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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of Registrant as specified in its Charter)
Delaware 75-2287571
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
- ---------------------------------- --------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4062
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------------- --------------------------
Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. Yes No X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
Aggregate market value of the voting Units held by non-affiliates of the
registrant: $671,359,557. This figure is estimated as of June 28, 2002, at which
date the closing price of the Registrant's Units on the New York Stock Exchange
was $37.68 per Unit and assumes that only the General Partner of the Registrant
(the "General Partner"), officers and directors of the General Partner and its
parent and wholly owned subsidiaries of the General Partner and its parent were
affiliates.
Number of Units of the Registrant outstanding at March 21, 2003:
28,195,090.
PART I
Item 1. Business
GENERAL
Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (the
"Partnership"), is engaged in the refined petroleum products and anhydrous
ammonia pipeline business and the terminaling of petroleum products and
specialty liquids. The Partnership was formed in September 1989 to acquire, own
and operate the pipeline system and operations that had been previously
conducted by Kaneb Pipe Line Company LLC, a Delaware limited liability company
("KPL"), since 1953. KPL owns a 1% interest as general partner of the
Partnership and a 1% interest as general partner of Kaneb Pipe Line Operating
Partnership, L.P., a Delaware limited partnership ("KPOP"). The Partnership's
pipeline operations are conducted through KPOP, of which the Partnership is the
sole limited partner and KPL is the sole general partner. The terminaling
business of the Partnership is conducted through 1) Support Terminals Operating
Partnership, L.P. ("STOP"), and its affiliated partnerships and corporate
entities, which operate under the trade names "ST Services" and "StanTrans,"
among others; and 2) Statia Terminals International N.V. and its subsidiary
entities ("Statia"). KPL is a wholly-owned subsidiary of Kaneb Services LLC, a
Delaware limited liability company ("KSL") (NYSE: KSL).
PIPELINE BUSINESS
Introduction
The Partnership's pipeline business consists primarily of the
transportation of refined petroleum products as a common carrier in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado, Wyoming and Minnesota. On
December 24, 2002, the Partnership acquired the Northern Great Plains Product
System from Tesoro Refining and Marketing Company for approximately $100
million. This product pipeline system is now referred to as the Partnership's
North Pipeline. On November 1, 2002, the Partnership acquired a 2,000 mile
anhydrous ammonia pipeline from Koch Pipeline Company, LP and Koch Fertilizer
Storage and Terminal Company for approximately $139 million. The Partnership's
three refined petroleum products pipelines and the anhydrous ammonia pipeline
are described below.
East Pipeline
Construction of the East Pipeline commenced in the 1950s with a line from
southern Kansas to Geneva, Nebraska. During subsequent years, the East Pipeline
was extended northward to its present terminus at Jamestown, North Dakota, west
to North Platte, Nebraska and east into the State of Iowa. The East Pipeline,
which moves refined products from south to north, now consists of 2,090 miles of
pipeline ranging in size from 6 inches to 16 inches.
The East Pipeline system also consists of 17 product terminals in Kansas,
Nebraska, Iowa, South Dakota and North Dakota with total storage capacity of
approximately 3.5 million barrels and an additional 23 product tanks with total
storage capacity of approximately 1,118,393 barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump stations in Kansas and 38 booster pump stations throughout the system.
Additionally, the system maintains various office and warehouse facilities, and
an extensive quality control laboratory.
The East Pipeline transports refined petroleum products, including propane,
received from refineries in southeast Kansas and other connecting pipelines to
its terminals along the system and to receiving pipeline connections in Kansas.
Shippers on the East Pipeline obtain refined petroleum products from refineries
connected to the East Pipeline or through other pipelines directly connected to
the pipeline system. Five connecting pipelines can deliver propane for shipment
through the East Pipeline from gas processing plants in Texas, New Mexico,
Oklahoma and Kansas.
Most of the refined petroleum products delivered through the East Pipeline
are ultimately used as fuel for railroads or in agricultural operations,
including fuel for farm equipment, irrigation systems, trucks used for
transporting crops and crop drying facilities. Demand for refined petroleum
products for agricultural use, and the relative mix of products required, is
affected by weather conditions in the markets served by the East Pipeline.
Government agricultural policies and crop prices also affect the agricultural
sector. Although periods of drought suppress agricultural demand for some
refined petroleum products, particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.
The mix of refined petroleum products delivered varies seasonally, with
gasoline demand peaking in early summer, diesel fuel demand peaking in late
summer and propane demand higher in the fall. In addition, weather conditions in
the areas served by the East Pipeline affect both the demand for and the mix of
the refined petroleum products delivered through the East Pipeline, although
historically any overall impact on the total volumes shipped has been
short-term. Tariffs charged to shippers for transportation of products do not
vary according to the type of product delivered.
West Pipeline
KPOP acquired the West Pipeline in February 1995, increasing the
Partnership's pipeline business in South Dakota and expanding it into Wyoming
and Colorado. The West Pipeline system includes approximately 550 miles of
pipeline in Wyoming, Colorado and South Dakota, four truck-loading terminals and
numerous pump stations situated along the system. The system's four product
terminals have a total storage capacity of over 1.7 million barrels.
The West Pipeline originates near Casper, Wyoming, where it serves as a
connecting point with Sinclair's Little America Refinery and the Seminoe
Pipeline that transports product from Billings, Montana area refineries. At
Douglas, Wyoming, a 6 inch pipeline branches off to serve the Partnership's
Rapid City, South Dakota terminal approximately 190 miles away. The 6 inch
pipeline also receives product from Wyoming Refining's pipeline at a connection
located near the Wyoming/South Dakota border. From Douglas, the Partnership's 8
inch pipeline continues southward through a delivery point at the Burlington
Northern junction to terminals at Cheyenne, Wyoming, the Denver metropolitan
area and Fountain, Colorado.
The West Pipeline system parallels the Partnership's East Pipeline to the
west. The East Pipeline's North Platte line terminates in western Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne, Wyoming Terminal.
The West Pipeline serves Denver and other eastern Colorado markets and supplies
jet fuel to Ellsworth Air Force Base at Rapid City, South Dakota, as compared to
the East Pipeline's largely agricultural service area. The West Pipeline has a
relatively small number of shippers, who, with few exceptions, are also shippers
on the Partnership's East Pipeline system.
North Pipeline
The North Pipeline, acquired in December 2002, runs from west to east
approximately 440 miles from its origin at the Tesoro Refining and Marketing
Company's Mandan, North Dakota refinery to the Minneapolis, Minnesota area. It
has four product terminals, one in North Dakota and three in Minnesota, with a
total tankage capacity of 1.3 million barrels. The North Pipeline crosses the
Partnership's East Pipeline near Jamestown, North Dakota and the two pipelines
will be connected at that location in the near future. The North Pipeline is
presently supplied exclusively by the Mandan refinery. Once connected to the
East Pipeline, it will be capable of delivering or receiving products to or from
the East Pipeline.
Ammonia Pipeline
On November 1, 2002, the Partnership acquired the anhydrous ammonia
pipeline (the "Ammonia Pipeline") from two Koch companies. Anhydrous ammonia is
primarily used as agricultural fertilizer through direct application. Other uses
are as a component of various types of dry fertilizer as well as use as a
cleaning agent in power plant scrubbers. The 2,000 mile pipeline originates in
the Louisiana delta area where it has access to three marine terminals. It moves
north through Louisiana and Arkansas into Missouri, where at Hermann, Missouri,
one branch splits going east into Illinois and Indiana, and the other branch
continues north into Iowa and then turning west into Nebraska. The Partnership
acquired a storage and loading terminal near Hermann, Missouri but it was leased
back to Koch Nitrogen. The administrative headquarters for the Ammonia Pipeline
is located in Hermann, Missouri. The Ammonia Pipeline is connected to twenty-two
other non-Partnership owned terminals and also has several industrial delivery
locations. Product is primarily supplied to the pipeline from plants in
Louisiana and foreign-source product through the marine terminals.
Other Systems
The Partnership also owns three single-use pipelines, located near
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies
diesel fuel to a railroad fueling facility. The Oregon and Washington lines are
fully automated, however the Wyoming line utilizes a coordinated startup
procedure between the refinery and the railroad. For the year ended December 31,
2002, these three systems combined transported a total of 3.5 million barrels of
diesel fuel, representing an aggregate of $1.0 million in revenues.
Pipelines Products and Activities
The revenues for the East Pipeline, West Pipeline, North Pipeline, Ammonia
Pipeline and Other Pipelines (collectively, the "Pipelines") are based upon
volumes and distances of product shipped. The following table reflects the total
volume and barrel miles of refined petroleum products shipped and total
operating revenues earned by the Pipelines for each of the periods indicated,
but does not include any information on the Ammonia Pipeline and North Pipeline
systems which were acquired on November 1 and December 24, 2002, respectively:
Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- -------------- ------------- --------------
Volume (1).................. 89,780 92,116 89,192 85,356 77,965
Barrel miles (2)............ 18,275 18,567 17,843 18,440 17,007
Revenues (3)................ $78,240 $74,976 $70,685 $67,607 $63,421
(1) Volumes are expressed in thousands of barrels of refined petroleum product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
(3) Revenues are expressed in thousands of dollars.
The following table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:
Year Ended December 31,
(thousands of barrels)
------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- -------------- ------------- --------------
Gasoline.................... 45,106 46,268 44,215 41,472 37,983
Diesel and fuel oil......... 40,450 42,354 41,087 40,435 36,237
Propane..................... 4,224 3,494 3,890 3,449 3,745
------------- ------------- -------------- ------------- --------------
Total....................... 89,780 92,116 89,192 85,356 77,965
============= ============= ============== ============= ==============
Diesel and fuel oil are used in farm machinery and equipment, over-the-road
transportation, railroad fueling and residential fuel oil. Gasoline is primarily
used in over-the-road transportation and propane is used for crop drying,
residential heating and to power irrigation equipment. The mix of refined
petroleum products delivered varies seasonally, with gasoline demand peaking in
early summer, diesel fuel demand peaking in late summer and propane demand
higher in the fall. In addition, weather conditions in the areas served by the
East Pipeline affect both the demand for and the mix of the refined petroleum
products delivered through the East Pipeline, although historically any overall
impact on the total volumes shipped has been short-term. Tariffs charged to
shippers for transportation of products do not vary according to the type of
product delivered. Demand on the North Pipeline is anticipated to reflect the
same agricultural nature as the East Pipeline except for the Minneapolis area
terminal which should be more like the Denver metropolitan area demand.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained in a manner
consistent with applicable federal, state and local laws and regulations,
standards prescribed by the American Petroleum Institute and accepted industry
practice. Further, protective measures are taken and routine preventive
maintenance is performed on the Pipelines in order to prolong the useful lives
of the Pipelines. Such measures include cathodic protection to prevent external
corrosion, inhibitors to prevent internal corrosion and periodic inspection of
the Pipelines. Additionally, the Pipelines are patrolled at regular intervals to
identify equipment or activities by third parties that, if left unchecked, could
result in encroachment upon the Pipeline's rights-of-way and possible damage to
the Pipelines.
The Partnership uses state-of-the-art Supervisory Control and Data
Acquisition remote supervisory control software programs to continuously monitor
and control the Pipelines from the Wichita, Kansas headquarters and from the
Roseville, Minnesota terminal for the North Pipeline. The system monitors
quantities of refined petroleum products injected in and delivered through the
Pipelines and automatically signals the Wichita headquarters or Roseville
personnel upon deviations from normal operations that requires attention.
Pipeline Operations
For pipeline operations, integrity management and public safety, the East
Pipeline, the West Pipeline, the North Pipeline and the Ammonia Pipeline are
subject to federal regulation by one or more of the following governmental
agencies or laws: the Federal Energy Regulatory Commission ("FERC"), the Surface
Transportation Board, the Department of Transportation, the Environmental
Protection Agency, and the Homeland Security Act. Additionally, the operations
and integrity of the Pipelines are subject to the respective state jurisdictions
along the route of the systems. See "Regulation."
Except for the three single-use pipelines and certain ethanol facilities,
all of the Partnership's pipeline operations constitute common carrier
operations and are subject to federal tariff regulation. In May 1998, KPOP was
authorized by the FERC to adopt market-based rates in approximately one-half of
its markets on the East and West systems. Common carrier activities are those
under which transportation through the Partnership's Pipelines is available at
published tariffs filed, in the case of interstate petroleum product shipments,
with the FERC, or in the case of intrastate petroleum product shipments, in
Kansas, Colorado, Wyoming and North Dakota, with the relevant state authority,
to any shipper of refined petroleum products who requests such services and
satisfies the conditions and specifications for transportation. The Ammonia
Pipeline is subject to federal regulation by the Surface Transportation Board,
rather than the FERC.
In general, a shipper on one of the Partnership's refined petroleum
products pipelines delivers products to the pipeline from refineries or third
party pipelines that connect to the Pipelines. The pipelines' refined petroleum
products operations also include 25 truck-loading terminals through which
refined petroleum products are delivered to storage tanks and then loaded into
petroleum transport trucks. Five of the 25 terminals also receive propane into
storage tanks and then load it into transport trucks. The Ammonia Pipeline
receives product from anhydrous ammonia plants or from the marine terminals for
imported product. Tariffs for transportation are charged to shippers based upon
transportation from the origination point on the pipeline to the point of
delivery. Such tariffs also include charges for terminaling and storage of
product at the Pipeline's terminals. Pipelines are generally the lowest cost
method for intermediate and long-haul overland transportation of refined
petroleum products.
Each shipper transporting product on a pipeline is required to supply KPOP
with a notice of shipment indicating sources of products and destinations. All
petroleum product shipments are tested or receive refinery certifications to
ensure compliance with KPOP's specifications. Shippers are generally invoiced by
KPOP immediately upon the product entering one of the Pipelines.
The following table shows the number of tanks owned by KPOP at each refined
petroleum product terminal location at December 31, 2002, the storage capacity
in barrels and truck capacity of each terminal location.
Location of Number Tankage Truck
Terminals of Tanks Capacity Capacity(a)
----------------------------- -------- --------- -----------
Colorado:
Dupont 18 692,000 6
Fountain 13 391,000 5
Iowa:
LeMars 9 103,000 2
Milford(b) 11 172,000 2
Rock Rapids 12 366,000 2
Kansas:
Concordia(c) 7 79,000 2
Hutchinson 9 161,000 2
Salina 10 98,000 3
Minnesota
Moorhead 17 498,000 3
Sauk Centre 11 114,000 2
Roseville 13 594,000 5
Nebraska:
Columbus(d) 12 191,000 2
Geneva 39 678,000 6
Norfolk 16 187,000 4
North Platte 22 197,000 5
Osceola 8 79,000 2
North Dakota:
Jamestown(e) 19 315,000 4
South Dakota:
Aberdeen 12 181,000 2
Mitchell 8 72,000 2
Rapid City 13 256,000 3
Sioux Falls 9 381,000 2
Wolsey 21 149,000 4
Yankton 25 246,000 4
Wyoming:
Cheyenne 15 345,000 2
------ -----------
Totals 349 6,545,000
====== ===========
(a) Number of trucks that may be simultaneously loaded.
(b) This terminal is situated on land leased through August 7, 2007 at an
annual rental of $2,400. KPOP has the right to renew the lease upon its
expiration for an additional term of 20 years at the same annual rental
rate.
(c) This terminal is situated on land leased through the year 2060 for a total
rental of $2,000.
(d) Also loads rail tank cars.
(e) Two terminals
The East Pipeline also has intermediate storage facilities consisting of 13
storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson, Kansas,
with aggregate capacities of approximately 584,393 and 534,000 barrels,
respectively. During 2002, approximately 56.8% and 90.1% of the deliveries of
the East Pipeline and the West Pipeline, respectively, were made through their
terminals, and the remainder of the respective deliveries of such lines were
made to other pipelines and customer owned storage tanks.
Storage of product at terminals pending delivery is considered by the
Partnership to be an integral part of the petroleum product delivery service of
its pipelines. Shippers generally store refined petroleum products for less than
one week. Ancillary services, including injection of shipper-furnished and
generic additives, are available at each terminal.
Demand for and Sources of Refined Petroleum Products
The Partnership's pipeline business depends in large part on (i) the level
of demand for refined petroleum products in the markets served by the pipelines
and (ii) the ability and willingness of refiners and marketers having access to
the pipelines to supply such demand by deliveries through the pipelines.
Most of the refined petroleum products delivered through the East Pipeline
and the western three terminals on the North Pipeline are ultimately used as
fuel for railroads or in agricultural operations, including fuel for farm
equipment, irrigation systems, trucks used for transporting crops and crop
drying facilities. Demand for refined petroleum products for agricultural use,
and the relative mix of products required, is affected by weather conditions in
the markets served by the East and North Pipeline. The agricultural sector is
also affected by government agricultural policies and crop prices. Although
periods of drought suppress agricultural demand for some refined petroleum
products, particularly those used for fueling farm equipment, the demand for
fuel for irrigation systems often increases during such times.
While there is some agricultural demand for the refined petroleum products
delivered through the West Pipeline, as well as military jet fuel volumes, most
of the demand is centered in the Denver and Colorado Springs area. Because
demand on the West Pipeline and the Minneapolis area terminal of the North
Pipeline is significantly weighted toward urban and suburban areas, the product
mix on the West Pipeline and that terminal includes a substantially higher
percentage of gasoline than the product mix on the East Pipeline.
The Partnership's refined petroleum products pipelines are also dependent
upon adequate levels of production of refined petroleum products by refineries
connected to the Pipelines, directly or through connecting pipelines. The
refineries are, in turn, dependent upon adequate supplies of suitable grades of
crude oil. The refineries connected directly to the East Pipeline obtain crude
oil from producing fields located primarily in Kansas, Oklahoma and Texas, and,
to a much lesser extent, from other domestic or foreign sources. In addition,
refineries in Kansas, Oklahoma and Texas are also connected to the East Pipeline
through other pipelines. These refineries obtain their supplies of crude oil
from a variety of sources. The refineries connected directly to the West
Pipeline are located in Casper and Cheyenne, Wyoming and Denver, Colorado.
Refineries in Billings and Laurel, Montana are connected to the West Pipeline
through other pipelines. These refineries obtain their supplies of crude oil
primarily from Rocky Mountain sources. The North Pipeline, until the connection
to the East Pipeline is complete, is dependent on the Tesoro Mandan refinery
which primarily operates on North Dakota crude oil although it has the ability
to access other crude oils. If operations at any one refinery were discontinued,
the Partnership believes (assuming unchanged demand for refined petroleum
products in markets served by its refined petroleum products pipelines) that the
effects thereof would be short-term in nature, and the Partnership's business
would not be materially adversely affected over the long term because such
discontinued production could be replaced by other refineries or by other
sources.
The majority of the refined petroleum product transported through the East
Pipeline in 2002 was produced at three refineries located at McPherson and El
Dorado, Kansas and Ponca City, Oklahoma, and operated by National Cooperative
Refining Association ("NCRA"), Frontier Refining and Conoco, Inc. respectively.
The NCRA and Frontier Refining refineries are connected directly to the East
Pipeline. The McPherson, Kansas refinery operated by NCRA accounted for
approximately 28.9% of the total amount of product shipped over the East
Pipeline in 2002. The East Pipeline also has direct access by third party
pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf
Coast supplies of products through connecting pipelines that receive products
from pipelines originating on the Gulf Coast. Five connecting pipelines can
deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and
Kansas to the East Pipeline for shipment.
The majority of the refined petroleum products transported through the West
Pipeline is produced at the Frontier Refinery located at Cheyenne, Wyoming, the
Valero Energy Corporation and Conoco Refineries located at Denver, Colorado, and
Sinclair's Little America Refinery located at Casper, Wyoming, all of which are
connected directly to the West Pipeline. The West Pipeline also has access to
three Billings, Montana, area refineries through a connecting pipeline.
Demand for and Sources of Anhydrous Ammonia
The Partnership's Ammonia Pipeline business depends on (1) the level of
demand for direct application of anhydrous ammonia as a fertilizer for crop
production ("Direct Application" or "DA"); (2) the weather (DA is not effective
if the ground is too wet) and (3) the price of natural gas (the primary
component of anhydrous ammonia).
The Ammonia Pipeline is the largest of three anhydrous ammonia pipelines in
the US and the only one that has the capability of receiving foreign production
directly into the system and transporting anhydrous ammonia into the nation's
corn belt. This ability to receive either domestic or foreign anhydrous ammonia
is a competitive advantage over the next largest ammonia system which originates
in Oklahoma and extends into Iowa.
Corn producers have several fertilizer alternatives such as liquid, dry or
Direct Application. Liquid and dry fertilizers are both upgrades of anhydrous
ammonia and therefore are more costly but are less sensitive to weather
conditions during application. DA is the cheapest method of fertilizer
application but cannot be applied if the ground is too wet or extremely dry.
Principal Customers
KPOP had a total of approximately 58 shippers in 2002. The principal
shippers include four integrated oil companies, three refining companies, two
large farm cooperatives and one railroad. Transportation revenues attributable
to the top 10 shippers of the East and West Pipelines were $61.5 million, $51.5
million, and $48.7 million, which accounted for 74%, 69%, and 69% of total
revenues shipped for each of the years 2002, 2001, and 2000, respectively.
Competition and Business Considerations
The East and North Pipelines' major competitor is an independent, regulated
common carrier pipeline system owned by The Williams Companies, Inc.
("Williams") that operates approximately 100 miles east of and parallel to the
East Pipeline and in close proximity to the North Pipeline. The Williams system
is a substantially more extensive system than the East and North Pipelines.
Competition with Williams is based primarily on transportation charges, quality
of customer service and proximity to end users, although refined product pricing
at either the origin or terminal point on a pipeline may outweigh transportation
costs. Twenty-one of the East Pipeline's and all four of the North Pipeline's
delivery terminals are located within 2 to 145 miles of, and in direct
competition with Williams' terminals.
The West Pipeline competes with the truck-loading racks of the Cheyenne and
Denver refineries and the Denver terminals of the Chase Terminal Company and
Phillips Petroleum Company. Valero L.P. terminals in Denver and Colorado
Springs, connected to a Valero L.P. pipeline from their Texas Panhandle
Refinery, are major competitors to the West Pipeline's Denver and Fountain
Terminals, respectively.
Because pipelines are generally the lowest cost method for intermediate and
long-haul movement of refined petroleum products, the Partnership's more
significant competitors are common carrier and proprietary pipelines owned and
operated by major integrated and large independent oil companies and other
companies in the areas where the Partnership deliver products. Competition
between common carrier pipelines is based primarily on transportation charges,
quality of customer service and proximity to end users. The Partnership believes
high capital costs, tariff regulation, environmental considerations and problems
in acquiring rights-of-way make it unlikely that other competing pipeline
systems comparable in size and scope to its pipelines will be built in the near
future, provided its pipelines have available capacity to satisfy demand and its
tariffs remain at reasonable levels.
The costs associated with transporting products from a loading terminal to
end users limit the geographic size of the market that can be served
economically by any terminal. Transportation to end users from the loading
terminals of the Partnership is conducted principally by trucking operations of
unrelated third parties. Trucks may competitively deliver products in some of
the areas served by the Partnership's pipelines. However, trucking costs render
that mode of transportation not competitive for longer hauls or larger volumes.
The Partnership does not believe that trucks are, or will be, effective
competition to its long-haul volumes over the long term.
Competitors of the Ammonia Pipeline include another anhydrous ammonia
pipeline which originates in Oklahoma and terminates in Iowa. The competitor
pipeline has the same DA demand and weather issues as the Ammonia Pipeline but
is restricted to domestically produced anhydrous ammonia. Barges and railroads
represent direct competition for smaller niche markets but are not competitive
for larger demand markets.
LIQUIDS TERMINALING BUSINESS
Introduction
The Partnership's terminaling business is conducted through the Support
Terminal Services operation ("ST Services" or "ST") and Statia Terminals
International N.V. ("Statia"). ST Services is one of the largest independent
petroleum products and specialty liquids terminaling companies in the United
States. Statia, acquired on February 28, 2002 for a purchase price of $178
million (net of cash acquired), plus the assumption of $107 million of debt,
owns and operates the Partnership's two largest terminals and provides related
value-added services, including crude oil and petroleum product blending and
processing, berthing of vessels at their marine facilities, and emergency and
spill response services. In addition to its terminaling services, Statia sells
bunkers, which is the fuel marine vessels consume, and bulk petroleum products
to various commercial interests. In January 2001, the Partnership completed the
acquisition of Shore Terminals LLC for a purchase price of $107 million cash and
1,975,090 limited partnership units of the Partnership (valued at $56.5 million
at the date of the agreement).
For the year ended December 31, 2002, the Partnership's terminaling
business accounted for approximately 53% of the Partnership's revenues. As of
December 31, 2002, ST operated 39 facilities in 20 states, with a total storage
capacity of approximately 33.3 million barrels. ST also owns and operates six
terminals located in the United Kingdom, having a total capacity of
approximately 5.5 million barrels. In September 2002, ST acquired eight
terminals in Australia and New Zealand with a total capacity of approximately
1.2 million barrels for approximately $47 million in cash. ST Services and its
predecessors have a long history in the terminaling business and handle a wide
variety of liquids from petroleum products to specialty chemicals to edible
liquids. At the end of 2002, Statia's tank capacity was 18.8 million barrels,
including an 11.3 million barrel storage and transshipment facility located on
the Netherlands Antilles island of St. Eustatius, and a 7.5 million barrel
storage and transshipment facility located at Point Tupper, Nova Scotia, Canada.
The Partnership's terminal facilities provide storage and handling services
on a fee basis for petroleum products, specialty chemicals and other liquids.
The Partnership's six largest terminal facilities are located on the Island of
St. Eustatius, Netherlands Antilles; in Point Tupper, Nova Scotia, Canada; in
Piney Point, Maryland; in Linden, New Jersey (50% owned joint venture); in
Crockett, California; and in Martinez, California.
Description of Largest Terminal Facilities
St. Eustatius, Netherlands Antilles
Statia owns and operates an 11.3 million barrel petroleum terminaling
facility located on the Netherlands Antilles island of St. Eustatius, which is
located at a point of minimal deviation from major shipping routes. This
facility is capable of handling a wide range of petroleum products, including
crude oil and refined products, and can accommodate the world's largest tankers
for loading and discharging crude oil. A three-berth jetty, a two-berth monopile
with platform and buoy systems, a floating hose station, and an offshore single
point mooring buoy with loading and unloading capabilities serve the terminal's
customers' vessels. The St. Eustatius facility has a total of 51 tanks. The fuel
oil and petroleum product facilities have in-tank and in-line blending
capabilities, while the crude tanks have tank-to-tank blending capability as
well as in-tank mixers. In addition to the storage and blending services at St.
Eustatius, the facility has the flexibility to utilize certain storage capacity
for both feedstock and refined products to support its atmospheric distillation
unit, which is capable of processing up to 15,000 BPD of feedstock, ranging from
condensates to heavy crude oil. Statia owns and operates all of the berthing
facilities at its St. Eustatius terminal and charges vessels a fee for their
use. Vessel owners or charterers may incur separate fees for associated services
such as pilotage, tug assistance, line handling, launch service, emergency
response services, and other ship services.
Point Tupper, Nova Scotia, Canada
Statia owns and operates a 7.5 million barrel terminaling facility located
at Point Tupper on the Strait of Canso, near Port Hawkesbury, Nova Scotia,
Canada, which is located approximately 700 miles from New York City, 850 miles
from Philadelphia and 2,500 miles from Mongstad, Norway. This facility is the
deepest independent, ice-free marine terminal on the North American Atlantic
coast, with access to the East Coast and Canada as well as the Midwestern United
States via the St. Lawrence Seaway and the Great Lakes system. With one of the
premier jetty facilities in North America, the Point Tupper facility can
accommodate substantially all of the world's largest, fully-laden very large
crude carriers and ultra large crude carriers for loading and discharging crude
oil, petroleum products, and petrochemicals. The Point Tupper facility has a
total of 37 tanks. Its butane sphere is one of the largest of its kind in North
America. The facility's tanks were renovated in 1994 to comply with construction
standards that meet or exceed American Petroleum Institute, NFPA, and other
material industry standards. Crude oil and petroleum product movements at the
terminal are fully automated. Separate Statia fees apply for the use of the
jetty facility as well as associated services, including pilotage, tug
assistance, line handling, launch service, spill response services, and other
ship services. Statia also charters tugs, mooring launches, and other vessels to
assist with the movement of vessels through the Strait of Canso and the safe
berthing of vessels at Point Tupper and to provide other services to vessels.
Piney Point, Maryland
The largest terminal currently owned by ST is located on approximately 400
acres on the Potomac River. The facility was acquired as part of the purchase of
the liquids terminaling assets of Steuart Petroleum Company and certain of its
affiliates (collectively "Steuart") in December 1995. The Piney Point terminal
has approximately 5.4 million barrels of storage capacity in 28 tanks and is the
closest deep-water facility to Washington, D.C. This terminal competes with
other large petroleum terminals in the East Coast water-borne market extending
from New York Harbor to Norfolk, Virginia. The terminal currently stores
petroleum products consisting primarily of fuel oils and asphalt. The terminal
has a dock with a 36-foot draft for tankers and four berths for barges. It also
has truck-loading facilities, product-blending capabilities and is connected to
a pipeline which supplies residual fuel oil to two power generating stations.
Linden, New Jersey
In October 1998, ST entered into a joint venture relationship with
Northville Industries Corp. ("Northville") to acquire a 50% ownership interest
in and the management of the terminal facility at Linden, New Jersey that was
previously owned by Northville. The 44-acre facility provides ST with deep-water
terminaling capabilities at New York Harbor and primarily stores petroleum
products, including gasoline, jet fuel and fuel oils. The facility has a total
capacity of approximately 3.9 million barrels in 22 tanks, can receive products
via ship, barge and pipeline and delivers product by ship, barge, pipeline and
truck. The terminal owns two docks and leases a third with draft limits of 35,
24 and 24 feet, respectively.
Crockett, California
The Crockett Terminal was acquired in January 2001 as a part of the Shore
acquisition. The terminal has approximately 3 million barrels of tankage and is
located in the San Francisco Bay area. The facility provides deep-water access
for handling petroleum products and gasoline additives such as ethanol. The
terminal offers pipeline connections to various refineries and pipelines. It
receives and delivers product by vessel, barge, pipeline and truck-loading
facilities. The terminal also has railroad tank car unloading capability.
Martinez, California
The Martinez Terminal, also acquired in January 2001 as a part of the Shore
acquisition, is located in the refinery area of San Francisco Bay. It has
approximately 2.8 million barrels of tankage and handles refined petroleum
products as well as crude oil. The terminal is connected to a pipeline and to
area refineries by pipelines and can also receive and deliver products by vessel
or barge. It also has a truck rack for product delivery.
The Partnership's facilities have been designed with engineered structural
measures to minimize the possibility of the occurrence and the level of damage
in the event of a spill or fire. All loading areas, tanks, pipes and pumping
areas are "contained" to collect any spillage and insure that only properly
treated water is discharged from the site.
Other Terminal Sites
In addition to the four major domestic facilities described above, ST
Services has 35 other terminal facilities located throughout the United States,
six facilities in the United Kingdom, four facilities in Australia and four in
New Zealand. These other facilities primarily store petroleum products for a
variety of customers, with the exception of the facilities in Texas City, Texas,
which handles specialty chemicals; Columbus, Georgia, which handles aviation
gasoline and specialty chemicals; Winona, Minnesota, which handles nitrogen
fertilizer solutions; Savannah, Georgia, which handles chemicals and caustic
solutions, as well as petroleum products; Vancouver, Washington, which handles
chemicals and fertilizer; Eastham, United Kingdom which handles chemicals and
animal fats; and Runcorn, United Kingdom, which handles molten sulphur, and the
Australian and New Zealand terminals which handle chemicals and animal fats and
oil. Overall, these facilities provide ST Services with locations which are
diverse geographically, in products handled and in customers served.
The following table outlines the Partnership's terminal locations,
capacities, tanks and primary products handled:
Tankage No. of Primary Products
Facility Capacity Tanks Handled
- ------------------------------- -------------- ------ -------------------------------------
Major U. S. Terminals:
Piney Point, MD 5,403,000 28 Petroleum
Linden, NJ(a) 3,884,000 22 Petroleum
Crockett, CA 3,048,000 24 Petroleum
Martinez, CA 2,800,000 16 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Other U. S. Terminals:
Montgomery, AL(b) 162,000 7 Petroleum, Jet Fuel
Moundville, AL 310,000 6 Jet Fuel
Tucson, AZ(a) 181,000 7 Petroleum
Los Angeles, CA 597,000 20 Petroleum
Richmond, CA 617,000 25 Petroleum
Stockton, CA 706,000 32 Petroleum
Homestead, FL(b) 72,000 2 Jet Fuel
Augusta, GA 110,000 8 Petroleum
Bremen, GA 180,000 8 Petroleum, Jet Fuel
Brunswick, GA 302,000 3 Fertilizer, Pulp Liquor
Columbus, GA 180,000 25 Petroleum, Chemicals
Macon, GA(b) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 861,000 19 Petroleum, Chemicals
Blue Island, IL 752,000 19 Petroleum
Chillicothe, IL(a) 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Westwego, LA 849,000 53 Molasses, Fertilizer, Caustic
Andrews AFB Pipeline, MD(b) 72,000 3 Jet Fuel
Baltimore, MD 832,000 50 Chemicals, Asphalt, Jet Fuel
Salisbury, MD 177,000 14 Petroleum
Winona, MN 229,000 7 Fertilizer
Reno, NV 107,000 7 Petroleum
Paulsboro, NJ 1,580,000 18 Petroleum
Alamogordo, NM(b) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Petroleum, Jet Fuel
Portland, OR 1,119,000 31 Petroleum
Philadelphia, PA 894,000 11 Petroleum
Dumfries, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(b) 40,000 2 Jet Fuel
Tacoma, WA 377,000 15 Petroleum
Vancouver, WA 166,000 42 Chemicals, Fertilizer
Milwaukee, WI 308,000 7 Petroleum
Tankage No. of Primary Products
Facility Capacity Tanks Handled
- ------------------------------- -------------- ------ -------------------------------------
Foreign Terminals:
St. Eustatius, Netherlands
Antilles. 11,334,000 51 Petroleum, crude oil
Point Tupper, Canada 7,501,000 37 Petroleum, crude oil
Sydney, Australia 330,000 65 Chemicals, fats and oils
Melbourne, Australia 468,000 118 Specialty chemicals
Geelong, Australia 145,000 12 Specialty chemicals
Adelaide, Australia 90,000 24 Chemicals, tallow, petroleum
Auckland, New Zealand (a) 64,000 39 Fats, oils and chemicals
New Plymouth, New Zealand 35,000 10 Fats, oils and chemicals
Mt. Managui, New Zealand 52,000 21 Fats, oils and chemicals
Wellington, New Zealand 50,000 13 Fats, oils and chemicals
Grays, England 1,945,000 53 Petroleum
Eastham, England 2,185,000 162 Chemicals, Petroleum, Animal Fats
Runcorn, England 146,000 4 Molten sulphur
Glasgow, Scotland 344,000 16 Petroleum
Leith, Scotland 459,000 34 Petroleum, Chemicals
Belfast, Northern Ireland 407,000 41 Petroleum
--------------- --------------
58,735,000 1,452
=============== ==============
(a) The terminal is 50% owned by ST.
(b) Facility also includes pipelines to U.S. government military base
locations.
Customers
The storage and transport of jet fuel for the U.S. Department of Defense is
an important part of ST's business. Eleven of ST's terminal sites are involved
in the terminaling or transport (via pipeline) of jet fuel for the Department of
Defense and six of the eleven locations have been utilized solely by the U.S.
Government. One of these locations is presently without government business. Of
the eleven locations, six include pipelines which deliver jet fuel directly to
nearby military bases.
Statia provides terminaling services for crude oil and refined petroleum
products to many of the world's largest producers of crude oil, integrated oil
companies, oil traders, and refiners. Statia's crude oil transshipment customers
include an oil producer that leases and utilizes 5.0 million barrels of storage
at St. Eustatius, and a major international oil company which leases and
utilizes 3.6 million barrels of storage at Point Tupper, both of which have
long-term contracts with Statia. In addition, two different international oil
companies each lease and utilize 1.0 million barrels of clean products storage
at St. Eustatius and Point Tupper, respectively. Also in Canada, a consortium
consisting of major oil companies sends natural gas liquids via pipeline to
certain processing facilities on land leased from Statia. After processing,
certain products are stored at the Point Tupper facility under a long-term
contract. In addition, Statia's blending capabilities have attracted customers
who have leased capacity primarily for blending purposes and who have
contributed to Statia's bunker fuel and bulk product sales.
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators, such
as the Partnership, many major energy and chemical companies own extensive
terminal storage facilities. Although such terminals often have the same
capabilities as terminals owned by independent operators, they generally do not
provide terminaling services to third parties. In many instances, major energy
and chemical companies that own storage and terminaling facilities are also
significant customers of independent terminal operators, such as the
Partnership. Such companies typically have strong demand for terminals owned by
independent operators when independent terminals have more cost effective
locations near key transportation links, such as deep-water ports. Major energy
and chemical companies also need independent terminal storage when their owned
storage facilities are inadequate, either because of size constraints, the
nature of the stored material or specialized handling requirements.
Independent terminal owners generally compete on the basis of the location
and versatility of terminals, service and price. A favorably located terminal
will have access to various cost effective transportation modes both to and from
the terminal. Possible transportation modes include waterways, railroads,
roadways and pipelines. Terminals located near deep-water port facilities are
referred to as "deep-water terminals" and terminals without such facilities are
referred to as "inland terminals"; though some inland facilities are served by
barges on navigable rivers.
Terminal versatility is a function of the operator's ability to offer
handling for diverse products with complex handling requirements. The service
function typically provided by the terminal includes, among other things, the
safe storage of the product at specified temperature, moisture and other
conditions, as well as receipt at and delivery from the terminal, all of which
must be in compliance with applicable environmental regulations. A terminal
operator's ability to obtain attractive pricing is often dependent on the
quality, versatility and reputation of the facilities owned by the operator.
Although many products require modest terminal modification, operators with a
greater diversity of terminals with versatile storage capabilities typically
require less modification prior to usage, ultimately making the storage cost to
the customer more attractive.
A few companies offering liquid terminaling facilities have significantly
more capacity than the Partnership. However, much of the Partnership's tankage
can be described as "niche" facilities that are equipped to properly handle
"specialty" liquids or provide facilities or services where management believes
they enjoy an advantage over competitors. As a result, many of the Partnership's
terminals compete against other large petroleum products terminals, rather than
specialty liquids facilities. Such specialty or "niche" tankage is less abundant
in the U.S. and "specialty" liquids typically command higher terminal fees than
lower-price bulk terminaling for petroleum products.
The main competition to crude oil storage at Statia's facilities is from
"lightering" which is the process by which liquid cargo is transferred to
smaller vessels, usually while at sea. The price differential between lightering
and terminaling is primarily driven by the charter rates for vessels of various
sizes. Lightering generally takes significantly longer than discharging at a
terminal. Depending on charter rates, the longer charter period associated with
lightering is generally offset by various costs associated with terminaling,
including storage costs, dock charges, and spill response fees. However,
terminaling is generally safer and reduces the risk of environmental damage
associated with lightering, provides more flexibility in the scheduling of
deliveries, and allows customers of Statia to deliver their products to multiple
locations. Lightering in U.S. territorial waters creates a risk of liability for
owners and shippers of oil under the U.S. Oil Pollution Act of 1990 and other
state and federal legislation. In Canada, similar liability exists under the
Canadian Shipping Act. Terminaling also provides customers with the ability to
access value-added terminal services.
In the bunkering business, Statia competes with ports offering bunker fuels
to which, or from which, each vessel travels or are along the route of travel of
the vessel. Statia also competes with bunker delivery locations around the
world. In the Western Hemisphere, alternative bunker locations include ports on
the U.S. East coast and Gulf coast and in Panama, Puerto Rico, the Bahamas,
Aruba, Curacao, and Halifax. In addition, Statia competes with Rotterdam and
various North Sea locations.
CAPITAL EXPENDITURES
Capital expenditures by the Pipelines, including routine maintenance and
expansion expenditures, but excluding acquisitions, were $9.5 million, $4.3
million, and $3.4 million for 2002, 2001 and 2000, respectively. During these
periods, adequate capacity existed on these pipelines to accommodate volume
growth, and the expenditures required for environmental and safety improvements
were not material in amount. Capital expenditures, including routine maintenance
and expansion expenditures, but excluding acquisitions, for the Partnership's
terminaling operations were $21.0 million, $12.9 million, and $6.1 million for
2002, 2001 and 2000, respectively.
Capital expenditures of the Partnership during 2003, including routine
maintenance and expansion expenditures, but excluding acquisitions, are expected
to be approximately $40 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Additional expansion-related capital expenditures will depend on
future opportunities to expand the Partnership's operations. Such future
expenditures, however, will depend on many factors beyond the Partnership's
control, including, without limitation, demand for refined petroleum products
and terminaling services in the Partnership's market areas, local, state and
federal governmental regulations, fuel conservation efforts and the availability
of financing on acceptable terms. No assurance can be given that required
capital expenditures will not exceed anticipated amounts during the year or
thereafter or that the Partnership will have the ability to finance such
expenditures through borrowings or choose to do so.
REGULATION
Interstate Regulation
The interstate common carrier petroleum product pipeline operations of the
Partnership are subject to rate regulation by FERC under the Interstate Commerce
Act. The Interstate Commerce Act provides, among other things, that to be lawful
the rates of common carrier petroleum pipelines must be "just and reasonable"
and not unduly discriminatory. New and changed rates must be filed with the
FERC, which may investigate their lawfulness on protest or its own motion. The
FERC may suspend the effectiveness of such rates for up to seven months. If the
suspension expires before completion of the investigation, the rates go into
effect, but the pipeline can be required to refund to shippers, with interest,
any difference between the level the FERC determines to be lawful and the filed
rates under investigation. Rates that have become final and effective may be
challenged by a complaint to FERC filed by a shipper or on the FERC's own
initiative. Reparations may be recovered by the party filing the complaint for
the two-year period prior to the complaint, if FERC finds the rate to be
unlawful.
The FERC allows for a rate of return for petroleum products pipelines
determined by adding (i) the product of a rate of return equal to the nominal
cost of debt multiplied by the portion of the rate base that is deemed to be
financed with debt and (ii) the product of a rate of return equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity. The appropriate rate of return for a
petroleum pipeline is determined on a case-by-case basis, taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.
Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"), rates
that were in effect on October 24, 1991 that were not subject to a protest,
investigation or complaint are deemed to be just and reasonable. Such rates,
commonly referred to as grandfathered rates, are subject to challenge only for
limited reasons. Any relief granted pursuant to such challenges may be
prospective only. Because the Partnership's rates that were in effect on October
24, 1991, were not subject to investigation and protest at that time, those
rates could be deemed to be just and reasonable pursuant to the EP Act. The
Partnership's current rates became final and effective in July 2000, and the
Partnership believes that its currently effective tariffs are just and
reasonable and would withstand challenge under the FERC's cost-based rate
standards. Because of the complexity of rate making, however, the lawfulness of
any rate is never assured.
On October 22, 1993, the FERC issued Order No. 561 which adopted a
simplified rate making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for such rate increases, there will be no need to file cost-of-service or
supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline
may make a limitless number of rate change filings. This indexing mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the ceiling rate below a pipeline's existing rates. The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.
The indexation method is to serve as the principal basis for the
establishment of oil pipeline rate changes in the future. However, the FERC
determined that a pipeline may utilize any one of the following alternative
methodologies to indexing: (i) a cost-of-service methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate that its
increased costs are prudently incurred and that there is a substantial
divergence between such increased costs and the rate that would be produced by
application of the index; and (ii) a pipeline may base its rates upon a
"light-handed" market-based form of regulation if it is able to demonstrate a
lack of significant market power in the relevant markets.
On September 15, 1997, the Partnership filed an Application for Market
Power Determination with the FERC seeking market based rates for approximately
half of its markets. In May 1998, the FERC granted the Partnership's application
and approximately half of the markets served by the East and West pipelines
subsequently became subject to market force regulation.
In the FERC's Lakehead decision issued June 15, 1995, the FERC partially
disallowed Lakehead's inclusion of income taxes in its cost of service.
Specifically, the FERC held that Lakehead was entitled to receive an income tax
allowance with respect to income attributable to its corporate partners, but was
not entitled to receive such an allowance for income attributable to the
partnership interests held by individuals. Lakehead's motion for rehearing was
denied by the FERC and Lakehead appealed the decision to the U.S. Court of
Appeals. Subsequently, the case was settled by Lakehead and the appeal was
withdrawn. In another FERC proceeding involving a different oil pipeline limited
partnership, various shippers challenged such pipeline's inclusion of an income
tax allowance in its cost of service. The FERC decided this case on the same
basis as its holding in the Lakehead case. If the FERC were to partially or
completely disallow the income tax allowance in the cost of service of the East
and West pipelines on the basis set forth in the Lakehead order, KPL believes
that the Partnership's ability to pay distributions to the holders of the Units
would not be impaired; however, in view of the uncertainties involved in this
issue, there can be no assurance in this regard.
The Ammonia Pipeline rates are regulated by the Surface Transportation
Board (the "STB"). The STB was established in 1996 when the Interstate Commerce
Commission was terminated by the ICC Termination Act of 1995. The STB is headed
by Board Members appointed by the President and confirmed by the Senate and is
authorized to have three members. The STB jurisdiction in general includes
railroad rate and service issues, rail restructuring transactions and labor
matters related thereto; certain trucking company, moving van, and
non-contiguous ocean shipping company rate matters; and certain pipeline matters
not regulated by the FERC. In the performance of its functions, the STB is
charged with promoting, where appropriate, substantive and procedural regulatory
reform in the economic regulation of surface transportation, and with providing
an efficient and effective forum for the resolution of disputes. The STB seeks
to facilitate commerce by providing an effective forum for efficient dispute
resolution and facilitation of appropriate market-based business transactions.
Intrastate Regulation
The intrastate operations of the East Pipeline in Kansas are subject to
regulation by the Kansas Corporation Commission, the intrastate operations of
the West Pipeline in Colorado and Wyoming are subject to regulation by the
Colorado Public Utility Commission and the Wyoming Public Service Commission,
respectively, and the intrastate operations of the North Pipeline are subject to
regulation by the North Dakota Public Utility Commission. Like the FERC, the
state regulatory authorities require that shippers be notified of proposed
intrastate tariff increases and have an opportunity to protest such increases.
KPOP also files with such state authorities copies of interstate tariff changes
filed with the FERC. In addition to challenges to new or proposed rates,
challenges to intrastate rates that have already become effective are permitted
by complaint of an interested person or by independent action of the appropriate
regulatory authority.
ENVIRONMENTAL MATTERS
General
The operations of the Partnership are subject to federal, state and local
laws and regulations relating to the protection of the environment in the United
States and to the environmental laws and regulations of the host countries in
regard to the terminals acquired overseas. Although the Partnership believes
that its operations are in general compliance with applicable environmental
regulations, risks of substantial costs and liabilities are inherent in pipeline
and terminal operations, and there can be no assurance that significant costs
and liabilities will not be incurred by the Partnership. Moreover, it is
possible that other developments, such as increasingly strict environmental
laws, regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the Partnership, past and
present, could result in substantial costs and liabilities to the Partnership.
See "Item 3 - Legal Proceedings" for information concerning two lawsuits
against certain subsidiaries of the Partnership involving claims for
environmental damages.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of
the Federal Water Pollution Control Act of 1972 and other statutes as they
pertain to prevention and response to oil spills. The OPA subjects owners of
facilities to strict, joint and potentially unlimited liability for removal
costs and certain other consequences of an oil spill, where such spill is into
navigable waters, along shorelines or in the exclusive economic zone. In the
event of an oil spill into such waters, substantial liabilities could be imposed
upon the Partnership. Regulations concerning the environment are continually
being developed and revised in ways that may impose additional regulatory
burdens on the Partnership.
Contamination resulting from spills or releases of refined petroleum
products is not unusual within the petroleum pipeline and liquids terminaling
industries. The East Pipeline and ST Services have experienced limited
groundwater contamination at various terminal and pipeline sites resulting from
various causes including activities of previous owners. Remediation projects are
underway or under construction using various remediation techniques. The costs
to remediate contamination at several ST terminal locations are being borne by
the former owners under indemnification agreements. Although no assurances can
be made, the Partnership believes that the aggregate cost of these remediation
efforts will not be material.
Groundwater remediation efforts are ongoing at all four of the West
Pipeline's terminals and at a Wyoming pump station. Regulatory officials have
been consulted in the development of remediation plans. In connection with the
purchase of the West Pipeline, KPOP agreed to implement remediation plans at
these specific sites over the succeeding five years following the acquisition in
return for the payment by the seller, Wyco Pipe Line Company, of $1,312,000 to
KPOP to cover the discounted estimated future costs of these remediations.
The EPA has promulgated regulations that may require the Partnership to
apply for permits to discharge storm water runoff. Storm water discharge permits
also may be required in certain states in which the Partnership operates. Where
such requirements are applicable, the Partnership has applied for such permits
and, after the permits are received, will be required to sample storm water
effluent before releasing it. The Partnership believes that effluent limitations
could be met, if necessary, with minor modifications to existing facilities and
operations. Although no assurance in this regard can be given, the Partnership
believes that the changes will not have a material effect on the Partnership's
financial condition or results of operations.
Aboveground Storage Tank Acts
A number of the states in which the Partnership operates in the United
States have passed statutes regulating aboveground tanks containing liquid
substances. Generally, these statutes require that such tanks include secondary
containment systems or that the operators take certain alternative precautions
to ensure that no contamination results from any leaks or spills from the tanks.
Although there is not total federal regulation of all above ground tanks, the
DOT has adopted an industry standard that addresses tank inspection, repair,
alteration and reconstruction. This action requires pipeline companies to comply
with the standard for tank inspection and repair for all tanks regulated by the
DOT. The Partnership is in substantial compliance with all above ground storage
tank laws in the states with such laws. Although no assurance can be given, the
Partnership believes that the future implementation of above ground storage tank
laws by either additional states or by the federal government will not have a
material adverse effect on the Partnership's financial condition or results of
operations.
Air Emissions
The operations of the Partnership are subject to the Federal Clean Air Act
and comparable state and local statutes. The Partnership believes that the
operations of its pipelines and terminals are in substantial compliance with
such statutes in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that have been
and are to be developed and implemented by the EPA and state environmental
agencies. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides are
subject to increasingly stringent regulations, including requirements that
certain sources install maximum or reasonably available control technology. In
addition, the 1999 Federal Clean Air Act Amendments include a new operating
permit for major sources ("Title V Permits"), which applies to some of the
Partnership's facilities. Additionally, new dockside loading facilities owned or
operated by the Partnership in the United States will be subject to the New
Source Performance Standards that were proposed in May 1994. These regulations
require control of VOC emissions from the loading and unloading of tank vessels.
Although the Partnership is in substantial compliance with applicable air
pollution laws, in anticipation of the implementation of stricter air control
regulations, the Partnership is taking actions to substantially reduce its air
emissions. The Partnership plans to install bottom loading and vapor recovery
equipment on the loading racks at selected terminal sites along the East
Pipeline that do not already have such emissions control equipment. These
modifications will substantially reduce the total air emissions from each of
these facilities. Having begun in 1993, this project is being phased in over a
period of years.
Solid Waste
The Partnership generates non-hazardous solid waste that is subject to the
requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes in the United States. The EPA is considering the
adoption of stricter disposal standards for non-hazardous wastes. RCRA also
governs the disposal of hazardous wastes. At present, the Partnership is not
required to comply with a substantial portion of the RCRA requirements because
the Partnership's operations generate minimal quantities of hazardous wastes.
However, it is anticipated that additional wastes, which could include wastes
currently generated during pipeline operations, will in the future be designated
as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly
disposal requirements than are non-hazardous wastes. Such changes in the
regulations may result in additional capital expenditures or operating expenses
by the Partnership.
At the terminal sites at which groundwater contamination is present, there
is also limited soil contamination as a result of the aforementioned spills. The
Partnership is under no present requirements to remove these contaminated soils,
but the Partnership may be required to do so in the future. Soil contamination
also may be present at other Partnership facilities at which spills or releases
have occurred. Under certain circumstances, the Partnership may be required to
clean up such contaminated soils. Although these costs should not have a
material adverse effect on the Partnership, no assurance can be given in this
regard.
Superfund
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund") imposes liability, without regard to fault or the
legality of the original act, on certain classes of persons that contributed to
the release of a "hazardous substance" into the environment. These persons
include the owner or operator of the site and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. CERCLA
also authorizes the EPA and, in some instances, third parties to act in response
to threats to the public health or the environment and to seek to recover from
the responsible classes of persons the costs they incur. In the course of its
ordinary operations, the Partnership may generate waste that may fall within
CERCLA's definition of a "hazardous substance". The Partnership may be
responsible under CERCLA for all or part of the costs required to clean up sites
at which such wastes have been disposed.
Environmental Impact Statement
The United States National Environmental Policy Act of 1969 (the "NEPA")
applies to certain extensions or additions to a pipeline system. Under NEPA, if
any project that would significantly affect the quality of the environment
requires a permit or approval from any United States federal agency, a detailed
environmental impact statement must be prepared. The effect of the NEPA may be
to delay or prevent construction of new facilities or to alter their location,
design or method of construction.
Indemnification
KPL has agreed to indemnify the Partnership against liabilities for damage
to the environment resulting from operations of the East Pipeline prior to
October 3, 1989. Such indemnification does not extend to any liabilities that
arise after such date to the extent such liabilities result from change in
environmental laws or regulations. Under such indemnity, KPL is presently liable
for the remediation of contamination at certain East Pipeline sites. In
addition, both KPOP and ST were wholly or partially indemnified under certain
acquisition contracts for some environmental costs. Most of such contracts
contain time and amount limitations on the indemnities. To the extent that
environmental liabilities exceed the amount of such indemnity, KPOP has
affirmatively assumed the excess environmental liabilities.
SAFETY REGULATION
The Partnership's pipelines are subject to regulation by the United States
Department of Transportation (the "DOT") under the Hazardous Liquid Pipeline
Safety Act of 1979 ("HLPSA") relating to the design, installation, testing,
construction, operation, replacement and management of their pipeline
facilities. The HLPSA covers anhydrous ammonia, petroleum and petroleum products
pipelines and requires any entity that owns or operates pipeline facilities to
comply with such safety regulations and to permit access to and copying of
records and to make certain reports and provide information as required by the
Secretary to Transportation. The Federal Pipeline Safety Act of 1992 amended the
HLPSA to include requirements of the future use of internal inspection devices.
The Partnership does not believe that it will be required to make any
substantial capital expenditures to comply with the requirements of HLPSA as so
amended.
On November 3, 2000, the DOT issued new regulations intended by the DOT to
assess the integrity of hazardous liquid pipeline segments that, in the event of
a leak or failure, could adversely affect highly populated areas, areas
unusually sensitive to environmental impact and commercially navigable
waterways. Under the regulations, an operator is required, among other things,
to conduct baseline integrity assessment tests (such as internal inspections)
within seven years, conduct future integrity tests at typically five-year
intervals and develop and follow a written risk-based integrity management
program covering the designated high consequence areas. The Partnership does not
believe that any increased costs of compliance with these regulations will
materially affect the Partnership's results of operations.
The Partnership is subject to the requirements of the United States Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes that
regulate the protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that certain information be
maintained about hazardous materials used or produced in operations and that
this information be provided to employees, state and local authorities and
citizens. The Partnership believes that it is in general compliance with OSHA
requirements, including general industry standards, record keeping requirements
and monitoring of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize information about the hazardous materials used in its operations.
Certain parts of this information must be reported to employees, state and local
governmental authorities, and local citizens upon request. In general, the
Partnership expects to increase its expenditures during the next decade to
comply with higher industry and regulatory safety standards such as those
described above. Such expenditures cannot be accurately estimated at this time,
although they are not expected to have a material adverse impact on the
Partnership.
EMPLOYEES
The Partnership has no employees. The business of the Partnership is
conducted by the general partner, KPL, and its affiliate, Kaneb LLC, which
employs all persons necessary for the operation of the Partnership's business.
At December 31, 2002, approximately 1,071 persons were employed. Approximately
105 of the persons at 6 terminal unit locations in the United States were
subject to representation by labor unions and collective bargaining or similar
contracts at that date. KPL and Kaneb LLC consider relations with their
employees to be good.
AVAILABLE INFORMATION
The Partnership files annual, quarterly, and other reports and other
information with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). You may read and copy any
materials that the Partnership files with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain additional
information about the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy information statements, and
other information regarding issuers that file electronically with the SEC.
The Partnership also makes available free of charge on or through the
Partnership's Internet site (http://www.kaneb.com) the Partnership's Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and other information statements and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after the reports and other information is
electronically filed with, or furnish it to, the SEC.
Item 2. Properties
The properties owned or utilized by the Partnership and its subsidiaries
are generally described in Item 1 of this Report. Additional information
concerning the obligations of the Partnership and its subsidiaries for lease and
rental commitments is presented under the caption "Commitments and
Contingencies" in Note 6 to the Partnership's consolidated financial statements.
Such descriptions and information are hereby incorporated by reference into this
Item 2.
The properties used in the operations of the Partnership's pipelines are
owned by the Partnership, through its subsidiary entities, except for KPL's
operational headquarters, located in Wichita, Kansas, which is held under a
lease that expires in 2004. Statia's facilities are owned through subsidiaries
and the majority of ST's facilities are owned, while the remainder, including
some of its terminal facilities located in port areas and its operational
headquarters, located in Dallas, Texas, are held pursuant to lease agreements
having various expiration dates, rental rates and other terms.
Item 3. Legal Proceedings
Grace Litigation. Certain subsidiaries of the Partnership were sued in a
Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
which the Partnership acquired ST Services in 1993. The lawsuit involves
environmental response and remediation costs allegedly resulting from jet fuel
leaks in the early 1970's from a pipeline. The pipeline, which connected a
former Grace terminal with Otis Air Force Base in Massachusetts (the "Otis
pipeline" or the "pipeline"), ceased operations in 1973 and was abandoned before
1978, when the connecting terminal was sold to an unrelated entity. Grace
alleged that subsidiaries of the Partnership acquired the abandoned pipeline, as
part of the acquisition of ST Services in 1993 and assumed responsibility for
environmental damages allegedly caused by the jet fuel leaks. Grace sought a
ruling from the Texas court that these subsidiaries are responsible for all
liabilities, including all present and future remediation expenses, associated
with these leaks and that Grace has no obligation to indemnify these
subsidiaries for these expenses. In the lawsuit, Grace also sought
indemnification for expenses of approximately $3.5 million that it incurred
since 1996 for response and remediation required by the State of Massachusetts
and for additional expenses that it expects to incur in the future. The
consistent position of the Partnership's subsidiaries has been that they did not
acquire the abandoned pipeline as part of the 1993 ST Services transaction, and
therefore did not assume any responsibility for the environmental damage nor any
liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition agreement by
failing to disclose matters related to the pipeline, and (2) the pipeline was
abandoned before 1978 -- 15 years before the Partnership's subsidiaries acquired
ST Services. On August 30, 2000, the Judge entered final judgment in the case
that Grace take nothing from the subsidiaries on its claims seeking recovery of
remediation costs. Although the Partnership's subsidiaries have not incurred any
expenses in connection with the remediation, the court also ruled, in effect,
that the subsidiaries would not be entitled to indemnification from Grace if any
such expenses were incurred in the future. Moreover, the Judge let stand a prior
summary judgment ruling that the pipeline was an asset acquired by the
Partnership's subsidiaries as part of the 1993 ST Services transaction and that
any liabilities associated with the pipeline would have become liabilities of
the subsidiaries. Based on that ruling, the Massachusetts Department of
Environmental Protection and Samson Hydrocarbons Company (successor to Grace
Petroleum Company) wrote letters to ST Services alleging its responsibility for
the remediation, and ST Services responded denying any liability in connection
with this matter. The Judge also awarded attorney fees to Grace of more than
$1.5 million. Both the Partnership's subsidiaries and Grace have appealed the
trial court's final judgment to the Texas Court of Appeals in Dallas. In
particular, the subsidiaries have filed an appeal of the judgment finding that
the Otis pipeline and any liabilities associated with the pipeline were
transferred to them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an
automatic stay against actions against Grace. This automatic stay covers the
appeal of the Dallas litigation, and the Texas Court of Appeals has issued an
order staying all proceedings of the appeal because of the bankruptcy. Once that
stay is lifted, the Partnership's subsidiaries that are party to the lawsuit
intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA. The
MMR Site contains a number of groundwater contamination plumes, two of which are
allegedly associated with the Otis pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of Defense,
pursuant to a Federal Facilities Agreement, has been responding to the
Government remediation demand for most of the contamination problems at the MMR
Site. Grace and others have also received and responded to formal inquiries from
the United States Government in connection with the environmental damages
allegedly resulting from the jet fuel leaks. The Partnership's subsidiaries
voluntarily responded to an invitation from the Government to provide
information indicating that they do not own the pipeline. In connection with a
court-ordered mediation between Grace and the Partnership's subsidiaries, the
Government advised the parties in April 1999 that it has identified two spill
areas that it believes to be related to the pipeline that is the subject of the
Grace suit. The Government at that time advised the parties that it believed it
had incurred costs of approximately $34 million, and expected in the future to
incur costs of approximately $55 million, for remediation of one of the spill
areas. This amount was not intended to be a final accounting of costs or to
include all categories of costs. The Government also advised the parties that it
could not at that time allocate its costs attributable to the second spill area.
By letter dated July 26, 2001, the United States Department of Justice
("DOJ") advised ST Services that the Government intends to seek reimbursement
from ST Services under the Massachusetts Oil and Hazardous Material Release
Prevention and Response Act and the Declaratory Judgment Act for the
Government's response costs at the two spill areas discussed above. The DOJ
relied in part on the Texas state court judgment, which in the DOJ's view, held
that ST Services was the current owner of the pipeline and the
successor-in-interest of the prior owner and operator. The Government advised ST
Services that it believes it has incurred costs exceeding $40 million, and
expects to incur future costs exceeding an additional $22 million, for
remediation of the two spill areas. The Partnership believes that its
subsidiaries have substantial defenses. ST Services responded to the DOJ on
September 6, 2001, contesting the Government's positions and declining to
reimburse any response costs. The DOJ has not filed a lawsuit against ST
Services seeking cost recovery for its environmental investigation and response
costs. Representatives of ST Services have met with representatives of the
Government on several occasions since September 6, 2001 to discuss the
Government's claims and to exchange information related to such claims.
Additional exchanges of information are expected to occur in the future and
additional meetings may be held to discuss possible resolution of the
Government's claims without litigation.
PEPCO Litigation. On April 7, 2000, a fuel oil pipeline in Maryland owned
by Potomac Electric Power Company ("PEPCO") ruptured. Work performed with regard
to the pipeline was conducted by a partnership of which ST Services is general
partner. PEPCO has reported that it has incurred total cleanup costs of $70
million to $75 million. PEPCO probably will continue to incur some cleanup
related costs for the foreseeable future, primarily in connection with EPA
requirements for monitoring the condition of some of the impacted areas. Since
May 2000, ST Services has provisionally contributed a minority share of the
cleanup expense, which has been funded by ST Services' insurance carriers. ST
Services and PEPCO have not, however, reached a final agreement regarding ST
Services' proportionate responsibility for this cleanup effort, if any, and
cannot predict the amount, if any, that ultimately may be determined to be ST
Services' share of the remediation expense, but ST believes that such amount
will be covered by insurance and therefore will not materially adversely affect
the Partnership's financial condition.
As a result of the rupture, purported class actions were filed against
PEPCO and ST Services in federal and state court in Maryland by property and
business owners alleging damages in unspecified amounts under various theories,
including under the Oil Pollution Act ("OPA") and Maryland common law. The
federal court consolidated all of the federal cases in a case styled as In re
Swanson Creek Oil Spill Litigation. A settlement of the consolidated class
action, and a companion state-court class action, was reached and approved by
the federal judge. The settlement involved creation and funding by PEPCO and ST
Services of a $2,250,000 class settlement fund, from which all participating
claimants would be paid according to a court-approved formula, as well as a
court-approved payment to plaintiffs' attorneys. The settlement has been
consummated and the fund, to which PEPCO and ST Services contributed equal
amounts, has been distributed. Participating claimants' claims have been settled
and dismissed with prejudice. A number of class members elected not to
participate in the settlement, i.e., to "opt out," thereby preserving their
claims against PEPCO and ST Services. All non-participant claims except one have
been settled for immaterial amounts with ST Services' portion of such
settlements provided by its insurance carrier. ST Services' insurance carrier
has assumed the defense of the continuing action and ST Services believes that
the carrier would assume the defense of any new litigation by a non-participant
in the settlement, should any such litigation be commenced. While the
Partnership cannot predict the amount, if any, of any liability it may have in
the continuing action or in other potential suits relating to this matter, it
believes that the current and potential plaintiffs' claims will be covered by
insurance and therefore these actions will not have a material adverse effect on
its financial condition.
PEPCO and ST Services agreed with the federal government and the State of
Maryland to pay costs of assessing natural resource damages arising from the
Swanson Creek oil spill under OPA and of selecting restoration projects. This
process was completed in mid-2002. ST Services' insurer has paid ST Services'
agreed 50 percent share of these assessment costs. In late November 2002, PEPCO
and ST Services entered into a Consent Decree resolving the federal and state
trustees' claims for natural resource damages. The decree required payments by
ST Services and PEPCO of a total of approximately $3 million to fund the
restoration projects and for remaining damage assessment costs. The federal
court entered the Consent Decree as a final judgment on December 31, 2002. PEPCO
and ST have each paid their 50% share and thus fully performed their payment
obligations under the Consent Decree. ST Services' insurance carrier funded ST
Services' payment.
The U.S. Department of Transportation ("DOT") has issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over several
years of pipeline safety regulations and proposing a civil penalty of $647,000
jointly against the two companies. ST Services and PEPCO have contested the DOT
allegations and the proposed penalty. A hearing was held before the Office of
Pipeline Safety at the DOT in late 2001. ST Services does not anticipate any
further hearings on the subject and is still awaiting the DOT's ruling.
By letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it intended to seek penalties from ST
Services in connection with the April 7, 2000 spill. The State of Maryland
subsequently asserted that it would seek penalties against ST Services and PEPCO
totaling up to $12 million. A settlement of this claim was reached in mid-2002
under which ST Services' insurer will pay a total of slightly more than $1
million in installments over a five year period. PEPCO has also reached a
settlement of these claims with the State of Maryland. Accordingly, the
Partnership believes that this matter will not have a material adverse effect on
its financial condition.
On December 13, 2002, ST Services sued PEPCO in the Superior Court,
District of Columbia, seeking, among other causes of action, a declaratory
judgment as to ST Services' legal obligations, if any, to reimburse PEPCO for
costs of the oil spill. On December 16, 2002, PEPCO sued ST Services in the
United States District Court for the District of Maryland, seeking recovery of
all its costs for remediation of the oil spill. Both parties have pending
motions to dismiss the other party's suit. The Partnership believes that any
costs or damages resulting from these lawsuits will be covered by insurance and
therefore will not materially adversely affect the Partnership's financial
condition.
The Partnership has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business. Management
of the Partnership believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect on
the financial position or results of operations of the Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
The Partnership did not hold a meeting of Unitholders or otherwise submit
any matter to a vote of security holders in the fourth quarter of 2002.
PART II
Item 5. Market for the Registrant's Units and Related Unitholder Matters
The Partnership's limited partnership interests ("Units") are listed and
traded on the New York Stock Exchange (the "NYSE"), under the symbol "KPP." At
March 21, 2003, there were approximately 1,000 unitholders of record. Set forth
below are prices on the NYSE and cash distributions for the periods indicated
for such Units.
Unit Prices
-------------------- Cash
Year High Low Distributions
---------------------------------- ------- ------- -------------
2001:
First Quarter $ 31.81 $ 27.75 $ .70
Second Quarter 36.00 30.00 .70
Third Quarter 40.44 34.13 .75
Fourth Quarter 42.19 37.83 .75
2002:
First quarter 44.00 34.35 .79
Second Quarter 42.06 36.05 .79
Third Quarter 38.55 30.99 .79
Fourth Quarter 38.18 31.60 .79
2003:
First quarter 38.15 34.72 .81 (a)
(through March 21, 2003)
(a) The cash distribution with respect to the first quarter of 2003 is payable
May 15, 2003.
Under the terms of its financing agreements, the Partnership is prohibited
from declaring or paying any distribution if a default exists thereunder.
Item 6. Summary Historical Financial and Operating Data
The following table sets forth, for the periods and at the dates indicated,
selected historical financial and operating data for Kaneb Pipe Line Partners,
L.P. and subsidiaries (the "Partnership"). The data in the table (in thousands,
except per unit amounts) is derived from the historical financial statements of
the Partnership and should be read in conjunction with the Partnership's audited
financial statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended December 31,
--------------------------------------------------------------------
2002 (a) 2001 (a) 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Revenues.............................. $ 386,630 $ 207,796 $ 156,232 $ 158,028 $ 125,812
---------- ---------- --------- ---------- ----------
Cost of products sold................. 90,898 - - - -
Operating costs....................... 131,326 90,632 69,653 69,148 52,200
Depreciation and amortization......... 39,425 23,184 16,253 15,043 12,148
Gain on sale of assets................ (609) - (1,126) - -
General and administrative............ 19,869 11,889 11,881 9,424 6,261
----------- ---------- --------- ---------- ----------
Total costs and expenses.............. 280,909 125,705 96,661 93,615 70,609
----------- ---------- --------- ---------- ----------
Operating income...................... 105,721 82,091 59,571 64,413 55,203
Interest and other income............. 3,570 4,277 316 408 626
Interest expense...................... (28,110) (14,783) (12,283) (13,390) (11,304)
Loss on debt extinguishment........... (3,282) (6,540) - - -
Minority interest in net income....... (738) (648) (467) (499) (441)
----------- ---------- --------- ---------- ----------
Income before income taxes............ 77,161 64,397 47,137 50,932 44,084
Income tax expense.................... (4,083) (256) (943) (1,496) (418)
----------- ---------- --------- ---------- ----------
Net income............................ $ 73,078 $ 64,141 $ 46,194 $ 49,436 $ 43,666
=========== ========== ========= ========== ==========
Allocation of net income per unit..... $ 2.96 $ 3.03 $ 2.43 $ 2.81 $ 2.67
=========== ========== ========= ========== ==========
Cash distributions declared per unit.. $ 3.16 $ 2.90 $ 2.80 $ 2.80 $ 2.60
=========== ========== ========= ========== ==========
Balance Sheet Data (at year end):
Property and equipment, net........... $ 1,092,192 $ 481,274 $ 321,355 $ 316,883 $ 268,626
Total assets.......................... 1,215,410 548,371 375,063 365,953 308,432
Long-term debt........................ 694,330 262,624 166,900 155,987 153,000
Partners' capital..................... 392,284 219,517 160,767 168,288 105,388
(a) See Note 3 to Consolidated Financial Statements regarding acquisitions.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Pipe Line Partners, L.P. (the "Partnership") and
notes thereto and the summary historical financial and operating data included
elsewhere in this report.
GENERAL
In September 1989, Kaneb Pipe Line Company LLC ("KPL"), a wholly-owned
subsidiary of Kaneb Services LLC, formed the Partnership to own and operate its
refined petroleum products pipeline business. KPL manages and controls the
operations of the Partnership through its general partner interest and a 20% (at
December 31, 2002) limited partner interest. The Partnership operates through
Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in
which the Partnership holds a 99% interest as limited partner. KPL owns a 1%
interest as general partner of the Partnership and a 1% interest as general
partner of KPOP.
The Partnership's petroleum pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado, Wyoming and Minnesota.
Common carrier activities are those under which transportation through the
pipelines is available at published tariffs filed, in the case of interstate
shipments with the Federal Energy Regulatory Commission (the "FERC"), or in the
case of intrastate shipments, with the relevant state authority, to any shipper
of refined petroleum products who requests such services and satisfies the
conditions and specifications for transportation. The petroleum pipelines
primarily transport gasoline, diesel oil, fuel oil and propane. Substantially
all of the petroleum pipeline operations constitute common carrier operations
that are subject to federal or state tariff regulations. The Partnership also
owns an approximately 2,000-mile anhydrous ammonia pipeline system acquired from
Koch Pipeline Company, L.P. in November of 2002 (see "Liquidity and Capital
Resources"). The fertilizer pipeline originates in southern Louisiana, proceeds
north through Arkansas and Missouri, and then branches east into Illinois and
Indiana and north and west into Iowa and Nebraska.
The Partnership's terminaling business is conducted through Support
Terminal Services operation ("ST Services") and Statia Terminals International
N.V. ("Statia"). ST Services is one of the largest independent petroleum
products and specialty liquids terminaling companies in the United States. In
the United States, ST Services operates 39 facilities in 20 states. ST Services
also owns and operates six terminals located in the United Kingdom and eight
terminals in Australia and New Zealand. ST Services and its predecessors have a
long history in the terminaling business and handle a wide variety of liquids
from petroleum products to specialty chemicals to edible liquids. Statia,
acquired on February 28, 2002 (see "Liquidity and Capital Resources"), owns a
terminal on the Island of St. Eustatius, Netherlands Antilles and a terminal at
Point Tupper, Nova Scotia, Canada.
The Partnership's product sales business delivers bunker fuels to ships in
the Caribbean and Nova Scotia, Canada, and sells bulk petroleum products to
various commercial customers at these two locations.
CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 386,630 $ 207,796 $ 156,232
=========== =========== ===========
Operating income..................................... $ 105,721 $ 82,091 $ 59,571
=========== =========== ===========
Net income........................................... $ 73,078 $ 64,141 $ 46,194
=========== =========== ===========
Capital expenditures, excluding acquisitions......... $ 31,101 $ 17,246 $ 9,483
=========== =========== ===========
For the year ended December 31, 2002, revenues increased by $178.8 million,
or 86%, compared to 2001, due to a $73.2 million increase in revenues in the
terminaling business and a $7.7 million increase in revenues in the pipeline
business. 2002 revenues also include $97.9 million in product sales revenues
from a business acquired with Statia in February of 2002. See "Liquidity and
Capital Resources" regarding 2002 acquisitions. Operating income for the year
ended December 31, 2002 increased by $23.6 million, or 29%, when compared to
2001, due to a $19.7 million increase in terminaling business operating income,
a $1.9 million increase in pipeline operating income and 2002 product sales
operating income of $2.1 million. Overall, net income for the year ended
December 31, 2002 increased by $8.9 million, or 14%, when compared to 2001.
For the year ended December 31, 2001, revenues increased by $51.6 million,
or 33%, compared to 2000, due to a $47.3 million increase in revenues in the
terminaling business and a $4.3 million increase in revenues in the pipeline
business. Terminaling revenues include the operations of Shore from the January
3, 2001 acquisition date (see "Liquidity and Capital Resources"). Operating
income for the year ended December 31, 2001 increased by $22.5 million, or 38%,
when compared to 2000, due to a $22.0 million increase in terminaling business
operating income and a $0.6 million increase in pipeline operating income.
Overall, net income for the year ended December 31, 2001 increased by $17.9
million, or 39% when compared to 2000.
PIPELINE OPERATIONS
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 82,698 $ 74,976 $ 70,685
Operating costs...................................... 33,744 28,844 25,223
Depreciation and amortization........................ 6,408 5,478 5,180
General and administrative........................... 3,923 3,881 4,069
----------- ----------- -----------
Operating income..................................... $ 38,623 $ 36,773 $ 36,213
=========== =========== ===========
Pipeline revenues are based on volumes shipped and the distances over which
such volumes are transported. For the year ended December 31, 2002, revenues
increased by $7.7 million, or 10%, compared to 2001, due to higher per barrel
rates realized on volumes shipped on existing pipelines and as a result of the
November and December 2002 pipeline acquisitions (see "Liquidity and Capital
Resources"). Approximately $4.5 million of the 2002 revenue increase was a
result of the pipeline acquisitions. For the year ended December 31, 2001,
revenues increased by $4.3 million, or 6%, compared to 2000, due to increases in
barrel miles shipped and increases in terminaling charges. Because tariff rates
are regulated by the FERC, the pipelines compete primarily on the basis of
quality of service, including delivering products at convenient locations on a
timely basis to meet the needs of its customers. Barrel miles on petroleum
pipelines totaled 18.3 billion, 18.6 billion and 17.8 billion for the years
ended December 31, 2002, 2001 and 2000, respectively.
Operating costs, which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee benefits,
and property and other taxes, increased by $4.9 million in 2002 and $3.6 million
in 2001. The increase in 2002 was due to the pipeline acquisitions and increases
in expenditures for routine repairs and maintenance. The increase in 2001 was
due to increases in fuel and power costs and expenses from pipeline relocation
projects. For the year ended December 31, 2002, depreciation and amortization
increased by $0.9 million, when compared to 2001, due to the pipeline
acquisitions. General and administrative costs include managerial, accounting
and administrative personnel costs, office rental expense, legal and
professional costs and other non-operating costs.
TERMINALING OPERATIONS
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 205,971 $ 132,820 $ 85,547
Operating costs...................................... 94,480 61,788 44,430
Depreciation and amortization........................ 32,368 17,706 11,073
Gain on sale of assets............................... (609) - (1,126)
General and administrative........................... 14,692 8,008 7,812
----------- ----------- -----------
Operating income..................................... $ 65,040 $ 45,318 $ 23,358
=========== =========== ===========
For the year ended December 31, 2002, revenues increased by $73.2 million,
or 55%, compared to 2001, due to 2002 terminal acquisitions (see "Liquidity and
Capital Resources") and overall increases in utilizations at existing locations.
Approximately $63 million of the revenue increase was a result of the terminal
acquisitions. For the year ended December 31, 2001, revenues increased by $47.3