SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 1-10473
PRIDE COMPANIES, L.P.
(Name of registrant)
Delaware 75-2313597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1209 North Fourth Street, Abilene, Texas 79601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(915) 674-8000
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 [ ]
Indicate the number of units outstanding of each of the
issuer's classes of units, as of the latest practicable date.
Class Outstanding at November 1, 1997
_____________ _______________________________
Common Units 4,950,000<PAGE>
<TABLE>
PART I. Item 1. Financial Information
PRIDE COMPANIES, L.P.
BALANCE SHEETS
(Amounts in thousands, except unit amounts)
<CAPTION>
September 30,
1997 December 31,
(unaudited) 1996
___________ ____________
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 558 $ 472
Accounts receivable, less allowance
for doubtful accounts 14,294 18,163
Inventories 15,107 19,171
Prepaid expenses 1,382 1,286
___________ ___________
Total current assets 31,341 39,092
Property, plant and equipment 137,389 136,778
Accumulated depreciation 42,078 37,224
___________ ___________
Property, plant and equipment - net 95,311 99,554
Other assets 1,047 1,070
___________ ___________
$ 127,699 $ 139,716
LIABILITIES AND PARTNERS' CAPITAL:
Current liabilities:
Accounts payable $ 29,445 $ 32,316
Accrued payroll and related benefits 1,511 1,498
Accrued taxes 3,346 4,805
Other accrued liabilities 2,718 2,095
Current portion of long-term debt 46,572 6,516
___________ ___________
Total current liabilities 83,592 47,230
Long-term debt, excluding current portion 5,935 50,417
Deferred income taxes 2,447 2,590
Other long-term liabilities 8,871 9,881
Partners' capital:
Common units (5,275,000 units authorized
and 4,950,000 outstanding) 26,785 29,474
General partners' interest 69 124
___________ ___________
Total partners' capital 26,854 29,598
___________ ___________
$ 127,699 $ 139,716
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
<CAPTION>
Three Months Ended
September 30,
1997 1996
______________ ___________
<S> <C> <C>
Revenues $ 134,734 $ 145,884
Cost of sales and operating expenses,
before depreciation 128,116 142,666
Marketing, general and
administrative expenses 2,297 2,479
Depreciation 1,717 1,721
____________ ___________
Operating income (loss) 2,604 (982)
Other income (expense):
Interest income 13 25
Interest expense (1,370) (1,457)
Credit and loan fees (564) (785)
Other - net 18 (1)
____________ ___________
Income (loss) before income taxes 701 (3,200)
Income tax expense (benefit) (70) (15)
____________ ___________
Net income (loss) $ 771 $ (3,185)
General partners' interest $ 15 $ (62)
Net income (loss) allocable
to unitholders $ 756 $ (3,123)
Net income (loss) per unit -
before conversion $ 0.15 $ (0.31)
Net income (loss) per unit -
after conversion $ 0.15 $ (0.63)
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per unit amounts)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
____________ ___________
<S> <C> <C>
Revenues $ 404,813 $ 450,670
Cost of sales and operating expenses,
before depreciation 390,378 435,341
Marketing, general and
administrative expenses 7,148 7,573
Depreciation 5,151 5,241
____________ ___________
Operating income (loss) 2,136 2,515
Other income (expense):
Interest income 29 111
Interest expense (4,055) (4,380)
Credit and loan fees (1,452) (2,346)
Other - net 474 34
____________ ___________
Income (loss) before income taxes (2,868) (4,066)
Income tax expense (benefit) (124) (33)
____________ ___________
Net income (loss) $ (2,744) $ (4,033)
General partners' interest $ (55) $ (79)
Net income (loss) allocable
to unitholders $ (2,689) $ (3,954)
Net income (loss) per unit -
before conversion $ (0.54) $ (0.40)
Net income (loss) per unit -
after conversion $ (0.54) $ (0.80)
See accompanying notes.
/TABLE
<PAGE>
<TABLE>
PRIDE COMPANIES, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
____________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,744) $ (4,033)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Noncash charges (credits) to earnings:
Depreciation 5,151 5,241
(Gain) loss on sale or disposal
of property, plant and equipment (156) (27)
Deferred tax benefit (143) (96)
Net effect of changes in:
Accounts receivable 3,869 683
Inventories 4,064 (5,035)
Prepaid expenses (96) (34)
Accounts payable and other
long-term liabilities (3,881) 5,338
Accrued liabilities (823) 1,266
____________ ___________
Total adjustments 7,985 7,336
____________ ___________
Net cash provided by (used in)
operating activities 5,241 3,303
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,138) (1,311)
Proceeds from disposal of property,
plant and equipment 408 47
Other 1 (95)
____________ ___________
Net cash provided by (used in)
investing activities (729) (1,359)
Cash flows from financing activities:
Proceeds from debt and credit
facilities 103,866 17,585
Payments on debt and credit
facilities (108,292) (19,357)
Other 0 (3)
____________ ___________
Net cash provided by (used in)
financing activities (4,426) (1,775)
____________ ___________
Net increase (decrease) in cash and
cash equivalents 86 169
Cash and cash equivalents at the
beginning of the period 472 288
____________ ___________
Cash and cash equivalents at the
end of the period $ 558 $ 457
See accompanying notes.
/TABLE
<PAGE>
PRIDE COMPANIES, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Pride Companies, L.P. (the "Partnership"), a Delaware limited
partnership, owns and operates a modern simplex petroleum refinery
facility located near Abilene, Texas (the "Refinery"), a crude oil
gathering business (the "Crude Gathering System") that gathers,
transports, and resells and redelivers crude oil in the Texas and
New Mexico markets, and certain integrated product pipeline
operations (the "Products System"). The Partnership's operations
are considered a single industry segment, the refining of crude oil
and the sale of the resulting petroleum products. The primary
purpose of the Crude Gathering System is to supply the Refinery
with crude oil. In that connection, it purchases and resells crude
oil in order to provide a supply of the appropriate grade of crude
oil at strategic locations for input into the Refinery. The Crude
Gathering System consists of a series of gathering lines and a
fleet of trucks which transport crude oil into third party
pipelines and into the system's primary asset, a common carrier
pipeline which delivers crude oil to and terminates at the
Refinery. The Products System consists of certain product
pipelines which originate at the Refinery and terminate at the
Partnership's marketing terminals.
Pride Refining, Inc. (the "Managing General Partner") owns a
1.9% general partner interest in and serves as the managing general
partner of the Partnership. Pride SGP, Inc. ("Special General
Partner" or "Pride SGP") owns a 0.1% general partner interest in
and serves as the special general partner of the Partnership. The
Managing General Partner and the Special General Partner
(collectively the "General Partners") collectively own a 2% general
partner interest. The Partnership adopted certain amendments to
its partnership agreement (the "Amendments"), which were effective
December 31, 1996 and modified the capital structure of the
Partnership. In addition to its general partner interest, the
Special General Partner owns a 4.9% interest in the Partnership
through ownership of common limited partner units with terms
specified by the Amendments ("Common Units"). Public ownership
represented by the remaining Common Units is 93.1%. Prior to the
effectiveness of the Amendments, the Special General Partner owned
a 51.7% limited partner interest in the Partnership through
ownership of common limited partner units ("Old Common Units"), and
the public owned a 46.3% interest in the Partnership through
ownership of convertible preferred limited partner units
("Preferred Units").
2. Accounting Policies
The financial statements of the Partnership include all of its
majority owned subsidiaries including limited partnership interests
where the Partnership has significant control through related
parties. All intercompany transactions have been eliminated and
minority interest has been provided where applicable. The
financial statements included in this quarterly report on Form 10-Q
are unaudited and condensed and do not contain all information
required by generally accepted accounting principles to be included
in a full set of financial statements. In the opinion of
management, all material adjustments, consisting only of normal and
recurring adjustments, necessary to present fairly the financial
position, results of operations, and cash flows for such periods
have been included. Interim period results are not necessarily
indicative of the results to be achieved for the full year. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
The financial statements of the Partnership presented in its
Annual Report on Form 10-K for the year ended December 31, 1996
include a summary of significant accounting policies that should be
read in conjunction with this quarterly report on Form 10-Q.
Certain amounts in the financial statements for the prior year have
been reclassified to conform to the 1997 presentation. The
Partnership has two subsidiaries that are corporations which are
separate taxable entities whose operations are subject to federal
income taxes.
Net Income (Loss) per Unit - Before Conversion is calculated
using the actual weighted average number of units outstanding
during the period (4,950,000 Common Units for the period ended
September 30, 1997 and 4,700,000 Preferred Units and 5,250,000 Old
Common Units for the period ended September 30, 1996) divided into
the Partnership's net income (loss) after adjusting for general
partner allocations. Net Income (Loss) per Unit - After Conversion
is calculated based on the weighted average number of Common Units
outstanding as a result of the Amendments which were effective
December 31, 1996 (4,950,000 Common Units for the periods ended
September 30, 1997 and 1996) divided into the Partnership's net
income (loss) after adjusting for general partner allocations. In
February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS 128"). The adoption
of SFAS 128 is not expected to have a material effect on the
Partnership's prior periods or present earnings per unit
calculation.
3. Related Party Transactions
In accordance with the Second Amended and Restated Agreement
of Limited Partnership of Pride Companies, L.P. ("Partnership
Agreement"), the Managing General Partner conducts, directs and
exercises control over substantially all of the activities of the
Partnership. The Managing General Partner has a 1.9% interest in
the income and cash distributions of the Partnership, subject to
certain adjustments. Certain members of the management of the
Managing General Partner are also members of the management of
Pride SGP, which has a 0.1% general partner interest and a 4.9%
limited partner interest in the Partnership.
The Partnership has no directors or officers; however,
directors and officers of the Managing General Partner are employed
by the Partnership to function in this capacity. Compensation of
these persons and any other expenses incurred on behalf of the
Partnership by the Managing General Partner and Pride SGP are paid
by the Partnership.
Certain conflicts of interest, including potential non-arm's
length transactions, could arise as a result of the relationships
described above. The Partnership Agreement provides that the Board
of Directors and management of the Managing General Partner have
certain duties to manage the Partnership in the best interests of
the unitholders and consequently must exercise good faith and
integrity in handling the assets and affairs of the Partnership.
4. Inventories
<TABLE>
<CAPTION>
Inventories are valued at the At At
lower of cost or market and September 30, December 31,
consist of: 1997 1996
(in thousands)
_____________________________ ___________ ___________
<S> <C> <C>
Crude oil $ 10,035 $ 14,543
Refined products and blending
materials 7,381 12,002
___________ ___________
17,416 26,545
LIFO reserve (3,313) (8,381)
___________ ___________
Petroleum inventories 14,103 18,164
Spare parts and supplies 1,004 1,007
___________ ___________
$ 15,107 $ 19,171
</TABLE>
The last-in/first-out (LIFO) inventory cost method is used for
crude oil and refined products and blending materials. The
weighted average inventory cost method is used for spare parts and
supplies.
5. Long-Term Debt
The Partnership's credit facility was amended and restated on
August 13, 1996. On August 14, 1997, the Partnership's credit
facility was amended to extend the maturity date to July 1, 1998.
The Partnership has requested that its current banks extend the
credit facility until October 1, 1998. The extension has not yet
been granted, and since the maturity date is less than one year,
the entire credit facility is classified as current. While the
current credit facility is in place through July 1, 1998, the
Partnership is currently in negotiations with third party lenders
and expects to receive a commitment in the near future to provide
a credit facility similar to the Partnership's current credit
facility. Such discussions are proceeding well; however, there are
no assurances the Partnership will be successful in refinancing the
current banks or receive an extension from the current banks.
The Partnership has a $6.5 million standby letter of credit
facility for general corporate purposes and the purchase of crude
oil and other refinery feedstocks ("Facility A") and a $42.5
million standby letter of credit facility for the purchase of crude
oil ("Facility B"). The fee on outstanding Facility A and Facility
B standby letters of credit is 1 and 1/2% per annum. For the
unused portion of the standby letter of credit facility, the fee is
one-half of 1% per annum. Though no advances had been drawn under
either the Facility A or Facility B standby letter of credit
facility, the Partnership did have approximately $721,000 and $37.1
million, respectively, in outstanding standby letters of credit at
September 30, 1997. The credit agreement also provides, at the
banks' discretion, an additional $8.0 million standby letter of
credit facility for the purchase of crude oil and other refinery
feedstocks ("Special LC Facility"). The fee on outstanding Special
LC Facility standby letters of credit is 3% per annum. There is no
commitment fee for the unused portion of the Special LC Facility.
The Partnership had no outstanding standby letters of credit under
the Special LC Facility as of September 30, 1997. As a result of
the decline in crude oil prices in the first quarter of 1997 and
management's expectations for lower average crude oil prices for
the remainder of the year as compared with 1996, the Partnership
believes its current letter of credit facilities, supplemented by
the Special LC Facility, are adequate.
The Partnership has available to it a revolving line of credit
of $12.0 million ("Revolver"), a $23.6 million term loan (the "Term
Loan") and a total of $16.8 million in three series of convertible
senior secured notes (collectively the "Senior Secured Notes"). At
September 30, 1997, the balances outstanding on the Revolver, Term
Loan and the Senior Secured Notes were $2.9 million, $23.6 million
and $16.8 million, respectively. Under the amended credit
facility, the Partnership is required to make quarterly principal
payments on the Term Loan in the amount of excess cash, as defined
in the credit agreement, for the preceding quarter. The
Partnership has classified the entire balance of $23.6 million
under the Term Loan as current as of September 30, 1997.
Advances under the Revolver and Term Loan bear interest at
prime plus 1 and 1/2% and 2%, respectively, payable monthly. The
prime rate was 8 and 1/2% as of September 30, 1997. The Senior
Secured Notes issued to the lenders under the credit facility
consist of $2.5 million in Convertible Senior Secured Series A
Promissory Notes ("Note A"), $9.3 million in Convertible Senior
Secured Series B Promissory Notes ("Note B"), and $5.0 million in
Convertible Senior Secured Series C Promissory Notes ("Note C").
The Senior Secured Notes bear interest at prime plus 1% payable
monthly, and have the same maturity as the credit facility. Note
B and Note C automatically convert to preferred convertible equity
securities upon the refinancing with additional third party lenders
the letter of credit facility, the Revolver, and the Term Loan.
Under certain circumstances, the Senior Secured Notes or the
preferred convertible equity securities are convertible at
the holders' election into Common Units. The entire amount
outstanding under the Senior Secured Notes has been classified as
current as of September 30, 1997.
The Partnership has pledged substantially all its assets as
collateral for the credit facility and the Senior Secured Notes.
In addition, the General Partners have guaranteed the facility, and
Pride SGP as guarantor has pledged its assets at no cost to the
Partnership as collateral for such loans. The Partnership may
elect to prepay the credit facility without any prepayment penalty.
Advances under the Revolver are subject to repayment on a
daily basis to the extent of excess cash. As a result, the full
amount outstanding at September 30, 1997 has been included in the
current portion of long-term debt. The Revolver is subject to a
borrowing base which includes a reduction by the amount of letters
of credit issued under Facility A. Subject to the borrowing base,
the Partnership may borrow any amounts previously repaid. At
September 30, 1997, the Partnership had a borrowing base reduced by
letters of credit under Facility A of $10.1 million. Therefore,
the Partnership had available to it an additional $7.2 million
above the $2.9 million outstanding under the Revolver. The fee
payable on the unused portion of the Revolver is one-half of 1% per
annum. The credit facility also requires the Partnership to pay a
monthly fee of $10,000.
The Partnership has two outstanding financing agreements to
fund working capital with Pride SGP which were entered into on
March 26, 1993 and September 7, 1995. Pride SGP made the unsecured
loans to the Partnership in the aggregate principal amount of $2.5
million, bearing interest at prime plus 1%. The prime rate was 8
and 1/2% at September 30, 1997. The loans, which mature July 1,
1998, have been classified as current as of September 30, 1997.
The Partnership also has a nonrecourse loan from Diamond
Shamrock with an outstanding balance of $5.7 million at September
30, 1997, bearing interest at 8% per annum with monthly interest
payments. The assets of Pride Borger, Inc. ("Pride Borger"), a
wholly owned subsidiary of the Partnership, are pledged as
collateral. Pride Borger owns 50% of a 271-mile crude oil and
vacuum gas oil pipeline extending from Hawley, Texas, which is
located near the Partnership's Refinery, to Borger, Texas (the
"Texas Plains System"). Pride Borger also guarantees the note.
Monthly principal payments are made to Diamond Shamrock based on
the number of throughput barrels for the prior month in the Texas
Plains System. Current maturities are estimated to be $148,000 at
September 30, 1997.
On January 9, 1995, the Partnership executed a note to a local
bank related to the renovation and refinancing of its
administrative offices in Abilene. Prior to this, the Partnership
leased additional office space from a third party. The note bears
interest at prime plus one-half of 1% and had an outstanding
principal balance of $360,000 as of September 30, 1997. The note
matures January 9, 2000. The Partnership has classified $18,000 of
the note as current as of September 30, 1997.
During 1995, the Partnership converted non-interest bearing
accounts payable to the United States Government related to pricing
adjustments which had been accrued since 1993 to a $2.4 million
installment loan. The principal balance was $662,000 as of
September 30, 1997. The note bears interest based on the rate set
by the Secretary of the Treasury. This rate was 6.75% as of
September 30, 1997. The note requires monthly payments of $84,000
and matures June 1, 1998. The Partnership has classified the
entire balance of the note as current as of September 30, 1997.
6. Common Units
At September 30, 1997, 4,950,000 Common Units were
outstanding, representing a 98% limited partner interest in the
Partnership. The general partners are entitled to 2% of all
distributions with respect to their aggregate general partner
interest in the Partnership.
Under the terms of the Partnership's credit agreement, the
bank restricted the payment of distributions to unitholders until
July 1, 1998, the maturity date of the credit agreement. Future
distributions will be dependent on, among other things, payment in
full of the bank debt, expiration of all liabilities related to
letters of credit, the termination of the credit agreement, and
income of the Partnership, all in accordance with the Partnership
Agreement.
7. Contingencies
The Partnership has filed a substantial claim against the
Defense Fuel Supply Center relating to erroneous pricing of fuel
purchased over a period of several years from the Partnership and
its predecessors. The ultimate outcome of this matter cannot
presently be determined.
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Management believes that the outcome of all claims and litigation
is either adequately insured or will not have a material adverse
effect on the Partnership's financial position or results of
operations.
The Partnership announced on June 20, 1997 that it had
executed a long-term product supply agreement (the "Agreement")
with Texaco Trading & Transportation, Inc. ("TTTI"), a wholly-owned
subsidiary of Texaco, Inc. The Agreement has a 10-year primary
term beginning upon completion of TTTI's recently announced new
system of pipelines and terminals and has renewal provisions for up
to an additional 10 years. It provides that the Partnership will
purchase all gasoline and middle distillates (principally diesel
and jet fuel), which it may desire to purchase, exclusively from
TTTI. The Partnership will purchase gasoline, diesel and jet fuel
from TTTI for delivery to the Partnership's existing customer base,
which includes wholesale customers, exchange partners, and military
bases, primarily using the Partnership's existing pipelines and
terminals.
The Partnership is not required by the Agreement to
discontinue its refining operations, but it is anticipated that
such operations may, if the banks in its credit facility consent,
as discussed below, be phased into a products and crude oil
terminal operation. The Partnership is in the process of
evaluating the cost of such transition, costs of decommissioning
equipment and related environmental compliance costs, and the
Partnership currently estimates such costs at no more than $1.8
million. The Agreement with TTTI will allow the Partnership to
expand its crude gathering operations, conducted under the name
Pride Pipeline Company. It is contemplated that the arrangement
with TTTI will enable the Partnership to transport crude oil it now
gathers to attractive markets, including Cushing, Oklahoma.
Currently a large portion of Pride Pipeline Company's gathered
crude oil is restricted to use as refinery feed stock. The
Partnership anticipates that the new arrangement will produce
operating cash flows similar to the level that the Partnership has
experienced for the last four years. However, the Partnership
believes that cash flows should be less volatile since the
Agreement will result in more stable product margins and eventually
decrease the Partnership's exposure to volatility in refining
margins. The Partnership also believes that the Agreement will
better enable the Partnership to remain competitive as
environmental standards change and the industry trends toward
consolidation and realignments in the future.
The Partnership has not received approval from the banks in
its credit facility to discontinue or phase down refinery
operations, and the banks may or may not grant that consent. Such
consent is required under the current loan agreement prior to
discontinuance or phase down of the refinery. The Partnership will
continue its previously announced efforts to refinance with
additional third party creditors its letter of credit facility, the
Revolver, Term Loan and Senior Secured Notes. The Partnership does
not plan to accelerate any phase down of refinery operations until
the refinancing is completed or the banks' consent is obtained
which, until that time, will limit the Partnership's ability to
fully realize the benefits of the Agreement. If the refinancing is
completed or the banks' consent is obtained and the Partnership
holds these assets for disposal, it is reasonably possible that a
material loss will be recognized related to such assets.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Overview
Pride Companies, L.P. is a Delaware limited partnership which
owns and operates a petroleum refining business ("Refinery"),
products pipeline business ("Products System"), and crude oil
gathering business ("Crude Gathering System").
The Crude Gathering System is the primary source of crude
supply for the Refinery, although some gathering is done for
others. It gathers crude at the wellhead and then buys and sells
crude oil so that it can deliver crude to the Refinery. After the
crude is processed into petroleum products at the Refinery, it is
marketed and if necessary transported to the Partnership's
terminals through the Products System's pipelines.
The following is a discussion of the results of operations of
the Partnership. This discussion should be read in conjunction
with the financial statements included in this report.
Forward Looking Statements
This Form 10-Q contains certain forward looking statements.
Such statements are typically punctuated by words or phrases such
as "anticipate," "estimate," "projects," "should," "may,"
"management believes," and words or phrases of similar import.
Such statements are subject to certain risks, uncertainties or
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated,
estimated or projected. Among the key factors that may have a
direct bearing on the Partnership's results of operations and
financial conditions are: (i) the rate of utilization of the
Refinery, (ii) the margins between the prices of the Partnership's
refined petroleum products and the cost of crude oil, (iii) the
volume throughput on and margins from the transportation and resale
of crude oil from the Partnership's Crude Gathering System, (iv)
the impact of current and future laws and governmental regulations
affecting the refining industry in general and the Partnership's
operations in particular, (v) the ability of the Partnership to
effect a restructuring and recapitalization prior to the maturity
of its credit facility, (vi) the ability of the Company to sustain
cash flow from operations sufficient to realize its investments in
operating assets of the Company, and (vii) the continuation of
operations utilizing the Refinery in a manner similar to the
Company's current operating structure.
General
The Partnership's current operating results depend principally
on the rate of utilization of the Refinery, the margins between the
prices of its refined petroleum products and the cost of crude oil,
the volume throughput on the Products System, and the volume
throughput on and margins from the transportation and resale of
crude oil from its Crude Gathering System. Higher Refinery
utilization allows the Partnership to spread its fixed costs across
more barrels, thereby lowering the fixed costs per barrel of crude
oil processed. The refining business is highly competitive, and
the Partnership's margins are significantly impacted by general
industry margins. Industry margins are determined by a variety of
regional, national, and global trends, including oil prices,
weather, and economic conditions, among other things. The
Refinery's military aviation fuel prices are influenced by these
trends since the pricing for military aviation fuel is based on Jet
A, a kerosene-based product, and the price of diesel and heating
fuels affects the price of kerosene.
Margins in the Crude Gathering System are influenced by the
level of competition and the price of crude oil. When prices are
higher, crude oil can generally be resold at higher margins.
Additionally, transportation charges trend upward when higher crude
oil prices stimulate increased exploration and development.
Conversely, when crude oil prices decrease, margins on the resale
of crude oil as well as transportation charges tend to decrease.
In addition, the intrasystem pricing of crude oil between the
Refinery and the Crude Gathering System is based in part on an
adjusted Midland spot price for crude oil above the Partnership's
posted price for such crude oil (the "Premium"), which represents
the approximate amount above posting that would be realized on the
sale of such crude oil to an unrelated third party. The total
intrasystem price for crude oil between the Refinery and the Crude
Gathering System includes the Premium, the Partnership's posted
price and transportation costs. An increase in the Premium for
crude oil will have a negative impact on the Refinery and have a
positive impact on the Crude Gathering System. On the other hand,
a decrease in the Premium for crude oil will have a positive impact
on the Refinery and a negative impact on the Crude Gathering
System. For the third quarter of 1997, the average Premium for
crude oil was $1.77 compared to $2.23 for the third quarter of
1996. The average Premium for crude oil was $1.93 for the nine
months ended September 30, 1997 compared to $2.47 for the nine
months ended September 30, 1996. As a result, the Refinery was
positively affected and the Crude Gathering System was negatively
affected in both the third quarter of 1997 and the first nine
months of 1997 due to the decline in the Premium during such
periods.
In evaluating the financial performance of the Partnership,
management believes it is important to look at operating income,
before depreciation, in addition to operating income which is after
depreciation. Operating income, before depreciation, measures the
Partnership's ability to generate and sustain working capital and
cash flows from operations. However, such measure is before debt
service, so it does not indicate the amount available for
distribution, reinvestment or other discretionary uses. Gross
revenues primarily reflect the level of crude oil prices and are
not necessarily an accurate reflection of the Partnership's
profitability. Also important to the evaluation of the Refinery's
performance are barrels of crude oil refined, gross margin (revenue
less cost of crude) per barrel, and operating expense per barrel,
before depreciation.
Third Quarter 1997 Compared to Third Quarter 1996
GENERAL -- Net income for the third quarter of 1997 was
$771,000 compared to net loss of $3.2 million for the third quarter
of 1996. The improvement was a result of increased refining
margins and lower interest expense and credit and loan fees of
$308,000 in the third quarter of 1997 compared to the third quarter
of 1996. The improvement was partially offset by weaker crude
gathering margins during the third quarter of 1997 compared to the
same period last year.
Operating income was $2.6 million for the third quarter of
1997 compared to an operating loss of $982,000 for the third
quarter of 1996. Operating income, before depreciation, for the
third quarter of 1997 increased to $4.3 million from $739,000 for
the third quarter of 1996.
The following table details the operating income (loss);
depreciation; and the operating income (loss), before depreciation
(in thousands), for the third quarter of 1997 and 1996.
<TABLE>
<CAPTION>
Operating
Income
Operating (Loss)
Income Before
(Loss) Deprec. Deprec.
_______ _______ ________
<S> <C> <C> <C>
Third Quarter 1997
Refinery and Products System $ 2,356 $ 1,242 $ 3,598
Crude Gathering System 248 475 723
_______ _______ ________
Total $ 2,604 $ 1,717 $ 4,321
Third Quarter 1996
Refinery and Products System $(2,534) $ 1,236 $ (1,298)
Crude Gathering System 1,552 485 2,037
_______ _______ ________
Total $ (982) $ 1,721 $ 739
</TABLE>
REFINERY AND PRODUCTS SYSTEM -- Operating income of the
Refinery and Products System was $2.4 million for the third quarter
of 1997 compared to operating loss of $2.5 million for the third
quarter of 1996. Depreciation expense for the Refinery and
Products System was approximately $1.2 million for both the third
quarter of 1997 and the third quarter of 1996. Operating income,
before depreciation, of the Refinery and Products System was $3.6
million for the third quarter of 1997 compared to operating loss,
before depreciation, of $1.3 million for the third quarter of 1996.
Operating income of the Refinery was $2.2 million for the
third quarter of 1997 compared to operating loss of $2.8 million
for the same period in 1996. Depreciation expense for the Refinery
alone was $1.0 million for both the third quarter of 1997 and the
third quarter of 1996. Operating income, before depreciation, of
the Refinery was $3.2 million for the third quarter of 1997
compared to operating loss, before depreciation, of $1.8 million
for the third quarter of 1996.
Refinery gross margin per barrel was $2.55 for the third
quarter of 1997 versus $0.90 for the same period in 1996. The
increase in the gross margin primarily reflects strong gasoline
margins and the decrease in the Premium for crude oil purchased
from the Crude Gathering System. Refinery throughput averaged
30,111 BPD for the third quarter of 1997 versus 32,339 BPD for the
same period in 1996. Operating expenses per barrel, before
depreciation, were $0.99 for the third quarter of 1997 compared to
$1.12 for the third quarter of 1996.
Operating income for the Products System was $159,000 for the
third quarter of 1997 compared to $266,000 for the third quarter of
1996. Depreciation expense for the Products System was $217,000
for the third quarter of 1997 compared to $221,000 for the third
quarter of 1996. Operating income, before depreciation, for the
Products System decreased to $376,000 for the third quarter of 1997
from $486,000 for the same period in 1996 due to lower
transportation volumes in the third quarter of 1997. Total
transportation volumes were 11,468 BPD for the third quarter of
1997 compared to 13,385 BPD for the same period in 1996.
CRUDE GATHERING SYSTEM -- Operating income for the Crude
Gathering System was $248,000 for the third quarter of 1997
compared to $1.6 million for the same period in 1996 due to a
decline in crude gathering margins. The Premium for crude oil sold
to the Refinery was substantially lower in the third quarter of
1997 than the third quarter of 1996, but the amount paid above
posting for such crude oil to third parties did not decrease
accordingly. The amount paid above posting for crude oil to third
parties should decrease in the future as the crude oil market's
expectation for a high Premium diminishes. Depreciation expense
for the Crude Gathering System decreased to $475,000 for the third
quarter of 1997 from $485,000 for the third quarter of 1996.
Operating income, before depreciation, for the Crude Gathering
System was $723,000 for the third quarter of 1997 and $2.0 million
for the third quarter of 1996. The net margin was $0.05 per barrel
for the third quarter of 1997 versus $0.31 per barrel for the same
period in 1996. The volume of crude oil gathered by the Crude
Gathering System decreased to 53,457 BPD for the third quarter of
1997 from 53,635 BPD for the third quarter of 1996.
First Nine Months 1997 Compared to First Nine Months 1996
GENERAL -- Net loss for the first nine months of 1997 was $2.7
million compared to net loss of $4.0 million for the first nine
months of 1996. The improvement was primarily a result of improved
refining margins, lower operating expenses and lower interest and
credit and loan fees of $1.2 million during the first nine months
of 1997. Interest and credit and loan fees decreased due to the
lower interest rates that became effective upon completion of phase
two of the refinancing and restructuring and the accrual during the
first nine months of 1996 for facility fees of $1.1 million. The
improvement was partially offset by weaker crude gathering margins
during the first nine months of 1997.
Operating income was $2.1 million for the first nine months of
1997 compared to $2.5 million for the first nine months of 1996.
Operating income, before depreciation, decreased for the first nine
months of 1997 to $7.3 million from $7.8 million for the first nine
months of 1996.
The table below details the operating income (loss);
depreciation; and the operating income (loss), before depreciation
by division (in thousands) for the first nine months of 1997 and
1996.
<TABLE>
<CAPTION>
Operating
Income
Operating (Loss)
Income Before
(Loss) Deprec. Deprec.
_______ _______ ________
<S> <C> <C> <C>
First Nine Months 1997
Refinery and Products System $ 631 $ 3,716 $ 4,347
Crude Gathering System 1,505 1,435 2,940
_______ _______ ________
Total $ 2,136 $ 5,151 $ 7,287
First Nine Months 1996
Refinery and Products System $(5,219) $ 3,736 $ (1,483)
Crude Gathering System 7,734 1,505 9,239
_______ _______ ________
Total $ 2,515 $ 5,241 $ 7,756
</TABLE>
REFINERY AND PRODUCTS SYSTEM -- Operating income of the
Refinery and Products System was $631,000 for the first nine months
of 1997 compared to operating loss of $5.2 million for the first
nine months of 1996. Depreciation expense for the Refinery and
Products System was approximately $3.7 million for the first nine
months of 1997 and the first nine months of 1996. Operating
income, before depreciation, of the Refinery and Products System
was $4.3 million for the first nine months of 1997 compared to
operating loss, before depreciation, of $1.5 million for the first
nine months of 1996.
Operating income of the Refinery was $118,000 for the first
nine months of 1997 compared to operating loss of $6.1 million for
the first nine months of 1996. Refining margins increased for the
first nine months of 1997 due to the lower Premium for crude oil
during such period. Depreciation expense for the Refinery alone
was $3.1 million for both the first nine months of 1997 and the
first nine months of 1996. Operating income, before depreciation,
of the Refinery was $3.2 million for the first nine months of 1997
compared to operating loss, before depreciation, of $3.0 million
for the first nine months of 1996.
Refinery gross margin per barrel was $1.83 for the first nine
months of 1997 versus $1.16 for the same period in 1996. Refinery
throughput averaged 31,220 BPD during the first nine months of 1997
versus 32,289 BPD for the same period in 1996. Operating expenses
per barrel, before depreciation, were $1.03 for the first nine
months of 1997 versus $1.09 for the same period in 1996.
Operating income for the Products System was $513,000 for the
first nine months of 1997 compared to $876,000 for the first nine
months of 1996. Depreciation expense for the Products System was
$653,000 for the first nine months of 1997 and $661,000 for the
first nine months of 1996. Operating income, before depreciation,
for the Products System decreased to $1.2 million for the first
nine months of 1997 from $1.5 million for the same period in 1996
as a result of decreased volumes and increased operating costs due
to leak repairs. Total transportation volumes were 12,345 BPD for
the first nine months of 1997 compared to 13,390 BPD for the same
period in 1996 due to a decline in shipments to the San Angelo
terminal.
CRUDE GATHERING SYSTEM -- Operating income for the Crude
Gathering System was $1.5 million for the first nine months of 1997
compared to $7.7 million for the same period in 1996 due to the
decrease in the Premium for crude oil for the first nine months of
1997 and an increase in the amount paid above posting for crude oil
to third parties. Depreciation expense for the Crude Gathering
System was $1.4 million for the first nine months of 1997 and $1.5
million for the first nine months of 1996. Operating income,
before depreciation, for the Crude Gathering System was $2.9
million for the first nine months of 1997 and $9.2 million for the
first nine months of 1996. The net margin was $0.11 per barrel for
the first nine months of 1997 compared to $0.47 per barrel for the
first nine months of 1996. Due to the elimination of several
marginal contracts, the volume of crude oil gathered by the Crude
Gathering System decreased to 50,610 BPD for the first nine months
of 1997 from 59,996 BPD for the first nine months of 1996.
Factors and Trends Affecting Operating Results
A number of factors have affected the Partnership's operating
results, both indirectly and directly, such as environmental
compliance, other regulatory matters, industry trends and price of
crude oil, inventory prices, and seasonality and weather. The
Managing General Partner expects that such conditions will continue
to affect the Partnership's business to varying degrees in the
future. The order in which these factors are discussed is not
intended to represent their relative significance.
ENVIRONMENTAL COMPLIANCE -- Increasing public and governmental
concern about air quality is expected to result in continued
regulation of air emissions. Regulations relating to carbon
monoxide and regulations on oxygen content in gasoline and sulfur
content in diesel fuel are expected to be increasingly important as
a means of improving air quality in urban areas. The Partnership
plans to spend approximately $1.1 million in the aggregate in 1997,
1998 and 1999 on several projects to maintain compliance with
various environmental requirements including $400,000 for a sewer
system upgrade and $380,000 for tank cleanup.
Effective January 1, 1995, the Clean Air Act Amendment of 1990
required that certain areas of the country use reformulated
gasoline ("RFG"). The Abilene and San Angelo market areas do not
require RFG. Collin, Dallas, Denton, and Tarrant Counties, which
comprise the Dallas-Fort Worth ("DFW") metroplex area, do require
RFG; however, the Partnership's Aledo terminal lies outside this
area and is allowed to supply conventional gasoline that is not
destined for sale in these four counties. New regulations took
effect that imposed new quality standards for conventional gasoline
in the rest of the country; however, they were much less
restrictive than the RFG regulations. Management does not believe
that these have had or will have a material adverse effect on the
Partnership's operations.
OTHER REGULATORY REQUIREMENTS -- The Partnership is also
subject to the rules and regulations of, among others, the
Occupational Safety and Health Administration, Texas Air Control
Board, Texas Railroad Commission, and Texas Water Commission.
INDUSTRY TRENDS AND PRICE OF CRUDE OIL -- Industry trends and
the price of crude oil will continue to affect the Partnership's
business. While refined products are generally sold at a margin
above crude oil prices, fluctuations in the price of crude oil can
have a significant short-term effect on refining margins because
there is usually a lag in the movement of product prices, both up
and down, in relation to the movement of crude oil prices. The
general level of crude oil prices can also have a significant
effect on the margins in the crude gathering business. Margins in
the Crude Gathering System generally tend to be influenced by
competition, the general price level of crude oil and the Premium.
When prices are higher, crude oil can generally be resold at higher
margins. Additionally, transportation charges realized by the
Crude Gathering System are slightly less competitive when higher
crude oil prices result in increased exploration and development.
Conversely, when crude oil prices decrease, margins on the resale
of crude oil and transportation charges generally tend to decrease.
INVENTORY PRICES -- The Partnership utilizes the last-
in/first-out (LIFO) method of determining inventory values. LIFO
minimizes the effect of fluctuations in inventory prices on
earnings by matching current costs with current revenue. The LIFO
method is the predominant method used in the refining industry.
SEASONALITY AND WEATHER -- Gasoline consumption is typically
highest in the United States in the summer months and lowest in the
winter months. As a result, margins for gasoline tend to be higher
in the summer months. Diesel consumption in the southern United
States is generally higher just prior to and during the winter
months when commercial trucking is routed on southern highways to
avoid severe weather conditions further north. Additionally,
diesel fuel prices tend to increase during the winter months when
refiners divert heating fuels to northern areas. The Refinery's
military aviation fuel prices are influenced by these trends since
the pricing for military aviation fuel is based on Jet A, a
kerosene based product, and the price of diesel and heating fuels
affect the price of kerosene.
OTHER FACTORS -- The Partnership was recently awarded a new
jet fuel contract to supply the U. S. Government with approximately
29.7 million gallons for the contract period beginning October 1,
1997 and ending September 30, 1998.
<PAGE>
Financial Condition
Inflation
The Partnership's operations would be adversely impacted by
significant, sustained increases in crude oil and other energy
prices. Although the Partnership's operating costs are generally
impacted by inflation, the Managing General Partner does not expect
general inflationary trends to have a material adverse impact on
the Partnership's business.
Financial Resources and Liquidity
The Partnership receives payments from the United States
Government, major oil companies, and other customers within
approximately 7 to 15 days from shipment in the case of products
sales and by the 20th of the following month in the case of third-
party crude oil sales and exchanges. The Partnership maintains
inventory in the amount of approximately 14 to 20 days of sales.
The Partnership generally pays for crude oil feedstock on the 20th
of the month following the month in which it is received. As a
result, the Partnership's operating cycle is such that it generally
receives cash for the refined products on a basis roughly equal to
the average terms on which it pays for the crude oil feedstock.
Letters of credit are an integral part of the operations of the
Crude Gathering System since the Partnership takes title to the
crude oil it gathers.
The Partnership's credit facility was amended and restated on
August 13, 1996. On August 14, 1997, the Partnership's credit
facility was amended to extend the maturity date to July 1, 1998.
The Partnership has requested that its current banks extend the
credit facility until October 1, 1998. The extension has not yet
been granted, and since the maturity date is less than one year,
the entire credit facility is classified as current. While the
current credit facility is in place through July 1, 1998, the
Partnership is currently in negotiations with third party lenders
and expects to receive a commitment in the near future to provide
a credit facility similar to the Partnership's current credit
facility. Such discussions are proceeding well; however, there are
no assurances the Partnership will be successful in refinancing the
current banks or receive an extension from the current banks.
The Partnership has a $6.5 million standby letter of credit
facility for general corporate purposes and the purchase of crude
oil and other refinery feedstocks ("Facility A") and a $42.5
million standby letter of credit facility for the purchase of crude
oil ("Facility B"). The fee on outstanding Facility A and Facility
B standby letters of credit is 1 and 1/2% per annum. For the
unused portion of the standby letter of credit facility, the fee is
one-half of 1% per annum. Though no advances had been drawn under
either the Facility A or Facility B standby letter of credit
facility, the Partnership did have approximately $721,000 and $37.1
million, respectively, in outstanding standby letters of credit at
September 30, 1997. The credit agreement also provides, at the
banks' discretion, an additional $8.0 million standby letter of
credit facility for the purchase of crude oil and other refinery
feedstocks ("Special LC Facility"). The fee on outstanding Special
LC Facility standby letters of credit is 3% per annum. There is no
commitment fee for the unused portion of the Special LC Facility.
The Partnership had no outstanding standby letters of credit under
the Special LC Facility as of September 30, 1997. As a result of
the decline in crude oil prices in the first quarter of 1997 and
management's expectations for lower average crude oil prices for
the remainder of the year as compared with 1996, the Partnership
believes its current letter of credit facilities, supplemented by
the Special LC Facility, are adequate.
The Partnership has available to it a revolving line of credit
of $12.0 million ("Revolver"), a $23.6 million term loan (the "Term
Loan") and a total of $16.8 million in three series of convertible
senior secured notes (collectively the "Senior Secured Notes"). At
September 30, 1997, the balances outstanding on the Revolver, Term
Loan and the Senior Secured Notes were $2.9 million, $23.6 million
and $16.8 million, respectively. Under the amended credit
facility, the Partnership is required to make quarterly principal
payments on the Term Loan in the amount of excess cash, as defined
in the credit agreement, for the preceding quarter. The
Partnership has classified the entire balance of $23.6 million
under the Term Loan as current as of September 30, 1997.
Advances under the Revolver and Term Loan bear interest at
prime plus 1 and 1/2% and 2%, respectively, payable monthly. The
prime rate was 8 and 1/2% as of September 30, 1997. The Senior
Secured Notes issued to the lenders under the credit facility
consist of $2.5 million in Convertible Senior Secured Series A
Promissory Notes ("Note A"), $9.3 million in Convertible Senior
Secured Series B Promissory Notes ("Note B"), and $5.0 million in
Convertible Senior Secured Series C Promissory Notes ("Note C").
The Senior Secured Notes bear interest at prime plus 1% payable
monthly, and have the same maturity as the credit facility. Note
B and Note C automatically convert to preferred convertible equity
securities upon the refinancing with additional third party lenders
the letter of credit facility, the Revolver and the Term Loan.
Under certain circumstances, the Senior Secured Notes or the
preferred convertible equity securities are convertible at the
holders' election into Common Units. The entire amount outstanding
under the Senior Secured Notes has been classified as current as of
September 30, 1997.
The Partnership has pledged substantially all its assets as
collateral for the credit facility and the Senior Secured Notes.
In addition, the General Partners have guaranteed the facility, and
Pride SGP as guarantor has pledged its assets at no cost to the
Partnership as collateral for such loans. The Partnership may
elect to prepay the credit facility without any prepayment penalty.
Advances under the Revolver are subject to repayment on a
daily basis to the extent of excess cash. As a result, the full
amount outstanding at September 30, 1997 has been included in the
current portion of long-term debt. The Revolver is subject to a
borrowing base which includes a reduction by the amount of letters
of credit issued under Facility A. Subject to the borrowing base,
the Partnership may borrow any amounts previously repaid. At
September 30, 1997, the Partnership had a borrowing base reduced by
letters of credit under Facility A of $10.1 million. Therefore,
the Partnership had available to it an additional $7.2 million
above the $2.9 million outstanding under the Revolver. The fee
payable on the unused portion of the Revolver is one-half of 1% per
annum. The credit facility also requires the Partnership to pay a
monthly fee of $10,000.
The Partnership has two outstanding financing agreements to
fund working capital with Pride SGP which were entered into on
March 26, 1993 and September 7, 1995. Pride SGP made the unsecured
loans to the Partnership in the aggregate principal amount of $2.5
million bearing interest at prime plus 1%. The prime rate was 8
and 1/2% at September 30, 1997. The loans, which mature July 1,
1998, have been classified as current as of September 30, 1997.
The Partnership also has a nonrecourse loan from Diamond
Shamrock with an outstanding balance of $5.7 million at September
30, 1997, bearing interest at 8% per annum with monthly interest
payments. The assets of Pride Borger, Inc. ("Pride Borger"), a
wholly owned subsidiary of the Partnership, are pledged as
collateral. Pride Borger owns 50% of a 271-mile crude oil and
vacuum gas oil pipeline extending from Hawley, Texas, which is
located near the Partnership's Refinery, to Borger, Texas (the
"Texas Plains System"). Pride Borger also guarantees the note.
Monthly principal payments are made to Diamond Shamrock based on
the number of throughput barrels for the prior month in the Texas
Plains System. Current maturities are estimated to be $148,000 at
September 30, 1997.
On January 9, 1995, the Partnership executed a note to a local
bank related to the renovation and refinancing of its
administrative offices in Abilene. Prior to this, the Partnership
leased additional office space from a third party. The note bears
interest at prime plus one-half of 1% and had an outstanding
principal balance of $360,000 as of September 30, 1997. The note
matures January 9, 2000. The Partnership has classified $18,000 of
the note as current as of September 30, 1997.
During 1995, the Partnership converted non-interest bearing
accounts payable to the United States Government related to pricing
adjustments which had been accrued since 1993 to a $2.4 million
installment loan. The principal balance was $662,000 as of
September 30, 1997. The note bears interest based on the rate set
by the Secretary of the Treasury. This rate was 6.75% as of
September 30, 1997. The note requires monthly payments of $84,000
and matures June 1, 1998. The Partnership has classified the
entire balance of the note as current as of September 30, 1997.
Cash flows have been and will continue to be significantly
affected by fluctuations in the cost and volume of crude oil and
refined products held in inventory and the timing of accounts
receivable collections. Cash flows are also affected by refining
margins and crude oil gathering margins.
The Partnership's operations have generated losses in each of
the last six years and current ratios of less than one to one in
each of the last four years. These financial results are primarily
a result of depressed refining margins along with increasing
depreciation expense and interest expense and related fees through
1995. Crude gathering volumes have also decreased. Under the jet
fuel contract with the U. S. Government which began on April 1,
1997 and ends on March 31, 1998, the Partnership will supply
approximately 2.5% less military aviation fuel than it supplied
under the previous contract; however, the prices awarded compared
to the base reference price net of transportation under this
contract have improved approximately 0.9 cents per gallon from the
prices in the previous contract, which will more than offset the
impact of the reduced volumes. The Partnership was recently
awarded another contract to supply the U. S. Government with
approximately 29.7 million gallons of jet fuel which began on
October 1, 1997 and ends on September 30, 1998.
The losses incurred in the first nine months of 1997 were
funded by additional borrowing which became available under the
Partnership's revolving credit facility.
The Partnership's return to profitability is principally
dependent upon restructuring its credit facility, increased volumes
and/or improved profit margins, as well as continued cost control
initiatives. The Partnership's long-term viability is dependent
upon its effecting a restructuring and recapitalization.
The Partnership announced on June 20, 1997 that it had
executed a long-term product supply agreement (the "Agreement")
with Texaco Trading & Transportation, Inc. ("TTTI"), a wholly-owned
subsidiary of Texaco, Inc. The Agreement has a 10-year primary
term beginning upon completion of TTTI's recently announced new
system of pipelines and terminals and has renewal provisions for up
to an additional 10 years. It provides that the Partnership will
purchase all gasoline and middle distillates (principally diesel
and jet fuel), which it may desire to purchase, exclusively from
TTTI. The Partnership will purchase gasoline, diesel and jet fuel
from TTTI for delivery to the Partnership's existing customer base,
which includes wholesale customers, exchange partners, and military
bases, primarily using the Partnership's existing pipelines and
terminals.
The Partnership is not required by the Agreement to
discontinue its refining operations, but it is anticipated that
such operations may, if the banks in its credit facility consent,
as discussed below, be phased into a products and crude oil
terminal operation. The Partnership is in the process of
evaluating the cost of such transition, costs of decommissioning
equipment and related environmental compliance costs, and the
Partnership currently estimates such costs at no more than $1.8
million. The Agreement with TTTI will allow the Partnership to
expand its crude gathering operations, conducted under the name
Pride Pipeline Company. It is contemplated that the arrangement
with TTTI will enable the Partnership to transport crude oil it now
gathers to attractive markets, including Cushing, Oklahoma.
Currently a large portion of Pride Pipeline Company's gathered
crude oil is restricted to use as refinery feed stock. The
Partnership anticipates that the new arrangement will produce
operating cash flows similar to the level that the Partnership has
experienced for the last four years. However, the Partnership
believes that cash flows should be less volatile since the
Agreement will result in more stable product margins and eventually
decrease the Partnership's exposure to volatility in refining
margins. The Partnership also believes that the Agreement will
better enable the Partnership to remain competitive as
environmental standards change and the industry trends toward
consolidation and realignments in the future.
The Partnership has not received approval from the banks in
its credit facility to discontinue or phase down refinery
operations, and the banks may or may not grant that consent. Such
consent is required under the current loan agreement prior to
discontinuance or phase down of the refinery. The Partnership will
continue its previously announced efforts to refinance with
additional third party creditors its letter of credit facility, the
Revolver, Term Loan and Senior Secured Notes. The Partnership does
not plan to accelerate any phase down of refinery operations until
the refinancing is completed or the banks' consent is obtained
which, until that time, will limit the Partnership's ability to
fully realize the benefits of the Agreement. If the refinancing is
completed or the banks' consent is obtained and the Partnership
holds these assets for disposal, it is reasonably possible that a
material loss will be recognized related to such assets.
The most significant and urgent need of the Partnership is to
effect a restructuring and recapitalization of the Partnership's
debt and equity. On August 13, 1996, the Partnership completed the
first of three phases ("Phase One") which called for the execution
of documents with the bank lenders. Phase Two ("Phase Two") was
completed effective December 31, 1996 when the Unitholders adopted
an amendment to the Partnership Agreement. The amendment included
the conversion of the outstanding Preferred Units and Old Common
Units into Common Units and the cancellation of all preferred and
common unit arrearages. As part of Phase Two, the banks converted
a portion of their Term Loan into Senior Secured Notes, lowered
certain interest rates and credit and loan fees and extended the
maturity. In phase three ("Phase Three"), the Partnership plans to
refinance with additional third party creditors the letter of
credit facility, the Revolver, the Term Loan and a portion of the
Senior Secured Notes. Any Series B and Series C Senior Secured
Notes not refinanced would automatically convert to a preferred
convertible equity security which is further convertible into
Common Units. During the first nine months of 1997, the Partnership
expensed $443,000 related to the restructuring of the Limited
Partnership Agreement and its credit facility and recapitalization.
This is in addition to the $1.8 million expensed during the two
year period ended December 31, 1996.
The Managing General Partner had originally hoped to complete
Phase Three by the end of the first quarter of 1997. The Managing
General Partner and its advisors, with the concurrence of the bank
lenders, concluded that conditions were not optimal to pursue the
Phase Three financing as originally contemplated. At this time,
the Managing General Partner cannot predict when, or if, Phase
Three will be completed. If the Partnership is successful in
arranging a complete restructuring and recapitalization of the
Partnership, the Managing General Partner believes it will enhance
the Partnership's financial strength, flexibility and future access
to capital markets as well as lower interest expense. However, if
the Partnership fails to complete Phase Three, it will have to
pursue other means of effecting a restructuring and
recapitalization, including redeployment of assets, asset sales and
strategic alliances, prior to the maturity of its credit facility
on July 1, 1998.
Capital Expenditures
The Partnership incurred capital expenditures of $638,000 for
the third quarter of 1997 and $1.1 million for the nine months
ended September 30, 1997.
Cash Distributions
At September 30, 1997, 4,950,000 Common Units were
outstanding, representing a 98% limited partner interest in the
Partnership. The general partners are entitled to 2% of all
distributions with respect to their aggregate general partner
interest in the Partnership.
Under the terms of the Partnership's credit agreement, the
bank restricted the payment of distributions to unitholders until
July 1, 1998, the maturity date of the credit agreement. Future
distributions will be dependent on, among other things, payment in
full of the bank debt, expiration of all liabilities for letters of
credit, the termination of the credit agreement, and income of the
Partnership, all in accordance with the Partnership Agreement.
PART II. Other Information
Item 1. Legal Proceedings
The Partnership has filed a substantial claim against the
Defense Fuel Supply Center relating to erroneous pricing of fuel
purchased over a period of several years from the Partnership and
its predecessors. The ultimate outcome of this matter cannot
presently be determined.
The Partnership is involved in various claims and routine
litigation incidental to its business for which damages are sought.
Management believes that the outcome of all claims and litigation
is either adequately insured or will not have a material adverse
effect on the Partnership's financial position or results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Second Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1996
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L.P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).
27 Financial Data Schedule for the nine months ended
September 30, 1997.
b. Reports on Form 8-K:
None.<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 thereunto duly authorized.
PRIDE COMPANIES, L.P.
By: Pride Refining, Inc.
as its Managing General Partner
(Registrant)
November 14, 1997 Brad Stephens
Date Brad Stephens
Chief Executive Officer
(Signing on behalf of Registrant)
November 14, 1997 George Percival
Date George Percival
Chief Financial Officer
(Signing as Principal Financial
Officer)
<PAGE>
PRIDE COMPANIES, L.P.
Exhibits to
Report to Form 10-Q
INDEX TO EXHIBITS
Exhibit Number
(Reference to
Item 601 of
Regulation S-K)
_________________
4.1 Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.1 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 (Commission File No. 1-
10473)).
4.2 Second Amended and Restated Agreement of Limited
Partnership of the Partnership (incorporated by reference
to Exhibit 3.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1996
(Commission File No. 1-10473)).
4.3 Deposit Agreement among the Partnership and the
Depository (incorporated by reference to Exhibit 4.1 of
the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (Commission File No.
1-10473)).
4.4 Transfer Application (included as Exhibit A to the
Deposit Agreement, which is incorporated by reference to
Exhibit 4.2 of the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(Commission File No. 1-10473)).
4.5 Form of Depositary Receipt for Common Units of Pride
Companies, L.P. (incorporated by reference to Exhibit 4.5
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (Commission File No.
1-10473)).
27 Financial Data Schedule for the nine months ended
September 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 558
<SECURITIES> 0
<RECEIVABLES> 14,294
<ALLOWANCES> 0
<INVENTORY> 15,107
<CURRENT-ASSETS> 31,341
<PP&E> 137,389
<DEPRECIATION> 42,078
<TOTAL-ASSETS> 127,699
<CURRENT-LIABILITIES> 83,592
<BONDS> 5,935
0
0
<COMMON> 26,785
<OTHER-SE> 69
<TOTAL-LIABILITY-AND-EQUITY> 127,699
<SALES> 404,813
<TOTAL-REVENUES> 404,813
<CGS> 390,378
<TOTAL-COSTS> 390,378
<OTHER-EXPENSES> 5,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,055
<INCOME-PRETAX> (2,868)
<INCOME-TAX> (124)
<INCOME-CONTINUING> (2,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,744)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
