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 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 001-16405
KANEB SERVICES LLC
(Exact name of registrant as specified in its charter)
Delaware 75-2931295
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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: (972) 699-4062
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Shares 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 Shares held by non-affiliates of the
registrant: $220,491,301. This figure is estimated as of March 12, 2002, at
which date the closing price of the Registrant's Shares on the New York Stock
Exchange was $20.58 per Share and assumes that only officers and directors of
the Registrant were affiliates of the Registrant.
Number of Shares of the Registrant outstanding at March 12, 2002:
11,287,777.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART I
Item 1. Business
GENERAL
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Kaneb Services LLC (the "Company") is a limited liability company organized
under the laws of the State of Delaware. The Company manages and operates a
refined petroleum products pipeline transportation system and petroleum products
and specialty liquids terminal storage business through the general partner
interest owned by one of its subsidiaries in Kaneb Pipe Line Partners, L.P., a
Delaware limited partnership ("KPP"), which in turn owns those systems and
facilities through its subsidiaries.
KPP is a separate public entity whose limited partner units are traded over
the New York Stock Exchange (NYSE: KPP). KSL's wholly owned subsidiary, Kaneb
Pipe Line Company LLC, a Delaware limited liability company, ("KPL"), owns the
general partner interest and 5.1 million limited partner units of KPP. For
financial statement purposes, the assets, liabilities and earnings of KPP are
included in the Company's combined financial statements, with the public
unitholders' interest reflected as interest of outside non-controlling partners
in KPP. For purposes of this report, the business, operations, revenues and
other information about KPP are presented as a whole, even though the Company
does not, directly or indirectly, own 100% of KPP. The Company's product
marketing services are conducted by Martin Oil LLC, a Delaware limited liability
company ("Martin"), a 100% owned subsidiary of KPL. Martin provides wholesale
motor fuel marketing services throughout the Great Lakes and Rocky Mountain
regions.
Additional information regarding KPP may be found in KPP's Annual Report on
Form 10-K and KPP's Quarterly Reports on Form 10-Q as filed with the Securities
and Exchange Commission.
PRODUCTS PIPELINE BUSINESS
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Introduction
KPP's pipeline business consists primarily of the transportation, as a
common carrier, of refined petroleum products in Kansas, Iowa, Nebraska, South
Dakota, North Dakota, Wyoming and Colorado. KPP owns and operates two common
carrier pipelines (the "Pipelines") described below.
East Pipeline
The East Pipeline was originally constructed in the 1950's with a line from
southern Kansas to Geneva, Nebraska and was later extended north to where it
presently ends at Jamestown, North Dakota. In addition, KPP owns an eight-inch
line from Geneva, Nebraska to North Platte, Nebraska, a 16" line from McPherson,
Kansas to Geneva, Nebraska and a six-inch pipeline from Champlin Oil Company. In
1997, KPP completed construction of a new six-inch pipeline from Conway, Kansas
to Windom, Kansas (which is located approximately 22 miles north of Hutchinson)
that allows KPP's Hutchinson terminal to be supplied directly from McPherson. As
a result of this pipeline becoming operational, a 158-mile segment of the former
Champlin line was shut down, including a terminal located at Superior, Nebraska.
The other end of the line runs northeast approximately 175 miles, crossing the
main pipeline near Osceola, Nebraska, continuing through a terminal at Columbus,
Nebraska, and later interconnecting with KPP's Yankton/Milford line to terminate
at Rock Rapids, Iowa. In December 1998, Kaneb Pipe Line Operating Partnership,
L.P. ("KPOP"), in which KPL is the general partner and KPP is the sole limited
partner, acquired from Amoco Oil Company a 175-mile pipeline that runs from
Council Bluffs, Iowa to Sioux Falls, South Dakota and the terminal at Sioux
Falls. On December 31, 1998, KPOP, pursuant to its option, purchased a 203-mile
North Platte line for approximately $5 million at the end of a lease. In January
1999, a connection was completed to service the Sioux Falls terminal through the
main East Pipeline.
The East Pipeline system also consists of 17 product terminals in Kansas,
Nebraska, Iowa, South Dakota and North Dakota with total storage capacity of
approximately 3.5 million barrels and an additional 22 product tanks with total
storage capacity of approximately 1,006,000 barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump stations in Kansas and 38 booster pump stations throughout the system.
Additionally, the system maintains various office and warehouse facilities, and
an extensive quality control laboratory. KPOP owns the entire 2,090-mile East
Pipeline. KPOP leases office space for its operating headquarters in Wichita,
Kansas.
The East Pipeline transports refined petroleum products, including propane,
received from refineries in southeast Kansas and other connecting pipelines to
its terminals along the system and to receiving pipeline connections in Kansas.
Shippers on the East Pipeline obtain refined petroleum products from refineries
connected to the East Pipeline or through other pipelines directly connected to
the pipeline system. Five connecting pipelines can deliver propane for shipment
through the East Pipeline from gas processing plants in Texas, New Mexico,
Oklahoma and Kansas.
West Pipeline
KPOP acquired the West Pipeline in February 1995 when it purchased the
assets of Wyco Pipe Line Company. By acquiring the West Pipeline, KPP increased
its pipeline business in South Dakota and expanded it into Wyoming and Colorado.
The West Pipeline system includes approximately 550 miles of pipeline in
Wyoming, Colorado and South Dakota, four truck loading terminals and numerous
pump stations located along the system. The system's four product terminals have
a total storage capacity of over 1.7 million barrels.
The West Pipeline originates at Casper, Wyoming and travels east to the
Strouds Station, where it serves as a connecting point with Sinclair's Little
America Refinery and the Seminoe Pipeline that transports product from Billings,
Montana-area refineries. From Strouds, the West Pipeline continues east through
its eight-inch line to Douglas, Wyoming, where a six-inch pipeline branches off
to serve KPP's Rapid City, South Dakota terminal approximately 190 miles away.
The Rapid City terminal has a three-bay, bottom-loading truck rack and storage
tank capacity of 256,000 barrels. The six-inch pipeline also receives product
from Wyoming Refining's pipeline at a connection located near the Wyoming/South
Dakota border, approximately 30 miles south of Wyoming Refining's Newcastle,
Wyoming Refinery. From Douglas, KPP's eight-inch pipeline continues south
through a delivery point at the Burlington Northern junction to the terminal at
Cheyenne, Wyoming. The Cheyenne terminal has a two-bay, bottom-loading truck
rack and storage tank capacity of 345,000 barrels and serves as a receiving
point for products from the Frontier Oil & Refining Company refinery at
Cheyenne, as well as a product delivery point to Conoco's Cheyenne Pipeline.
From the Cheyenne terminal, the eight-inch pipeline extends south into Colorado
to the Dupont Terminal located in the Denver metropolitan area. The Dupont
Terminal is the largest terminal on the West Pipeline system, with a six-bay,
bottom-loading truck rack and storage tank capacity of 692,000 barrels. The
eight-inch pipeline continues to the Commerce City Station, where the West
Pipeline can receive from and transfer product to the Ultramar Diamond Shamrock
and Conoco refineries and the Phillips Petroleum Terminal. From Commerce City, a
six-inch line continues south 90 miles where the system terminates at the
Fountain, Colorado Terminal serving the Colorado Springs area. The Fountain
Terminal has a five-bay, bottom-loading truck rack and storage tank capacity of
366,000 barrels.
The West Pipeline system parallels KPP's East Pipeline to the west. The
East Pipeline's North Platte line ends in western Nebraska, approximately 200
miles east of the West Pipeline's Cheyenne, Wyoming Terminal. Conoco's Cheyenne
Pipeline runs from west to east from the Cheyenne Terminal to near the East
Pipeline's North Platte Terminal, although a portion of the line from Sidney,
Nebraska (approximately 100 miles from Cheyenne) to North Platte has been
deactivated. The West Pipeline serves Denver and other eastern Colorado markets
and supplies jet fuel to Ellsworth Air Force Base at Rapid City, South Dakota.
The East Pipeline supplies railroad and agricultural operations. The West
Pipeline has a relatively small number of shippers, who, with few exceptions,
are also shippers on KPP's East Pipeline system.
Other Systems
KPP also owns three single-use pipelines, located near Umatilla, Oregon,
Rawlins, Wyoming and Pasco, Washington, each of which supplies diesel fuel to a
railroad fueling facility. The Oregon and Washington lines are fully automated;
however the Wyoming line utilizes a coordinated start-up procedure between the
refinery and the railroad. For the year ended December 31, 2001, these three
systems combined transported a total of 3.2 million barrels of diesel fuel,
representing an aggregate of $1.3 million in revenues.
Pipelines Products and Activities
The Pipelines' revenues are based on volumes and distances of product
shipped. The following table reflects the total volume and barrel miles of
refined petroleum products shipped and total operating revenues earned by the
Pipelines for each of the periods indicated:
Year Ended December 31,
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2001 2000 1999 1998 1997
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Volume (1).................. 92,116 89,192 85,356 77,965 69,984
Barrel miles (2)............ 18,567 17,843 18,440 17,007 16,144
Revenues (3)................ $74,976 $70,685 $67,607 $63,421 $61,320
(1) Volumes are expressed in thousands of barrels of refined petroleum product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
(3) Revenues are expressed in thousands of dollars.
The following table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:
Year Ended December 31,
(thousands of barrels)
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2001 2000 1999 1998 1997
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Gasoline.................... 46,268 44,215 41,472 37,983 32,237
Diesel and fuel oil......... 42,354 41,087 40,435 36,237 33,541
Propane..................... 3,494 3,890 3,449 3,745 4,206
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Total....................... 92,116 89,192 85,356 77,965 69,984
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Diesel and fuel oil are used in farm machinery and equipment, over-the-road
transportation, railroad fueling and residential fuel oil. Gasoline is primarily
used in over-the-road transportation and propane is used for crop drying,
residential heating and to power irrigation equipment. The mix of refined
petroleum products delivered varies seasonally, with gasoline demand peaking in
early summer, diesel fuel demand peaking in late summer and propane demand
higher in the fall. In addition, weather conditions in the areas served by the
East Pipeline affect both the demand for and the mix of the refined petroleum
products delivered through the East Pipeline, although historically any overall
impact on the total volumes shipped has been short-term. Tariffs charged to
shippers for transportation of products do not vary according to the type of
product delivered.
Maintenance and Monitoring
The Pipelines have been constructed and are maintained in a manner
consistent with applicable Federal, state and local laws and regulations,
standards prescribed by the American Petroleum Institute and accepted industry
practice. Further, protective measures are taken and routine preventive
maintenance is performed on the Pipelines to prolong the useful lives of the
Pipelines. Such measures include cathodic protection to prevent external
corrosion, inhibitors to prevent internal corrosion and periodic inspection of
the Pipelines. Additionally, the Pipelines are patrolled at regular intervals to
identify equipment or activities by third parties that, if left unchecked, could
result in encroachment upon the Pipeline's rights-of-way and possible damage to
the Pipelines.
KPP uses a state-of-the-art Supervisory Control and Data Acquisition remote
supervisory control software program to monitor continuously and control the
Pipelines from the Wichita, Kansas headquarters. The system monitors quantities
of refined petroleum products injected in and delivered through the Pipelines
and automatically signals the Wichita headquarters personnel upon deviations
from normal operations that require attention.
Pipeline Operations
Both the East Pipeline and the West Pipeline are interstate pipelines and
thus subject to Federal regulation by such governmental agencies as the Federal
Energy Regulatory Commission ("FERC"), the Department of Transportation, and the
Environmental Protection Agency. Additionally, the West Pipeline is subject to
state regulation of certain intrastate rates in Colorado and Wyoming and the
East Pipeline is subject to state regulation in Kansas. See "Regulation."
Except for the three single-use pipelines and certain ethanol facilities,
all of KPP's pipeline operations constitute common carrier operations and are
subject to Federal tariff regulation. In May 1998, KPOP was authorized by the
FERC to adopt market-based rates in approximately one-half of its markets. 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 is available at published tariffs filed, in the case of
interstate shipments, with the FERC, or in the case of intrastate shipments in
Kansas, Colorado and Wyoming, with the relevant state authority, 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 delivers products to the
pipeline from refineries or third-party pipelines that connect to the Pipelines.
The Pipelines' operations also include 21 truck loading terminals through which
refined petroleum products are delivered to storage tanks and then loaded into
petroleum transport trucks. Five of the 20 terminals also receive propane into
storage tanks and then load it into transport trucks. Tariffs for transportation
are charged to shippers based upon transportation from the origination point on
the pipeline to the point of delivery. Such tariffs also include charges for
terminaling and storage of product at the Pipeline's terminals. Pipelines are
generally the lowest cost method for intermediate and long-haul overland
transportation of refined petroleum products.
Each shipper transporting product on one of the Pipelines 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 following table shows the number of tanks owned by KPOP at each
terminal location at December 31, 2001, the storage capacity in barrels and
truck capacity of each terminal location.
Location of Number Tankage Truck
Terminals of Tanks Capacity Capacity(a)
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Colorado:
Dupont 18 692,000 6
Fountain 13 366,000 5
Iowa:
LeMars 9 103,000 2
Milford(b) 11 172,000 2
Rock Rapids 12 366,000 2
Kansas:
Concordia(c) 7 79,000 2
Hutchinson 9 162,000 2
Salina 10 98,000 3
Nebraska:
Columbus(d) 12 191,000 2
Geneva 39 678,000 8
Norfolk 16 187,000 4
North Platte 22 198,000 5
Osceola 8 79,000 2
North Dakota:
Jamestown 13 188,000 2
South Dakota:
Aberdeen 12 181,000 2
Mitchell 8 72,000 2
Rapid City 13 256,000 3
Sioux Falls 9 394,000 2
Wolsey 21 149,000 4
Yankton 25 246,000 4
Wyoming:
Cheyenne 15 345,000 2
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Totals 302 5,202,000
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(a) Number of trucks that may be simultaneously loaded.
(b) This terminal is situated on land leased through August 7, 2007 at an
annual rental of $2,400. KPOP has the right to renew the lease upon its
expiration for an additional term of 20 years at the same annual rental
rate.
(c) This terminal is situated on land leased through the year 2060 for a total
rental of $2,000.
(d) Also loads rail tank cars.
The East Pipeline also has intermediate storage facilities consisting of 12
storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson, Kansas,
with aggregate capacities of approximately 472,000 and 534,000 barrels,
respectively. During 2001, approximately 53.3% and 92.2% of the deliveries of
the East Pipeline and the West Pipeline, respectively, were made through their
terminals, and the remainder of the respective deliveries of such lines were
made to other pipelines and customer-owned storage tanks.
Storage of product at terminals pending delivery is considered by KPP 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
KPP's pipeline business depends in large part on (1) the level of demand
for refined petroleum products in the markets served by the Pipelines and (2)
the ability and willingness of refiners and marketers having access to the
Pipelines to supply that demand by delivering through the Pipelines.
Most of the refined petroleum products delivered through the East Pipeline
are used as fuel for railroads or in agricultural operations, including fuel for
farm equipment, irrigation systems, trucks used for transporting crops and
crop-drying facilities. Demand for refined petroleum products for agricultural
use, and the relative mix of products required, is affected by weather
conditions in the markets served by the East Pipeline. The agricultural sector
is also affected by government agricultural policies and crop prices. Although
periods of drought suppress agricultural demand for some refined petroleum
products, particularly those used for fueling farm equipment, the demand for
fuel for irrigation systems often increases during such times.
While there is some agricultural demand for the refined petroleum products
delivered through the West Pipeline, as well as military jet fuel volumes, most
of the demand is centered in the Denver and Colorado Springs area. Because
demand on the West Pipeline 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 dependent on adequate levels of production of refined
petroleum products by refineries connected to the Pipelines, directly or
indirectly through connecting pipelines. The refineries, in turn, depend on
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 and foreign sources. Refineries in Kansas, Oklahoma and Texas are
connected to the East Pipeline through other pipelines. These refineries obtain
their supplies of crude oil from a variety of sources. The refineries connected
directly to the West Pipeline are located in Casper and Cheyenne, Wyoming and
Denver, Colorado. Refineries in Billings and Laurel, Montana are connected to
the West Pipeline through other pipelines. These refineries obtain their
supplies of crude oil primarily from Rocky Mountain sources. KPP believes that
if one refinery discontinued its operations, (assuming unchanged demand for
refined petroleum products in markets served by the Pipelines) the effects would
be short-term in nature, and KPP's business would not be materially adversely
affected over the long term because the discontinued production could be
replaced by other refineries or by other sources.
The majority of the refined petroleum product transported through the East
Pipeline in 2001 was produced at three refineries located at McPherson and El
Dorado, Kansas and Ponca City, Oklahoma, and operated by National Cooperative
Refining Association ("NCRA"), Frontier Refining and Conoco, Inc. respectively.
The NCRA and Frontier Refining refineries are connected directly to the East
Pipeline. The McPherson, Kansas refinery operated by NCRA accounted for
approximately 30.6% of the total amount of product shipped over the East
Pipeline in 2001. The East Pipeline also has direct access by third-party
pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf
Coast supplies of products through connecting pipelines that receive products
from pipelines originating on the Gulf Coast. Five connecting pipelines can
deliver propane from gas processing plants in Texas, New Mexico, Oklahoma and
Kansas to the East Pipeline for shipment.
The majority of the refined petroleum products transported through the West
Pipeline is produced at the Frontier Refinery located at Cheyenne, Wyoming, the
Ultramar Diamond Shamrock and Conoco Refineries located at Denver, Colorado, and
Sinclair's Little America Refinery located at Casper, Wyoming, all of which are
connected directly to the West Pipeline. The West Pipeline also has access to
three Billings, Montana area refineries through a connecting pipeline.
Principal Customers
KPOP had a total of approximately 46 shippers in 2001. The principal
shippers include four integrated oil companies, three refining companies, two
large farm cooperatives and one railroad. Transportation revenues attributable
to the top 10 shippers of the Pipelines were $51.5 million, $48.7 million and
$42.7 million, which accounted for 69%, 69% and 63% of total revenues shipped
for each of the years 2001, 2000 and 1999, respectively.
Competition and Business Considerations
The East Pipeline's major competitor is an independent, regulated common
carrier pipeline system owned by The Williams Companies, Inc. which operates
approximately 100 miles east of and parallel to the East Pipeline. The Williams
system is a substantially more extensive system than the East Pipeline.
Furthermore, Williams and its affiliates have capital and financial resources
that are substantially greater than the Company's and KPP's capital and
financial resources. 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. Sixteen of the East Pipeline's 17
delivery terminals are located within 2 to 145 miles of, and in direct
competition with, Williams' terminals.
The West Pipeline competes with the truck loading racks of the Cheyenne and
Denver refineries and the Denver terminals of the Chase Terminal Company and
Phillips Petroleum Company. Ultramar Diamond Shamrock terminals in Denver and
Colorado Springs, connected to a Ultramar Diamond Shamrock pipeline from their
Texas Panhandle Refinery, are major competitors to the West Pipeline's Denver
and Fountain Terminals, respectively.
Because pipelines are generally the lowest cost method for intermediate and
long-haul movement of refined petroleum products, the Pipelines' more
significant competitors are common carrier and proprietary pipelines owned and
operated by major integrated and large independent oil companies and other
companies in the areas where the Pipelines deliver products. Competition between
common carrier pipelines is based primarily on transportation charges, quality
of customer service and proximity to end users. KPP 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 KPP is conducted principally by trucking operations of unrelated
third parties. Trucks may competitively deliver products in some of the areas
served by the Pipelines; but trucking costs render that mode of transportation
not competitive for longer hauls or larger volumes. The Company does not believe
that trucks are, or will be, effective competition to KPP's long-haul volumes
over the long term.
LIQUIDS TERMINALING BUSINESS
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Introduction
The Support Terminal Services operation, which is wholly owned by KPOP, is
one of the largest independent petroleum products and specialty liquids
terminaling companies in the United States. KPP's terminaling business is
conducted through Support Terminals Operating Partnership, L.P. and its
affiliated partnerships and corporate entities, which operate under the names
"ST Services" and "StanTrans", among others. For the year ended December 31,
2001, the terminaling business accounted for approximately 64% of KPP's
revenues. As of December 31, 2001, ST Services operated 41 facilities in 20
states and the District of Columbia, with a total storage capacity of
approximately 33.5 million barrels. ST Services owns and operates six terminals
located in the United Kingdom, having a total capacity of approximately 5.5
million barrels.
On January 3, 2001, KPP completed the acquisition of Shore Terminals LLC.
Shore Terminals owns seven terminals, four in California (three in the San
Francisco Bay area and one in Los Angeles) and one each in Tacoma, Washington,
Portland, Oregon and Reno, Nevada, with a total storage capacity of 7.8 million
barrels. All of the terminals handle petroleum products and, with the exception
of the Nevada terminal, have deep water access. The purchase price was
approximately $107,000,000 in cash and 1,975,090 limited partner units of KPP
(valued at $56.5 million on the date of agreement and its announcement). The
acquisition, which became a part of the ST Services terminaling operations,
significantly increased ST Services' presence on the West Coast. ST Services and
its predecessors have a long history in the terminaling business and handle a
wide variety of liquids from petroleum products to specialty chemicals to edible
liquids.
ST Services' terminal facilities provide storage and handling services on a
fee basis for petroleum products, specialty chemicals and other liquids. ST
Services' six largest domestic terminal facilities are located in Piney Point,
Maryland; Linden, New Jersey (which is a 50% owned joint venture); Crockett,
California; Martinez, California; Jacksonville, Florida and Texas City, Texas.
These facilities accounted for approximately 44.5% of ST Services' revenues and
49.2% of its tankage capacity in 2001.
Description of Largest Domestic Terminal Facilities
Piney Point, Maryland
The largest terminal currently owned by ST Services is located on
approximately 400 acres on the Potomac River. The facility was acquired as part
of the purchase of the liquids terminaling assets of Steuart Petroleum Company
and certain of its affiliates (collectively "Steuart") in December 1995. The
Piney Point terminal has approximately 5.4 million barrels of storage capacity
in 28 tanks and is the closest deep-water facility to Washington, D.C. This
terminal competes with other large petroleum terminals in the East Coast
water-borne market extending from New York Harbor to Norfolk, Virginia. The
terminal currently stores petroleum products consisting primarily of fuel oils,
asphalt and caustic soda solution. The terminal has a dock with a 36-foot draft
for tankers and four berths for barges. It also has truck loading facilities,
product blending capabilities and is connected to a pipeline which supplies
residual fuel oil to two power-generating stations.
Linden, New Jersey
In October 1998, ST Services entered into a joint venture relationship with
Northville Industries Corp. ("Northville") to acquire the management of and a
50% ownership interest in the terminal facility at Linden, New Jersey, which was
previously owned by Northville. The 44-acre facility provides ST Services with
deep-water terminaling capabilities at New York Harbor and primarily stores
petroleum products, including gasoline, jet fuel and fuel oils. The facility has
a total capacity of approximately 3.9 million barrels in 22 tanks, can receive
products via ship, barge and pipeline and delivers product by ship, barge,
pipeline and truck. The terminal owns two docks and leases a third with draft
limits of 35, 24 and 24 feet, respectively.
Crockett, California
The Crockett Terminal was acquired in January 2001 as a part of the Shore
acquisition. The terminal has approximately 3 million barrels of tankage and is
located in the San Francisco Bay area. The facility provides deep-water access
for handling petroleum products and gasoline additives such as ethanol. The
terminal offers pipeline connections to various refineries and pipelines. It
receives and delivers product by vessel, barge, pipeline and truck-loading
facilities. The terminal also has railroad tank car unloading capability.
Martinez, California
The Martinez Terminal, also acquired in January 2001 as a part of the Shore
acquisition, is located in the refinery area of San Francisco Bay. It has
approximately 2.8 million barrels of tankage and handles refined petroleum
products as well as crude oil. The terminal is connected to a pipeline and to
area refineries by pipelines and can also receive and deliver products by vessel
or barge. It also has a truck rack for product delivery.
Jacksonville, Florida
The Jacksonville terminal, also acquired as part of the Steuart
transaction, is located on approximately 86 acres 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 30 tanks. The terminal is currently used to
store petroleum products including gasoline, No. 2 oil, No. 6 oil, diesel,
kerosene and asphalt. This terminal has a tanker berth with a 38-foot draft,
four barge berths and also offers truck and rail car loading facilities and
facilities to blend residual fuels for ship bunkering.
Texas City, Texas
The Texas City facility is situated on 39 acres of land leased from the
Texas City Terminal Railway Company ("TCTRC") with long-term renewal options.
Located on Galveston Bay near the mouth of the Houston Ship Channel,
approximately sixteen miles from open water, the Texas City terminal consists of
124 tanks with a total capacity of approximately 2 million barrels. The eastern
end of the Texas City site is adjacent to three deep-water docking facilities,
which are also owned by TCTRC. 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 Services is charged dockage and wharfage fees on a per vessel and
per unit basis, respectively, by TCTRC, which it passes on to its customers.
The Texas City facility is designed to accommodate a diverse product mix,
including specialty chemicals, such as petrochemicals and has tanks equipped for
the specific storage needs of the various products handled; piping and pumping
equipment for moving the product between the tanks and the transportation modes;
and, an extensive infrastructure of support equipment. ST Services receives or
delivers the majority of the specialty chemicals that it handles via ship or
barge at Texas City. ST Services also receives and delivers liquids via rail
tank cars and transport trucks and has direct pipeline connections to refineries
in Texas City.
ST's facilities have been designed with engineered structural measures to
minimize the possibility of the occurrence and the level of damage in the event
of a spill or fire. All loading areas, tanks, pipes and pumping areas are
"contained" to collect any spillage and insure that only properly treated water
is discharged from the site.
Other Terminal Sites
In addition to the six major facilities described above, ST Services now
has 35 other terminal facilities located throughout the United States and six
facilities in the United Kingdom. These other facilities represented
approximately 50.8% of ST Services' total tankage capacity and approximately
55.5% of its total revenue for 2001. With the exception of the facilities in
Columbus, Georgia, which handles aviation gasoline and specialty chemicals;
Winona, Minnesota, which handles nitrogen fertilizer solutions; Savannah,
Georgia, which handles chemicals and caustic solutions; as well as petroleum
products, Vancouver, Washington, which handles chemicals and bulk fertilizer;
Eastham, United Kingdom which handles chemicals and animal fats; and Runcorn,
United Kingdom, which handles molten sulphur, these facilities primarily store
petroleum products for a variety of customers. Overall, these facilities provide
ST Services locations which are diverse geographically, in products handled and
in customers served.
The following table outlines ST Services' terminal locations, capacities,
tanks and primary products handled:
Tankage No. of Primary Products
Facility Capacity Tanks Handled
--------------------------- ----------- -------- ------------------------------------
Major U. S. Terminals:
Piney Point, MD 5,403,000 28 Petroleum
Linden, NJ(a) 3,884,000 22 Petroleum
Crockett, CA 3,048,000 24 Petroleum
Martinez, CA 2,800,000 16 Petroleum
Jacksonville, FL 2,066,000 30 Petroleum
Texas City, TX 2,002,000 124 Chemicals and Petrochemicals
Other U. S. Terminals:
Montgomery, AL(b) 162,000 7 Petroleum, Jet Fuel
Moundville, AL(b) 310,000 6 Jet Fuel
Tuscon, AZ(a) 181,000 7 Petroleum
Los Angeles, CA 597,000 20 Petroleum
Richmond, CA 617,000 25 Petroleum
Stockton, CA 706,000 32 Petroleum
M Street, DC 133,000 3 Petroleum
Homestead, FL(b) 72,000 2 Jet Fuel
Augusta, GA 110,000 8 Petroleum
Bremen, GA 180,000 8 Petroleum, Jet Fuel
Brunswick, GA 302,000 3 Petroleum, Pulp Liquor
Columbus, GA 180,000 25 Petroleum, Chemicals
Macon, GA(b) 307,000 10 Petroleum, Jet Fuel
Savannah, GA 861,000 19 Petroleum, Chemicals
Blue Island, IL 752,000 19 Petroleum
Chillicothe, IL(a) 270,000 6 Petroleum
Peru, IL 221,000 8 Petroleum, Fertilizer
Indianapolis, IN 410,000 18 Petroleum
Westwego, LA 849,000 53 Molasses, Fertilizer, Caustic
Andrews AFB Pipeline, MD(b) 72,000 3 Jet Fuel
Baltimore, MD 832,000 50 Chemicals, Asphalt, Jet Fuel
Salisbury, MD 177,000 14 Petroleum
Winona, MN 229,000 7 Fertilizer
Reno, NV 107,000 7 Petroleum
Paulsboro, NJ 1,580,000 18 Petroleum
Alamogordo, NM(b) 120,000 5 Jet Fuel
Drumright, OK 315,000 4 Petroleum, Jet Fuel
Portland, OR 1,119,000 31 Petroleum
Philadelphia, PA 894,000 11 Petroleum
San Antonio, TX 207,000 4 Jet Fuel
Dumfries, VA 554,000 16 Petroleum, Asphalt
Virginia Beach, VA(b) 40,000 2 Jet Fuel
Tacoma, WA 377,000 15 Petroleum
Vancouver, WA 166,000 42 Chemicals, Fertilizer
Milwaukee, WI 308,000 7 Petroleum
Foreign Terminals:
Grays, England 1,945,000 53 Petroleum
Eastham, England 2,185,000 162 Chemicals, Petroleum, Animal Fats
Runcorn, England 146,000 4 Molten sulphur
Glasgow, Scotland 344,000 16 Petroleum
Leith, Scotland 459,000 34 Petroleum, Chemicals
Belfast, Northern Ireland 407,000 41 Petroleum
--------------- --------------
39,006,000 1,069
=============== ==============
(a) The terminal is 50% owned by ST.
(b) Facility also includes pipelines to U.S. government military base
locations.
Customers
The storage and transport of jet fuel for the U.S. Department of Defense is
an important part of ST Services' business. Eleven of ST Services' terminal
sites are involved in the terminaling or transport (via pipeline) of jet fuel
for the Department of Defense and six of these eleven locations are only used by
the U.S. Government. One of these locations is presently without government
business. Of the eleven locations, five include pipelines which deliver jet fuel
directly to nearby military bases, while another location supplies Andrews Air
Force Base, Maryland and consists of a barge receiving dock and an 11.3 mile
pipeline with three 24,000 barrel double-bottomed tanks and an administration
building located on the base.
Competition and Business Considerations
In addition to the terminals owned by independent terminal operators, such
as ST, many major energy and chemical companies own extensive terminal storage
facilities. Although such terminals often have the same capabilities as
terminals owned by independent operators, they generally do not provide
terminaling services to third parties. In many instances, major energy and
chemical companies that own storage and terminaling facilities are also
significant customers of independent terminal operators, such as ST. Such
companies typically have strong demand for terminals owned by independent
operators when independent terminals have more cost effective locations near key
transportation links, such as deep-water ports. Major energy and chemical
companies also need independent terminal storage when their owned storage
facilities are inadequate, either because of size constraints, the nature of the
stored material or specialized handling requirements.
Independent terminal owners generally compete on the basis of the location
and versatility of terminals, service and price. A favorably located terminal
will have access to various cost effective transportation modes both to and from
the terminal. Possible transportation modes include waterways, railroads,
roadways and pipelines. Terminals located near deep-water port facilities are
referred to as "deep-water terminals" and terminals without such facilities are
referred to as "inland terminals"; though some inland facilities are served by
barges on navigable rivers.
Terminal versatility is a function of the operator's ability to offer
handling for diverse products with complex handling requirements. The service
function typically provided by the terminal includes, among other things, the
safe storage of the product at specified temperature, moisture and other
conditions, as well as receipt at and delivery from the terminal, all of which
must be in compliance with applicable environmental regulations. A terminal
operator's ability to obtain attractive pricing often depends on the quality,
versatility and reputation of the facilities owned by the operator. Although
many products require modest terminal modification, operators with a greater
diversity of terminals with versatile storage capabilities typically require
less modification before usage, ultimately making the storage cost to the
customer more attractive.
Several companies offering liquid terminaling facilities have significantly
more capacity than ST. But much of ST Services' 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 have facilities used primarily
for petroleum-related products. As a result, many of ST Services' terminals
compete against other large petroleum products terminals, rather than specialty
liquids facilities. Such specialty or "niche" tankage is less abundant in the
U.S. and "specialty" liquids typically command higher terminal fees than
lower-price bulk terminaling for petroleum products.
RECENT DEVELOPMENTS
- -------------------
On February 28, 2002, KPP acquired all of the liquids terminaling
subsidiaries of Statia Terminals Group NV ("Statia") for approximately $194
million in cash. The acquired Statia subsidiaries have approximately $107
million in outstanding debt, including $101 million of 11.75% notes due in
November 2003. The cash portion of the purchase price was funded by KPP's $275
million revolving credit agreement and proceeds from KPOP's February 2002 public
debt offering. On March 1, 2002, KPP announced that it had commenced the
procedure to redeem all of Statia's 11.75% notes at 102.938% of the principal
amount, plus accrued interest. The redemption is expected to be funded by KPP's
$275 million revolving credit facility.
Statia's terminaling operations encompass two world-class, strategically
located facilities. The storage and transshipment facility on the island of St.
Eustatius, which is located east of Puerto Rico, has tankage capacity of 11.3
million barrels. The facility located at Point Tupper, Nova Scotia, Canada has
tankage capacity of 7.4 million barrels. Both facilities produce a broad range
of products and services, including storage and throughput, marine services and
product sales of bunker fuels and bulk oil products.
CAPITAL EXPENDITURES
- --------------------
Capital expenditures by KPP relating to its pipelines, excluding
acquisitions, were $4.3 million, $3.4 million and $3.6 million for 2001, 2000
and 1999, respectively. During these periods, adequate capacity existed on the
Pipelines to accommodate volume growth, and the expenditures required for
environmental and safety improvements were not material in amount. Capital
expenditures, excluding acquisitions, by ST Services relating to its terminaling
business were $12.9 million, $6.1 million and $11.0 million for 2001, 2000 and
1999, respectively.
Capital expenditures of KPP during 2002 are expected to be approximately
$15 million to $20 million, excluding capital expenditures relating to Statia.
Additional expansion-related capital expenditures will depend on future
opportunities to expand KPP's operations. KPP intends to finance future
expansion capital expenditures primarily through KPP's borrowings. Such future
expenditures, however, will depend on many factors beyond KPP's control,
including, without limitation, demand for refined petroleum products and
terminaling services in KPP'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 KPP will have the ability to finance such expenditures through
borrowings or choose to do so.
REGULATION
- ----------
Interstate Regulation
The interstate common carrier pipeline operations of KPP 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. Reparations may be recovered by the party filing the complaint for
the two-year period before the complaint, if FERC finds the rate to be unlawful.
The FERC allows for a rate of return for petroleum products pipelines
determined by adding (i) the product of a rate of return equal to the nominal
cost of debt multiplied by the portion of the rate base that is deemed to be
financed with debt and (ii) the product of a rate of return equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity. The appropriate rate of return for a
petroleum pipeline is determined on a case-by-case basis, taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.
Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"), rates
that were in effect on October 24, 1991 that were not subject to a protest,
investigation or complaint are deemed to be just and reasonable. Such rates,
commonly referred to as grandfathered rates, are subject to challenge only for
limited reasons. Any relief granted pursuant to such challenges may be
prospective only. Because KPP's rates that were in effect on October 24, 1991
were not subject to investigation and protest at that time, those rates could be
deemed to be just and reasonable pursuant to this act. KPP's current rates
became final and effective in July 2000, and KPP believes that its currently
effective tariffs are just and reasonable and would withstand challenge under
the FERC's cost-based rate standards. Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.
On October 22, 1993, the FERC issued Order No. 561 which adopted a
simplified rate-making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price-cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for such rate increases, there will be no need to file cost-of-service or
supporting data. Moreover, so long as the ceiling is not exceeded, a pipeline
may make a limitless number of rate change filings. This indexing mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the ceiling rate below a pipeline's existing rates. The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.
The indexation method is to serve as the principal basis for the
establishment of oil pipeline rate changes in the future. But the FERC
determined that a pipeline may use any one of the following alternative
methodologies to indexing: (1) a cost-of-service methodology may be used by a
pipeline to justify a change in a rate if a pipeline can demonstrate that its
increased costs are prudently incurred and that there is a substantial
divergence between such increased costs and the rate that would be produced by
application of the index and (2) a pipeline may base its rates upon a
"light-handed" market-based form of regulation if it can demonstrate a lack of
significant market power in the relevant markets.
On September 15, 1997, KPP filed an Application for Market Power
Determination with the FERC seeking market-based rates for approximately half of
its markets. In May 1998, the FERC granted KPP's application and approximately
half of the Pipelines' markets subsequently became subject to market-force
regulation.
In the FERC's Lakehead decision issued June 15, 1995, the FERC partially
disallowed Lakehead's inclusion of income taxes in its cost of service.
Specifically, the FERC held that Lakehead was entitled to receive an income tax
allowance with respect to income attributable to its corporate partners, but was
not entitled to receive such an allowance for income attributable to the
partnership interests held by individuals. Lakehead's motion for rehearing was
denied by the FERC and Lakehead appealed the decision to the U.S. Court of
Appeals. Subsequently, the case was settled by Lakehead and the appeal was
withdrawn. In another FERC proceeding involving a different oil pipeline limited
partnership, various shippers challenged such pipeline's inclusion of an income
tax allowance in its cost of service. The FERC decided this case on the same
basis as its holding in the Lakehead case. If the FERC were to partially or
completely disallow the income tax allowance in the cost of service of the
Pipelines on the basis set forth in the Lakehead order, the Company believes
that KPP's ability to pay distributions to its limited partners and general
partner, including to the Company, would not be impaired; however, in view of
the uncertainties involved in this issue, there can be no assurance in this
regard.
Intrastate Regulation
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 KPP are subject to Federal, state and local laws and
regulations relating to the protection of the environment in the United States
and, since February 1999, the environmental laws and regulations of the United
Kingdom in regard to the terminals acquired from GATX Terminals, Limited, in the
United Kingdom. Although KPP believes that its operations generally comply 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 KPP. Moreover,
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 KPP, past and present, could possibly
result in substantial costs and liabilities to KPP, which may affect
distributions to the Company.
See "Item 3 - Legal Proceedings" for information concerning two lawsuits
against certain KPP subsidiaries involving claims for environmental damages.
Water
The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of
the Federal Water Pollution Control Act of 1972 and other statutes as they
pertain to prevention and response to oil spills. The OPA subjects owners of
facilities to strict, joint and potentially unlimited liability for removal
costs and certain other consequences of an oil spill, where such spill is into
navigable waters, along shorelines or in the exclusive economic zone. In the
event of an oil spill into such waters, substantial liabilities could be imposed
on KPP. Regulations concerning the environment are continually being developed
and revised in ways that may impose additional regulatory burdens on KPP.
Contamination resulting from spills or releases of refined petroleum
products is not unusual within the petroleum pipeline and liquids terminaling
industries. The East Pipeline and ST Services have experienced limited
groundwater contamination at various terminal and pipeline sites resulting from
various causes including activities of previous owners. Remediation projects are
underway or under construction using various remediation techniques. The costs
to remediate contamination at several ST Services terminal locations are being
borne by the former owners under indemnification agreements. KPP believes that
the aggregate cost of these remediation efforts will not be material.
Groundwater remediation efforts are ongoing at all four of the West
Pipeline's terminals and at a Wyoming pump station. Regulatory officials have
been consulted in the development of remediation plans. In connection with the
purchase of the West Pipeline, KPOP agreed to implement remediation plans at
these specific sites over the succeeding five years following the acquisition in
return for the payment by the seller, Wyco Pipe Line Company, of $1.3 million to
KPOP to cover the discounted estimated future costs of these remediations. KPP
accrued $2.1 million for these future remediation expenses.
In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain, Colorado ruptured, and approximately 1,000 barrels of product was
released. Containment and remedial action was immediately commenced. Upon
investigation, it appeared that the failure of the pipeline was due to damage
caused by third-party excavations. KPP has made a claim to the third party as
well as to its insurance carriers. KPP has entered into a Compliance Order on
Consent with the State of Colorado with respect to the remediation. As of
December 31, 2001, KPP has incurred $1.2 million of costs in connection with
this incident. Future costs are not anticipated to be significant. KPP has
recovered substantially all of its costs from its insurance carrier.
The EPA has promulgated regulations that may require KPP to apply for
permits to discharge storm water runoff. Storm water discharge permits also may
be required in certain states in which KPP operates. Where such requirements are
applicable, KPP has applied for such permits and, after the permits are
received, will be required to sample storm water effluent before releasing it.
KPP 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, KPP believes that the changes will not materially
affect KPP's financial condition or results of operations.
Above-Ground Storage Tank Acts
A number of the states in which KPP operates in the United States have
passed statutes regulating aboveground tanks containing liquid substances.
Generally, these statutes require that such tanks include secondary containment
systems or that the operators take certain alternative precautions to ensure
that no contamination results from any leaks or spills from the tanks. Although
there is not currently a Federal statute regulating these above ground tanks,
such a law could possibly be passed in the United States within the next few
years. KPP is in substantial compliance with all above-ground storage tank laws
in the states with such laws. Although no assurance can be given, KPP believes
that the future implementation of above ground storage tank laws by either
additional states or by the Federal government will not materially affect KPP's
financial condition or results of operations.
Air Emissions
The operations of KPP are subject to the Federal Clean Air Act and
comparable state and local statutes. KPP believes that the operations of the
Pipelines and terminals are in substantial compliance with such statutes in all
states in which they operate.
Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial operations in the United States to incur future capital
expenditures to meet the air emission control standards that have been and are
to be developed and implemented by the EPA and state environmental agencies.
Pursuant to these Clean Air Act Amendments, those KPP facilities that emit
volatile organic compounds ("VOC") or nitrogen oxides are subject to
increasingly stringent regulations, including requirements that certain sources
install maximum or reasonably available control technology. In addition, the
1999 Federal Clean Air Act Amendments include a new operating permit for major
sources ("Title V Permits"), which applies to some of KPP's facilities.
Additionally, new dockside loading facilities owned or operated by KPP in the
United States will be subject to the New Source Performance Standards that were
proposed in May 1994. These regulations require control of VOC emissions from
the loading and unloading of tank vessels.
Although KPP is in substantial compliance with applicable air pollution
laws, in anticipation of the implementation of stricter air control regulations,
KPP is taking actions to substantially reduce its air emissions. KPP plans to
install bottom-loading and vapor-recovery equipment on the loading racks at
selected terminal sites along the East Pipeline that do not already have such
emissions control equipment. These modifications will substantially reduce the
total air emissions from each of these facilities. Having begun in 1993, this
project is being phased in over a period of years.
Solid Waste
KPP generates non-hazardous solid waste that is subject to the requirements
of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes in the United States. The EPA is considering the adoption of
stricter disposal standards for non-hazardous wastes. RCRA also governs the
disposal of hazardous wastes. At present, KPP is not required to comply with a
substantial portion of the RCRA requirements because KPP's operations generate
minimal quantities of hazardous wastes. But KSL anticipates 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 KPP.
At the terminal sites at which groundwater contamination is present, there
is also limited soil contamination as a result of the aforementioned spills. KPP
is under no present requirements to remove these contaminated soils, but KPP 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, KPP may be required to clean up such contaminated soils.
Although these costs should not have a material adverse effect on KPP, no
assurance can be given in this regard.
Superfund
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund") imposes liability, without regard to fault or the
legality of the original act, on certain classes of persons that contributed to
the release of a "hazardous substance" into the environment. These persons
include the owner or operator of the site and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. CERCLA
also authorizes the EPA and, in some instances, third parties to act in response
to threats to the public health or the environment and to seek to recover from
the responsible classes of persons the costs they incur. In the course of its
ordinary operations, KPP may generate waste that may fall within CERCLA's
definition of a "hazardous substance". KPP may be responsible under CERCLA for
all or part of the costs required to clean up sites at which such wastes have
been disposed.
Environmental Impact Statement
The United States National Environmental Policy Act of 1969 (the "NEPA")
applies to certain extensions or additions to a pipeline system. Under NEPA, if
any project that would significantly affect the quality of the environment
requires a permit or approval from any United States Federal agency, a detailed
environmental impact statement must be prepared. The effect of the NEPA may be
to delay or prevent construction of new facilities or to alter their location,
design or method of construction.
Indemnification
KPL has agreed to indemnify KPP against liabilities for damage to the
environment resulting from operations of the East Pipeline before October 3,
1989. Such indemnification does not extend to any liabilities that arise after
such date to the extent such liabilities result from change in environmental
laws or regulations. Under such indemnity, KPL is presently liable for the
remediation of contamination of certain East Pipeline sites. In addition, both
KPOP and ST Services were wholly or partially indemnified under certain
acquisition contracts for some environmental costs. Most of such contracts
contain time and amount limitations on the indemnities. To the extent that
environmental liabilities exceed the amount of such indemnity, KPOP has
affirmatively assumed the excess environmental liabilities.
SAFETY REGULATION
- -----------------
The Pipelines are subject to regulation by the United States Department of
Transportation (the "DOT") under the Hazardous Liquid Pipeline Safety Act of
1979 ("HLPSA") relating to the design, installation, testing, construction,
operation, replacement and management of their pipeline facilities. The HLPSA
covers petroleum and petroleum products pipelines and requires any entity that
owns or operates pipeline facilities to comply with such safety regulations and
to permit access to and copying of records and to make certain reports and
provide information as required by the Secretary to Transportation. The Federal
Pipeline Safety Act of 1992 amended the HLPSA to include requirements of the
future use of internal inspection devices. KPP does not believe that it will be
required to make any substantial capital expenditures to comply with the
requirements of HLPSA as so amended.
On November 3, 2000, the DOT issued new regulations intended by the DOT to
assess the integrity of hazardous liquid pipeline segments that, in the event of
a leak or failure, could adversely affect highly populated areas, areas
unusually sensitive to environmental impact and commercially navigable
waterways. Under the regulations, an operator is required, among other things,
to conduct baseline integrity assessment tests (such as internal inspections)
within seven years, conduct future integrity tests at typically five-year
intervals and develop and follow a written risk-based integrity management
program covering the designated high consequence areas. The Company does not
believe that any increased costs of compliance with these regulations will
materially affect the KPP's results of operations.
KPP is subject to the requirements of the United States Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes that
regulate the protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that certain information be
maintained about hazardous materials used or produced in operations and that
this information be provided to employees, state and local authorities and
citizens. KPP believes that it is in general compliance with OSHA requirements,
including general industry standards, record keeping requirements and monitoring
of occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require KPP 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, KPP 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 KPP.
PRODUCT MARKETING BUSINESS
- --------------------------
In March 1998, the Company entered the product marketing business through
an acquisition by Martin, one of the Company's wholly owned subsidiaries. For
over 40 years, this operation and its predecessors have engaged in the business
of acquiring quantities of motor fuels and reselling them at wholesale in
smaller lots at truck racks located in terminal storage facilities along
pipelines primarily located throughout California, Colorado, Illinois, Indiana,
Ohio, Wisconsin and Wyoming. This business does not own any retail outlets,
pipelines or terminals. For the year ended December 31, 2001, the product
marketing segment's revenues, gross margin and operating income (loss) were
$327.5 million, $1.3 million and $(0.6) million, respectively.
EMPLOYEES
- ---------
At December 31, 2001, the Company and its subsidiaries employed
approximately 623 persons. Approximately 605 persons were employed by Kaneb Pipe
Line Company LLC of which 115 were subject to representation by unions for
collective bargaining purposes; however only 91 persons employed at 5 of the
Company's terminal unit locations were subject to collective bargaining
contracts at that date. Union contracts regarding conditions of employment for
21, 29, 16, 19 and 6 employees are in effect through March 31, 2002, June 28,
2002, November 1, 2003, June 30, 2004 and September 30, 2005, respectively. All
such contracts are subject to automatic renewal for successive one-year periods
unless either party provides written notice in a timely manner to terminate or
modify such agreement.
Item 2. Properties
The properties owned or used by the Company and its subsidiaries are
generally described in Item 1 of this report. Additional information concerning
the obligations of the Company and KPP for lease and rental commitments is
presented under the caption "Commitments and Contingencies" in Note 9 to the
Company's consolidated financial statements. Such descriptions and information
are hereby incorporated by reference into this Item 2.
The properties used in the operations of the Pipelines are owned by KPP,
through its subsidiary entities, except for KPL's operational headquarters,
located in Wichita, Kansas, which is held under a lease that expires in 2004.
The majority of ST Services' facilities are owned, while the remainder,
including most of its terminal facilities located in port areas and its
operational headquarters, located in Dallas, Texas, are held pursuant to lease
agreements having various expiration dates, rental rates and other terms.
Item 3. Legal Proceedings
Grace Litigation. Certain subsidiaries of KPP were sued in a Texas state
court in 1997 by Grace Energy Corporation ("Grace"), the entity from which KPP
acquired ST Services in 1993. The lawsuit involves environmental response and
remediation costs allegedly resulting from jet fuel leaks in the early 1970's
from a pipeline. The pipeline, which connected a former Grace terminal with Otis
Air Force Base in Massachusetts (the "Otis pipeline" or the "pipeline"), ceased
operations in 1973 and was abandoned not later than 1976, when the connecting
terminal was sold to an unrelated entity. Grace alleged that subsidiaries of KPP
acquired the abandoned pipeline, as part of the acquisition of ST Services in
1993 and assumed responsibility for environmental damages allegedly caused by
the jet fuel leaks. Grace sought a ruling from the Texas court that these
subsidiaries are responsible for all liabilities, including all present and
future remediation expenses, associated with these leaks and that Grace has no
obligation to indemnify these subsidiaries for these expenses. In the lawsuit,
Grace also sought indemnification for expenses of approximately $3.5 million
that it incurred since 1996 for response and remediation required by the State
of Massachusetts and for additional expenses that it expects to incur in the
future. The consistent position of KPP's subsidiaries has been that they did not
acquire the abandoned pipeline as part of the 1993 ST Services transaction, and
therefore did not assume any responsibility for the environmental damage nor any
liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition agreement by
failing to disclose matters related to the pipeline, and (2) the pipeline was
abandoned before 1978 -- 15 years before KPP's subsidiaries acquired ST
Services. On August 30, 2000, the Judge entered final judgment in the case that
Grace take nothing from the subsidiaries on its claims seeking recovery of
remediation costs. Although KPP's subsidiaries have not incurred any expenses in
connection with the remediation, the court also ruled, in effect, that the
subsidiaries would not be entitled to indemnification from Grace if any such
expenses were incurred in the future. Moreover, the Judge let stand a prior
summary judgment ruling that the pipeline was an asset acquired by KPP's
subsidiaries as part of the 1993 ST Services transaction and that any
liabilities associated with the pipeline would have become liabilities of the
subsidiaries. Based on that ruling, the Massachusetts Department of
Environmental Protection and Samson Hydrocarbons Company (successor to Grace
Petroleum Company) wrote letters to ST Services alleging its responsibility for
the remediation, and ST Services responded denying any liability in connection
with this matter. The Judge also awarded attorney fees to Grace of more than
$1.5 million. Both KPP's subsidiaries and Grace have appealed the trial court's
final judgment to the Texas Court of Appeals in Dallas. In particular, the
subsidiaries have filed an appeal of the judgement finding that the Otis
pipeline and any liabilities associated with the pipeline were transferred to
them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an
automatic stay against actions against Grace. This automatic stay covers the
appeal of the Dallas litigation, and the Texas Court of Appeals has issued an
order staying all proceedings of the appeal because of the bankruptcy. Once that
stay is lifted, KPP's subsidiaries that are party to the lawsuit intend to
resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military Reservation
("MMR Site"), which has been declared a Superfund Site pursuant to CERCLA. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the Otis pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of Defense and
the United States Coast Guard, pursuant to a Federal Facilities Agreement, have
been responding to the Government remediation demand for most of the
contamination problems at the MMR Site. Grace and others have also received and
responded to formal inquiries from the United States Government in connection
with the environmental damages allegedly resulting from the jet fuel leaks.
KPP's subsidiaries voluntarily responded to an invitation from the Government to
provide information indicating that they do not own the pipeline. In connection
with a court-ordered mediation between Grace and KPP's subsidiaries, the
Government advised the parties in April 1999 that it has identified two spill
areas that it believes to be related to the pipeline that is the subject of the
Grace suit. The Government at that time advised the parties that it believed it
had incurred costs of approximately $34 million, and expected in the future to
incur costs of approximately $55 million, for remediation of one of the spill
areas. This amount was not intended to be a final accounting of costs or to
include all categories of costs. The Government also advised the parties that it
could not at that time allocate its costs attributable to the second spill area.
By letter dated July 26, 2001, the United States Department of Justice
("DOJ") advised ST Services that the Government intends to seek reimbursement
from ST Services under the Massachusetts Oil and Hazardous Material Release
Prevention and Response Act and the Declaratory Judgment Act for the
Government's response costs at the two spill areas discussed above. The DOJ
relied in part on the judgment by the Texas state court that, in the view of the
DOJ, held that ST Services was the current owner of the pipeline and the
successor-in-interest of the prior owner and operator. The Government advised ST
Services that it believes it has incurred costs exceeding $40 million, and
expects to incur future costs exceeding an additional $22 million, for
remediation of the two spill areas. KPP believes that its subsidiaries have
substantial defenses. ST Services responded to the DOJ on September 6, 2001,
contesting the Government's positions and declining to reimburse any response
costs. ST Services and the Government have continued to exchange correspondence
and documents on the matter. The DOJ has not filed a lawsuit against ST Services
seeking cost recovery for its environmental investigation and response costs.
PEPCO Litigation. On April 7, 2000, a fuel oil pipeline in Maryland owned
by Potomac Electric Power Company ("PEPCO") ruptured. The pipeline was operated
by a partnership of which ST Services is general partner. PEPCO has reported
that it expects to incur total cleanup costs of $70 million to $75 million.
Since May 2000, ST Services has provisionally contributed a minority share of
the cleanup expense, which has been funded by ST Services' insurance carriers.
KPP and PEPCO have not, however, reached a final agreement regarding our
proportionate responsibility for this cleanup effort and have reserved all
rights to assert claims for contribution against each other. KPP cannot predict
the amount, if any, that ultimately may be determined to be ST Services' share
of the remediation expense, but it believes that such amount will be covered by
insurance and will not materially adversely affect KPP's financial condition.
As a result of the rupture, purported class actions have been filed against
PEPCO and ST Services in federal and state court in Maryland by property and/or
business owners alleging damages in unspecified amounts under various theories,
including under the Oil Pollution Act ("OPA"). The court consolidated all of
these cases in a case styled as In re Swanson Creek Oil Spill Litigation. The
trial judge recently granted preliminary approval of a $2,250,000 class
settlement, with ST Services and PEPCO each contributing half of the settlement
fund. Notice of the proposed settlement will be sent to putative class members
and putative class members have until March 26, 2002 to opt out. ST Services or
PEPCO can void the settlement if too many putative class members opt out and
elect to pursue separate litigation. A hearing on final settlement will be held
on April 15, 2002. If the settlement is finally approved, this litigation should
be concluded in 2002. It is expected that most class members will elect to
participate in the class settlement, but it is possible that even if the In re
Swanson Creek Oil Spill Litigation settlement becomes final, ST Services may
still face litigation from opt-out plaintiffs. ST Services' insurance carriers
have assumed the defense of these actions. While KPP cannot predict the amount,
if any, of any liability it may have in these suits, it believes that such
amounts will be covered by insurance and that these actions will not have a
material adverse effect on our financial condition.
PEPCO and ST Services have agreed with the State of Maryland to pay costs
of assessing natural resource damages arising from the Swanson Creek oil spill
under OPA, but they cannot predict at this time the amount of any damages that
may be claimed by Maryland. KPP believes that both the assessment costs and such
damages are covered by insurance and will not materially adversely affect KPP's
financial condition.
The U.S. Department of Transportation ("DOT") has issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over several
years of pipeline safety regulations and proposing a civil penalty of $674,000.
ST Services and PEPCO have contested the DOT allegations and the proposed
penalty. A hearing was held before the DOT in late 2001, and ST Services
anticipates that the DOT will rule during the first quarter of 2002. In
addition, by letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it plans to exercise its right to
seek penalties from ST Services in connection with the April 7, 2000 spill. The
ultimate amount of any penalty attributable to ST Services cannot be determined
at this time, but KPP believes that this matter will not have a material adverse
effect on its financial condition.
The Company, primarily KPP, has other contingent liabilities resulting from
litigation, claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect on
the financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not hold a meeting of shareholders or otherwise submit any
matter to a vote of security holders in the fourth quarter of 2001.
Any proposals of holders of the Company's Common Shares intended to be
presented at the Company's Annual Meeting of Stockholders to be held in 2002
must be received by the Company, addressed to Howard C. Wadsworth, Vice
President, Treasurer and Secretary, Kaneb Services LLC, 2435 North Central
Expressway, Richardson, Texas 75080, no later than March 29, 2002 to be included
in the Proxy Statement and form of proxy relating to that meeting. Additionally,
proxies for the Company's Annual Meeting of Stockholders to be held in the year
2002 may confer discretionary power to vote on any matter that may come before
the meeting unless, with respect to a particular matter, (i) the Company
received written notice, addressed to the Company's Secretary, not later than
March 29, 2002, that the matter will be presented at such annual meeting and
(ii) the Company fails to include in its proxy statement for the 2002 annual
meeting advice on the nature of the matter and how the Company intends to
exercise its discretion to vote on the matter.
PART II
Item 5. Market for the Registrant's Shares and Related Shareholder Matters
The Company's shares ("Shares") were listed and began trading on the New
York Stock Exchange (the "NYSE") effective June 29, 2001, under the symbol
"KSL." At March 12, 2002, there were approximately 4,000 shareholders of record
for the Company. Set forth below are prices on the NYSE and cash distributions
for the periods indicated for such Shares.
Share Prices Cash
Year High Low Distributions
------------------------- --------- --------- -------------
2001:
Third Quarter $16.76 $13.87 $.3625
Fourth Quarter 19.72 16.95 .3625
2002:
First quarter
(through March 12, 2002) 20.58 18.25
Under the terms of its financing agreements, the Company is prohibited from
declaring or paying any distribution if a default exists thereunder.
Item 6. Summary Historical Financial and Operating Data
The following table sets forth, for the periods and at the dates indicated,
certain selected historical consolidated financial data for Kaneb Services LLC
and Subsidiaries (the "Company"). The data in the table (in thousands, except
per share amounts) should be read in conjunction with the Company's audited
financial statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended December 31,
--------------------------------------------------------------------
2001 (a) 2000 1999 1998 1997
---------- ---------- --------- ---------- ----------
Income Statement Data:
Revenues.............................. $ 535,338 $ 537,418 $ 370,326 $ 240,032 $ 121,156
========== ========== ========= ========== ==========
Operating income...................... $ 79,791 $ 61,174 $ 64,911 $ 55,197 $ 52,620
========== ========== ========= ========== ==========
Income before gain on issuance of
units by KPP, income taxes and
extraordinary item................. $ 18,325 $ 15,467 $ 17,999 $ 15,303 $ 14,166
Income tax benefit (expense) (b)...... 998 (2,824) 9,494 (1,258) (5,603)
Gain on issuance of units by KPP (c).. 9,859 - 16,764 - -
---------- ---------- --------- ---------- ----------
Income before extraordinary item...... 29,182 12,643 44,257 14,045 8,563
Extraordinary item - loss on
extinguishment of KPP debt, net of
income taxes and interest of outside
non-controlling partners in KPP's
net income (d)..................... (859) - - - -
---------- ---------- --------- ---------- ----------
Net income............................ $ 28,323 $ 12,643 $ 44,257 $ 14,045 $ 8,563
========== ========== ========= ========== ==========
Per Share Data:
Earnings per common share:
Basic:
Before extraordinary item...... $ 2.65 $ 1.19 $ 4.22 $ 1.33 $ 0.79
Extraordinary item............. (.08) - - - -
---------- ---------- --------- ---------- ----------
$ 2.57 $ 1.19 $ 4.22 $ 1.33 $ 0.79
========== ========== ========= ========== ==========
Diluted:
Before extraordinary item...... $ 2.54 $ 1.15 $ 4.06 $ 1.28 $ 0.78
Extraordinary item............. (.08) - - - -
---------- ---------- --------- ---------- ----------
$ 2.46 $ 1.15 $ 4.06 $ 1.28 $ 0.78
========== ========== ========= ========== ==========
Cash distributions declared
per share (e)...................... $ 0.725
==========
Balance Sheet Data (at year end):
Working capital (deficit)............. $ (1,269) $ 25,305 $ 15,107 $ (12,751) $ (3,611)
Total assets.......................... 571,767 429,852 427,608 330,517 276,371
Long-term debt........................ 277,302 184,052 167,028 155,852 132,118
Shareholders' equity.................. 33,932 71,369 86,833 37,192 21,873
(a) Includes the operations of Shore Terminals LLC from January 3, 2001 (see
Note 3 to Consolidated Financial Statements).
(b) See Note 4 to consolidated financial statements regarding recognition in
2000 and 1999 of expected benefits from prior years tax losses (change in
valuation allowance) and Note 4 regarding 2001 benefit for change in tax
status.
(c) See Note 2 to consolidated financial statements regarding the 1999 gain on
issuance of units by KPP and Note 3 regarding 2001 gain.
(d) See Note 6 to consolidated financial statements regarding extraordinary
item - loss on extinguishment of KPP debt.
(e) The Company expects to make quarterly distributions of 100% of available
cash, as defined in the limited liability agreement, to the common
shareholders of record on the applicable record date, within 45 days after
the end of each quarter. Available cash consists generally of all the cash
receipts less all cash disbursements and reserves. Distributions of $.3625
per share were declared and paid for each of the third and fourth quarters
of 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
On November 27, 2000, the Board of Directors of Kaneb Services, Inc.
authorized the distribution of its pipeline, terminaling and product marketing
businesses (the "Distribution") to its stockholders in the form of a new limited
liability company, Kaneb Services LLC (the "Company"). On June 29, 2001, the
Distribution was completed, with each shareholder of Kaneb Services, Inc.
receiving one common share of the Company for each three shares of Kaneb
Services, Inc.'s common stock held on June 20, 2001, the record date for the
Distribution, resulting in the distribution of 10.85 million shares of the
Company. On August 7, 2001, the stockholders of Kaneb Services, Inc. approved an
amendment to its certificate of incorporation to change its name to Xanser
Corporation ("Xanser").
This discussion should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and the summary
historical combined financial data included elsewhere in this report.
GENERAL
- -------
In September 1989, Kaneb Pipe Line Company LLC ("KPL"), now a wholly-owned
subsidiary of the Company, formed Kaneb Pipe Line Partners, L.P. ("KPP") to own
and operate its refined petroleum products pipeline business. KPL manages and
controls the operations of KPP through its general partner interests and a 25%
limited partnership interest. KPP operates through Kaneb Pipe Line Operating
Partnership, L.P. ("KPOP"), a limited partnership in which KPP holds a 99%
interest as limited partner and KPL owns a combined 2% interest as general
partner of KPP and KPOP. KPP is engaged through operating subsidiaries in the
refined petroleum products pipeline business and, since 1993, terminaling and
storage of petroleum products and specialty liquids.
KPP's pipeline business consists primarily of the transportation through
the East Pipeline and the West Pipeline (collectively referred to as the
"Pipelines"), as common carriers, of refined petroleum products. Common carrier
activities are those under which transportation through the Pipelines is
available at published tariffs filed, in the case of interstate shipments, with
the Federal Energy Regulatory Commission (the "FERC"), or in the case of
intrastate shipments in Kansas, Colorado and Wyoming, with the relevant state
authority, to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for transportation. The
Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The
products are transported from refineries connected to the Pipelines, 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. KPP
has not engaged, nor does it currently intend to engage, in the merchant
function of buying and selling refined petroleum products. KPP's business of
terminaling petroleum products and specialty liquids is conducted under the name
ST Services.
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired Shore
Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (with a market value of $56.5 million on the date of the
agreement and its announcement). Financing for the cash portion of the purchase
price was supplied under KPP's $275 million unsecured revolving credit
agreement, which is without recourse to the Company, with a group of banks. See
"Liquidity and Capital Resources". Shore owns seven terminals, located in four
states, with a total tankage capacity of 7.8 million barrels. All of the
terminals handle petroleum products and, with the exception of one, have deep
water access.
On February 1, 1999, KPP, through two wholly-owned indirect subsidiaries,
acquired six terminals in the United Kingdom from GATX Terminal Limited for
(pound)22.6 million (approximately $37.2 million) plus transaction costs and the
assumption of certain liabilities. The acquisition of the six locations, which
have an aggregate tankage capacity of 5.4 million barrels, was initially
financed by KPP with term loans from a bank. $13.3 million of the term loans
were repaid in July 1999 with the proceeds from KPP's public unit offering. See
"Liquidity and Capital Resources". Three of the terminals, handling petroleum
products, chemicals and molten sulfur, respectively, operate in England. The
remaining three facilities, two in Scotland and one in Northern Ireland, are
primarily petroleum terminals. All six terminals are served by deepwater marine
docks.
KPP is the third largest independent liquids terminaling company in the
United States. At December 31, 2001, ST Services operated 41 facilities in 20
states, the District of Columbia and six facilities in the United Kingdom with
an aggregate tankage capacity of approximately 39.0 million barrels.
In 1998, KPL acquired a petroleum product marketing business which provides
wholesale motor fuel marketing services in the Great Lakes and Rocky Mountain
regions, as well as California.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Consolidated revenues.................................................. $ 535,338 $ 537,418 $ 370,326
Consolidated operating income.......................................... $ 79,791 $ 61,174 $ 64,911
Consolidated income before gain on issuance of units by KPP,
income taxes and extraordinary item................................. $ 18,325 $ 15,467 $ 17,999
Consolidated net income................................................ $ 28,323 $ 12,643 $ 44,257
Consolidated capital expenditures, excluding acquisitions.............. $ 17,309 $ 9,533 $ 14,620
For the year ended December 31, 2001, consolidated revenues decreased by
$2.1 million, or less than 1%, when compared to the year ended December 31,
2000, due to a $53.6 million decrease in product marketing revenues, resulting
from decreases in both volumes sold and sales prices, that were substantially
offset by a $47.3 million increase in terminaling revenues and a $4.3 million
increase in pipeline revenues. Terminaling revenues include the operations of
Shore from the January 3, 2001 acquisition date. Consolidated operating income
for the year ended December 31, 2001 increased by $18.6 million, or 30%, when
compared to the year ended December 31, 2000, due to a $22.0 million increase in
terminaling operating income, partially offset by a $3.1 million decrease in
product marketing operating income. Consolidated December 31, 2001 income before
gain on issuance of units by KPP, income taxes and extraordinary item, increased
by $2.9 million, or 18%, when compared to the year ended December 31, 2000, due
primarily to an increase in terminaling operating income, partially offset by a
decrease in product marketing operating income. Consolidated net income for the
year ended December 31, 2001 includes a gain of $9.9 million, before income
taxes, from the January 2001 issuance of units by KPP (See "Liquidity and
Capital Resources") and an extraordinary loss on extinguishment of KPP debt of
$0.9 million, net of income taxes and interest of outside non-controlling
partners in KPP net income. Additionally, effective with the Distribution, the
Company became a pass-through entity with its income, for Federal and state
purposes, taxed at the shareholder level instead of the Company paying such
taxes. As a result of the change in tax status of the Company, all deferred
income tax assets and liabilities relating to temporary differences were
eliminated, resulting in a credit to income tax expense in 2001 of $8.6 million.
Consolidated net income for the year ended December 31, 2001, including these
items, aggregated $28.3 million, compared to $12.6 million in 2000.
For the year ended December 31, 2000, consolidated revenues increased by
$167.1 million, or 45%, when compared to 1999, due to a $168.9 million increase
in revenues from the product marketing business. Consolidated operating income
decreased by $3.7 million, or 6%, when compared to 1999, due to a $5.2 million
decrease in terminaling operating income, partially offset by a $0.4 million
increase in pipeline operating income and a $1.0 million increase in product
marketing operating income. Consolidated 2000 income before income taxes and the
gain on issuance of units by KPP decreased by $2.5 million, or 14%, when
compared to the 1999 period. Consolidated net income for 2000 includes $4.6
million in expected benefits from prior years tax losses (change in valuation
allowance) that were available to offset future taxable income (See "Income
Taxes"). Consolidated net income, including this item, was $12.6 million in
2000. Additionally, as a result of the recognition of expected future income tax
benefits in 1999, the results of operations for the year ended December 31, 2000
reflect a full effective tax rate provision, before the change in valuation
allowance.
PIPELINE OPERATIONS
- -------------------
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 74,976 $ 70,685 $ 67,607
Operating costs...................................... 28,844 25,223 23,579
Depreciation and amortization........................ 5,478 5,180 5,090
General and administrative........................... 3,881 4,069 3,102
----------- ----------- -----------
Operating income..................................... $ 36,773 $ 36,213 $ 35,836
=========== =========== ===========
Pipelines revenues are based on volumes shipped and the distances over
which such volumes are transported. For the year ended December 31, 2001,
revenues increased by $4.3 million, compared to 2000, due to increases in barrel
miles shipped and increases in terminaling charges. For the year ended December
31, 2000, revenues increased by $3.1 million, compared to 1999, due to an
increase in terminaling charges. Because tariff rates are regulated by the FERC,
the Pipelines compete primarily on the basis of quality of service, including
delivering products at convenient locations on a timely basis to meet the needs
of its customers. Barrel miles totaled 18.6 billion, 17.8 billion and 18.4
billion for the years ended December 31, 2001, 2000 and 1999, respectively.
Operating costs, which include fuel and power costs, materials and
supplies, maintenance and repair costs, salaries, wages and employee benefits,
and property and other taxes, increased by $3.6 million in 2001 and $1.6 million
in 2000, respectively. The increase in 2001 was due to increases in fuel and
power costs and expenses from pipeline relocation projects. The increase in 2000
was due to increases in materials and supplies costs, including additives, that
are volume related. General and administrative costs, which include managerial,
accounting and administrative personnel costs, office rental expense, legal and
professional costs and other non-operating costs, decreased by $0.2 million in
2001 and increased by $1.0 million in 2000, compared to the respective prior
year. The increase in 2000 was the result of a one-time benefit resulting from
the favorable elimination of a contingency in 1999.
TERMINALING OPERATIONS
- ----------------------
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Revenues............................................. $ 132,820 $ 85,547 $ 90,421
Operating costs...................................... 61,788 44,430 45,569
Depreciation and amortization........................ 17,706 11,073 9,953
General and administrative........................... 8,008 7,812 6,322
Gain on sale of assets............................... - (1,126) -
----------- ----------- -----------
Operating income..................................... $ 45,318 $ 23,358 $ 28,577
=========== =========== ===========
For the year ended December 31, 2001, revenues increased by $47.3 million,
compared to 2000, due to the Shore acquisition and overall increases on
utilization and at existing locations, the result of relatively favorable market
conditions. Approximately $36.0 million of the 2001 revenue increase was a
result of the Shore acquisition. 2000 revenues decreased by $4.9 million,
compared to 1999, as revenue increases resulting from the United Kingdom and
other 1999 terminal acquisitions were more than offset by decreases in tank
utilization due to unfavorable domestic market conditions resulting from
declines in forward product pricing. Average annual tankage utilized for the
years ended December 31, 2001, 2000 and 1999 aggregated 30.1 million barrels,
21.0 million barrels and 22.6 million barrels, respectively. The 2001 increase
in average annual tankage utilized resulted from the Shore acquisition and the
favorable market conditions. The 2000 decrease resulted from the unfavorable
domestic market conditions. Average revenues per barrel of tankage utilized for
the years ended December 31, 2001, 2000 and 1999 was $4.41, $4.12 and $4.00,
respectively. The increase in 2001 average revenues per barrel of tankage
utilized was due to favorable market conditions, when compared to 2000. The 2000
increase, when compared to 1999, was due to the storage of a larger
proportionate volume of specialty chemicals, which are historically at higher
per barrel rates than petroleum products.
In 2001, operating costs increased by $17.4 million, when compared to 2000,
due to the Shore acquisition and increases in volumes stored. 2000 operating
costs decreased by $1.1 million, when compared to 1999, due to lower costs
resulting from the overall decline in volumes stored. General and administrative
expense increased by $0.2 million in 2001 and by $1.5 million in 2000. The
increase in general and administrative costs in 2001, compared to 2000, is due
to the Shore acquisition partially offset by the extraordinary high litigation
costs in 2000. The increase in 2000, compared to 1999, was due entirely to the
extraordinarily high litigation costs. In 2000, KPP sold land and other
terminaling business assets for approximately $2.0 million in net proceeds,
recognizing a gain on disposition of assets of $1.1 million.
Total tankage capacity (39.0 million barrels at December 31, 2001) has
been, and is expected to remain, adequate to meet existing customer storage
requirements. Customers consider factors such as location, access to cost
effective transportation and quality of service, in addition to pricing, when
selecting terminal storage.
PRODUCT MARKETING SERVICES
- --------------------------
Year Ended December 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
(in thousands)
Revenues............................................................... $ 327,542 $ 381,186 $ 212,298
Cost of products sold.................................................. 326,230 377,132 209,165
----------- ----------- -----------
Gross margin........................................................... $ 1,312 $ 4,054 $ 3,133
=========== =========== ===========
Operating income (loss)................................................ $ (611) $ 2,472 $ 1,459
=========== =========== ===========
For the year ended December 31, 2001, product marketing revenues decreased
by $53.6 million, or 14%, compared to 2000, due to a decrease in both volumes
sold and sales price. Volumes sold and sales price decreased to 364 million
gallons and $0.90 per gallon in 2001, compared to 408 million gallons and $0.94
per gallon in 2000. Gross margin and operating income decreased by $2.7 million
and $3.1 million, respectively, in 2001, compared to 2000, due to sharp
fluctuations in prices, which more than offset normal product margins.
For the year ended December 31, 2000, revenues increased by $168.9 million
compared to 1999, due to an increase in both sales volumes and sales price.
Total volumes sold and sales price per gallon for the year ended December 31,
2000 aggregated 408 million and $0.94, respectively, compared to 349 million and
$0.61, in 1999, respectively. The volume increases are due to a combination of
increasing the number of terminals through which products are sold and
increasing the sales volumes at existing locations. The price increase was due
to significant increases in overall market prices. For the year ended December
31, 2000, gross margin and operating income increased by $0.9 million and $1.0
million, respectively, due to the increase in both the volumes sold and the
sales price received.
INTEREST AND OTHER INCOME
- -------------------------
In March of 2001, a wholly-owned subsidiary of KPP entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings. As the interest rate locks were not
designated as hedging instruments pursuant to the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 133, increases or decreases in the
fair value of the contracts are included as a component of interest and other
income, net. On May 22, 2001, the contracts were settled resulting in a gain of
$3.8 million, before income taxes and interest of outside non-controlling
partners in KPP's net income.
INTEREST EXPENSE
- ----------------
For the year ended December 31, 2001, consolidated interest expense
increased by $2.0 million, compared to the year ended December 31, 2000, due to
increases in KPP debt resulting from the Shore acquisition (see "Liquidity and
Capital Resources"), partially offset by declines in interest rates on variable
rate debt. For the year ended December 31, 2000, consolidated interest expense
decreased by $0.5 million, when compared to 1999, due to repayments of KPP debt
from a portion of its 1999 offering proceeds (see "Liquidity and Capital
Resources"). The decrease is partially offset by increases in the product
marketing interest expense from overall higher debt levels resulting from the
additional working capital requirements of increases in sales.
INCOME TAXES
- ------------
Tax expense reported in the consolidated financial statements prior to the
Distribution represents the tax expense of the Company and its subsidiaries as
if they had filed on a separate return basis. As a result of the Distribution,
the Company no longer participates with Xanser in filing a consolidated Federal
income tax return. Effective with the Distribution, the Company became a
pass-through entity with its income, for Federal and state purposes, taxed at
the shareholder level instead of the Company paying such taxes. As a result of
the change in tax status of the Company, all deferred income tax assets and
liabilities relating to temporary differences (a net $8.6 million deferred tax
liability) were eliminated, resulting in a credit to income tax expense in the
second quarter of 2001.
Prior to the Distribution, the Company maintained a valuation allowance to
adjust the total deferred tax assets to net realizable value in accordance with
SFAS No. 109. For the years ended December 31, 2000 and 1999, the Company
reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations by $4.6 million and
$23.3 million, respectively. The Company considered positive evidence, including
the effect of the Distribution, recent historical levels of taxable income, the
scheduled reversal of deferred tax liabilities, tax planning strategies, revised
estimates of future taxable income growth, and expiration periods of NOLs, among
other things, in making this evaluation and concluding that it is more likely
than not that the Company will realize the benefit of its net deferred tax
assets. Upon completion of the Distribution, all remaining deferred tax assets
relating to previously recorded net operating loss carryforwards ($16.2
million), which were utilized by Xanser to offset federal income taxes resulting
from the Distribution, were charged directly to shareholders' equity.
Income tax expense for the year ended December 31, 2000 includes a benefit
of $0.6 million, compared to $1.6 million for the year ended December 31, 1999,
relating to favorable developments pertaining to the resolution of certain state
income tax issues.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operating activities, including the operations of KPP, was
$110.1 million, $53.5 million and $52.7 million for the years ended December 31,
2001, 2000 and 1999, respectively. The increase in 2001 cash flows from
operations, compared to 2000, is primarily the result of increases in
terminaling revenues and operating income, a result of the Shore acquisition and
increases in utilization at existing terminal locations.
Capital expenditures, excluding expansion capital expenditures, were $17.3
million, $9.5 million and $14.6 million for the years ended December 31, 2001,
2000 and 1999, respectively, and almost exclusively relate to KPP. During all
periods, adequate pipeline capacity existed to accommodate volume growth, and
the expenditures required for environmental and safety improvements were not,
and are not expected in the future to be, significant. Environmental damages
caused by sudden and accidental occurrences are included under KPP's insurance
coverages (subject to deductibles and limited). KPP anticipates that routine
maintenance capital expenditures (excluding acquisitions) will total
approximately $15 million to $20 million in 2002. Such future expenditures by
KPP, however, will depend on many factors beyond KPP's control, including,
without limitation, demand for refined petroleum products and terminaling
services in KPP'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 KPP
will have the ability to finance such expenditure through borrowings, or choose
to do so.
KPP expects to fund its future cash distributions and its capital
expenditures (excluding acquisitions) with existing cash and anticipated cash
flows from operations. Expansionary capital expenditures of KPP are expected to
be funded through additional KPP bank borrowings and/or future KPP unit or debt
offerings.
The Company expects to make quarterly distributions of 100% of available
cash, as defined in the limited liability agreement, to the common shareholders
of record on the applicable record date, within 45 days after the end of each
quarter. Available cash consists generally of all the cash receipts less all
cash disbursements and reserves. Distributions of $.3625 per share were declared
and paid for each of the third and fourth quarters of 2001.
On July 13, 2001, the Company entered into an agreement with a bank that
provides for a $50 million revolving credit facility through July 1, 2008. The
credit facility, which bears interest at variable rates, is secured by 4.6
million KPP limited partnership units and has a variable rate commitment fee on
unused amounts. At December 31, 2001, $9.1 million was drawn on the credit
facility, at an interest rate of 3.01%.
In December 2000, KPP entered into a credit agreement with a group of banks
that provides for a $275 million unsecured revolving credit facility through
December 2003. The credit facility, which is without recourse to the Company,
bears interest at variable rates and has a variable commitment fee on unutilized
amounts. The credit facility contains financial and operational covenants,
including limitations on investments, sales of assets and transactions with
affiliates. Absent an event of default, those covenants do not restrict
distributions to the Company or the other partners. In January of 2001, proceeds
from the facility were used to repay in full KPP's $128 million of mortgage
notes and $15 million outstanding under its $25 million revolving credit
facility. An additional $107 million was used to finance the cash portion of the
Shore acquisition. Under the provisions of the mortgage notes, KPP incurred $6.5
million in prepayment penalties which, net of income taxes and interest of
outside non-controlling partners in KPP's net income, has been recognized as an
extraordinary expense in the first quarter of 2001. At December 31, 2001, $238.9
million was drawn on the facility, at an interest rate of 2.69%, which is due in
December 2003.
In January 1999, KPP, through two wholly-owned subsidiaries, entered into a
credit agreement with a bank that provided for the issuance of $39.2 million of
term loans in connection with the United Kingdom terminal acquisition and $5.0
million for general partnership purposes. $18.3 million of the term loans were
repaid in July 1999 with the proceeds from KPP's public unit offering. The
remaining portion ($23.7 million at December 31, 2001), with a fixed rate of
7.25%, is due in December 2003. The term loans under the credit agreement, as
amended, are unsecured and are pari passu with the $275 million revolving credit
facility. The term loans, which are without recourse to the Company, contain
certain financial and operational covenants.
The product marketing subsidiary has a credit agreement with a bank that,
as amended, provides for a $20 million revolving credit facility through March
2003. The credit facility bears interest at variable rates, has a commitment fee
of 0.25% per annum on unutilized amounts and contains certain financial and
operational covenants. The credit facility, which is without recourse to the
Company, is secured by essentially all of the tangible and intangible assets of
the products marking business and by 500,000 KPP limited partnership units held
by the product marketing subsidiary. At December 31, 2001, $5.6 million was
drawn on the facility.
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per unit, generating approximately $65.6 million in net
proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, the $25.0 million revolving credit facility and $18.3
million in term loans (including $13.3 million in term loans resulting from the
United Kingdom terminal acquisition).
In January of 2002, KPP issued 1.25 million limited partnership units in a
public offering at $41.65 per unit, generating approximately $49.7 million in
net proceeds. The proceeds were used to reduce the amount of indebtedness
outstanding under KPP's $275 million revolving credit facility.
In February 2002, KPOP issued $250 million of 7.75% senior unsecured notes
due February 15, 2012. The net proceeds from the public offering, $248.2
million, were used to repay the $188.9 million outstanding under the $275
million revolving credit agreement and to partially fund the acquisition of all
of the liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, KPP acquired Statia for approximately $194 million in
cash. The acquired Statia subsidiaries have approximately $107 million in
outstanding debt, including $101 million of 11.75% notes due in November 2003.
The cash portion of the purchase price was funded by KPP's $275 million
revolving credit agreement and proceeds from KPOP's February 2002 public debt
offering. On March 1, 2002, KPP announced that it had commenced the procedure to
redeem all of Statia's 11.75% notes at 102.938% of the principal amount, plus
accrued interest. The redemption is expected to be funded by KPP's $275 million
revolving credit facility.
See also "Item 1 - Regulation", regarding the FERC's Lakehead decision.
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with Xanser, whereby, the Company will pay Xanser an
amount equal to the expenses incurred by Xanser in connection with the
Distribution. These expenses include approximately $6.1 million in costs
incurred in connection with the redemption of Xanser's Series A Preferred Stock
and approximately $2.1 million in legal and professional and other expenses
incurred in connection with the Distribution. The distribution of common shares
is taxable to Xanser, which will recognize taxable income to the extent of the
excess of the value of the Company's common shares distributed over the tax
basis of the Company's assets in the hands of Xanser. Xanser will use all of its
available net operating loss carryforwards to reduce that taxable income, but
the total amount of taxable income is expected to exceed such net operating loss
carryforwards, and the Distribution Agreement obligates the Company to pay
Xanser amounts calculated based on whatever tax is due on the net amount of
income. The Company cannot currently determine exactly what this amount will be
and what the tax will be, but Xanser estimates that the tax will approximate
$14.6 million, after utilization of all available net operating loss
carryforwards and $4.4 million of alternative minimum tax credits. Included in
long-term payables and other liabilities at December 31, 2001 is approximately
$14.7 million for such costs and expenses. The Distribution Agreement also
requires the Company to pay Xanser an amount calculated based on any income tax
liability of Xanser that, in the sole judgement of Xanser, (i) is attributable
to increases in income tax from past years arising out of adjustments required
by Federal and state tax authorities, to the extent that such increases are
properly allocable to the businesses that became part of the Company, or (ii) is
attributable to the distribution of the Company's common shares and the
operations of the Company's businesses in the current year and the preceding
years. In the event of an examination of Xanser by Federal or state tax
authorities, Xanser will have unfettered control over the examination,
administrative appeal, settlement or litigation that may be involved,
notwithstanding that the Company has agreed to pay any additional tax.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The carrying value of KPP's property and equipment is periodically
evaluated using management's estimates of undiscounted future cash flows, or, in
some cases, third-party appraisals, as the basis of determining if impairment
exists under the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed Of". To the extent
that impairment is indicated to exist, an impairment loss is recognized by KPP
under SFAS No. 121 based on fair value. The application of SFAS No. 121 did not
have a material impact on the results of operations of KPP for the years ended
December 31, 2001, 2000 or 1999. However, future evaluations of carrying value
are dependent of many factors, some of which are out of KPP's control, including
demand for refined petroleum products and terminaling services in KPP's market
areas, and local, state and Federal governmental regulations. To the extent that
such factors or conditions change, it is possible that future impairments might
occur, which could have a material effect on the results of operations of KPP.
KPP environmental expenditures that relate to current operations are
expensed or capitalized, as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded by KPP when
environmental assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. Generally, the timing of these accruals coincides
with the completion of a feasibility study or KPP's commitment to a formal plan
of action. The application of KPP's environmental accounting policies did not
have a material impact on the results of operations of KPP for the years ended
December 31, 2001, 2000 or 1999. Although KPP believes that its operations are
in general compliance with applicable environmental regulations, risks of
substantial costs and liabilities are inherent in pipeline and terminaling
operations. Moreover, it is possible that other developments, such as
increasingly strict environmental laws, regulations and enforcement policies
thereunder, and legal claims for damages to property or persons resulting from
operations of KPP could result in substantial costs and liabilities, any of
which could have a material effect on the results of operations of KPP.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In July of 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141 "Business Combinations", which requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method of accounting. SFAS No. 141 also specifies the criteria for recording
intangible assets other than goodwill in a business combination. The Company is
currently assessing the impact of SFAS No. 141 on its financial statements.
Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and
Other Intangible Assets", which requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The Company is currently
assessing the impact of SFAS No. 142, which must be adopted in the first quarter
of 2002.
Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which establishes requirements for the removal-type costs
associated with asset retirements. The Company is currently assessing the impact
of SFAS No. 143, which must be adopted in the first quarter of 2003.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144, which supercedes SFAS No. 121, is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years
with earlier application encouraged. The Company is currently assessing the
impact on its financial statements.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios. The Company's investment
portfolio consists of cash equivalents; accordingly, the carrying amounts
approximate fair value. The Company's investments are not material to its
financial position or performance. Assuming variable rate debt of $253.6 million
(including KPP's debt) at December 31, 2001, a one percent increase in interest
rates would increase annual net interest expense and decrease interest of
outside non-controlling partners in KPP's net income by approximately $2.5
million and $1.7 million, respectively.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Company begin on
page F-1 of this report. Such information is hereby incorporated by reference
into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements Beginning
Page
Set forth below ris a list of financial statements appearing in this
report.
Kaneb Services LLC Financial Statements:
Independent Auditors' Report.............................................................. F - 1
Consolidated Statements of Income - Three Years Ended December 31, 2001................... F - 2
Consolidated Balance Sheets - December 31, 2001 and 2000.................................. F - 3
Consolidated Statements of Cash Flows - Three Years Ended December 31, 2001............... F - 4
Consolidated Statements of Shareholders' Equity - Three Years
Ended December 31, 2001................................................................ F - 5
Notes to Consolidated Financial Statements................................................ F - 6
(a)(2) Financial Statement Schedules
Set forth below are the financial statement schedules appearing in
this report.
Schedule I - Kaneb Services LLC (Parent Company) Condensed Financial Statements:
Statement of Income - Period from June 30, 2001 to December 31, 2001...................... F - 20
Balance Sheet - December 31, 2001......................................................... F - 21
Statement of Cash Flows - Period from June 30, 2001 to December 31, 2001.................. F - 22
Schedule II - Kaneb Services LLC Valuation and Qualifying Accounts - Years Ended
December 31, 2001, 2000 and 1999.......................................................... F - 23
Schedules, other than those listed above, have been omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements
or related notes thereto. Schedule I information for periods prior to June
30, 2001 has been omitted since the Parent Company was not formed and
capitalized prior to that date.
(a)(3) List of Exhibits
3.01 Amended and Restated Limited Liability Company Agreement of Registrant,
filed as Exhibit 3.1 to the exhibits to Registrant's Form 10-Q, for the
period ended June 30, 2001, which exhibit is hereby incorporated by
reference.
4.01 Specimen Common Share Certificate, filed as Exhibit 4.01 to the exhibits
to Registrant's Form 10/A, dated May 1, 2001, which exhibit is hereby
incorporated by reference.
4.02 Kaneb Services LLC 2001 Incentive Plan, filed as Exhibit 4.2 to the
exhibits to Registrant's Registration Statement on Form S-8 ("Form S-8")
(S.E.C. File No. 333-65404), which exhibit is hereby incorporated by
reference.
10.01 Distribution Agreement by and between the Registrant and Kaneb Services,
Inc., filed as Exhibit 10.1 to the exhibits to Registrant's Form 10-Q,
for the period ended June 30, 2001, which exhibit is hereby incorporated
by reference.
10.02 Administrative Services Agreement by and between the Registrant and Kaneb
Services, Inc., filed as Exhibit 10.2 to the exhibits to Registrant's
Form 10-Q, for the period ended June 30, 2001, which exhibit is hereby
incorporated by reference.
10.03 Rights Agreement by and between the Registrant and The Chase Manhattan
Bank, filed as Exhibit 10.3 to the exhibits to Registrant's Form 10-Q,
for the period ended June 30, 2001, which exhibit is hereby incorporated
by reference.
10.04 Employee Benefits Agreement by and between the Registrant and Kaneb
Services, Inc., filed as Exhibit 10.04 to the exhibits to Registrant's
Form 10/A, dated May 24, 2001, which exhibit is hereby incorporated by
reference.
10.05 ST Agreement and Plan of Merger dated December 21, 1992 by and among
Grace Energy Corporation, Support Terminal Services, Inc., Standard
Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc.
and NSTI, Inc., as amended by Amendment of STS Merger Agreement dated
March 2, 1993, filed as Exhibit 10.1 of the exhibits to Kaneb Pipe Line
Partners, L.P.'s Current Report on Form 8-K, dated March 16, 1993, which
exhibit is hereby incorporated by reference.
10.06 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company
and Kaneb Pipe Line Operating Partnership, L.P., dated February 19, 1995,
filed as Exhibit 10.1 of the exhibits to the Kaneb Pipe Line Partners,
L.P.'s March 1995 Form 8-K, which exhibit is hereby incorporated by
reference.
10.07 Asset Purchase Agreements between and among Steuart Petroleum Company,
SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment
Company, Support Terminals Operating Partnership, L.P. and Kaneb Pipe
Line Operating Partnership, L.P., as amended, dated August 27, 1995,
filed as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Kaneb
Pipe Line Partners, L.P's Current Report on Form 8-K dated January 3,
1996, which exhibits are hereby incorporated by reference.
10.08 Credit Agreement dated March 25, 1998 between Martin Oil Corporation and
Harris Trust & Savings Bank, filed as Exhibit 10.08 to the exhibits to
Registrant's Form 10/A, dated May 1, 2001, which exhibit is hereby
incorporated by reference.
10.09 First Amendment to Credit Agreement dated March 18, 1999 between Martin
Oil Corporation and Harris Trust & Savings Bank, filed as Exhibit 10.09
to the exhibits to Registrant's Form 10/A, dated May 1, 2001, which
exhibit is hereby incorporated by reference.
10.10 Second Amendment to Credit Agreement dated February 11, 2000 between
Martin Oil Corporation and Harris Trust & Savings Bank, filed as Exhibit
10.10 to the exhibits to Registrant's Form 10/A, dated May 1, 2001, which
exhibit is hereby incorporated by reference.
10.11 Formation and Purchase Agreement, by and among Support Terminal Operating
Partnership, L.P., Northville Industries Corp. and AFFCO, Corp., dated
October 30, 1998, filed as Exhibit 10.9 to the Kaneb Pipe Line Partners,
L.P.'s Form 10-K for the year ended December 31, 1998, which exhibit is
hereby incorporated by reference.
10.12 Agreement, by and among, GATX Terminals Limited, ST Services Ltd., ST
Eastham, Ltd., GATX Terminals Corporation, Support Terminals Operating
Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated January 26,
1999, filed as Exhibit 10.10 to the Kaneb Pipe Line Partners, L.P.'s Form
10-K for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
10.13 Credit Agreement, by and among, Kaneb Pipe Line Operating Partnership,
L.P., ST Services, Ltd. and SunTrust Bank, Atlanta, dated January 27,
1999, filed as Exhibit 10.11 to the Kaneb Pipe Line Partners, L.P.'s Form
10-K for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
10.14 Revolving Credit Agreement, dated as of December 28, 2000 by and among
Kaneb Pipe Line Operating Partnership, L.P., Kaneb Pipe Line Partners,
L.P., the Lenders party thereto, and SunTrust Bank, as Administrative
Agent, filed as Exhibit 10.11 to Kaneb Pipe Line Partners, L.P.'s Form
10-K for the year ended December 31, 2000, which exhibit is hereby
incorporated by reference.
10.15 Securities Purchase Agreement by and among Shore Terminals LLC, Kaneb
Pipe Line Partners, L.P. and the Sellers Named Therein, dated as of
September 22, 2000, Amendment No. 1 To Securities Purchase Agreement,
dated as of November 28, 2000 and Registration Rights Agreement, dated as
of January 3, 2001, filed as Exhibits 10.1, 10.2 and 10.3 of the exhibits
to Kaneb Pipe Line Partners, L.P.'s Current Report on Form 8-K dated
January 3, 2001, which exhibits are hereby incorporated by reference.
10.16 Kaneb Services LLC 401(k) Savings Plan, filed as Exhibit 10.16 to the
exhibits to Registrant's Form 10/A, dated May 24, 2001, which exhibit is
hereby incorporated by reference.
10.17 Credit Agreement by and between the Registrant and Kaneb Services, Inc.,
filed as Exhibit 10.5 to the exhibits to Registrant's Form 10-Q, for the
period ended June 30, 2001, which exhibit is hereby incorporated by
reference. This credit commitment was permanently terminated effective
December 10, 2001.
10.18 Loan Agreement by and between the Registrant, Kaneb Pipe Line Company LLC
and the Bank of Scotland, filed as Exhibit 10.6 to the exhibits to
Registrant's Form 10-Q, for the period ended June 30, 2001, which exhibit
is hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
23 Consent of KPMG LLP, filed herewith.
24 Powers of Attorney (included in this report and incorporated herein by
reference.)
(b) Reports on Form 8-K
None.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Kaneb Services LLC
We have audited the accompanying consolidated balance sheets of Kaneb Services
LLC and its subsidiaries (the "Company") as listed in the index appearing in
Item 14(a)(1). In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules as listed in
the index appearing under Item 14(a)(2). These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
February 11, 2002
F - 1
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Revenues:
Services................................................... $ 207,796,000 $ 156,232,000 $ 158,028,000
Products................................................... 327,542,000 381,186,000 212,298,000
--------------- -------------- --------------
Total revenues.......................................... 535,338,000 537,418,000 370,326,000
--------------- -------------- --------------
Costs and expenses:
Cost of products sold...................................... 326,230,000 377,132,000 209,165,000
Operating costs............................................ 91,704,000 70,399,000 70,012,000
Depreciation and amortization.............................. 23,261,000 16,320,000 15,094,000
General and administrative................................. 14,352,000 13,519,000 11,144,000
Gain on sale of assets..................................... - (1,126,000) -
--------------- -------------- --------------
Total costs and expenses................................ 455,547,000 476,244,000 305,415,000
--------------- -------------- --------------
Operating income.............................................. 79,791,000 61,174,000 64,911,000
Interest and other income..................................... 4,132,000 332,000 445,000
Interest expense.............................................. (15,381,000) (13,346,000) (13,878,000)
--------------- -------------- --------------
Income before gain on issuance of units by KPP, income taxes,
interest of outside non-controlling partners in KPP's net
income and extraordinary item.............................. 68,542,000 48,160,000 51,478,000
Gain on issuance of units by KPP.............................. 9,859,000 - 16,764,000
Income tax benefit (expense).................................. 998,000 (2,824,000) 9,494,000
Interest of outside non-controlling partners in KPP's
net income................................................. (50,217,000) (32,693,000) (33,479,000)
--------------- -------------- --------------
Income before extraordinary item.............................. 29,182,000 12,643,000 44,257,000
Extraordinary item - loss on extinguishment of debt
by KPP, net of income taxes and interest of outside
non-controlling partners in KPP............................ (859,000) - -
--------------- -------------- --------------
Net income.................................................... $ 28,323,000 $ 12,643,000 $ 44,257,000
=============== ============== ==============
Earnings per share:
Basic:
Before extraordinary item............................... $ 2.65 $ 1.19 $ 4.22
Extraordinary item...................................... (0.08) - -
--------------- -------------- --------------
$ 2.57 $ 1.19 $ 4.22
=============== ============== ==============
Diluted:
Before extraordinary item............................... $ 2.54 $ 1.15 $ 4.06
Extraordinary item...................................... (0.08) - -
--------------- -------------- --------------
$ 2.46 $ 1.15 $ 4.06
=============== ============== ==============
See notes to consolidated financial statements.
F - 2
KANEB SERVICES LLC
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 10,004,000 $ 6,394,000
Accounts receivable.......................................................... 32,890,000 38,417,000
Inventories.................................................................. 8,402,000 15,998,000
Prepaid expenses and other................................................... 3,378,000 5,521,000
-------------- --------------
Total current assets...................................................... 54,674,000 66,330,000
-------------- --------------
Property and equipment.......................................................... 639,291,000 459,070,000
Less accumulated depreciation................................................... 157,895,000 137,622,000
-------------- --------------
Net property and equipment................................................ 481,396,000 321,448,000
-------------- --------------
Investments in affiliates....................................................... 22,252,000 22,568,000
Excess of cost over fair value of net assets of acquired businesses
and other assets............................................................. 13,445,000 19,506,000
-------------- --------------
$ 571,767,000 $ 429,852,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 15,152,000 $ 13,093,000
Accrued expenses............................................................. 18,753,000 14,965,000
Accrued distributions payable to shareholders................................ 4,131,000 -
Accrued distributions payable to outside non-controlling
partners in KPP's net income.............................................. 11,392,000 9,250,000
Deferred terminaling fees.................................................... 6,515,000 3,717,000
-------------- --------------
Total current liabilities................................................. 55,943,000 41,025,000
-------------- --------------
Long-term debt.................................................................. 277,302,000 184,052,000
Long-term payables and other liabilities........................................ 36,371,000 13,425,000
Interest of outside non-controlling partners in KPP............................. 168,219,000 119,981,000
Commitments and contingencies
Shareholders' equity:
Shareholders' investment..................................................... 34,428,000 71,774,000
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment................................. (496,000) (405,000)
-------------- --------------
33,932,000 71,369,000
-------------- --------------
$ 571,767,000 $ 429,852,000
============== ==============
See notes to consolidated financial statements.
F - 3
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Operating activities:
Net income................................................. $ 28,323,000 $12,643,000 $ 44,257,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................... 23,261,000 16,320,000 15,094,000
Equity in earnings of affiliates, net of distributions.. (5,000) (154,000) (1,072,000)
Interest of outside non-controlling partners in KPP's
net income............................................ 50,217,000 32,693,000 33,479,000
Gain on issuance of units by KPP........................ (9,859,000) - (16,764,000)
Gain on sale of assets ................................. - (1,126,000) -
Deferred income taxes................................... (999,000) 2,448,000 (9,147,000)
Extraordinary item...................................... 859,000 - -
Other................................................... (5,728,000) 1,101,000 1,386,000
Changes in working capital components:
Accounts receivable................................... 7,617,000 (4,760,000) (11,959,000)
Inventories and prepaid expenses...................... 8,770,000 (6,759,000) (6,491,000)
Accounts payable and accrued expenses................. 7,620,000 1,115,000 3,932,000
--------------- -------------- --------------
Net cash provided by operating activities............. 110,076,000 53,521,000 52,715,000
--------------- -------------- --------------
Investing activities:
Acquisitions of terminals by KPP, net of cash acquired..... (111,562,000) (12,264,000) (44,390,000)
Capital expenditures....................................... (17,309,000) (9,533,000) (14,620,000)
Proceeds from sale of assets............................... 2,807,000 1,961,000 -
Other...................................................... (2,157,000) (74,000) (973,000)
--------------- -------------- --------------
Net cash used in investing activities................. (128,221,000) (19,910,000) (59,983,000)
--------------- -------------- --------------
Financing activities:
Issuance of debt........................................... 269,625,000 20,724,000 59,508,000
Payments on debt........................................... (182,915,000) (3,700,000) (58,332,000)
Issuance of common shares.................................. 2,354,000 - -
Distributions to shareholders.............................. (4,137,000) - -
Distributions to outside non-controlling
partners in KPP......................................... (44,040,000) (37,000,000) (35,426,000)
Changes in long-term payables and other liabilities........ (19,132,000) (13,491,000) (19,676,000)
Net proceeds from issuance of units by KPP................. - - 65,574,000
--------------- -------------- --------------
Net cash provided by (used in) financing activities... 21,755,000 (33,467,000) 11,648,000
--------------- -------------- --------------
Increase in cash and cash equivalents......................... 3,610,000 144,000 4,380,000
Cash and cash equivalents at beginning of period.............. 6,394,000 6,250,000 1,870,000
--------------- -------------- --------------
Cash and cash equivalents at end of period.................... $ 10,004,000 $ 6,394,000 $ 6,250,000
=============== ============== ==============
Supplemental cash flow information:
Cash paid for interest..................................... $ 15,044,000 $ 13,529,000 $ 13,253,000
=============== ============== ==============
Cash paid for income taxes................................. $ 312,000 $ 601,000 $ 417,000
=============== ============== ==============
Non-cash investing and financing activities-
Issuance of units in connection with
acquisition of terminals by KPP......................... $ 56,488,000 $ - $ -
=============== ============== ==============
See notes to consolidated financial statements.
F - 4
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Shareholders' Comprehensive Comprehensive
Investment Income (Loss) Total Income
------------- -------------- ------------- --------------
Balance at January 1, 1999.................. $ 37,192,000 $ - $ 37,192,000 $ -
Net income for the year................ 44,257,000 - 44,257,000 44,257,000
Capital contributions.................. 5,588,000 - 5,588,000 -
Foreign currency translation adjustment - (204,000) (204,000) (204,000)
------------- -------------- ------------- --------------
Comprehensive income for the year...... $ 44,053,000
==============
Balance at December 31, 1999................ 87,037,000 (204,000) 86,833,000 -
Net income for the year................ 12,643,000 - 12,643,000 12,643,000
Capital contributions.................. 2,094,000 - 2,094,000 -
Dividends.............................. (30,000,000) - (30,000,000) -
Foreign currency translation adjustment - (201,000) (201,000) (201,000)
------------- -------------- ------------- --------------
Comprehensive income for the year...... $ 12,442,000
==============
Balance at December 31, 2000................ 71,774,000 (405,000) 71,369,000 -
Net income for the year................ 28,323,000 - 28,323,000 28,323,000
Capital contributions.................. 328,000 - 328,000 -
Dividends.............................. (61,310,000) - (61,310,000) -
Distributions declared................. (8,268,000) - (8,268,000) -
Issuance of common shares and other.... 3,581,000 - 3,581,000 -
Foreign currency translation adjustment - (91,000) (91,000) (91,000)
------------- -------------- ------------- --------------
Comprehensive income for the year...... $ 28,232,000
==============
Balance at December 31, 2001................ $ 34,428,000 $ (496,000) $ 33,932,000
============= ============== =============
See notes to consolidated financial statements.
F - 5
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Distribution by Kaneb Services, Inc.
On November 27, 2000, the Board of Directors of Kaneb Services, Inc.
authorized the distribution of its Pipeline, Terminaling and Product Marketing
businesses (the "Distribution") to its stockholders in the form of a new limited
liability company, Kaneb Services LLC (the "Company"). On June 29, 2001, the
Distribution was completed, with each shareholder of Kaneb Services, Inc.
receiving one common share of the Company for each three shares of Kaneb
Services, Inc.'s common stock held on June 20, 2001, the record date for the
Distribution, resulting in the distribution of 10.85 million shares of the
Company. On August 7, 2001, the stockholders of Kaneb Services, Inc. approved an
amendment to its certificate of incorporation to change its name to Xanser
Corporation ("Xanser").
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with Xanser, whereby, the Company will pay Xanser an
amount equal to the expenses incurred by Xanser in connection with the
Distribution. These expenses include approximately $6.1 million in costs
incurred in connection with the redemption of Xanser's Series A Preferred Stock
and approximately $2.1 million in legal and professional and other expenses
incurred in connection with the Distribution. The distribution of common shares
is taxable to Xanser, which will recognize taxable income to the extent of the
excess of the value of the Company's common shares distributed over the tax
basis of the Company's assets in the hands of Xanser. Xanser will use all of its
available net operating loss carryforwards to reduce that taxable income, but
the total amount of taxable income is expected to exceed such net operating loss
carryforwards, and the Distribution Agreement obligates the Company to pay
Xanser amounts calculated based on whatever tax is due on the net amount of
income. The Company cannot currently determine exactly what this amount will be
and what the tax will be, but Xanser estimates that the tax will approximate
$14.6 million, after utilization of all available net operating loss
carryforwards and $4.4 million of alternative minimum tax credits. Included in
long-term payables and other liabilities at December 31, 2001 is approximately
$14.7 million for such costs and expenses. The Distribution Agreement also
requires the Company to pay Xanser an amount calculated based on any income tax
liability of Xanser that, in the sole judgement of Xanser, (i) is attributable
to increases in income tax from past years arising out of adjustments required
by Federal and state tax authorities, to the extent that such increases are
properly allocable to the businesses that became part of the Company, or (ii) is
attributable to the distribution of the Company's common shares and the
operations of the Company's businesses in the current year and the preceding
years. In the event of an examination of Xanser by Federal or state tax
authorities, Xanser will have unfettered control over the examination,
administrative appeal, settlement or litigation that may be involved,
notwithstanding that the Company has agreed to pay any additional tax.
Basis of Presentation
The consolidated financial statements reflect the results of operations
of the Company, which is comprised of the pipeline, terminaling and product
marketing businesses of Xanser that were distributed to the stockholders of
Xanser on June 29, 2001. The consolidated financial statements have been
prepared using the historical bases in the assets and liabilities and historical
results of operations related to these businesses. All significant intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents.
Inventories
Inventories consist primarily of petroleum products purchased for resale
in the product marketing business and are valued at the lower of cost or market.
Cost is determined using the weighted average cost method.
F - 6
Property and Equipment
Property and equipment are carried at historical cost. Additions of new
equipment and major renewals and replacements of existing equipment are
capitalized. Repairs and minor replacements that do not materially increase
values or extend useful lives are expensed. Depreciation of property and
equipment is provided on a straight-line basis at rates based upon expected
useful lives of various classes of assets. The rates used for pipeline and
certain storage facilities, which are subject to regulation, are the same as
those which have been promulgated by the Federal Energy Regulatory Commission
(the "FERC").
The carrying value of KPP's property and equipment is periodically
evaluated using undiscounted future cash flows as the basis for determining if
impairment exists under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". To the extent impairment is
indicated to exist, an impairment loss will be recognized by KPP under SFAS No.
121 based on fair value.
Revenue and Income Recognition
Pipeline transportation revenues are recognized as services are provided.
Storage fees are billed one month in advance and are reported as deferred
income. Revenue is recognized in the month services are provided. Revenues from
the product marketing business are recognized when product is sold and title and
risk pass to the customer.
Sales of Securities by Subsidiaries
The Company recognizes gains and losses in the statements of income
resulting from subsidiary sales of additional equity interest, including KPP
limited partnership units, to unrelated parties.
Foreign Currency Translation
The Company translates the balance sheet of KPP's foreign subsidiary
using year-end exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from the change in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive income (loss) in
Shareholder's Equity. Gains and losses resulting from foreign currency
transactions are included in the statements of income.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
The excess of cost over the fair value of net assets of acquired
businesses is being amortized on a straight-line basis over periods ranging from
20 to 40 years. Accumulated amortization was $0.2 million at December 31, 2001.
The Company periodically evaluates the proprietary of the carrying amount
of the excess of cost over fair value of net assets of acquired businesses, as
well as the amortization period, to determine whether current events or
circumstances warrant adjustments to the carrying value and/or revised estimates
of the amortization period. The Company believes that no such impairment has
occurred and that no reduction in the amortization period is warranted.
Environmental Matters
KPP environmental expenditures that relate to current operations are
expensed or capitalized, as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded by KPP when
environmental assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. Generally, the timing of these accruals coincides
with the completion of a feasibility study or KPP's commitment to a formal plan
of action.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
130 only requires additional disclosure and does not affect the Company's
financial position or results of operations.
Cash Distributions
The Company expects to make quarterly distributions of 100% of available
cash, as defined in the limited liability agreement, to the common shareholders
of record on the applicable record date, within 45 days after the end of each
quarter. Available cash consists generally of all the cash receipts less all
cash disbursements and reserves. Distributions of $.3625 per share were declared
for each of the third and fourth quarters of 2001.
Accounting for Income Taxes
The accompanying financial statements have been prepared under SFAS No.
109, "Accounting for Income Taxes", assuming the Company were a separate entity.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. As a result of the Distribution on June 29, 2001, the
Company became a pass-through entity with its income, for federal and state
purposes, taxed at the shareholder level instead of the Company paying such
taxes.
Earnings Per Share
Earnings per share for the period subsequent to the Distribution has been
calculated using basic and diluted weighted average shares outstanding for each
of the periods presented. Prior to June 30, 2001, the basic weighted average
shares were calculated by adjusting Xanser's historical basic weighted average
shares outstanding for the applicable period to reflect the number of Company
shares that would have been outstanding at the time assuming the distribution of
one Company common share for each three shares of Xanser common stock. For
periods prior to the Distribution, the diluted weighted average shares reflect
an estimate of the potential dilutive effect of common stock equivalents. Such
estimate is calculated based on Xanser's dilutive effect of common stock
equivalents. For the years ended December 31, 2001, 2000 and 1999, basic
weighted average shares outstanding were 11,014,000, 10,589,000 and 10,484,000,
and diluted weighted average shares outstanding were 11,509,000, 11,029,000 and
10,897,000, respectively.
Derivative Instruments
Effective January 1, 2001, the Company adopted the provisions of SFAS No.
133, "Accounting For Derivative Instruments and Hedging Activities", which
establishes the accounting and reporting standards for such activities. Under
SFAS No. 133, companies must recognize all derivative instruments on its balance
sheet at fair value. Changes in the value of derivative instruments, which are
considered hedges, are offset against the change in fair value of the hedged
item through earnings, or recognized in other comprehensive income until the
hedged item is recognized in earnings, depending on the nature of the hedge.
SFAS No. 133 requires that unrealized gains and losses on derivatives not
qualifying for hedge accounting be recognized currently in earnings. On January
1, 2001, the Company was not a party to any derivative contracts, accordingly,
initial adoption of SFAS No. 133 at that date did not have any effect on the
Company's result of operations or financial position.
In March of 2001, a wholly-owned subsidiary of KPP entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings. As the interest rate locks were not
designated as hedging instruments pursuant to the requirements of SFAS No. 133,
increases or decreases in the fair value of the contracts were included as a
component of interest and other income. On May 22, 2001, the contracts were
settled resulting in a gain of $3.8 million, before income taxes and interest of
outside non-controlling partners in KPP's net income.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141 "Business Combinations", which requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method of accounting. SFAS No. 141 also specifies the criteria for recording
intangible assets other than goodwill in a business combination. The Company is
currently assessing the impact of SFAS No. 141 on its financial statements.
Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and
Other Intangible Assets", which requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The Company is currently
assessing the impact of SFAS No. 142, which must be adopted in the first quarter
of 2002.
Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which establishes requirements for the removal-type costs
associated with asset retirements. The Company is currently assessing the impact
of SFAS No. 143, which must be adopted in the first quarter of 2003.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144, which supercedes SFAS No. 121, is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years
with earlier application encouraged. The Company is currently assessing the
impact on its financial statements.
2. PUBLIC OFFERING OF UNITS BY KPP
In July 1999, KPP issued 2.25 million limited partnership units in a
public offering at $30.75 per unit, generating approximately $65.6 million in
net proceeds. A portion of the proceeds was used to repay in full KPP's term
loans (including $13.3 million in term loans resulting from the United Kingdom
terminal acquisition referred to in note 3). As a result of KPP issuing
additional units to unrelated parties, the Company's pro-rata share of the net
assets of KPP increased by $16.8 million. Accordingly, in 1999, the Company
recognized a $16.8 million gain before deferred income taxes of $6.4 million.
3. ACQUISITIONS
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired
Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (valued at $56.5 million on the date of agreement and its
announcement). Financing for the cash portion of the purchase price was supplied
under KPP's $275 million unsecured revolving credit agreement, with a group of
banks (see Note 6). The acquisition has been accounted for, beginning in January
2001, using the purchase method of accounting. As a result of KPP issuing
additional units to unrelated parties, the Company's share of net assets of KPP
increased by $9.9 million. Accordingly, the Company recognized a $9.9 million
gain, before deferred income taxes of $3.8 million, in the first quarter of
2001. Assuming the Shore acquisition occurred on January 1, 2000, unaudited pro
forma revenues, net income, basic earnings per share and diluted earnings per
share for the year ended December 31, 2000 would be $570.8 million, $12.4
million, $1.17 and $1.12, respectively.
On February 1, 1999, KPP, through two wholly-owned indirect subsidiaries,
acquired six terminals in the United Kingdom from GATX Terminal Limited for
(pound)22.6 million (approximately $37.2 million) plus transaction costs and the
assumption of certain liabilities. The acquisition, which was initially financed
by KPP with term loans from a bank, has been accounted for using the purchase
method of accounting. $13.3 million of the term loans were repaid by KPP in July
1999 with the proceeds from a public unit offering (see Note 2).
4. INCOME TAXES
The Company has historically participated with Xanser in filing a
consolidated federal income tax return. Tax expense reported in the consolidated
financial statements prior to the Distribution represents the tax expense of the
Company and its subsidiaries as if they had filed on a separate return basis.
Effective with the Distribution, the Company became a pass-through entity with
its income, for Federal and state purposes, taxed at the shareholder level
instead of the Company paying such taxes. As a result of the change in tax
status of the Company, all deferred income tax assets and liabilities relating
to temporary differences (a net $8.6 million deferred tax liability) were
eliminated, resulting in a credit to income tax expense in the second quarter of
2001.
Certain KPP terminaling operations are conducted through separate taxable
wholly-owned corporate subsidiaries. The income before tax expense for these
subsidiaries was $4.5 million, $4.1 million and $4.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively. KPP has recorded a deferred tax
liability of $6.1 million and $5.9 million as December 2001 and 2000,
respectively, which is associated with these subsidiaries.
Income tax expense (benefit) is made up of the following components:
Year ended December 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
Federal:
Current............................... $ - $ (203,000) $ 311,000
Deferred.............................. (1,972,000) 1,434,000 (10,129,000)
--------------- --------------- ----------------
(1,972,000) 1,231,000 (9,818,000)
--------------- --------------- ----------------
Foreign:
Current............................... - - -
Deferred.............................. 1,144,000 991,000 1,296,000
--------------- --------------- ----------------
1,144,000 991,000 1,296,000
--------------- --------------- ----------------
State:
Current............................... 590,000 579,000 (659,000)
Deferred.............................. (760,000) 23,000 (313,000)
--------------- --------------- ----------------
(170,000) 602,000 (972,000)
--------------- --------------- ----------------
Total income tax expense (benefit)...... $ (998,000) $ 2,824,000 $ (9,494,000)
=============== =============== ================
Prior to the Distribution, the Company maintained a valuation allowance
to adjust the total deferred tax assets to net realizable value in accordance
with SFAS No. 109. For the years ended December 31, 2000 and 1999, the Company
reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations by $4.6 million and
$23.3 million, respectively. The Company considered positive evidence, including
the effect of the Distribution, recent historical levels of taxable income, the
scheduled reversal of deferred tax liabilities, tax planning strategies, revised
estimates of future taxable income growth, and expiration periods of NOLs, among
other things, in making this evaluation and concluding that it is more likely
than not that the Company will realize the benefit of its net deferred tax
assets. Upon completion of the Distribution, all remaining deferred tax assets
relating to previously recorded net operating loss carryforwards ($16.2
million), which were utilized by Xanser to offset federal income taxes resulting
from the Distribution, were charged directly to shareholders' equity.
5. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
Estimated December 31,
useful ---------------------------------------------
life (years) 2001 2000
-------------- ----------------- -------------------
Land...................................... -- $ 43,005,000 $ 23,360,000
Buildings................................. 35 10,849,000 9,159,000
Furniture and fixtures.................... 16 4,092,000 3,574,000
Transportation equipment.................. 6 5,092,000 4,469,000
Machinery and equipment................... 20 - 40 32,750,000 32,996,000
Pipeline and terminaling equipment........ 20 - 40 534,292,000 378,123,000
Construction and work-in-progress......... -- 9,211,000 7,389,000
----------------- ------------------
Total property and equipment.............. 639,291,000 459,070,000
Less accumulated depreciation........... 157,895,000 137,622,000
----------------- ------------------
Net property and equipment................ $ 481,396,000 $ 321,448,000
================= ==================
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
-------------------------------------
2001 2000
--------------- ---------------
Revolving credit facility, due July 2008....................... $ 9,125,000 $ -
KPP first mortgage notes, repaid in January 2001............... - 128,000,000
KPP $25 million revolving credit facility, repaid
in January 2001.............................................. - 15,000,000
KPP term loan, due January 2002................................ 23,724,000 23,900,000
KPP $275 million revolving credit facility, due December 2003.. 238,900,000 -
Revolving credit facility of subsidiary, due March 2003........ 5,553,000 17,152,000
--------------- ---------------
Total long-term debt........................................... $ 277,302,000 $ 184,052,000
=============== ===============
In December 2000, KPP entered into a credit agreement with a group of
banks that provides for a $275 million unsecured revolving credit facility
through December 2003. The credit facility, which is without recourse to the
Company, bears interest at variable rates and has a variable commitment fee on
unutilized amounts. The credit facility contains certain financial and
operational covenants, including certain limitations on investments, sales of
assets and transactions with affiliates. Absent an event of default, such
covenants do not restrict distributions to the Company or other limited partner
interests. In January of 2001, proceeds from the facility were used to repay in
full KPP's $128 million of mortgage notes and $15 million outstanding under its
$25 million revolving credit facility. An additional $107 million was used to
finance the cash portion of the Shore acquisition. Under the provisions of the
mortgage notes, KPP incurred $6.5 million in prepayment penalties which, net of
income taxes and interest of outside non-controlling partners in KPP's net
income, has been recognized as an extraordinary expense in the first quarter of
2001. At December 31, 2001, $238.9 million was drawn on the facility, at an
interest rate of 2.69%, which is due in December 2003.
In January 1999, KPP, through two wholly-owned subsidiaries, entered into
a credit agreement with a bank that provided for the issuance of $39.2 million
in term loans in connection with the United Kingdom terminal acquisition and
$5.0 million for general partnership purposes. $18.3 million of the term loans
were repaid in July 1999 with the proceeds from KPP's public unit offering. The
remaining portion ($23.7 million at December 31, 2001), with a fixed rate of
7.25%, is due in December 2003. The term loans under the credit agreement, as
amended, are unsecured and are pari passu with the $275 million revolving credit
facility. The term loans contain certain financial and operational covenants.
The product marketing subsidiary has a credit agreement with a bank that,
as amended, provides for a $20 million revolving credit facility through March
2003. The credit facility bears interest at variable rates, has a commitment fee
of 0.25% per annum on unutilized amounts and contains certain financial and
operational covenants. The credit facility, which is without recourse to the
Company, is secured by essentially all of the tangible and intangible assets of
the product marketing business and by 500,000 KPP limited partnership units held
by a subsidiary of the Company. At December 31, 2001, $5.6 million was drawn on
the facility.
7. RETIREMENT PLANS
Prior to the Distribution, substantially all of the Company's domestic
employees were covered by Kaneb Services, Inc.'s defined contribution plan,
which provided for varying levels of employer matching. Effective with the
Distribution, the Company adopted a similar defined contribution plan for its
employees. The Company's contributions under these plans were $1.0 million, $0.8
million and $0.8 million for 2001, 2000 and 1999, respectively.
8. EMPLOYEE STOCK PLANS
The Company has various plans for officers, directors and key employees
under which stock options, deferred stock units and restricted stock may be
issued.
Stock Options
The options granted under the plan generally expire ten years from date
of grant. All options were granted at prices greater than or equal to the market
price at the date of grant.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS 123. The Black-Scholes option pricing model
has been used to estimate the value of stock options issued and the assumptions
in the calculations under such model include stock price variance or volatility
of 2.40% based on weekly average variances of KPP's units prior to the
Distribution and the Company's common shares after the Distribution for the ten
year period preceding issuance, a risk-free rate of return of 5.39% based on the
30-year U.S. treasury bill rate for the ten-year expected life of the options,
and an annual dividend yield of 8.4%. Using estimates calculated by such option
pricing model, pro forma net income, basic earnings per share and diluted
earnings per share would have been $28,284,000, $2.51 and $2.41, respectively
for the year ended December 31, 2001.
In connection with the Distribution, the Company issued options in its
common shares to all holders of Kaneb Services, Inc. common stock options in
order to maintain the same intrinsic value for each holder as at the time of the
Distribution. At the Distribution date, the exercise price for each option to
purchase shares of Kaneb Services, Inc. common stock was reduced to an amount
equal to the result of (1) the fair market value of a share of Kaneb Services,
Inc.'s common stock on the ex-dividend date multiplied by (2) a fraction, the
numerator of which was the original exercise price for the option and the
denominator of which was the fair market value of a share of Kaneb Services,
Inc.'s common stock on the last trading date prior to the ex-dividend date. The
number of shares subject to the Kaneb Services, Inc. stock option was not
changed as a result of the Distribution. With regard to options issued for
shares of the Company, the exercise price applicable was that price that created
the same ratio of exercise price to market price as in the adjusted exercise
price applicable to the holders of Kaneb Services, Inc. options. The number of
common shares subject to options issued by the Company was such number necessary
to produce an intrinsic value (determined as of the ex-dividend date) that, when
added to the intrinsic value of the adjusted Kaneb Services, Inc. option
(determined as of the ex-dividend date), equaled the pre-distribution intrinsic
value of the Kaneb Services, Inc. option, if any, (determined as of the last
trading date prior to the ex-dividend date). However options to purchase
fractional common shares of the Company were not granted. The fair market values
of shares of Kaneb Services, Inc.'s common stock and the Company's common shares
were based upon the closing sales price of the stock on the last trading date
prior to the ex-distribution date and the opening sales price of the shares on
the ex-distribution date. All options issued by the Company, excluding the
Company's corporate staff and Xanser's corporate staff, were issued without
restrictions on exercise.
At December 31, 2001, options on 669,701 shares at prices ranging from
$3.27 to $14.33 were outstanding, of which 345,653 were exercisable at prices
ranging from $3.27 to $11.28.
Deferred Stock Unit Plan
In 1996, Kaneb Services, Inc. implemented a stock-based deferred
compensation plan (Deferred Stock Unit or DSU Plan) whereby officers, directors
and key executives were permitted to defer compensation on a pretax basis to
receive shares of Kaneb Services, Inc. common stock at a predetermined date
after the end of the compensation deferral period. In connection with the
Distribution, the Company agreed to issue Deferred Stock Units (DSUs) equivalent
in price to the Company's common shares at that time. For every three Kaneb
Services, Inc. DSUs held, the Company issued one DSU, such that the intrinsic
value of each holder's deferred compensation account remained unchanged as a
result of the Distribution. In addition, upon the payment date of any dividends
on the Company's common shares, the Company agreed to credit each deferred
account with the equivalent value of the dividend. Upon the scheduled payment of
the deferred accounts, the Company agreed to issue one common share for each DSU
relative to Company DSUs previously issued and to pay the equivalent of the
accumulated deferred dividends to the previously deferred account holder. All
other terms of the DSU Plan remained unchanged. Similarly, Kaneb Services, Inc.
agreed to issue to employees of the Company who hold DSUs, the number of shares
of Kaneb Services, Inc. (now Xanser) common stock subject to the Kaneb Services,
Inc. DSUs held by those employees. At December 31, 2001, approximately 190,000
common shares of the Company are issuable under this arrangement.
Restricted Stock
In September 2001, the Company issued an aggregate of 30,000 restricted
common shares to the outside Directors of the Company. All of such shares vest
or become transferable in one-third increments on each anniversary date after
issuance. In conjunction will the issuance and commencement of vesting of the
restricted shares, the Company recognized a total expense of $0.1 million in
2001.
9. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments
under KPP's operating leases as of December 31, 2001:
Year ending December 31:
2002...................................... $ 2,664,000
2003...................................... 2,433,000
2004...................................... 1,979,000
2005...................................... 1,411,000
2006...................................... 1,383,000
-------------
Total minimum lease payments.............. $ 9,870,000
=============
Total rent expense under operating leases amounted to $4.2 million, $3.2
million and $2.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
The operations of KPP are subject to Federal, state and local laws and
regulations in the United States and the United Kingdom relating to protection
of the environment. Although KPP believes its operations are in general
compliance with applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline and terminal operations, and there can
be no assurance that significant costs and liabilities will not be incurred by
KPP. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations of
KPP, could result in substantial costs and liabilities to KPP. KPP has recorded
an undiscounted reserve for environmental claims in the amount of $13.5 million
at December 31, 2000, including $12.8 million related to acquisitions of
pipelines and terminals. During 2001 and 2000, respectively, KPP incurred $5.2
million and $2.3 million of costs related to such acquisition reserves and
reduced the liability accordingly.
In December 1995, KPP acquired the liquids terminaling assets of Steuart
Petroleum Company and certain of its affiliates. The asset purchase agreement
includes a provision for an earn-out payment, which, if incurred, would be
recorded as additional purchase price, based upon revenues of one of the
terminals exceeding a specified amount for a seven-year period ending in
December 2002. No amount was payable under the earn-out provision in 1999, 2000
and 2001.
The asset purchase agreement entered into by a subsidiary of the Company
in connection with the 1998 acquisition of its product marketing business
includes a provision for an earn-out based on annual operating results of the
acquired business for a five-year period ending March 2003. In 2000, $211,000
was paid under the earn-out provision and included as additional purchase price.
No amounts were payable under the earn-out provision in 2001 or 1999.
Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace Energy Corporation ("Grace"), the entity from which KPP's subsidiaries
acquired ST Services in 1993. The lawsuit involves environmental response and
remediation costs allegedly resulting from jet fuel leaks in the early 1970's
from a pipeline. The pipeline, which connected a former Grace terminal with Otis
Air Force Base in Massachusetts (the "Otis pipeline" or the "pipeline"), ceased
operations in 1973 and was abandoned not later than 1976, when the connecting
terminal was sold to an unrelated entity. Grace alleged that subsidiaries of KPP
acquired the abandoned pipeline, as part of the acquisition of ST Services in
1993 and assumed responsibility for environmental damages allegedly caused by
the jet fuel leaks. Grace sought a ruling from the Texas court that these
subsidiaries are responsible for all liabilities, including all present and
future remediation expenses, associated with these leaks and that Grace has no
obligation to indemnify these subsidiaries for these expenses. In the lawsuit,
Grace also sought indemnification for expenses of approximately $3.5 million
that it incurred since 1996 for response and remediation required by the State
of Massachusetts and for additional expenses that it expects to incur in the
future. The consistent position of KPP's subsidiaries has been that they did not
acquire the abandoned pipeline as part of the 1993 ST Services transaction, and
therefore did not assume any responsibility for the environmental damage nor any
liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including findings
that (1) Grace had breached a provision of the 1993 acquisition agreement by
failing to disclose matters related to the pipeline, and (2) the pipeline was
abandoned before 1978 -- 15 years before KPP's subsidiaries acquired ST
Services. On August 30, 2000, the Judge entered final judgment in the case that
Grace take nothing from the subsidiaries on its claims seeking recovery of
remediation costs. Although KPP's subsidiaries have not incurred any expenses in
connection with the remediation, the court also ruled, in effect, that the
subsidiaries would not be entitled to indemnification from Grace if any such
expenses were incurred in the future. Moreover, the Judge let stand a prior
summary judgment ruling that the pipeline was an asset acquired by KPP's
subsidiaries as part of the 1993 ST Services transaction and that any
liabilities associated with the pipeline would have become liabilities of the
subsidiaries. Based on that ruling, the Massachusetts Department of
Environmental Protection and Samson Hydrocarbons Company (successor to Grace
Petroleum Company) wrote letters to ST Services alleging its responsibility for
the remediation, and ST Services responded denying any liability in connection
with this matter. The Judge also awarded attorney fees to Grace of more than
$1.5 million. Both KPP's subsidiaries and Grace have appealed the trial court's
final judgment to the Texas Court of Appeals in Dallas. In particular, the
subsidiaries have filed an appeal of the judgement finding that the Otis
pipeline and any liabilities associated with the pipeline were transferred to
them as well as the award of attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy, which created an
automatic stay against actions against Grace. This automatic stay covers the
appeal of the Dallas litigation, and the Texas Court of Appeals has issued an
order staying all proceedings of the appeal because of the bankruptcy. Once that
stay is lifted, KPP's subsidiaries that are party to the lawsuit intend to
resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR Site"), which has been declared a Superfund Site pursuant to
CERCLA. The MMR Site contains nine groundwater contamination plumes, two of
which are allegedly associated with the Otis pipeline, and various other waste
management areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, have been responding to the Government remediation demand for most of
the contamination problems at the MMR Site. Grace and others have also received
and responded to formal inquiries from the United States Government in
connection with the environmental damages allegedly resulting from the jet fuel
leaks. KPP's subsidiaries voluntarily responded to an invitation from the
Government to provide information indicating that they do not own the pipeline.
In connection with a court-ordered mediation between Grace and KPP's
subsidiaries, the Government advised the parties in April 1999 that it has
identified two spill areas that it believes to be related to the pipeline that
is the subject of the Grace suit. The Government at that time advised the
parties that it believed it had incurred costs of approximately $34 million, and
expected in the future to incur costs of approximately $55 million, for
remediation of one of the spill areas. This amount was not intended to be a
final accounting of costs or to include all categories of costs. The Government
also advised the parties that it could not at that time allocate its costs
attributable to the second spill area.
By letter dated July 26, 2001, the United States Department of Justice
("DOJ") advised ST Services that the Government intends to seek reimbursement
from ST Services under the Massachusetts Oil and Hazardous Material Release
Prevention and Response Act and the Declaratory Judgment Act for the
Government's response costs at the two spill areas discussed above. The DOJ
relied in part on the judgment by the Texas state court that, in the view of the
DOJ, held that ST Services was the current owner of the pipeline and the
successor-in-interest of the prior owner and operator. The Government advised ST
Services that it believes it has incurred costs exceeding $40 million, and
expects to incur future costs exceeding an additional $22 million, for
remediation of the two spill areas. KPP believes that its subsidiaries have
substantial defenses. ST Services responded to the DOJ on September 6, 2001,
contesting the Government's positions and declining to reimburse any response
costs. The DOJ has not filed a lawsuit against ST Services seeking cost recovery
for its environmental investigation and response costs.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac
Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a
partnership of which ST Services is general partner. PEPCO has reported that it
expects to incur total cleanup costs of $70 million to $75 million. Since May
2000, ST Services has provisionally contributed a minority share of the cleanup
expense, which has been funded by ST Services' insurance carriers. KPP and PEPCO
have not, however, reached a final agreement regarding our proportionate
responsibility for this cleanup effort and have reserved all rights to assert
claims for contribution against each other. KPP cannot predict the amount, if
any, that ultimately may be determined to be ST Services' share of the
remediation expense, but it believes that such amount will be covered by
insurance and will not materially adversely affect KPP's financial condition.
As a result of the rupture, purported class actions have been filed
against PEPCO and ST Services in federal and state court in Maryland by property
and/or business owners alleging damages in unspecified amounts under various
theories, including under the Oil Pollution Act ("OPA"). The court consolidated
all of these cases in a case styled as In re Swanson Creek Oil Spill Litigation.
The trial judge recently granted preliminary approval of a $2,250,000 class
settlement, with ST Services and PEPCO each contributing half of the settlement
fund. Notice of the proposed settlement will be sent to putative class members
and putative class members have until March 26, 2002 to opt out. ST Services or
PEPCO can void the settlement if too many putative class members opt out and
elect to pursue separate litigation. A hearing on final settlement will be held
on April 15, 2002. If the settlement is finally approved, this litigation should
be concluded in 2002. It is expected that most class members will elect to
participate in the class settlement, but it is possible that even if the In re
Swanson Creek Oil Spill Litigation settlement becomes final, ST Services may
still face litigation from opt-out plaintiffs. ST Services' insurance carriers
have assumed the defense of these actions. While KPP cannot predict the amount,
if any, of any liability it may have in these suits, it believes that such
amounts will be covered by insurance and that these actions will not have a
material adverse effect on our financial condition.
PEPCO and ST Services have agreed with the State of Maryland to pay costs
of assessing natural resource damages arising from the Swanson Creek oil spill
under OPA, but they cannot predict at this time the amount of any damages that
may be claimed by Maryland. KPP believes that both the assessment costs and such
damages are covered by insurance and will not materially adversely affect KPP's
financial condition.
The U.S. Department of Transportation ("DOT") has issued a Notice of
Proposed Violation to PEPCO and ST Services alleging violations over several
years of pipeline safety regulations and proposing a civil penalty of $674,000.
ST Services and PEPCO have contested the DOT allegations and the proposed
penalty. A hearing was held before the DOT in late 2001, and ST Services
anticipates that the DOT will rule during the first quarter of 2002. In
addition, by letter dated January 4, 2002, the Attorney General's Office for the
State of Maryland advised ST Services that it plans to exercise its right to
seek penalties from ST Services in connection with the April 7, 2000 spill. The
ultimate amount of any penalty attributable to ST Services cannot be determined
at this time, but KPP believes that this matter will not have a material adverse
effect on its financial condition.
The Company, primarily KPP, has other contingent liabilities resulting
from litigation, claims and commitments incident to the ordinary course of
business. Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect on
the financial position or results of operations of the Company.
10. RELATED PARTY TRANSACTIONS
General and administrative expenses include allocations of actual costs
incurred of approximately $0.2 million in 2001 and $0.8 million in 2000 and
1999, which were incurred by Kaneb Services, Inc. in providing services to the
Company based on the time devoted to the Company. These services include
accounting, tax, finance, legal, investor relations and employee benefit
services. Such allocation is included in the accompanying combined statements of
income as general and administrative expenses and as a capital contribution.
11. BUSINESS SEGMENT DATA
The Company conducts business through three principal operations; the
"Pipeline Operations," which consists primarily of the transportation of refined
petroleum products in the Midwestern states as a common carrier, the
"Terminaling Operations," which provide storage for petroleum products,
specialty chemicals and other liquids, and the "Product Marketing Operations",
which provides wholesale motor fuel marketing services throughout the Midwest
and Rocky Mountain regions, as well as California. General corporate includes
general and administrative costs, including accounting, tax, finance, legal,
investor relations and employee benefit services. General corporate assets
include cash, deferred income taxes and other assets not related to the
segments.
The Company measures segment profit as operating income. Total assets are
those assets controlled by each reportable segment. Business segment data is as
follows:
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Business segment revenues:
Pipeline operations................................... $ 74,976,000 $ 70,685,000 $ 67,607,000
Terminaling operations................................ 132,820,000 85,547,000 90,421,000
Product marketing operations.......................... 327,542,000 381,186,000 212,298,000
--------------- -------------- --------------
$ 535,338,000 $ 537,418,000 $ 370,326,000
=============== ============== ==============
Business segment profit:
Pipeline operations................................... $ 36,773,000 $ 36,213,000 $ 35,836,000
Terminaling operations................................ 45,318,000 23,358,000 28,577,000
Product marketing operations.......................... (611,000) 2,472,000 1,459,000
General corporate..................................... (1,689,000) (869,000) (961,000)
--------------- -------------- --------------
Operating income................................... 79,791,000 61,174,000 64,911,000
Interest expense...................................... (15,381,000) (13,346,000) (13,878,000)
Interest and other income ............................ 4,132,000 332,000 445,000
--------------- -------------- --------------
Income before gain on issuance of units by KPP,
income taxes, interest of outside non-controlling
partners in KPP's' net income and
extraordinary item................................. $ 68,542,000 $ 48,160,000 $ 51,478,000
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Pipeline operations................................ $ 5,478,000 $ 5,180,000 $ 5,090,000
Terminaling operations............................. 17,706,000 11,073,000 9,953,000
Product marketing operations....................... 77,000 67,000 51,000
--------------- -------------- --------------
$ 23,261,000 $ 16,320,000 $ 15,094,000
=============== ============== ==============
Capital expenditures (excluding acquisitions):
Pipeline operations................................... $ 4,309,000 $ 3,439,000 $ 3,547,000
Terminaling operations................................ 12,937,000 6,044,000 11,021,000
Product marketing operations.......................... 63,000 50,000 52,000
--------------- -------------- --------------
$ 17,309,000 $ 9,533,000 $ 14,620,000
=============== ============== ==============
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Total assets:
Pipeline operations................................... $ 105,156,000 $ 102,656,000 $ 104,774,000
Terminaling operations................................ 443,215,000 272,407,000 261,179,000
Product marketing operations.......................... 19,313,000 35,364,000 28,101,000
General corporate..................................... 4,083,000 19,425,000 33,554,000
--------------- -------------- --------------
$ 571,767,000 $ 429,852,000 $ 427,608,000
=============== ============== ==============
The following geographical area data includes revenues based on location
of the operating segment and net property and equipment based on physical
location.
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Geographical area revenues:
United States........................................... $ 514,276,000 $ 517,915,000 $ 348,495,000
United Kingdom.......................................... 21,062,000 19,503,000 21,831,000
--------------- -------------- --------------
$ 535,338,000 $ 537,418,000 $ 370,326,000
=============== ============== ==============
Geographical area operating income:
United States........................................... $ 74,275,000 $ 56,725,000 $ 59,037,000
United Kingdom.......................................... 5,516,000 4,449,000 5,874,000
--------------- -------------- --------------
$ 79,791,000 $ 61,174,000 $ 64,911,000
=============== ============== ==============
Geographical area net property and equipment:
United States........................................... $ 440,226,000 $ 282,778,000 $ 275,251,000
United Kingdom.......................................... 41,170,000 38,670,000 41,705,000
--------------- -------------- --------------
$ 481,396,000 $ 321,448,000 $ 316,956,000
=============== ============== ==============
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all debt as of December 31, 2001 and 2000 was
approximately $277 million and $191 million, as compared to the carrying value
of $277 million and $184 million, respectively. These fair values were estimated
using discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. These estimates are
not necessarily indicative of the amounts that would be realized in a current
market exchange.
The Company does not believe that it has a significant concentration of
credit risk at December 31, 2001, as its accounts receivable are generated from
three business segments with customers located throughout the United States and
the United Kingdom. No customer constituted 10% of the Company's combined
revenues in 2001, 2000 or 1999.
13. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 2001 and 2000 are summarized as follows:
Quarter Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------- ---------------- ---------------- ---------------
2001:
Revenues........................ $ 136,421,000 $ 151,831,000 $ 130,663,000 $ 116,423,000
================ ================ =============== ==============
Operating income................ $ 17,319,000 $ 22,124,000 $ 22,726,000 $ 17,622,000
================ ================ =============== ==============
Net income...................... $ 6,896,000(a) $ 12,217,000(b) $ 5,956,000 $ 3,254,000
================ ================ =============== ==============
Earnings per share:
Basic........................ $ .65 $ 1.14 $ .55 $ .29
================ ================ =============== ==============
Diluted...................... $ .61 $ 1.08 $ .52 $ .28
================ ================ =============== ==============
2000:
Revenues........................ $ 117,069,000 $ 135,535,000 $ 135,058,000 $ 149,756,000
================ ================ =============== ==============
Operating income................ $ 13,669,000 $ 16,403,000 $ 17,664,000 $ 13,438,000
================ ================ =============== ==============
Net income...................... $ 2,416,000 $ 3,192,000 $ 2,680,000 $ 4,355,000 (c)
================ ================ =============== ==============
Earnings per share:
Basic........................ $ .23 $ .31 $ .26 $ .41
================ ================ =============== ==============
Diluted...................... $ .22 $ .29 $ .24 $ .39
================ ================ =============== ==============
(a) See Note 2 regarding gain on issuance of units by KPP and Note 6
regarding extraordinary item - loss on extinguishment of KPP debt.
(b) See Note 4 regarding benefit resulting from change in tax status.
(c) See Note 4 regarding reduction in valuation allowance for deferred
tax assets.
14. SUBSEQUENT EVENTS (unaudited)
In January of 2002, KPP issued 1.25 million limited partnership units in
a public offering at $41.65 per unit, generating approximately $49.7 million in
net proceeds. The proceeds were used to reduce the amount of indebtedness
outstanding under KPP's $275 million revolving credit facility.
In February 2002, KPOP issued $250 million of 7.75% senior unsecured
notes due February 15, 2012. The net proceeds from the public offering, $248.2
million, were used to repay the $188.9 million outstanding under the $275
million revolving credit agreement and to partially fund the acquisition of all
of the liquids terminaling subsidiaries of Statia Terminals Group NV ("Statia").
On February 28, 2002, KPP acquired Statia for approximately $194 million
in cash. The acquired Statia subsidiaries have approximately $107 million in
outstanding debt, including $101 million of 11.75% notes due in November 2003.
The cash portion of the purchase price was funded by KPP's $275 million
revolving credit agreement and proceeds from KPOP's February 2002 public debt
offering. On March 1, 2002, KPP announced that it had commenced the procedure to
redeem all of Statia's 11.75% notes at 102.938% of the principal amount, plus
accrued interest. The redemption is expected to be funded by KPP's $275 million
revolving credit facility.
Schedule I
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENT OF INCOME
Period from June 30, 2001 to December 31, 2001
General and administrative expenses.......................... $ (1,053,000)
Other income, net............................................ 23,000
Equity in earnings of subsidiaries........................... 10,240,000
-------------
Net income................................................ $ 9,210,000
=============
Earnings per share:
Basic..................................................... $ 0.84
=============
Diluted................................................... $ 0.80
=============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
F - 20
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED BALANCE SHEET
December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,369,000
Prepaid expenses and other assets......................... 601,000
-------------
Total current assets.................................... 1,970,000
-------------
Investments in and advances to subsidiaries.................. 62,358,000
Other assets................................................. 719,000
-------------
$ 65,047,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 275,000
Accrued expenses.......................................... 629,000
Accrued distributions payable............................. 4,131,000
-------------
Total current liabilities............................... 5,035,000
-------------
Long-term debt............................................... 9,125,000
Long-term payables and other liabilities..................... 16,955,000
Shareholders' equity:
Shareholders' investment.................................. 34,428,000
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment............... (496,000)
-------------
Total shareholders' equity.............................. 33,932,000
-------------
$ 65,047,000
=============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
F - 21
Schedule I
(Continued)
KANEB SERVICES LLC (PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
Period from June 30, 2001 to December 31, 2001
Operating activities:
Net income................................................................................... $ 9,210,000
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiaries, net of distributions................................... (5,370,000)
Changes in current assets and liabilities.................................................. 303,000
--------------
Net cash provided by operating activities................................................ 4,143,000
--------------
Investing activities:
Changes in other assets...................................................................... (719,000)
--------------
Net cash used in investing activities...................................................... (719,000)
--------------
Financing activities:
Issuance of debt............................................................................. 9,125,000
Issuance of common shares.................................................................... 2,354,000
Distributions to shareholders................................................................ (4,137,000)
Changes in long-term payables and other liabilities.......................................... (9,397,000)
--------------
Net cash used in financing activities...................................................... (2,055,000)
--------------
Increase in cash and cash equivalents........................................................... 1,369,000
Cash and cash equivalents at beginning of period................................................ -
--------------
Cash and cash equivalents at end of period...................................................... $ 1,369,000
==============
See "Notes to Consolidated Financial Statements" of
Kaneb Services LLC included in this report.
F - 22
Schedule II
KANEB SERVICES LLC
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
------------- ------------ ------------- ----------- -------------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
Year Ended December 31, 2001:
For doubtful receivables
classified as current assets... $ 565 $ 184 $ - $ (96)(a) $ 653
============= =========== ============= =========== ============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ - $ - $ - $ - $ -
============= =========== ============= =========== =============
Year Ended December 31, 2000:
For doubtful receivables
classified as current assets... $ 533 $ 460 $ - $ 428)(a) $ 565
============= =========== ============= =========== =============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 4,550 $ - $ - $ (4,550)(b) $ -
============= =========== ============= =========== =============
Year Ended December 31, 1999:
For doubtful receivables
classified as current assets... $ 198 $ 453 $ - $ (118)(a) $ 533
============= =========== ============= =========== =============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 27,842 $ - $ - $ (23,292)(b) $ 4,550
============= =========== ============= =========== =============
Notes:
(a) Receivable write-offs and reclassifications, net of recoveries.
(b) Reduction in valuation allowance resulting in income tax benefit.
F - 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Services LLC has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KANEB SERVICES LLC
By: JOHN R. BARNES
---------------------------------------
Chairman of the Board and
Chief Executive Officer
Date: March 15, 2002
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of John R. Barnes and Howard C.
Wadsworth his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same and all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Kaneb
Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line Company and
on the date indicated.
Signature Title Date
- ---------------------------------------- ---------------------------- --------------
Principal Executive Officer
JOHN R. BARNES Chairman of the Board March 15, 2002
- ---------------------------------------- and Chief Executive Officer
Principal Accounting Officer
HOWARD C. WADSWORTH Vice President, Treasurer March 15, 2002
- ---------------------------------------- and Secretary
Directors
SANGWOO AHN Director March 15, 2002
- ----------------------------------------
MURRAY R. BILES Director March 15, 2002
- ----------------------------------------
FRANK M. BURKE, JR. Director March 15, 2002
- ----------------------------------------
CHARLES R. COX Director March 15, 2002
- ----------------------------------------
HANS KESSLER Director March 15, 2002
- ----------------------------------------
JAMES R. WHATLEY Director March 15, 2002
- ----------------------------------------