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Rating Action:

MOODY'S CHANGES KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.'S OUTLOOK TO NEGATIVE (Baa3 SENIOR UNSECURED)

18 Sep 2002
MOODY'S CHANGES KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.'S OUTLOOK TO NEGATIVE (Baa3 SENIOR UNSECURED)

Approximately $250 Million of Debt Securities Affected.

New York, September 18, 2002 -- Moody's Investors Service confirmed the debt rating of Kaneb Pipe Line Operating Partnership, L.P. (Kaneb) at Baa3 senior unsecured. The outlook is negative.

Moody's rating actions are in response to Kaneb's announcement of two large acquisitions: Burns Philps' bulk liquids terminals in Australia and New Zealand for approximately US$44 million and Koch Industries' ammonia pipeline for $140 million. These rating actions assume that Kaneb will finance these acquisitions very soon with issuances of common units and long-term debt off its shelf registration.

The negative outlook reflects the concerns raised by 1) recent financial results that have been below expectations, 2) expansion of its terminalling business into the Australia and New Zealand, which are new markets for Kaneb, and 3) concerns about acquisition activity which has exceeded our expectations. Moody's may take further rating action if Kaneb is not successful in permanently financing the Burns and Koch acquisitions as planned, in integrating these operations under its management, and in achieving financial results that approximate their historic levels.

The Burns and Koch acquisitions stretch the scope of the acquisition event risk that was incorporated in Kaneb's rating. Assuming the consummation of both, Kaneb will have almost doubled its net book value from year-end 2001 with $470 million of acquisitions. The pace has been rapid, and acquisitions have been of a significant size. Kaneb is still in the process of integrating Statia's operations, whose financial performance to-date has been below our expectations. Moody's will monitor Kaneb's progress in integrating Statia and improving its financial results. Kaneb's rating may also be pressured if there is further diversification into new businesses and geographic regions, particularly outside the U.S.

As of June 30, 2002, Kaneb had about $73 million of cash on hand, which, along with the proceeds from the debt and equity issuances, will be applied toward the acquisitions and the paydown of short-term debt. Moody's believes that such a financing plan, if executed as planned, will help the company to maintain its financial position at levels commensurate with its current rating level. For the last twelve months ended June 30, Kaneb's debt (net cash)-to-EBITDA was about 3.7 times, which is higher than company's historic levels and which reflects the debt incurred in its $285 million acquisition of Statia Terminals Group which had just closed at the end of February.

Moody's notes that both the Burns terminals and Koch ammonia pipeline have long track records of generating free cash flow, which is suitable for a master limited partnership like Kaneb that distributes all its available cash. The Burns terminals generate very consistent cash flow, supported by stable market demand. However, integrating operations in a new market, particularly in distant non-U.S. markets, may pose a challenge. The ammonia pipeline's cash flow is supported by the enduring need for ammonia in the Cornbelt, where the pipeline enjoys a strong market position. The ammonia is mostly used as fertilizer by the agricultural industry, and demand for it is underpinned by its necessity to farming and its competitiveness against alternatives. However, volumes are seasonal, and could be negatively impacted by wet weather or high natural gas costs, as they were in the last two years.

Kaneb Pipe Line Operating Partnership, L.P. is a subsidiary of Kaneb Pipe Line Partners, L.P. Headquartered in Richardson, Texas, Kaneb Pipe Line Partners, L.P. is a master limited partnership that is engaged in the transportation of refined petroleum products and the terminaling of petroleum products and specialty liquids.

New York
John Diaz
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mihoko Manabe
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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