SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1994 and
December 31, 1993 ....................................... 1
Consolidated Statement of Income for the three and
six month periods ended June 30, 1994 and 1993 .......... 2
Consolidated Statement of Cash Flows for the three
and six month periods ended June 30, 1994 and 1993 ...... 3
Notes to Consolidated Financial Statements ................. 4
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations .............. 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 7
Item 6. Exhibits and Reports on Form 8-K ...................... 8
Signature ...................................................... 8
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31,
1994 1993
----------- ------------
(Unaudited)
A S S E T S
Current assets
Cash and cash equivalents................ $ 28,438 $ 32,162
Accounts receivable, net................. 32,592 32,787
Other current assets..................... 15,599 2,801
---------- ----------
Total current assets................... 76,629 67,750
---------- ----------
Properties, plant and equipment............ 685,849 683,082
Less accumulated depreciation............ (73,033) (66,472)
---------- ----------
Net properties, plant and equipment.... 612,816 616,610
Other assets............................... 12,008 12,620
---------- ----------
Total assets........................... $ 701,453 $ 696,980
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable......................... $ 2,589 $ 2,403
Accrued liabilities...................... 30,127 33,235
---------- ----------
Total current liabilities.............. 32,716 35,638
---------- ----------
Long-term debt............................. 355,000 355,000
Other long-term liabilities................ 36,100 39,283
---------- ----------
Total liabilities...................... 423,816 429,921
---------- ----------
Minority interest.......................... 1,427 1,208
---------- ----------
Commitments and contingencies
(Notes (f) and (g))...................... ---------- ----------
Partners' capital
General Partner ......................... 1,427 1,208
Limited Partners......................... 274,783 264,643
---------- ----------
Total partners' capital................ 276,210 265,851
---------- ----------
Total liabilities
and partners' capital................ $ 701,453 $ 696,980
========== ==========
See Notes to Consolidated Financial Statements.
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per unit amounts)
Three months Six months
ended June 30, ended June 30,
--------------------- ---------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
Operating revenues
Trunk revenues.................. $ 45,798 $ 44,897 $ 87,080 $ 83,604
Storage and terminaling revenues 9,446 9,637 18,055 18,129
Other revenues.................. 2,918 2,688 5,549 5,163
---------- ---------- ---------- ----------
Total operating revenues...... 58,162 57,222 110,684 106,896
---------- ---------- ---------- ----------
Operating expenses
Field operating expenses........ 7,781 8,659 15,748 16,667
General and
administrative expenses....... 5,339 5,325 11,666 11,364
Facilities costs................ 5,267 4,893 10,736 10,056
Depreciation and amortization... 4,908 4,778 9,786 9,549
Power cost...................... 4,783 4,417 9,208 8,351
---------- ---------- ---------- ----------
Total operating expenses...... 28,078 28,072 57,144 55,987
---------- ---------- ---------- ----------
Operating income.................. 30,084 29,150 53,540 50,909
Interest expense.................. 9,328 9,243 18,588 18,364
Other income, net................. 3,417 184 3,594 328
---------- ---------- ---------- ----------
Net income
before minority interest........ 24,173 20,091 38,546 32,873
Minority interest in income....... (501) (417) (799) (682)
---------- ---------- ---------- ----------
Net income........................ $ 23,672 $ 19,674 $ 37,747 $ 32,191
========== ========== ========== ==========
Income per unit .................. $ 1.21 $ 1.01 $ 1.93 $ 1.65
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1994 1993 1994 1993
--------- --------- --------- ---------
Cash flows from operating activities:
Net income......................... $ 23,672 $ 19,674 $ 37,747 $ 32,191
--------- -------- --------- ---------
Adjustments to reconcile net
income to net cash provided
by operating activities--
Depreciation and amortization.... 4,908 4,778 9,786 9,549
Minority interest in income...... 501 417 799 682
Environmental and
litigation costs paid........... (1,218) (186) (1,646) (333)
Credit from changes in
eligibility requirements for
postretirement medical benefits. (3,087) 0 (3,087) 0
Other, net....................... 518 144 946 (1,463)
Changes in--
Accounts receivable............. (330) 2,758 196 (3,141)
Accounts payable and
accrued liabilities............ (10,617) (10,255) (2,508) 3,603
Other current assets............ (9,518) 1,913 (12,798) (2,176)
--------- --------- --------- ---------
Total adjustments............ (18,843) (431) (8,312) 6,721
--------- --------- --------- ---------
Net cash provided by
operating activities....... 4,829 19,243 29,435 38,912
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures............... (3,268) (7,483) (5,119) (11,583)
Other.............................. (173) 97 (72) 196
--------- --------- --------- ---------
Net cash used by
investing activities....... (3,441) (7,386) (5,191) (11,387)
Cash flows from financing activities:
Distributions to partners
and minority interest............. (13,984) (13,984) (27,968) (27,968)
--------- --------- --------- ---------
Decrease in cash and cash equivalents (12,596) (2,127) (3,724) (443)
Cash and cash equivalents--
Beginning of period................ 41,034 29,040 32,162 27,356
--------- --------- --------- ---------
End of period...................... $ 28,438 $ 26,913 $ 28,438 $ 26,913
========= ========= ========= =========
Interest paid........................ $ 18,663 $ 18,663 $ 18,663 $ 18,663
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The consolidated financial statements should be read in
conjunction with the Santa Fe Pacific Pipeline Partners, L.P.
(the "Partnership") Annual Report on Form 10-K for the year ended
December 31, 1993.
(b) In the opinion of Partnership management, all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair statement of the results of operations for the periods
presented have been included in these consolidated financial
statements. Certain comparative prior year amounts in the
consolidated financial statements have been reclassified to
conform with the current year presentation.
(c) The consolidated statement of income for the three and six
month periods ended June 30, 1994 is not necessarily indicative
of the results of operations for the full year 1994.
(d) Income per unit is computed based upon consolidated net
income of the Partnership less an allocation of income to the
General Partner in accordance with the partnership agreement, and
is based upon the 19,148,148 units outstanding. The quarterly
allocation of income to the General Partner, which was 2.07% of
net income before minority interest for the three and six month
periods ended June 30, 1994 and 1993, is based on its percentage
of cash distributions from available cash at the end of each
quarter.
(e) On July 14, 1994, the Partnership declared a cash
distribution of $0.70 per unit for the second quarter of 1994, to
be paid on August 12, 1994 to unitholders of record on July
29, 1994.
<PAGE>
(f) As discussed in Note 6 to the Partnership's consolidated
financial statements for the year ended December 31, 1993,
certain of the Partnership's shippers have filed civil suits and
initiated a Federal Energy Regulatory Commission ("FERC")
proceeding alleging, among other things, that the shippers had
been damaged by the Partnership's failure to fulfill alleged
promises to expand the East Line's capacity between El Paso,
Texas and Phoenix, Arizona to meet shipper demand. The FERC
proceeding also involves claims, among other things, that certain
of the Partnership's tariffs and charges on its East and West
Lines are excessive. It is the opinion of management that any
additional costs, in excess of recorded liabilities, incurred to
defend and resolve these matters, or any capital expenditures
which may be required under the terms of the settlement
agreement, will not have a material adverse effect on the
Partnership's financial condition; nevertheless, it is possible
that the Partnership's results of operations, in particular
quarterly or annual periods, could be materially affected by the
ultimate resolution of these matters.
(g) As discussed in Note 6 to the Partnership's consolidated
financial statements for the year ended December 31, 1993, the
Partnership's transportation and terminal operations are subject
to extensive regulation under federal, state and local
environmental laws concerning, among other things, the
generation, handling, transportation and disposal of hazardous
materials and the Partnership is, from time to time, subject to
environmental cleanup and enforcement actions.
Estimates of the Partnership's ultimate liabilities associated
with environmental remediation activities and related costs are
particularly difficult to make with certainty due to the number
of variables involved, including the early stage of investigation
at certain sites, the lengthy time frames required to complete
remediation at certain locations, the number of parties involved,
the number of remediation alternatives available, and the
uncertainty of potential recoveries from third parties. Based on
the information presently available, it is the opinion of
management that any such costs, to the extent they exceed
recorded liabilities, will not have a material adverse effect on
the Partnership's financial condition; nevertheless, it is
possible that the Partnership's results of operations in
particular quarterly or annual periods could be materially
affected as conditions change or additional information becomes
available.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1994 Compared to 1993 Period:
Net income for the three months ended June 30, 1994 of $23.7
million was $4.0 million higher than in the prior year quarter,
primarily due to a $3.1 million credit, included in the other
income, net line item of the statement of income, resulting from
changes in eligibility requirements for postretirement medical
benefits. Excluding the $3.1 million credit, net income of $20.6
million was 5% higher than in the prior year quarter. Revenues
for the second quarter of 1994 of $58.2 million were $0.9
million, or 2%, above prior year quarter levels. Trunk revenues
were $0.9 million higher than in the 1993 quarter due to higher
volumes partially offset by a 2% decrease in average length of
haul. Total volumes transported increased 6% from the second
quarter of 1993. Commercial volumes, which accounted for 95% of
total volumes, were 5% higher than in the prior year quarter,
reflecting strong economic growth in Arizona and Nevada in 1994
compared to 1993. Military volumes increased 25% over 1993.
Operating expenses of $28.1 million were even with the 1993
quarter, with higher facilities costs ($0.4 million), power cost
($0.4 million), and depreciation and amortization ($0.1 million)
offset by lower field operating expenses ($0.9 million).
Facilities costs increased as a result of higher right-of-way
rentals. The increase in power cost resulted from higher volumes
and increased power rates. The increase in depreciation and
amortization expense resulted from the Partnership's expanding
capital asset base. The decrease in field operating expenses is
primarily due to lower major maintenance costs. Major maintenance
costs in the 1993 quarter were higher primarily as the result of
certain preventative pipeline repairs associated with the
Partnership's ongoing internal inspection program.
Six Months Ended June 30, 1994 Compared to 1993 Period:
Net income for the six months ended June 30, 1994 was $37.7
million, compared to net income of $32.2 million in the prior
year period, with the $5.6 million increase largely attributable
to the $3.1 million second quarter credit resulting from changes
in eligibility requirements for postretirement medical benefits
and increased volumes. Excluding the $3.1 million credit, net
income was $34.7 million, or 8%, over the prior year six month
period. Operating income for the first six months of 1994 of
$53.5 million was $2.6 million, or 5%, higher than in 1993.
Revenues for the first half of 1994 of $110.7 million were $3.8
million, or 4%, above 1993 levels. Trunk revenues were $3.5
million higher than in the 1993 period primarily due to higher
volumes and longer average length of haul. Total volumes
transported increased 6% from the first six months of 1993, with
commercial volumes 5% higher and military volumes 22% higher than
in 1993. The longer average haul reflects increased deliveries to
Arizona and Nevada, primarily due to increased demand in 1994.
<PAGE>
Operating expenses of $57.1 million were $1.2 million higher than
in the first six months of 1993, with higher power cost ($0.9
million), facilities costs ($0.7 million), general and
administrative expenses ($0.3 million) and depreciation and
amortization ($0.2 million) partially offset by a decrease in
field operating expenses ($0.9 million) accounting for the
increase. The increase in power cost resulted from higher volumes
and increased power rates. Facilities costs increased as a result
of higher right-of-way rentals. General and administrative
expenses increased about 3% due to generally higher employee
benefit costs. The decrease in field operating expenses is
primarily due to lower major maintenance costs. 1993 major
maintenance costs were higher resulting from certain preventative
pipeline repairs associated with the Partnership's ongoing
internal inspection program and flood damage to two river
crossings on the West Line.
Financial Condition
For the six months ended June 30, 1994, cash and cash equivalents
decreased $3.7 million. Cash flow from operations before working
capital and minority interest adjustments totaled $43.7 million
for the six months, an increase of $3.8 million from 1993.
Working capital cash requirements increased $13.4 million from
the 1993 six month period. Significant uses of cash included cash
distributions of $28.0 million, a semiannual interest payment of
$18.7 million, purchases of noncash short term investments of
$11.8 million and capital expenditures of $5.1 million. Total
cash and cash equivalents of $28.4 million at June 30, 1994
included $14.0 million for the second quarter 1994 distribution
to be paid to unitholders in August 1994.
Capital expenditures in the first six months of $5.1 million were
$6.5 million lower than in the prior year. Full year 1994 capital
expenditures are expected to total approximately $23 million.
While the Partnership anticipates that sufficient funds will be
provided by operations to satisfy all working capital and capital
expenditure requirements during the remainder of 1994, the
Partnership's $60 million term facility is available for
financing significant capital projects and for refinancing a
portion of the Partnership's long-term debt. The Partnership also
has a $20 million working capital facility which is available for
short-term borrowing purposes. The facilities provide that any
associated borrowings will be secured by certain Partnership
assets and are subject to other reasonable and customary terms
and conditions. To date, neither of these facilities have been
utilized.
Long-term debt at June 30, 1994 consisted of $355 million of
First Mortgage Notes at an average interest rate of 10.51% per
annum with the first annual principal repayment required December
15, 1994. The Partnership expects to refinance some or all of
this debt as it becomes payable.
<PAGE>
Other Matters
Litigation and Environmental Matters:
Reference is made to Notes (f) and (g) to the Partnership's notes
to consolidated financial statements, beginning on page 4 of this
Report, for discussions of the status of the East Line litigation
and the FERC proceeding and of environmental matters. Management
believes that, in the aggregate, the costs associated with the
resolution of the East Line litigation and related FERC
proceeding and the costs of completing known environmental
remediation projects will not adversely affect the Partnership's
ability to maintain its current quarterly cash distribution.
FERC Rate-Making Methodology:
In October 1993, the FERC issued Order 561 establishing a new
rate-making methodology, to become effective January 1, 1995,
which would allow oil pipelines to adjust their transportation
tariffs as long as those rates do not exceed prescribed ceiling
levels determined by reference to annual changes in the Producer
Price Index for Finished Goods ("PPI-FG"), minus one percent. The
Partnership and other parties petitioned for a rehearing of the
FERC order because, among other things, the index selected by the
FERC does not adequately reflect historical cost increases
incurred by the industry. Having reviewed the Partnership's and
other parties' comments on Order 561, the FERC issued a final
ruling, Order 561-A, on July 28, 1994, that reaffirmed Order 561
in all significant respects, including the index selected, except
that the circumstances under which a carrier could apply for rate
increases based on a cost of service justification were expanded.
Order 561-A would allow pipelines to apply for cost of service-
based rates in those cases where the carrier can demonstrate that
a "substantial divergence" exists between the rates that would be
allowed under cost-based rate-making and the rates produced by
indexation. On August 5, 1994, the Association of Oil Pipe Lines,
of which the Partnership is a member, filed a notice of appeal in
the United States Circuit Court of Appeals for Washington, D.C.
in order to challenge the suitability of the index selected and
certain other aspects of Orders 561 and 561-A.
Also on July 28, 1994, the FERC issued two Notices of Proposed
Rulemaking ("NOPRs") which would, first, allow carriers that can
demonstrate that they do not have significant market power in the
relevant markets served to establish market-based rates in those
markets and, second, provide additional guidelines on cost of
service filing and reporting requirements for oil pipelines. It
is anticipated that final orders on these two NOPRs will become
effective, along with Order 561-A, on January 1, 1995.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
East Line Litigation and FERC Proceeding:
Reference is made to Item 3 in the Partnership's 1993 Annual
Report on Form 10-K, incorporated herein by reference, for
background information on certain East Line litigation and a
related FERC proceeding.
Navajo Refining Company ("Navajo"), which, under a 1985 FERC rate
case settlement, had been prohibited from challenging the
Partnership's rates until November 1993, filed a complaint
against certain East Line and West Line rates in December 1993.
On April 20, 1994, the FERC accepted Navajo's complaint and ruled
that certain other parties seeking to challenge West Line rates
would not need to demonstrate "changed circumstances" in order to
do so. However, the Partnership requested reconsideration of that
portion of the ruling pertaining to parties other than Navajo
and, on July 20, 1994, the FERC reversed a portion of the April
20, 1994 ruling, reaffirming that, other than with respect to
Navajo, the Partnership's West Line rates are deemed just and
reasonable under the provisions of the Energy Policy Act of 1992.
Any shipper other than Navajo that wishes to challenge the
Partnership's West Line rates will need to demonstrate "changed
circumstances."
On June 24, 1994, the complainants filed their cases-in-chief
with the FERC, seeking refunds for shipments between 1990 and
1993 aggregating in the range of $15 million to $20 million, as
well as tariff rate reductions of between 40% and 50% for future
shipments. Three sets of joint testimony were filed, one by
Chevron U.S.A. Products Company and Navajo, a second by El Paso
Refinery, L.P. ("El Paso") and Refinery Holding Company, L.P.,
and a third by ARCO Products Company and Texaco Refining and
Marketing Inc. The rates being challenged were established
pursuant to FERC-approved settlements resolving a prior rate
proceeding and have not been changed since 1991, when they were
adjusted in accordance with those agreements. The requests for
past and future rate relief are based largely on legal arguments
that have previously been rejected by the FERC, on novel
regulatory theories, and on factual assertions that the
Partnership believes to be inaccurate. The various shipper
submissions also take positions that are inconsistent with each
other in several significant respects. The Partnership continues
to believe that its rates and practices are lawful under FERC
precedent and will continue its vigorous defense of that
position.
<PAGE>
The present procedural schedule calls for the FERC Staff to
submit its case-in-chief in this proceeding on August 17, 1994.
The date on which the Partnership is to file testimony in
response to the shippers' and the FERC Staff's submissions has
not yet been established. The shipper's and the FERC Staff's
testimony will be subject to full discovery and cross-
examination. On July 20, 1994, a first round of discovery was
initiated against the shippers.
All activity in El Paso's civil action against the Partnership
has been stayed since October 1992 by virtue of the bankruptcy
proceeding, however, bankruptcy court filings indicate that the
trustee retained legal counsel during the second quarter of 1994
for purposes of pursuing this litigation. El Paso seeks
unspecified damages in this action. The Partnership believes this
lawsuit is without merit and intends to vigorously defend itself
if and when activity commences in this action.
Item 5. Other Information.
On June 29, 1994, Santa Fe Pacific Corporation ("SFP"), and
Burlington Northern Inc. ("BNI") entered into a definitive
Agreement and Plan of Merger which calls for SFP to merge with
and into BNI, with BNI being the surviving corporation. Gerald
Grinstein, BNI's chairman and chief executive officer, will be
chairman of the surviving corporation. Robert D. Krebs, chairman,
president and chief executive officer of SFP, will be president
and chief executive officer of the surviving corporation. Two-
thirds of the directors of the surviving corporation will be
designated by BNI, and one-third of the directors of the
surviving corporation will be designated by SFP. The merger has
been approved by the boards of directors of SFP and BNI, but is
still subject to a number of conditions, including approval by
the stockholders of both BNI and SFP and approval by the
Interstate Commerce Commission.
The Registrant's general partner and 42% limited partner, Santa
Fe Pacific Pipelines, Inc., is a wholly owned indirect subsidiary
of SFP. Management believes that this merger, if approved, will
have no significant impact on the operations of the Partnership.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K: The Registrant filed a Current Report
on Form 8-K dated June 29, 1994 (date of earliest event reported)
and filed on July 11, 1994. This report described, under Part II,
Item 1, the agreement and plan of merger between SFP and BNI and
included, in Part II, Item 7, exhibits relating to the merger
agreement. The Registrant's general partner and 42% limited
partner, Santa Fe Pacific Pipelines, Inc., is a wholly owned
indirect subsidiary of SFP.
The Registrant filed one report on Form 8-K/A as Amendment No. 1
to Current Report on Form 8-K dated June 29, 1994 (date of
earliest event reported) and filed on July 29, 1994. This report
included, in Part II, Item 7, an exhibit listing of schedules to
the agreement and plan of merger between SFP and BNI.
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.
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
Date: August 12, 1994 By: /s/ ROBERT L. EDWARDS
----------------------------------
Robert L. Edwards
Senior Vice President,
Treasurer and Chief Financial Officer
(On behalf of the Registrant)
