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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, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10066
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4191066
(State of incorporation) (I.R.S. Employer Identification No.)
1100 TOWN & COUNTRY ROAD
ORANGE, CALIFORNIA 92868
(Address of principal executive offices, including zip code)
(714) 560-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1996 and December 31, 1995......... 1
Consolidated Statement of Income for the three-month and
six-month periods ended June 30, 1996 and 1995........................... 2
Consolidated Statement of Cash Flows
for the three-month and six month periods ended June 30, 1996
and 1995................................................................. 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 .................................................... 8
Item 6. Exhibits and Reports on Form 8-K...................................... 8
Signature...................................................................... 9
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
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June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents................... $ 27,271 $ 41,219
Accounts receivable, net.................... 41,785 38,897
Other current assets........................ 4,976 2,139
-------- --------
Total current assets....................... 74,032 82,255
-------- --------
Properties, plant and equipment................ 729,141 716,197
Less accumulated depreciation............... 101,091 92,879
-------- --------
Net properties, plant and equipment........ 628,050 623,318
Other assets................................... 16,519 15,281
-------- --------
Total assets............................... $718,601 $720,854
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable............................ $ 2,672 $ 3,466
Accrued liabilities......................... 25,640 30,609
-------- --------
Total current liabilities.................. 28,312 34,075
Long-term debt................................. 355,000 355,000
Other long-term liabilities.................... 58,228 60,468
-------- --------
Total liabilities.......................... 441,540 449,543
-------- --------
Minority interest.............................. 1,431 1,246
-------- --------
Commitments and contingencies
(Notes (d) and (e))........................... -- --
-------- --------
Partners' capital
General partner............................. 1,431 1,246
Limited partners............................ 274,199 268,819
-------- --------
Total partners' capital.................... 275,630 270,065
-------- --------
Total liabilities and partners' capital.... $718,601 $720,854
======== ========
</TABLE>
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)
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<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
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Operating revenues
Trunk revenues............................... $ 47,881 $ 47,610 $ 92,400 $ 89,978
Storage and terminaling revenues............. 9,711 9,643 18,675 18,408
Other revenues............................... 3,203 3,301 6,316 6,368
-------- -------- -------- --------
Total operating revenues................... 60,795 60,554 117,391 114,754
-------- -------- -------- --------
Operating expenses
Field operating expenses..................... 8,303 8,195 17,493 17,044
General and administrative expenses.......... 8,443 6,347 15,358 12,942
Depreciation and amortization................ 5,321 5,090 10,642 10,185
Facilities costs............................. 4,557 5,496 10,387 11,005
Power costs.................................. 5,023 5,159 9,697 9,678
Provision for environmental
costs (Note (e))............................ -- 9,000 -- 9,000
-------- -------- -------- --------
Total operating expenses................... 31,647 39,287 63,577 69,854
-------- -------- -------- --------
Operating income............................... 29,148 21,267 53,814 44,900
Interest expense............................... 9,080 9,319 18,162 18,547
Other income, net.............................. 426 788 805 1,513
-------- -------- -------- --------
Net income before minority interest............ 20,494 12,736 36,457 27,866
Less minority interest in net income........... (661) (411) (1,176) (899)
-------- -------- -------- --------
Net income..................................... $ 19,833 $ 12,325 $ 35,281 $ 26,967
======== ======== ======== ========
Income per unit................................ $ 1.00 $ 0.62 $ 1.78 $ 1.36
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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Three months Six months
ended June 30, ended June 30,
-------- ------- -------- --------
1996 1995 1996 1995
-------- ------- -------- --------
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Cash flows from operating activities:
Net income.......................................... $ 19,833 $ 12,325 $35,281 $ 26,967
-------- ------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization.................... 5,321 5,090 10,642 10,185
Minority interest in net income.................. 661 411 1,176 899
Net additions to (payments against)
environmental and litigation reserves .......... (2,961) 7,475 (8,018) 6,660
Other, net....................................... (505) 608 (1,926) 1,014
Changes in:
Accounts receivable............................ (3,043) (1,717) (2,888) (3,666)
Accounts Payable and accrued liabilities....... (9,600) (13,249) (36) (4,301)
Other current assets........................... 2,183 4,533 (2,837) (2,985)
-------- ------- -------- -------
Total adjustments.............................. (7,944) 3,151 (3,887) 7,806
-------- ------- -------- -------
Net cash provided by
operating activities......................... 11,889 15,476 31,394 34,773
Cash flows from investing activities:
Capital expenditures.............................. (5,107) (7,808) (14,638) (11,156)
Cash flows from financing activities:
Cash distributions................................ (15,352) (15,352) (30,704) (29,336)
-------- ------- -------- --------
Decrease in cash and cash equivalents................. (8,570) (7,684) (13,948) (5,719)
Cash and cash equivalents--
Beginning of period .............................. 35,841 50,913 41,219 48,948
-------- -------- -------- --------
End of period..................................... $ 27,271 $ 43,229 $ 27,271 $ 43,229
======== ======== ======== ========
Interest paid......................................... $ 17,703 $ 18,313 $ 18,150 $ 18,504
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The accompanying consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K of Santa Fe Pacific Pipeline
Partners, L.P. (the "Partnership") for the year ended December 31, 1995. In the
opinion of Partnership management, all adjustments necessary for a fair
presentation of the results of operations for the periods presented have been
included in these consolidated financial statements. Unless otherwise noted, all
such adjustments are of a normal recurring nature. The results of operations for
any interim period are not necessarily indicative of the results of operations
to be expected for the entire year.
(b) 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 3.23% of net income before minority interest in 1996 and 1995, respectively,
is based on its percentage of cash distributions from available cash at the end
of each quarter.
(c) On July 11, 1996, the Partnership declared a cash distribution of $0.75 per
unit for the second quarter of 1996, to be paid on August 14, 1996 to
unitholders of record on July 31, 1996.
(d) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1995, certain of the Partnership's
shippers have filed civil suits and initiated Federal Energy Regulatory
Commission ("FERC") complaint proceedings alleging, among other things, that the
shippers were 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 remaining civil action, brought by El Paso Refinery,
L.P. ("El Paso") and its general partner, claims unspecified actual damages,
which appear to include the $190 million cost of a refinery expansion completed
in 1992, plus punitive and consequential damages. The FERC proceedings involve
claims, among other things, that certain of the Partnership's rates and charges
on its East and West Lines are excessive. To date, the complainants have filed
testimony in the FERC proceedings seeking reparations for shipments between 1990
and 1994 aggregating approximately $35 million, as well as rate reductions of
between 30% and 40% for shipments in 1995 and thereafter.
The Partnership's accompanying balance sheet includes reserves for costs related
to the resolution of the El Paso civil suit and FERC proceeding. While the
Partnership believes it has meritorious defenses in these matters, the
complainants and plaintiffs are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with litigation and FERC rate-making methodology,
management cannot predict with certainty the ultimate outcome of these matters.
As additional information becomes available, it may be necessary for the
Partnership to record additional charges to earnings to maintain its reserves at
a level deemed adequate at that time, and the costs associated with the ultimate
resolution of these matters could have a material adverse effect on the
Partnership's results of operations, financial condition, or ability to maintain
its quarterly cash distribution at the current level.
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(e) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1995, 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.
The Partnership's accompanying balance sheet includes reserves for environmental
costs that relate to existing conditions caused by past operations. Estimates of
the Partnership's ultimate liabilities associated with environmental 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 most locations, the
number of parties involved, the number of remediation alternatives available,
the uncertainty of potential recoveries from third parties and the evolving
nature of environmental laws and regulations.
Based on the information presently available, it is the opinion of management
that the Partnership's environmental 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 additional information becomes available.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO 1995 PERIOD
The Partnership reported net income for the three months ended June 30, 1996 of
$19.8 million, compared to net income of $12.3 million in the corresponding 1995
quarter, with the variance being primarily due to a $9.0 million provision for
environmental litigation costs recorded in 1995. Excluding the 1995 provision,
adjusted net income for the three months ended June 30, 1995 was $21.0 million.
Revenues and total volumes transported for the second quarter of 1996 were
essentially even with the corresponding 1995 quarter.
Operating expenses of $31.6 million were $7.6 million lower than in the 1995
quarter, due largely to the 1995 provision for environmental costs. Excluding
the provision, operating expenses would have been $1.4 million, or 4.5%, higher
than in 1995, with higher general and administrative expenses ($2.1 million),
depreciation and amortization ($0.2 million) and field operating expenses ($0.1
million), partially offset by lower facilities costs ($0.9 million) and power
costs ($0.1 million). General and administrative expenses increased largely due
to higher outside legal costs associated with the FERC proceeding and higher
employee benefit costs. The increase in field operating expenses is primarily
attributable to higher pipeline repairs and maintenance, including pipeline
recoating projects, partially offset by reductions in other field costs. The
decrease in facilities costs is primarily attributable to a property tax refund,
partially offset by higher right-of-way-rental expense.
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Other income, net decreased by $0.4 million compared to the 1995 period
primarily due to lower interest income, which resulted from lower interest rates
and cash balances.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO 1995 PERIOD
The Partnership reported net income for the six months ended June 30, 1996 of
$35.3 million, compared to net income of $27.0 million in the corresponding 1995
period, with the variance being primarily due to the $9.0 million provision for
environmental costs recorded in 1995. Excluding the 1995 provision, adjusted net
income for the six months ended June 30, 1995 was $35.7 million. Trunk revenues
were $2.4 million higher than in the 1995 period due to higher volumes. Total
volumes transported increased 2% from the 1995 period, with commercial volumes
about 3% higher and military volumes 6% lower than in 1995. Deliveries to most
markets served by the Partnership have increased over 1995 levels, although
Southern California deliveries were lower as a result of competition from short-
haul trucking from Los Angeles area terminals.
Operating expenses of $63.6 million were $6.3 million lower than in the first
six months of 1995 due largely to the 1995 provision for environmental costs.
Excluding the provision, operating expenses would have been $2.7 million, or
4.5% higher than in 1995, with higher general and administrative expenses ($2.4
million), depreciation and amortization ($0.5 million) and field operating
expenses ($0.4 million), partially offset by lower facilities costs ($0.6
million), accounting for that increase. General and administrative expenses were
higher due to outside legal costs associated with the FERC proceeding and higher
employee benefit costs. The increase in field operating expenses is primarily
attributable to higher pipeline repairs and maintenance, including pipeline
recoating projects, partially offset by reductions in other field costs. The
decrease in facilities costs is primarily attributable to a property tax refund,
partially offset by higher right-of-way rental expense.
Other income, net decreased by $0.7 million compared to the 1995 period
primarily due to lower interest income, which resulted from lower interest rates
and cash balances.
FINANCIAL CONDITION
For the six months ended June 30, 1996, cash and cash equivalents decreased by
$13.9 million. Cash flow from operations before working capital and minority
interest adjustments totaled $36.0 million for the six months, an increase of
$1.3 million from the corresponding 1995 period. Uses of cash included payment
of settlement costs related to the Sparks, Nevada environmental site litigation
and deferred right-of-way lease negotiation legal costs. Working capital cash
requirements decreased $5.2 million from the corresponding 1995 six-month period
primarily due to timing differences in the payment of accrued obligations and in
the collection of trade and nontrade receivables.
Significant uses of cash included cash distributions of $30.7 million and
capital expenditures of $14.6 million. In January 1996, the Partnership
completed the purchase, from Kinley Pipelines of California, of a 35-mile, 6-
inch diameter pipeline that serves Lemoore Naval Air Station from the
Partnership's Fresno, California terminal, for approximately $6 million. Total
capital expenditures for 1996 are projected at approximately $28 million. Total
cash and cash equivalents of $27.3 million at June 30, 1996 included $15.4
million for the second quarter 1996 distribution to be paid to unitholders in
August 1996.
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The Partnership has continued to investigate the feasibility of providing
pipeline service from the San Francisco Bay area to Colton, in Southern
California, by expanding the existing capacity on its North Line and building a
new pipeline between Fresno and Colton. The level of shipper throughput
commitments obtained to date is not sufficient to proceed and places the
viability of this project in doubt.
Long-term debt aggregated $355 million at June 30, 1996 and consisted of $327
million of First Mortgage Notes (the "Notes") and a $28 million borrowing under
the Partnership's bank term credit facility. The Partnership intends to
refinance some or all of the Notes as the various series become payable. To
facilitate such refinancing and provide for additional financial flexibility,
the Partnership presently has available the multi-year term credit facility,
with a $60 million aggregate limit, and a $20 million working capital facility,
with three banks. The term facility may continue to be used for refinancing a
portion of the Notes and for capital projects, while the working capital
facility is available for general short-term borrowing purposes.
OTHER MATTERS
Reference is made to Note (d) to the Partnership's notes to consolidated
financial statements, beginning on page 4 of this Report, and to Part II, Item 1
of this Report, for discussions of the status of the East Line civil litigation
and FERC proceeding.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 in the Partnership's 1995 Annual Report on Form 10-K
for background information on certain litigation.
FERC PROCEEDING
Hearings in the FERC Proceeding (Docket Nos. OR92-8-000, et al.) commenced on
-- ---
April 9, 1996 and concluded on July 19, 1996. The procedural schedule calls for
the completion of post-hearing briefing on November 15, 1996. An initial
decision by the FERC Administrative Law Judge is expected in 1997.
As discussed in the Partnership's 1995 Form 10-K, in June 1995, the FERC issued
a decision in an unrelated rate proceeding involving Lakehead Pipe Line Company,
Limited Partnership ("Lakehead"), ruling that Lakehead could not include an
income tax allowance in its cost of service with respect to partnership income
that is attributable to limited partnership interests held by individuals. On
May 17, 1996, the FERC issued an order on rehearing in that proceeding (the
"Lakehead Order") that clarified the June 1995 decision and further limited
Lakehead's entitlement to an income tax allowance by excluding from Lakehead's
cost of service the taxes attributable to curvative allocations of income to
Lakehead's general partner under Section 704(c) of the Internal Revenue Code. If
upheld and applied in the Partnership's FERC Proceeding, the Partnership's
entitlement to an income tax allowance in its cost of service could also be
limited by the principles stated in the Lakehead Order. However, the Lakehead
Order, standing alone, has not caused management to modify its overall
assessment of, or disclosures concerning, the Partnership's FERC Proceeding.
In June 1996, in a related FERC proceeding concerning the Partnership (Docket
Nos. OR96-2-000, et al.), the FERC consolidated the complaints filed by Texaco
-- ---
and ARCO in December 1995 and January 1996, respectively, and granted Tosco
Corporation's motion to intervene. This proceeding involves whether a tariff
filing is required for movements on certain of the Partnership's lines upstream
of its Watson station origin point, and, if so, what rates may properly be
charged for those movements. The present procedural schedule calls for testimony
to be filed by the parties between August and October 1996 and for hearings to
commence in December 1996. Management does not believe that this proceeding,
when resolved, will have a material adverse effect on the annual results of
operations, financial condition or liquidity of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following document is filed as part of this report:
Exhibit 27 Financial Data Schedule as of and for the six months ended
June 30, 1996.
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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.
(Registrant)
By: SANTA FE PACIFIC PIPELINES, INC.,
AS GENERAL PARTNER
Date: August 13, 1996 By: /s/ BARRY R. PEARL
------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the Registrant)
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SANTA FE PACIFIC PIPELINE PARTNERS, L.P. AS
OF AND FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 27,271
<SECURITIES> 0
<RECEIVABLES> 41,785
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,032
<PP&E> 729,141
<DEPRECIATION> 101,091
<TOTAL-ASSETS> 718,601
<CURRENT-LIABILITIES> 28,312
<BONDS> 355,000
0
0
<COMMON> 0
<OTHER-SE> 275,630
<TOTAL-LIABILITY-AND-EQUITY> 718,601
<SALES> 0
<TOTAL-REVENUES> 117,391
<CGS> 0
<TOTAL-COSTS> 63,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,162
<INCOME-PRETAX> 36,457
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,281
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
</TABLE>
