SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8 - K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): FEBRUARY 24, 1995
KANEB SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation)
1-5083 74-1191271
(Commission File Number) (IRS Employer Identification No.)
2435 N. Central Expressway, Seventh Floor, Richardson, Texas 75080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 699-4000
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 24, 1995, Registrant, through its wholly-owned subsidiary,
Kaneb Pipe Line Company, as general partner for and on behalf of Kaneb Pipe Line
Partners, L.P. and its operating partnership, Kaneb Pipe Line Operating
Partnership, L.P., acquired the refined petroleum product pipeline assets of
Wyco Pipe Line Company ("Wyco") for $27.1 million in cash. Wyco was owned 60%
by a subsidiary of GATX Terminals Corporation and 40% by a subsidiary of Amoco
Pipe Line Company. There is no material relationship between these companies
and the Registrant or any of its affiliates, directors or officers or associates
of any such directors or officers.
The assets consist of approximately 550 miles of 8" and 6" pipeline
originating in Casper, Wyoming, running south to a truck loading terminal at
Cheyenne, Wyoming, another truck loading terminal at Dupont, Colorado and
terminating at a truck loading terminal at Fountain, Colorado. A branch line
runs from Douglas Junction, Wyoming to a truck loading terminal at Rapid City,
South Dakota. Included are approximately 1,700,000 barrels of tankage at the
terminals, 11 pump stations and all of the other equipment associated with a
working product pipeline system.
The system supplies various grades of motor gasoline, heating oil, and
diesel oil at the terminal truck racks from origin points at Casper/Strouds
station, Mule Creek, and Cheyenne, Wyoming and Commerce City, Colorado.
Registrant intends to continue the business of Wyco.
The transaction was financed by the sale of first mortgage notes to three
insurance companies. The notes are due February 24,2002 and bear interest at
the rate of 8.37%.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Report of Independent Accountants.
Statement of Income and Retained Earnings - Years Ended December 31,
1994 and 1993;
Statement of Financial Position - December 31, 1994 and 1993;
Statement of Cash Flows - Years Ended December 31, 1994 and 1993.
(b) Pro forma financial information.
(c) Exhibits.
10.1. Agreement for Sale and Purchase of Assets by and between Wyco
Pipe Line Company and Kaneb Pipe Line Operating Partnership, L.P.
dated February 19, 1995.
10.2. Note Purchase Agreement dated as of December 22, 1994.
23.1. Consent of Independent Accountants.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KANEB SERVICES, INC.
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(Registrant)
Date: March 13, 1995 /s/ Tony M. Regan
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Tony M. Regan
Controller
WYCO PIPE LINE COMPANY
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FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 1994 AND 1993
--------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
January 27, 1995, except as to Note 8,
which is as of February 17, 1995
To the Board of Directors of
Wyco Pipe Line Company
In our opinion, the accompanying statement of financial position and the
related statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Wyco
Pipe Line Company at December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of Wyco Pipe Line Company'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
WYCO PIPE LINE COMPANY
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STATEMENT OF INCOME AND RETAINED EARNINGS
-----------------------------------------
Year Ended December 31,
-----------------------
1994 1993
---- ----
Revenues
Transportation revenue, including
amounts billed to affiliated
companies of $1,068,465 and
$1,475,862, respectively $12,806,828 $11,585,336
Rent revenue, including $458,333 in 1994
from affiliated company 511,283 10,823
Interest and other income, net 376,240 171,681
Gain on the sale of assets - 5,005,781
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13,694,351 16,773,651
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Costs and expenses
Operating expense 2,357,214 2,119,276
Maintenance expense 2,770,777 2,395,215
General expense 780,555 663,791
Depreciation 1,042,054 840,792
Taxes, other than income taxes 365,432 321,123
Interest expense - 13,091
Casualty and other losses 1,642,218 1,003,714
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8,958,250 7,357,002
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Income before provision for income taxes 4,736,101 9,416,649
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Provision for income taxes
Federal
Current 2,487,349 1,847,870
Deferred (802,338) 1,373,274
State 164,618 113,366
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1,849,629 3,334,510
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Net income 2,886,472 6,082,139
Retained earnings at beginning of year 10,312,551 8,535,412
Dividends declared - $124.10
and $123.00 per share, respectively (4,343,500) (4,305,000)
---------- ----------
Retained earnings at end of year $ 8,855,523 $10,312,551
========== ==========
Earnings per share of common stock: $88.04 $173.78
The accompanying notes are an integral part of this financial statement.
-2-
WYCO PIPE LINE COMPANY
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STATEMENT OF FINANCIAL POSITION
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December 31,
------------
1994 1993
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ASSETS
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Current Assets
Cash (Unrestricted) $ 28,078 $ 723,201
Marketable equity securities - at cost, which
approximates market 400,000 0
Accounts receivable - affiliated companies 570,152 120,314
Accounts receivable - trade 1,805,969 1,131,626
Materials and supplies 50,141 50,141
Prepaid expenses and other current assets 221,004 531,853
Deferred tax assets 785,000 272,000
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Total current assets 3,860,344 2,829,135
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Cash (Restricted) - 6,622,662
Deferred charges and miscellaneous assets 6,817 11,459
Property and equipment - at cost,
less accumulated depreciation of
$19,916,471 and $18,864,550, respectively 15,571,385 10,269,874
----------- -----------
Total Assets $19,438,546 $19,773,130
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable - trade $ 715,645 $ 960,571
Accounts payable - affiliated companies 451,481 210,552
Income taxes payable 217,503 418,090
Other taxes payable 363,885 317,571
Accrued liabilities 2,960,681 1,396,100
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Total current liabilities 4,709,195 3,302,884
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Deferred rental income 296,970 300,000
Deferred income taxes 3,476,858 3,717,695
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Total deferred liabilities 3,773,828 4,017,695
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Commitments and Contingencies (See Note 8)
Shareholders' Equity
Common stock, no par value -
Authorized - 50,000 shares
Issued and outstanding - 35,000 shares
at $60.00 per share 2,100,000 2,100,000
Retained earnings 8,855,523 10,312,551
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Total shareholders' equity 10,955,523 12,412,551
----------- -----------
Total Liabilities and Shareholders' Equity $19,438,546 $19,733,130
=========== ===========
The accompanying notes are an integral part of this financial statement.
-3-
WYCO PIPE LINE COMPANY
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STATEMENT OF CASH FLOWS
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Year Ended December 31,
-----------------------
1994 1993
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Cash flows from operating activities:
Net income $2,886,472 $6,082,139
Adjustments to reconcile net income
to cash provided by operating activities:
Gain on sale of assets - (5,005,781)
Depreciation 1,042,054 840,792
Increase in payables and accrued
liabilities 1,406,311 1,387,782
(Increase) Decrease in receivables (1,124,181) 172,518
Decrease (Increase) in prepaid
expenses and other current assets 310,849 (472,437)
Net change in deferred taxes and
other items (752,218) 1,945,282
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Net cash provided by operating
activities 3,769,287 4,950,295
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Cash flows from investing activities:
Proceeds from sale of assets 212,000 6,600,000
Cash restricted as to use 6,622,662 (6,622,662)
Capital expenditures (6,555,572) (13,204)
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Net cash used in investing
activities 279,090 (35,866)
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Cash flows from financing activities:
Repayment of line of credit - (300,000)
Cash dividends paid (4,343,500) (4,305,000)
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Net cash used in financiing
activities (4,343,500) (4,605,000)
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Decrease in cash and marketable securities (295,123) 309,429
Cash and cash equivalents
- - beginning of year 723,201 413,772
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Cash and cash equivalents
- - end of year $ 428,078 $ 723,201
========== =========
The accompanying notes are an integral part of this financial statement.
-4-
WYCO PIPE LINE COMPANY
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NOTES TO FINANCIAL STATEMENTS
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DECEMBER 31, 1994 AND 1993
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NOTE 1- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Wyco Pipe Line Company (the Company) owns and operates a 552-mile pipeline from
Wyoming and South Dakota to Colorado and owns and leases a 30-mile pipeline in
North Dakota. The Company is an interstate common carrier pipeline under the
Interstate Commerce Act of 1887. The Federal Energy Regulatory Commission (FERC)
has regulatory authority over the rates, shipping regulations and other
practices of common carrier pipelines and are empowered to regulate the
accounting for operations.
Cash and cash equivalents, for purposes of reporting cash flows, consist of
short-term highly liquid securities held to maturity and are stated at cost,
which approximates fair value.
Acquisitions of properties and significant betterments to existing properties
are capitalized. Expenditures for repairs and maintenance are charged to
expense as incurred.
The Company computes depreciation for financial reporting purposes on a
straight-line basis over lives prescribed by the Federal Energy Regulatory
Commission (FERC). Depreciation taken for income tax purposes is based on
accelerated methods and lives authorized by the Internal Revenue Code.
During 1993 the Company adopted Financial Accounting Standard No. 109,
"Accounting for Income Taxes". Adoption of the Standard did not affect the
Company's 1993 financial statements. The principal temporary differences giving
rise to deferred taxes at December 31, 1994 and 1993 were depreciation and
provisions for environmental and litigation-related costs.
Earnings per share of common stock is based on the number of shares of common
stock outstanding during the year, which amounted to 35,000 shares in each year.
-5-
NOTE 2- CASH FLOW INFORMATION:
For purposes of the statement of cash flows, cash and cash equivalents include
cash and marketable securities, all of which have a maturity of three months or
less when acquried.
Net cash provided by operating activities reflects cash payments for interest
and income taxes as follows:
Year Ended December 31,
-----------------------
1994 1993
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Interest paid $ - $ 13,091
Income taxes paid $2,832,000 $1,607,584
NOTE 3- RESTRICTED CASH AND SALE OF PIPELINE:
On August 30, 1993, the Company sold an idle ten-inch diameter pipeline segment
in Wyoming, with a net book value of $1,594,000, for $6,600,000. The Company
realized an after-tax gain of $3,254,000 on this sale. The proceeds were
recorded as restricted cash at December 31, 1993 as the Company intended to use
the proceeds to effect a like-kind exchange. See Note 4.
NOTE 4- PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
December 31,
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1994 1993
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Gross Net Net
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(in thousands)
Pipelines $15,860 $ 6,454 $ 2,532
Buildings 1,509 658 610
Land 190 190 190
Machinery, equipment and other 17,417 7,757 6,670
Construction work in progress 512 512 268
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$35,488 $15,571 $10,270
====== ====== ======
Property and equipment at December 31, 1994 includes assets with an original
cost of $5,834,000 and accumulated depreciation of $194,500 relating to a
pipeline purchased from Amoco Pipeline Company (Amoco), a shareholder, in 1994.
This pipeline was leased back to Amoco under an agreement which expires on
February 24, 1996. Rental income in 1994 under this lease totaled $458,333 and
future rentals total $541,667.
See also Note 9.
-6-
NOTE 5- RELATED PARTIES:
The Company is operated and managed by Amoco in accordance with an operating
agreement dated May 31, 1977.
Effective January 1, 1989, the Company entered into two separate agreements with
Amoco to provide Control Center operations which monitor and control pipeline
flow and allow satellite communications from the locations on the Pipeline
System to the Control Center. Charges to the Company in 1994 and 1993 under
these agreements were as follows:
Year Ended December 31,
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1994 1993
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Management and operating fee $ 488,448 $ 502,296
Control center 246,024 242,840
Satellite communication fee 68,000 68,000
Other Operating costs 1,869,096 1,493,585
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$2,671,568 $2,306,721
========= =========
Other operating costs consist primarily of employee wages and related payroll
costs and include charges relating to employee benefit plans, which are
calculated as a percentage of total salaries. As specified in the operating
agreement, this percentage represents the average ratio of benefit plan costs to
total salaries of Amoco employees.
Accounts receivable - affiliated companies includes $466,000 receivable from
Amoco Pipeline. This amount was paid to Amoco Pipeline in anticipation of the
receipt of assets as part of the like-kind exchange executed in 1994 (see Note
3) which were not received.
See Note 4 concerning other transactions with Amoco during 1994.
NOTE 6- CREDIT AGREEMENTS:
On April 15, 1994, the Company entered into a credit agreement with its
shareholders, GATX Pipeline Company and Amoco Pipeline Company, which provides
for borrowings of up to $1,000,000 at a prime rate of interest through April 15,
1995. Also, on December 30, 1994, the Company entered into a credit agreement
with one of its shareholders, Amoco Pipeline Company, which provides for
borrowings of up to $5,000,000 at a prime rate of interest over renewable
one-year terms. There were no borrowings outstanding under these agreements at
December 31, 1994.
-7-
NOTE 7 - ENVIRONMENTAL ACCRUAL:
In 1994, the Company recorded a charge of $1,200,000 for environmental
remediation. This amount is net of expected insurance recoveries of $200,000.
The accrual for remediation totaled $1,400,000 at December 31, 1994 and
represents management's best estimate of such costs. Additional accruals, if
any, are not expected to have a material adverse effect on the Company's
financial position.
NOTE 8 - LITIGATION:
In December 1991, the Company was named in a lawsuit (Joseph Kramer et al. v.
Wyco Pipe Line Company), which alleged that the Company's activities resulted in
the hydrocarbon contamination of the groundwater and soil on the plaintiffs'
property and asserts losses of at least $5,570,000. The plaintiffs also seek
punitive and emotional distress damages and statutory interest. The Company is
currently undertaking remediation efforts. The Company provided $300,000 and
$800,000 related to this lawsuit and the remediation efforts in 1994 and 1993,
respectively. The Company does not believe that the ultimate resolution of this
matter will have a material adverse impact on its financial position.
NOTE 9 - SALE OF PIPELINE:
The Company anticipates that it will sell its 552-mile pipeline in 1995. The net
book value of property and equipment relating to this pipeline approximated
$9,931,500 at December 31, 1994. The Company expects to realize a significant
gain on the sale and to reinvest the proceeds in other pipeline-related
property.
-8-
KANEB SERVICES, INC.
PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
In February 1995, Kaneb Services, Inc. ("Kaneb") acquired, through its interest
in Kaneb Pipe Line Partners, L.P., the refined petroleum product pipeline assets
of Wyco Pipe Line Company ("Wyco") for $27.1 million. Wyco was owned 60% by a
subsidiary of GATX Terminals Corporation and 40% by a subsidiary of Amoco Pipe
Line Company. The acquisition was financed by the sale of $27 million of first
mortgage notes to three insurance companies.
The following unaudited pro forma financial statements for Kaneb have been
derived from the audited historical financial statements of Kaneb and Wyco for
the year ended December 31, 1993 and the unaudited financial statements for the
nine month period ended September 30, 1994. The following unaudited pro forma
financial statements have been compiled as if Kaneb acquired the pipeline assets
of Wyco on the date of the balance sheet or as of the beginning of the period
for income statement purposes. The unaudited pro forma financial statements
should be read in conjunction with the notes accompanying such unaudited pro
forma financial statements and with the audited historical financial statements
and related notes of Kaneb and Wyco.
The unaudited pro forma financial statements may not be indicative of the
results that would have occurred if Kaneb had acquired the pipeline assets of
Wyco on the dates indicated or which will be obtained in the future.
KANEB SERVICES, INC.
PRO FORMA STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993
(In Thousands, except per unit amounts)
(Unaudited)
Kaneb Wyco Acquisition Pro
Historical Historical Adjustments Forma
-------------- ------------- ------------- --------------
Revenues $ 198,549 $ 16,602 $ ( 5,006) (a) $ 210,145
-------------- ------------- ------------- --------------
Costs and expenses:
Operating costs 153,231 5,839 - 159,070
Depreciation 11,655 841 (137) (b) 12,359
General and administrative 4,133 664 - 4,797
-------------- ------------- ------------- --------------
Total costs and expenses 169,019 7,344 (137) 176,226
-------------- ------------- ------------- --------------
Operating income 29,530 9,258 (4,869) 33,919
Interest income 307 43 - 350
Other income (expense) (514) 129 - (385)
Interest expense (13,559) (13) (2,247) (c) (15,819)
Amortization of excess of cost over fair value
of net assets of acquired business (1,845) - - (1,845)
-------------- ------------- ------------- --------------
Income before minority interest, income taxes and
gain on issuance of units by partnership 13,919 9,417 (7,116) 16,220
Minority interest in net income (10,989) - - (10,989)
Income taxes (1,898) (3,335) 3,222 (d) (2,011)
Gain on issuance of units by partnership 15,122 - - 15,122
-------------- ------------- ------------- --------------
Net income $ 16,154 $ 6,082 $ (3,894) $ 18,342
============== ============= ============= ==============
Earnings per common share -
primary and fully diluted $ 0.46 $ 0.53
============== ==============
KANEB SERVICES, INC.
PRO FORMA STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(In Thousands, except per unit amounts)
(Unaudited)
Kaneb Wyco Acquistion Pro
Historical Historical Adjustments Forma
------------ ------------ ------------- ------------
Revenues $ 156,460 $ 9,461 $ - $ 165,921
------------ ------------ ------------ ------------
Costs and expenses:
Operating costs 119,549 3,438 - 122,987
Depreciation 9,352 629 (101) (b) 9,880
General and administative 3,061 909 - 3,970
------------ ------------ ------------ ------------
Total costs and expenses 131,962 4,976 (101) 136,837
------------ ------------ ------------ ------------
Operating income 24,498 4,485 101 29,084
Other income (expense) 78 583 - 661
Interest expense (10,033) - (1,695) (c) (11,728)
Amortization of excess of cost over fair value
of net assets of acquired business (1,386) - - (1,386)
------------ ------------ ------------ ------------
Income before minority interest and income taxes 13,157 5,068 (1,594) 16,631
Minority interest in net income (9,400) - - (9,400)
Income taxes (1,835) (1,965) (1,808) (d) (1,992)
------------ ------------ ------------ ------------
Net income $ 1,922 $ 3,103 $ 214 $ 5,239
============ ============ ============ ============
Earnings per common share - primary
and fully diluted $ 0.03 $ 0.13
============ ============
KANEB SERVICES, INC.
PRO FORMA BALANCE SHEETS
SEPTEMBER 30, 1994
(In Thousands)
(Unaudited)
Kaneb Acquistion Pro
Historical Adjustments Forma
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ASSETS
Current assets:
Cash and cash equivalents $ 13,472 $ 2,047 (e) $ 15,519
Accounts receivable, trade 31,597 31,597
Inventories 5,775 - 5,775
Prepaid expenses and
other current assets 6,631 - 6,631
------------- ------------- ----------------
Total current asstes 57,475 2,047 59,522
------------- ------------- ----------------
Property and equipment, net 162,930 28,161 (a) 191,091
------------- ------------- ----------------
Excess of cost over fair value of net
assets of acquired business 67,338 - 67,338
------------- ------------- ----------------
Other assets 4,953 - 4,953
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$ 292,696 $ 30,208 $ 322,904
============= ============= ================
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt $ 14,847 $ - $ 14,847
Accounts payable 11,608 - 11,608
Accrued expenses 24,607 $ 1,296 (f) 25,903
Accrued distribution payable 4,021 - 4,021
------------- ------------- ----------------
Total current liabilities 55,083 1,296 56,379
------------- ------------- ----------------
Long-term debt, less current portion 146,265 27,000 (g) 173,265
------------- ------------- ----------------
Net liabilities of discontinued operations 4,342 - 4,342
------------- ------------- ----------------
Deferred income taxes and other liabilities 5,730 1,912 (h) 7,642
------------- ------------- ----------------
Minority interest 62,633 - 62,633
------------- ------------- ----------------
Commitments and contingencies
Stockholders' equity 18,643 - 18,643
------------- -------------- ----------------
$ 292,696 $ 30,208 $ 322,904
============= ============== ================
Kaneb Services, Inc.
Notes to Pro Forma Financial Statements
(a) Represents the preliminary allocation of the estimated fair market value of
the acquired assets and elimination of the historical gain on an asset
sale in 1993, however, the internal valuation of the assets is not
complete as of the date of this filing.
(b) Adjusts the depreciation of the acquired assets.
(c) Reflects interest expense on $27 million of acquisition debt.
(d) Federal income tax expense has been eliminated.
(e) Represents cash received from seller to settle liabilities acquired.
(f) Represents liabilities assumed and accrued acquisition costs
(g) Reflects the issuance of $27 million of long-tern debt, incurred in
connection with the Wyco acquisition.
(h) Represents liabilities assumed in connection with the acquisition.