Item 2. Properties
The properties owned or utilized by the Partnership and its subsidiaries are generally described in Item 1 of this Report. Additional information concerning the obligations of the Partnership and its subsidiaries for lease and rental commitments is presented under the caption "Commitments and Contingencies" in Note 6 to the Partnership's consolidated financial statements. Such descriptions and information are hereby incorporated by reference into this Item 2.
The properties used in the operations of the 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's 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.
Item 3. Legal Proceedings
Certain subsidiaries of the Partnership are defendants in a lawsuit filed in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from whom the Partnership acquired ST in 1993, involving certain issues allegedly arising out of the Partnership's acquisition of ST. Grace alleges that the defendants assumed responsibility for certain environmental damages to a former ST facility located in Massachusetts that occurred at a time prior to the Partnership's acquisition of ST. The defendants have also received and responded to inquiries from two governmental authorities in connection with the same allegation by Grace. The defendants' consistent position is that it did not acquire the facility in question as part of the 1993 ST transaction and, consequently, did not assume any responsibility for the environmental damage. The case is set for trial in June, 1999.
Additionally, the Partnership is a party to several lawsuits arising, from time to time, 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
The Partnership did not hold a meeting of Unitholders or otherwise submit any matter to a vote of security holders in the fourth quarter of 1998.
PART II
Item 5.
Item 5. Market for the Registrant's Units and Related Unitholder Matters
The Partnership's limited partnership interests ("Units") are listed and traded on the New York Stock Exchange (the "NYSE"), under the symbol "KPP." At March 15, 1999, there were approximately 1,000 Unitholders. On August 14, 1998, the Partnership paid its regular quarterly cash distribution of $0.65 per Unit to the holders of each class of the Partnership's outstanding Units. This cash distribution represented the twelfth consecutive quarterly cash distribution of Available Cash constituting Cash from Operations in an amount equal to or exceeding the $0.55 Minimum Quarterly Distribution, as such terms are defined in the Partnership's Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). As a result of this payment, pursuant to the terms of the Partnership Agreement, the Preference Period ended effective July 1, 1998, and all differences and distinctions between Senior Preference, Preference and Common Units automatically ceased as of such date. Consequently, as of August 14, 1998, all outstanding units of limited partnership interests in the Partnership were designated as "Units," constituting a single class of securities. Set forth below are prices on the NYSE and cash distributions for the periods indicated for Senior Preference Units and Preference Units, respectively, through August 14, 1998 and, thereafter, for Units.
(1) Through August 14, 1998 (2) From August 14, 1998 (3) The amounts shown were paid on each class of units.
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 (the "Partnership"). The data in the table (in thousands, except per unit amounts) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(a) Includes the operations of the West Pipeline since its acquisition in February 1995 and the operations of Steuart since its acquisition in December 1995.
(b) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in taxable entities.
(c) 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 any class of units that did not receive the same amount of cash distributions per unit (if any). If the same cash distributions per unit are declared for all classes of units, income or loss is allocated pro rata based on the aggregate amount of distributions declared.
(d) Prior to the third quarter of 1998, the Partnership had three classes of partnership interests designated as Senior Preference Units, Preference Units and Common Units, respectively. Pursuant to the Partnership Agreement, on August 14, 1998, each such class of units were converted into a single class designated as "Units", effective July 1, 1998. Allocations of net income and cash distributions declared were equal for all classes of units in 1998. See "Item 5 - Market for Registrant's Units and Related Unitholder Matters."
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 consolidated financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the summary historical financial and operating data included elsewhere in this report.
General
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and operate its refined petroleum products pipeline business. The Partnership operates through KPOP, a limited partnership in which the Partnership holds a 99% interest as limited partner and KPL owns a 1% interest as general partner in both the Partnership and KPOP. The Partnership is engaged through operating subsidiaries in the refined petroleum products pipeline business and, since 1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the transportation through the East Pipeline and the West Pipeline, as common carriers, of refined petroleum products. The East Pipeline and the West Pipeline are collectively referred to as the "Pipelines." The Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The products are transported from refineries connected to the Pipeline, directly or through other pipelines, to agricultural users, railroads and wholesale customers in the states in which the Pipelines are located and in portions of other states. Substantially all of the Pipelines' operations constitute common carrier operations that are subject to Federal or state tariff regulations. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products.
The Partnership's business of terminaling petroleum products and specialty liquids is conducted under the name ST Services ("ST").
On October 30, 1998, the Partnership, through a wholly-owned subsidiary, entered into acquisition and joint venture agreements with Northville Industries Corp. ("Northville") to acquire and manage the former Northville terminal located in Linden, New Jersey. Under the agreements, the Partnership acquired a 50% interest in the newly-formed ST Linden Terminal LLC for $20.5 million plus transaction costs. The petroleum storage facility, which has capacity of 3.9 million barrels in 22 tanks, was financed by the Partnership's existing revolving credit facility and a revolving promissory note.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.4 million) plus transaction costs and the assumption of certain liabilities. The acquisition of the six locations, which have an aggregate tankage capacity of 5.5 million barrels, was financed by term loans from a bank. 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.
The Partnership is the third largest independent liquids terminaling company in the United States. At December 31, 1998, ST operated 33 facilities in 18 states and the District of Columbia with an aggregate tankage capacity of approximately 22.2 million barrels.
Pipeline Operations
Pipelines revenues are based on volumes shipped and the distances over which such volumes are transported. For the year ended December 31, 1998, revenues increased by $2.1 million, or 3%, compared to 1997, due to an overall increase in volumes shipped, primarily on the East Pipeline. For the year ended December 31, 1997, revenues decreased by $2.1 million, or 3%, compared to 1996, primarily as a result of adverse effects on product demand caused by abnormal weather patterns in the Midwest and shifts in the distribution of product supplies in the Rocky Mountain area. 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 17.0 billion, 16.1 billion and 16.7 billion for the years ended December 31, 1998, 1997 and 1996, 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 $0.4 million in 1998 and decreased $2.0 million in 1997. The changes in both years were primarily in materials and supplies, including additives, that are volume related, and in outside services. General and administrative costs, which include managerial, accounting and administrative personnel costs, office rental expense, legal and professional costs and other non-operating costs, increased by $0.2 million in each of the years ended December 31, 1998 and 1997.
Terminaling Operations
For the years ended December 31, 1998 and 1997, revenues increased by $2.6 million and $5.7 million, respectively, due to terminal acquisitions and increased utilization of existing terminals due to favorable market conditions, partially offset by a decrease in the overall price realized for storage in 1998. Average annual tankage utilized for the years ended December 31, 1998, 1997 and 1996 aggregated 15.2 million barrels, 12.4 million barrels and 11.9 million barrels, respectively. The 1998 and 1997 increases in average annual tankage utilized resulted from increased storage at the Partnership's largest petroleum storage facility and the terminal acquisitions. Average revenues per barrel of tankage utilized for the years ended December 31, 1998, 1997 and 1996 was $4.11, $4.83 and $4.55, respectively. The decrease in 1998 was due to the storage of a larger proportionate volume of petroleum products, which are historically at lower rates per barrel than specialty chemicals.
Operating costs increased by $1.7 million in 1998 and $2.3 in 1997, due to the increases in tank utilization and terminal acquisitions. General and administrative expense increased by $0.3 million in each of the years ended December 31, 1998 and 1997.
Total tankage capacity (22.2 million barrels at December 31, 1998) 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.
Liquidity and Capital Resources
Cash provided by operating activities was $58.8 million, $54.8 million and $49.2 million for the years 1998, 1997 and 1996, respectively. The increase in cash provided by operations in 1998 resulted primarily from overall improvements in revenues and operating income in the pipeline operations from increased volumes shipped. The increase in 1997 was primarily a result of improvements in revenues and operating income in the terminaling operations.
At December 31, 1998, the Partnership had a net working capital deficit of approximately $23.1 million resulting from, among other factors, cash paid and short-term debt incurred for acquisitions which closed near the end of 1998. The General Partner believes that the Partnership will be able to meets its ongoing obligations with cash flows from operations, along with the Partnership's ability to refinance and/or issue additional debt, and that the Partnership's ability to pay distributions to the holders of Units has not been impaired; however, there can be no assurance in this regard.
Capital expenditures, excluding expansion capital expenditures, were $9.4 million, $10.6 million and $7.1 million for 1998, 1997 and 1996, respectively. During all periods, adequate pipeline capacity existed to accommodate volume growth and the expenditures required for environmental and safety improvements were not, and are not expected in the future to be, material. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages. Capital expenditures of the Partnership during 1999 are expected to be approximately $12 million to $16 million. Such future expenditures, however, will depend on many factors beyond the Partnership's control, including, without limitation, demand for refined petroleum products and terminaling services in the Partnership's market areas, local, state and Federal governmental regulations, fuel conservation efforts and the availability of financing on acceptable terms. No assurance can be given that required capital expenditures will not exceed anticipated amounts during the year or thereafter or that the Partnership will have the ability to finance such expenditures through borrowings or choose to do so.
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 less all cash disbursements and reserves. Distributions of $2.60 per unit were declared to Unitholders in 1998, $2.50 per unit was declared in 1997 and $2.30 per unit was declared in 1996. Payment of the August 14, 1998, regular cash distribution represented the twelfth consecutive quarterly distribution of Available Cash constituting Cash from Operations in an amount equal to or exceeding the $0.55 Minimum Quarterly Distribution specified in the Partnership Agreement. Accordingly, pursuant to the terms of the Partnership Agreement, all differences and distinctions between Senior Preference Units, Preference Units and Common Units automatically ceased as of such date. At that time, all outstanding units of limited partnership interest in the Partnership became "Units" constituting a single class of equity securities, which trade on the New York Stock Exchange under the symbol "KPP".
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures are expected to be funded through additional Partnership borrowings and/or future public unit offerings.
In October 1998, a wholly-owned subsidiary of the Partnership entered into a Promissory Note Agreement with a bank that, as amended on February 1, 1999, provides a $15 million revolving credit availability through June 30, 1999. The Promissory Note Agreement bears interest at variable interest rates and has a commitment fee of 0.35% per annum of the unused available balance. At December 31, 1998, $10.0 million was drawn under the Promissory Note Agreement.
The Partnership has a Credit Agreement with two banks that currently provides a $25 million revolving credit facility for working capital and other partnership purposes. Borrowings under the Credit Agreement bear interest at variable rates and are due and payable in January 2001. The Credit Agreement has a commitment fee of 0.15% per annum of the unused credit facility. At December 31, 1998, $25.0 million was drawn under this credit facility.
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 Staff also supported the disallowance of income taxes. The FERC recently decided the case on the same basis as the Lakehead case. If the FERC were to disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, the General Partner believes that the Partnership's ability to pay distributions to the holders of the Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard.
Year 2000 Issue
Although the Partnership believes that most of its activities and operations are not materially impacted by Year 2000 Issues ("Y2K"), the Partnership recognizes the challenges associated with Y2K and has undertaken a review and testing of its computer systems to identify Y2K-related issues associated with any items of software or hardware used in its business operations. Most of the software systems used by the Partnership are licensed from third parties and are Y2K compliant or will be upgraded to Y2K compliant releases before the end of 1999. This issue is being addressed by the Partnership in multiple phases, including assessment, remediation, testing and implementation, and progress is being monitored by the general partner's senior management. All material systems, including non-information technology systems which may house non-compliant, embedded technology are being evaluated.
In addition to addressing the Partnership's own systems, as described above, the Partnership must assess the state of readiness of the systems of other entities with which it does business. Failure by these third parties to adequately resolve their Y2K problems could have a material adverse effect on the Partnership's operations.
The Partnership believes its success in being Y2K compliant will not be conclusively known until the year 2000 is actually reached. Although failure by one or more of the Partnership's own systems could result in lost revenues and/or additional expenses required to carry out manual processing of transactions, the Partnership cannot predict the effect that external forces could have on its business. Failures by banking institutions, the telecommunications industry and others could have far-reaching effects on the entire economy and the Partnership.
The Partnership's operations (including both information technology and non-information technology systems) are in varying states of readiness for compliance with Y2K issues. The initial assessment phase has been completed for substantially all of the Partnership's operations, and in many cases, remediation, testing and implementation activities have also been completed. The Partnership expects to complete all phases of its Y2K program prior to December 31, 1999.
The Partnership believes that it is not possible to determine with certainty that all Y2K problems affecting the Partnership have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, the Partnership cannot accurately predict how many failures related to the Y2K problem will occur or the severity, duration or financial consequences of such failures. The Partnership has hired an outside Y2K consultant to assist the Partnership in meeting its goals and in developing contingency plans to define and address the worst-case scenario likely to be faced by the Partnership. The plan is expected to be in place by the end of the second quarter of 1999.
Expenses incurred by the Partnership during 1998 and 1997, related to assessing, remediating and testing its information technology systems, which were not material, have been expensed as incurred and funded from operations. The Partnership does not anticipate that the cost to become fully Y2K compliant will be material.
Allocation of Net Income and Earnings
Net income or loss is allocated between limited partner interests and the general partner pro rata based on the aggregate amount of cash distributions declared (including general partner incentive distributions). Beginning in 1997, distributions by the Partnership of Available Cash reached the Second Target Distribution, as defined in the Partnership Agreement, which entitled the general partner to receive certain incentive distributions at different levels of cash distributions. Earnings per Unit shown on the consolidated statements of income are calculated by dividing the limited partners' interest in net income by the weighted average number of Units outstanding. If the allocation of income had been made as if all income had been distributed in cash, earnings per Unit would have been $2.66 and $2.53 for the years ended December 31, 1998 and 1997, respectively.
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 Partnership is exposed are interest rates on the Partnership's debt and investment portfolios. The Partnership centrally manages its debt and investment portfolios considering investment opportunities and risks and overall financing strategies. The Partnership's investment portfolio consists of cash equivalents; accordingly, the carrying amounts approximate fair value. The Partnership's investments are not material to the financial position or performance of the Partnership. Assuming year-end 1998 variable rate debt and investment levels, a one percent change in interest rates would increase net interest expense by approximately $0.4 million.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data of the Partnership begin on page of this report. Such 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.
Reference is made to the Registrant's Current Reports on Forms 8-K and 8-K/A, dated November 6, 1998 and March 9, 1999, respectively, which reports are incorporated herein by reference.
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 KPL as general partner. Set forth below is certain information concerning the directors and executive officers of KPL. 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 KPL.
*Less than one percent
(a) Mr. Doherty, Chairman of the Board and Chief Executive Officer of KPL since September 1989, is also Senior Vice President of Kaneb.
(b) Mr. Hutchens assumed his current position in January 1994, having been with KPL since January 1960. Mr. Hutchens had been Vice President since January 1981. Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981.
(c) Mr. Scoggins became an executive officer of KPL in August 1997, prior to which he served in senior level positions for ST for more than 10 years.
(d) Mr. Harrison assumed his present position in November 1992, prior to which he served in a variety of financial positions including Assistant Secretary and Treasurer with ARCO Pipe Line Company for approximately 19 years.
(e) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.
(f) Mr. Ahn, a director of KPL since July 1989, is also a director of Kaneb. Mr. Ahn has been a general partner of Morgan Lewis Githens & Ahn, an investment banking firm, since 1982 and currently serves as a director of Gradall Industries, Inc., ITI Technologies, Inc., PAR Technology Corporation, Quaker Fabric Corporation, and Stuart Entertainment, Inc.
(g) Mr. Barnes, a director of KPL, is also Chairman of the Board, President and Chief Executive Officer of Kaneb.
(h) Mr. Biles joined KPL in November 1953 and served as President from January 1985 until his retirement at the close of 1993.
(i) Mr. Burke, a director of KPL since January 1997, is also a director of Kaneb. Mr. Burke has been Chairman and Managing General Partner of Burke, Mayborn Company, Ltd., a private investment company, for more than the past five years. Mr. Burke also currently serves as a director of Medicalcontrol, Inc. He was previously associated with Peat, Marwick, Mitchell & Co. (now KPMG LLP), an international firm of certified public accountants, for twenty-four years.
(j) Mr. Cox, a director of KPL since September 1995, is also a director of Kaneb. Mr. Cox has been a private business consultant since retiring in January 1998 from Fluor Daniel, Inc., an international services company, where he served in senior executive level positions during a 27 year career with that organization.
(k) Mr. Kessler was elected to the Board on February 19, 1998 to fill a vacancy. Mr. Kessler has served as Chairman and Managing Director of KMB Kessler + Partner GmbH since 1992. He was previously a Managing Director and Vice President of a European Division of Tyco International Ltd.
(l) Mr. Whatley, a director of KPL since July 1989, is also a director of Kaneb and served as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989.
(m) Partnership Units listed are those beneficially owned by the person indicated, his spouse or children living at home and do not include Units in which the person has disclaimed any beneficial interest.
Audit Committee
Messrs. Sangwoo Ahn and Frank M. Burke, Jr. serve as the members of the Audit Committee of KPL. 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 potential conflicts of interest may arise.
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, 1998, none of KPL's officers or employees participated in the deliberations of KPL's Board of Directors concerning executive officer compensation.
Section 16(a) Beneficial Ownership Reporting Compliance Statement
Section 16(a) of the Securities and Exchange Act of 1934, as amended ("Section 16(a)") requires the Company's officers and directors, among others, to file reports of ownership and changes of ownership in the Partnership's equity securities with the Securities and Exchange Commission and the New York Stock Exchange. Such persons are also required by related regulations to furnish the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, KPL believes that, since January 1, 1998, its officers and directors have complied with all applicable filing requirements with respect to the Partnership's equity securities, except that rather than being reported on a timely Form 4, Mr. Barnes reported on a Form 5 two acquisitions of a small number of Units by a family trust of which he is neither the grantor, trustee nor beneficiary and in which he disclaims any beneficial ownership.
Item 11.
Item 11. Executive Compensation
The Partnership has no executive officers, but is obligated to reimburse the Company for compensation paid to KPL'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 1998, 1997 and 1996, to the Chief Executive Officer and each of the other most highly compensated executive officers of KPL.
SUMMARY COMPENSATION TABLE
Name and Principal Annual Compensation All Other Position Year Salary(a) Bonus(b) Compensation(c) - -------------------- ----- ----------------------------- ---------------
Edward D. Doherty(d) 1998 $ 216,758 $ -0- $ 6,402 Chairman of the 1997 208,350 18,420(f) 6,541 Board and Chief 1996 200,333 93,040 6,832 Executive Officer
Leon E. Hutchens 1998 188,083 10,000 7,027 President 1997 180,617 -0- 7,338 1996 173,700 15,000 7,051
Ronald D. Scoggins(d) 1998 161,348(e) -0- 6,100 Senior Vice 1997 139,899(e) 9,210(g) 5,003 President
Jimmy L. Harrison 1998 117,000 5,000 3,120 Vice President 1997 110,532 -0- 2,854 Controller 1996 105,532 4,000 3,775
(a) Amounts for 1998, 1997 and 1996, respectively, include deferred compensation for Mr. Doherty ($13,692, $12,980 and $14,901); Mr. Hutchens ($4,869, $922 and $2,529); and Mr. Scoggins ($10,600 and $7,950).
(b) Amounts earned in year shown and paid the following year.
(c) Represents the Company's contributions to Kaneb's Savings Investment Plan (a 401(k) plan) and the imputed value of Company-paid group term life insurance.
(d) The compensation for these individuals is paid by Kaneb, which is reimbursed for all or substantially all of such compensation by KPL.
(e) Amounts for 1998 and 1997, respectively, include $31,131 and $13,608 in the form of Partnership Units (412 and 227) and Kaneb Services, Inc. Common Stock (1,322 and 1,927).
(f) Includes deferred compensation of $18,420.
(g) Includes deferred compensation of $9,210.
Director's Fees
During 1998, each member of KPL's Board of Directors who was not also an employee of the Company or Kaneb was paid an annual retainer of $10,000 in lieu of all attendance fees.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
At March 15, 1999, KPL owned a combined 2% General Partner interest in the Partnership and KPOP and, together with its affiliates, owned Units representing an aggregate limited partner interest of approximately 31%.
Item 13.
Item 13. Certain Relationships and Related Transactions
KPL is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Note 7 to the Partnership's consolidated financial statements.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1)Financial Statements Beginning Page
Set forth below is a list of financial statements appearing in this report.
Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements: Consolidated Statements of Income - Three Years Ended December 31, 1998.......................... F - 1 Consolidated Balance Sheets - December 31, 1998 and 1997....... F - 2 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1998.......................... F - 3 Consolidated Statements of Partners' Capital - Three Years ended December 31, 1998.......................... F - 4 Notes to Consolidated Financial Statements..................... F - 5 Reports of Independent Accountants............................. F - 13
(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) which exhibit is hereby incorporated 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, filed as Exhibit 10.1 of the exhibits to Registrant's Current Report on Form 8-K ("Form 8-K"), dated March 16, 1993, which exhibit is hereby incorporated by reference.
10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P. ("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other Lenders, dated December 22, 1994 (the "TCB Loan Agreement"), filed as Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 1994, which exhibit is hereby incorporated by reference.
10.3 Amendmentto the TCB Loan Agreement, dated January 30, 1998, filed as Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 1997.
10.4 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL") and TCB, dated October 11, 1993 (the "TCB Security Agreement"), filed as Exhibit 10.3 of the exhibits to the Registrant's Form 10-K for the year ended December 31, 1993, which exhibit is hereby incorporated by reference.
10.5 Amendment to the TCB Security Agreement, filed herewith.
10.5 Note Purchase Agreements, dated December 22, 1994, filed as Exhibit 10.2 of the exhibits to Registrant's Form 8-K, dated March 13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby incorporated by reference.
10.6 Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of the exhibits to the Registrant's Form 10-K for the year ended December 31, 1996, which exhibit is hereby incorporated by reference.
10.7 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to the Registrant's March 1995 Form 8-K, which exhibit is hereby incorporated by reference.
10.8 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 KPOP, as amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's Current Report on Form 8-K dated January 3, 1996, which exhibits are hereby incorporated by reference.
10.9 Formationand Purchase Agreement, between and among Support Terminal Operating Partnership, L.P., Northville Industries Corp. and AFFCO, Corp., dated October 30, 1998, filed herewith.
10.10 Agreement, between and among, GATX Terminals Limited, ST Services, Ltd., ST Eastham, Ltd., GATX Termianls Corporation, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated January 26, 1999, filed herewith.
10.11 Credit Agreement, between and among, Kaneb Pipe Line Operating Partnership, L.P., ST Services, Ltd. and Suntrust Bank, Atlanta, dated January 27, 1999, filed herewith.
21 List of Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K regarding a change in the Registrant's Certifying Accountant, dated November 6, 1998.
Current Report on Form 8-K regarding the Acquisition of certain Terminal Storage Facilities located in the United Kingdom, dated February 12, 1999.
Current report on Form 8-K/A regarding a change in the Registrant's Certifying Accountant, dated March 9, 1999.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------------- 1998 1997 ------------- -------------- ASSETS Current assets: Cash and cash equivalents........... $ 849,000 $ 6,376,000 Accounts receivable................. 13,917,000 11,503,000 Prepaid expenses.................... 4,035,000 4,021,000 ------------- -------------- Total current assets............. 18,801,000 21,900,000 ------------- --------------
Property and equipment................. 398,253,000 345,802,000 Less accumulated depreciation.......... 108,622,000 98,670,000 ------------- -------------- Net property and equipment....... 289,631,000 247,132,000 ------------- -------------- $ 308,432,000 $ 269,032,000 ============= ==============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities: Short-term and current portion of long-term debt................. $ 10,000,000 $ 2,335,000 Accounts payable.................... 3,939,000 2,400,000 Accrued expenses.................... 4,809,000 3,297,000 Accrued distributions payable....... 10,725,000 10,725,000 Accrued taxes, other than income taxes...................... 2,080,000 1,957,000 Deferred terminaling fees........... 3,526,000 2,892,000 Payable to general partner.......... 6,785,000 1,143,000 ------------- -------------- Total current liabilities........ 41,864,000 24,749,000 ------------- --------------
Long-term debt, less current portion... 153,000,000 132,118,000
Other liabilities and deferred taxes... 7,131,000 6,935,000
Minority interest...................... 1,049,000 1,034,000
Commitments and contingencies
Partners' capital: Limited partners.................... 104,342,000 103,167,000 General partner..................... 1,046,000 1,029,000 ------------- -------------- Total partners' capital.......... 105,388,000 104,196,000 ------------- -------------- $ 308,432,000 $ 269,032,000 ============= ==============
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(a) Prior to the third quarter of 1998, the Partnership had three classes of partnership interests designated Senior Preference Units, Preference Units and Common Units, respectively. Pursuant to the Partnership Agreement, on August 14, 1998, each such class of units were converted into a single class designated "Units", effective July 1, 1998. See Note 2.
(b) KPL owns a combined 2% interest in the Partnership as General Partner.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. ("KPP" or the "Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling 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 (the "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. At December 31, 1998, the Company, together with its affiliates, owned an approximate 31% interest as a limited partner and as a general partner owned a combined 2% interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements. The preparation of the Partnership'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.
Cash and cash equivalents
The Partnership'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. The Partnership does not have any derivative financial instruments.
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, as disclosed in Note 4. 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.
The Partnership's Support Terminal Services operation ("ST") provides terminaling and other ancillary services. Storage fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided.
Environmental matters
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.
Income tax considerations
Income before income tax expense is made up of the following components:
Partnership operations are not subject to Federal or state income taxes. However, certain operations of ST are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 1998, 1997 and 1996 primarily consists of deferred U.S. Federal income taxes of $.5 million, $.7 million and $.6 million, respectively. The net deferred tax liability of $3.6 million and $3.1 million at December 31, 1998 and 1997, respectively, consists of deferred tax liabilities of $8.8 million and $8.2 million, respectively, and deferred tax assets of $5.2 million and $5.2 million, respectively. The deferred tax liabilities consist primarily of tax depreciation in excess of book depreciation and the deferred tax assets consist primarily of net operating losses. The corporate operations have net operating loss carryforwards for tax purposes totaling approximately $14.4 million which expire in years 2008 through 2013.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns 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 any 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 ("SFAS") 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.
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 all Available Cash within 45 days after the end of each quarter to Unitholders of record on the applicable record date. Distributions of $2.60, $2.50 and $2.30 per Unit were declared to all classes of Units in 1998, 1997 and 1996, respectively.
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 during the Preference Period, as defined, was subject to the preferential rights of the holders of the Senior Preference Units ("SPUs") 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 was made to holders of Preference Units ("PUs") or Common Units ("CUs") for such quarter. The CU's were not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period continued until such time as the Minimum Quarterly Distribution had been paid to the holders of the SPU's, the PU's and the CU's for twelve consecutive quarters. Payment of the August 14, 1998 regular cash distribution represented the twelfth consecutive quarterly distribution of Available Cash constituting Cash from Operations in an amount equal to or exceeding the $.55 Minimum Quarterly Distribution specified in the Partnership Agreement. Accordingly, pursuant to the terms of the Partnership Agreement, all differences and distinctions between SPU's, PU's and CU's automatically ceased as of such date. At that time, all outstanding units of limited partnership interest in the Partnership became "Units," constituting a single class of equity securities, which trade on the New York Stock Exchange under the symbol "KPP".
Allocation of net income and earnings
For the periods presented, net income or loss has been allocated between limited partner interests and the general partner pro rata based on the aggregate amount of cash distributions declared (including general partner incentive distributions). Beginning in 1997, distributions by the Partnership of Available Cash reached the Second Target Distribution, as defined in the Partnership Agreement, which entitled the general partner to certain incentive distributions at different levels of cash distributions. Earnings per Unit shown on the consolidated statements of income are calculated by dividing the amount of limited partners' interest in net income, by the weighted average number of Units outstanding. If the allocation of income had been made as if all income had been distributed in cash, earnings per Unit would have been $2.66 and $2.53 for the years ended December 31, 1998 and 1997, respectively.
Change in presentation
Certain prior year financial statement items have been reclassified to conform with the 1998 presentation.
3. ACQUISITIONS
On October 30, 1998, the Partnership, through a wholly-owned subsidiary, entered into acquisition and joint venture agreements with Northville Industries Corp. ("Northville") to acquire and manage the former Northville terminal located in Linden, New Jersey. Under the agreements, the Partnership acquired a 50% interest in the newly-formed ST Linden Terminal LLC for $20.5 million plus transaction costs. The investment was financed by the Partnership's existing revolving credit facility and a revolving promissory note. The investment is being accounted for by the equity method of accounting, with the excess cost over net book value of the equity investment being amortized over the life of the underlying assets. During 1998, the Partnership acquired other terminals and pipelines for aggregate consideration of $23.9 million. The pro forma effects of these acquisitions, including the Northville transaction, were not material.
On February 1, 1999, the Partnership, through two wholly-owned indirect subsidiaries, acquired six terminals in the United Kingdom from GATX Terminal Limited for (pound)22.6 million (approximately $37.4 million) plus transaction costs and the assumption of certain liabilities. The acquisition was financed with term loans from a bank. The acquisition will be accounted for, beginning in February 1999, using the purchase method of accounting.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
In December 1998, the Partnership exercised its option to purchase pipeline equipment previously held under a capital lease for $5.1 million in cash.
5. DEBT
In October 1998, a wholly-owned subsidiary of KPP entered into a Promissory Note Agreement with a bank that, as amended on February 1, 1999, provides for a $15 million revolving credit availability through June 30, 1999. The Promissory Note Agreement bears interest at variable interest rates and has a commitment fee of 0.35% per annum of the unused available balance. At December 31, 1998, $10.0 million was drawn under the Promissory Note Agreement and included in current liabilities.
Long-term debt is summarized as follows:
In 1994, a wholly-owned subsidiary entered into a restated credit agreement with a group of banks that, as subsequently amended, provides a $25 million revolving credit facility through January 31, 2001. The credit facility bears interest at variable interest rates and has a commitment fee of 0.15% per annum of the unused credit facility. At December 31, 1998, $25.0 million was drawn under the credit facility.
Also, in 1994, another 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 1995, the Partnership issued $27 million of additional Notes due February 24, 2002 which bear interest at the rate of 8.37% per annum. The Notes and the credit facility are secured by a mortgage on the East Pipeline and contain certain financial and operational covenants.
In June 1996, the Partnership issued $68 million of new first mortgage notes bearing interest at rates ranging from 7.08% to 7.98%. $35.0 million of these notes is due June 2001, $8.0 million is due June 2003, $10.0 million is due June 2006 and $15.0 million is due June 2016. The loan is secured, pari passu with the existing Notes and credit facility, by a mortgage on the East Pipeline.
6. COMMITMENTS AND CONTINGENCIES
The following is a schedule by years of future minimum lease payments under operating leases as of December 31, 1998:
Year ending December 31:
1999......................................... $ 1,355,000 2000......................................... 1,341,000 2001......................................... 1,261,000 2002......................................... 1,082,000 2003......................................... 1,088,000 Thereafter................................... 1,023,000 ------------- Total minimum lease payments................. $ 7,150,000 =============
Total rent expense under operating leases amounted to $1.1 million, $1.3 million and $1.2 million for the years ended December 31, 1998, 1997 and 1996, respectively.
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 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 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. The Partnership has recorded an undiscounted reserve for environmental claims in the amount of $5.3 million at December 31, 1998, including $4.5 million related to acquisitions of pipelines and terminals. During 1998, the Partnership incurred $0.6 million of costs related to such acquisition reserves and reduced the liability accordingly.
The Company has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (the 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 December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart"). The asset purchase agreement includes a provision for an earn-out payment 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 1996, 1997 and 1998.
Certain subsidiaries of the Partnership are defendants in a lawsuit filed in a Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from whom the Partnership acquired ST in 1993, involving certain issues allegedly arising out of the Partnership's acquisition of ST. Grace alleges that the defendants assumed responsibility for certain environmental damages to a former ST facility located in Massachusetts that occurred at a time prior to the Partnership's acquisition of ST. The defendants have also received and responded to inquiries from two governmental authorities in connection with the same allegation by Grace. The defendants' consistent position is that it did not acquire the facility in question as part of the 1993 ST transaction and, consequently, did not assume any responsibility for the environmental damage. The case is set for trial in June, 1999.
The Partnership 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, including the Grace litigation described above, will not have a materially adverse effect on the financial position or results of operations of the Partnership.
7. 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 $11.3 million, $10.8 million and $10.5 million for the years ended December 31, 1998, 1997 and 1996, 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 $9.3 million, $9.0 million and $8.4 million of compensation and benefits, paid to officers and employees of the Company for the years ended December 31, 1998, 1997 and 1996, respectively, which represent the actual amounts paid by the Company or Kaneb. In addition, the Partnership paid $.2 million during each of these respective years for an allocable portion of the Company's overhead expenses. At December 31, 1998 and 1997, the Partnership owed the Company $1.8 million and $1.1 million, respectively, for these expenses which are due under normal invoice terms. Additionally, at December 31, 1998, $5.0 million was payable to the Company under a short-term promissory note agreement. The promissory note, which accrued interest at 6.75% per annum, was repaid in February 1999.
8. BUSINESS SEGMENT DATA
The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). The Partnership's adoption of SFAS No. 131, effective January 1, 1998 and applied retroactively, did not alter the composition of its reportable operating segments.
The Partnership conducts business through two principal operations; the "Pipeline Operations," which consists primarily of the transportation of refined petroleum products in the Midwestern states as a common carrier, and the "Terminaling Operations," which provide storage for petroleum products, specialty chemicals and other liquids. At December 31, 1998, all Pipeline and Terminaling Operations were conducted domestically.
The Partnership measures segment profit as operating income. Total assets are those assets controlled by each reportable segment.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of all debt as of December 31, 1998 and 1997 was approximately $171 million and $134 million, as compared to the carrying value of $163 million and $128 million, respectively. These fair values were estimated using discounted cash flow analysis, based on the Partnership'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 Partnership has no derivative financial instruments.
The Partnership markets and sells its services to a broad base of customers and performs ongoing credit evaluations of its customers. The Partnership does not believe it has a significant concentration of credit risk at December 31, 1998. No customer constituted 10 percent or more of consolidated revenues in 1998, 1997 or 1996.
10. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly operating results for 1998 and 1997 are summarized as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kaneb Pipe Line Partners, L.P.
We have audited the 1998 consolidated financial statements of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") as listed in the index appearing under Item 14(a)(1) on page 29. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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 Partnership as of December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
KPMG LLP Dallas, Texas February 25, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated balance sheet and the related consolidated statements of income, of cash flows and of changes in partners' capital as of and for each of the two years in the period ended December 31, 1997 (listed in the index appearing under Item 14(a)(1) on page 29) present fairly, in all material respects, the financial position, results of operations and cash flows of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") as of and for each of the two years in the period ended December 31, 1997, 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. We have not audited the consolidated financial statements of Kaneb Pipe Line Partners, L.P. and its subsidiaries for any period subsequent to December 31, 1997.
PRICEWATERHOUSECOOPERS LLP Dallas, Texas February 19, 1998
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: EDWARD D. DOHERTY Chairman of the Board and Chief Executive Officer Date: March 25, 1999
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 EDWARD D. DOHERTY Chairman of the Board March 25, 1999 and Chief Executive Officer
Principal Accounting Officer JIMMY L. HARRISON Controller March 25, 1999
Directors
SANGWOO AHN Director March 25, 1999
JOHN R. BARNES Director March 25, 1999
M.R. BILES Director March 25, 1999
FRANK M. BURKE, JR. Director March 25, 1999
CHARLES R. COX Director March 25, 1999
HANS KESSLER Director March 25, 1999
JAMES R. WHATLEY Director March 25, 1999
EXHIBIT INDEX
Exhibit Number Description - ------- ---------------------------------------------------------------------- 10.5 TCB Security Agreement
10.9 Formationand Purchase Agreement, between and among Support Terminal Operating Partnership, L.P., Northville Industries Corp. and AFFCO, Corp., dated October 30, 1998
10.10 Agreement, between and among, GATX Terminals Limited, ST Services, Ltd., ST Eastham, Ltd., GATX Termianls Corporation, Support Terminals Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated January 26, 1999
10.11 Credit Agreement, between and among, Kaneb Pipe Line Operating Partnership, L.P., ST Services, Ltd. and Suntrust Bank, Atlanta, dated January 27, 1999
22 List of Subsidiaries, filed herewith.
27 Financial Data Schedule, filed herewith.