<PAGE>
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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 June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-14569
PLAINS ALL AMERICAN PIPELINE, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0582150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 DALLAS STREET
HOUSTON, TEXAS 77002
(Address of principal executive offices)
(Zip Code)
(713) 654-1414
(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
----- -----
At August 11, 2000, there were outstanding 23,049,239 Common Units, 1,307,190
Class B Common Units and 10,029,619 Subordinated Units.
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<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets:
June 30, 2000 and December 31, 1999......................... 3
Consolidated Statements of Operations:
For the three and six months ended June 30, 2000 and 1999... 4
Consolidated Statements of Cash Flows:
For the six months ended June 30, 2000 and 1999............. 5
Consolidated Statement of Partners' Capital:
For the six months ended June 30, 2000...................... 6
Notes to Consolidated Financial Statements....................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 12
PART II. OTHER INFORMATION....................................... 22
2
<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,600 $ 53,768
Accounts receivable and other current assets 316,070 508,920
Inventory 32,333 34,826
Assets held for sale (Note 3) - 141,486
-------- ----------
Total current assets 350,003 739,000
-------- ----------
PROPERTY AND EQUIPMENT 458,385 454,878
Less allowance for depreciation and amortization (18,368) (11,581)
-------- ----------
440,017 443,297
-------- ----------
OTHER ASSETS
Pipeline linefill 18,562 17,633
Other 10,727 23,107
-------- ----------
$819,309 $1,223,037
======== ==========
LIABILITIES AND PARTNERS' CAPTIAL
CURRENT LIABILITIES
Accounts payable and other current liabilities $282,478 $ 485,400
Due to affiliates 24,663 42,692
Short-term debt and current portion of long-term debt 3,000 109,369
-------- ----------
Total current liabilities 310,141 637,461
LONG-TERM LIABILITIES
Bank debt 267,250 259,450
Subordinated note payable - general partner - 114,000
Other long-term liabilities and deferred credits 9,571 19,153
-------- ----------
Total liabilities 586,962 1,030,064
-------- ----------
PARTNERS' CAPITAL
Common unitholders (23,049,239 units outstanding) 231,069 208,359
Class B common unitholders (1,307,190 units outstanding) 21,836 20,548
Subordinated unitholders (10,029,619 units outstanding) (21,226) (35,621)
General partner 668 (313)
-------- ----------
Total partners' capital 232,347 192,973
-------- ----------
$819,309 $1,223,037
======== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
--------------------------- ------------------------------
2000 1999 2000 1999
--------------------------- ------------------------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
REVENUES $738,967 $862,524 $1,738,286 $1,318,284
COST OF SALES AND OPERATIONS 706,193 836,069 1,668,960 1,272,170
UNAUTHORIZED TRADING LOSSES
AND RELATED EXPENSES (NOTE 2) - 21,470 - 42,675
--------- ------- ---------- ----------
Gross Margin 32,774 4,985 69,326 3,439
--------- ------- ---------- ----------
EXPENSES
General and administrative 7,949 5,769 16,444 7,947
Noncash compensation expense - - 131 -
Depreciation and amortization 4,661 3,840 14,799 6,671
Restructuring expense - - - 410
--------- ------- ---------- ----------
Total expenses 12,610 9,609 31,374 15,028
--------- ------- ---------- ----------
Operating income (loss) 20,164 (4,624) 37,952 (11,589)
Interest expense (5,184) (4,720) (12,040) (7,913)
Related party interest expense (966) - (3,268) -
Gain on sale of assets (Note 3) - - 48,188 -
Interest and other income 3,049 190 10,531 287
--------- ------- ---------- ----------
Net income (loss) before extraordinary item 17,063 (9,154) 81,363 (19,215)
Extraordinary item (11,002) - (15,147) -
--------- -------- ---------- ----------
NET INCOME (LOSS) $ 6,061 $ (9,154) $ 66,216 $ (19,215)
========= ======== ========== ==========
NET INCOME (LOSS) - LIMITED PARTNERS $ 5,874 $ (9,032) $ 64,826 $ (18,891)
========= ======== ========== ==========
NET INCOME (LOSS) - GENERAL PARTNER $ 187 $ (122) $ 1,390 $ (324)
========= ======== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS)
PER LIMITED PARTNER UNIT
Net income (loss) before extraordinary item $ 0.49 $(0.29) $2.32 $(0.62)
Extraordinary item (0.32) - (0.43) -
--------- -------- ---------- ----------
Net income (loss) $ 0.17 $(0.29) $1.89 $(0.62)
========= ======== ========== ==========
WEIGHTED AVERAGE UNITS
OUTSTANDING 34,386 30,807 34,386 30,450
========= ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
--------- ----------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 66,216 $ (19,215)
Items not affecting cash flows
from operating activities:
Depreciation and amortization 14,799 6,671
Gain on the sale of assets (Note 3) (48,188) -
Other noncash items 4,712 182
Change in assets and liabilities:
Accounts receivable and other current assets 162,125 (73,822)
Inventory 2,493 (1,250)
Accounts payable and other current liabilities (207,607) 102,908
Pipeline linefill (929) (3)
Other long-term liabilities and deferred credits (29) -
--------- ----------
Net cash provided by (used in) operating activities (6,408) 15,471
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Costs incurred in connection with acquisitions - (141,971)
Additions to property and equipment and other assets (5,548) (4,990)
Proceeds from sales of assets (Note 3) 223,859 155
--------- ----------
Net cash provided by (used in) investing activities 218,311 (146,806)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (to) from affiliates (18,029) 8,731
Proceeds from issuance of Class B Common Units - 25,252
Proceeds from long-term debt 443,050 187,621
Proceeds from short-term debt 45,250 24,150
Payment of subordinated debt - general partner (114,000) -
Principal payments of long-term debt (485,900) (72,621)
Principal payments of short-term debt (100,969) (11,900)
Costs incurred in connection with financing arrangements (6,500) (3,527)
Distributions to unitholders (26,973) (19,741)
--------- ----------
Net cash provided by (used in) financing activities (264,071) 137,965
--------- ----------
Net increase (decrease) in cash and cash equivalents (52,168) 6,630
Cash and cash equivalents, beginning of period 53,768 5,503
--------- ----------
Cash and cash equivalents, end of period $ 1,600 $ 12,133
========= ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
TOTAL
CLASS B GENERAL PARTNERS'
COMMON UNITS COMMON UNITS SUBORDINATED UNITS PARTNER CAPITAL
------------------- ------------------ ------------------- ------- --------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT AMOUNT AMOUNT
------- --------- ------- ------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 23,049 $208,359 1,307 $20,548 10,030 $(35,621) $ (313) $192,973
Noncash compensation expense - - - - - - 131 131
Distributions - (20,744) - (1,176 - (4,513) (540) (26,973)
Net income - 43,454 - 2,464 - 18,908 1,390 66,216
------- --------- ----- ------- ------ -------- ------ --------
Balance at June 30, 2000 23,049 $231,069 1,307 $21,836 10,030 $(21,226) $ 668 $232,347
======= ========= ===== ======= ====== ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PLAINS ALL AMERICAN PIPELINE, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES
We are a Delaware limited partnership that was formed in September of 1998 to
acquire and operate the midstream crude oil business and assets of Plains
Resources Inc. and its wholly owned subsidiaries. On November 23, 1998, we
completed our initial public offering and the transactions whereby we became the
successor to the business of the midstream subsidiaries of Plains Resources. Our
operations are conducted through Plains Marketing, L.P., All American Pipeline,
L.P. and Scurlock Permian Pipe Line LLC. Our general partner, Plains All
American Inc., is a wholly owned subsidiary of Plains Resources. We are engaged
in interstate and intrastate marketing, transportation and terminalling of crude
oil. Our operations are conducted primarily in California, Texas, Oklahoma,
Louisiana and the Gulf of Mexico.
The accompanying financial statements and related notes present our
consolidated financial position as of June 30, 2000 and December 31, 1999; the
results of our operations for the three and six months ended June 30, 2000 and
1999; cash flows for the six months ended June 30, 2000 and 1999; and changes in
partners' capital for the six months ended June 30, 2000. The financial
statements have been prepared in accordance with the instructions to interim
reporting as prescribed by the Securities and Exchange Commission ("SEC"). All
adjustments, consisting only of normal recurring adjustments that, in the
opinion of management were necessary for a fair statement of the results for the
interim periods, have been reflected. All significant intercompany transactions
have been eliminated. Certain reclassifications have been made to prior period
amounts to conform with current period presentation. The results of operations
for the three and six months ended June 30, 2000 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 our consolidated
financial statements and notes thereto presented in our 1999 Annual Report on
Form 10-K.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and if so, the type of
hedge transaction. For fair value hedge transactions in which we are hedging
changes in the fair value of an asset, liability, or firm commitment, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the fair value of the hedged item. For cash flow
hedge transactions, in which we are hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are affected by the variability of the cash flows of
the hedged item. This statement was amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137") issued in June 1999. SFAS 137 deferred
the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. We
are required to adopt this statement beginning January 1, 2001. We have not yet
determined what impact the adoption of SFAS 133 would have on the consolidated
balance sheets, statements of operations and cash flows; however, this standard
could increase volatility in earnings and partners' capital through
comprehensive income. In June 2000, the FASB issued SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedge Activities." SFAS 138 amended
the portions of SFAS 133, inclusive of the definition of the normal purchase and
sale exclusion.
NOTE 2 -- UNAUTHORIZED TRADING LOSSES AND RESTATED FINANCIAL STATEMENTS
In November 1999, we discovered that a former employee had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). A full investigation into the unauthorized trading activities by
outside legal counsel and independent accountants and consultants determined
that the vast majority of the losses occurred from March through November 1999,
and that the impact warranted a restatement of previously reported financial
information for 1999 and 1998. Consequently, the consolidated financial
statements for 1999 appearing in this report were previously restated to reflect
the unauthorized trading losses.
7
<PAGE>
NOTE 3 -- ASSET DISPOSITIONS
We initiated the sale of approximately 5.2 million barrels of crude oil
linefill from the All American Pipeline in November 1999. This sale was
completed in March 2000. The linefill was located in the segment of the All
American Pipeline that extends from Emidio, California, to McCamey, Texas.
Except for minor third party volumes, Plains Marketing, L.P., one of our
subsidiaries, has been the sole shipper on this segment of the pipeline since
its predecessor acquired the line from Goodyear on July 30, 1998. Proceeds from
the sale of the linefill were approximately $100.0 million, net of associated
costs, and were used (1) to repay outstanding indebtedness under our $65.0
million senior secured term credit facility entered into in December 1999 to
fund short-term working capital requirements resulting from the unauthorized
trading losses and (2) for general working capital purposes. We recognized a
total gain of $44.6 million in connection with the sale of the linefill, of
which $16.5 million was recorded in the fourth quarter of 1999. The amount of
crude oil linefill for sale at December 31, 1999 was $37.9 million and is
included in assets held for sale on the consolidated balance sheet.
On March 24, 2000, we completed the sale of the above referenced segment of
the All American Pipeline to a unit of El Paso Energy Corporation for proceeds
of approximately $124.0 million, which are net of associated transaction costs
and estimated costs to remove certain equipment. We recognized a gain of $20.1
million in connection with the sale in the first quarter of 2000. Proceeds from
the sale were used to permanently reduce the All American Pipeline, L.P. term
loan facility (see Notes 6 and 7). The cost of the pipeline segment is included
in assets held for sale on the consolidated balance sheet at December 31, 1999.
NOTE 4 -- ACQUISITIONS
West Texas Gathering System Acquisition
On July 15, 1999, Plains Scurlock Permian, L.P. (a predecessor of All American
Pipeline, L.P.) completed the acquisition of a West Texas crude oil pipeline and
gathering system from Chevron Pipe Line Company for approximately $36.0 million,
including transaction costs. Our total acquisition cost was approximately $38.9
million including costs to address certain issues identified in the due
diligence process.
Pro Forma Results for the West Texas Gathering System Acquisition
The following unaudited pro forma data is presented to show pro forma
revenues, net loss and basic and diluted net loss per limited partner unit as if
the West Texas Gathering System acquisition had occurred on January 1, 1999 (in
thousands):
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
Revenues $1,322,051
==========
Net loss $ (19,704)
==========
Basic and diluted net loss
per limited partner unit $ (0.63)
==========
NOTE 5 -- DISTRIBUTIONS
On February 14, 2000, we paid a cash distribution of $0.45 per unit on our
outstanding common units and Class B units. The distribution was paid to
unitholders of record on February 7, 2000 for the period October 1, 1999 through
December 31, 1999. The total distribution paid was approximately $11.2 million,
with approximately $7.2 million paid to our public unitholders and the remainder
paid to our general partner for its limited and general partner interests. The
distribution is equal to the minimum quarterly distribution specified in the
Partnership Agreement. No distribution was declared on the subordinated units
owned by our general partner.
On May 15, 2000, we paid a cash distribution of $0.45 per unit on our
outstanding common units, Class B units and subordinated units. The distribution
was paid to unitholders of record on May 5, 2000 for the period January 1, 2000
through March 31, 2000. The total distribution paid was approximately $15.8
million, with approximately $7.3 million paid to our public unitholders and the
remainder to our general partner for its limited and general partner interests.
8
<PAGE>
On July 25, 2000, we declared a cash distribution of $0.4625 per unit on our
outstanding common units, Class B units and subordinated units. The distribution
is payable on August 14, 2000, to holders of record on August 4, 2000. The total
distribution to be paid is approximately $16.3 million, with approximately $7.5
million to be paid to our public unitholders and the remainder to be paid to our
general partner for its limited and general partner interests.
NOTE 6 -- CREDIT FACILITIES
On May 8, 2000, we entered into new bank credit agreements. The borrower under
the new facilities is Plains Marketing, L.P. We are a guarantor of the
obligations under the credit facilities. The obligations are also guaranteed by
the subsidiaries of Plains Marketing, L.P. We entered into the credit agreements
in order to:
. refinance the existing bank debt of Plains Marketing, L.P. and Plains
Scurlock Permian, L.P. in conjunction with the merger of Plains Scurlock
Permian, L.P. into All American Pipeline, L.P.;
. refinance existing bank debt of All American Pipeline, L.P.;
. repay up to $114.0 million plus accrued interest of subordinated debt to our
general partner, and
. provide additional flexibility for working capital, capital expenditures, and
for other general corporate purposes.
Our new bank credit agreements consist of:
. a $400.0 million senior secured revolving credit facility. The revolving
credit facility is secured by substantially all of our assets and matures in
April 2004. No principal is scheduled for payment prior to maturity. The
revolving credit facility bears interest at our option at either the base
rate, as defined, plus an applicable margin, or LIBOR plus an applicable
margin. We incur a commitment fee on the unused portion of the revolving
credit facility.
. a $300.0 million senior secured letter of credit and borrowing facility, the
purpose of which is to provide standby letters of credit to support the
purchase and exchange of crude oil for resale and borrowings to finance crude
oil inventory that has been hedged against future price risk. The letter of
credit facility is secured by substantially all of our assets and has a
sublimit for cash borrowings of $100.0 million to purchase crude oil that has
been hedged against future price risk. The letter of credit facility expires
in April 2003. Aggregate availability under the letter of credit facility for
direct borrowings and letters of credit is limited to a borrowing base, which
is determined monthly based on certain of our current assets and current
liabilities (primarily inventory and accounts receivable and accounts payable
related to the purchase and sale of crude oil). At June 30, 2000,
approximately $129.4 million in letters of credit were outstanding under the
letter of credit and borrowing facility.
Our bank credit agreements prohibit distributions on, or purchases or
redemptions of, units if any default or event of default is continuing. In
addition, the agreements contain various covenants limiting our ability to,
among other things:
. incur indebtedness;
. grant liens;
. sell assets;
. make investments;
. engage in transactions with affiliates;
. enter into prohibited contracts; and
. enter into a merger or consolidation.
Our bank credit agreements treat a change of control as an event of default
and also require us to maintain:
. a current ratio (as defined) of 1.0 to 1.0;
. a debt coverage ratio that is not greater that 4.0 to 1.0 for the period from
March 31, 2000 to March 31, 2002 and subsequently 3.75 to 1.0;
. an interest coverage ratio that is not less than 2.75 to 1.0; and
. a debt to capital ratio of not greater than 0.65 to 1.0.
A default under our bank credit agreements would permit the lenders to
accelerate the maturity of the outstanding debt and to foreclose on the assets
securing the credit facilities. As long as we are in compliance with our bank
credit agreements, they do not restrict our ability to make distributions of
"available cash" as defined in our partnership agreement. We are currently in
compliance with the covenants contained in our bank credit agreements. At June
30, 2000, we could have borrowed the full $400.0 million available under our
secured revolving credit facility.
9
<PAGE>
At June 30, 2000 and December 31, 1999, the carrying value of short-term debt
($3.0 million and $58.7 million, respectively) and long-term debt ($267.3
million and $424.1 million, respectively) approximated fair value.
NOTE 7 -- EXTRAORDINARY ITEM
During the six months ended June 30, 2000, we recognized extraordinary losses,
consisting primarily of unamortized debt issue costs, of $15.1 million related
to the permanent reduction of the All American Pipeline, L.P. term loan facility
(see Notes 3 and 6) and the refinancing of our credit facilities. In addition,
interest and other income for the six months ended June 30, 2000, includes $9.7
million of previously deferred gains from terminated interest rate swaps as a
result of the debt extinguishments.
NOTE 8 -- CONTINGENCIES
Texas Securities Litigation. On November 29, 1999, a class action lawsuit was
filed in the United States District Court for the Southern District of Texas
entitled Di Giacomo v. Plains All American Pipeline, et al. The suit alleged
that Plains All American Pipeline, L.P. ("PAA") and certain of our general
partner's officers and directors violated federal securities laws, primarily in
connection with unauthorized trading by a former employee. An additional
nineteen cases were filed in the Southern District of Texas, some of which name
our general partner and Plains Resources as additional defendants. The court
consolidated all subsequently filed cases under the first filed action described
above and appointed two lead plaintiffs representing two different plaintiff
classes: (1) purchasers of Plains Resources common stock and options (the
"Plains Plaintiffs") and (2) purchasers of our common units (the "PAA
Plaintiffs"). On July 14, 2000, the Plains Plaintiffs filed a consolidated
complaint alleging violations of Rule 10b-5 and Section 20(a) of the Securities
Exchange Act of 1934. On the same day, the PAA Plaintiffs filed a consolidated
complaint, naming as additional defendants the underwriters for the public
offering of our units. The PAA Plaintiffs' consolidated complaint alleges that
the defendants are liable for securities fraud violations under Rule 10b-5 and
Section 20(a) of the Securities Exchange Act of 1934 and for making false
registration statements under Sections 11 and 15 of the Securities Act of 1933.
The plaintiffs in the Texas securities litigation seek, among other things,
damages for all losses and damages allegedly sustained by the plaintiffs from
the unauthorized trading loss and defendants' alleged misconduct, and any
additional relief as may be just and proper under the circumstances.
Texas Derivative Litigation. On July 11, 2000, a derivative lawsuit was filed
in the United States District Court for the Southern District of Texas entitled
Fernandez v. Plains All American Inc., et al., naming the general partner, its
directors and certain of its officers as defendants. This lawsuit contains the
same claims and seeks the same relief as the Delaware derivative litigation
described below. A responsive pleading or motion on behalf of the defendants is
due on August 14, 2000.
Delaware Derivative Litigation. On December 3, 1999, two derivative lawsuits
were filed in the Delaware Chancery Court, New Castle County, entitled Susser v.
Plains All American Inc., et al and Senderowitz v. Plains All American Inc., et
al. These suits, and three others which were filed in Delaware subsequently,
named our general partner, its directors and certain of its officers as
defendants, and allege that the defendants breached the fiduciary duties that
they owed to PAA and our unitholders by failing to monitor properly the
activities of our employees. The derivative complaints allege, among other
things, that PAA has been harmed due to the negligence or breach of fiduciary
duties of the officers and directors that are named in the lawsuits. The court
has consolidated all of the cases under the caption In Re Plains All American
Inc. Shareholders Litigation, and has designated the complaint filed in Sussex
v. Plains All American Inc. as the operative complaint in the consolidated
action. No responsive pleading or motion on behalf of the defendants is
currently due.
The plaintiffs in the Delaware securities litigation seek that the defendants
(1) account for all losses and damages allegedly sustained by us from the
unauthorized trading losses, (2) establish and maintain effective internal
controls ensuring that our affiliates and persons responsible for our affairs do
not engage in wrongful practices detrimental to us, (3) account for the
plaintiffs' costs and expenses in litigation, including reasonable attorneys'
fees, accountants' fees, and experts' fees and (4) provide the plaintiffs any
additional relief as may be just and proper under the circumstances.
We intend to vigorously defend the claims made against us in the Texas
securities litigation, the Texas derivative litigation and the Delaware
derivative litigation. However, there can be no assurance that we will be
successful in our defense or that these lawsuits will not have a material
adverse effect on our financial position or results of operation.
We, in the ordinary course of business, are a claimant and/or a defendant in
various other legal proceedings. Management does not believe that the outcome of
these other legal proceedings, individually and in the aggregate, will have a
materially adverse effect on our financial condition or results of operations.
10
<PAGE>
NOTE 9 -- OPERATING SEGMENTS
Our operations consist of two operating segments: (1) Pipeline Operations -
engages in interstate and intrastate crude oil pipeline transportation and
related merchant activities; (2) Marketing, Gathering, Terminalling and Storage
Operations - engages in purchases and resales of crude oil at various points
along the distribution chain and the leasing of terminalling and storage
facilities.
<TABLE>
<CAPTION>
Marketing,
a Gathering,
Terminalling
(in thousands) (unaudited) Pipeline & Storage Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues:
External Customers $106,520 $ 632,447 $ 738,967
Intersegment (a) 6,083 - 6,083
Other 2,706 343 3,049
-------- ---------- ----------
Total revenues of reportable segments $115,309 $ 632,790 $ 748,099
======== ========== ==========
Segment gross margin (b) $ 12,759 $ 20,015 $ 32,774
Segment gross profit (c) 12,093 12,732 24,825
Net income before extraordinary item 10,718 6,345 17,063
----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999 (RESTATED)
Revenues:
External Customers $223,128 $ 639,396 $ 862,524
Intersegment (a) 19,470 (55) 19,415
Other 29 161 190
-------- ---------- ----------
Total revenues of reportable segments $242,627 $ 639,502 $ 882,129
======== ========== ==========
Segment gross margin (b) $ 12,917 $ (7,932) $ 4,985
Segment gross profit (c) 12,189 (12,973 (784)
Net income (loss) 6,035 (15,189) (9,154)
----------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
Revenues:
External Customers $286,578 $1,451,708 $1,738,286
Intersegment (a) 60,498 - 60,498
Other 9,679 852 10,531
-------- ---------- ----------
Total revenues of reportable segments $356,755 $1,452,560 $1,809,315
======== ========== ==========
Gain on sale of assets $ 48,188 $ - $ 48,188
Segment gross margin (b) 25,914 43,412 69,326
Segment gross profit (c) 24,291 28,591 52,882
Net income before extraordinary item 73,105 8,258 81,363
----------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 (RESTATED)
Revenues:
External Customers $377,615 $ 940,669 $1,318,284
Intersegment (a) 34,775 - 34,775
Other 95 192 287
-------- ---------- ----------
Total revenues of reportable segments $412,485 $ 940,861 $1,353,346
======== ========== ==========
Segment gross margin (b) $ 24,936 $ (21,497) $ 3,439
Segment gross profit (c) 23,413 (27,921) (4,508)
Net income (loss) 11,509 (30,724) (19,215)
----------------------------------------------------------------------------------------------
</TABLE>
a) Intersegment sales were conducted on an arm's length basis.
b) Gross margin is calculated as revenues less cost of sales and operations
expenses.
c) Gross profit is calculated as revenues less costs of sales and operations
expenses and general and administrative expenses.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Pipeline Operations. Our activities from pipeline operations generally consist
of transporting third-party volumes of crude oil for a tariff and merchant
activities designed to capture price differentials between the cost to purchase
and transport crude oil to a sales point and the price received for such crude
oil at the sales point. Tariffs on our pipeline systems vary by receipt point
and delivery point. The gross margin generated by our tariff activities depends
on the volumes transported on the pipeline and the level of the tariff charged,
as well as the fixed and variable costs of operating the pipeline. Our ability
to generate a profit on margin activities is not tied to the absolute level of
crude oil prices but is generated by the difference between an index-related
price paid and other costs incurred in the purchase of crude oil and an index-
related price at which we sell crude oil. We are well positioned to take
advantage of these price differentials due to our ability to move purchased
volumes on our pipeline systems. We combine reporting of gross margin for tariff
activities and margin activities due to the sharing of fixed costs between the
two activities.
Terminalling and Storage Activities and Gathering and Marketing Activities.
Gross margin from terminalling and storage activities is dependent on the
throughput volume of crude oil stored and the level of fees generated at our
terminalling and storage facilities. Gross margin from our gathering and
marketing activities is dependent on our ability to sell crude oil at a price in
excess of our aggregate cost. These operations are not directly affected by the
absolute level of crude oil prices, but are affected by overall levels of supply
and demand for crude oil and fluctuations in market related indices.
UNAUTHORIZED TRADING LOSSES
In November 1999, we discovered that a former employee had engaged in
unauthorized trading activity, resulting in losses of approximately $162.0
million ($174.0 million, including estimated associated costs and legal
expenses). Approximately $154.9 million of the unauthorized trading loss was
recognized in 1999, with approximately $21.2 million and $21.5 million of this
amount recognized in the first and second quarters of 1999, respectively. As a
result, we have previously restated our 1999 financial information.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
For the three months ended June 30, 2000, we reported net income of $6.1
million on total revenue of $739.0 million compared to a net loss for the same
period in 1999 of $9.2 million on total revenues of $862.5 million. The results
for the three months ended June 30, 2000 and 1999 include the following unusual
or nonrecurring items:
2000
. an extraordinary loss of $11.0 million related to the refinancing of our
credit agreements, and
. $2.9 million of previously deferred gains on interest rate swap terminations
recognized due to the early extinguishment of debt.
1999
. $21.5 million of unauthorized trading losses.
Excluding these nonrecurring items, we would have reported net income of $14.2
million and $12.3 million for the three months ended June 30, 2000 and 1999,
respectively.
12
<PAGE>
The following table sets forth our operating results for the periods indicated
and includes the impact of nonrecurring items discussed above (in thousands)
(unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
-------- ----------
(RESTATED)
<S> <C> <C>
OPERATING RESULTS:
Revenues $738,967 $862,524
======== ========
Gross margin:
Pipeline $ 12,759 $ 12,917
Gathering and marketing
and terminalling and storage 20,015 13,538
Unauthorized trading losses - (21,470)
--------- --------
Total 32,774 4,985
General and administrative expense (7,949) (5,769)
-------- --------
Gross profit $ 24,825 $ (784)
======== ========
Net income (loss) $ 6,061 $ (9,154)
======== ========
AVERAGE DAILY VOLUMES (MBBLS/DAY):
Pipeline Activities:
All American
Tariff activities 74 101
Margin activities 57 63
Other 118 20
-------- --------
Total 249 184
======== ========
Lease gathering 237 251
Bulk purchases 26 137
-------- --------
Total 263 388
======== ========
Terminal throughput 61 84
======== ========
Storage leased to third parties,
monthly average volumes 1,953 2,333
======== ========
</TABLE>
Revenues. Revenues decreased to $739.0 million for the second quarter of 2000
compared to the 1999 second quarter amount of $862.5 million, as lower current
year lease gathering and bulk purchase volumes and decreased pipeline margin
revenues offset higher crude oil prices.
Cost of Sales and Operations. Cost of sales and operations decreased to $706.2
million in the second quarter of 2000 compared to $836.1 million in the same
quarter of 1999. The decrease is primarily due to lower current year lease
gathering and bulk purchase volumes and a decrease in pipeline margin purchases
partially offset by increased purchase costs as a result of higher crude oil
prices.
General and Administrative. General and administrative expenses were $7.9
million for the quarter ended June 30, 2000, compared to $5.8 million for the
second quarter in 1999. The increase in 2000 is primarily due to the Scurlock
acquisition for which only two months of operations are included in the 1999
quarter (approximately $1.7 million) and consulting fees related to assistance
in review and implementation of enhanced controls.
Depreciation and Amortization. Depreciation and amortization expense was $4.7
million for the quarter ended June 30, 2000, compared to $3.8 million for the
second quarter of 1999. The increase is primarily due to the Scurlock and West
Texas gathering system acquisitions in mid-1999 and increased amortization of
debt issue costs. These increases were partially offset by decreased
depreciation related to the segment of the All American Pipeline that was sold.
During the second quarter of 2000, we refinanced our credit facilities and
recognized an extraordinary loss consisting primarily of debt issue costs. As a
result of the refinancing and the March 2000 sale of the segment of the All
American Pipeline, we estimate that our depreciation and amortization expense
will average approximately $4.5 million per quarter in the future, based on our
current property base.
13
<PAGE>
Interest expense. Interest expense was $6.2 million for the quarter ended June
30, 2000, compared to $4.7 million for the 1999 quarter. The increase is
primarily due to higher interest rates in 2000 as compared to 1999. Interest
expense was approximately $9.2 million in the first quarter of 2000. The second
quarter 2000 decrease from this level is primarily due to the reduction in debt
with the proceeds from first quarter asset sales.
Nonrecurring Items
Early extinguishment of debt. During the quarter ended June 30, 2000, we
recognized an extraordinary loss, consisting primarily of unamortized debt issue
costs, totaling $11.0 related to the refinancing or our credit facilities. In
addition, interest and other income for the second quarter 2000 includes $2.9
million of previously deferred gains from terminated interest rate swaps as a
result of the debt extinguishment.
Unauthorized trading losses. As previously discussed, we recognized losses of
approximately $21.5 million in the second quarter of 1999 as a result of
unauthorized trading by a former employee.
Segment Results
Pipeline Operations. Gross margin from pipeline operations was $12.8 million
for the quarter ended June 30, 2000 compared to $12.9 million for the prior year
quarter. Increased margins from the Scurlock and West Texas gathering system
acquisitions in mid-1999 were offset by a decrease in tariff transport volumes.
These volumes decreased due to the sale of the segment of the All American
Pipeline and lower production from Exxon's Santa Ynez Field and the Point
Arguello Field, both offshore California.
Gross revenues from pipeline margin activities decreased approximately $119.0
million from the prior year period primarily due to the sale of the segment of
the All American Pipeline and a decrease in volumes that were purchased and
resold. The margin between revenue and direct cost of crude purchased was $3.9
million for the quarter ended June 30, 2000 compared to $8.9 million for the
prior year second quarter. Pipeline tariff revenues were approximately $13.1
million for the second quarter of 2000 compared to approximately $10.5 million
for the same period in 1999 as increases related to the Scurlock and West Texas
gathering system acquisitions were offset by the sale of the All American
Pipeline segment. Pipeline operations and maintenance expenses decreased to $3.9
million for the second quarter of 2000 compared to $6.8 million for the second
quarter of 1999, also due to the acquisitions and disposition.
Tariff transport volumes on the All American Pipeline decreased from an
average of 101,000 barrels per day for the quarter ended June 30, 1999 to 74,000
barrels per day in the comparable quarter of 2000, primarily due to the sale of
the California to Texas portion of the line and to a decrease in shipments of
offshore California production, which decreased from 79,000 barrels per day to
74,000 barrels per day. Barrels associated with our merchant activities on the
All American Pipeline decreased from 63,000 barrels per day in the second
quarter of 1999 to 57,000 barrels per day in the second quarter of 2000, also
due to the sale of the line. Tariff volumes shipped on the Scurlock and West
Texas gathering systems averaged 118,000 barrels per day and 20,000 barrels per
day during the second quarter of 2000 and 1999, respectively. The 1999 period
includes volumes for Scurlock effective May 1, 1999, and no volumes for the West
Texas gathering system which was acquired effective July 1, 1999.
Gathering and Marketing Activities and Terminalling and Storage Activities.
Gross margin from gathering, marketing, terminalling and storage activities was
approximately $20.0 million for the quarter ended June 30, 2000 compared to
$13.5 million in the prior year quarter (excluding the unauthorized trading
losses), primarily due to an increase in our per barrel margin from $0.54 in the
prior year period to $0.80 per barrel in the current year period. Gross revenues
from these activities were approximately $632.4 million and $639.4 million in
the second quarter of 2000 and 1999, respectively, as decreased revenues
primarily due to lower bulk purchase volumes offset increased revenues resulting
from higher crude prices. Our average sales price was approximately $26.14 per
barrel in the current year period compared to $17.96 per barrel in the prior
year period.
Lease gathering volumes decreased from an average of 251,000 barrels per day
in the second quarter of 1999 to approximately 237,000 barrels per day in the
current year period. Bulk purchase volumes decreased from approximately 137,000
barrels per day in the 1999 second quarter to approximately 26,000 barrels per
day in the current year period. These decreases are primarily due to the
termination of low-margin purchase contracts subsequent to the discovery of the
unauthorized trading losses.
14
<PAGE>
In the period immediately following the disclosure of the unauthorized trading
losses, a significant number of our suppliers and trading partners reduced or
eliminated the open credit previously extended to us. Consequently, the amount
of letters of credit we needed to support the level of our crude oil purchases
then in effect increased significantly. In addition, the cost of obtaining
letters of credit increased under our amended credit facility. In many
instances we arranged for letters of credit to secure our obligations to
purchase crude oil from our customers, which increased our letter of credit
costs and decreased our unit margins. In other instances, primarily involving
lower-margin wellhead and bulk purchases, our purchase contracts were
terminated.
Six Months Ended June 30, 2000 and 1999
For the six months ended June 30, 2000, we reported net income of $66.2
million on total revenue of $1.7 billion, compared to a net loss for the same
period in 1999 of $19.2 million on total revenues of $1.3 billion. The results
for the six months ended June 30, 2000 and 1999 include the following unusual or
nonrecurring items:
2000
. a $28.1 million gain on the sale of crude oil linefill;
. a $20.1 million gain on the sale of the segment of the All American Pipeline
that extends from Emidio, California, to McCamey, Texas;
. $9.7 million of previously deferred gains on interest rate swap terminations
recognized due to the early extinguishment of debt;
. an extraordinary loss of $15.1 million related to the early extinguishment of
debt, and
. amortization of $4.6 million of debt issue costs associated with facilities
put in place during the fourth quarter of 1999.
1999
. $42.7 million of unauthorized trading losses and
. restructuring expenses of $0.4 million.
Excluding these nonrecurring items, we would have reported net income of $28.1
million and $23.9 million for the six months ended June 30, 2000 and 1999,
respectively.
The following table sets forth our operating results for the periods indicated
and includes the impact of nonrecurring items discussed above (in thousands)
(unaudited):
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
---------- ----------
(RESTATED)
OPERATING RESULTS:
Revenues $1,738,286 $1,318,284
========== ==========
Gross margin:
Pipeline $ 25,914 $ 24,936
Gathering and marketing
and terminalling and storage 43,412 21,178
Unauthorized trading losses - (42,675)
---------- ----------
Total 69,326 3,439
General and administrative expense (16,444) (7,947)
---------- ----------
Gross profit $ 52,882 $ (4,508)
========== ==========
Net income (loss) $ 66,216 $ (19,215)
========== ==========
Table continued on following page
15
<PAGE>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
---------- ----------
(RESTATED)
AVERAGE DAILY VOLUMES (MBBLS/DAY):
Pipeline Activities:
All American
Tariff activities 73 113
Margin activities 58 55
Other 116 10
---------- ----------
Total 247 178
========== ==========
Lease gathering 247 186
Bulk purchases 28 116
---------- ----------
Total 275 302
========== ==========
Terminal throughput 55 79
========== ==========
Storage leased to third parties,
monthly average volumes 1,389 2,026
========== ==========
Revenues. Revenues increased to $1,738.3 million from $1,318.3 million in the
first half of 1999. The increase is primarily due to higher crude oil prices,
which were partially offset by lower current year volumes.
Cost of Sales and Operations. Cost of sales and operations increased to
$1,669.0 million from $1,272.2 million in the first half of 1999. The increase
is primarily due to higher crude oil prices, which partially offset lower
current year volumes.
General and Administrative. General and administrative expenses were $16.4
million for the six months ended June 30, 2000, compared to $7.9 million for the
same period in 1999. The increase in 2000 is primarily due to the Scurlock
acquisition in May 1999 (approximately $5.7 million) and consulting fees related
to the unauthorized trading loss investigation and assistance in review and
implementation of enhanced controls (approximately $1.8 million).
Depreciation and Amortization. Depreciation and amortization expense was $14.8
million for the six months ended June 30, 2000, compared to $6.7 million for the
first half of 1999. The increase is primarily due to the Scurlock and West Texas
gathering system acquisitions in mid-1999 and increased amortization of debt
issue costs associated with facilities put in place during the fourth quarter of
1999 due to the unauthorized trading losses. These increases were partially
offset by decreased depreciation related to the segment of the All American
Pipeline that was sold.
During the second quarter, we refinanced our credit facilities and recognized
an extraordinary loss consisting primarily of debt issue costs. As a result of
the refinancing and the March 2000 sale of the segment of the All American
Pipeline, we estimate that our depreciation and amortization expense will
average approximately $4.5 million per quarter in the future, based on our
current property base.
Interest expense. Interest expense was $15.3 million for the six months ended
June 30, 2000, compared to $7.9 million for the same period in 1999. The
increase is primarily due to a higher average debt level in 2000 resulting from
our 1999 acquisitions and the unauthorized trading losses and to higher interest
rates in the current year.
Nonrecurring Items
Gain on sale of linefill. We initiated the sale of 5.2 million barrels of
crude oil linefill from the All American Pipeline in November 1999. The sale was
completed in March 2000. We recognized a gain of $28.1 million in connection
with the sale of the linefill in the first quarter of 2000.
Gain on sale of pipeline segment. On March 24, 2000, we completed the sale of
the segment of the All American Pipeline that extends from Emidio, California to
McCamey, Texas to a unit of El Paso Energy Corporation for proceeds of
approximately $124.0 million, which are net of associated transaction costs and
estimated costs to remove certain equipment. We recognized a total gain of $20.1
million in connection with the sale in the first quarter of 2000.
16
<PAGE>
Early extinguishment of debt. During the six months ended June 30, 2000, we
recognized extraordinary losses, consisting primarily of unamortized debt issue
costs, totaling $15.1 million related to the permanent reduction of the All
American Pipeline, L.P. term loan facility and the refinancing of our credit
facilities. In addition, interest and other income for the six months ended June
30, 2000, includes $9.7 million of previously deferred gains from terminated
interest rate swaps as a result of the debt extinguishments.
Unauthorized trading losses. As previously discussed, we recognized losses of
approximately $42.7 million in the first half of 1999 as a result of
unauthorized trading by a former employee.
Restructuring charge. We incurred a $0.4 million restructuring charge,
primarily associated with personnel reduction in the first quarter of 1999.
Segment Results
Pipeline Operations. Gross margin from pipeline operations was $25.9 million
for the six months ended June 30, 2000 compared to $24.9 million for the prior
year period. Increased margins from the Scurlock and West Texas gathering system
acquisitions in mid-1999, were offset by lower revenues due to a decrease in
tariff transport volumes. These volumes decreased due to lower production from
Exxon's Santa Ynez Field and the Point Arguello Field, both offshore California,
and the sale of the segment of the All American Pipeline.
Gross revenues from pipeline margin activities decreased approximately $92.0
million from the prior year period primarily due to the sale of the segment of
the All American Pipeline and a decrease in volumes that were purchased and
resold. The margin between revenue and direct cost of crude purchased was $9.2
million for the six months ended June 30, 2000 compared to $14.0 million for the
prior year first half. Pipeline tariff revenues were approximately $24.3 million
for the first half of 2000 compared to approximately $23.9 million for the same
period in 1999 as increases related to the Scurlock and West Texas gathering
system acquisitions were offset by the sale of the segment of the All American
Pipeline segment. Pipeline operations and maintenance expenses were
approximately $7.6 million for the first half of 2000 compared to $13.0 million
for the first half of 1999, also due to the acquisitions and disposition.
Tariff transport volumes on the All American Pipeline decreased from an
average of 113,000 barrels per day for the six months ended June 30, 1999 to
73,000 barrels per day in the comparable period of 2000, primarily due to the
sale of the California to Texas portion of the line and a decrease in shipments
of offshore California production, which decreased from 83,000 barrels per day
to 73,000 barrels per day. Barrels associated with our merchant activities on
the All American Pipeline increased from 55,000 barrels per day in the first
half of 1999 to 58,000 barrels per day in the same period of 2000. Tariff
volumes shipped on the Scurlock and West Texas gathering systems averaged
116,000 barrels per day and 10,000 barrels per day during the first half of 2000
and 1999, respectively. The 1999 period includes volumes for Scurlock effective
May 1, 1999, and no volumes for the West Texas gathering system which was
acquired effective July 1, 1999.
Gathering and Marketing Activities and Terminalling and Storage Activities.
Gross margin from gathering, marketing, terminalling and storage activities was
approximately $43.4 million for the six months ended June 30, 2000 compared to
$21.2 million in the prior year period (excluding the unauthorized trading
losses). The increase in gross margin is primarily due to an increase in lease
gathering volumes as a result of the Scurlock acquisition and favorable market
conditions in the current year period. Our per barrel margin increased from
$0.48 in the prior year period to $0.87 per barrel in the current year period.
Gross revenues from gathering, marketing, terminalling and storage activities
were approximately $1.4 billion and $0.9 billion in the first half of 2000 and
1999, respectively, as increased revenues resulting from higher crude oil prices
were partially offset by decreased revenues primarily due to lower bulk purchase
volumes. Our average sales price was approximately $28.78 per barrel in the
current year period compared to $16.98 per barrel in the prior year period.
Lease gathering volumes increased from an average of 186,000 barrels per day
for the first half of 1999 to approximately 247,000 barrels per day in 2000.
Bulk purchase volumes decreased from approximately 116,000 barrels per day for
the first half of 1999 to approximately 28,000 barrels per day in the current
year due to the termination of low-margin purchase contracts subsequent to the
discovery of the unauthorized trading losses.
In the period immediately following the disclosure of the unauthorized trading
losses, a significant number of our suppliers and trading partners reduced or
eliminated the open credit previously extended to us. Consequently, the amount
of letters of credit we needed to support the level of our crude oil purchases
then in effect increased significantly. In addition, the cost of obtaining
letters of credit increased under our amended credit facility. In many instances
we arranged for letters of credit to secure our obligations to purchase crude
oil from our customers, which increased our letter of credit costs and decreased
our unit margins. In other instances, primarily involving lower-margin wellhead
and bulk purchases, our purchase contracts were terminated.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
SIX MONTHS ENDED
JUNE 30,
---------------------
(in millions) (unaudited) 2000 1999
----------------------------------------------------------------
Cash provided by (used in):
Operating activities $ (6.4) $ 15.5
Investing activities 218.3 (146.8)
Financing activities (264.1) 138.0
-----------------------------------------------------------------------
Operating Activities. Net cash used in operating activities for the first half
of 2000 resulted primarily from the amounts paid during the first quarter of
2000 for the 1999 unauthorized trading losses.
Investing Activities. Net cash provided by investing activities for the first
half of 2000 included approximately $224.0 million of proceeds from the sale of
the segment of the All American Pipeline and pipeline linefill.
Financing activities. Cash used in financing activities for the first half of
2000 resulted from net payments of $98.6 million of short-term and long-term
debt and the repayment of subordinated debt of $114.0 million to the general
partner. Proceeds used to reduce the bank debt primarily came from the asset
sales discussed above. Proceeds to repay the $114.0 million of subordinated debt
to the general partner came from our revolving credit facility.
Credit Facilities
Amounts outstanding under our credit agreements at June 30, 2000 were as
follows (in thousands) (unaudited):
Plains Marketing, L.P. revolving credit facility $267,250
Plains Marketing, L.P. letter of credit and hedged inventory facility 3,000
--------
$270,250
========
On May 8, 2000, we entered into new bank credit agreements. The borrower under
the new facilities is Plains Marketing, L.P. We are a guarantor of the
obligations under the credit facilities. The obligations are also guaranteed by
the subsidiaries of Plains Marketing, L.P. We entered into the credit agreements
in order to:
. refinance the existing bank debt of Plains Marketing, L.P. and Plains
Scurlock Permian, L.P. in conjunction with the merger of Plains Scurlock
Permian, L.P. into All American Pipeline, L.P.;
. refinance existing bank debt of All American Pipeline, L.P.;
. repay up to $114.0 million plus accrued interest of subordinated debt to our
general partner, and
. provide additional flexibility for working capital, capital expenditures, and
for other general corporate purposes.
Our new bank credit agreements consist of:
. a $400.0 million senior secured revolving credit facility. The revolving
credit facility is secured by substantially all of our assets and matures in
April 2004. No principal is scheduled for payment prior to maturity. The
revolving credit facility bears interest at our option at either the base
rate, as defined, plus an applicable margin, or LIBOR plus an applicable
margin. We incur a commitment fee on the unused portion of the revolving
credit facility.
. a $300.0 million senior secured letter of credit and borrowing facility, the
purpose of which is to provide standby letters of credit to support the
purchase and exchange of crude oil for resale and borrowings to finance crude
oil inventory that has been hedged against future price risk. The letter of
credit facility is secured by substantially all of our assets and has a
sublimit for cash borrowings of $100.0 million to purchase crude oil that has
been hedged against future price risk. The letter of credit facility expires
in April 2003. Aggregate availability under the letter of credit facility for
direct borrowings and letters of credit is limited to a borrowing base, which
is determined monthly based on certain of our current assets and current
liabilities (primarily inventory and accounts receivable and accounts payable
related to the purchase and sale of crude oil). At June 30, 2000,
approximately $129.4 million in letters of credit were outstanding under the
letter of credit and borrowing facility.
18
<PAGE>
Our bank credit agreements prohibit distributions on, or purchases or
redemptions of, units if any default or event of default is continuing. In
addition, the agreements contain various covenants limiting our ability to,
among other things:
. incur indebtedness;
. grant liens;
. sell assets;
. make investments;
. engage in transactions with affiliates;
. enter into prohibited contracts; and
. enter into a merger or consolidation.
Our bank credit agreements treat a change of control as an event of default
and also requires us to maintain:
. a current ratio (as defined) of 1.0 to 1.0;
. a debt coverage ratio that is not greater that 4.0 to 1.0 for the period from
March 31, 2000 to March 31, 2002 and subsequently 3.75 to 1.0;
. an interest coverage ratio that is not less than 2.75 to 1.0; and
. a debt to capital ratio of not greater than 0.65 to 1.0.
A default under our bank credit agreements would permit the lenders to
accelerate the maturity of the outstanding debt and to foreclose on the assets
securing the credit facilities. As long as we are in compliance with our bank
credit agreements, they do not restrict our ability to make distributions of
"available cash" as defined in our partnership agreement. We are currently in
compliance with the covenants contained in our credit agreements. At June 30,
2000, we could have borrowed the full $400.0 million available under our secured
revolving credit facility.
Contingencies
Since our announcement in November 1999 of our losses resulting from
unauthorized trading by a former employee, numerous class action lawsuits have
been filed against us, certain of our general partner's officers and directors
and in some of these cases, our general partner and Plains Resources Inc.
alleging violations of the federal securities laws. In addition, derivative
lawsuits were filed in the Delaware Chancery Court against our general partner,
its directors and certain of its officers alleging the defendants breached the
fiduciary duties owed to us and our unitholders by failing to monitor properly
the activities of our traders. See Part II - "Other Information" - Item 1. -
"Legal Proceedings."
Although we maintain an inspection program designed to prevent and, as
applicable, to detect and address releases of crude oil into the environment
from our pipeline and storage operations, we may experience such releases in the
future, or discover releases that were previously unidentified. Damages and
liabilities incurred due to any future environmental releases from our assets
may substantially affect our business.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and if so, the type of
hedge transaction. For fair value hedge transactions in which we are hedging
changes in the fair value of an asset, liability, or firm commitment, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the fair value of the hedged item. For cash flow
hedge transactions, in which we are hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are affected by the variability of the cash flows of
the hedged item. This statement was amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137") issued in June 1999. SFAS 137 deferred
the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. We
are required to adopt this statement beginning January 1, 2001. We have not yet
determined what impact the adoption of SFAS 133 would have on the consolidated
balance sheets, statements of operations and cash flows; however, this standard
could increase volatility in earnings and partners' capital through
comprehensive income. In June 2000, the
19
<PAGE>
FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedge Activities." SFAS 138 amended the portions of SFAS 133, inclusive of the
definition of the normal purchase and sale exclusion.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to various market risks, including volatility in crude oil
commodity prices and interest rates. To manage such exposure, we monitor our
inventory levels and our expectations of future commodity prices and interest
rates when making decisions with respect to risk management. We do not enter
into derivative transactions for speculative trading purposes that would expose
us to price risk. Substantially all of our derivative contracts are exchanged or
traded with major financial institutions and the risk of credit loss is
considered remote.
Commodity Price Risk. The fair value of outstanding derivative instruments and
the change in fair value that would be expected from a 10 percent price increase
are shown in the table below (in millions) (unaudited):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------- --------------------------------------
EFFECT OF EFFECT OF
10% 10%
FAIR PRICE FAIR PRICE
VALUE CHANGE VALUE CHANGE
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Crude oil :
Futures contracts $ 8.2 $ 5.5 $ - $(2.8)
Swaps and options contracts (0.2) (0.1) (0.6) (0.1)
</TABLE>
The fair values of the futures contracts are based on quoted market prices
obtained from the NYMEX. The fair value of the swaps is estimated based on
quoted prices from independent reporting services compared to the contract price
of the swap which approximate the gain or loss that would have been realized if
the contracts had been closed out at the dates indicated above. All hedge
positions offset physical positions exposed to the cash market; none of these
offsetting physical positions are included in the above table. Price-risk
sensitivities were calculated by assuming an across-the-board 10 percent
increase in prices regardless of term or historical relationships between the
contractual price of the instruments and the underlying commodity price. In the
event of an actual 10 percent change in prompt month crude prices, the fair
value of our derivative portfolio would typically change less than that shown in
the table due to lower volatility in out-month prices.
Interest Rate Risk. Our debt instruments are sensitive to market fluctuations
in interest rates. At June 30, 2000 and December 31, 1999, the carrying value of
short-term debt ($3.0 million and $58.7 million, respectively) and long-term
debt ($267.3 million and $424.1 million, respectively) approximated fair value.
Interest rate swaps and collars are used to hedge underlying debt obligations.
These instruments hedge specific debt issuances and qualify for hedge
accounting. The interest rate differential is reflected as an adjustment to
interest expense over the life of the instruments. At June 30, 2000, we had
interest rate swap and collar arrangements for an aggregate notional principal
amount of $215.0 million, which positions had an aggregate value of
approximately $0.4 million as of such date. These instruments are based on LIBOR
margins and generally provide for a floor of 5% and a ceiling of 6.5% for $90.0
million of debt and a floor of 6% and a ceiling of 8% for $125.0 million of
debt.
20
<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
All statements, other than statements of historical fact, included in this
report are forward-looking statements, including, but not limited to, statements
identified by the words "anticipate," "believe," "estimate," "expect,"
"plan," "intend" and "forecast" and similar expressions and statements
regarding our business strategy, plans and objectives of our management for
future operations. These statements reflect our current views and those of our
general partner with respect to future events, based on what we believe are
reasonable assumptions. These statements, however, are subject to certain risks,
uncertainties and assumptions, including, but not limited to:
. the availability of adequate supplies of and demand for crude oil in the
areas in which we operate;
. the impact of crude oil price fluctuations;
. the effects of competition;
. the success of our risk management activities;
. the availability (or lack thereof) of acquisition or combination
opportunities;
. the impact of current and future laws and governmental regulations;
. environmental liabilities that are not covered by an indemnity or insurance;
and
. general economic, market or business conditions.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, actual results may vary materially from the results
anticipated in the forward-looking statements. Except as required by applicable
securities laws, we do not intend to update these forward-looking statements and
information.
21
<PAGE>
PART II. OTHER INFORMATION
Items 1. LEGAL PROCEEDINGS
Texas Securities Litigation. On November 29, 1999, a class action lawsuit was
filed in the United States District Court for the Southern District of Texas
entitled Di Giacomo v. Plains All American Pipeline, et al. The suit alleged
that Plains All American Pipeline, L.P. ("PAA") and certain of our general
partner's officers and directors violated federal securities laws, primarily in
connection with unauthorized trading by a former employee. An additional
nineteen cases were filed in the Southern District of Texas, some of which name
our general partner and Plains Resources as additional defendants. The court
consolidated all subsequently filed cases under the first filed action described
above and appointed two lead plaintiffs representing two different plaintiff
classes: (1) purchasers of Plains Resources common stock and options (the
"Plains Plaintiffs") and (2) purchasers of our common units (the "PAA
Plaintiffs"). On July 14, 2000, the Plains Plaintiffs filed a consolidated
complaint alleging violations of Rule 10b-5 and Section 20(a) of the Securities
Exchange Act of 1934. On the same day, the PAA Plaintiffs filed a consolidated
complaint, naming as additional defendants the underwriters for the public
offering of our units. The PAA Plaintiffs' consolidated complaint alleges that
the defendants are liable for securities fraud violations under Rule 10b-5 and
Section 20(a) of the Securities Exchange Act of 1934 and for making false
registration statements under Sections 11 and 15 of the Securities Act of 1933.
The plaintiffs in the Texas securities litigation seek, among other things,
damages for all losses and damages allegedly sustained by the plaintiffs from
the unauthorized trading loss and defendants' alleged misconduct, and any
additional relief as may be just and proper under the circumstances.
Texas Derivative Litigation. On July 11, 2000, a derivative lawsuit was filed
in the United States District Court for the Southern District of Texas entitled
Fernandez v. Plains All American Inc., et al., naming the general partner, its
directors and certain of its officers as defendants. This lawsuit contains the
same claims and seeks the same relief as the Delaware derivative litigation
described below. A responsive pleading or motion on behalf of the defendants is
due on August 14, 2000.
Delaware Derivative Litigation. On December 3, 1999, two derivative lawsuits
were filed in the Delaware Chancery Court, New Castle County, entitled Susser v.
Plains All American Inc., et al and Senderowitz v. Plains All American Inc., et
al. These suits, and three others which were filed in Delaware subsequently,
named our general partner, its directors and certain of its officers as
defendants, and allege that the defendants breached the fiduciary duties that
they owed to PAA and our unitholders by failing to monitor properly the
activities of our employees. The derivative complaints allege, among other
things, that PAA has been harmed due to the negligence or breach of fiduciary
duties of the officers and directors that are named in the lawsuits. The court
has consolidated all of the cases under the caption In Re Plains All American
Inc. Shareholders Litigation, and has designated the complaint filed in Sussex
v. Plains All American Inc. as the operative complaint in the consolidated
action. No responsive pleading or motion on behalf of the defendants is
currently due.
The plaintiffs in the Delaware securities litigation seek that the defendants
(1) account for all losses and damages allegedly sustained by us from the
unauthorized trading losses, (2) establish and maintain effective internal
controls ensuring that our affiliates and persons responsible for our affairs do
not engage in wrongful practices detrimental to us, (3) account for the
plaintiffs' costs and expenses in litigation, including reasonable attorneys'
fees, accountants' fees, and experts' fees and (4) provide the plaintiffs any
additional relief as may be just and proper under the circumstances.
We intend to vigorously defend the claims made against us in the Texas
securities litigation, the Texas derivative litigation and the Delaware
derivative litigation. However, there can be no assurance that we will be
successful in our defense or that these lawsuits will not have a material
adverse effect on our financial position or results of operations.
We, in the ordinary course of business, are a claimant and/or a defendant in
various other legal proceedings. Management does not believe that the outcome of
these other legal proceedings, individually and in the aggregate, will have a
materially adverse effect on our financial condition or results of operation.
Items 2, 3, 4 & 5 are not applicable and have been omitted.
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
27. Financial Data Schedule
B. Reports on Form 8-K
None
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<PAGE>
SIGNATURES
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 and thereunto duly authorized.
PLAINS ALL AMERICAN PIPELINE, L.P.
By: PLAINS ALL AMERICAN INC.
Its General Partner
Date: August 14, 2000 By: /s/ Cynthia A. Feeback
----------------------
Cynthia A. Feeback, Vice
President - Accounting and Treasurer
(Principal Accounting Officer) of the
General Partner
23
