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Ivan: KAB

The Wall Board: Stocks (Misc): STOCKS NOT OTHERWISE LISTED: Ivan: KAB

By Gap on Tuesday, December 7, 1999 - 11:35 am:

Strange mix. Your comparison to a utility is quite appropriate. Pipelines are highly regulated
and therefore basically subject to govt. price controls. Pipelines can only significantly grow
revenue by increasing throughput. How does the IS piece "fit"? Unless the techies are
focusing on pipeline-related issues, it seems an awfully strange combination. Disturbing,
even, from an investment point of view, because the businesses are so vastly different.

The pipeline and tanks are valuable assets that can be milked until eternity, throwing off a
good bit of cash year after year. There is little competition worry, since the laying of
significant new pipelines or building of tanks is very difficult today.

I wouldn't worry too much about the litigation. Pipeline companies are always being sued by
someone... that's just a cost of doing business. Right of way issues, spill issues, tarriff issues,
you name it. Someone's always mad at them. Even their customers frequently sue them
when capacity gets tight and has to be rationed. Each customer usually claims the formula
used to ration capacity isn't fair or somesuch.

What's their loss reserve? Some "bad" pipelines go as high as 10% of revenue, while others
are less than a percent.

The good news is that nothing can compete with an operational pipeline. They relentlessly
move product 24x7x365. Someone recently told me that owning a pipeline is basically an
excuse to make money. The bad news is their earnings from these assets are capped by
regulation.

How did they end up with the IS division? What sort of work do they take? Are they a "body
shop" (recruiter, taking $x per hour)? Or do they do full life cycle development on a project
basis?