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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-59597
LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1715851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LAKE SUPERIOR PLACE
21 WEST SUPERIOR STREET
DULUTH, MN 55802-2067
(Address of principal executive offices and zip code)
(218) 725-0100
(Registrant's telephone number, including area code )
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements
Statement of Income for the three month
and nine month periods ended September 30, 1999 and 1998............................... 1
Statement of Cash Flows
for the nine month periods ended September 30, 1999 and 1998........................... 2
Statement of Financial Position
as at September 30, 1999 and December 31, 1998......................................... 3
Statement of Partners' Capital
for the nine month period ended September 30, 1999..................................... 4
Notes to the Financial Statements........................................................ 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 5
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................. 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................................................... 11
ITEM 6. Exhibits and Reports on Form 8-K........................................................... 12
SIGNATURE ........................................................................................... 13
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This Quarterly Report on Form 10-Q contains forward-looking statements.
These statements are based on the Partnership's beliefs as well as assumptions
made by and information currently available to the Partnership. When used in
this document, the words "anticipate," "believe," "expect," "estimate,"
"forecast," "project," and similar expressions identify forward-looking
statements. These statements reflect the Partnership's current views with
respect to future events and are subject to various risks, uncertainties and
assumptions including:
- the Partnership's dependence upon adequate supplies of and demand for
western Canadian crude oil,
- the price of crude oil and the willingness of shippers to ship crude
oil when prices are low,
- the ability of the Partnership's critical suppliers and customers to
complete Year 2000 readiness activities, and
- the effects of competition, in particular, by other pipeline systems.
If one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this Form 10-Q. Except as required by applicable securities
laws, the Partnership does not intend to update these forward-looking
statements. For additional discussion of these risks, uncertainties and
assumptions, see the Partnership's 1998 Annual Report on Form 10-K.
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERSHIP
STATEMENT OF INCOME
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<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(unaudited; dollars in millions) 1999 1998 1999 1998
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Operating Revenue $ 79.6 $ 70.2 $ 234.0 $ 217.5
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Expenses
Power 12.7 16.1 39.8 52.7
Operating and administrative 18.7 16.5 49.3 49.8
Depreciation (Note 3) 14.8 10.4 42.9 31.2
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46.2 43.0 132.0 133.7
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Operating Income 33.4 27.2 102.0 83.8
Interest and Other Income 0.5 0.6 2.7 4.7
Interest Expense (13.9) (5.0) (40.0) (18.0)
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Net Income $ 20.0 $ 22.8 $ 64.7 $ 70.5
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</TABLE>
See accompanying notes to the financial statements.
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LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
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<CAPTION>
Nine months ended
September 30,
(unaudited; dollars in millions) 1999 1998
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Cash Provided from Operating Activities
Net income $ 64.7 $ 70.5
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 42.9 31.2
Interest on accrued rate refunds (Note 4) 0.7 1.7
Other 0.3 (0.2)
Changes in operating assets and liabilities:
Accounts receivable and other (3.6) 3.0
Materials and supplies (0.6) (0.3)
General Partner and affiliates 1.3 (4.4)
Accounts payable and other (5.9) 4.9
Interest payable 11.1 3.5
Property and other taxes (0.9) (1.6)
Payment of rate refunds and related interest (Note 4) (23.1) (21.5)
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86.9 86.8
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Investing Activities
Short-term investments, net - 48.9
Repayments from (advances to) affiliate 13.9 (13.4)
Additions to property, plant and equipment (58.2) (351.4)
Changes in construction payables (36.1) (3.0)
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(80.4) (318.9)
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Financing Activities
Variable rate financing, net (40.0) 187.0
Loan from General Partner - 37.0
Partners' capital contributions, net (Note 5) 120.9 -
Distributions to partners (80.5) (71.5)
Other (0.1) (0.3)
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0.3 152.2
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Increase/(Decrease) in Cash and Cash Equivalents * 6.8 (79.9)
Cash and Cash Equivalents at Beginning of Period 47.0 118.6
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Cash and Cash Equivalents at End of Period $ 53.8 $ 38.7
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</TABLE>
* Cash equivalents are defined as all highly marketable securities with a
maturity of three months or less when purchased. Short-term investments are
marketable securities with a maturity of more than three months when
purchased.
See accompanying notes to the financial statements.
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LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
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<CAPTION>
September 30, December 31,
(unaudited, except for December 31, 1998; dollars in millions) 1999 1998
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 53.8 $ 47.0
Advances to affiliate 18.1 32.0
Accounts receivable and other 28.8 25.2
Materials and supplies 7.7 7.1
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108.4 111.3
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Deferred Charges and Other 6.5 6.7
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Property, Plant and Equipment
At cost 1,544.4 1,487.3
Accumulated depreciation (232.9) (191.1)
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1,311.5 1,296.2
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$ 1,426.4 $ 1,414.2
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LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Due to General Partner and affiliates $ 4.2 $ 2.9
Accounts payable and other 11.3 53.3
Interest payable 16.6 5.5
Property and other taxes 11.0 11.9
Accrued rate refunds and related interest (Note 4) 6.3 28.7
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49.4 102.3
Long-Term Debt 774.5 814.5
Contingencies (Note 6)
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823.9 916.8
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Partners' Capital
Limited Partner 598.8 494.8
General Partner 3.7 2.6
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602.5 497.4
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$ 1,426.4 $ 1,414.2
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</TABLE>
See accompanying notes to the financial statements.
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LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
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<CAPTION>
(unaudited, except for December 31, 1998; Limited General
dollars in millions) Partner Partner Total
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<S> <C> <C> <C>
Partners' Capital at December 31, 1998 $ 494.8 $ 2.6 $ 497.4
Partners' Capital Contributions, net (Note 5) 119.7 1.2 120.9
Net Income Allocation 64.0 0.7 64.7
Distributions to Partners (79.7) (0.8) (80.5)
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Partners' Capital at September 30, 1999 $ 598.8 $ 3.7 $ 602.5
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</TABLE>
See accompanying notes to the financial statements.
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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
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1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
they contain all adjustments which management considers necessary to
present fairly the financial position as at September 30, 1999 and December
31, 1998; the results of operations for the three and nine month periods
ended September 30, 1999 and 1998; and cash flows for the nine month
periods ended September 30, 1999 and 1998. The results of operations for
the three month and nine month periods ended September 30, 1999, should not
be taken as indicative of the results to be expected for the full year. The
interim financial statements should be read in conjunction with the
Partnership's financial statements and notes thereto presented in the
Partnership's 1998 Annual Report on Form 10-K.
2. Comparative Amounts
Certain comparative amounts are reclassified to conform with the current
period's financial statement presentation.
3. Depreciation Rates
Revised depreciation rates were approved by the Federal Energy Regulatory
Commission ("FERC"), effective on January 1, 1999, better representing the
expected remaining service life of the pipeline system and coinciding with
the in-service date for the Partnership's System Expansion Program II ("SEP
II"). Depreciation expense for the three month and nine month periods ended
September 30, 1999, is $1.4 million and $4.8 million lower, respectively,
than it would have been under previous depreciation rates.
4. Accrued Rate Refunds and Related Interest
In 1996, FERC approved a settlement agreement ("Settlement Agreement")
between the Partnership
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and customer representatives on all outstanding contested tariff rates. The
Settlement Agreement resulted in an approximate tariff rate reduction of 6%
and total rate refunds and related interest of $120.0 million through the
effective date of October 1, 1996. The $6.3 million total rate refund
balance remaining at September 30, 1999 is being repaid through a 10%
reduction in tariff rates. This reduction will continue until all refunds
have been made, which is expected to occur during the fourth quarter of
1999. Interest will continue to accrue on the unpaid balance based on the
90-day Treasury Bill rate.
5. Partners' Capital Contributions
On April 28, 1999, the Partnership received capital contributions from its
Partners providing net proceeds of $120.9 million. The proceeds were used
to repay indebtedness under the Partnership's Revolving Credit Facility
incurred to finance pipeline expansion projects.
6. Environmental Contingencies
The Partnership is subject to federal and state laws and regulations
relating to the protection of the environment. Environmental risk is
inherent to liquid pipeline operations and the Partnership could, at times,
be subject to environmental cleanup and enforcement actions. The General
Partner manages this environmental risk through appropriate environmental
policies and practices to minimize the impact to the Partnership. To the
extent that the Partnership is unable to recover environmental costs in its
rates (if not recovered through insurance), the General Partner has agreed
to indemnify the Partnership from and against any costs relating to
environmental liabilities associated with the pipeline system prior to its
transfer to the Partnership in 1991. This excludes any liabilities
resulting from a change in laws after such transfer. The Partnership
continues to voluntarily investigate past leak sites for the purpose of
assessing whether any remediation is required in light of current
regulations, and to date no material environmental risks have been
identified.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Net income for the nine months ended September 30, 1999, was $64.7 million,
compared to $70.5 million, for the same period in 1998. The decline in net
income reflects higher interest expense and depreciation, which were partially
offset by higher operating revenue and lower power costs.
Operating revenue for the first nine months of 1999 increased $16.5 million, to
$234.0 million, over the corresponding period in 1998 as declines in deliveries
were more than offset by increased tariffs (see "General, - Tariff Matters").
Deliveries averaged 1.371 million barrels per day for the first nine months of
1999, compared to 1.575 million barrels per day for the same period of 1998.
Reduced deliveries are due to the continuing negative impact on crude oil supply
available to the Partnership caused by low crude oil prices in 1998 and early
1999 which have significantly interrupted oil exploration and development
activity in western Canada. System utilization, measured in barrel miles, was
265 billion for the first nine months of 1999, compared to 295 billion for the
first nine months of last year, reflecting the decline in deliveries.
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Expenses for the first nine months of 1999 decreased slightly by $1.7 million
from the corresponding period last year as lower power costs were partially
offset by higher depreciation costs. Power costs decreased $12.9 million due to
lower throughput volumes and operating efficiencies gained from the expanded
pipeline facilities. Depreciation expense increased $11.7 million primarily due
to placing SEP II in service on January 1, 1999, which was partially offset by
reduced depreciation rates.
Interest expense for the first nine months of 1999 was $22.0 million higher than
the same period of 1998 due to higher borrowings associated with the
Partnership's expansion projects.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
Net income for the three months ended September 30, 1999, was $20.0 million,
compared to $22.8 million, for the same period last year. The decline in
quarterly results reflects higher operating and administrative, depreciation and
interest expense, which was partially offset by higher operating revenue and
lower power costs.
Operating revenue for the third quarter of 1999 was $79.6 million, an increase
of $9.4 million over the corresponding period in 1998, as declines in deliveries
were more than offset by increased tariffs. Deliveries averaged 1.343 million
barrels per day for the third quarter of 1999, compared to 1.530 million barrels
per day for the same period of 1998. As previously noted, the reduction stems
primarily from low crude oil prices in 1998 and early 1999 that continue to
impact the supply of crude oil available to the Partnership. The third quarter
decrease in deliveries is also attributable to a reduction in short haul volumes
of light crude between Chicago and eastern Canada of approximately 70,000
barrels per day due to changing market conditions (see "General, - Montreal
Extension Reversal"). System utilization, measured in barrel miles, was 89
billion for the third quarter of 1999, compared to 95 billion for the same
period in 1998, reflecting the decline in deliveries.
Expenses for the three months ended September 30, 1999, increased $3.2 million
from the corresponding period in 1998 due to increased depreciation and
operating and administrative costs, which were partially offset by decreased
power costs. Depreciation costs increased $4.4 million primarily due to placing
SEP II in service on January 1, 1999, which was partially offset by reduced
depreciation rates. The increase in operating and administrative costs of $2.2
million was due to a higher oil loss measurement experience and a reduction in
capitalized charges due to lower capital expenditures. Power costs decreased
$3.4 million due to lower throughput volumes and operating efficiencies gained
from the expanded pipeline facilities.
Interest expense for the third quarter of 1999 was $8.9 million higher than the
same period of 1998 due to higher borrowings associated with the Partnership's
expansion projects.
The results of operations for the three month and nine month periods ended
September 30, 1999 should not be taken as indicative of the results of
operations expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership anticipates that it will continue to have adequate liquidity to
fund future recurring operating, investing and financing activities. The
Partnership intends to fund ongoing capital expenditures with the proceeds from
future partner capital contributions, debt offerings, borrowings, cash generated
from operating activities, and existing cash and cash equivalents. Cash
distributions are expected to be funded with internally generated cash. The
Partnership's ability to make future debt offerings and receive partner capital
contributions will depend on prevailing market conditions and interest rates and
the then-existing financial condition of the Partnership.
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At September 30, 1999, cash and cash equivalents totaled $53.8 million, as
compared to $47.0 million at December 31, 1998, as cash generated from operating
activities and net proceeds from partner capital contributions exceeded cash
required for distributions, repayments of variable rate financing and capital
related expenditures. Of this $53.8 million, $27.9 million will be used for the
cash distribution payable November 12, 1999, with the remaining $25.9 million
available for capital expenditures or other business needs.
Cash flow from operating activities remained largely unchanged, as the first
nine months of 1999 was $86.9 million, compared with $86.8 million for the same
period last year.
On April 28, 1999, the Partnership received net partner capital contributions of
$120.9 million. These proceeds were used to repay indebtedness incurred under
the Partnership's Revolving Credit Facility to finance pipeline expansion
projects.
Capital expenditures for the first nine months of 1999 totalled $58.2 million,
of which $25.3 million was for the first phase of the Terrace program (see " -
General, - Terrace Program"), $21.0 million was for SEP II and $11.9 million was
for other system enhancements and core maintenance activities. The first phase
of the Terrace program is substantially complete with $138.0 million of the
approximately $140.0 million total capital expenditures incurred through
September 30, 1999. The Partnership anticipates total SEP II capital
expenditures in 1999 of approximately $30.0 million for remaining right-of-way
restoration, clean-up and acquisition costs, in addition to the $450.0 million
cost of the SEP II project incurred to December 31, 1998. In addition to Terrace
and SEP II, the Partnership anticipates total capital expenditures in 1999 of
$21.4 million for pipeline system enhancements and core maintenance activities.
GENERAL
Future Prospects
Deliveries averaged 1.371 million barrels per day for the first nine months of
1999 or approximately 200,000 barrels per day less than the same period in 1998.
The decline in deliveries is greater than anticipated by the Partnership at the
beginning of 1999. Accordingly, the Partnership anticipates earnings for 1999
will be at the low end of the $80 to $90 million range discussed in the
Partnership's 1998 Annual Report on Form 10-K. The Partnership could experience
a similar pattern of deliveries in 2000. If this is the case, Partnership
earnings in 2000 will likely approximate 1999 levels, which the Partnership
anticipates will allow it to maintain its current level of quarterly
distributions.
The Partnership's near-term prospects remain sensitive to crude oil production
recovery in western Canada, crude oil prices and market pricing dynamics in the
Partnership's Midwest U.S. and Ontario markets. The Partnership's long-term
outlook remains positive due to the current strong world crude oil prices and
projected increases in heavy and synthetic crude oil production, in particular
from the oil sands deposits in Alberta. The Partnership is well positioned to
benefit from increases in crude oil supply through a combination of existing
capacity and planned future expansion. The increased Canadian production is
anticipated to be taken up by demand from the Midwest U.S.
Montreal Extension Reversal
Enbridge Pipelines Inc.'s system includes a section that extends from Sarnia,
Ontario, to Montreal, Quebec ("Line 9"), which at one time flowed in a
west-to-east direction. Enbridge Pipelines Inc. ("Enbridge Pipelines"), the
parent company of the General Partner, and a group of refiners developed the
Line 9 reversal project which enables crude oil to be imported into eastern
Canada through the facilities of Portland Pipe Line Corporation and Montreal
Pipe Line Limited. Line 9 was reversed in two stages, allowing shipments from an
east-to-west direction from Montreal to the major refining centers in
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Ontario. The first stage entered service in the second quarter of 1999 with a
capacity of 120,000 barrels per day from Montreal to North Westover, Ontario.
Full reversal was completed in early October 1999 at a capacity of 240,000
barrels per day from Montreal to Sarnia. The reversal of Line 9 has resulted in
Enbridge Pipelines becoming a competitor of the Partnership's system for
supplying crude oil to the Ontario market.
The reversal of Line 9 has resulted in decreased deliveries over the
Partnership's system to eastern Canada beginning with the second quarter of this
year. The Partnership anticipates that displaced volumes originating in western
Canada will be diverted to other markets in the Midwest U.S. The Partnership
also anticipates that U.S. domestic and foreign crude oil volumes that enter the
Partnership's system in Chicago for delivery to eastern Canada will continue to
decline from recent historical levels due to the reversal of Line 9. Deliveries
of light crude between Chicago and Eastern Canada decreased approximately 70,000
barrels per day for the third quarter of 1999 as compared to same period last
year. It is anticipated that increasing heavy crude oil production from western
Canada delivered to the Midwest U.S. will offset reductions in light crude oil
deliveries to Ontario. The level of decline in deliveries over the Partnership's
system to eastern Canada will be dependent upon global crude oil market dynamics
and the level of utilization of Line 9. For additional information on the Line 9
reversal, see the Partnership's 1998 Annual Report on Form 10-K.
Terrace Program
The Terrace program, which is being undertaken by the Partnership in conjunction
with Enbridge Pipelines, is a multi-phased expansion program of both the United
States and Canadian portions of the pipeline system. Subject to continued
industry support, customer requirements and receipt of regulatory approvals,
this multi-phased expansion program is expected to be completed over the period
1999 through 2005.
The first phase of the Terrace Expansion Program is expected to be completed in
November 1999 and will add 170,000 barrels per day of heavy crude oil capacity
from the Canadian border to Superior, Wisconsin. Phase I is expected to cost the
Partnership approximately $140.0 million for construction of facilities in the
United States, and to cost Enbridge Pipelines approximately Cdn. $600.0 million
for construction of facilities in Canada. Through September 30, 1999, the
Partnership had spent $138.0 million for construction of Phase I facilities in
the United States.
Subsequent phases of Terrace will depend on customer requirements and, if
completed, are expected to provide up to 350,000 barrels per day of heavy crude
oil capacity in addition to the 170,000 barrels per day to be provided by Phase
I. Subject to completion of all phases of Terrace, and after allowing for
anticipated declines in light crude oil production, total system delivery
capability is expected to increase by approximately 350,000 barrels per day.
Tariff Matters
The Partnership filed a tariff agreement ("Tariff Agreement") with FERC
providing for tariff rate surcharges commencing as of January 1, 1999 for SEP II
and April 1, 1999 for Terrace. This filing consolidated the Partnership's 1996
Settlement Agreement for SEP II and other significant agreements with customers
concerning Terrace and the transportation of heavy crude oil. The FERC approved
the Tariff Agreement, which allows the Partnership to earn a return on its SEP
II equity investment that varies with utilization of SEP II capacity on Enbridge
Pipelines' portion of the system. Under the Tariff Agreement, the return on SEP
II equity can range from a minimum of 7.5% to a maximum of 15%. For 1999, the
tariff rate surcharge for SEP II is approximately $0.11 per barrel for light
crude oil to Chicago, Illinois. This surcharge allows the Partnership to recover
the cost of service for SEP II facilities and earn a 7.5% return on SEP II
equity investment during 1999.
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The tariff rate surcharge for Terrace is approximately $0.013 per barrel for
light crude oil to Chicago. This tariff surcharge assumes completion of Phases
II and III of Terrace. If these phases of Terrace are not completed, the Tariff
Agreement provides that the Partnership will be allowed to increase the tariff
surcharge on a cost of service basis to allow recovery of, and return on, the
Partnership's Phase I Terrace investment, including any revenue variances
between the application of the toll increment and the annual cost of service of
Terrace.
Effective July 1, 1999, in compliance with the indexed rate ceilings allowed by
FERC, the Partnership decreased its rates for transportation approximately 1.8%.
The decrease in tariff rates is not expected to have a material impact on the
Partnership.
The 1996 FERC-approved Settlement Agreement between the Partnership and customer
representatives resulted in total rate refunds and related interest of $120.0
million through the effective date of October 1, 1996. The rate refund is being
repaid through a 10% reduction in tariff rates. On October 22, 1999, the
Partnership filed revised tariffs removing the 10% reduction effective November
22, 1999, as the $120 million is expected to be fully repaid during the fourth
quarter of 1999.
Year 2000
The Partnership's pipeline system is operationally dependent on the ability of
Enbridge Pipelines to transport crude oil and other liquid hydrocarbons from
western Canada to reach markets in the United States and eastern Canada. Due to
the integrated nature of these two pipeline systems, the Partnership's Year 2000
Readiness Program is being conducted in conjunction with Enbridge Pipelines.
As of September 30, 1999, all of the Partnership and Enbridge Pipelines' mission
critical systems, as well as the high and medium priority systems, had been
remediated, tested and deployed according to the standards established by the
Partnership and Enbridge Pipelines for the Year 2000 Readiness Program. The
Partnership and Enbridge Pipelines are also addressing lower priority systems
and equipment, with no significant remediation issues encountered to date. A
comprehensive clean management program has been adopted, ensuring all new
acquisitions or systems implemented by the Partnership subsequent to the
reporting date are Year 2000 compliant.
Business continuity and contingency plans have been established, including the
formation of a communications network that will be in place for the year end
rollover with key people on site and additional resources on call. Testing of
these plans and staff training is currently in progress and will continue to the
end of 1999. In addition, the Partnership and Enbridge Pipelines are
participating in industry task forces on Year 2000 readiness and have met and
continue to monitor the readiness of critical suppliers and customers.
As of September 30, 1999, the Partnership had incurred $1.9 million of operating
and $0.3 million of capital costs. As a result of fewer than anticipated
remediation issues, the Partnership expects that the actual cost of the project
will approximate $3.0 million as compared to the original cost estimate of $6.0
million referenced in the Partnership's 1998 Annual Report on Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Partnership's market risk is primarily impacted by changes in interest
rates. The Partnership's exposure to movements in interest rates is managed
through its long-term debt ratio target, its allocation of fixed and floating
rate debt, and the use of interest rate risk management agreements. Reference
should be made to the Partnership's 1998 Annual Report on Form 10-K.
On July 15, 1999, the Partnership entered into an interest rate swap agreement
with a notional amount of $50.0 million to hedge its variable rate indebtedness
under the Partnership's Revolving Credit Facility. Under the three-year
agreement, the Partnership makes or receives quarterly payments based on the
difference between actual variable rates and a fixed rate of 6.231%.
As the Partnership does not own the crude oil and Natural Gas Liquids ("NGL") it
transports, its cash flows are not significantly impacted by changes in
commodity prices. However, commodity prices have a significant impact on the
underlying supply and demand for crude oil and NGL that the Partnership
transports.
The Partnership has minimal foreign exchange risk.
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PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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In late July 1998, the Partnership's directional drilling operations for SEP II
construction caused a discharge of non-hazardous bentonite drilling mud in a
wetlands area. The State of Illinois is pursuing an action relating to this
discharge under Natural Resource Damage Assessment regulations of the Clean
Water Act to seek compensation for damage to the wetlands area. A settlement in
principle has been reached with the State to resolve the matter at a cost to the
Partnership of under $100,000.
In a separate action related to the drilling mud discharge in the wetlands area,
the U.S. Environmental Protection Agency ("EPA") filed an administrative
complaint against the Partnership on August 20, 1999, proposing a civil penalty
of $82,500 for violations of the Clean Water Act resulting from the bentonite
discharges into the wetlands. Representatives of the Partnership met with the
EPA and negotiated a Consent Order that has been signed by both the EPA and the
Partnership and took effect November 5, 1999. Pursuant to the Consent Order, the
Partnership will pay a civil penalty in the amount of $13,365 and will perform a
Supplemental Environmental Project consisting of the payment of $45,875 to a
conservation foundation in Illinois for the purchase of 12 acres of
environmentally sensitive property on the Fox River near Chicago to be
contributed to the Illinois Department of Natural Resources for management and
preservation.
By the end of November, the Partnership will make payment to the state of
Illinois of $98,000 and costs of $2,000 for a May 28, 1998, release of crude oil
caused by a third party in Orland Park, Illinois. The Partnership, the third
party and the Illinois Attorney General negotiated a Consent Order which was
entered on November 5, 1999, together with the Complaint alleging the
violations. The Partnership has filed suit against the third party to recoup the
penalty and all other costs incurred by the Partnership in connection with the
May 28 release.
The Partnership received a draft complaint on September 21, 1999, from the
Department of Justice of the State of Wisconsin alleging violations of state
pollution control regulations during construction on SEP II during the summer of
1998. The first three claims asserted in the draft complaint allege that the
Partnership failed to monitor discharges of water from SEP II construction
trenches on certain occasions in the summer of 1998 and exceeded the effluent
limitations set forth in a permit. The fourth claim noted in the draft complaint
alleges that the Partnership had failed to immediately report a release of NGL
from its Superior, Wisconsin, terminal in mid-January 1999. Although it appears
likely that a penalty will be assessed against the Partnership, it is not
anticipated that the penalty will have a material impact on the financial
condition of the Partnership.
11
<PAGE> 14
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
a) Exhibits
27.1 Financial Data Schedule as of and for the nine months ended September
30, 1999.
b) Reports on Form 8-K
A report on Form 8-K was filed July 20, 1999, submitting a press release
dated July 15, 1999, declaring a cash distribution and reporting the second
quarter financial results.
A report on Form 8-K was filed July 21, 1999, submitting the consent of
PricewaterhouseCoopers LLP, the Registrant's independent accountants, to
incorporate by reference in the Registration Statement on Form S-3 (No.
333-59597) (the "Registration Statement") its report dated January 8, 1999,
appearing on page F-2 of Lakehead Pipe Line Company, Limited Partnership's
Annual Report on Form 10-K for the year ended December 31, 1998 (the
"Lakehead Report"). A report on Form 8-K/A was filed on July 23, 1999, in
order to revise and supersede the consent previously filed in the Original
Form 8-K. The new consent related to the incorporation by reference in the
Registration Statement of the accountants' report dated January 8, 1999,
relating to the balance sheet of Lakehead Pipe Line Company, Inc., which
appears in the Current Report on Form 8-K of Lakehead Pipe Line Partners,
L.P., dated April 15, 1999, as well as the Lakehead Report.
12
<PAGE> 15
SIGNATURE
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.
LAKEHEAD PIPE LINE COMPANY, LIMITED PARTNERS
(Registrant)
By: Lakehead Pipe Line Company, Inc.
as General Partner
/s/ J.L. Balko
--------------------------------------------
J. L. Balko
Chief Accountant
(Principal Financial and
Accounting Officer)
Dated: November 12, 1999
13
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 53800
<SECURITIES> 0
<RECEIVABLES> 28800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108400
<PP&E> 1544400
<DEPRECIATION> 232900
<TOTAL-ASSETS> 1426400
<CURRENT-LIABILITIES> 49400
<BONDS> 774500
0
0
<COMMON> 0
<OTHER-SE> 602500
<TOTAL-LIABILITY-AND-EQUITY> 1426400
<SALES> 0
<TOTAL-REVENUES> 234000
<CGS> 0
<TOTAL-COSTS> 132000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40000
<INCOME-PRETAX> 64700
<INCOME-TAX> 0
<INCOME-CONTINUING> 64700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64700
<EPS-BASIC> 0
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