increase of $1.1 million, or 16%, as compared to general and administrative expenses of $7.0 million for fiscal 2003. This increase resulted primarily from additional professional fees, insurance and other costs of $0.6 million incurred in connection with being a public company which were not incurred in the prior year. As a percentage of net voyage revenue, general and administrative expenses increased to 10.5% in fiscal 2004 from 10.1% in fiscal 2003.
Interest Expense, Net
Interest expense, net was $6.4 million in fiscal 2004, a decrease of $2.4 million, or 28%, as compared to $8.8 million in fiscal 2003. This decrease resulted from the significant repayment of debt using the proceeds of our initial public offering in January 2004. Additionally, a portion of both the pre- and post-IPO debt expense resulted from debt bearing interest at a floating rate tied to 30-day LIBOR, which averaged 1.1% for fiscal 2004 compared to 1.5% for fiscal 2003.
Loss on Reduction of Debt
In connection with the initial public offering, $73.9 million in predecessor company debt was repaid. Included in this amount was $6.3 million in prepayment and make-whole amounts, of which $3.3 million had previously been accrued by our predecessor as supplemental interest that would have been payable upon maturity of certain of these loans, resulting in a loss on prepayment of $3.0 million. In addition, $0.2 million in deferred financing costs related to the debt was also written off.
Provision (Benefit) For Income Taxes
For fiscal 2004, our effective tax rate was 16.5%, exclusive of the benefit discussed in the following paragraph, as compared to 6.4% in fiscal 2003. The periods prior to our initial public offering on January 14, 2004 relate to our predecessor. Our effective tax rate comprises the New York City Unincorporated Business Tax on our operating partnership, plus federal, state and local corporate income taxes on the taxable income of the operating partnership’s corporate subsidiary.
Certain net assets contributed to us were transferred by our predecessor’s corporate subsidiaries. These net assets had tax bases that were lower than their carrying values for financial reporting purposes, which resulted in deferred tax liabilities relating to these temporary differences. Upon transfer to us, the future reversal of these differences will be subject to our effective tax rate, which is significantly lower than the effective tax rate of our predecessor’s corporate subsidiaries. The effect of the change in tax rates applicable to these differences is reflected as a deferred tax benefit of $17.6 million in fiscal 2004.
Net Income
Net income was $21.2 million for fiscal 2004, an increase of $16.2 million compared to $5.0 million in fiscal 2003. This increase resulted from the $17.6 million deferred tax benefit discussed in the preceding paragraph, the increased net voyage revenue of $7.8 million, and the decrease in interest expense, net of $2.4 million, offset by the $3.2 million loss on reduction of debt, increased operating expenses of $2.5 million, increased depreciation and amortization of $2.3 million, increased general and administrative expenses of $1.1 million, and the decrease in bareboat charter and other revenue of $1.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows. Net cash provided by operating activities was $24.4 million in fiscal 2005, $17.8 million in fiscal 2004 and $13.2 million in fiscal 2003. The increase of $6.6 million in fiscal 2005, compared to fiscal 2004, resulted primarily from the improved operating results, after adjusting for non-cash expenses such as depreciation and amortization, and a $3.0 million positive impact from changes in operating working capital. This positive impact resulted mainly from increased accounts payable due to increased operating costs of a larger fleet, partially offset by increases in prepaid expenses such as fuel supplies and insurance premiums. The increase of $4.6 million in fiscal 2004, compared to fiscal 2003, resulted primarily from increased net voyage revenue, partially offset by increases in vessel operating and general and administrative expenses. The improved revenue in fiscal 2004 also resulted in an increase in accounts receivable, which provided an offsetting reduction in cash provided by operating activities.
Investing Cash Flows. Net cash used in investing activities totaled $55.9 million in fiscal 2005, $59.2 million in fiscal 2004 and $0.2 million in fiscal 2003. The primary elements of these activities were vessel acquisitions, construction of new vessels and retrofitting of existing ones, and the drawdown of Title XI escrow funds during the vessel construction period. We spent $30.7 million, $34.1 million and $3.5 million on vessel acquisitions in fiscal 2005, 2004 and 2003, respectively. The fiscal 2005 acquisitions included the vessels acquired in December 2004 and the DBL 78, which was acquired in June 2005. Construction expenditures for our tank vessel newbuilding program and rebuilding projects totaled $16.8 million in fiscal 2005, $26.5 million in fiscal 2004 and $18.7 million in fiscal 2003. Other capital expenditures of $9.0 million in fiscal 2005, $9.5 million in fiscal 2004 and $5.2 million in fiscal 2003 related primarily to repowering of, and installation of coupling systems on, certain tugboats, and expenditures related to upgrading the vessels acquired in December 2004. Capital expenditures made in the normal course of business are generally financed by cash from operations and, where necessary, borrowings under our revolving credit agreement.
In fiscal 2002, we invested the net proceeds of $39.1 million from our Title XI borrowings in short-term U.S. government obligations. These proceeds were held in escrow and then drawn down by us
upon delivery of the four tank barges being financed and used to repay construction period borrowings made under our revolving credit agreement. We made $10.7 million and $26.8 million of such drawdowns from our Title XI escrow account in fiscal 2004 and fiscal 2003, respectively. The fourth and final tank vessel in this newbuilding program was delivered in January 2004. The final $1.5 million of escrow funds were left on deposit and are available to the Maritime Administration of the U.S. Department of Administration (“MARAD”) in connection with the restructuring of our financial agreement for the Title XI bonds at the time of our initial public offering. Under this agreement, we are required to make monthly reserve fund deposits which are used to make semi-annual debt service payments. Such deposits, which are reflected in net cash provided by financing activities, were $4.0 million and $1.7 million for fiscal 2005 and fiscal 2004, respectively. For more information, please read “-Title XI Borrowings” below.
Financing Cash Flows. Net cash provided by financing activities was $31.2 million in fiscal 2005 and $41.7 million in fiscal 2004; net cash used in financing activities was $13.0 million in fiscal 2003.
During fiscal 2005, we increased our credit line borrowings and term loans by a net of $39.2 million, primarily to finance vessel acquisitions. We also paid $18.2 million in distributions to our unitholders in fiscal 2005. In March 2005, we signed a new five-year $80.0 million credit agreement with a syndicate of banks. See “-Credit Agreement” below. The new credit agreement replaced our then-existing $47.0 million credit agreement, which was repaid and terminated. On June 1, 2005, we issued and sold 500,000 common units in a private placement for gross proceeds of $16.0 million.
During fiscal 2004, we completed our initial public offering and used the gross proceeds thereof to pay down term loans and credit line borrowings, including prepayment costs, that had been contributed to us by our predecessor, to pay underwriting fees, professional fees and other offering expenses, and to redeem the 665,000 common units received by our predecessor in connection with the transfer of net assets to us concurrent with the initial public offering. Also in fiscal 2004, we entered into $36.0 million of new term loans to finance the purchase of the DBL 140/Lincoln Sea and the DBL 105 rebuilding project. Finally, we paid $3.7 million in distributions to partners in fiscal 2004. In fiscal 2003, we repaid $9.8 million of term loans and $2.0 million of credit line borrowings and paid $1.5 million in financing costs, primarily attributable to our initial public offering.
Oil Pollution Act of 1990. Tank vessels are subject to the requirements of OPA 90. OPA 90 mandates that all single-hull tank vessels operating in U.S. waters be removed from petroleum and petroleum product transportation services at various times through January 1, 2015, and provides a schedule for the phase-out of the single-hull vessels based on their age and size. One single-hull vessel, renamed the DBL 155, was retrofitted to double-hull and redelivered to us in September 2004. To replace the operating capacity of four single-hull vessels that phased out at varying times from December 2002 to December 2004, we entered into a contract with Bollinger Gretna, L.L.C. in March 2001 for the construction of four double-hull tank barges to be built over three years. The aggregate cost of these four vessels, which have all been delivered, was approximately $46.2 million, including financing and other costs and certain special equipment. These new tank barges were coupled with tugboats we own, using an articulated connection system, to create integrated tug-barge units that provide increased operating efficiency and enhanced safety and reliability. We financed the purchase of the four new tank vessels through the issuance of Title XI bonds described below under “-Title XI Borrowings.” At June 30, 2005, approximately 72% of the barrel-carrying capacity of our tank vessel fleet was double-hulled in compliance with OPA 90, and the remainder will be in compliance with OPA 90 until January 2015.
Ongoing Capital Expenditures. Marine transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance. We estimate that, over the next five years, we will spend an average of approximately $11.5 million per year to drydock and maintain our tank vessels’ operating capacity. We expect such expenditures to approximate $10.7 million in fiscal 2006. In addition, we anticipate that we will spend
$0.5 million annually for other general capital expenditures. Periodically, we also make expenditures to acquire or construct additional tank vessel capacity and/or to upgrade our overall fleet efficiency. For a further discussion of maintenance and expansion capital expenditures, please read footnote 3 to the table in “Selected Financial Data” in Item 6 of this report. The following table summarizes total maintenance capital expenditures, including drydocking expenditures, and expansion capital expenditures for the periods presented (in thousands):
In September 2004, we signed an agreement with a shipyard to construct a new 100,000-barrel tank barge, which is expected to be delivered during the fall of 2005. The total cost, after addition of certain special equipment and integration with an existing tugboat, is expected to be in the range of $13.0 to $14.0 million. We also signed an agreement with the same shipyard in February 2005 to construct two new 28,000-barrel tank barges that are expected to be delivered during the first calendar quarter of 2006 and which are expected to cost, in the aggregate and after the addition of certain special equipment, in the range of $9.0 to $10.0 million. In August 2005, we signed another agreement with that shipyard to construct another new 28,000-barrel tank barge that we expect will be delivered in the summer of 2006 and which is expected to cost, after the addition of certain special equipment, in the range of $4.5 to $5.0 million. We expect to finance these newbuildings from borrowings and cash from operations.
Additionally, we intend to retire or retrofit 22 single-hull tank vessels by December 2014, which at June 30, 2005 represented approximately 28% of our barrel-carrying capacity. We estimate that the current cost to replace this capacity with newbuildings and by retrofitting certain of our existing vessels would range from $58.0 million to $66.0 million. This capacity can also be replaced by acquiring existing double-hull tank vessels as opportunities arise. We are currently evaluating the most cost-effective means to replace this capacity.
Liquidity Needs. Our primary short-term liquidity needs are to fund general working capital requirements, distributions to unitholders, and drydocking expenditures while our long term liquidity needs are primarily associated with expansion and other maintenance capital expenditures. Expansion capital expenditures are primarily for the purchase of vessels, while maintenance capital expenditures include drydocking expenditures and the cost of replacing tank vessel operating capacity. Our primary sources of funds for our short term liquidity needs are cash flows from operations and borrowings under our credit facility, while our long term sources of funds are cash from operations, long term bank borrowings and other debt or equity financings.
We believe that cash flows from operations and borrowings under our credit agreement, described under “-Credit Agreement” below, will be sufficient to meet our liquidity needs for the next 12 months.
Credit Agreement. In March 2005, we entered into a new five-year $80.0 million revolving credit agreement with a syndicate of banks. The new credit agreement replaced our then-existing $47.0 million revolving credit agreement, which was repaid and terminated. The new credit agreement contains a $20.0 million sublimit for letters of credit and allows us to request an increase in the total availability under the new credit agreement by up to $20.0 million, to a maximum of $100.0 million, so long as no default or event of default has occurred and is continuing.
Obligations under the new credit agreement are secured by a first priority security interest, subject to permitted liens, on certain of our vessels having an orderly liquidation value at least equal to the greater of (a) $50.0 million and (b) 1.25 times the amount of the obligations (including letters of credit) outstanding under the new credit agreement. Interest rates on outstanding borrowings and commitment fees are determined quarterly based upon the ratio of Total Funded Debt (as defined in the new credit agreement) to EBITDA (as defined in the new credit agreement) and are determined according to whether the loan is based on the London interbank offered rate (a LIBOR-based loan) or on a rate per annum equal to the greater of (a) the bank’s prime rate, or (b) 0.50% in excess of the federal funds effective rate (a base rate loan). The following table summarizes the rates of interest and commitment fees under the new credit agreement:
Interest on a base rate loan is payable monthly over the five-year term of the agreement. Interest on a LIBOR-based loan is due, at our election, one, two, three or six months after such loan is made. Outstanding principal amounts are due upon termination of the agreement.
Loan proceeds under the new credit agreement may be used for any purpose in the ordinary course of business, including vessel acquisitions, ongoing working capital needs and distributions. Amounts borrowed and repaid may be re-borrowed. Borrowings made for working capital purposes must be reduced to zero for a period of at least 15 consecutive days once each year.
The new credit agreement contains covenants that are similar to, but generally more favorable than, the prior revolving credit agreement. These covenants include, among others:
· the maintenance of the following financial ratios (all as defined in the new credit agreement): (a) fixed charges to EBITDA of at least 2.50 to 1:00, (b) total funded debt to tangible capitalization of no greater than 0.60 to 1.00, and (c) total funded debt to EBITDA of no more than 3.75 to 1.00.
· restrictions on creating liens on or disposing of the vessels securing the new credit agreement, subject to permitted exceptions;
· restrictions on merging and selling assets outside the ordinary course of business;
· prohibitions on making distributions to limited or general partners of ours during the continuance of an event of default; and
· restrictions on transactions with affiliates and materially changing our business.
The new credit agreement contains customary events of default. If a default occurs and is continuing, we must repay all amounts outstanding thereunder.
Borrowings outstanding under the new credit agreement as of June 30, 2005 were $47.1 million. We have also utilized $6.5 million in a stand-by letter of credit under the credit facility as collateral in connection with security granted to MARAD pursuant to the financial agreements governing our Title XI borrowings. For more information, please read “-Title XI Borrowings” below.
Other Term Loans. In March 2005, we entered into a new, three-year term loan in the amount of $11.7 million to refinance an existing loan. Our obligations under this agreement are secured by a first priority security interest in three vessels. We have assigned to the lender all proceeds from the charters, hires, and contracts of affreightment, as well as the proceeds of any insurance payments, with respect to the pledged vessels. The loan is repayable in monthly principal installments of $69,578, with the remaining principal amount repayable at maturity, plus accrued interest at an annual fixed rate of 6.25%. The loan agreement contains events of default and covenants that are customary for facilities of this type.
Also in March 2005, we also entered into an agreement to borrow up to $11.0 million to partially finance construction of the new 100,000-barrel tank barge described above in “-Ongoing Capital Expenditures.” The loan bears interest at 30-day LIBOR plus 1.05%; interest only is payable monthly through the earlier of October 31, 2005 or delivery of the tank barge. Thereafter, monthly principal payments of principal, plus accrued interest, are payable over seven years, with the remaining principal amount payable at maturity. The loan is collateralized by the related tank barge. Borrowings outstanding on this loan totaled $6.4 million at June 30, 2005.
In June 2005, we entered into an agreement to borrow up to $18.0 million to finance the purchase of the 80,000-barrel double-hull tank barge acquired in June 2005 and to partially finance construction of the new 28,000-barrel tank barges described above in “-Ongoing Capital Expenditures.” The loan bears interest at 30-day LIBOR plus 1.60% for the interim financing period, which is the earlier of April 30, 2006 or the delivery of the two 28,000-barrel barges, and 30-day LIBOR plus 1.75% thereafter. Interest only is payable monthly through the interim financing period. Thereafter, monthly payments of principal, plus accrued interest, are payable over seven years, with the remaining principal amount payable at maturity. We have the option, after the first anniversary date of the note, to convert to a fixed interest rate. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan totaled $11.6 million at June 30, 2005.
To finance the January 2004 acquisition of a 140,000-barrel capacity double-hull tank barge and related tugboat, we entered into a seven-year, $25.0 million term loan. To finance the rebuilding of the DBL 105 and the retrofitting of the DBL 155, we entered into an agreement with a financial institution in May 2004 to provide $20.0 million of term loans to permanently finance these vessels upon completion of the respective projects. These term loans were repaid upon closing of the new credit agreement and new term loan as described above.
Title XI Borrowings. To provide permanent financing for the four tank vessels built under our recently completed newbuilding program, we applied for and received from the Maritime Administration of the U.S. Department of Transportation, or MARAD, a guarantee of obligations for mortgage financing pursuant to Title XI of the Merchant Marine Act of 1936. Under this program, the long-term financing for these four new tank vessels is guaranteed by the full faith and credit of the United States of America, which is collateralized by the tank vessels being constructed and certain other agreements. The guarantee amount of $40.4 million is equal to 87.5% of the MARAD-approved cost of construction of the four tank vessels, which includes qualifying financing costs. We refer to our obligations relating to this financing as our “Title XI borrowings.”
On June 7, 2002, we privately placed $40.4 million of bonds (“Title XI bonds”), which were guaranteed by MARAD. The proceeds of $39.1 million, net of certain closing fees, were deposited in an escrow account with the U.S. Department of the Treasury and were invested in U.S. government obligations. The bonds were issued in four series and bear interest at a weighted average fixed rate of 6.2% per year. Each series is repayable over 25 years beginning six months after the delivery date of the related tank vessel.
On July 26, 2002, February 5, 2003, June 27, 2003, and January 16, 2004, respectively, the delivery dates of the four tank barges, we drew down the portion of the escrow account relating to the particular vessel. Principal repayment of these bonds, excluding interest, will total $1.6 million for fiscal 2005 and for each fiscal year thereafter until the debt is repaid.
The agreements with MARAD governing the Title XI borrowing guarantees are collateralized by a first priority security interest, subject to permitted liens, on the four Title XI vessels. In addition, throughout the term of the Title XI bonds, we will cause additional funds in the aggregate sum of $8.0 million to be made available to the U.S. Secretary of Transportation (the “Secretary”) in the form of one or more letters of credit and/or additional cash deposits ($1.5 million minimum for cash deposits) to the escrow account that we maintain pursuant to the terms of the Title XI agreements. We are obligated under the financial agreement with MARAD to escrow on a monthly basis one-sixth of the next semi-annual debt service payment due for each series of the Title XI bonds, which deposits are used to make such semi-annual payments. We have also granted MARAD first priority security interests in additional vessels having an orderly liquidation value of $10.0 million.
The financial agreements relating to the Title XI bonds enable us to make distributions of our available cash in accordance with the terms of our partnership agreement, except under any of the following circumstances, in which case distributions would require the written consent of the Secretary:
· failure to pay any principal, interest, fees, expenses or other amounts on the Title XI bonds or related obligations when due;
· failure to observe any agreement, security instrument, obligation, representation, warranty or covenant included in the agreements with respect to the Title XI bonds;
· bankruptcy or insolvency events involving us, the operating partnership or any of our subsidiaries; or
· exceeding $5.0 million in indebtedness incurred for the purpose of making distributions or indemnity payments to our predecessor and certain of its affiliates.
The Title XI financial agreements also contain various covenants that generally prohibit us, without the Secretary’s written consent, from engaging in any of the following activities:
· entering into any agreements with third parties to manage the Title XI vessels;
· selling, mortgaging, transferring, leasing or demise chartering the Title XI vessels to third parties;
· entering into sale/leaseback transactions that do not result in sale proceeds at least equal to the fair value of the property sold;
· guaranteeing the obligations of other persons;
· embarking on any new business not related to our current business;
· making certain indemnity payments; and
· subject to certain exceptions, merging, consolidating or conveying any portion of our properties or assets and dissolving our partnership.
In addition, unless (a) we maintain a consolidated fixed charge coverage ratio (as defined in the financial agreements) of at least 3.0 to 1.0, (b) after giving effect to a transaction or transactions, our consolidated net worth exceeds our consolidated long-term debt, and (c) after giving effect to a transaction or transactions, our consolidated net worth is at least initially $90.0 million (or in any fiscal year after our 2004 fiscal year, is at least 90% of our consolidated net worth as of the last day of the immediately
preceding fiscal year but shall not be lower than $90.0 million), we will not be allowed, without the Secretary’s written consent, to:
· withdraw any capital;
· redeem any partnership interest or convert any of the same into debt;
· except as described above, make any distribution respecting any partnership interest;
· make any investments in the securities of any related party;
· make any loan or advance to, or prepay any indebtedness to:
· any shareholder or partner of K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P. or any of their respective consolidated subsidiaries;
· any director, officer or employee of K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P., any of their respective consolidated subsidiaries or any related party; or
· any related party;
· grant compensation increases to employees earning more than certain defined amounts, acquire any fixed assets other than those required for the maintenance of our existing assets, or make any new investments in other than obligations of the United States;
· either enter into or become liable (directly or indirectly) under charters and leases (having a term of six months or more) which have annual payments aggregating in excess of $0.5 million;
· pay any indebtedness subordinated to the Title XI bonds;
· incur any new indebtedness, except current liabilities, short-term loans or loans under our revolving credit lines incurred in the ordinary course of business; or
· permit any new mortgages or liens on any of our property or assets, subject to certain exceptions.
Restrictive Covenants. The agreements governing our $80.0 million credit facility, Title XI borrowings and term loans contain restrictive covenants that, among others, (a) prohibit distributions under defined events of default, (b) restrict investments and sales of assets, and (c) require us to adhere to certain financial covenants, including defined ratios of fixed charge coverage and funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined), and a minimum balance of partners’ capital.
Under the terms of the credit facility and the term loans, we are prevented from declaring distributions if any event of default, as defined, occurs or would result from such declaration. The financial agreements relating to the Title XI bonds enable us to make distributions of our available cash in accordance with the terms of our partnership agreement, except under certain defined circumstances in which case distributions would require the written consent of the Secretary.
Private Placement of Common Units. On June 1, 2005, we issued and sold 500,000 common units to Tortoise in a private placement for proceeds of $16.0 million, before expenses associated with the offering. The offer and sale of the common units was made pursuant to an exemption from registration under section 4(2) of the Securities Act of 1933, as amended. Tortoise has agreed not to sell any of the common units until December 1, 2005.
In connection with its purchase of common units, we entered into a registration rights agreement with Tortoise. Pursuant to this agreement, we filed a shelf registration statement on August 30, 2005 for the resale of the common units, and we have agreed to use commercially reasonable efforts to cause the shelf registration statement to be declared effective by the Securities and Exchange Commission by January 27,
2006. In addition, we granted Tortoise certain “piggyback” registration rights in the registration rights agreement.
We used the net proceeds to repay indebtedness incurred under our revolving credit facility in connection with our December 2004 vessel acquisition.
Contractual Obligations and Contingencies. Our contractual obligations at June 30, 2005 consisted of the following (in thousands):
Payments Due by Period
(1) Capital expenditures relating to shipyard payments for the construction of a new 100,000-barrel double-hull tank barge and two new 28,000-barrel double-hull tank barges.
The executive officers of K-Sea General Partner GP LLC have entered into employment agreements with K-Sea Transportation Inc., our indirect wholly owned corporate subsidiary. Each of the employment agreements had an initial term of one year. The term of each employment agreement is automatically extended for successive one-year terms unless either party gives 30 days written notice prior to the end of the term that such party desires not to renew the employment agreement. The employment agreements currently provide for an aggregate base annual salary of $710,000. In addition, each employee is eligible to receive an annual bonus award based upon our consolidated financial performance. If the employee’s employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by .75) multiplied by the employee’s base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee’s non-competition provisions multiplied by the employee’s base salary at the time of termination or resignation.
We are a party to various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collision or other casualty and to claims arising under vessel charters. All of these personal injury, collision and casualty claims are fully covered by insurance, subject to deductibles ranging from $25,000 to $100,000. We accrue on a current basis for estimated deductibles we expect to pay.
EW Transportation LLC and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by various parties, including former employees, alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with our initial public offering. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately $47,000 and are seeking to settle the other case. We may be subject to litigation in the future involving these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate friable asbestos or remove friable asbestos on our vessels, as well as for exposure to second-hand smoke and other matters.
EW Transportation Corp., a predecessor to our partnership, and many other marine transportation companies operating in New York, have come under audit with respect to the New York State Petroleum Business Tax (“PBT”), which is a tax on vessel fuel consumed while operating in New York State territorial
waters. The boundaries of these waters have never been defined. An industry group in which we and EW Transportation Corp. participate has proposed to the New York taxing authority that it adopt a calculation methodology for the PBT that it has applied, for purposes of a different tax, for many years. The taxing authority has not yet responded to this proposal. We have begun filing monthly tax returns, and have accrued our estimated liability using the industry’s proposed calculation methodology. In accordance with the agreements entered into in connection with our initial public offering, any liability resulting from the PBT prior to January 14, 2004 (the effective date of the initial public offering) is a retained liability of our predecessor.
Inflation
During the last three years, inflation has had a relatively minor effect on our financial results. Our contracts generally contain escalation clauses whereby certain cost increases, including labor and fuel, can be passed through to our customers.
Related Party Transactions
We lease our office and pier facilities from, and charter certain vessels to, affiliates of an employee. Additionally, we utilize one of these affiliates for tank cleaning services. Please read note 7 to our audited consolidated financial statements included elsewhere in this report.
KSP Investors A L.P., KSP Investors B L.P., and KSP Investors C L.P. and their controlled affiliates have agreed to indemnify us for claims associated with certain retained liabilities. For more information regarding the indemnification obligations and other related party transactions, please read “Certain Relationships and Related Transactions” in Item 13 of this report.
Seasonality
We operate our tank vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. Movements of clean oil products, such as motor fuels, generally increase during the summer driving season. Movements of black oil products and distillates, such as heating oil, generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably cold winters result in significantly higher demand for heating oil in the northeastern United States, which is a significant market for our tank barge services. The summer driving season can increase demand for automobile fuel and, accordingly, the demand for our services. A decline in demand for, and level of consumption of, refined petroleum products, particularly in the East Coast and Gulf Coast regions, could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and profitability.
CRITICAL ACCOUNTING POLICIES
The accounting treatment of a particular transaction is governed by generally accepted accounting principles, or GAAP, and, in certain circumstances, requires us to make estimates, judgments and assumptions that we believe are reasonable based upon information available. We base our estimates, judgments and assumptions on historical experience and known facts that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We believe that, of our significant accounting policies discussed in note 3 to our audited consolidated financial statements, the following may involve a higher degree of judgment.
Revenue Recognition
We earn revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of affreightment and voyage charters, revenue is recognized based upon the relative
transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued when such losses become evident.
Depreciation
Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the straight-line method over the estimated useful lives of the individual assets as follows: tank vessels-ten to twenty-five years; tugboats-twenty years; and pier and office equipment-five years. For single-hull tank vessels, these useful lives are limited to the remaining period of operation prior to mandatory retirement as required by OPA 90. Also included in vessels are drydocking expenditures that are capitalized and amortized over three years. Major renewals and betterments of assets are capitalized and depreciated over the remaining useful lives of the assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed. To date, our experience confirms that these policies are reasonable, although there may be events or changes in circumstances in the future that indicate the recovery of the carrying amount of a vessel might not be possible. Examples of events or changes in circumstances that could indicate that the recoverability of a vessel’s carrying amount should be assessed might include a change in regulations such as OPA 90, or continued operating losses, or projections thereof, associated with a vessel or vessels. If events or changes in circumstances as set forth above indicate that a vessel’s carrying amount may not be recoverable, we would then be required to estimate the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the vessel, we would recognize an impairment loss to the extent the carrying value exceeds its fair value by appraisal. Our assumptions and estimates would include, but not be limited to, the estimated fair market value of the assets and their estimated future cash flows, which are based on additional assumptions such as asset utilization, length of service of the asset and estimated salvage values. Although we believe our assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.
Amortization of Drydocking Expenditures
Drydocking expenditures are capitalized and amortized over three years. Drydocking of vessels is required by both the U.S. Coast Guard and by the applicable classification society, which in our case is the American Bureau of Shipping. Such drydocking activities include, but are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel. Amortization of drydocking expenditures is included in depreciation and amortization expense.
Accounts Receivable
We extend credit to our customers in the normal course of business. We regularly review our accounts, estimate the amount of uncollectible receivables each period, and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the current financial strength of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. Historically, credit risk with respect to our trade receivables has generally been considered minimal because of the financial strength of our customers.
Deferred Income Taxes
We provide deferred taxes for the tax effects of differences between the financial reporting and tax bases of assets and liabilities at enacted tax rates in effect in the jurisdictions where we operate for the years in which the differences are expected to reverse. A valuation allowance is provided, if necessary, for deferred tax assets that are not expected to be realized.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) revises FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition to revising FAS 123, FAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows.” We are required to adopt FASB 123(R) as of July 1, 2005. The adoption will require us to recognize the fair value of unit options granted under our long-term incentive plan. To date, no unit options have been granted.
On April 4, 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). This interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. It also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We are required to adopt FIN 47 as of June 30, 2006, and we do not expect that such adoption will have a significant impact on our financial position, results of operations or cash flows.
On June 2, 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections-a replacement of APB No. 20 and FAS No. 3” (“FAS 154”). FAS 154 replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”) and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“FAS 3”) and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. We are required to adopt FAS 154 as of July 1, 2006, and we do not expect that such adoption will have a significant impact on our financial position, results of operations or cash flows.
RISK FACTORS
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. Unitholders should carefully consider the following risk factors together with all of the other information included elsewhere in this report.
We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.
We may not have sufficient available cash each quarter to pay the minimum quarterly distribution. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
· the level of consumption of refined petroleum products in the markets in which we operate;
· the prices we obtain for our services;
· the level of our operating costs, including payments to our general partner; and
· prevailing economic conditions.
Additionally, the actual amount of cash we have available for distribution depends on other factors such as:
· the level of capital expenditures we make, including for acquisitions, retrofitting of vessels and compliance with new regulations;
· the restrictions contained in our debt instruments and our debt service requirements;
· fluctuations in our working capital needs;
· our ability to make working capital borrowings; and
· the amount, if any, of reserves, including reserves for future capital expenditures and other matters, established by our general partner in its discretion.
The amount of cash we have available for distribution depends primarily on our cash flow, including cash flow from operations and working capital borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.
Our business would be adversely affected if we failed to comply with the Jones Act provisions on coastwise trade, or if those provisions were modified, repealed or waived.
We are subject to the Jones Act and other federal laws that restrict maritime transportation between points in the United States to vessels built and registered in the United States and owned and manned by U.S. citizens. We are responsible for monitoring the ownership of our common units and other partnership interests. If we do not comply with these restrictions, we would be prohibited from operating our vessels in U.S. coastwise trade, and under certain circumstances we would be deemed to have undertaken an unapproved foreign transfer, resulting in severe penalties, including permanent loss of U.S. coastwise trading rights for our vessels, fines or forfeiture of the vessels. For information about the Jones Act and other maritime laws, please read “Regulation-Coastwise Laws” in Items 1 and 2 of this report.
During the past several years, interest groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag competition for trades and cargoes currently reserved for U.S.-flag vessels under the Jones Act and cargo preference laws. We believe that continued efforts will be made to modify or repeal the Jones Act and cargo preference laws currently benefiting U.S.-flag vessels. If these efforts are successful, it could result in increased competition, which could reduce our revenues and cash available for distribution.
The Secretary of the Department of Homeland Security is vested with the authority and discretion to waive the coastwise laws to such extent and upon such terms as he may prescribe whenever he deems that such action is necessary in the interest of national defense. In response to the effects of Hurricane Katrina, on September 1, 2005 the Secretary of the Department of Homeland Security waived the coastwise laws generally for the transportation of petroleum products until September 19, 2005 and further waived the coastwise laws generally for the transportation of petroleum released from the Strategic Petroleum Reserve undertaken in response to circumstances arising from Hurricane Katrina. Any waiver of the coastwise laws, whether in response to natural disasters or otherwise, could result in increased competition, which could reduce our revenues and cash available for distribution.
We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution.
We must make substantial capital expenditures, including drydocking expenses and the replacement or retrofitting of our single-hull vessels under OPA 90, to maintain the operating capacity of our fleet. We currently expect to spend an average of $12.0 million per year in drydocking and other general capital expenditures to maintain the operating capacity of our fleet, excluding any additional drydocking and other general capital expenditures that would be required if our acquisition of Sea Coast Towing, Inc. is consummated.
Prior to January 1, 2015, we intend to retire or retrofit 22 single-hull vessels, which represents approximately 28% of our barrel-carrying capacity as of June 30, 2005. We estimate that the current cost to replace this capacity with newbuildings and by retrofitting certain of our existing vessels ranges from $58.0 million to $66.0 million. This capacity can also be replaced by acquiring existing double-hull tank vessels as opportunities arise. At the time we make these expenditures, the actual cost could be higher due to inflation and other factors.
Please read “In calculating our available cash from operating surplus each quarter, we are required to deduct estimated maintenance capital expenditures, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted” for information about our requirement to deduct estimated maintenance capital expenditures in calculating our available cash from operating surplus.
In calculating our available cash from operating surplus each quarter, we are required to deduct estimated maintenance capital expenditures, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted.
Our partnership agreement requires us to deduct estimated maintenance capital expenditures from operating surplus each quarter, as opposed to actual maintenance capital expenditures, in order to reduce disparities in operating surplus caused by the fluctuating level of maintenance capital expenditures, such as drydocking. Because of the substantial capital expenditures we intend to make by January 1, 2015 to replace the operating capacity of our single-hull vessels, our annual estimated maintenance capital expenditures for purposes of calculating operating surplus also includes $1.5 million to reduce the fluctuation in operating surplus that would otherwise be caused by the required expenditures.
The amount of estimated maintenance capital expenditures we deduct from operating surplus is subject to review and change by the board of directors of K-Sea General Partner GP LLC, with the concurrence of the conflicts committee of such board. In years when estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, as we expect will be the case in some years until we actually make expenditures for the OPA 90 replacements and retrofitting, the amount of cash available for distribution to unitholders will be lower than if actual maintenance capital expenditures were deducted from operating surplus.
Please read “We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution” for information regarding substantial expenditures that we must make to maintain the operating capacity of our fleet.
Capital expenditures and other costs necessary to operate and maintain a vessel vary depending on the age of the vessel and changes in governmental regulations, safety or other equipment standards.
Capital expenditures and other costs necessary to operate and maintain a vessel increase with the age of the vessel. In addition, changes in governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer
requirements or competition, may require us to make additional expenditures. For example, we may be required to make significant expenditures for alterations or the addition of new equipment to satisfy requirements of the U.S. Coast Guard and the American Bureau of Shipping. In addition, we may be required to take our vessels out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our older vessels profitably during the remainder of their economic lives.
In order to fund these capital expenditures, we will either incur borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets for future offerings may be limited by our financial condition at the time as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures would limit our ability to continue to operate some of our vessels and could have a material adverse effect on our business and on our ability to make distributions to unitholders.
A decline in demand for, and level of consumption of, refined petroleum products, particularly in the East Coast and Gulf Coast regions, could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and profitability.
The demand for tank vessel capacity is influenced by the demand for refined petroleum products and other factors including:
· global and regional economic and political conditions;
· developments in international trade;
· changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported;
· environmental concerns; and
· competition from alternative sources of energy, such as natural gas, and alternate transportation methods.
Any of these factors could adversely affect the demand for tank vessel capacity and charter rates. Any decrease in demand for tank vessel capacity or decrease in charter rates could adversely affect our business, financial condition and results of operations.
In addition, we operate our tank vessels in the East Coast and Gulf Coast regions, markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. Movements of certain clean oil products, such as motor fuels, generally increase during the summer driving season. Movements of black oil products and certain clean oil products, such as heating oil, generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably mild winters can result in significantly lower demand for heating oil in the northeastern United States, which is a significant market for our tank barge services. In addition, unpredictable weather patterns and variations in oil reserves disrupt vessel scheduling. Seasonality could materially affect our business, financial condition and results of operations in the future.
Marine transportation is an inherently risky business.
Our vessels and their cargoes are at risk of being damaged or lost because of events such as:
· marine disasters;
· bad weather;
· mechanical failures;
· grounding, fire, explosions and collisions;
· human error; and
· war and terrorism.
All of these hazards can result in death or injury to persons, loss of property, environmental damages, delays or rerouting. If one of our vessels were involved in an accident, with the potential risk of environmental contamination, the resulting media coverage could have a material adverse effect on our business, financial condition and results of operations. Please read “Legal Proceedings” in Item 3 of this report.
Our insurance may not be adequate to cover our losses.
We may not be adequately insured to cover losses from our operational risks, which could have a material adverse effect on our operations. For example, a catastrophic oil spill or other disaster could exceed our insurance coverage. In addition, our affiliate, EW Transportation LLC, and its predecessors may not have insurance coverage prior to March 1986. If we were subject to claims related to that period, including claims from current or former employees, EW Transportation LLC may not have insurance to pay the liabilities, if any, that could be imposed on us. If we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material.
We may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and some claims may not be paid. In the past, stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable. In addition, our insurance may be voidable by the insurers as a result of certain actions of ours.
We rely on a limited number of customers for a significant portion of our revenues. The loss of any of these customers could adversely affect our business and operating results.
Our customers consist primarily of major oil companies, oil traders and refineries. The portion of our revenues attributable to any single customer changes over time, depending on the level of relevant activity by the customer, our ability to meet the customer’s needs and other factors, many of which are beyond our control. Two customers accounted for 26% and 16%, respectively, of our consolidated revenues for fiscal 2005. If we were to lose either of these customers or if either of these customers significantly reduced its use of our services, our business and operating results could be adversely affected.
We may not be able to grow or effectively manage our growth.
A principal focus of our strategy is to continue to grow by expanding our business in the East Coast and Gulf Coast regions and to expand into other geographic markets. For example, we recently entered into an agreement to acquire Sea Coast Towing, Inc., which is engaged in the maritime transportation of refined petroleum products and related businesses along the West Coast of the United States and Alaska. Our future growth will depend upon a number of factors, some of which we can control and some of which we cannot. These factors include our ability to:
· identify businesses engaged in managing, operating or owning vessels for acquisitions or joint ventures;
· identify vessels for acquisition;
· consummate acquisitions or joint ventures, including our pending acquisition of Sea Coast Towing, Inc;
· integrate any acquired businesses or vessels successfully with our existing operations;
· hire, train and retain qualified personnel to manage and operate our growing business and fleet;
· identify new geographic markets;
· improve our operating and financial systems and controls; and
· obtain required financing for our existing and new operations.
A deficiency in any of these factors would adversely affect our ability to achieve anticipated levels of cash flows or realize other anticipated benefits. In addition, competition from other buyers could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay.
We may not be able to successfully integrate the operations of Sea Coast Towing with our current operations.
In August 2005, we entered into a definitive agreement to acquire Sea Coast Towing, Inc., which operates 15 tank barges (representing approximately 705,000 barrels of capacity) and 15 tugboats along the West Coast of the United States and Alaska. If we complete our acquisition of Sea Coast, the integration of Sea Coast’s operations with our current operations will be a complex, time consuming and costly process. Failure to timely and successfully integrate Sea Coast may have a material adverse effect on our business, financial condition and results of operations. The difficulties of integrating Sea Coast will present challenges to our management including:
· operating a significantly larger combined company with operations in geographic areas in which we have not previously operated;
· managing relationships with new customers for whom we have not previously provided services;
· integrating personnel with diverse backgrounds and organizational cultures;
· experiencing operational interruptions or the loss of key employees, customers or suppliers;
· establishing the internal controls and procedures for the combined entity that we are required to maintain under the Sarbanes-Oxley Act of 2002; and
· consolidating other corporate and administrative functions.
We will also be exposed to risks that are commonly associated with transactions similar to this acquisition, such as unanticipated liabilities and costs, some of which may be material, and diversion of management’s attention. As a result, the anticipated benefits of the acquisition may not be fully realized, if at all.
Because we obtain some of our insurance through protection and indemnity associations, we also may be subject to calls, or premiums, in amounts based not only on our own claim records, but also the claim records of all other members of the protection and indemnity associations.
We may be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in significant expenses to us, which could reduce our profits or cause losses. Moreover, the protection and indemnity clubs and other insurance providers reserve the right to make changes in insurance coverage with little or no advance notice.
We may not be able to renew time charters, consecutive voyage charters, contracts of affreightment and bareboat charters when they expire.
We received approximately 74% of our revenue from time charters, consecutive voyage charters, contracts of affreightment and bareboat charters during fiscal 2005. These arrangements, which are generally for periods of one year or more, may not be renewed, or if renewed, may not be renewed at similar rates. If we are unable to obtain new charters at rates equivalent to those received under the old charters, our profitability may be adversely affected.
Voyage charters may not be available at rates that will allow us to operate our vessels profitably.
During fiscal 2005, we derived approximately 26% of our revenue from single voyage charters. Voyage charter rates fluctuate significantly based on tank vessel availability, the demand for refined petroleum products and other factors. Increased dependence on the voyage charter market by us could result in a lower utilization of our vessels and decreased profitability. Future voyage charters may not be available at rates that will allow us to operate our vessels profitably.
Our purchase of existing vessels carries risks associated with the quality of those vessels.
Our fleet renewal and expansion strategy includes the acquisition of existing vessels as well as the ordering of newbuildings. Unlike newbuildings, existing vessels typically do not carry warranties with respect to their condition. While we generally inspect any existing vessel prior to purchase, such an inspection would normally not provide us with as much knowledge of its condition as we would possess if the vessel had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be more substantial than for vessels we have operated since they were built. These costs could decrease our profits and reduce our liquidity.
We are subject to complex laws and regulations, including environmental regulations, that can adversely affect the cost, manner or feasibility of doing business.
Increasingly stringent federal, state and local laws and regulations governing worker health and safety and the manning, construction and operation of vessels significantly affect our operations. Many aspects of the marine industry are subject to extensive governmental regulation by the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs Service and MARAD, and to regulation by private industry organizations such as the American Bureau of Shipping. The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards. The U.S. Coast Guard is authorized to inspect vessels at will.
Our operations are also subject to federal, state, local and international laws and regulations that control the discharge of pollutants into the environment or otherwise relate to environmental protection. Compliance with such laws, regulations and standards may require installation of costly equipment or operational changes. Failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Some environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA 90, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the United States. Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for natural resource damages. The potential for these releases could increase as we increase our fleet capacity. Most states bordering on a navigable waterway have enacted legislation providing for potentially unlimited liability for the discharge of pollutants within their waters.
Terrorist attacks have resulted in increased costs and have disrupted our business. Continued hostilities in the Middle East or other sustained military campaigns may adversely impact our results of operations.
After the terrorist attacks of September 11, 2001, New York Harbor was shut down temporarily, resulting in the suspension of our local operations in the New York City area for four days and the loss of revenue related to these operations. The long-term impact that terrorist attacks and the threat of terrorist attacks may have on the petroleum industry in general, and on us in particular, is not known at this time. Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect our operations in unpredictable ways, including disruptions of petroleum supplies and markets, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror.
Changes in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for us to obtain. Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital.
We depend upon unionized labor for the provision of our services. Any work stoppages or labor disturbances could disrupt our business.
All of our seagoing personnel other than tug and tanker captains, or approximately 75% of our workforce, are employed under a contract with a division of the International Longshoreman’s Association that expires on June 30, 2008. Any work stoppages or other labor disturbances could have a material adverse effect on our business, financial condition and results of operations.
Increased competition in the domestic tank vessel industry could result in reduced profitability and loss of market share for us.
Contracts for our vessels are generally awarded on a competitive basis, and competition in the markets we serve is intense. The most important factors determining whether a contract will be awarded include:
· availability and capability of the vessels;
· ability to meet the customer’s schedule;
· price;
· safety record;
· reputation; and
· experience.
Some of our competitors may have greater financial resources and larger operating staffs than we do. As a result, they may be able to make vessels available more quickly and efficiently, transition to double-hull barges from single-hull barges more rapidly, and withstand the effects of declines in charter rates for a longer period of time. They may also be better able to weather a downturn in the oil and gas industry. As a result, we could lose customers and market share to these competitors.
We also face competition from refined petroleum product pipelines. Long-haul transportation of refined petroleum products is generally less costly by pipeline than by tank vessel. The construction of new pipeline segments to carry petroleum products into our markets, including pipeline segments that connect with existing pipeline systems, and the conversion of existing non-refined petroleum product pipelines, could adversely affect our ability to compete in particular locations.
Our employees are covered by federal laws that may subject us to job-related claims in addition to those provided by state laws.
Some of our employees are covered by provisions of the Jones Act and general maritime law. These laws typically operate to make liability limits established by state workers’ compensation laws inapplicable to these employees and to permit these employees and their representatives to pursue actions against employers for job-related injuries in federal courts. Because we are not generally protected by the limits imposed by state workers’ compensation statutes, we may have greater exposure for claims made by these employees.
We depend on key personnel for the success of our business.
We depend on the services of our senior management team and other key personnel. In particular, our success depends on the continued efforts of Mr. Timothy J. Casey, the President and Chief Executive Officer of K-Sea General Partner GP LLC, and other key employees. The loss of the services of any key employee could have a material adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available.
Due to our lack of asset diversification, adverse developments in our marine transportation business would reduce our ability to make distributions to our unitholders.
We rely exclusively on the revenues generated from our marine transportation business. Due to our lack of asset diversification, an adverse development in this business would have a significantly greater impact on our business, financial condition and results of operations than if we maintained more diverse assets.
Changes in international trade agreements could affect our ability to provide marine transportation services at competitive rates.
Currently, vessel trade or marine transportation between two points within the same country, generally known as cabotage or coastwise trade, is not included in the General Agreement on Trade in Services or the North American Free Trade Agreement. In addition, the Jones Act restricts maritime cargo transportation between U.S. ports to U.S.-flag vessels qualified to engage in U.S. coastwise trade. If maritime services were deemed to include cabotage and included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other multi-national trade agreements, transportation of maritime cargo between U.S. ports could be opened to foreign-flag vessels. Foreign vessels would have lower construction costs and would generally operate at significantly lower costs than we do in U.S. markets, which would likely have a material adverse effect on our ability to compete.
K-Sea General Partner L.P. and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to the detriment of our unitholders.
Our affiliates indirectly own the general partner interest and a 46.2% limited partner interest in us and own and control the general partner of our general partner. Conflicts of interest may arise between our general partner and our affiliates, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of our affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:
· our general partner is allowed to take into account the interests of parties other than us, such as the interests of its affiliates, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
· our general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;
· our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to our unitholders;
· in some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units or to make incentive distributions or to hasten the expiration of the subordination period;
· our general partner determines which costs incurred by it and its affiliates, including K-Sea General Partner GP LLC, are reimbursable by us;
· our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf;
· our general partner controls the enforcement of obligations owed to us by it and its affiliates; and
· our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
Our partnership agreement currently limits the ownership of our partnership interests by individuals or entities that are not U.S. citizens. This restriction could limit the liquidity of our common units.
In order to ensure compliance with Jones Act citizenship requirements, the board of directors of the general partner of our general partner has adopted a requirement that at least 85% of our partnership interests must be held by U.S. citizens. This requirement may have an adverse impact on the liquidity or market value of our common units, because unitholders will be unable to sell units to non-U.S. citizens. Any purported transfer of common units in violation of these provisions will be ineffective to transfer the common units or any voting, dividend or other rights in respect of the common units.
The IRS could treat us as a corporation for tax purposes, which would substantially reduce cash available for distribution to unitholders.
The federal income tax benefit of an investment in us depends largely on our being treated as a partnership for federal income tax purposes. The IRS has not provided any ruling on this matter. If we were treated as a corporation for federal income tax purposes, we would pay tax on our income at corporate rates, currently 35%, distributions would generally be taxed again to unitholders as corporate distributions and no income, gains, losses, or deductions would flow through to unitholders. Because a tax would be imposed upon us as an entity, cash available for distribution to unitholders would be substantially reduced. Treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to unitholders and thus would likely result in a substantial reduction in the value of the common units.
Current law may change and cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state, or local income tax purposes, the minimum
quarterly distribution amount and the target distribution amounts will be decreased to reflect the impact of that law on us. Finally, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise and other forms of taxation. If any of these states were to impose a tax on us, the cash available for distribution to unitholders would be reduced.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Title XI bonds and one outstanding term loan bear interest at fixed interest rates ranging from 6.17% to 6.26%. Borrowings under our credit agreement and two outstanding term loans bear interest at a floating rate based on LIBOR, which will subject us to increases or decreases in interest expense resulting from movements in that rate. Based on an aggregate $65.1 million of floating rate debt outstanding as of June 30, 2005, the impact of a 1% increase in interest rates would result in an increase in interest expense, and a corresponding decrease in income before income taxes, of approximately $0.7 million annually.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements set forth on pages to of this report are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2005 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
As of June 30, 2005, management assessed the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that our internal control over financial reporting was effective as of June 30, 2005, based on those criteria.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included under the heading “Report of Independent Registered Public Accounting Firm” on page herein.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
K-Sea General Partner GP LLC, as the general partner of K-Sea General Partner L.P., our general partner, manages our operations and activities. Our general partner is not elected by our unitholders and is not subject to re-election on a regular basis. Unitholders are not entitled to elect the directors of K-Sea General Partner GP LLC or directly or indirectly participate in our management or operation.
Set forth below is information concerning the directors and executive officers of K-Sea General Partner GP LLC as of September 12, 2005. Executive officers and directors are elected for one-year terms.
James J. Dowling has served as our Chairman of the Board since July 2003, has served as Chairman of the Board of EW Transportation LLC (formerly K-Sea Transportation LLC) since January 2002 and has served as a director of EW Transportation LLC since its formation in April 1999. Mr. Dowling has been a Managing Director of Jefferies Capital Partners, a private investment firm, since January 2002, and is a director of a private company in which Jefferies Capital Partners has an interest. Jefferies Capital Partners is the manager of Furman Selz Investors II L.P. and its affiliated entities.
Timothy J. Casey has served as our President, Chief Executive Officer and Director since July 2003. Mr. Casey has served as President, Chief Executive Officer and Director of EW Transportation LLC since April 1999. Mr. Casey is also a board member for American Waterways Operators and The Seamen’s Church Institute.
Anthony S. Abbate has served as a Director since February 2004. Mr. Abbate has been President and Chief Executive Officer of Interchange Financial Services Corporation, a bank holding company, since 1984 and President and Chief Executive Officer of its principal subsidiary, Interchange Bank, since 1981.
Mr. Abbate also serves as Chairman of the Executive Committee of both Interchange Financial Services Corporation and Interchange Bank.
Barry J. Alperin has served as a Director since February 2004. Mr. Alperin is a business consultant who retired from Hasbro Inc. in 1996 after 11 years in various senior executive positions, including Vice Chairman and Director. Mr. Alperin is currently on the board of Henry Schein, Inc., a distributor of healthcare products to office-based practitioners, and The Hain Celestial Group, Inc., a natural and organic beverage, snack, specialty food and personal care products company.
Brian P. Friedman has served as a director since July 2003. Mr. Friedman has been a managing member of Jefferies Capital Partners, a private investment firm, and affiliated entities since 1997. Mr. Friedman also serves as Chairman of the Executive Committee of Jefferies & Company, Inc. Mr. Friedman serves as a director of Jefferies Group, Inc., an investment banking firm, Iowa Telecommunications Services, Inc., a provider of telecommunications services, Real Mex Restaurants, Inc., a restaurant chain operator, Telex Communications, Inc., a manufacturer of audio and wireless communications equipment, Pacific Basin Limited, an international transportation company, and various private companies in which Jefferies Capital Partners or its affiliates have an interest.
Frank Salerno has served as a Director since February 2004. From mid-1999 until his retirement in February 2004, Mr. Salerno was Managing Director and Chief Operating Officer of Merrill Lynch Investment Advisors-Americas Institutional Division, an investment advisory company.
John J. Nicola has served as our Chief Financial Officer since July 2003, and has served as Chief Financial Officer of EW Transportation LLC since July 2000. Mr. Nicola was employed from November 1993 to July 2000 by Maersk Sealand, a container shipping company, in various senior financial management roles, including Chief Financial Officer of Maersk’s East Coast and Gulf terminal operating subsidiary. Mr. Nicola is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Thomas M. Sullivan has served as our Vice President of Operations since July 2003. Mr. Sullivan served as Vice President of Operations for EW Transportation LLC since April 1999. Mr. Sullivan also served as Vessel Supervisor for EW Transportation LLC’s predecessor from March 1995 until April 1999.
Richard P. Falcinelli has served as our Vice President of Administration and Secretary since July 2003. Mr. Falcinelli has served as Vice President of Administration and Secretary of EW Transportation LLC since April 1999.
Meetings and Committees of the Board of Directors
Meetings
K-Sea General Partner GP LLC’s board of directors held four meetings during fiscal 2005. During fiscal 2005, each director attended at least 75% of the aggregate of (1) the total number of meetings of the board of directors of K-Sea General Partner GP LLC and (2) the total number of meetings held by all committees of such board on which he served.
Audit Committee
K-Sea General Partner GP LLC has a standing audit committee consisting of Messrs. Abbate, Alperin (Chairman) and Salerno. The board of directors of K-Sea General Partner GP LLC has determined that all members of the audit committee are independent within the meaning of the listing standards of the New York Stock Exchange and the applicable rules of the Securities and Exchange Commission. In addition, the board of directors of K-Sea General Partner GP LLC has determined that Mr. Abbate is an
audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission.
The primary responsibilities of the audit committee are to assist the board of directors of K-Sea General Partner GP LLC in overseeing (1) the integrity of our financial statements, (2) our independent registered public accounting firm’s qualifications, independence, and performance, (3) the effectiveness of our internal controls and procedures and our internal audit function, and (4) our compliance with legal and regulatory requirements. The audit committee has the sole authority to appoint, retain and terminate our independent registered public accounting firm, which reports directly to the audit committee.
The audit committee has established procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.
Compensation Committee
K-Sea General Partner GP LLC has a standing compensation committee consisting of Messrs Alperin, Dowling and Friedman. The compensation committee, among other tasks, determines and approves the chief executive officer’s compensation, makes recommendations to the board with respect to other executive officer compensation, and reviews from time to time the compensation and benefits of non-employee directors.
Conflicts Committee
K-Sea General Partner GP LLC has a standing conflicts committee consisting of Messrs. Abbate, Alperin and Salerno. The conflicts committee reviews specific matters that the board of directors of K-Sea General Partner GP LLC believes may involve conflicts of interest and takes such other action as may be required under the terms of our partnership agreement.
Director Independence
The board of directors of K-Sea General Partner GP LLC has determined that Messrs. Abbate, Alperin and Salerno are independent within the meaning of the listing standards for general independence of the New York Stock Exchange. Under the listing standards, the audit committee is required to be composed solely of directors who are independent. The standards for audit committee membership include additional requirements under rules of the SEC.
The listing standards relating to general independence consist of both a requirement for a board determination that the director has no material relationship with the listed company and a listing of several specific relationships that preclude independence. To assist it in making determinations of independence, the board has adopted categorical standards as permitted under the listing standards. Although the board considers all relevant facts and circumstances in assessing whether a director is independent, relationships falling within the categorical standards are not required to be disclosed or separately discussed in this report in connection with the board’s independence determinations. A relationship falls within the categorical standards adopted by the board if it:
· is a type of relationship addressed in
· the rules of the SEC requiring proxy statement disclosure of relationships and transactions, or
· the provisions of the New York Stock Exchange Listed Company Manual listing relationships that preclude a determination of independence,
but under those rules neither requires disclosure nor precludes a determination of independence, or
· consists of charitable contributions by us to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization’s gross revenue in any of the last three years.
None of the independent directors had relationships relevant to an independence determination that were outside the scope of the board’s categorical standards.
Because we are a limited partnership, the listing standards of the New York Stock Exchange do not require K-Sea General Partner GP LLC to have a majority of independent directors or a nominating/corporate governance or compensation committee.
Code of Business Conduct and Ethics
The board of directors of K-Sea General Partner GP LLC has adopted a code of business conduct and ethics for all employees, including our principal executive officer and principal financial and accounting officer. If any amendments are made to the code or if K-Sea General Partner GP LLC grants any waiver, including any implicit waiver, from a provision of the code that the SEC or the New York Stock Exchange (“NYSE”) requires us to disclose, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.
Corporate Governance Guidelines
The board of directors of K-Sea General Partner GP LLC has also adopted corporate governance guidelines in accordance with the rules of the New York Stock Exchange.
Availability of Corporate Governance Documents
Copies of the board committee charters, code of business conduct and ethics and corporate governance guidelines are available, without charge, on our website at www.k-sea.com and in print, free of charge, upon written request to the Secretary, K-Sea General Partner GP LLC, 3245 Richmond Terrace, Staten Island, NY 10303.
Annual Certification
We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. In 2004, we submitted to the NYSE the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual. In 2005, we expect to submit this certification to the NYSE within 30 days after filing this report.
Executive Sessions of the Board of Directors
Messrs. Abbate, Alperin, Dowling, Friedman and Salerno, who are non-management directors of K-Sea General Partner GP LLC, meet at regularly scheduled executive sessions without management. These meetings are chaired on a rotating basis by the chairmen of the audit committee and compensation committee. Persons wishing to communicate with our non-management directors may do so by writing to them at K-Sea General Partner GP LLC, c/o Board of Directors, 3245 Richmond Terrace, Staten Island, New York 10303.
Messrs. Abbate, Alperin, and Salerno, who are independent non-management directors of K-Sea General Partner GP LLC, meet at least annually in executive sessions without management and the other directors. Mr. Abbate serves as the presiding director at those executive sessions.
Communications with Independent Directors
Persons wishing to communicate with our independent non-management directors may do so by writing to them at K-Sea General Partner GP LLC, c/o Board of Directors, 3245 Richmond Terrace, Staten Island, New York 10303.
Payments to our General Partner
K-Sea General Partner LP does not receive any management fee or other compensation in connection with its management of us; however, K-Sea General Partner LP or its affiliates who perform services for us and/or our subsidiaries are reimbursed at cost for all expenses incurred on our behalf which are necessary or appropriate to the conduct of our business. These costs totaled approximately $0 and $17,000 during fiscal 2005 and fiscal 2004, respectively. We also directly pay the fees of the independent directors of K-Sea General Partner GP LLC and reimburse meeting-related expenses of all directors of K-Sea General Partner GP LLC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Officers, directors and greater than 10% unitholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms.
Based solely on our review of the copies of such forms we received, or representations from certain reporting persons that no Form 4s were required for those persons, we believe that during the fiscal year ended June 30, 2005, all of our officers, directors, and greater than 10% beneficial owners complied on a timely basis with all applicable filing requirements under Section 16(a) of the Securities Exchange Act of 1934, except that two Form 4s for Frank Salerno were not timely filed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual salary, bonus and all other compensation awards and payouts made to our President and Chief Executive Officer, and our three other executive officers, in respect of fiscal 2005 and 2004:
Summary Compensation Table(1)
(1) K-Sea Transportation Partners L.P. and K-Sea General Partner GP LLC, the general partner of our general partner, were formed in July 2003; however, neither paid compensation to its directors or
officers prior to January 14, 2004, the closing date of our initial public offering. The data in the table above for fiscal 2004 reflects payments to our executive officers by us and by our predecessor companies in respect of fiscal 2004.
(2) Bonuses are earned based on the results of operations for each fiscal year and are reported above for the fiscal year in which they were earned. Bonuses for the fiscal year ended June 30, 2005 have not yet been awarded.
(3) Represents the value of the executive officer’s restricted unit award under the K-Sea Transportation Partners L.P. Long-Term Incentive Plan (calculated by multiplying the closing market price of our common units on the date of grant by the number of restricted units awarded). As of June 30, 2005, Mr. Casey had 15,000 restricted units with a value of $513,750, and each of Messrs. Nicola, Sullivan and Falcinelli had 5,000 restricted units with a value of $171,250. The restricted units vest in five equal installments beginning October 1, 2005. Each restricted unit includes an associated distribution equivalent right, which entitles the recipient to receive an amount in cash equal to, and at the same time as, the cash distributions made by us with respect to a common unit during the period such restricted unit is outstanding.
(4) Consists of contributions to our 401(k) and money purchase defined contribution plans.
Unit Option Awards
No unit options were awarded during fiscal 2005.
Employment Agreements
The executive officers of K-Sea General Partner GP LLC, including Timothy J. Casey, John J. Nicola, Thomas M. Sullivan and Richard P. Falcinelli, have entered into employment agreements with K-Sea Transportation Inc., our indirect wholly owned corporate subsidiary. The following is a summary of the material provisions of those employment agreements, copies of which have been previously filed as exhibits. All of these employment agreements are substantially similar, with certain exceptions as set forth below.
The employment agreements contemplate that each employee will serve as an officer of K-Sea General Partner GP LLC and other affiliates. Each of the employment agreements had an initial term of one year. The term of each employment agreement is automatically extended for successive one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement.
Mr. Casey receives a base annual salary of $245,000 and each of Messrs. Nicola, Falcinelli and Sullivan receive a base annual salary of $155,000. Under the employment agreement, each employee is eligible to receive an annual bonus award based upon the financial performance of us and our subsidiaries. The board of directors of K-Sea General Partner GP LLC will determine the amount of any bonus award and may issue additional awards to each employee in the amounts and at the times it so determines. Further, each employee is entitled to an automobile and certain other benefits.
If the employee’s employment is terminated without cause (as defined in the employment agreement) or if the employee resigns for good reason (as defined in the employment agreement), the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by .75) multiplied by the employee’s base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee’s non-competition provisions multiplied by the employee’s base salary at the time of termination or resignation. In addition, K-Sea Transportation Inc. will pay on behalf of each employee the premiums necessary to provide coverage continuation rights under certain insurance policies for a one-year period after termination or resignation.
The employment agreements also provide for a non-competition period that will continue for two years after the termination of the employee’s employment, except that the non-competition period may terminate earlier as determined by the board of directors of K-Sea General Partner GP LLC if (a) the employee is terminated other than for cause and (b) such termination does not occur within 30 days after a “change in control,” as defined therein. During the non-competition period, the employee is generally prohibited from engaging in any business that competes with us or our affiliates in areas in which we conduct business as of the date of termination and from soliciting or inducing any of our employees to terminate their employment with us or accept employment with anyone else or interfere in a similar manner with our business.
Long-Term Incentive Plan
K-Sea General Partner GP LLC has adopted the K-Sea Transportation Partners L.P. Long-Term Incentive Plan for directors and employees of K-Sea General Partner GP LLC and its affiliates, including K-Sea Operating Partnership L.P. and K-Sea Transportation Inc. The long-term incentive plan permits the grant of awards covering an aggregate of 440,000 common units in the form of unit options and restricted units. The plan is administered by the compensation committee of the board of directors of K-Sea General Partner GP LLC, and will continue in effect until the earlier of the date determined by the board of directors of K-Sea General Partner GP LLC or the date common units are no longer available for the payment of awards under the plan.
K-Sea General Partner GP LLC’s board of directors or its compensation committee at its discretion are able to terminate, suspend or discontinue the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. K-Sea General Partner GP LLC’s board of directors or its compensation committee also have the right to alter or amend the long-term incentive plan or any part thereof from time to time, including increasing the number of units that may be granted subject to unitholder approval as required by the exchange upon which the common units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.
Restricted Units. A restricted unit is a “phantom” unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the fair market value of a common unit. The compensation committee may determine to make grants under the plan to employees and directors containing such terms as the compensation committee shall determine under the plan, including the period over which restricted units granted to employees and directors will vest. The compensation committee will be able to base its vesting determination upon the achievement of specified performance objectives. In addition, subject to additional or contrary provisions in a unit award agreement, the restricted units will vest upon a change in control of K-Sea Transportation Partners L.P. or our general partner.
If a grantee’s employment or membership on the board of directors terminates for any reason, the grantee’s restricted units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise or unless otherwise provided in a written employment agreement between the grantee and K-Sea General Partner GP LLC or its affiliates. Common units to be delivered upon the vesting of restricted units may be common units acquired by the general partner of our general partner in the open market, common units already owned by the general partner of our general partner, common units acquired by the general partner of our general partner directly from us or any other person or any combination of the foregoing, as determined by the compensation committee at its discretion. K-Sea General Partner GP LLC will be entitled to reimbursement by us for the cost incurred in acquiring common units. Thus, the cost of the restricted units will be borne by us. If we issue new common units upon vesting of the restricted units, the total number of common units outstanding will increase. The compensation committee, in its discretion, may grant tandem distribution equivalent units (“DERs”) with
respect to restricted units, which entitle the recipient to receive an amount in cash equal to, and at the same time as, the cash distributions made by us with respect to a common unit during the period such restricted unit is outstanding.
We intend the issuance of the common units upon vesting of the restricted units under the plan to serve as a means of incentive compensation for superior performance and not primarily as an opportunity to participate in the equity appreciation of the common units. Therefore, plan participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.
Unit Options. The long-term incentive plan will permit the grant of options covering common units. The compensation committee will be able to make grants under the plan to employees and directors containing such terms as the committee determines. Unit options will not have an exercise price that is less than the fair market value of the units on the date of grant. In general, unit options granted will become exercisable over a period determined by the compensation committee. In addition, the unit options will become exercisable upon a change in control of K-Sea Transportation Partners L.P. or K-Sea Operating Partnership L.P. or upon the achievement of specified performance objectives. Unless otherwise provided in an award agreement, unit options may be exercised only by the participant during his lifetime or by the person to whom the participant’s right will pass by will or the laws of descent and distribution.
If a grantee’s employment or membership on the board of directors terminates for any reason, the grantee’s unvested options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise or unless otherwise provided in a written employment agreement between the grantee and K-Sea General Partner GP LLC or its affiliates. Upon exercise of a unit option, K-Sea General Partner GP LLC will acquire common units in the open market or directly from us or any other person or use common units that it already owns, or any combination of the foregoing, as determined by the compensation committee in its discretion. K-Sea General Partner GP LLC will be entitled to reimbursement by us for the difference between the cost incurred in acquiring these common units and the proceeds received from an optionee at the time of exercise. Thus, the cost of the unit options will be borne by us. If we issue new common units upon exercise of the unit options, the total number of common units outstanding will increase, and the general partner of our general partner will pay us the proceeds it receives from the optionee upon exercise of the unit option. The unit option plan has been designed to furnish additional compensation to employees and directors and to align their economic interests with those of common unitholders.
Unit Purchase Plan
We have a unit purchase plan for employees of our general partner and its affiliates. The number of common units initially available for purchase under this plan is 200,000. The unit purchase plan is intended to serve as a means of encouraging participants to invest in common units and to encourage participants to devote their best efforts to the business of the partnership. Our general partner pays the brokerage commissions, transfer taxes and other costs and expenses of the plan. All common units acquired under the plan will be subject to a one-year holding period from the date of purchase. If a participant sells or otherwise disposes of his common units during this one-year holding period, the participant will thereafter be precluded from participating in the unit purchase plan until the first unit purchase period following the first anniversary of the date of the pledge, transfer, sale or other distribution of common units. The plan is administered by the compensation committee of the board of directors of K-Sea General Partner GP LLC. The plan may be terminated at any time by the compensation committee and will automatically terminate when all of the available common units under the plan have been purchased. The plan may be amended from time to time by the compensation committee.
Director Compensation
K-Sea General Partner GP LLC pays no additional remuneration to its employees for serving as directors.
The following table provides information on compensation and reimbursement practices for independent directors of K-Sea General Partner GP LLC (Messrs. Abbate, Alperin and Salerno):
(1) The board of directors of K-Sea General Partner GP LLC established compensation and reimbursement policies for fiscal 2006 at its regularly scheduled meeting on September 8, 2005. These policies will apply to subsequent fiscal years unless changed by the board of directors of K-Sea General Partner GP LLC or the compensation committee thereof.
(2) Additional fee is only $500 if the audit committee meeting occurs on the same day as a board meeting.
(3) Restricted units vest on the first anniversary of the date of grant, subject to earlier vesting in the event of a change in control, death, disability or retirement and to such other terms as are set forth in the award agreement, a form of which has been filed as an exhibit to this report. The date of grant for fiscal 2006 is September 8, 2005; the date of grant for subsequent fiscal years will be the date of the first regularly scheduled board meeting during such fiscal year. Grants of restricted units include associated DERs.
(4) On February 23, 2004, the independent directors were each granted 3,000 restricted units and associated DERs. The restricted units vest in four equal annual installments beginning on February 23, 2005, subject to earlier vesting in the event of a change in control, death, disability or retirement and to such other terms as are set forth in the award agreement.
On October 1, 2004, the compensation committee of the board of directors of K-Sea General Partner GP LLC granted 15,000 restricted units and associated DERs to Mr. Dowling under the K-Sea Transportation Partners L.P. Long-Term Incentive Plan. The restricted units vest in five equal annual installments beginning on October 1, 2005.
Except as described above, neither Mr. Dowling nor Mr. Friedman has received any remuneration for serving as a director. We also reimburse Mr. Dowling and Mr. Friedman for expenses attendant to board membership.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITYHOLDER MATTERS.
A diagram depicting our current organizational structure is presented below.
K-Sea Transportation Partners L.P.
The following table sets forth the beneficial ownership of units of K-Sea Transportation Partners L.P. as of September 12, 2005 by beneficial owners of 5% or more of such units by each director and executive officer of K-Sea General Partner GP LLC and by all directors and executive officers as a group.
* Less than 1%.
(1) Unless otherwise noted, each beneficial owner has sole voting and dispositive power with respect to the common and subordinated units set forth opposite such holder’s name.
(2) Holders of restricted units do not have voting or investment power with respect to such units prior to vesting. Restricted units that vest within 60 days of the date of this report are deemed outstanding for purposes of determining the beneficial ownership and computing the percentage ownership of such person, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Accordingly, the following common units that may be issued upon the vesting of restricted units are included in the table: Mr. Dowling-3,000; Mr. Casey-3,000; Mr. Nicola-1,000; Mr. Sullivan-1,000; and Mr. Falcinelli-1,000.
(3) EW Transportation LLC is owned by individual investors, including certain of our directors and executive officers, and by KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a “KSP Entity”). The table below sets forth the economic interest in, and beneficial ownership of equity interests of, EW Transportation LLC, which beneficial ownership includes units beneficially owned by EW Holding Corp. and EW Transportation Corp., its wholly owned subsidiaries. The address of EW Transportation LLC is 3245 Richmond Terrace, Staten Island, New York 10303.
(4) EW Holding Corp.’s beneficial ownership includes units beneficially owned by EW Transportation Corp., its wholly owned subsidiary. The address of each entity is 3245 Richmond Terrace, Staten Island, New York 10303.
(5) Based solely on a Schedule 13G filed with the Securities and Exchange Commission on August 12, 2005 by Tortoise Energy Infrastructure Corporation (“TEIC”) and Tortoise Capital Advisors, L.L.C., an investment advisor to TEIC and certain managed accounts (“TCA”). TCA, by virtue of an investment advisory agreement with TEIC, has all investment and voting power over common units owned of record by TEIC. TCA and TEIC have reported that they share voting power and dispositive power over the common units owned of record by TEIC. TCA also acts as an investment advisor to certain managed accounts. Including shares owned of record by TEIC, TCA has shared voting power with respect to 629,227 common units and shared dispositive power with respect to 666,533 common units. TCA is not the record owner of any common units and disclaims any beneficial interest in such common units. The address of each entity is 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.
(6) Mr. Friedman owns 51% of Park Avenue Transportation Inc., the general partner of each KSP Entity and, therefore, may be deemed to beneficially own the subordinated units held by EW Transportation LLC. The address of each KSP Entity and Park Avenue Transportation Inc. is 520 Madison Avenue, 12th Floor, New York, New York 10022.
EW Transportation LLC
The following table sets forth the economic interest in, and the beneficial ownership of equity interests of, EW Transportation LLC as of September 12, 2005:
* Less than 1%.
(1) Park Avenue Transportation Inc. is the general partner of each of KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a “KSP Entity”) and, therefore, has sole voting and dispositive power with respect to the equity interests of EW Transportation LLC owned by each KSP Entity. Mr. Friedman owns 51% of the outstanding shares of capital stock of Park Avenue Transportation Inc., the general partner of each KSP Entity. In addition, Mr. Friedman has an economic interest in FS Private Investments LLC, which in turn has an economic interest in each KSP Entity.
(2) Mr. Dowling is a limited partner in KSP Investors C L.P. and has an effective 1.38% economic interest in EW Transportation LLC.
K-Sea General Partner GP LLC
The following table sets forth the economic interest in, and the beneficial ownership of equity interests of, K-Sea General Partner GP LLC, the general partner of our general partner, as of September 12, 2005:
(1) Park Avenue Transportation Inc. is the general partner of each of KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a “KSP Entity”) and, therefore, has sole voting and dispositive power with respect to the equity interests of K-Sea General Partner GP LLC owned by each KSP Entity. Mr. Friedman owns 51% of the outstanding shares of capital stock of the general partner of each KSP Entity.
(2) Mr. Dowling has an effective 1.38% economic interest in K-Sea General Partner GP LLC.
Equity Compensation Plan Information
The following table sets forth in tabular format a summary of our equity plan information as of September 12, 2005:
(1) The K-Sea Transportation Partners L.P. Long-Term Incentive Plan is our only equity compensation plan. No options, warrants or rights have been issued under this plan. For a description of the material
features of this plan, please read “Executive Compensation-Long-Term Incentive Plan” in Item 11 of this report.
(2) An aggregate of 61,750 restricted units have been issued under the K-Sea Transportation Partners L.P. Long-Term Incentive Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Distributions and Payments to Our General Partner and Its Affiliates
We generally distribute 98% of our available cash to our unitholders, including EW Transportation LLC, EW Holding Corp. and EW Transportation Corp. in their capacity as holders of an aggregate of 4,165,000 subordinated units, and the remaining 2% of our available cash to our general partner. If distributions exceed the $0.50 per unit minimum quarterly distribution and other higher target levels, our general partner is entitled to increasing percentages of the distributions, up to 50% of the distributions above the highest target level. We refer to the rights to the increasing distributions as “incentive distribution rights.” Please read “Market For Registrant’s Common Equity, Related Securityholder Matters and Issuer Purchases of Equity Securities-Incentive Distribution Rights” in Item 5 of this report. Assuming we pay the $0.50 per unit minimum quarterly distribution on all of our outstanding units, our general partner would receive an annual distribution of $360,500 on its 2% general partner interest, and affiliates of our general partner receive an annual distribution of approximately $8,330,000 on their subordinated units.
Our general partner and its affiliates do not receive a management fee or other compensation for the management of our partnership. Our general partner and its affiliates are entitled to be reimbursed, however, for all direct and indirect expenses incurred on our behalf. Our general partner has sole discretion in determining the amount of these expenses. These reimbursed expenses totaled approximately $0 and $17,000 in fiscal 2005 and fiscal 2004, respectively.
If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests.
Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.
Omnibus Agreement
We are a party to an omnibus agreement with KSP Investors A L.P. (“KSP A”), KSP Investors B L.P. (“KSP B”), KSP Investors C L.P. (“KSP C” and, together with KSP A and KSP B, the “KSP Entities”), EW Transportation LLC, EW Acquisition Corp., EW Holding Corp., EW Transportation Corp., K-Sea General Partner LP (our general partner), K-Sea General Partner GP LLC (the general partner of our general partner), K-Sea OLP GP LLC (the general partner of our operating partnership) and K-Sea Operating Partnership L.P. (our operating partnership).
Noncompetition
Under the omnibus agreement, neither the KSP Entities nor their controlled affiliates may engage, either directly or indirectly, in the business of providing refined petroleum product marine transportation, distribution and logistics services in the United States to the extent such business generates qualifying income for federal income tax purposes. The restriction does not apply to the assets that were retained by our predecessors at the closing of our initial public offering in January 2004. Except as provided above, neither the KSP Entities nor their controlled affiliates are prohibited from engaging in activities in which
they compete directly or indirectly with us. Jefferies Capital Partners, and the funds it manages, are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us.
Indemnification
Under the omnibus agreement, the KSP Entities, EW Transportation LLC and the subsidiaries of EW Transportation LLC (collectively, “the Indemnitors”) have jointly and severally agreed to indemnify us until January 14, 2009 against certain environmental and toxic tort liabilities and, until January 14, 2014, against certain other toxic tort liabilities associated with the operation of the assets before January 14, 2004. Liabilities resulting from changes in law after the closing of our initial public offering are excluded from the environmental indemnity. We have agreed to indemnify the Indemnitors for events and conditions associated with the operation of our assets that occur on or after January 14, 2004 to the extent the Indemnitors are not required to indemnify us. There is an aggregate cap of $10 million on the amount of indemnity coverage provided by the Indemnitors for the environmental and toxic tort liabilities.
The Indemnitors have also agreed to indemnify us for liabilities related to:
· certain defects in title to the assets contributed to us and failure to obtain certain consents and permits necessary to conduct our business that arise before January 14, 2008;
· events and conditions associated with any assets retained by the Indemnitors or any of their respective affiliates, whether occurring before or after January 14, 2004;
· certain liabilities retained by EW Holding Corp., EW Transportation LLC and EW Transportation Corp.; and
· certain income tax liabilities attributable to the operation of the assets contributed to us prior to the time they were contributed to us in connection with our initial public offering.
Amendments
The omnibus agreement may not be amended without the prior approval of the conflicts committee if the proposed amendment will, in the reasonable discretion of our general partner, adversely affect holders of our common units.
Properties
We lease our office and pier facilities from, and charter certain vessels to, affiliates of an employee. Additionally, we utilize one of these affiliates for tank cleaning services. Please read note 7 to our audited consolidated financial statements included elsewhere in this report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table presents fees for services rendered by PricewaterhouseCoopers LLP during fiscal 2005 and fiscal 2004.
(1) Fees for audit of annual financial statements and internal controls over financial reporting under the Sarbanes Oxley Act of 2002, reviews of the related quarterly financial statements, and reviews of documents filed with the SEC.
(2) Fees for professional services for consultations related to financial accounting and reporting standards, compliance with the Sarbanes Oxley Act of 2002, and due diligence related to acquisitions.
(3) Fees related to professional services for tax compliance, tax advice and tax planning.
The audit committee has considered whether the provision of the non-audit services described above is compatible with maintaining the independence of PricewaterhouseCoopers LLP and determined that the provision of such services was compatible with maintaining such independence.
Audit Committee Policies and Procedures for Pre-approval of Audit and Non-Audit Services
Consistent with SEC policies regarding auditor independence, the audit committee is responsible for pre-approving all audit and non-audit services performed by the independent registered public accounting firm. In addition to its approval of the audit engagement, the audit committee takes action at least annually to authorize the performance by the independent registered public accounting firm of several specific types of services within the categories of audit-related services and tax services. Audit-related services include assurance and related services that are reasonably related to the performance of the audit or review of the financial statements. Authorized tax services include compliance-related services such as services involving tax filings, as well as consulting services such as tax planning, transaction analysis and opinions. Services are subject to pre-approval of the specific engagement if they are outside the specific types of services included in the periodic approvals covering service categories or if they are in excess of specified fee limitations. The audit committee may delegate pre-approval authority to subcommittees. During 2005, no pre-approval requirements were waived.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements.
See “Index to Financial Statements” set forth on page.
(a)(2) Financial Statement Schedules.
None.
(a)(3) Exhibits.
10.3.2*
-
Amendment No. 1 to Commitment to Guarantee Obligations, dated as of January 14, 2004, made and entered by the United States of America and accepted by K-Sea Transportation Partners L.P. and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.4.2 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.4*
-
Amended and Restated Security Agreement, dated as of January 14, 2004, among K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P., and the United States of America (incorporated by reference to Exhibit 10.5 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.5*
-
Restated Title XI Reserve Fund and Financial Agreement, dated as of January 14, 2004, among K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P., K-Sea Transportation Inc. and The United States of America (incorporated by reference to Exhibit 10.6 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.6.1*
-
K-Sea Transportation Partners L.P. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 to the Partnership’s Quarterly Report on Form 10-Q for the period ended March 31, 2004).
10.6.2*
-
Form of Director Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated October 1, 2005).
10.6.3*
-
Form of Employee Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Partnership’s Current Report on Form 8-K dated October 1, 2005).
10.7*
-
K-Sea Transportation Partners L.P. Employee Unit Purchase Plan (incorporated by reference to Exhibit 4.2 to the Partnership’s Registration Statement on Form S-8 (Registration No. 333-117251) filed on July 9, 2004).
10.8*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Timothy J. Casey (incorporated by reference to Exhibit 10.9 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.9*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and John J. Nicola (incorporated by reference to Exhibit 10.10 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.10*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Richard P. Falcinelli (incorporated by reference to Exhibit 10.11 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.11*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Thomas M. Sullivan (incorporated by reference to Exhibit 10.12 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.12
-
Form of Indemnification Agreement
10.13*
-
Loan and Security Agreement dated as of March 24, 2005 by and among K-Sea Operating Partnership L.P., as Borrower, the Lenders party thereto, LaSalle Bank National Association, as Syndication Agent, and KeyBank National Association, as Administrative Agent and Collateral Trustee for the Lenders (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2005).
10.14*
-
Loan and Security Agreement dated as of March 24, 2005 by and between The CIT Group/Equipment Financing, Inc., as Lender, and K-Sea Operating Partnership L.P., as Borrower (incorporated by reference to Exhibit 10.2 to the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2005).
10.15*
-
Loan Agreement, dated as of March 17, 2005, between K-Sea Operating Partnership L.P. and First Union Commercial Corporation (incorporated by reference to Exhibit 10.3 to the Partnership’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).
10.16
-
Loan Agreement, dated as of June 28, 2005, between K-Sea Operating Partnership L.P. and Citizens Asset Finance, a d/b/a of Citizens Leasing Corporation.
10.17*
-
Common Unit Purchase Agreement dated as of June 1, 2005 by and between the Partnership and Tortoise Energy Infrastructure Corporation (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated June 1, 2005).
21.1
-
List of Subsidiaries.
23.1
-
Consent of PricewaterhouseCoopers LLP.
31.1
-
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
-
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
-
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
-
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference, as indicated.
 Management contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
INDEX TO CONSOLIDATED STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2005 and 2004
Consolidated Statements of Operations for the fiscal years ended
June 30, 2005, 2004 and 2003
Consolidated Statements of Partners’ Capital/Members’ Equity for the fiscal years ended
June 30, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the General Partner and Unitholders of K-Sea Transportation Partners L.P.
We have completed an integrated audit of K-Sea Transportation Partners L.P.’s 2005 consolidated financial statements and of its internal control over financial reporting as of June 30, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of K-Sea Transportation Partners L.P. and its subsidiaries at June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’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 the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements 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 our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of June 30, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
K-SEA TRANSPORTATION PARTNERS L.P. (Note 1)
Successor to K-Sea Transportation LLC (Predecessor)
CONSOLIDATED BALANCE SHEETS
(in thousands)
See accompanying notes to consolidated financial statements.
K-SEA TRANSPORTATION PARTNERS L.P. (Note 1)
Successor to K-Sea Transportation LLC (Predecessor)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
See accompanying notes to consolidated financial statements.
K-SEA TRANSPORTATION PARTNERS L.P. (Note 1)
Successor to K-Sea Transportation LLC (Predecessor)
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL/MEMBERS’ EQUITY
(in thousands)
See accompanying notes to consolidated financial statements.
K-SEA TRANSPORTATION PARTNERS L.P. (Note 1)
Successor to K-Sea Transportation LLC (Predecessor)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
K-SEA TRANSPORTATION PARTNERS L.P.
Successor to K-Sea Transportation LLC (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except unit and per unit amounts)
Note 1: Basis of Presentation
On July 8, 2003, K-Sea Transportation Partners L.P. (the “Partnership”) was formed to own and operate the refined petroleum product marine transportation, distribution and logistics business conducted by K-Sea Transportation LLC (since renamed EW Transportation LLC, or “EW LLC”) and its subsidiaries K-Sea Acquisition Corp., EW Holding Corp. and K-Sea Transportation Corp. (since renamed EW Transportation Corp.) (collectively, the “Predecessor”). The Partnership and its predecessor companies have since 1959 engaged in the transportation of refined petroleum products in the northeastern United States and Gulf of Mexico. On January 14, 2004, the Predecessor contributed assets and liabilities constituting the business of the Predecessor to the Partnership in connection with the initial public offering of common units representing limited partner interests in the Partnership (the “common units”). In exchange for these assets and liabilities, the Predecessor received 665,000 common units and 4,165,000 subordinated units representing limited partner interests in the Partnership. The Partnership’s general partner received a 2% general partner interest and certain incentive distribution rights in the Partnership. Incentive distribution rights represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution, any cumulative arrearages on common units, and certain target distribution levels, have been achieved. The target distribution levels entitle the general partner to receive 15% of quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, 25% of quarterly cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit, and 50% of quarterly cash distributions in excess of $0.75 per unit. The Partnership is required to distribute all of its available cash from operating surplus, as defined in the partnership agreement.
The transfer to the Partnership of the assets and liabilities constituting the business of the Predecessor represented a reorganization of entities under common control and was recorded at historical cost. The net assets transferred were $5,334 greater than the net assets of the Predecessor due to the retention by the Predecessor of certain net liabilities. The consolidated financial statements included herein are for the Predecessor for all periods prior to January 14, 2004.
Note 2: Initial Public Offering
On January 14, 2004, the Partnership completed its initial public offering of 3,625,000 common units at a price of $23.50 per unit. On January 21, 2004, the Partnership sold an additional 540,000 common units to the underwriters in connection with the exercise of their over-allotment option. Total gross proceeds from these sales were $97,877, before offering costs and underwriting fees of $11,776. Concurrent with these sales, the Partnership redeemed the 665,000 common units held by EW LLC (see note 1) at a cost of $14,592. After the initial public offering and related redemption, there were 4,165,000 common units and 4,165,000 subordinated units outstanding. As described in the partnership agreement, during the subordination period the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages from prior quarters. The subordination period will end once the Partnership meets certain financial tests described in the partnership agreement, but it generally cannot end before December 31, 2008. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. If the Partnership meets certain financial tests described in
the partnership agreement, 25% of the subordinated units can convert into common units on or after December 31, 2006, and an additional 25% can convert into common units on or after December 31, 2007.
The proceeds retained by the Partnership relating to the sale of the common units in the initial public offering totaled $83,285. These proceeds were used to repay $73,941 in outstanding term and revolving credit debt, including prepayment fees and make-whole amounts, and to pay $5,939 in underwriting fees and $3,405 in professional fees and other offering expenses.
Note 3: Summary of Significant Accounting Policies
Basis of Consolidation. These consolidated financial statements are for the Partnership and its wholly owned subsidiaries. For all periods prior to January 14, 2004, the business was operated by the Predecessor, and therefore the consolidated financial statements are for the Predecessor (see note 1) for those periods. All material inter-company transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. Cash equivalents include time deposits with maturities of three months or less when purchased and cash on deposit at a financial institution.
Vessels and Equipment. Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the straight-line method over the estimated useful lives of the individual assets as follows: tank vessels-ten to twenty-five years; tugboats-twenty years; and pier and office equipment-five years. For single-hull tank vessels, such useful lives are limited to the remaining period of operation prior to mandatory retirement as required by the Oil Pollution Act of 1990 (“OPA 90”). OPA 90 requires that the Partnership’s 22 single-hull vessels, representing approximately 28% of total barrel-carrying capacity as of June 30, 2005, be retired or retrofitted to double-hull by December 31, 2014.
Included in vessels and equipment are drydocking expenditures that are capitalized and amortized over three years. Drydocking of vessels is required both by the United States Coast Guard and by the applicable classification society, which in the Partnership’s case is the American Bureau of Shipping. Such drydocking activities include, but are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel.
Major renewals and betterments of assets are capitalized and depreciated over the remaining useful lives of the assets. Leasehold improvements are capitalized and depreciated over the shorter of their useful lives or the remaining term of the lease. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed.
The Partnership assesses impairment on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. An impairment loss would be recognized to the extent the carrying value exceeds fair value by appraisal.
When property items are retired, sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts with any gain or loss on the dispositions included in income. Assets to be disposed of are reported at the lower of their carrying amounts or fair values, less the estimated costs of disposal.
Fuel Supplies. Fuel used to operate the Partnership’s vessels, and on hand at the end of the period, is recorded at cost. Such amounts totaled $2,473 and $1,170 as of June 30, 2005 and 2004, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets.
Deferred Financing Costs. Direct costs associated with obtaining long-term financing are deferred and amortized over the terms of the related financings. Deferred financing costs are stated net of accumulated amortization which, at June 30, 2005 and 2004, amounted to $815 and $675, respectively.
Revenue Recognition. The Partnership earns revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued when such losses become evident.
Use of Estimates. The preparation of 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 revenues and expenses during the reporting period. The most significant estimates relate to depreciation of the vessels, liabilities incurred from workers’ compensation, commercial and other claims, the allowance for doubtful accounts and deferred income taxes. Actual results could differ from these estimates.
Concentrations of Credit Risk. Financial instruments which potentially subject the Partnership to concentrations of credit risk are primarily cash and cash equivalents and trade accounts receivable. The Partnership maintains its cash and cash equivalents on deposit at a financial institution in amounts that, at times, may exceed insurable limits.
With respect to accounts receivable, the Partnership extends credit based upon an evaluation of a customer’s financial condition and generally does not require collateral. The Partnership maintains an allowance for doubtful accounts for potential losses, totaling $667 and $571 at June 30, 2005 and 2004, respectively, and does not believe it is exposed to concentrations of credit risk that are likely to have a material adverse effect on its financial position, results of operations or cash flows. For the fiscal years ended June 30, 2005, 2004 and 2003, the Partnership’s allowance for doubtful amounts was impacted by additional charges of $213, $100, and $81, and write-offs of $117, $5 and $8, respectively.
Income Taxes. The Partnership’s effective tax rate comprises the New York City Unincorporated Business Tax on its operating partnership, plus federal, state, local and foreign corporate income taxes on the taxable income of the operating partnership’s corporate subsidiaries. Prior to the initial public offering, EW LLC was a limited liability company and treated as a partnership for income tax purposes. Accordingly, it was not responsible for federal, state and local income taxes, as its profits and losses were passed directly to its members for inclusion in their income tax returns. EW LLC was subject to the New York City Unincorporated Business Tax, and its subsidiaries were C corporations that were subject to federal, state and local income taxes.
Deferred taxes represent the tax effects of differences between the financial reporting and tax bases of the Partnership’s and Predecessor’s assets and liabilities, as applicable, at enacted tax rates in effect for the years in which the differences are expected to reverse. The recoverability of deferred tax assets is evaluated and a valuation allowance established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Unit-Based Compensation. The Partnership has adopted a long-term incentive plan that permits the granting of awards to directors and employees in the form of restricted units and unit options. The Partnership recognizes compensation cost for the restricted units under the intrinsic value method based on the market value of the common units at the grant date. The market values are amortized over the vesting periods, which range from four to five years, on a straight-line basis. No unit options have been granted.
Net Income per Unit. Basic net income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner interest from its issuance date of January 14, 2004, as described below, by the weighted average number of units outstanding during the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted average number of outstanding units is increased to include the dilutive effect of outstanding unit options or restricted units. For periods prior to January 14, 2004, such units are equal to the common and subordinated units received by the Predecessor in exchange for the net assets contributed to the Partnership, or 4,830,000 units.
As required by Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share” (“EITF 03-6”), which is effective for periods beginning after March 31, 2004, the general partner’s interest in net income is calculated as if all net income for the year was distributed according to the terms of the partnership agreement, regardless of whether those earnings would or could be distributed. The partnership agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter after establishment of cash reserves. Unlike available cash, net income is affected by non-cash items, such as deferred tax benefits.
As described in note 1 above, the general partner’s incentive distribution rights entitle it to receive an increasing percentage of distributions when the quarterly cash distribution exceeds $0.55 per unit. For purposes of EITF 03-6, the Partnership must treat net income as if it were distributable. Therefore, since net income exceeded $0.55 per unit in the third quarter of fiscal 2004 due to recognition in that quarter of a deferred tax benefit of $17,561, the assumed distribution of all net income, pursuant to EITF 03-6, results in use of the increasing percentages to calculate the general partner’s interest in net income for the quarter ended March 31, 2004. Notwithstanding the foregoing, the deferred tax benefit is not included in the calculation of available cash under the partnership agreement and, therefore, the general partner did not and will not receive any incentive distributions of available cash as a result of such deferred tax benefit.
Note 4: Vessels and Equipment and Construction in Progress
At June 30, 2005 and 2004, vessels and equipment and construction in progress comprised the following:
Depreciation and amortization of vessels and equipment for the fiscal years ended June 30, 2005, 2004 and 2003 was $20,584, $18,256 and $16,006, respectively. Such depreciation and amortization includes amortization of drydocking expenditures for the fiscal years ended June 30, 2005, 2004 and 2003 of $6,823, $7,421 and $7,158, respectively.
On December 8, 2004, the Partnership acquired ten tank barges and seven tugboats. The addition of this capacity represented a 10.6% increase in the aggregate barrel-carrying capacity of the Partnership’s fleet at the time of the acquisition. The purchase price of $21,184 (including acquisition related costs) included a water treatment facility. The transaction was financed using the Partnership’s available credit
lines and the purchase price allocated to the individual assets acquired based on independent appraisals. These assets are included in vessels and equipment, net, in the consolidated balance sheet.
On June 28, 2005, the Partnership acquired an 80,000-barrel capacity double-hull tank barge for a purchase price of $10,000, excluding certain modifications made to the barge. The acquisition was financed using borrowings under a new term loan. The vessel is included in vessels and equipment, net, in the consolidated balance sheet.
In September 2004, the Partnership completed the double-hulling of the KTC 155, now renamed the DBL 155, and accepted delivery of the vessel. The Partnership also signed an agreement with a shipyard in September 2004 to construct a new 100,000-barrel tank barge which is expected to be delivered during the fall of 2005. The total cost, after addition of certain special equipment and integration with an existing tugboat, is expected to be in the range of $13,000 to $14,000. Additionally, the Partnership signed an agreement with a shipyard in February 2005 to construct two new 28,000-barrel tank barges which are expected to be delivered during the first calendar quarter of 2006 and which are expected to cost, in the aggregate and after the addition of certain special equipment, in the range of $9,000 to $10,000. Construction in progress at June 30, 2005 includes expenditures on the new 100,000-barrel and 28,000-barrel tank barges.
On January 29, 2004, the Partnership acquired a 140,000-barrel capacity double-hull tank barge and an 8,000 horsepower tugboat, both built in 2000. The purchase price of $34,120 was financed using available cash and $25,048 in borrowings under a new term loan. The Partnership also signed a new multi-year contract with the sellers to transport petroleum products in the northeastern United States. The portion of the purchase price in excess of the fair value of the vessels, as determined by appraisal, was allocated to the related contract and is included in other assets. Such amount is being amortized over the contract period.
During fiscal 2004, the Partnership also completed the rebuilding of the DBL 105 for petroleum transportation. This vessel, along with a tugboat, was purchased in fiscal 2003 for $3,539, funded by credit line borrowings.
In March 2001, K-Sea Transportation Corp. and Bollinger Gretna, L.L.C. signed a contract for the construction of four double-hull tank vessels to be built over three years. The aggregate cost of these four vessels was $46,193, including financing and other fees and certain special equipment. Delivery of the first vessel occurred in July 2002, the second in February 2003, the third in June 2003, and the fourth vessel in January 2004.
Note 5: Financing
Credit Agreement
In March 2005, the Partnership entered into a new, five-year $80,000 revolving credit agreement with a syndicate of banks. The new agreement replaced the Partnership’s existing $47,000 revolving credit agreement, which was repaid and terminated. The new agreement contains a $20,000 sublimit for letters of credit and allows the Partnership to request an increase in the total availability under the new agreement by up to $20,000, up to a maximum of $100,000, so long as no default or event of default has occurred and is continuing. Obligations under the new agreement are collateralized by a first priority security interest, subject to permitted liens, on certain of our vessels having an orderly liquidation value equal to the greater of (a) $50,000 and (b) 1.25 times the amount of the obligations (including letters of credit) outstanding. Borrowings under the credit facility bear interest, at the option of the Partnership, at a rate equal to (a) the greater of the prime rate and the federal funds rate plus 0.5% (a “base rate loan”), or (b) 30-day London Interbank Offered Rate (“LIBOR”) plus a margin of 1.00% to 2.00% based upon the ratio of Total Funded Debt to EBITDA, as defined in the agreement. The Partnership also incurs commitment fees,
payable quarterly, on the unused amount of the facility at a rate ranging from 0.175% to 0.375% based upon the ratio of Total Funded Debt to EBITDA, as defined in the agreement. As of June 30, 2005, outstanding borrowings under this facility totaled $47,112.
Term Loans
Term loans outstanding at June 30, 2005 and 2004 were as follows:
In March 2005, the Partnership entered into an agreement to borrow up to $11,000 to partially finance construction of the new 100,000-barrel tank barge described in note 4. The loan bears interest at 30-day LIBOR plus 1.05%; interest only is payable monthly through the earlier of October 31, 2005 or delivery of the tank barge. Thereafter, monthly payments of principal, plus accrued interest, are payable over seven years, with the remaining principal amount payable at maturity. The loan is collateralized by the related tank barge. Borrowings outstanding on this loan total $6,435 at June 30, 2005.
In March 2005 the Partnership entered into a new, three-year term loan in the amount of $11,700 bearing interest at a fixed rate of 6.25% annually. The loan is payable in monthly principal installments of $70, with the remaining principal amount payable at maturity. The loan is collateralized by three vessels and the proceeds were used to refinance an existing term loan. Borrowings outstanding on this loan total $11,492 at June 30, 2005.
In June 2005, the Partnership entered into an agreement to borrow up to $18,000 to finance the purchase of the 80,000-barrel double-hull tank barge and construction of the new 28,000-barrel double-hull tank barges described in note 4. The loan bears interest at 30-day LIBOR plus 1.60% for the interim financing period, which is the earlier of April 30, 2006 or the delivery of the two 28,000-barrel tank barges, and 30-day LIBOR plus 1.75% thereafter. Interest only is payable monthly through the interim financing period. Thereafter, monthly payments of principal, plus accrued interest, are payable over seven years, with the remaining principal amount payable at maturity. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan total $11,557 at June 30, 2005.
In connection with the acquisition of an integrated tug-barge unit in January 2004, the Partnership entered into a seven-year, $25,048 term loan. In May 2004, the Partnership entered into an agreement with a financial institution for $20,000 of loans to provide term financing for two vessel rebuilding and retrofitting projects. These term loans were repaid upon closing of the refinanced credit agreement and three-year term loan described above. A net loss of $1,359, representing prepayment fees and writeoff of the related deferred financing costs, was recorded in connection with prepayment of the term loans and termination of the old credit facility.
In connection with the Partnership’s initial public offering, all of the Predecessor’s debt, exclusive of $12,950 in subordinated notes, was contributed to the Partnership. The contributed short-term and long-term debt (excluding the Title XI bonds, as described below) aggregated $73,941, and was repaid using proceeds of the offering. Such repayments included $6,041 in prepayment and make-whole amounts, of which $3,274 had previously been accrued by the Predecessor as supplemental interest which would have been payable upon maturity of certain of these loans, resulting in a loss on prepayment of $2,767. In addition, $240 in deferred financing costs related to the contributed debt was also written off. In the fourth quarter of fiscal 2004, an additional $151 was paid as a final adjustment to the make-whole payment.
Title XI Bonds
On June 7, 2002, the Predecessor issued bonds aggregating $40,441, in four series, through a private placement for the purpose of providing long-term financing for the construction of four new double-hull tank vessels. The bonds are guaranteed by the Maritime Administration of the U.S. Department of Transportation (“MARAD”) pursuant to Title XI of the Merchant Marine Act of 1936 (the “Title XI bonds”). The guarantee agreements required the net bond proceeds of $39,115, net of $1,326 of guarantee fees paid directly to MARAD, to be held in a restricted account (the “Title XI escrow account”) maintained at the U.S. Department of Treasury for subsequent drawdown, by series, as each vessel was delivered and accepted. The Title XI escrow account was substantially drawn down upon delivery of the final vessel in January 2004. Each series is payable over 25 years from the delivery date of the related vessel. The guarantee is collateralized by, among other things, the newbuild vessels.
In connection with the Partnership’s initial public offering in January 2004, the agreements with MARAD governing the Title XI borrowings were restructured. The Partnership is required to make available to MARAD additional collateral in the form of (a) a total of $8,000 in additional funds in the form of escrowed cash (with a minimum of $1,519) and standby letters of credit, and (b) additional vessels having an orderly liquidation value of at least $10,000. As of June 30, 2005, the Partnership had escrowed with MARAD $1,519 in cash and $6,485 in standby letters of credit, and has pledged the additional vessels. In addition, the Partnership is obligated each month to place in escrow with MARAD one-sixth of the next semi-annual debt service payment due for each series of the Title XI bonds, which deposits are used to make such semi-annual payments.
At June 30, 2005 and 2004, Title XI bonds outstanding comprised the following:
Restrictive Covenants
The agreements governing the $80,000 credit facility, the Title XI borrowings and the term loans contain restrictive covenants that, among others, (a) prohibit distributions under defined events of default, (b) restrict investments and sales of assets, and (c) require the Partnership to adhere to certain financial covenants, including defined ratios of fixed charge coverage and funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined), and a minimum balance of partners’ capital.
Interest
Interest expense, net of amounts capitalized, and interest income, was as follows:
The weighted average interest rate on the Title XI bonds and term loans was 5.8% and 5.2% at June 30, 2005 and 2004, respectively, which debt is subject to prepayment fees. Interest payable totaled $1,125 and $972 as of June 30, 2005 and 2004, respectively, and is included in accrued expenses and other current liabilities in the consolidated balance sheets. At June 30, 2005 and 2004, accounts payable included book overdrafts of $853 and $0, respectively, representing outstanding checks.
Maturities of Long-Term Debt
As of June 30, 2005, maturities of long-term debt for each of the next five years were as follows:
Equity Financing
On June 1, 2005, the Partnership issued and sold 500,000 common units to Tortoise Energy Infrastructure Corporation (“Tortoise”) in a private placement for proceeds of $16.0 million, before expenses associated with the offering. The proceeds were used to repay indebtedness incurred under the Partnership’s revolving credit facility in connection with its December 2004 vessel acquisition. The offer and sale of the common units was made pursuant to an exemption from registration under section 4(2) of the Securities Act of 1933, as amended. No underwriting discounts or commissions were paid in connection with the private placement. Pursuant to the terms of a registration rights agreement, the Partnership has agreed to register the resale of the common units with the Securities and Exchange Commission. Tortoise has agreed not to sell any of the common units prior to December 1, 2005.
Note 6: Income Taxes
The components of the provision (benefit) for income taxes for the fiscal years ended June 30, 2005, 2004 and 2003 are as follows:
Certain net assets contributed to the Partnership at the time of the initial public offering in January 2004 were transferred by EW LLC’s corporate subsidiaries. These net assets had tax bases that were lower than their carrying values for financial reporting purposes, which resulted in deferred tax liabilities relating to these temporary differences. The future reversal of these differences will be subject to the Partnership’s effective tax rate, which is significantly lower than the effective tax rate of EW LLC’s corporate subsidiaries. The effect of the change in tax rates applicable to these differences is reflected as a deferred tax benefit of $17,561 for the fiscal year ended June 30, 2004.
A reconciliation of income tax expense, as computed using the federal statutory income tax rate of 34%, to the Partnership and Predecessor provisions (benefits) for income taxes for the fiscal years ended June 30, 2005, 2004 and 2003 is as follows:
Significant components of deferred income tax liabilities and assets as of June 30, 2005 and 2004 are as follows:
The Partnership had temporary differences at June 30, 2005 primarily related to the excess of the book basis of vessels and equipment over the related tax basis in the amount of $90,483. This amount will result in taxable income, in the years these differences reverse, that will be included in the overall allocation of taxable income to the unitholders of the Partnership.
A valuation allowance has been established due primarily to the uncertainty of realizing certain net operating loss carry-forwards of the Partnership’s corporate subsidiaries.
At June 30, 2005, the Partnership’s corporate subsidiaries had federal net operating losses of $1,364 which begin to expire in 2024, state net operating losses of $429 which begin to expire in 2024, and foreign net operating losses of $289 which begin to expire in 2008.
Note 7: Commitments and Contingencies
The Partnership leases its New York office and pier facilities from an affiliate of an employee under an agreement which extends through April 2009. Terms of the agreement provide for annual rental payments of $400 annually through April 2009, which increased as of May 1, 2004 from $352 annually. Rent expense was $400, $360 and $352 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. In addition, a subsidiary of the Partnership leases office and pier facilities and a water treatment facility in Virginia under an agreement with a third party that extends through January 2010. The Virginia lease agreement requires annual rental payments of $250 through January 8, 2010. The subsidiary receives $84 from sublease of a portion of the Virginia property which extends to December 31, 2009. The subsidiary has an option to buy the Virginia premises at any time after the first anniversary date of the lease for an aggregate purchase price of $4,200. Rent expense, net of the sublease, for the fiscal year ended June 30, 2005 was $97. The Partnership and subsidiary are also responsible for real estate taxes, insurance and all other costs associated with occupying these properties.
Included in total revenues are time charter and bareboat charter revenues of $21,747, $9,751 and $8,996 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Such revenues include $513, $778, and $1,455 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively, related to vessels chartered to an affiliate of an employee. The Partnership also utilizes such affiliate for tank cleaning services at a cost of $2,318, $2,916 and $1,664 for the years ended June 30, 2005, 2004 and 2003, respectively. The Partnership’s time charters and bareboat charters extend over various periods which expire between 2005 and 2009.
At June 30, 2005, minimum contractually agreed future revenue under time and bareboat charters was as follows:
The Partnership entered into employment agreements with its executive officers in January 2004. Each of the employment agreements had an initial term of one year. The term of each employment agreement is automatically extended for successive one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement. The employment agreements currently provide for annual base salaries aggregating $710. In addition, each employee is eligible to receive an annual bonus award based upon the consolidated financial performance of the Partnership. If the employee’s employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by .75) multiplied by the employee’s base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee’s non-competition provisions multiplied by the employee’s base salary at the time of termination or resignation.
EW Transportation Corp., a predecessor to the Partnership, and many other marine transportation companies operating in New York have come under audit with respect to the New York State Petroleum Business Tax (“PBT”), which is a tax on vessel fuel consumed while operating in New York State territorial waters. The boundaries of these waters have never been defined. An industry group in which EW Transportation Corp. and the Partnership participate have proposed to the New York taxing authority that it adopt a calculation methodology for the PBT that it has applied, for purposes of a different tax, for many years. The taxing authority has not yet responded to this proposal. The Partnership has begun filing monthly tax returns, and has accrued an estimated liability using the industry’s proposed calculation methodology. In accordance with the agreements entered into in connection with the Partnership’s initial public offering, any liability resulting from the PBT prior to January 14, 2004 (the effective date of the offering) is a retained liability of the Predecessor.
The Partnership is the subject of various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collisions and other casualties. Although the outcome of any individual claim or action cannot be predicted with certainty, the Partnership believes that any adverse outcome, individually or in the aggregate, would be substantially mitigated by applicable insurance or indemnification from previous owners of the Partnership’s assets, and would not have a material adverse effect on the Partnership’s financial position, results of operations or cash flows. The Partnership is also subject to deductibles with respect to its insurance coverage that range from $25 to $100 per incident and provides on a current basis for estimated payments thereunder.
Note 8: Long-term Incentive Plan
In January 2004, K-Sea General Partner GP LLC, the general partner of the Partnership’s general partner, adopted the K-Sea Transportation Partners L.P. Long-term Incentive Plan (the “Plan”) for directors and employees of K-Sea General Partner GP LLC and its affiliates. The Plan currently permits the grant of awards covering an aggregate of 440,000 common units in the form of restricted units and unit
options and is administered by the Compensation Committee of the Board of Directors of K-Sea General Partner GP LLC. The Board of Directors of K-Sea General Partner GP LLC, in its discretion, may terminate the Plan at any time with respect to any restricted units for which a grant has not yet been made, and also reserves the right to alter or amend the Plan from time to time, including increasing the number of common units with respect to which awards may be granted subject to unitholder approval as required by the New York Stock Exchange. No change in any outstanding grant may be made, however, which would materially impair the rights of the participant without the consent of such participant. Subject to certain exceptions, restricted units are subject to forfeiture if employment is terminated prior to vesting. As the restricted units vest, K-Sea General Partner GP LLC has the option to either acquire common units in the open market for delivery to the recipient or distribute newly issued common units from the Partnership. In all cases, K-Sea General Partner GP LLC is reimbursed by the Partnership for such expenditures.
During the years ended June 30, 2005 and 2004, 52,000 and 9,000 restricted units, respectively, were granted for which the unit price on the respective grant dates was $31.25 and $28.70. These restricted units vest over periods ranging from four to five years. In 2005, 2,250 restricted units vested, and the Partnership issued 2,250 common units to the recipients. At June 30, 2005 and 2004, 58,750 and 9,000 unvested restricted units were outstanding. Unit compensation expense amounted to $413 and $23, for the years ended June 30, 2005 and 2004, respectively.
Note 9: Retirement Plans
The Partnership has a money purchase pension plan, and also a defined contribution plan that qualifies under Section 401(k) of the Internal Revenue Code. These plans cover all eligible employees. Under the terms of the money purchase pension plan, the Partnership contributes five percent of each eligible employee’s annual compensation, as defined in the plan document. The 401(k) plan provides that eligible employees may make contributions, subject to Internal Revenue Code limitations, and the Partnership will match the first two percent of employee compensation contributed, subject to a maximum amount. For the money purchase plan, expenses totaled $1,000, $836 and $862 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. For the 401(k) plan, expenses totaled $443, $402 and $286 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively.
Accrued expenses for the money purchase plan totaled $1,077 and $871 as of June 30, 2005 and 2004, respectively, and are included in accrued expenses and other current liabilities in the consolidated balance sheets. Additionally, accrued expenses for payroll-related costs totaled $1,431 and $1,348 as of June 30, 2005 and 2004, respectively, which are also included in accrued expenses and other current liabilities in the consolidated balance sheets.
Note 10: Major Customers
Two customers accounted for 26% and 16% of consolidated revenues for the fiscal year ended June 30, 2005, two customers accounted for 28% and 14% of consolidated revenues for the fiscal year ended June 30, 2004, and three customers accounted for 15%, 13% and 11% of consolidated revenues for the fiscal year ended June 30, 2003.
Note 11: Fair Value of Financial Instruments
As of June 30, 2005, the fair value of long-term debt was approximately $118,200 based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities. The fair value of the Partnership’s other financial instruments approximated their cost bases as such instruments are short-term in nature or were recently negotiated.
Note 12: New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) revises FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition to revising FAS 123, FAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows.” The Partnership is required to adopt FASB 123(R) as of July 1, 2005. The adoption will require the Partnership to recognize the fair value of unit options granted under its long-term incentive plan. To date, no unit options have been granted.
On April 4, 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). This interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. It also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Partnership is required to adopt FIN 47 as of June 30, 2006, and does not expect that such adoption will have a significant impact on its financial position, results of operations or cash flows.
On June 2, 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections-a replacement of APB No. 20 and FAS No. 3” (“FAS 154”). FAS 154 replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”) and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The Partnership is required to adopt FAS 154 as of July 1, 2006, and does not expect that such adoption will have a significant impact on its financial position, results of operations or cash flows.
Note 13: Quarterly Results of Operations (Unaudited)
The following summarizes certain quarterly results of operations for each of the fiscal years ended June 30, 2005 and 2004:
Note 14: Subsequent Event
On August 23, 2005, the Partnership entered into a definitive purchase agreement with Marine Resources Group, Inc. and Saltchuk Resources, Inc. to acquire Sea Coast Towing, Inc. (“Sea Coast”), a wholly-owned subsidiary of Marine Resources Group, based in Seattle, Washington. Sea Coast is engaged in the marine transportation of refined petroleum products along the West Coast of the United States and Alaska. The purchase price will consist of $77,000 in cash and 125,000 common units. The transaction is expected to close in late October, subject to customary closing conditions.
EXHIBIT INDEX
Exhibit
Number
Description
2.1*
Membership Interest Purchase Agreement dated August 23, 2005 by and among K-Sea Operating Partnership L.P., the Partnership, Marine Resources Group, Inc. and Saltchuk Resources, Inc. (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated August 23, 2005). Schedules have been omitted but will be furnished supplementally to the Securities and Exchange Commission on request.
3.1*
-
Certificate of Limited Partnership of K-Sea Transportation Partners L.P. (incorporated by reference to Exhibit 3.1 to the Partnership’s Registration Statement on Form S-1 (Registration No. 107084), as amended (the “Registration Statement”), originally filed on July 16, 2003).
3.2*
-
Second Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (including specimen unit certificate for the common units) (incorporated by reference to Exhibit 3.2 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
3.3*
-
Certificate of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.3 to the Registration Statement).
3.4*
-
Amended and Restated Agreement of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.4 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
3.5*
-
Certificate of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.5 to the Registration Statement).
3.6*
-
First Amended and Restated Agreement of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.6 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
3.7*
-
Certificate of Formation of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.7 to the Registration Statement).
3.8*
-
First Amended and Restated Limited Liability Company Agreement of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.8 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
4.1*
-
Trust Indenture relating to United States Government Guaranteed Ship Financing Obligations among K-Sea Transportation LLC, EW Holding Corp. and JPMorgan Chase Bank dated as of June 7, 2002 (incorporated by reference to Exhibit 4.1.1 to the Registration Statement).
4.2*
-
Supplemental Indenture No. 1, dated as of January 14, 2004, to the Trust Indenture relating to United States Government Guaranteed Ship Financing Obligations among JPMorgan Chase Bank, EW Holding Corp., K-Sea Transition 4 Corp., K-Sea LP4, L.P., K-Sea Transportation LLC, K-Sea LP1, L.P., K-Sea LP2, L.P., K-Sea Transportation Partners L.P. and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 4.1.2 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
4.3*
-
Registration Rights Agreement dated as of June 1, 2005 by and between the Partnership and Tortoise Energy Infrastructure Corporation (incorporated by reference to Exhibit 4.1 to the Partnership’s Current Report on Form 8-K dated June 1, 2005).
10.1*
-
Contribution, Conveyance and Assumption Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Transportation LLC, EW Holding Corp., K-Sea Transportation Corp., K-Sea Transportation Partners L.P. and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.2 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.2*
-
Omnibus Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Acquisition Corp., New EW Holding Corp., New K-Sea Transportation Corp., K-Sea General Partner L.P., K-Sea General Partner GP LLC, K-Sea Transportation Partners L.P., K-Sea OLP GP, LLC and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.3 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.3.1*
-
Commitment to Guarantee Obligations by The United States of America Accepted by K-Sea Transportation LLC and EW Holding Corp., Shipowners, dated June 7, 2002 (incorporated by reference to Exhibit 10.4.1 to the Registration Statement).
10.3.2*
-
Amendment No. 1 to Commitment to Guarantee Obligations, dated as of January 14, 2004, made and entered by the United States of America and accepted by K-Sea Transportation Partners L.P. and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.4.2 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.4*
-
Amended and Restated Security Agreement, dated as of January 14, 2004, among K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P., and the United States of America (incorporated by reference to Exhibit 10.5 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.5*
-
Restated Title XI Reserve Fund and Financial Agreement, dated as of January 14, 2004, among K-Sea Transportation Partners L.P., K-Sea Operating Partnership L.P., K-Sea Transportation Inc. and The United States of America (incorporated by reference to Exhibit 10.6 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.6.1*
-
K-Sea Transportation Partners L.P. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 to the Partnership’s Quarterly Report on Form 10-Q for the period ended March 31, 2004).
10.6.2*
-
Form of Director Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated October 1, 2005).
10.6.3*
-
Form of Employee Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Partnership’s Current Report on Form 8-K dated October 1, 2005).
10.7*
-
K-Sea Transportation Partners L.P. Employee Unit Purchase Plan (incorporated by reference to Exhibit 4.2 to the Partnership’s Registration Statement on Form S-8 (Registration No. 333-117251) filed on July 9, 2004).
10.8*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Timothy J. Casey (incorporated by reference to Exhibit 10.9 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.9*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and John J. Nicola (incorporated by reference to Exhibit 10.10 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.10*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Richard P. Falcinelli (incorporated by reference to Exhibit 10.11 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.11*
-
Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Thomas M. Sullivan (incorporated by reference to Exhibit 10.12 to the Partnership’s Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.12
-
Form of Indemnification Agreement
10.13*
-
Loan and Security Agreement dated as of March 24, 2005 by and among K-Sea Operating Partnership L.P., as Borrower, the Lenders party thereto, LaSalle Bank National Association, as Syndication Agent, and KeyBank National Association, as Administrative Agent and Collateral Trustee for the Lenders (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2005).
10.14*
-
Loan and Security Agreement dated as of March 24, 2005 by and between The CIT Group/Equipment Financing, Inc., as Lender, and K-Sea Operating Partnership L.P., as Borrower (incorporated by reference to Exhibit 10.2 to the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2005).
10.15*
-
Loan Agreement, dated as of March 17, 2005, between K-Sea Operating Partnership L.P. and First Union Commercial Corporation (incorporated by reference to Exhibit 10.3 to the Partnership’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).
10.16
-
Loan Agreement, dated as of June 28, 2005, between K-Sea Operating Partnership L.P. and Citizens Asset Finance, a d/b/a of Citizens Leasing Corporation.
10.17*
-
Common Unit Purchase Agreement dated as of June 1, 2005 by and between the Partnership and Tortoise Energy Infrastructure Corporation (incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated June 1, 2005).
21.1
-
List of Subsidiaries.
23.1
-
Consent of PricewaterhouseCoopers LLP.
31.1
-
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
-
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
-
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
-
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference, as indicated.
 Management contract, compensatory plan or arrangement.