ITEM 2. PROPERTIES
Descriptions of properties owned or utilized by the Partnership are contained in Item 1 of this report and such descriptions are hereby incorporated by reference into this Item 2. Under the captioned "Leases" in notes to the Partnership's financial statements included in Item 8 herein below, additional information is presented concerning obligations for lease and rental commitments. Said additional information is hereby incorporated by reference into this Item 2.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary course of business. Subject to certain deductibles and self-insurance retentions, substantially all the claims made in these lawsuits are covered by insurance policies.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In July, 1994, the unitholders of the Partnership overwhelmingly approved a consent solicitation amending the Partnership Agreement to allow the Partnership to issue up to an additional 7.5 million Senior Preference Units. The Partnership has no current plans to issue these units, however, this gives the Partnership added flexibility for future acquisitions or refinancing.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND RELATED UNITHOLDER MATTERS
The Partnership's senior preference limited partner interests ("Senior Preference Units") are listed and traded on the New York Stock Exchange. At March 17, 1995, there were approximately 1,164 Senior Preference Unitholders of record. Set forth below are Senior Preference Unit prices on the New York Stock Exchange and cash distributions per Senior Preference Unit paid for the periods indicated.
The Partnership has paid the Minimum Quarterly Distribution on each outstanding Senior Preference Unit for each quarter since the Partnership's inception. The Partnership has also paid the Minimum Quarterly Distribution on Preference Units with respect to all quarters since inception of the Partnership, except for the failure to pay distributions in the second, third and fourth quarters of 1991 totalling $9,323,000. All such arrearages have since been satisfied and none remain as of December 31, 1994. No distributions were paid on the outstanding Common Units, which are not entitled to arrearages in the payment of the Minimum Quarterly Distribution thereon, until 1994 when distributions totalling $1,738,000 were paid.
Under the terms of its financing agreements, the Partnership is prohibited from declaring or paying any distribution if a default exists thereunder.
ITEM 6.
ITEM 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates indicated, selected historical financial and operating data for Kaneb Pipe Line Partners, L.P. and Subsidiaries ("Partnership"). The data in the table (in thousands, except per unit amounts) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(a) Includes the operations of ST since its acquisition on March 2, 1993.
(b) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in a taxable entity.
(c) Net income of the Partnership for each reporting period is allocated to the Senior Preference Units (SPU) in an amount equal to the cash distributions to the SPU declared for that reporting period.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the summary historical and pro forma financial and operating data included elsewhere in this report.
GENERAL
In September, 1989 Kaneb Pipe Line Company ("Company"), a wholly owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed a master limited partnership, Kaneb Pipe Line Partners, L.P. ("Partnership"), to own and operate its refined petroleum products pipeline business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. The Partnership's business consists primarily of the transportation, as a common carrier, of refined petroleum products, including propane, from refineries and pipeline connections in Kansas to destinations in Kansas, Nebraska, Iowa, South Dakota and North Dakota, and related terminaling activities. The Partnership owns a 2,075 mile integrated pipeline system with 16 terminals in Kansas, Nebraska, Iowa, South Dakota and North Dakota. The pipeline serves oil companies, railroads and farm cooperatives in such states and in portions of three adjoining states. Three refineries have direct access to the pipeline; these refineries obtain crude oil primarily from producing areas in Kansas, Oklahoma and Texas.
Effective March 2, 1993, the Partnership acquired, through KPOP, Support Terminal Services, Inc. ("ST"), a petroleum products and specialty liquids storage and terminaling company headquartered in Dallas, Texas, for approximately $65 million (including $2 million in acquisition costs). In connection with the acquisition, the Partnership borrowed $65 million from a group of banks. In April 1993, the Partnership completed a public offering of 2.25 million Senior Preference Units at $25.25 per unit. The bank loan was partially repaid with $50.8 million of the proceeds from the offering. The Partnership continually evaluates other potential acquisitions.
The Pipeline's common carrier operations are subject to federal or state tariff regulation. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products.
The Partnership's business depends in large part on (i) the level of demand for refined petroleum products in the geographic locations served by the pipeline and (ii) the ability and willingness of refiners and marketers having access to the pipeline to supply such demand by deliveries through the pipeline.
RESULTS OF PARTNERSHIP OPERATIONS
Net income increased $2.8 million or 11% in 1994 to $29.5 million due primarily to the inclusion of ST results for the full year in 1994 versus the 10 months in 1993 from the acquisition in March 1993. The increase in interest expense is attributable to the acquisition debt incurred for ST.
PIPELINE OPERATIONS
Revenues increased 5% in both 1994 and 1993. KPOP implemented a tariff increase of approximately 5.5% in April, 1994 and approximately 5.6% in July, 1992. Barrel miles increased 2% in both 1994 and 1993. The increase in barrel miles is primarily due to increased long-haul shipments related to product pricing advantages for shippers to western area terminals served by the Pipeline.
Operating costs increased 8% in 1994 and 13% in 1993. Property taxes increased $.3 and $.9 million in 1994 and 1993, respectively. The 1994 increase was primarily due to tax rate adjustments in Kansas and Nebraska and the 1993 increase was primarily due to non-recurring refunds received in 1992 and tax rate adjustments in Nebraska. Power costs increased by $.6 million in 1994 due to increased barrel miles, utility rates and increased usage of drag reducer. Material, supplies and outside services increased $.4 million in 1994 primarily due to unusually high repair and maintenance expenditures.
TERMINALING OPERATIONS
Revenues increased $2.7 million in 1994 as average tankage utilized increased .2 million barrels to 6.1 million barrels compared to 5.9 million barrels in 1993. Revenues per barrel stored increased by $.26 in 1994 to $5.33 per barrel.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership borrowed approximately $10 million on its term facility in the fourth quarter of 1993 in anticipation of terminal acquisitions to be made in 1994. The ratio of current assets to current liabilities decreased to .8 to 1 at December 31, 1994 from 1.29 to 1 at December 31, 1993 primarily as a result of terminal acquisitions in 1994 funded from the Partnership's cash balances. Cash provided by operating activities was $37.9 million, $37.2 million, and $26.6 million for the years 1994, 1993 and 1992, respectively. The increase in cash flow from operating activities in 1993 was due to the acquisition of ST.
Capital expenditures were $19.5 million, $8.1 million and $3.2 million for the years 1994, 1993 and 1992, respectively. Included in 1994 capital expenditures are three terminal acquisitions by ST that totalled $12.3 million. During these periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not material. Capital expenditures for 1995 are expected to be approximately $8.0 million, excluding the Wyco acquisition.
The Partnership makes distributions of 100% of its Available Cash to holders of LP Units and the General Partner. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and 1992. In 1995, the Partnership anticipates distributing $2.20 per Senior Preference Unit, which is the annualized Minimum Quarterly Distribution. During 1994, 1993, and 1992, the Partnership paid distributions of $12.3 million ($2.20 per unit), $19.3 million ($2.20 per unit and $1.21 per unit in arrearages) and $15.0 million ($2.20 per unit and $.45 per unit in arrearages) to the Preference Unitholders. During 1994, the Partnership paid distributions of $1.7 million ($.55 per unit) to the Common Unitholders.
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities and expansionary capital expenditures are expected to be funded through Partnership borrowings.
In 1994, a wholly-owned subsidiary of the Partnership sold $33 million of notes to a group of insurance companies. The notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, KPOP entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through November 30, 1997. The credit facility bears interest at variable rates and has a commitment fee of .2% per annum of the unused credit facility. No amounts were drawn under this credit facility at December 31, 1994. The notes and credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership.
Effective February 24, 1995, the Partnership, through KPOP, acquired the refined petroleum product pipeline assets of Wyco Pipe Line Company for $27.1 million. The acquisition was financed by the sale of additional first mortgage notes to three insurance companies. The notes are due February 24, 2002 and bear interest at the rate of 8.37% per annum.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Partnership begin on page of this report. Said information is hereby incorporated by reference into this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership and has no directors. The Partnership is managed by the Company as general partner. Set forth below is certain information concerning the directors and officers of the Company. All directors of the Company are elected annually by Kaneb, as its sole stockholder. All officers serve at the discretion of the Board of Directors of the Company.
____________________________________________________________ * Less than one percent
(1) Mr. Doherty, Chairman of the Board of the Company since September 1989, is also Senior Vice President of Kaneb. In addition to the Senior Preference Units set forth above, Mr. Doherty owns 75,000 Common Units representing an aggregate limited partnership interest of less than one percent. (2) Mr. Hutchens has served as President of the Company since January 1994. Having been with the Company since January 1960, Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981 and Vice President - Transportation until assuming his present position. (3) Mr. Easum has served the Company as Vice President of Business Development since August 1988, prior to which he was Director of Purchasing with Union Pacific Railroad Company since August 1980. (4) Mr. Wadsworth also serves as an officer of Kaneb. Mr. Wadsworth joined Kaneb in October, 1990, prior to which he served as general manager of Dorchester Hugoton, Ltd. for more than five years. (5) Mr. Harrison has served as Controller of the Company since November, 1992. Mr. Harrison was previously employed in various financial positions, including Assistant Secretary and Treasurer, by ARCO Pipe Line Company since April 1974. (6) Mr. Barnes, a director of the Company, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. In addition to the Senior Preference Units set forth above, Mr. Barnes owns 79,000 common and 60,500 preference units representing an aggregate limited partner interest of approximately 1%.
(7) Mr. Bentley, a director of the Company since July 1989, is also a director of Kaneb. Mr. Bentley has been President of Bentley Investment Corp., a private investment firm, since November 1985. (8) Mr. Ahn, a director of the Company since July 1989, is also a director of Kaneb. Mr. Ahn has been a partner of Morgan Lewis Githens & Ahn, L.P., an investment banking firm, since 1982 and currently serves as a director of Broadcasting Partners, Inc., Haynes International, Inc., ITI Technologies, Inc., PAR Technology, Inc., Quaker Fabric Corporation, and Stuart Entertainment, Inc. (9) Mr. Peak, a director of the Company since July 1989, is also a director of Kaneb. Mr. Peak has been General Partner of Dorchester Hugoton, Ltd., an oil and gas exploration and production partnership, for more than the past five years. (10) Mr. Whatley, a director of the Company since July 1989, is also a director of Kaneb. In addition to serving as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989, Mr. Whatley was elected and served in the additional offices of President and Chief Executive Officer of Kaneb from June until October 1986. He also serves as a director of United Financial Group, Inc.. (11) Mr. Ralph Rehm, who is also a director of Kaneb, is President of Northlake Consulting Company, which provides financial consulting services. Mr. Rehm provided consulting services on behalf of one of Kaneb's subsidiaries in 1993 and 1994. Mr. Rehm previously was engaged in financial consulting services for Northlake Consultants from June 1989 to May 1990, prior to which he served as Senior Vice President of Finance and Administration of Kaneb from December 1986. (12) Mr. Biles joined the Company in November 1953 and served as President from January 1985 until his retirement at the close of 1993. He presently serves as a Director of the Company. (13) Units of the Partnership listed are those which are owned by the person indicated, his spouse or children living at home. None of the directors of the Company owns more than two percent of the outstanding Senior Preference Units of the Partnership. Each director had sole power with respect to the Units attributed to him.
AUDIT COMMITTEE
Messrs. Sangwoo Ahn and James R. Whatley currently serve as the members of the Audit Committee of the Company. Such Committee will, on an annual basis, or more frequently as such Committee may determine to be appropriate, review policies and practices of the Company and the Partnership and deal with various matters as to which conflicts of interest may arise.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation committee or any other committee that performs the equivalent functions. During the fiscal year ended December 31, 1994, none of the Company's officers or employees participated in the deliberations of the Company's Board of Directors concerning executive officer compensation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no executive officers, but is obligated to reimburse the Company for compensation paid to the Company's executive officers in connection with their operation of the Partnership's business.
The following table sets forth information with respect to the aggregate compensation paid or accrued by the Company during the fiscal years 1994, 1993 and 1992, to the President and each of the most highly compensated executive officers and other key policy making personnel of the Company whose aggregate cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE --------------------------
ANNUAL COMPENSATION -------------------
_________________________
(1) Does not include the values of the personal use of Company paid club memberships, nor the personal use of assets, facilities and services of Company employees. The aggregate amount of additional benefits or compensation to any of the individuals listed in the Summary Compensation Table above did not exceed 10% of the reported compensation.
(2) Represents the Company's annual contributions in 1994 to Kaneb's defined contribution thrift plan in which all of the individuals listed in the Summary Compensation Table above were 100% vested with respect to the amounts indicated.
(3) Represents a lump sum payment in lieu of cost-of-living salary increases in 1992 and 1993.
Retirement Plan
Effective April 1, 1991, Kaneb established a defined contribution thrift plan applicable to the Company that permits all full-time employees who have completed one year of service to contribute 2% to 12% of base compensation, on a pre-tax basis, into participant accounts. In addition to mandatory contribution equal to 2% of base compensation per year for each plan participant, the Company makes matching contributions from 25% to 50% of up to the first 6% of base pay contributed by a plan participant. Employee contributions, together with earnings thereon, are not subject to forfeiture. That portion of a participant's account balance attributable to Company contributions, together with earnings thereon, is vested over a five year period at 20% per year. Participants are credited with their prior years of service for vesting purposes, however, no amounts are accrued for the accounts of participants, including the Company's executive officers, for years of service previous to the plan commencement date. Participants may direct the investment of their contributions into any of four funds, including Kaneb common stock. Plan assets are
held and distributed pursuant to a trust arrangement. Because levels of future compensation, participant contributions and investment yields cannot be reliably predicted over the span of time contemplated by a plan of this nature, it is impractical to estimate the annual benefits payable at retirement to the individuals listed in the Summary Cash Compensation Table above.
Director's Fees. During 1994, each member of the Company's Board of Directors who was not also an employee of the Company or Kaneb was paid an annual retainer of $4,000 in lieu of all attendance fees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 17, 1995, no person was known to the Partnership to be the beneficial owner of more than 5% of the Units. See Item 10 with respect to ownership of Senior Preference Units by officers and directors of the Company.
At March 17, 1995, the Company owned a combined 2% General Partner interest in the Partnership and the Operating Partnership, and owned preference units and common units representing a limited partner interest of approximately 52%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Notes 4 and 5 to the Partnership's financial statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
(A) (2) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(A) (3) LIST OF EXHIBITS
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference.
10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lendors, filed herewith.
10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
24.1 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
(B) REPORTS ON FORM 8-K - NONE.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P.
By: Kaneb Pipe Line Company ----------------------- General Partner
By: LEON E. HUTCHENS ------------------------ (Leon E. Hutchens) President and Chief Executive Officer Date: March 29, 1995
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material respects, the financial position of Kaneb Pipe Line Partners, L.P. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Dallas, Texas March 16, 1995
F - 1
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F - 2
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F - 3
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F - 4
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 --------------------------------------------------------------------------------
(a) Kaneb Pipe Line Company owns a 1% interest in Kaneb Pipe Line Partners, L.P. as General Partner.
(b) The partnership agreement allows for an additional issuance of up to 7.5 million senior preference units.
See accompanying notes to consolidated financial statements.
F - 5
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. Kaneb Pipe Line Company ("Company"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1% general partner interest in both the Partnership and KPOP. The Company's 1% interest in KPOP is reflected as the minority interest in the financial statements.
Effective March 1, 1993, the Partnership acquired Support Terminal Services, Inc. ("ST"), a petroleum products and specialty liquids storage and terminaling company headquartered in Dallas, Texas, for approximately $65 million. The acquisition was accounted for as a purchase, and, accordingly, the Partnership's consolidated statement of income includes the results of operations of ST since March 1, 1993. In connection with the acquisition, the Partnership borrowed $65 million from a group of banks, which was partially repaid with $50.8 million of the proceeds from a Senior Preference Unit ("SPU") offering.
In April 1993, the Partnership completed a public offering of 2.25 million SPU at $25.25 per unit. The net proceeds from the offering of $52.8 million was allocated among the equity accounts of the unitholders, general partner and minority interest based on the ownership percentages of the partnership subsequent to the offering. The Partnership believes that this allocation approximates the distribution of the net assets upon liquidation, assuming the Partnership was liquidated at net book value. However, the actual distribution of the net assets upon liquidation could be significantly different as a result of the fair market value of the net assets being substantially different than the net book value of the Partnership's assets in the accompanying financial statements.
The SPUs represent an approximate 44% ownership interest in the Partnership. The Company owns an approximate 52% interest as limited partner in the form of Preference Units and Common Units, and as the general partner owns a combined 2% interest. An approximate 2% ownership interest in the form of 60,500 Preference Units and 154,000 Common Units is held by officers of Kaneb.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Partnership's policy is to invest cash in highly liquid investments with maturities of three months or less, upon purchase. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents.
F - 6
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Certain leases have been capitalized and the leased assets have been included in property and equipment. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets. The rates used for pipeline and storage facilities of KPOP are the same as those which have been promulgated by the Federal Energy Regulatory Commission.
REVENUE AND INCOME RECOGNITION
KPOP provides pipeline transportation of refined petroleum products and liquified petroleum gases. Revenue is recognized upon receipt of the products into the pipeline system.
ST provides terminaling and other ancillary services. Fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided.
ENVIRONMENTAL MATTERS
The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes that its operations are in general compliance with applicable environmental regulation, 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 the Partnership. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership.
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Partnership's commitment to a formal plan of action.
The Company has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (date of formation of the Partnership). The indemnification does not extend to any liabilities that arise after such date to the extent that the liabilities result from changes in environmental laws and regulations. In addition, ST's former owner has agreed to indemnify the Partnership against liabilities for damages to the environment from operations conducted by the former owner prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000 until an aggregate amount of $10 million has been paid by ST's former owner. The Partnership has recorded a reserve for environmental claims in the amount of $1.0 million at December 31, 1994 in other liabilities on the accompanying balance sheet.
F - 7
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
INCOME TAX CONSIDERATIONS
Income before income tax expense is made up of the following components:
The Partnership is not subject to federal and state income taxes. However, certain operations of ST are conducted through wholly-owned subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 1994 and 1993 consists of deferred U.S. federal income taxes of $.6 million and $.4 million, respectively, and current federal income taxes of $.2 million in 1994.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax return of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly.
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of partnership units. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. Management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
ALLOCATION OF NET INCOME AND EARNINGS PER SENIOR PREFERENCE UNIT
Net income is allocated to the limited partnership units in an amount equal to the cash distributions declared for each reporting period and any remaining income or loss is allocated to the class of units that did not receive full distributions. If full distributions are declared to all classes of units, income will be allocated pro rata based on the aggregate amount of distributions declared.
Earnings per SPU are calculated by dividing the amount of net income allocated to the SPUs by the weighted average number of SPUs outstanding.
F - 8
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its Available Cash, as defined in the Partnership Agreement, to holders of limited partnership units ("Unitholders") and the Company. Available Cash consists generally of all the cash receipts of the Partnership plus the beginning cash balance less all of its cash disbursements and reserves. The Partnership expects to make distributions of Available Cash for each quarter of not less than $.55 per Senior Preference Unit (the "Minimum Quarterly Distribution"), or $2.20 per Senior Preference Unit on an annualized basis, for the foreseeable future, although no assurance is given regarding such distributions. The Partnership expects to make distributions of all Available Cash within 45 days after the end of each quarter to holders of record on the applicable record date. A distribution of $2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and 1992. During 1994, 1993 and 1992, the Partnership paid distributions of $2.20, $3.41 (includes $1.21 of arrearage payments) and $2.65 (includes $.45 of arrearage payments), respectively, to the Preference Unit holders. During 1994, the Partnership paid distributions of $.55 per unit to the Common Unitholders. As of December 31, 1994, no arrearages existed on any class of partnership interest.
Distributions by the Partnership of its Available Cash are made 99% to Unitholders and 1% to the Company, subject to the payment of incentive distributions to the General Partner if certain target levels of cash distributions to the Unitholders are achieved. The distribution of Available Cash for each quarter within the Preference Period, as defined, is subject to the preferential rights of the holders of the Senior Preference Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters, before any distribution of Available Cash is made to holders of Preference Units of Common Units for such quarter. In addition, for each quarter within the Preference Period, the distribution of any amounts to holders of Common Units is subject to the preferential rights of the holders of the Preference Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters. The Common Units are not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period will continue indefinitely until the Minimum Distribution has been paid to the holders of the Senior Preference Units, the Preference Units and the Common Units for twelve consecutive quarters. Prior to the end of the Preference Period, 2,650,000 of the Preference Units shall be converted into Senior Preference Units on a one-for-one basis if the Third Target Distribution, as defined, is paid to all Unitholders for four full consecutive quarters. The Third Target distribution is reached when distributions of Available Cash equals $2.80 per Limited Partner ("LP") Unit on an annualized basis. After the Preference Period ends all differences and distinctions between the three classes of units for the purposes of cash distributions will cease.
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KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
4. LONG-TERM DEBT AND LEASES
In 1994, a wholly-owned subsidiary of the Partnership issued $33 million of first mortgage notes ("Notes") to a group of insurance companies. The Notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, a wholly-owned subsidiary entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through November 30, 1997. The credit facility bears interest at variable interest rates and has a commitment fee of .2% per annum of the unused credit facility. No amounts were drawn under the credit facility at December 31, 1994. The Notes and credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership and contain certain financial and operational covenants.
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KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
The following is a schedule by years of future minimum lease payments under capital and operating leases together with the present value of net minimum lease payments for capital leases as of December 31, 1994:
(a) The capital lease is secured by certain pipeline equipment and the Partnership has accrued its option to purchase this equipment at the termination of the lease.
Total rent expense under operating leases amounted to $.9 million, $.9 million and $.2 million for the years ended December 31, 1994, 1993 and 1992, respectively.
KPOP and the Company entered into a payment priority agreement related to the capital lease obligation for pipeline equipment under which the Company is primarily liable for rental payments of approximately $2.9 million per year through April 1997 and KPOP is primarily liable for the remaining rental payments. KPOP has recorded a receivable of $5.8 million at December 31, 1994 from the Company for the present value of these future lease payments. This receivable bears interest at an annual rate of 13.8%, which reflects the imputed interest rate on the capital lease. KPOP recorded interest income of $.9 million, $1.2 million and $1.4 million from the Company on this receivable balance for the periods ended December 31, 1994, 1993 and 1992, respectively. The amount of the capital lease obligation that exceeds the receivable from the Company ($6.0 million at December 31, 1994) represents the present value of the lease obligation and purchase option due subsequent to April 1997.
The Partnership believes that the carrying value of the notes represents their estimated fair value as the notes were issued in December 1994 and that it is not practicable to estimate the fair value of the capital lease obligation and the associated receivable from the general partner.
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KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by the Company. The Company and Kaneb are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $9.0 million, $8.7 million and $7.2 million for the years ended December 31, 1994, 1993 and 1992, respectively, include compensation and benefits paid to officers and employees of the Company and Kaneb, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $7.0 million, $7.0 million and $6.3 million of compensation and benefits, including pension costs, paid to officers and employees of the Company for the periods ended December 31, 1994, 1993 and 1992, respectively, which represent the actual amounts paid by the Company or Kaneb. In addition, the Partnership paid $.2 million during each of these respective periods for an allocable portion of the Company's overhead expenses. At December 31, 1994 and 1993, the Partnership owed the Company $.8 million and $.5 million, respectively, for these expenses which are due under normal invoice terms.
6. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1994 and 1993 are summarized as follows:
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KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
7. SUBSEQUENT EVENT
Effective February 24, 1995, the Partnership, through KPOP, acquired the refined petroleum product pipeline assets of Wyco Pipe Line Company ("Wyco") for $27.1 million. The acquisition was financed by the issuance of first mortgage notes to three insurance companies. The notes are due February 24, 2002 and bear interest at the rate of 8.37% per annum. The acquisition will be accounted for as a purchase and, accordingly, the results of operations of Wyco will be included in the Partnership's consolidated statement of income subsequent to the date of acquisition.
The following summarized unaudited pro forma consolidated results of operations for years ended December 31, 1994 and 1993, assume the acquisition occurred as of the beginning of the period presented. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which might have resulted had the combination been in effect at the dates indicated, or which may occur in the future.
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INDEX TO EXHIBITS -----------------
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1, S.E.C. File No. 33-30330 and incorporated herein by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 16, 1993, and said exhibit is hereby incorporated by reference.
10.2 Note Purchase Agreement dated December 22, 1994. Said document is on file as Exhibit 10.2 of the exhibits to Registrant's report on Form 8-K filed on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.3 Restated Credit Agreement dated December 22, 1994 between Kaneb Pipe Line Operating Partnership, L.P., Texas Commerce Bank National Association, and certain Lendors, filed herewith.
10.4 Agreement for Sale and Purchase of Assets dated February 19, 1995 by and among Wyco Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.. Said document is on file as Exhibit 10.1 of the exhibits to Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
24.1 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.