<PAGE> 1
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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 1-9033
SUN ENERGY PARTNERS, L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2070723
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
123 ROBERT S. KERR AVE., OKLAHOMA CITY, OK 73102
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(405) 270-1313
---------------------------------------------------
(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[ ]
--------------------
The total number of Partnership Units outstanding as of April 30, 1999
was 421,170,459.
<PAGE> 2
FORWARD-LOOKING STATEMENTS
In the following report, Sun Energy Partners, L.P. has included certain
statements (other than statements of historical fact) that constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used
herein, the words "budget", "budgeted", "anticipate", "expects", "believes",
"seeks", "goals", "intends" or "projects" and similar expressions are intended
to identify forward-looking statements. It is important to note that Sun Energy
Partners, L.P.'s actual results could differ materially from those projected by
such forward-looking statements. Although Sun Energy Partners, L.P. believes
the expectations reflected in such forward-looking statements are reasonable
and such forward-looking statements are based upon the best data available at
the time this report is filed with the Securities and Exchange Commission, no
assurance can be given that such expectations will prove correct. Factors that
could cause Sun Energy Partners, L.P.'s results to differ materially from the
results discussed in such forward-looking statements include, but are not
limited to, the following: production variances from expectations, volatility
of oil and gas prices, the need to develop and replace its reserves, the
substantial capital expenditures required to fund its operations, exploration
uses, environmental risks, uncertainties about estimates of reserves,
competition, government regulation and political actions, and the ability of
Sun Energy Partners, L.P. to implement its business strategy. All such
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
2
<PAGE> 3
SUN ENERGY PARTNERS, L.P.
-------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Income for the Three Months Ended March
31, 1999 and 1998 ....................... 4
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 .... 5
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1999 and 1998 ................. 6
Notes to Condensed Consolidated
Financial Statements..................... 7
Report of Independent Accountants ....... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................ 14
Item 6. Exhibits and Reports on Form 8-K ........ 14
SIGNATURE ............................................. 15
</TABLE>
3
<PAGE> 4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Three Months
(Millions of Dollars, Except Ended March 31
Per Unit Amounts) 1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
REVENUES
Oil and gas $ 109 $ 138
Other (3) 8
--------- ---------
106 146
--------- ---------
COSTS AND EXPENSES
Operating costs 26 37
Production taxes 4 8
Exploration costs 9 41
Depreciation, depletion and
amortization 46 49
General and administrative
expense 6 11
Interest and debt expense 4 4
Interest capitalized -- (4)
--------- ---------
95 146
--------- ---------
Net Income $ 11 $ --
========= =========
Net Income Per Unit $ .03 $ --
========= =========
Cash Distributions Paid Per Unit $ -- $ .02
========= =========
Weighted Average Number of Units
Outstanding (in thousands) 421,171 421,171
========= =========
</TABLE>
(See Accompanying Notes)
4
<PAGE> 5
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
(Millions of Dollars) 1999 1998
------ ------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and short-term investments $ 5 $ 6
Accounts receivable and
other current assets 97 65
------ ------
Total Current Assets 102 71
Properties, Plants and Equipment
(Note 2) 1,243 1,221
Investment in Affiliate 79 79
Other 4 3
------ ------
Total Assets $1,428 $1,374
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Advances from affiliate $ 149 $ 88
Accounts payable 51 58
Accrued liabilities 51 50
Current portion of long-term debt
due affiliate 14 14
Current portion of long-term debt 1 1
------ ------
Total Current Liabilities 266 211
Long-Term Debt due Affiliate 20 24
Deferred Credits and Other
Liabilities 30 37
Partners' Capital (Note 3)
Limited partnership interests 341 338
General partnership interests 771 764
------ ------
Partners' Capital 1,112 1,102
------ ------
Total Liabilities and Partners'
Capital $1,428 $1,374
====== ======
</TABLE>
- ------------------
The successful efforts method of accounting is followed.
(See Accompanying Notes)
5
<PAGE> 6
SUN ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
(Millions of Dollars) 1999 1998
---- -----
CASH AND CASH EQUIVALENTS FROM OPERATING (Unaudited)
<S> <C> <C>
ACTIVITIES
Net income $ 11 $ --
Adjustments to reconcile net income to
net cash from operating
activities:
Depreciation, depletion and
amortization 46 49
Dry hole costs and leasehold
impairment 1 26
Loss (gain) on divestments 3 (5)
Changes in working capital:
Advances from affiliate 61 23
Accounts receivable and
other current assets (34) 38
Accounts payable and accrued
liabilities (6) 47
---- -----
Net Cash Flow Provided From Operating
Activities 82 178
---- -----
CASH AND CASH EQUIVALENTS FROM INVESTING
ACTIVITIES
Capital expenditures (67) (155)
Other (12) (12)
---- -----
Net Cash Flow Used In Investing
Activities (79) (167)
---- -----
CASH AND CASH EQUIVALENTS FROM FINANCING
ACTIVITIES
Repayments of long-term debt (4) (3)
Cash distributions paid to unit holders -- (9)
---- -----
Net Cash Flow Used In Financing
Activities (4) (12)
---- -----
CHANGES IN CASH AND CASH EQUIVALENTS (1) (1)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 6 2
---- -----
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 5 $ 1
==== =====
</TABLE>
(See Accompanying Notes)
6
<PAGE> 7
SUN ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements and
related notes of Sun Energy Partners, L.P. and its subsidiaries
(hereinafter, unless the context otherwise requires, being referred to
as the Partnership) are presented in accordance with the requirements
of Form 10-Q and do not include all disclosures normally required by
generally accepted accounting principles or those normally made in
annual reports on Form 10-K. In management's opinion, all adjustments
necessary for a fair presentation of the results of operations for the
periods shown have been made and are of a normal recurring nature. The
results of operations of the Partnership for the three months ended
March 31, 1999 are not necessarily indicative of the results for the
full year 1999.
The Partnership has adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income.
Comprehensive income and net income are identical for the periods
ended March 31, 1999 and 1998.
2. Properties, Plants and Equipment
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
------ ------
(Millions of Dollars)
<S> <C> <C>
Gross property $3,865 $3,853
Less accumulated depreciation,
depletion and amortization 2,622 2,632
------ ------
Net property $1,243 $1,221
====== ======
</TABLE>
7
<PAGE> 8
SUN ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Partners' Capital
At March 31, 1999, the ownership of the Partnership was comprised of a
69 percent general partnership interest and a 31 percent limited
partnership interest. Prior to February 26, 1999, Oryx Energy Company
(Oryx) controlled the Partnership and was its managing general partner.
On that date, Kerr-McGee Corporation (Kerr-McGee) became managing
general partner following its merger with Oryx, and Kerr-McGee now holds
a 98.2 percent interest in the Partnership. A 1.8 percent limited
partnership interest in the form of depositary units is held by the
public. As of March 31, 1999, there were a total of 421.2 million units
outstanding.
4. Planned Merger
On March 9, 1999, Kerr-McGee, as managing general partner, announced
that its Board of Directors had approved a plan to merge Sun Energy
Partners with Kerr-McGee Energy Corporation (an indirect wholly-owned
subsidiary of Kerr-McGee). As part of the transaction, each of the
publicly held limited partnership units will be converted solely into
the right to receive $4.52 in cash, and as a result, Kerr-McGee will own
100% of Sun Energy Partners. The transaction is subject to customary
closing conditions and regulatory approvals and is expected to be
completed by the third quarter, 1999. Early termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, was granted effective on April 7, 1999. Amendment No. 1 to
the preliminary Information Statement on Schedule 14C was filed with the
Securities Exchange Commission on May 3, 1999, pursuant to the
Securities Exchange Act of 1934.
8
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Sun Energy Partners, L.P. and
the Board of Directors of Kerr-McGee Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of Sun
Energy Partners, L.P. and its Subsidiaries as of March 31, 1999 and the related
condensed consolidated statements of income and cash flows for the three months
ended March 31, 1999 and 1998. These financial statements are the
responsibility of Kerr-McGee Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of income and cash flows for the year then
ended (not presented herein); and in our report dated February 22, 1999, except
for Note 14 as to which the date is March 9, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/PricewaterhouseCoopers LLP
Dallas, Texas
May 7, 1999
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
The Partnership's cash and cash equivalents decreased by $1 million over the
three months ended March 31, 1999. Cash flows for the first quarter of 1999
included $82 million provided from operating activities, $79 million used for
investing activities and $4 million used for financing activities. The $82
million net cash flow provided from operating activities was comprised of $61
million net cash flow provided from operating activities before changes in
current assets and liabilities and $21 million of net cash flow provided from
changes in current assets and liabilities. The $61 million net cash flow
provided from operating activities before changes in current assets and
liabilities was negatively impacted by decreased crude oil and natural gas
prices and decreased natural gas volumes. The $21 million net cash flow
provided from changes in current assets and liabilities consisted of a $61
million increase in advances from affiliate, a $34 million increase in accounts
receivable and other current assets and a $6 million decrease in accounts
payable and accrued liabilities.
The $79 million net cash flow used for investing activities consisted primarily
of $67 million used for capital expenditures. The $4 million net cash flow used
for financing activities resulted from the scheduled payment of $4 million of
long-term debt.
As a result of a combination of low operating cash flow and high capital
expenditures, no cash distribution will be paid for the 1999 first quarter.
Distributions will fluctuate due to oil and gas prices, production volumes,
operating costs, capital expenditures, exploration expenses and divestment
proceeds.
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $11 million compared to break-even
in the first quarter of 1998. Revenues for the 1999 first quarter were $106
million versus $146 million for the first quarter of 1998. In comparing the
first quarter of 1999 with the first quarter of 1998, crude oil prices
decreased by $3.65 per barrel and natural gas prices decreased $.27 per million
cubic feet. Crude oil production per barrel per day was the same for both
periods and natural gas volumes decreased 25 million cubic feet per day. The
reduction in gas volumes resulted primarily from December 1998 divestitures and
production declines.
Average net production of crude oil and condensate was 48 thousand barrels
daily during the first quarters of 1999 and 1998. The average crude oil and
condensate price in the first quarter of 1999 decreased to $11.40 per barrel,
as compared with $15.05 per barrel in the same period last year.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Average net production of natural gas for the first quarter of 1999 was 353
million cubic feet daily compared with average net production of 378 million
cubic feet daily for the same period in 1998. The average natural gas price for
the first quarter of 1999 was $1.89 per thousand cubic feet, as compared with
$2.16 per thousand cubic feet in the same period last year.
Prior to February 26, 1999, Oryx Energy Company (Oryx) controlled Sun Energy
Partners and was its managing general partner. On that date, Kerr-McGee
Corporation (Kerr-McGee) became managing general partner following its merger
with Oryx, and Kerr-McGee now controls Sun Energy Partners. The Company refers
to Oryx prior to February 26, 1999 and to Kerr-McGee since February 26, 1999.
On March 9, 1999, Kerr-McGee, as managing general partner, announced that its
Board of Directors had approved a plan to merge Sun Energy Partners with
Kerr-McGee Energy Corporation (an indirect wholly-owned subsidiary of
Kerr-McGee). (See Note 4 to the Condensed Consolidated Financial Statements.)
YEAR 2000 READINESS
In 1996, the Company established a formal Year 2000 Program (Program) to assess
and correct Year 2000 problems in both information technology and
non-informational technology systems. The Program is organized into two major
areas: business systems and facilities integrity. Business systems include
replacement and upgrade of computer hardware and software, including major
business applications, such as purchasing, inventory, engineering, financial,
human resources, etc. Facilities integrity encompasses telecommunications,
plant process controls, instrumentation and embedded chip systems as well as an
assessment of third party Year 2000 readiness.
As a result of the merger of Oryx with Kerr-McGee, the Company is undertaking
steps to minimize Year 2000 problems that might adversely impact the
Partnership.
To date, activities associated with business systems have included:
o inventory and assessment
o remediation and testing of legacy systems and hardware
o communication with critical business partners
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 READINESS (CONTINUED)
Ongoing activities include:
o conversion of data from Oryx's financial, human resources,
production, technical and other systems into Year 2000
compliant systems utilized by the Partnership
o remediating and testing certain Oryx legacy systems that will
be retained and utilized by the Partnership
o replacement of hardware and operating systems with Kerr-McGee
Year 2000 compliant systems
o Year 2000 integration testing of converted and remediated
systems to ensure proper functionality beyond 2000
These activities are scheduled to be complete near the end of third quarter,
1999. Costs expended to date by the Partnership are approximately $2.0 million.
Total forecasted costs are approximately $3.6 million, but are being
re-evaluated by the Company as a result of the merger. Management believes that
the costs are not material to the Partnership's results of operations,
financial position or cash flow.
To date, major activities associated with facilities integrity have included:
o inventory and assessment
o remediation
o testing and verification
Inventory and assessment activities are essentially complete with remediation
and testing and verification scheduled for completion in third quarter, 1999.
Additional activities will be incorporated and include communication with third
party vendors, suppliers and partners, and development of contingency plans.
These activities are expected to be complete in late third quarter or early
fourth quarter, 1999. Overall, facilities integrity activities are
approximately 70 percent complete.
Costs expended to date have been minor for facilities associated with the
Partnership. Forecasted costs to complete these activities are approximately
$200,000, but are being re-evaluated by the Company as a result of the merger.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 READINESS (CONTINUED)
Management believes that the Program is comprehensive and reduces Year 2000
risks associated with internal systems to a manageable level. Regardless of
management's efforts to assess and verify readiness there can be no assurance
that all entities affecting the Company will be Year 2000 ready. To address
these concerns, contingency plans will be developed. However, failure by a
third party to remediate their Year 2000 issues in a timely manner could have a
material effect to the Partnership's result of operations and cash flows in a
particular quarter or annual period. Failure of a critical operating or safety
component, or failure by a key third party supplier or customer are believed to
be the most reasonably likely worst case scenarios that could impact the
Partnership.
13
<PAGE> 14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Two purported class action lawsuits entitled Kaplan v. Sun Energy Partners,
L.P. and Greenfield v. Sun Energy Partners, L.P. have been filed in Delaware
Chancery Court by several unit holders. The complaints in these actions
variously name as defendants Sun Energy Partners, Kerr-McGee Corporation,
former directors of Oryx Energy Company and Kerr-McGee Corporation directors.
Among other things, the plaintiffs allege that the defendants have breached
fiduciary and common law duties by failing to offer a fair price to unit
holders in the merger, failing to negotiate the purchase price at arms-length,
failing to obtain an independent valuation of the units and of Sun Energy
Partners, and otherwise seeking to enrich themselves to the detriment of the
unit holders. The plaintiffs further allege that the merger is timed to take
advantage of the depressed market price of the units and that the purchase
price is grossly inadequate relative to the market price of the units prior to
the announcement of the merger and the premium paid in Kerr-McGee Corporation's
merger with Oryx. These lawsuits seek unspecified damages and costs and to
enjoin or rescind the merger, among other things. Sun Energy Partners and
Kerr-McGee Corporation believe that these lawsuits are wholly without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Partnership did not file any reports on Form 8-K
during the quarter ended March 31, 1999.
******************
We are pleased to furnish this report to unit holders who request it by writing
to:
Sun Energy Partners, L.P. Unit holder Relations
c/o Kerr-McGee Corporation
Managing General Partner
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma 73102
14
<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.
SUN ENERGY PARTNERS, L.P.
BY: KERR-MCGEE CORPORATION
--------------------------
(Managing General Partner)
BY: /s/Deborah A. Kitchens
--------------------------
Deborah A. Kitchens
(Vice President and Controller
and Chief Accounting Officer)
DATE: May 7, 1999
15
<PAGE> 16
INDEX TO EXHBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 94
<ALLOWANCES> 0
<INVENTORY> 1
<CURRENT-ASSETS> 102
<PP&E> 3,865
<DEPRECIATION> (2,622)
<TOTAL-ASSETS> 1,428
<CURRENT-LIABILITIES> 266
<BONDS> 20
0
0
<COMMON> 0
<OTHER-SE> 1,112
<TOTAL-LIABILITY-AND-EQUITY> 1,428
<SALES> 109
<TOTAL-REVENUES> 106
<CGS> 76
<TOTAL-COSTS> 76
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 11
<INCOME-TAX> 0
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
