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1
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 AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number 1-10311
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of Registrant as specified in its Charter)
Delaware 75-2287571
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2435 North Central Expressway
Richardson, Texas 75080
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (214) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------------- ---------------------------------
Senior Preference Units New York Stock Exchange
Preference 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.[ ]
Aggregate market value of the voting stock held by non-affiliates of
the registrant: $268,020,801. This figure is estimated as of March 15, 1996, at
which date the closing price of the Registrant's Senior Preference Units on the
New York Stock Exchange was $26.00 per share and the closing price of the
Registrant's Preference Units on the New York Stock Exchange was $24.25, and
assumes that only the Registrant's officers and directors were affiliates of
the Registrant.
Number of Senior Preference Units of the Registrant outstanding at
March 15, 1996: 7,250,000. Number of Preference Units of the Registrant
outstanding at March 15, 1996: 4,650,000.
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PART I
ITEM I. BUSINESS
GENERAL
The pipeline system of Kaneb Pipe Line Company was initially created
in 1953. In September 1989, Kaneb Pipe Line Partners, L.P. (the
"Partnership"), a Delaware limited partnership, was formed to acquire, own and
operate the refined petroleum products pipeline business (the "East Pipeline")
previously conducted by Kaneb Pipe Line Company, a Delaware corporation ("KPL"
or the "Company"), a wholly owned subsidiary of Kaneb Services, Inc., a
Delaware corporation ("Kaneb"). KPL owns a combined 2% interest as general
partner of the Partnership and of Kaneb Pipe Line Operating Partnership, L.P.,
a Delaware limited partnership ("KPOP"). The pipeline operations of the
Partnership 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 (i) Support Terminals Operating
Partnership, L.P. ("STOP"), (ii) Support Terminal Services, Inc., (iii)
StanTrans, Inc., (iv) StanTrans Partners L.P. ("STPP"), and (v) StanTrans
Holdings, Inc. KPOP, STOP and STPP are collectively referred to as the
"Operating Partnerships".
The Partnership is engaged, through its Operating Partnerships, in the
refined petroleum products pipeline business and the independent terminaling of
petroleum products and specialty liquids.
PRODUCTS PIPELINE BUSINESS
Introduction
The Partnership's pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
Partnership owns and operates two pipelines (the "Pipelines") as shown on the
map below:
[MAP]
The acquisition of the West Pipeline in February 1995 increased the
Partnership's pipeline business in South Dakota and expanded it into Wyoming
and Colorado. None of the results for 1994 or prior years include the West
Pipeline.
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East Pipeline
Construction of the East Pipeline commenced in the 1950's with a line
from southern Kansas to Geneva, Nebraska. During the 1960's, the East Pipeline
was expanded north to its present terminus at Jamestown, North Dakota. In
1981, the line from Geneva, Nebraska to North Platte, Nebraska was built and,
in 1982, the 16" line from McPherson, Kansas to Geneva, Nebraska was laid. In
1984, the Partnership acquired a 6" pipeline from Champlin Oil Company. A
portion of this 6" line runs south through Superior, Nebraska, to Hutchinson,
Kansas. The other end of the line runs northeast approximately 175 miles
crossing the main pipeline at Osceola, Nebraska, through a terminal at
Columbus, Nebraska, and later crossing and interconnecting with the
Yankton/Milford line to terminate at Rock Rapids, Iowa.
KPOP owns the entire 2,075 mile East Pipeline except for the 203-mile
North Platte line, which is held under a capitalized lease that expires at the
end of 1998 and which provides rights to renew the lease for five years. KPOP
has the option to purchase the North Platte line at the end of the lease term
for approximately $5 million. If such option is not exercised, the lessor can
require KPOP to purchase such line at a lower price. The East Pipeline also
owns 235 product distribution tanks in Kansas, Nebraska, Iowa, South Dakota and
North Dakota (with total storage capacity of approximately 3.2 million barrels)
and 23 product tanks with total storage capacity of approximately 922,000
barrels at its tank farm installations at McPherson and El Dorado, Kansas. The
East Pipeline further consists of six origin pump stations at refineries in
Kansas and 38 booster pump stations along the system in Kansas, Nebraska, Iowa,
South Dakota and North Dakota. The system also maintains distribution
terminals, various office and warehouse facilities, and an extensive quality
control laboratory. KPOP leases office space for its operating headquarters in
Wichita, Kansas.
The East Pipeline is an integrated pipeline transporting refined
petroleum products, including propane, received from refineries in southeast
Kansas, or from other connecting pipelines, to terminals in Kansas, Nebraska,
Iowa, South Dakota and North Dakota and to receiving pipeline connections in
Kansas. Shippers on the East Pipeline obtain refined petroleum products from
refineries connected to the East Pipeline directly or through other pipelines.
Such refineries obtain crude oil primarily from producing areas in Kansas,
Oklahoma and Texas. Five connecting pipelines deliver propane from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas to the East
Pipeline for shipment.
West Pipeline
On February 24, 1995, KPOP purchased the assets of WYCO Pipe Line
Company (the "West Pipeline"), owned 60% by GATX Terminals Corporation and 40%
by Amoco Pipe Line Company, for a purchase price of $27.1 million. The West
Pipeline assets consists of approximately 550 miles of underground pipe line in
Wyoming, Colorado and South Dakota, four truck loading terminals, numerous pump
stations and other related assets.
The West Pipeline originates at Casper, Wyoming where it is connected
via a Sinclair pipeline to Sinclair's Little America refinery. It also
receives product at Strouds Station, Wyoming, a short distance from Casper,
through a connection with the Seminoe Pipe Line bringing barrels down from the
Billings, Montana area refineries. From Strouds, the 8" main line continues
easterly to Douglas Junction where a 6" lateral line branches off to the Rapid
City, South Dakota terminal approximately 190 miles away. The Rapid City
terminal has two bottom loading truck racks and 268,506 barrels of tankage. The
Rapid City terminal also receives product from Wyoming Refining's Newcastle,
Wyoming refinery through their pipe line which enters the West Pipeline just
before the Wyoming/South Dakota border near Mule Creek, Wyoming.
From Douglas Junction the main 8" line continues southward to a truck
loading terminal at Cheyenne, Wyoming. At Cheyenne, the West Pipeline can
receive product from the Frontier refinery and can deliver product to the
Cheyenne Pipe Line. The Cheyenne terminal has two bottom loading truck racks
with 385,964 barrels of tankage. From Cheyenne, Wyoming the West Pipeline 8"
line extends south into Colorado to West Pipeline's terminal near Denver.
DuPont, its largest terminal, has 6 bottom loading truck lanes with vapor
recovery and 756,948 barrels of storage. At Denver, through its Commerce City
station, the West Pipeline can receive and transfer product to the Total
Petroleum and Conoco Oil refineries and the Phillips Petroleum terminal. From
Commerce City, a 6" line continues south 90 miles to the final terminal at
Fountain, Colorado. The Fountain terminal has five bottom loading truck lanes
and 389,545 barrels of tankage.
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Unlike the East Pipeline service area which is largely agricultural,
the West Pipeline serves the growing Denver and northeastern Colorado markets.
The West Pipeline also supplies the jet fuel for Ellsworth AFB at Rapid City.
The West Pipeline has a relatively small number of shippers, who, with two
exceptions, are also shippers on KPOP's system.
The West Pipeline system is the nearest pipe line paralleling the East
Pipeline system to the west. The East Pipeline North Platte line which
terminates in western Nebraska is approximately 200 miles east of the West
Pipeline's Cheyenne terminal. The small Cheyenne Pipe Line which moves products
from west to east connects the West Pipeline at Cheyenne, Wyoming with North
Platte, Nebraska, although that line has been deactivated from Sidney, Nebraska
(approximately 100 miles from Cheyenne) to North Platte.
The West Pipeline has experienced a number of spills over the years
and there are existing contamination problems. Remediation efforts are
on-going at the DuPont (Denver) and Fountain terminals and will be needed at
other locations. The Partnership received funds from the former owners to
cover known remediation requirements.
The West Pipeline is an interstate pipeline and thus subject to
regulation by the FERC as well as the States of Wyoming and Colorado on
its intrastate rates. It is subject to the same regulations of other
governmental agencies such as the Department of Transportation and the
Environmental Protection Agency as the East Pipeline. Therefore, the following
sections in regard to regulatory matters and the application of certain laws and
regulations of interstate pipe lines apply equally to the West Pipeline system.
The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. The following table reflects the
total volume and barrel miles of refined petroleum products shipped and total
operating revenues earned by the East Pipeline for each of the periods
indicated and by the West Pipeline since its acquisition on February 24, 1995.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- -------- --------- ---------
Volume (1) . . . . . . . 51,635 55,111 56,234 54,546 74,965
Barrel miles (2) . . . . 13,245 14,287 14,160 14,460 16,594
Revenues (3) . . . . . . $39,415 $42,179 $44,107 $46,117 $60,192
(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.
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The following table sets forth volumes, in thousands of barrels, of
gasoline, diesel and fuel oil, propane and other refined petroleum products
transported by the East Pipeline during each of the periods indicated and by
the West Pipeline since its acquisition on February 24, 1995.
YEAR ENDED DECEMBER 31,
(THOUSANDS OF BARRELS)
----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- -------- --------- ---------
Gasoline. . . . . . . . 24,152 24,816 25,407 23,958 37,348
Diesel and fuel oil . . 20,047 23,374 25,308 26,340 33,411
Propane . . . . . . . . 4,441 4,676 4,153 4,204 4,146
Other . . . . . . . . . 2,995 2,245 1,366 44 60
--------- --------- -------- --------- ---------
Total. . . . . . . 51,635 55,111 56,234 54,546 74,965
--------- --------- -------- --------- ---------
Diesel and fuel oil are used in farm machinery and equipment,
over-the-road transportation, rail road fueling and residential fuel oil.
Gasoline is primarily used in over-the-road transportation. 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 markets served by the East Pipeline affect the demand for and
the mix of the refined petroleum products delivered through the East Pipeline,
although historically any impact on the volumes shipped has been short-term.
Tariffs charged shippers for transportation do not vary according to the type
of product delivered.
In October, 1991, two single-use pipelines were acquired from Calnev
Pipe Line Company for $2.65 million. Each system, one of which is located in
Umatilla, Oregon and the other in Rawlins, Wyoming, supplies diesel fuel to
Union Pacific Railroad fueling facilities under contracts expiring in October
1996. Such contracts are renewable thereafter for successive two year terms
unless canceled by either party. The Oregon line is fully automated and the
Wyoming line requires minimal start-up assistance, which is provided by the
railroad. In May 1993, KPOP began operating a newly constructed single-use
pipeline near Pasco, Washington. For the year ended December 31, 1995, the
three systems combined transported a total of 3.3 million barrels of diesel
fuel, representing an aggregate of $1.2 million in revenues.
Maintenance and Monitoring
To prolong the useful lives of the Pipelines, routine preventive
maintenance is performed. Such maintenance includes cathodic protection to
prevent external corrosion and inhibitors for internal corrosion, periodic
internal inspection of the Pipelines and frequent patrols of the Pipelines'
rights-of-way. The Pipelines are patrolled at regular intervals to identify
equipment or activities by third parties, that, if left unchecked, could result
in encroachment of the Pipelines and other problems. Supervisory Control and
Data Acquisition ("SCADA"), a remote supervisory control software program,
continuously monitors the East Pipeline for operational control from the
Wichita office. The program monitors quantities of refined petroleum products
injected in and delivered through the East Pipeline, except at two continuously
manned locations, as well as pressure and temperature variations through the
East Pipeline, and automatically signals any deviation from normal operations
that requires attention. Portions of the systems can be shut down by remote
control. The program is fully operational throughout the East Pipeline.
A new, improved SCADA system was installed and in operation on the
West Pipeline as of October 15, 1995 and is anticipated to be in operation on
the East Pipeline during 1996.
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Pipeline Operations
The Pipelines have been constructed and are maintained consistent with
applicable federal, state and local laws and regulations, standards prescribed
by the American Petroleum Institute and accepted industry practice.
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. Also, certain
of its intrastate common carrier operations are subject to state tariff
regulation. Common carrier activities are those under which transportation
through the Pipelines are available at published tariffs filed with the FERC in
the case of interstate shipments, or the relevant state authority in the case of
intrastate shipments in Kansas, Colorado and Wyoming, to any shipper of refined
petroleum products who requests such services and satisfies the conditions and
specifications for transportation.
In general, a shipper on one of the Pipelines acquires refined
petroleum products from refineries connected to such Pipeline, or, if the
shipper already owns the refined petroleum products, delivers such products to
the Pipeline from those refineries or through pipelines that connect with such
Pipeline. Tariffs for such transportation are charged to shippers based upon
transportation from the origination point on such Pipeline to the point of
delivery. Such tariffs also include charges for terminaling and storage of
product at such Pipeline's terminals. Pipelines are generally the lowest cost
method for intermediate and long-haul overland transportation of refined
petroleum products.
Each shipper is required to supply KPOP with a notice of shipment
indicating sources of products and destinations. All 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 operations of the Pipelines also
include 20 truck loading terminals through which refined petroleum products are
delivered to petroleum transport trucks.
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The following table shows, with respect to each of such terminals, its
location, number of tanks owned by KPOP, storage capacity in barrels and truck
capacity. Except as indicated in the notes to the table, each terminal is owned
by KPOP.
LOCATION OF NUMBER STORAGE TRUCK
TERMINALS OF TANKS CAPACITY CAPACITY (1)
----------------- ------------ -------- ---------
COLORADO:
DuPont 17 689,269 6
Fountain 13 365,920 5
IOWA:
LeMars 9 102,914 2
Milford (3) 11 171,937 2
Rock Rapids 12 366,081 2
KANSAS:
Concordia (2) 7 79,339 2
Hutchinson 9 161,690 1
NEBRASKA:
Columbus (4) 12 191,417 2
Geneva 39 678,128 8
Norfolk 16 186,981 4
North Platte 22 197,914 5
Osceola 8 79,444 2
Superior 11 192,027 1
NORTH DAKOTA:
Jamestown 13 188,178 2
SOUTH DAKOTA:
Aberdeen 12 181,450 2
Mitchell 8 71,450 2
Rapid City 13 256,352 2
Wolsey 21 148,499 4
Yankton 25 245,473 4
WYOMING:
Cheyenne 15 345,009 2
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TOTALS 293 4,899,472
===== ===========
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(1) Number of trucks that may be simultaneously loaded.
(2) The Concordia terminal is situated on land leased through the year 2060
for a total rental of $2,000.
(3) The Milford terminal is situated on land leased through August 7, 2007
at an annual rental of $2,400. KPOP has the right to renew such lease
upon its expiration for an additional term of 20 years at the same
annual rental rate.
(4) Also loads rail tank cars.
The East Pipeline includes intermediate storage facilities consisting
of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas with aggregate capacities of 388,041 and 534,135 barrels, respectively.
During 1995, approximately 55% and 94% of the deliveries of the East Pipeline
and the West Pipeline, respectively, were made through their terminals, and
approximately 45% and 6% of the respective deliveries of such lines were made
to other pipelines and customer owned storage tanks.
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Storage of product at terminals pending delivery is considered by the
Partnership to be an integral part of the product delivery service of the
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 are ultimately used in agricultural operations, including fuel for
farm equipment, irrigation systems, trucks 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. 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, during such times the
demand for fuel for irrigation systems often increases.
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/Fountain areas. Because demand on the West Pipeline is significantly
weighted toward urban and suburban areas, the product mix on the West Pipeline
includes a substantially higher percentage of gasoline than the product mix on
the East Pipeline.
The 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. The major 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. If operations at any one
refinery were discontinued, the Partnership believes (assuming unchanged demand
for refined petroleum products in markets served by the 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. Three refineries connected directly to the East Pipeline, located at
El Dorado, Wichita and Augusta, Kansas, and operated by Coastal Refining and
Marketing, Inc., were closed during 1993. Their closure had no material impact
on the Partnership.
The majority of the refined petroleum product transported through the
East Pipeline is produced at three refineries in southeast Kansas located at
McPherson, El Dorado and Arkansas City, Kansas and operated by National
Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco") and Total
Petroleum, respectively. These refineries, which are connected directly to the
East Pipeline, shipped an aggregate of 33 million barrels of refined petroleum
products through the East Pipeline in 1995. One of such refineries, the
McPherson, Kansas refinery operated by NCRA, accounted for approximately 57.6%
of such amount.
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 a connecting pipeline that receives products from a
pipeline originating on the Gulf Coast. Five connecting pipelines 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 Oil & Refining Company refinery
located at Cheyenne, Wyoming, the Total Petroleum and Conoco Oil refineries
located at Denver, Colorado and Sinclair's Little America refinery located at
Casper, Wyoming. These refineries are connected directly to the West Pipeline.
The West Pipeline also has access to three Billings, Montana area refineries
through a connecting pipeline.
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Principal Customers
KPOP had a total of approximately 76 shippers in 1995. The principal
shippers include four integrated oil companies, two refining companies, three
large farm cooperatives and one railroad. Transportation revenues attributable
to the top 10 shippers were $43.7 million, $35.8 million and $35.6 million,
which accounted for 75%, 80% and 82% of total revenues for each of the years
1995, 1994 and 1993 respectively. These amounts were based upon revenue
shipped during the periods indicated.
Competition and Business Considerations
The East Pipeline's major competitor is an independent regulated
common carrier pipeline system owned by The Williams Companies, Inc. that
operates approximately 100 miles east of and parallel with the East Pipeline.
This competing pipeline system is a substantially more extensive system than
the East Pipeline. Furthermore, Williams and its affiliates have capital and
financial resources substantially greater than those of the Partnership.
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. Fifteen of the East Pipeline's 16 delivery terminals are
in direct competition with Williams' terminals located within two to 145 miles.
Upon the expiration of a five year settlement agreement pursuant to
which its tariffs had been frozen, Williams filed a comprehensive new tariff on
January 16, 1990. The filing proposed a tariff design for the future that
would allow Williams substantial flexibility to raise or lower various rates
without regulatory review and specifically provided increases in rates to many
destinations, decreases in rates to other destinations, volume incentive rates
at some terminals and rebates for shipments into certain counties from
specified terminals. Some counties in which rebates would apply lie in the
traditional service area of the East Pipeline. The Partnership intervened in
the Williams tariff proceeding before the FERC and protested the rebates. Nine
shippers also intervened or protested the Williams filing.
On February 15, 1990, FERC suspended the Williams tariff for the
maximum statutory period of seven months. Williams chose a bifurcated
proceeding under the authority of the FERC's ruling in the Buckeye Pipeline
Company case. Under the first phase of such a proceeding, a determination was
to be made whether Williams lacked significant market power in its various
markets. Discrimination issues were also scheduled to be determined during
the first phase. Ultimately Williams would be required to prove that its
tariff rates are just, reasonable and non-discriminatory. The tariff became
effective September 16, 1990 subject to refund depending on the outcome of the
FERC proceedings. A hearing was held before an administrative law judge of the
FERC from June 3 to August 9, 1991 on the first phase of the proceeding. On
January 24, 1992, the judge issued an initial decision which determined that
Williams had market power in 10 of 32 markets in which it operated and deferred
most of the other issues involved to the second phase of the case on the
grounds that they involved cost issues. All active parties have filed briefs
and exceptions to the judge's initial decision. On July 27, 1994, the FERC
issued its Opinion and Order on the Initial Decision. The FERC determined that
Williams had market power in 19 of 32 markets. The FERC also denied Williams'
motion proposing rate standards to apply to Phase II of the proceeding and
directed the administrative law judge to proceed with Phase II for the purpose
of establishing base rates in the 19 markets where Williams had market power.
All discrimination issues were also to be decided in Phase II. Williams filed
its direct testimony in Phase II on January 23, 1995. During the pendency of
the proceeding, Williams has instituted other tariff changes, which have been
permitted to go into effect subsequent to their suspension, subject to refund
depending on the final outcome of the 1990 FERC tariff proceedings. In May
1995, the Partnership reached a settlement with Williams and subsequently
withdrew from the case.
The West Pipeline competes with the truck loading racks of the
Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline
Company and Phillips Petroleum pipelines. A new Diamond Shamrock terminal in
Colorado Springs connected to a Diamond Shamrock pipeline from their Texas
Panhandle refinery is a major competitor to the West Pipeline's Fountain
terminal in Colorado Springs.
Because pipelines are generally the lowest cost method for
intermediate and long-haul movement of refined petroleum products, the
Pipelines' more significant competitors are common carrier and proprietary
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pipelines owned and operated by major integrated and large independent oil
companies and other companies in the areas where the Pipelines 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 the Pipelines
will be built in the near future, provided the 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 Pipelines. Trucking costs, however, render that mode of transportation
not competitive for longer hauls or larger volumes. The Partnership does not
believe that trucks are, or will be, over the long term effective competition
to its long-haul volumes.
LIQUIDS TERMINALING
Introduction
The Partnership's Support Terminal Services, Inc. operation ("ST") is
one of the largest independent petroleum products and specialty liquids
terminaling companies in the United States. For the year ended December 31,
1995, the Partnership's terminaling business accounted for approximately 38% of
the Partnership's revenues.
As of December 31, 1995, ST operates 31 facilities in 16 states and
the District of Columbia, with a total storage capacity of approximately 16.8
million barrels. ST and its predecessors have been in the terminaling business
for over 30 years and handle a wide variety of products from petroleum products
to specialty chemicals to edible liquids.
ST's terminal facilities provide storage on a fee basis for petroleum
products, specialty chemicals and other liquids. Prior to the Steuart
acquisition (See: "Recent Developments - Steuart Petroleum Company
Acquisition"), ST's three largest terminal facilities were located in Texas
City, Texas, Baltimore, Maryland, and Westwego, Louisiana. These facilities
accounted for approximately 70% of ST's revenues and 48% of its year-end
tankage capacity in 1995.
Description of Terminals- ST Services
Texas City, Texas. The Texas City facility is situated on 39 acres of
land, leased from the Texas City Terminal Railway Company with long-term
renewal options. It is located on Galveston Bay near the mouth of the Houston
Ship Channel and is approximately sixteen miles from open water. The eastern
end of the Texas City site is adjacent to three deep-water docking facilities,
which are also owned by Texas City Terminal Railway. The three deep-water
docks include two 36-foot draft docks and a 40-foot draft dock. The docking
facilities can accommodate any ship or barge capable of navigating the 40-foot
draft of the Houston Ship Channel. ST is charged dockage and wharfage fees on
a per vessel and per unit basis, respectively, by Texas City Terminal Railway,
which it passes directly to the shipper or owner of the incoming or outgoing
products.
ST handles and stores a wide range of specialty chemicals, including
petrochemicals, at the Texas City facility. The facilities are designed to
accommodate a diverse product mix, and include (i) tanks equipped for the
specific storage needs of the various products handled; (ii) piping and
pumping equipment for moving the product between the tanks and the
transportation modes; and (iii) an extensive infrastructure of support
equipment. The tankage at Texas City is constructed of either mild carbon
steel, stainless steel or aluminum. Certain of the tanks, piping and pumping
equipment are equipped for special product needs, including among other things,
linings and/or equipment that can control temperature, air pressure, air
mixture or moisture. ST receives or delivers the majority of the specialty
chemicals that it handles via ship or barge at Texas City. ST also receives
and delivers liquids via rail tank cars and transport trucks, and has direct
pipeline connections to refineries in Texas City.
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The Texas City tank facility consists of 124 tanks with a total
capacity of approximately 2,002 MBbls. All recently built tanks are equipped
with "double bottoms", which provide a leak detection system between the
primary and secondary bottom. ST's facility has been designed with engineered
structural measures to minimize the possibility of the occurrence and 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.
Baltimore, Maryland. The Baltimore facility is situated on 18 acres
of owned land, located just south of Baltimore near the Harbor Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft
channel and berth. The dock gives ST the ability to receive and deliver
shipments of product to and from barge and ship. Additionally, the terminal
can receive products by pipeline, truck and rail and deliver them to truck and
rail.
Similar to the Texas City facility, Baltimore is a specialty liquids
terminal. The primary products stored at the Baltimore facility include
asphalt, fructose, caustic solutions, military jet fuel, latex and other
chemicals.
The Baltimore tank facility consists of 50 tanks with a total capacity
of approximately 826 MBbls. All of the utilized tanks are dedicated to
specific products of customers under contract. The tanks are specifically
equipped to handle the requirements of the products they store.
Westwego, Louisiana. The Westwego facility (acquired by ST in June
1994) is situated on 27 acres of owned land adjacent to the West bank of the
Mississippi River across from New Orleans. A new dock built in 1992 is capable
of handling ocean going vessels and barges. The terminal has numerous handling
facilities for receiving and shipping by rail and tank truck as well as vessels
and barges.
The Westwego terminal historically has been primarily a terminal for
molasses, and animal and vegetable fats and oils. The former owner, PM Ag
Products, Inc., has contracted with ST for five years for terminaling in five
large molasses tanks. In recent years, the terminal has broadened its product
mix to include fertilizer, latex and caustic solutions. The facility includes
a blending plant for the formulation of certain molasses-based feeds.
The facility consists of 54 tanks with a total capacity of
approximately 858MBbls. There are additional smaller tanks for blending and
formulation of the liquid feeds.
Inland Terminal Sites. In addition to ST's three major facilities
and prior to the Steuart acquisition, ST had 20 inland terminal facilities
throughout the United States. These facilities represented approximately 53%
of ST's total tankage capacity and approximately 30% of its total revenue for
1995. With the exception of the facility in Columbus, Georgia, which handles
petroleum and specialty chemicals, and Winona, Minnesota, which handles
nitrogen fertilizer solutions, these inland facilities primarily store
petroleum products for a variety of customers. These facilities provide ST
with a geographically diverse base of customers and revenue.
The storage and transport of jet fuel for the U.S. Department of
Defense is an important part of ST's business. Nine of ST's terminal sites are
involved in the terminaling or transport (via pipeline) of jet fuel for the
Department of Defense. Six of the nine locations are utilized solely by the
U.S. Government. Five of the STOP locations own pipelines which deliver jet
fuel directly to nearby military bases.
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The following table, which does not include the recently acquired
Steuart assets, outlines ST's terminal locations, capacities, tanks and primary
products handled.
SUMMARY OF TERMINALS AND PIPELINES
------------------------------------------------------------------------------
TANKAGE NO. OF PRIMARY PRODUCTS
FACILITY CAPACITY(f) TANKS HANDLED
------------------ ---------- ------- -----------------------------
PRIMARY TERMINALS:
Westwego, LA(d) 858 54 Molasses, Fertilizer, Caustic
Baltimore, MD 826 50 Chemicals, Asphalt, Jet Fuel
Texas City, TX 2,002 124 Chemicals and Petrochemicals
INLAND TERMINALS:
Montgomery, AL(a) 162 7 Petroleum, Jet Fuel
Moundville, AL 310 6 Jet Fuel
Tuscon, AZ(b) 90 7 Petroleum
Imperial, CA 124 6 Petroleum
Stockton, CA 314 18 Petroleum
Homestead, FL(a) 72 2 Jet Fuel
Augusta, GA(e) 110 8 Petroleum
Bremen, GA 180 8 Petroleum, Jet Fuel
Columbus, GA 180 25 Petroleum, Chemicals
Macon, GA(a) 307 10 Petroleum
Chillicothe, IL 270 6 Petroleum
Peru, IL 221 8 Petroleum, Fertilizer
Indianapolis, IN 410 18 Petroleum
Salina, KS(c) 98 10 Petroleum
Winona, MN 229 7 Fertilizer
Alamogordo, NM(a) 120 5 Jet Fuel
Drumright, OK 315 4 Jet Fuel
San Antonio, TX 207 4 Jet Fuel
Virginia Beach, VA(a) 40 2 Jet Fuel
Milwaukee, WI 308 7 Petroleum
------ ----
7,753 396
====== ====
(a) Facility also includes pipelines to U.S. government military base locations.
(b) Represents a 50% interest in a 181 MBbl terminal.
(c) Terminal was purchased by STOP on January 18, 1994.
(d) Terminal was purchased by STOP on June 8, 1994.
(e) Terminal was purchased by STOP on July 21, 1994.
(f) Thousands of barrels.
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Recent Developments - Steuart Petroleum Company Acquisition
On December 19, 1995, the Partnership through its subsidiary
partnership STOP, acquired the liquids terminaling assets of Steuart Petroleum
Company and certain of its affiliates (collectively "Steuart") for $68 million
and the assumption of certain environmental liabilities. The Steuart
terminaling assets consist of eight facilities located in the District of
Columbia, Florida, Georgia, Maryland and Virginia including the pipeline
servicing Andrews Air Force Base in Maryland as shown in the map below:
[MAP]
Location No. of Capacity Modes
Number Locations Tanks (BBLS) Served
------ ------------------------- ----- -------- --------
1 Piney Point, MD 30 5,511,000 P,V,B,T
2 Jacksonville, FL 28 2,061,000 V,B,T,R
3 Cockpit Point, VA 4 465,000 P,B,T
4 Savannah, GA 12 310,000 V,B,T
5 Brunswick, GA 3 302,000 B,T
6 Farragut St., DC 5 176,000 P,T
7 M Street, DC 3 133,000 P,B,T
8 Andrews AFB Pipeline, MD 3 72,000 P,B
--- ----------
88 9,030,000
B- Barge T- Truck R- Rail P- Pipeline V- Vessel
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For the year ended December 31, 1995, on a pro forma basis giving
effect to the acquisition of Steuart's terminaling assets, revenues generated
by the assets acquired from Steuart would have accounted for approximately 17%
of the Partnership's revenues. Strategically, the Steuart acquisition gives
the Partnership a significantly increased presence in the East Coast of the
United States. Steuart's two largest facilities are located near Washington,
D.C. and at Jacksonville, Florida.
The largest acquired terminal is located on approximately 400 acres on
the Potomac River at Piney Point, Maryland. The Piney Point terminal has
approximately 5.5 million barrels of storage capacity in 30 tanks and is the
closest deep water facility to Washington, D.C. The Piney Point 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 and product blending
capabilities and is connected to a pipeline which supplies residual fuel oil to
two power generating stations.
The second largest Steuart terminal, located at Jacksonville, Florida,
is located on the St. John's River and consists of a main terminal and two
annexes with combined storage capacity of approximately 2.1 million barrels in
28 tanks. The Jacksonville terminal is currently used to store petroleum
products including gasoline, No. 2 oil, No. 6 oil, diesel, kerosene and bunker
fuel. This terminal has a tanker berth with a 38-foot draft and six barge
berths. The Jacksonville terminal, located on approximately 86 acres, also
offers truck and rail car loading facilities and facilities to blend residual
fuels for ship bunkering.
Other smaller, newly acquired facilities are located in Brunswick,
Georgia, Dumfries, Virginia, Savannah, Georgia and Washington, D.C. (two
terminals). All of these terminals, except one in Washington, D.C., which is
served by the Colonial pipeline, have facilities to receive product from barges
or ships and facilities to load tank trucks. Except for the Brunswick, Georgia
terminal, which is on leased land, each of these facilities is now owned by the
Partnership.
The eighth facility that the Partnership acquired in the Steuart
transaction consists of a barge receiving dock, an 11.3 mile pipeline, three
24,000 barrel double-bottomed tanks and an administration building located at
Andrews Air Force Base. This facility provides the barge receipt, pipeline
transportation and terminaling services for jet fuel to Andrews Air Force Base
on a tariff basis for the Defense Fuel Supply Center and has served the base
for the past 30 years.
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators,
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 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 captive storage
facilities are inadequate, either because of size constraints, the nature of
the stored material or specialized handling requirements.
Independent terminal owners compete based on 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" (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. An
increasingly important aspect of versatility and the service function is an
operator's ability to offer
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product handling and storage in compliance with 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
applications typically require less modification prior to usage, ultimately
making the storage cost to the customer more attractive.
Several companies offering liquid terminaling facilities have
significantly more capacity than ST. However, the majority of ST'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. Most of the larger operators,
including GATX Terminals Corporation, Williams, Northville Industries
Corporation and Petroleum Fuel & Terminal Company, have facilities used
primarily for petroleum related products. As a result, most of Steuart's
terminals will be competing against other large petroleum products terminals
rather than the specialty liquids facilities offered by tankage at ST's
waterfront terminals. 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.
Capital Expenditures
Capital expenditures, excluding acquisitions, by the Pipelines were
$5.1 million, $2.2 million and $3.4 million, respectively, for the three years
ended from December 31, 1993 to December 31, 1995. Approximately 66% of the
aggregate of these capital expenditures related primarily to maintenance of
existing operations and approximately 28% related to expansion projects.
During these periods, adequate Pipeline capacity existed to accommodate volume
growth, and the expenditures required for environmental and safety improvements
were not material in amount. Capital expenditures, excluding acquisitions, by
ST were $3.0 million, $5.0 million and $5.6 million, respectively, for the
three years ended from December 31, 1993 to December 31, 1995.
Capital expenditures of the Partnership (including ST) for maintenance
of existing operations during 1996 are expected to be approximately $7.5
million. Capital expenditures for expansionary purposes during 1996 are
expected to be approximately $2.0 million. (See: "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Resources
and Liquidity"). Additional expansionary capital expenditures will depend on
future opportunities to expand the Partnership's operation. The General
Partner intends to finance future expansive and some environmental capital
expenditures primarily through Partnership borrowings. 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 and/or choose
to finance such expenditures through borrowing.
REGULATION
Interstate Regulation
General. The interstate common carrier 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 complaint to FERC filed by a shipper or on
the FERC's own initiative, and 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.
In general, petroleum product pipeline rates are cost-based. Such
rates are permitted to generate operating revenues, based on projected volumes,
not greater than the total of the following components: (i) operating
expenses,
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(ii) depreciation and amortization, (iii) federal and state income taxes
(determined on a separate company basis and adjusted or "normalized" to avoid
year to year variations in rates due to the effect of timing differences
between book and tax accounting for certain expenses, primarily depreciation)
and (iv) an overall allowed rate of return on the pipeline's "rate base".
Generally, rate base is a measure of the investment in, or value of, the common
carrier assets of a petroleum products pipeline.
In 1985, the FERC began issuing a series of opinions ("FERC Opinions")
providing that oil pipeline rates would continue to be cost-based. The FERC
Opinions required that the rate base should be calculated by the net
depreciated "trended original cost" ("TOC") methodology. Under the TOC
methodology, after a starting rate base has been determined, a pipeline's rate
base is to be (i) increased by property additions at cost plus an amount equal
to the equity portion of the rate base multiplied or "trended" by an inflation
factor and (ii) decreased by property retirements, depreciation and
amortization of rate base write-ups reflecting inflation.
The FERC Opinions allow 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.
The Interstate Commerce Commission, which regulated oil pipelines
until 1978, had formerly determined rate base by using a current valuation
methodology. The FERC Opinions abandoned the valuation methodology and
required pipelines to establish a transition rate base for the pipeline's
existing plant. This transition rate base, called the "starting rate base," is
the sum of (i) the net depreciated original cost of the pipeline's property
multiplied by the ratio of debt to total capitalization and (ii) the net
depreciated reproduction portion of the valuation rate base as of 1983,
multiplied by the ratio of equity to total capitalization. The original cost
of land, rights of way less book depreciation, allowed working capital and
plant less book depreciation that were not included in the 1983 valuation may
be added to the starting rate base.
The actual capital structure as of June 28, 1985 of either the
pipeline or its parent is typically used to establish the starting rate base.
In general, the pipeline's structure is used if the pipeline issues long-term
debt to outside investors without any parent guarantee and the parent's
structure is used if the pipeline has no long-term debt, issues long-term debt
to its parent, or its long-term debt is guaranteed by its parent. In
individual cases, however, FERC may determine that the actual capital structure
of the pipeline or its parent is inappropriate for rate regulation purposes.
The FERC may then impute to the pipeline the capital structure it deems
appropriate to the pipeline's risk.
In addition to the TOC methodology, the FERC has indicated a
willingness to consider departures from cost-of-service rates depending upon
whether a pipeline's individual markets are sufficiently competitive. In a
proceeding involving Buckeye Pipeline Company ("Buckeye"), the FERC invited
jurisdictional pipelines to demonstrate that they lack significant market power
in all or some of their markets. In Buckeye, the FERC accepted a three-year
experimental program of light-handed regulation of the pipeline's rates. Under
the program, the FERC permitted the use of the volume-weighted average of
Buckeye's actual rates in those markets where it lacked significant market
power to determine the price cap for rates in non-competitive markets.
The Partnership has not attempted to depart from cost-based rates.
Instead, it has continued to rely on the traditional, cost-based TOC
methodology. The TOC methodology has not been subject to judicial review.
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 are subject to challenge only for limited reasons, relating to (i)
substantially changed circumstances in either the economic circumstances of the
subject pipeline or the nature of the services, (ii) a contractual bar that
prevented the complainant from previously challenging the rates or (iii) a
claim that such rates are unduly discriminatory or preferential. 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 subject to
investigation and protest at that time, its rates were not deemed to be just
and reasonable pursuant to the EP Act. The Partnership's current rates became
final and effective in April 1994, and the
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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.
The EP Act also required the FERC to issue a final rule establishing a
simplified and generally applicable rate making methodology for oil pipelines
no later than October 24, 1993. The FERC was also required to issue a final
rule to streamline procedures relating to oil pipeline rates "in order to avoid
unnecessary regulatory costs and delays" no later than April 24, 1994.
On October 22, 1993, the FERC issued Order No. 561 implementing the EP
Act. Order No. 561, among other things, adopted a simplified and generally
acceptable 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.
The pipeline rates in effect at December 31, 1994, which are
determined to be just and reasonable, become the "Base Rates" for application
of the indexing mechanism. This indexing mechanism calculates a ceiling rate.
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. Shippers may still be permitted to protest pipeline rates, even if
the rate change does not exceed the index ceiling, if the shipper can
demonstrate that the "increase is so substantially in excess of the actual cost
increase incurred by the pipeline" that the proposed rate would be unjust and
unreasonable. The index is cumulative, attaching to the applicable ceiling
rate and not to the actual rate charged. Thus, a rate that is not increased to
the ceiling level in a given year may still be increased to the ceiling level
in the following year. The pipeline may be required to decrease the current
rate if the rate being charged exceeds the ceiling level.
The index underlying Order No. 561 is to serve as the principal basis
for the establishment of oil pipeline rate changes in the future. As explained
by the FERC in Order Nos. 561 and 561-A, however, there may be circumstances
where the indexing mechanism will not apply. Specifically, the FERC determined
that a pipeline may utilize any one of the following three 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; (ii) a pipeline may file a rate change as part of a
settlement when it secures the agreement of all of its existing shippers; and
(iii) consistent with the Buckeye precedent, 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.
The indexing mechanism does not apply to initial rates of a pipeline,
which will still generally be established using the traditional TOC
methodology. Order No. 561 provides, however, that a pipeline can file an
initial rate based upon the agreement of at least one non-affiliated shipper,
without an accompanying cost-of-service justification for such rate. Yet, if
this agreed-upon rate is protested by another shipper, the pipeline will be
required to justify the initial rate on a cost-or-service basis. The initial
rate that is established by the pipeline becomes the pipeline's "Base Rate",
and the indexing mechanism will be applicable to that rate in subsequent years.
On October 28, 1994, after hearings and public comment period, the
FERC issued Order Nos. 571 and 572, intended as procedural follow-ups to Order
No. 561. In Order No. 571, the FERC (i) articulated cost-of-service and
reporting requirements to be applicable to pipeline initial rates and to
situations where indexing is determined to be inappropriate; (ii) adopted rules
for the establishment of revised depreciation rates; and (iii) revised the
information required to be reported by pipelines in their Form No. 6, "Annual
Report for Oil Pipelines". Order No. 572 establishes the filing requirements
and procedures that must be followed when a pipeline seeks to charge
market-based rates.
On June 15, 1995, the FERC issued a decision involving Lakehead
Pipeline Partners, L.P. ("Lakehead"), an unrelated oil pipeline limited
partnership. In this decision, the FERC partially disallowed Lakehead's
inclusion of income taxes in its cost of service, and thereby reversed the
previous December 1993 ruling of the Presiding Administrative Law Judge on this
issue. 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
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allowance for income attributable to the Partnership interests held by
individuals. Both Lakehead and representatives of its customers have filed
motions for rehearing. It is unlikely, however, that the FERC will reverse
itself on this issue on rehearing. It is possible that either Lakehead or its
customers may ultimately seek judicial review of the FERC decision, and it is
difficult to predict what position would be adopted by a reviewing court on the
income tax issue. In another FERC proceeding that has not yet reached the
hearing stage, involving a different oil pipeline limited partnership, various
shippers have challenged such pipeline's inclusion of an income tax allowance
in its cost of service. The FERC Staff has also filed testimony that supports
the disallowance of income taxes. If the FERC were to disallow the income tax
allowance in the cost of service of the Pipelines on the basis set forth in the
Lakehead order, the General Partner believes that the Partnership's ability to
pay the Minimum Quarterly Distribution to the holders of the Senior Preference
Units, Preference Units and Preference B Units would not be impaired; however,
in view of the uncertainties involved in this issue, there can be no assurance
in this regard.
Intrastate Regulation
General. The intrastate operations of the East Pipeline in Kansas are
subject to regulation by the Kansas Corporation Commission, and 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. 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 protection of the environment.
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, could result in substantial costs and
liabilities to the Partnership.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") 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. States in which the
Partnership operates have also enacted similar laws. Regulations are currently
being developed under OPA and state laws that may also impose additional
regulatory burdens on the Partnership.
The Pipelines cross several navigable rivers and streams. The FWPCA
imposes strict controls against the discharge of oil and its derivatives into
navigable waters. The FWPCA provides penalties for any discharges of petroleum
products in reportable quantities and imposes substantial potential liability
for the costs of removing an oil spill. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of a release of petroleum or its derivatives in surface waters or into
the groundwater.
Contamination resulting from spills or releases of refined petroleum
products are not unusual within the petroleum pipeline industry. The East
Pipeline has experienced limited groundwater contamination at four terminal
sites (Milford, Iowa, Norfolk and Columbus, Nebraska, and Yankton, South
Dakota) resulting from spills of refined petroleum products. Regulatory
authorities have been notified of these findings and cleanup is underway using
extraction wells and air strippers. The Partnership estimates that $600,000
has been expended to date for remediation at these four sites and that ongoing
remediation expenses at each site will be less than $5,000 per year for the
next several years. Groundwater contamination is also known to exist at East
Pipeline sites in Augusta,
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Kansas and in Potwin, Kansas, but no remediation has been required. Although no
assurances can be made, if remediation is required, the Partnership believes
that the resulting cost would not be material.
The East Pipeline experienced a spill due to third party damage during
the first quarter of 1991. Remediation of the ground water impacted by this
spill has been underway since the second quarter of 1991. The Partnership
estimates that on-going remediation expenses will be in the range of $10,000 to
$15,000 per year. Regulatory authorities have been notified. The Partnership
has filed suit against the third party seeking compensation for damages. The
case is currently scheduled for trial during the second quarter of 1996.
During 1994, the East Pipeline experienced a seam rupture of its 8"
northbound line in Nebraska in January and another similar rupture on the same
line in April. As a result of these ruptures, KPOP reduced the maximum
operating pressure on this line to 60% of the Maximum Allowable Operating
Pressure ("MAOP") and, on May 24, 1994 commenced a hydrostatic test to
determine the integrity of over 80 miles of that line. The test was completed
on the entire 80 miles on May 29, 1994, and the line was authorized to return
to approximately 80% of MAOP pending review by the Department of Transportation
("DOT") of the hydrostatic test results. On July 29, 1994, the DOT authorized
most of the line to return to the historical MAOP. Approximately 30 miles of
the line was authorized to return to slightly less than historical MAOP.
Although the Partnership has expended approximately $170,000 to date for
remediation at these rupture sites, the total amount of remediation expenses
that will be required has not yet been determined. These expenses are not
expected to have a material effect upon the results of the Partnership.
ST has experienced groundwater contamination at its terminal sites at
Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have
been notified of these findings and cleanup is underway using extraction wells
and air strippers. Groundwater contamination also exists at the ST terminal
site in Stockton, California and in the areas surrounding this site as a result
of the past operations of five of the facilities operating in this area. ST
has entered into an agreement with three of these other companies to allocate
responsibility for the clean up of the contaminated area. Under the initial
estimate of remedial costs, the parties (including ST) at Stockton would pay in
total approximately $752,000. However, the remediation costs have not been
finalized and could ultimately increase or decrease. In addition, ST is
responsible for up to two-thirds of the costs associated with existing
groundwater contamination at a formerly owned terminal at Marcy, New York,
which also is being remedied through extraction wells and air strippers. The
Partnership has expended approximately $350,000 to date for remediation at
these four sites and estimates that on-going remediation expenses will
aggregate approximately $300,000 to $450,000 over the next three years.
Groundwater contamination has been identified at ST terminal sites at
Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken
place. Shell Oil Company has indemnified ST for any contamination at the
Milwaukee site prior to ST's acquisition of the facility. Star Enterprises,
the former owner of the Montgomery terminal, has indemnified ST for
contamination at a portion of the Montgomery site where contamination was
identified prior to ST's acquisition of the facility. A remediation system is
in place to address groundwater contamination at the ST terminal facility in
Augusta, Georgia. Star Enterprises, the former owner of the Augusta terminal,
has indemnified ST for this contamination and has retained responsibility for
the remediation system. There is also a possibility that groundwater
contamination may exist at other facilities. Although no assurance in this
regard can be given, the Partnership believes that such contamination, if
present, could be remedied with extraction wells and air strippers similar to
those that are currently in use and that resulting costs would not be material.
In 1991, the Environmental Protection Agency (the "EPA") implemented
regulations expanding the definition of hazardous waste. The Toxicity
Characteristic Leaching Procedure ("TLC") has broadened the definition of
hazardous waste by including 25 constituents that were not previously included
in determining that a waste is hazardous. Water that comes in contact with
petroleum may fail the "TLC" procedure and require additional treatment prior
to its disposal. The Partnership has installed totally enclosed wastewater
treatment systems at all East Pipeline terminal sites to treat such petroleum
contaminated water, especially tank bottom water.
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
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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.
Groundwater remediation efforts are ongoing at the West Pipeline's
Dupont, Colorado terminal and will be required at the three other West Pipeline
terminals and one pump station. Regulatory officials have been consulted in
the development of remediation plans. In the course of acquisition
negotiations, KPOP's regulatory group and its outside environmental consultants
agreed upon the expense and costs of these required remediations. In
connection with the purchase of the West Pipeline, KPOP agreed to implement the
agreed remediation plans at these specific sites over the next five years in
return for the payment by Wyco Pipe Line Company of the estimated costs
thereof. At the closing, Wyco Pipe Line Company paid $1,312,000 to KPOP to
cover the discounted future costs of these remediations. In conjunction with
the acquisition, the Partnership accrued $2.1 million for these future
remediation expenses.
The Steuart terminals have experienced groundwater contamination at
the Piney Point, Maryland, Jacksonville, Florida and each of the Washington,
D.C. facilities. Foreseeable remediation expenses are estimated not to exceed
$1.8 million. The Partnership has agreed to assume the existing remediation
and the costs thereof up to $1.8 million. The Asset Purchase Agreements
provide, with respect to unknown environmental damages that are discovered
after the closing and that were caused by operations conducted by Steuart prior
to the closing, that the Partnership and Steuart will share those expenses at a
ratio of 20% for the Partnership and 80% for Steuart until a total of $2.5
million has been expended. Thereafter, such expenses will be the Partnership's
responsibility. This indemnity will expire three years from the closing of the
Steuart terminals acquisition. In conjunction with the acquisition, the
Partnership accrued $2.3 million for these expenses.
Aboveground Storage Tank Acts. A number of the states in which the
Partnership operates 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
in the tanks. Although there is not currently a federal statute regulating
these above ground tanks, there is a possibility that such a law will be passed
within the next couple of years. 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 the Pipelines are in substantial compliance
with such statues in all states in which they operate.
Amendments to the Federal Clean Air Act enacted in late 1990 will
require most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that are to be
developed and implemented by the EPA and state environmental agencies during
the next decade. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides and
are located in non-attainment areas will be subject to increasingly stringent
regulations, including requirements that certain sources install reasonably
available control technology. The EPA is also required to promulgate new
regulations governing the emissions of hazardous air pollutants. Some of the
Partnership's facilities are included within the categories of hazardous air
pollutant sources that will be affected by these regulations. Additionally,
new dockside loading facilities owned or operated by the Partnership will be
subject to the New Source Performance Standards that were proposed in May 1994.
These regulations will control VOC emissions from the loading and unloading of
tank vessels. In 1995, ST completed the installation of a marine vapor
collection system and large flare at its Texas City terminal at a cost of
approximately $2.0 million.
Although the Partnership is in substantial compliance with applicable
air pollution laws, in anticipation of the passage 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
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selected terminal sites that do not already have such emissions control
equipment. These modifications are expected to 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 solidwaste that
is subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. 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"), also known as "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.
ST has been named a potentially responsible party for a site located
at Elkton, Maryland, operated by Spectron, Inc. until August 1988. This site
is presently under the oversight of the EPA and is listed as a federal
"Superfund" site. A small amount of material handled by Spectron was
attributed to ST. The Partnership believes that ST will be able to settle its
potential obligation in connection with this matter for an aggregate cost of
approximately $10,000. However, until a final settlement agreement is signed
with the EPA, there is a possibility that the EPA could bring additional claims
against ST.
Environmental Impact Statement. The 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 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. Nevertheless, the
Partnership will remain liable for the remediation of groundwater contamination
resulting from three spills and the possible groundwater contamination at a
pumping and storage site referred to under "Water" to the standards that are in
effect at the time such remediation operations are concluded. In addition,
ST's former owner has agreed to indemnify the Partnership against liabilities
for damages to the environment from operations conducted by such former owners
prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited
in amount to 60% of any claim exceeding $100,000 until an aggregate amount of
$10 million has been paid by ST's former owner. In addition, with respect to
unknown environmental expenses from operations conducted by Wyco Pipe Line
Company prior to the closing of the Partnership's acquisition of the West
Pipeline, KPOP has agreed to pay the first $150,000 of such expenses, KPOP and
Wyco Pipe Line Company
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will share, on an equal basis, the next $900,000 of such expenses and Wyco Pipe
Line Company will indemnify KPOP for up to $2,950,000 of such expenses
thereafter. The indemnity expires in August 1999. To the extent environmental
liabilities exceed the amount of such indemnity, KPOP has affirmatively assumed
the excess environmental liabilities.
The Steuart terminals Asset Purchase Agreements provide, with respect
to unknown environmental damages that are discovered after the closing of the
Steuart terminals acquisition and that were caused by operations conducted by
Steuart prior to the closing, that the Partnership and Steuart will share
expenses associated with such environmental damages at a ratio of 20% for the
Partnership and 80% for Steuart until a total of $2.5 million has been
expended. Thereafter, such expenses will be the Partnership's responsibility.
This indemnity will expire three years from the closing of the Steuart
terminals acquisition and will be secured by a cash escrow fund.
SAFETY REGULATION
The Pipelines are subject to regulation by the Department of
Transportation 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
petroleum and petroleum products and requires any entity that owns or operates
pipeline facilities to comply with such plan, 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.
The Partnership is subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. 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 statues 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 pipeline business of the
Partnership is conducted by the General Partner, KPL, which at December 31,
1995, employed 168 persons, 59 of whom were salaried and, approximately 109 of
whom were hourly rate employees. Approximately 109 persons employed by KPL
were subject to representation by unions for collective bargaining purposes;
however, the last collective bargaining contract expired in 1967 and the
employees have not operated under a contract since that date.
The Partnership's liquids terminaling business is conducted through
subsidiaries of ST which at December 31, 1995, employed 175 persons,
approximately 105 of whom were salaried and approximately 70 of whom were
hourly rate employees. Approximately 34 persons employed by ST were subject to
representation by the Oil, Chemical and Atomic Workers International Union
AFL-CIO ("OCAW"). ST has an agreement with OCAW regarding conditions of
employment for the above persons, which is in effect through June 28, 1996.
This agreement is subject to automatic renewal for successive one-year periods
unless ST or OCAW serves written notice to terminate or modify such agreement
in a timely manner. In addition to the above, ST employed approximately 28
part-time hourly employees at December 31, 1995.
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On January 1, 1996, ST hired 79 former employees of Steuart Petroleum
Company who were working at the various terminals. None of these employees are
represented by a union.
ITEM 2. PROPERTIES
Descriptions of properties owned or utilized by the Partnership are
contained in Item 1 of this report and such descriptions are hereby
incorporated by reference into this Item 2. Under the captioned "Leases" in
notes to the Partnership's financial statements included in Item 8 herein
below, additional information is presented concerning obligations for lease and
rental commitments. Said additional information is hereby incorporated by
reference into this Item 2.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary
course of business. Subject to certain deductibles and self-insurance
retentions, substantially all the claims made in these lawsuits are covered by
insurance policies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit
any matter to a vote of security holders in the fourth quarter of 1995.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND RELATED
UNITHOLDER MATTERS
The Partnership's senior preference limited partner interests ("Senior
Preference Units") and Preference Units are listed and traded on the New York
Stock Exchange. At March 15, 1996, there were approximately 1,081 Senior
Preference Unitholders of record and approximately 200 Preference Unitholders of
record. Set forth below are prices for Senior Preference Units and Preference
Units, respectively, on the New York Stock Exchange and cash distributions per
Senior Preference Unit and Preference Unit, respectively, paid for the periods
indicated.
SENIOR PREFERENCE
UNIT PRICES
------------------ CASH DISTRIBUTIONS
YEAR HIGH LOW DECLARED
---- ---- --- ------------------
1994:
First Quarter . . . . . . . . . 28 3/8 24 1/4 .55
Second Quarter . . . . . . . . 26 3/8 23 5/8 .55
Third Quarter . . . . . . . . . 26 23 1/2 .55
Fourth Quarter . . . . . . . . 25 3/8 20 1/2 .55
1995:
First Quarter . . . . . . . . . 24 3/4 20 5/8 .55
Second Quarter . . . . . . . . 24 1/2 20 3/4 .55
Third Quarter . . . . . . . . . 24 3/4 22 3/8 .55
Fourth Quarter . . . . . . . . 25 23 1/8 .55
1996:
First Quarter
(through March 15, 1996) . . . 26 1/2 23 7/8 .55
PREFERENCE
UNIT PRICES
------------------ CASH DISTRIBUTIONS
YEAR HIGH LOW DECLARED
---- ---- --- ------------------
1995:
Third Quarter* . . . . . . . . 22 5/8 22 .55
Fourth Quarter . . . . . . . . 22 1/2 21 5/8 .55
*Partial Period Data
1996:
First Quarter . . . . . . . . . 24 3/8 22 1/2 .55
(through March 15, 1996)
The Partnership has paid the Minimum Quarterly Distribution on each
outstanding Senior Preference Unit for each quarter since the Partnership's
inception. The Partnership has also paid the Minimum Quarterly Distribution on
Preference Units with respect to all quarters since inception of the
Partnership, except for the failure to pay distributions in the second, third
and fourth quarters of 1991 totaling $9,323,000. All such arrearages have
since been satisfied and none remain as of December 31, 1995. Prior to 1994,
no distributions were paid on the outstanding Common Units, which are not
entitled to arrearages in the payment of the Minimum Quarterly. In 1994,
distributions totaling $1,738,000 were paid and in 1995, distributions totaling
$4,582,000 were paid.
Under the terms of its financing agreements, the Partnership is
prohibited from declaring or paying any distribution if a default exists
thereunder.
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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,
----------------------------------------------------------------
1991 1992 1993(a) 1994 1995(b)
-------- -------- --------- -------- ---------
INCOME STATEMENT DATA:
Revenue . . . . . . . . . . . . $ 39,415 $ 42,179 $ 69,235 $ 78,745 $ 96,928
-------- -------- --------- -------- ---------
Operating costs . . . . . . . . 14,337 14,507 29,012 33,586 40,617
Depreciation and amortization . 3,519 4,124 6,135 7,257 8,261
General and administrative . . 2,861 2,752 4,673 4,924 5,472
Legal expenses for tariff
protest . . . . . . . . . . 2,172 - - - -
-------- -------- --------- -------- ---------
Total costs and expenses . . 22,889 21,383 39,820 45,767 54,350
-------- -------- --------- -------- ---------
Operating income . . . . . . . 16,526 20,796 29,415 32,978 42,578
Interest and other income . . . 1,751 1,721 1,331 1,299 894
Interest expense . . . . . . . (2,259) (2,338) (3,376) (3,706) (6,437)
Minority interest . . . . . . . (159) (200) (266) (295) (360)
-------- -------- --------- -------- ---------
Income before income taxes . . 15,859 19,979 27,104 30,276 36,675
Income taxes(c) . . . . . . . . - - (450) (818) (627)
-------- -------- --------- -------- ---------
Net income . . . . . . . . . . $ 15,859 $ 19,979 $ 26,654 $ 29,458 $ 36,048
======== ======== ========= ======== =========
Allocation of net income
per Senior Preference
Unit(d) . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
========= ======== ========== ======== =========
Preference Unit . . . . . . $ .55 $ 2.65 $ 3.40 $ 2.20 $ 2.20
========= ======== ========== ======== =========
Cash distributions declared per
Senior Preference Unit . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
========= ======== ========== ======== =========
Preference Unit . . . . . . $ .55 $ 2.65 $ 3.40 $ 2.20 $ 2.20
========= ======== ========== ======== =========
BALANCE SHEET DATA (AT
PERIOD END):
Property and equipment, net... $ 68,225 $ 66,956 $ 133,436 $145,646 $ 246,471
Total assets.................. 88,530 86,409 162,407 163,105 267,787
Long-term debt................ 16,941 20,864 41,814 43,265 136,489
Partners' capital............. 61,918 55,657 100,598 99,754 100,748
(a) Includes the operations of ST since its acquisition on March 2, 1993.
(b) Includes the operations of the West Pipeline since its acquisition in
February 1995 and the operations of Steuart since its acquisition in
December 1995.
(c) Subsequent to the acquisition of ST in March 1993, certain operations are
conducted in taxable entities.
(d) Net income of the Partnership for each reporting period is allocated to
the Senior Preference Units ("SPU") and Preference Units ("PU") in an
amount equal to the cash distributions to the SPU and PU declared for
that reporting period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and
the summary historical and pro forma financial and operating data included
elsewhere in this report.
GENERAL
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and
operate its refined petroleum products pipeline business. The Partnership
operates through KPOP, a limited partnership in which the Partnership holds a
99% interest as limited partner and KPL owns a 1% interest as general partner
in both the Partnership and KPOP. The Partnership is engaged through operating
subsidiaries in the refined petroleum products pipeline business and, since
1993, terminaling of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the
transportation through the East Pipeline and the West Pipeline, as common
carriers, of refined petroleum products. The Partnership acquired the West
Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned
by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million
plus transaction costs and the assumption of certain environmental liabilities.
The acquisition was financed by the issuance of $27 million of first mortgage
notes due February 24, 2002, which bear interest at the rate of 8.37% per
annum. The East Pipeline and the West Pipeline are collectively referred to as
the "Pipelines." The Pipelines primarily transport gasoline, diesel oil, fuel
oil and propane. The products are transported from refineries connected to the
Pipeline, directly or through other pipelines, to agricultural users, railroads
and wholesale customers in the states in which the Pipelines are located and in
portions of other states. Substantially all of the Pipelines' operations
constitute common carrier operations that are subject to federal or state
tariff regulations. The Partnership has not engaged, nor does it currently
intend to engage, in the merchant function of buying and selling refined
petroleum products.
The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). ST is the
third largest independent terminaling company in the United States. With the
acquisition of Steuart (see below), ST operates 31 facilities in 16 states and
the District of Columbia with an aggregate tankage capacity of approximately
16.8 million barrels. The Texas City terminal is a deep-water facility
primarily serving the Gulf Coast petrochemical industry. The Westwego
terminal, purchased in June 1994 and located on the West bank of the
Mississippi River across from New Orleans, handles molasses, animal and
vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore
terminal is the largest independent terminal facility in the Baltimore area and
handles asphalt, fructose, latex, caustic solutions and other liquids.
ST acquired the liquids terminaling assets of Steuart Petroleum Company
and certain of its affiliates (collectively, "Steuart") in December 1995 for
$68 million plus transaction costs and the assumption of certain environmental
liabilities. The acquisition was financed with a $68 million bridge loan from
a bank. The Steuart terminaling assets consist of seven petroleum product
terminal facilities located in the District of Columbia, Florida, Georgia,
Maryland and Virginia and the pipeline and terminaling facilities serving
Andrews Air Force Base in Maryland. The Piney Point, Maryland terminal is the
closest petroleum storage facility to Washington D.C. which has access to deep
water. The Jacksonville terminal has 28 tanks with approximately 2.1 million
barrels of aggregate storage capacity, which are currently used to store
petroleum products. The remainder of ST's terminals primarily handle petroleum
products.
The Partnership acquired ST in March 1993 for approximately $65 million
(including $2 million in acquisition costs). In connection with the
acquisition, the Partnership borrowed $65 million from a group of banks. In
April 1993, the Partnership completed a public offering of 2.25 million Senior
Preference Units at $25.25 per unit. The bank loan was partially repaid with
$50.8 million of the proceeds from the offering, and the balance was refinanced
in December 1994. The Partnership continually evaluates other potential
acquisitions.
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PIPELINE OPERATIONS Year Ended December 31,
--------------------------------------------------
1993 1994 1995
----------- ----------- ----------
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 44,107 $ 46,117 $ 60,192
Operating costs . . . . . . . . . . . . . . . . . . . 16,453 17,777 22,564
Depreciation and amortization . . . . . . . . . . . . 4,055 4,276 4,843
General and administrative . . . . . . . . . . . . . 3,132 2,908 3,038
----------- ----------- ----------
Operating income . . . . . . . . . . . . . . . . . . $ 20,467 $ 21,156 $ 29,747
=========== =========== ==========
The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. Revenues increased $14.1 million and
$2.0 million in 1995 and 1994, respectively. The increase in 1995 is primarily
due to the acquisition of the West Pipeline. The Partnership implemented a
tariff increase of approximately 5.5% in April 1994, which accounted for more
than one-half of its increase in revenues in 1994 over 1993. Because tariff
rates are regulated by the FERC, the Pipelines compete primarily on the basis
of quality of service, including delivering products at convenient locations on
a timely basis to meet the needs of its customers. Barrel miles increased 15%
to 16.6 billion barrel miles in 1995 from 14.5 billion barrel miles in 1994,
due primarily to the acquisition of the West Pipeline.
Operating costs which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee benefits,
and property and other taxes, increased $4.8 million in 1995 and $1.3 million
in 1994. The 1995 increase is a result of the West Pipeline acquiaition and
the 1994 increase is due to increased barrel miles and utility rates, property
taxes and materials, supplies and outside services due to unusually high repair
and maintenance expenditures. The 1995 increase in depreciation and
amortization is a direct result of the February 1995 acquisition of the West
Pipeline. General and administrative costs include managerial, accounting and
administrative personnel costs, office rental and expense, legal and
professional costs and other non-operating costs.
TERMINALING OPERATIONS
Year Ended December 31,
--------------------------------------------------
1993 1994 1995
---------- ----------- ----------
Pro Forma Historical Historical
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 29,921 $ 32,628 $ 36,736
Operating costs . . . . . . . . . . . . . . . . . . . 15,064 15,809 18,053
Depreciation and amortization . . . . . . . . . . . . 2,496 2,981 3,418
General and administrative . . . . . . . . . . . . . 1,949 2,016 2,434
---------- ----------- ----------
Operating income . . . . . . . . . . . . . . . . . . $ 10,412 $ 11,822 $ 12,831
=========== =========== ==========
The increases in revenues are attributable to increases in prices
charged for storage and tankage volumes utilized. Revenues increased 13% in
1995 and 9% in 1994. Average annual tankage utilized increased 600,000 barrels
to 6.7 million barrels compared to 6.1 million barrels in 1994 primarily as a
direct result of terminal acquisitions in 1994 and 1995 and increased 200,000
barrels in 1994 over 1993. Average annual revenues per barrel of tankage
utilized increased by $0.13 in 1995 to $5.46 per barrel and increased $0.26 per
barrel in 1994 over 1993. Total tankage capacity (16.8 million barrels at
December 31, 1995) has been, and is expected to remain, adequate to meet
existing customer storage requirements. Customers consider factors such as
location, access to cost effective transportation and quality of service in
addition to pricing when selecting terminal storage. Operating costs increased
$2.2 million and $.7 million and depreciation and amortization increased $.4
and $.5 in 1995 and 1994, respectively, as a result of the terminal
acquisitions in 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 0.9 to 1 at
December 31, 1995 and 0.8 to 1 at December 31, 1994. Cash provided by
operating activities was $44.5 million, $37.9 million and $37.2 million for the
years 1995, 1994 and 1993 respectively. The increase in cash flow from
operating activities in 1995 was primarily a result of the West Pipeline and
the Westwego terminal acquisitions.
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Capital expenditures were $8.9 million, $7.1 million and $8.1
million for 1995, 1994 and 1993, respectively. During all periods, adequate
pipeline capacity existed to accommodate volume growth, and the expenditures
required for environmental and safety improvements were not, and are not
expected in the future to be, material. Environmental damages caused by sudden
and accidental occurrences are included under the Partnership's insurance
coverages. Capital expenditures of the Partnership for maintenance of existing
operations during 1996 are expected to be approximately $7.5 million. Capital
expenditures for expansionary purposes during 1996 are expected to be
approximately $2.0 million.
The Partnership makes distributions of 100% of its Available Cash to
Unitholders and the General Partner. Available Cash consists generally of all
the cash receipts less all cash disbursements and reserves. A distribution of
$2.20 per unit was paid to Senior Preference Unitholders in 1995, 1994 and
1993. During 1995, 1994 and 1993, the Partnership paid distributions of $12.4
million, ($2.20 per unit), $12.3 million ($2.20 per unit) and $19.3 million
($2.20 per unit and $1.20 per unit in arrearages) to the holders of Preference
Units. During 1995 and 1994, the Partnership paid distributions of $4.6
million ($1.45 per unit) and $1.7 million ($0.55 per unit) to the holders of
Common Units.
The Partnership expects to fund future cash distributions and
maintenance capital expenditures with existing cash and cash flows from
operating activities. Expansionary capital expenditures and some environmental
expenditures are expected to be funded through additional Partnership
borrowings.
In 1994, a subsidiary of the Partnership issued $33 million of first
mortgage notes ("Notes") to a group of insurance companies. Proceeds from
these notes were used to refinance existing debt of the Partnership that was
incurred in connection with the ST acquisition in 1993 and the terminal
acquisitions in 1994. The notes bear interest at the rate of 8.05% per annum
and are due on December 22, 2001. In 1994, the Partnership entered into the
Credit Agreement with a group of banks that provides a $15 million revolving
credit facility for working capital and other partnership purposes. Borrowings
under the Credit Agreement bear interest at variable rates and are due and
payable in November 1997. The Credit Agreement has a commitment fee of 0.2%
per annum of the unused credit facility. No amounts were drawn under this
credit facility at December 31, 1995. The notes and credit facility are
secured by a mortgage on the East Pipeline.
The Partnership acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company, a company jointly owned by GATX Terminals Corporation and
Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the
issuance of $27 million of Notes due February 24, 2002, which bear interest at
the rate of 8.37% per annum.
The acquisition of the Steuart terminaling assets has been initially
financed by a $68 million bank bridge loan. The bridge loan bears interest at a
variable rate based on the LIBOR rate plus 50 to 100 basis points and its'
maturity has been extended until March 1997. The Partnership expects to
refinance this loan under terms similar to the Notes discussed above. The loan
is secured, pari passu with the existing Notes and credit facility, by a
mortgage on the East Pipeline.
In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the partnership interests held by individuals. Both Lakehead
and representatives of its customers have filed motions for rehearing. It is
possible that either Lakehead or its customers may ultimately seek judicial
review of the FERC decision. It is difficult to predict what position would be
adopted by a reviewing court on the income tax issue. In another FERC
proceeding that has not yet reached the hearing stage, involving a different
oil pipeline limited partnership, various shippers have challenged such
pipeline's inclusion of an income tax allowance in its cost of service. The
FERC Staff has also filed testimony that supports the disallowance of income
taxes. If the FERC were to disallow the income tax allowance in the cost of
service of