<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10595
SFP PIPELINE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3713699
(State of incorporation) (I.R.S. Employer Identification No.)
301 NUGGET AVENUE
SPARKS, NEVADA 89431
(Address of principal executive offices, including zip code)
(702) 358-6971
(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 [_]
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ($0.01 PAR VALUE)
AS OF AUGUST 13, 1997: 1,000.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION H.
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<PAGE>
SFP PIPELINE HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1997 and December 31, 1996......... 1
Consolidated Statement of Operations
for the three-month and six-month periods ended June 30, 1997 and 1996... 2
Consolidated Statement of Cash Flows
for the three-month and six-month periods ended June 30, 1997 and 1996... 3
Notes to Consolidated Financial Statements................................ 4
Item 2. Management's Narrative Analysis of the Results of Operations....... 5
Financial Information of Santa Fe Pacific Pipeline Partners, L.P............ *
Financial Information of Burlington Northern Santa Fe Corporation........... **
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 6
Item 6. Exhibits and Reports on Form 8-K .................................. 6
Signature .................................................................. 7
</TABLE>
* Incorporated by reference from Part I of the Form 10-Q of Santa Fe Pacific
Pipeline Partners, L.P. for the quarter ended June 30, 1997 (Commission
File Number 1-10066)
** Incorporated by reference from Part I of the Form 10-Q of Burlington
Northern Santa Fe Corporation for the quarter ended June 30, 1997
(Commission File Number 1-11535)
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents....................................... $ 6,424 $ 3,061
Interest receivable............................................. 1,103 1,047
Other current assets............................................ 422 295
---------- ----------
Total current assets...................................... 7,949 4,403
Investment in Santa Fe Pacific Pipeline Partners, L.P............. 60,522 59,984
Notes receivable from Burlington Northern Santa Fe Corporation.... 130,000 130,000
Debt issuance costs, net.......................................... 6,356 6,597
Other assets...................................................... 2,923 2,701
---------- ----------
Total assets.............................................. $ 207,750 $203,685
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Interest payable................................................ $ 6,111 $ 6,111
Income taxes currently payable.................................. 502 848
Other current liabilities....................................... 7,770 4,981
---------- ----------
Total current liabilities................................. 14,383 11,940
Long-term debt, net of unamortized discount....................... 204,458 204,173
Deferred income taxes............................................. 57,732 58,042
Other liabilities................................................. 2,026 1,960
---------- ----------
Total liabilities......................................... 278,599 276,115
---------- ----------
Commitments and contingencies (Notes (e) and (f))................. -- --
---------- ----------
Stockholder's deficit.............................................
Common stock.................................................... 1 1
Additional paid-in capital...................................... (33,388) (33,388)
Accumulated deficit............................................. (37,462) (39,043)
---------- ----------
Total stockholder's deficit............................... (70,849) (72,430)
---------- ----------
Total liabilities and stockholder's deficit............... $ 207,750 $ 203,685
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity in income of
Santa Fe Pacific Pipelines Partners, L.P.......... $ 9,847 $ 9,479 $ 14,741 $ 16,864
General and administrative expenses
and other, net of reimbursements.................. 148 131 274 299
-------- -------- -------- --------
Operating income................................... 9,699 9,348 14,467 16,565
Interest income.................................... 2,210 2,185 4,329 4,383
Interest expense................................... 6,376 6,363 12,752 12,727
-------- -------- -------- --------
Income before income taxes......................... 5,533 5,170 6,044 8,221
Income taxes....................................... 2,255 2,106 2,463 3,349
-------- -------- -------- --------
Net income......................................... 3,278 3,064 3,581 4,872
Accumulated deficit................................
Beginning of period............................ (40,740) (34,678) (39,043) (36,486)
Cash dividends................................. -- (4,000) (2,000) (4,000)
-------- -------- -------- --------
End of period.................................. $(37,462) $(35,614) $(37,462) $(35,614)
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities: $ 3,278 $ 3,064 $ 3,581 $ 4,872
Net income............................................... -------- -------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities-
Equity in undistributed earnings of
Santa Fe Pacific Pipeline Partners, L.P............... (2,746) (2,377) (538) (2,660)
Deferred income taxes.................................. (284) (266) (310) (423)
Amortization of debt issuance costs
and original issue discount.......................... 264 252 526 502
Changes in:
Current assets........................................ (3) 259 (183) 249
Current liabilities................................... 1,337 1,355 2,443 1,856
Other assets and other liabilities.................... (78) (717) (156) (844)
-------- -------- -------- --------
Total adjustments.................................. (1,510) (1,494) 1,782 (1,320)
-------- -------- -------- --------
Net cash provided by operating activities.......... 1,768 1,570 5,363 3,552
Cash flows from investing activities....................... -- -- -- --
Cash flows from financing activities:
Cash dividends........................................... -- (4,000) (2,000) (4,000)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents........... 1,768 (2,430) 3,363 (448)
Cash and cash equivalents-
Beginning of period...................................... 4,656 9,872 3,061 7,890
-------- -------- -------- --------
End of period............................................ $ 6,424 $ 7,442 $ 6,424 $ 7,442
======== ======== ======== ========
Income taxes paid.......................................... $ 2,065 $ -- $ 3,120 $ --
======== ======== ======== ========
Interest paid.............................................. $ 6,114 $ 6,114 $ 12,225 $ 12,225
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The accompanying consolidated financial statements include the accounts of
SFP Pipeline Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Santa
Fe Pacific Pipelines, Inc. ("SFPPI") (collectively, the "Company"). Holdings is
a wholly owned subsidiary of Santa Fe Pacific Corporation ("Santa Fe") which
subsequent to a business combination in September 1995, Santa Fe is a wholly
owned subsidiary of Burlington Northern Santa Fe Corporation ("BNSF"). The
accompanying consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in its Annual Report on Form 10-K for the year ended December 31, 1996. In the
opinion of Company 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) SFPPI received distributions aggregating $14,203,000 during both the six-
month periods ended June 30, 1997 and 1996, by virtue of its general and limited
partner interests in Santa Fe Pacific Pipeline Partners, L.P. (the
"Partnership"). In July 1997, the Partnership declared second quarter 1997
distributions on SFPPI's general and limited partner interests aggregating
$7,102,000, payable in August 1997. Financial information with respect to the
Partnership is incorporated herein by reference from Part I of the Partnership's
Form 10-Q for the quarter ended June 30, 1997.
(c) The notes receivable from Burlington Northern Santa Fe Corporation ("BNSF")
are due and payable upon the maturity of the Company's Variable Rate
Exchangeable Debentures (the "Debentures"), but are payable at any time prior to
that date to the extent, and only to the extent, that Holdings' board of
directors determines in good faith that payment is needed, after taking into
account all other available funds, for Holdings to meet its obligations with
respect to the Debentures. BNSF assumed the obligations associated with these
notes from Santa Fe in January 1997. Financial information with respect to BNSF
is incorporated herein by reference from BNSF's Form 10-Q for the quarter ended
June 30, 1997.
(d) The Debentures bear interest at a variable rate, payable quarterly in
arrears. Interest expense for each quarter is generally recorded in an amount
equal to the aggregate amount of distributions declared by the Partnership for
that quarter on the 8,148,130 common units for which the Debentures would be
exchangeable. The Partnership declared cash distributions of $0.75 per unit for
the second quarter of 1997, and, accordingly, the Company accrued interest
expense of $6,111,000 for the three months ended June 30, 1997. Interest expense
reflected in the consolidated statement of operations also includes amortization
of the original issue discount and debt issuance costs for the Debentures.
(e) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, certain of the Partnership's shippers have
filed civil suits and initiated Federal Energy Regulatory Commission ("FERC")
complaint proceedings against the Partnership, and the Partnership has
established reserves for costs related to the resolution of these matters.
In June 1997, the Partnership entered into agreements with two of the
complainants, Chevron U.S.A. Products Company and Tosco Corporation, to settle
their claims in the FERC proceedings by
-4-
<PAGE>
making certain reparations and settlement payments to these parties over five
years and establishing lower prospective rates for certain East and West Line
interstate movements. The agreements, which are to be filed as a comprehensive
offer of settlement, are subject to the approval of the FERC. While the proposed
rate reductions would have a material adverse effect on the Partnership's and
the Company's results of operations, management does not believe that the terms
of this comprehensive offer of settlement, should it be approved and applied to
all of the complainants, would have a material adverse effect on the
Partnership's and the Company's financial condition or liquidity or the
Partnership's ability to maintain its quarterly cash distribution at the current
level.
While the Partnership believes it has meritorious defenses in the FERC
proceedings, the complainants are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with the FERC rate-making methodology, management
cannot predict with certainty either whether the proposed comprehensive offer of
settlement will be approved by FERC or the ultimate outcome of the FERC
proceedings. 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 and the Company's results of operations, financial
condition and liquidity and the Partnership's ability to maintain its quarterly
cash distribution at the current level.
In the remaining civil action, brought by El Paso Refinery, L.P. ("El Paso") and
its general partner, El Paso Refining, Inc. ("EPRI"), the Partnership has
entered into an agreement with the El Paso bankruptcy trustee to settle all of
the claims raised by El Paso and its general partner. The agreement was approved
by the bankruptcy court in April 1997 and, in July 1997, the time for any
further appeals expired, and the orders of the bankruptcy court became final. As
the amount of the settlement exceeded the amount that had previously been
reserved for this matter, the Partnership recorded a provision of $6 million to
reflect this settlement during the first quarter of 1997. Under the terms of the
settlement agreement, two equal installments of $8.0 million are payable by the
Partnership in September 1997 and June 1998.
(f) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, 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 discussion of environmental matters appearing at Note
(e) to the Partnership's consolidated financial statements for the quarter ended
June 30, 1997 is incorporated herein by reference from the Partnership's Form
10-Q for that quarter.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS
As the principal assets of the Company are its investment in the Partnership and
its notes receivable from BNSF, the following analysis should be read in
conjunction with the Part I financial information filed by the Partnership and
BNSF in their respective Quarterly Reports on Form 10-Q for the quarter ended
June 30, 1997, both of which are incorporated herein by reference.
-5-
<PAGE>
For the six months ended June 30, 1997, the Company's equity in income of the
Partnership of $16.9 million was $2.1 million, or approximately 13%, lower than
in the 1996 period. The Partnership's results of operations included a provision
for litigation costs of $6.0 million recorded during the first quarter of 1997.
Excluding this provision, the Partnership's adjusted net income for the six
months ended June 30, 1997 was $36.6 million compared to net income of $35.3
million in the 1996 period. Total Partnership revenues of $119.4 million were
$2.1 million, or approximately 2%, above the 1996 period, primarily due to an
increase in total volumes transported. Partnership operating expenses of $71.1
million were $7.5 million higher than in the first six months of 1996. Excluding
the provision described above, operating expenses would have been $65.1 million,
2% higher than in 1996 period, with higher field operating expenses being offset
by lower general and administrative expenses, facilities costs and power costs.
The Partnership's other income, net increased by $0.6 million as compared with
the 1996 period primarily due to interest income received from property tax
refunds.
The Company's interest income is earned on its notes receivable from BNSF
bearing interest at rates tied to the Federal Funds rate. Interest expense is
accrued based on the quarterly distribution paid on the 8,148,130 Partnership
units for which the Company's Debentures are, under certain specified
conditions, exchangeable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the discussion of the current status of certain litigation
appearing at "Part II, Item 1. Legal Proceedings" in the Partnership's Form 10-Q
for the quarter ended June 30, 1997, which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
Exhibit 13.1 Form 10-Q of Santa Fe Pacific Pipeline Partners, L.P. for
the quarter ended June 30, 1997.
Exhibit 13.2 Form 10-Q of Burlington Northern Santa Fe Corporation for
the quarter ended June 30, 1997 to be filed by
amendment.
Exhibit 27 Financial Data Schedule as of and for the six months ended
June 30, 1997.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997: None.
-6-
<PAGE>
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.
SFP PIPELINE HOLDING, INC
(Registrant)
Date: August 13, 1997 By: /s/ BARRY R. PEARL
-----------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the Registrant)
-7-
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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 officers, 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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<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1997 and December 31, 1996........... 1
Consolidated Statement of Income
for the three-month and six-month periods ended June 30, 1997 and 1996.... 2
Consolidated Statement of Cash Flows
for the three-month and six-month periods ended June 30, 1997 and 1996.... 3
Notes to Consolidated Financial Statements.................................. 4
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations........................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 7
Item 6. Exhibits and Reports on Form 8-K........................................ 9
Signature........................................................................ 9
</TABLE>
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 37,481 $ 42,122
Short-term investments.............................. 4,696 -
Accounts receivable, net............................ 37,843 33,563
Other current assets................................ 5,506 2,224
-------- ---------
Total current assets............................ 85,526 77,909
-------- --------
Properties, plant and equipment....................... 739,239 738,395
Less accumulated depreciation....................... 114,627 109,701
-------- --------
Net properties, plant and equipment............. 624,612 628,694
Other assets.......................................... 19,352 19,215
-------- --------
Total assets.................................... $729,490 $725,818
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable.................................... $ 3,530 $ 3,212
Accrued liabilities................................. 41,589 32,333
-------- --------
Total current liabilities........................ 45,119 35,545
Long-term debt......................................... 355,000 355,000
Other long-term liabilities............................ 64,285 71,351
-------- --------
Total liabilities................................ 464,404 461,896
-------- --------
Minority interest...................................... 1,045 1,007
-------- --------
Commitments and contingencies (Notes (d) and (e))...... - -
-------- --------
Partners' capital
General partner..................................... 1,045 1,007
Limited partners.................................... 262,996 261,908
-------- --------
Total partners' capital......................... 264,041 262,915
-------- --------
Total liabilities and partners' capital......... $729,490 $725,818
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per unit amounts)
<TABLE>
<CAPTION>
Three months Six Months
ended June 30, ended June 30,
----------------- ----------------
1997 1996 1997 1996
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Operating revenues
Trunk revenues................................. $49,809 $47,881 $ 93,984 $ 92,400
Storage and terminaling revenues............... 10,052 9,711 19,041 18,675
Other revenues................................. 3,498 3,203 6,424 6,316
------- ------- -------- --------
Total operating revenues.................. 63,359 60,795 119,449 117,391
------- ------- -------- --------
Operating expenses
Field operating expenses....................... 12,700 8,303 23,383 17,493
General and administrative expenses............ 6,287 8,443 12,626 15,358
Depreciation and amortization.................. 5,371 5,321 10,710 10,642
Power costs.................................... 4,969 5,023 9,449 9,697
Facilities costs............................... 4,355 4,557 8,947 10,387
Provision for litigation costs (Note (d))...... - - 6,000 -
------- ------- -------- --------
Total operating expenses.................. 33,682 31,647 71,115 63,577
------- ------- -------- --------
Operating income.................................. 29,677 29,148 48,334 53,814
Interest expense.................................. 9,017 9,080 17,851 18,162
Other income, net................................. 629 426 1,384 805
------- ------- -------- --------
Net income before minority interest............... 21,289 20,494 31,867 36,457
Less minority interest in net income.............. (687) (661) (1,028) (1,176)
------- ------- -------- --------
Net income........................................ $20,602 $19,833 $ 30,839 $ 35,281
======= ======= ======== ========
Income per unit................................... $ 1.04 $ 1.00 $ 1.56 $ 1.78
======= ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------- ----------------------
1997 1996 1997 1996
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 20,602 $ 19,833 $ 30,839 $ 35,281
-------- -------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization....................... 5,371 5,321 10,710 10,642
Minority interest in net income..................... 687 661 1,028 1,176
Net additions to (payments against) environmental
and litigation reserves............................ (4,838) (2,961) 431 (8,018)
Other, net.......................................... 533 (505) 786 (1,926)
Changes in:
Short-term investments............................ (4,696) - (4,696) -
Accounts receivable............................... (1,037) (3,043) (4,280) (2,888)
Accounts payable and accrued liabilities.......... (7,475) (9,600) 1,572 (36)
Other current assets.............................. 1,285 2,183 (3,282) (2,837)
-------- -------- -------- --------
Total adjustments.............................. (10,170) (7,944) 2,269 (3,887)
-------- -------- -------- --------
Net cash provided by operating activities...... 10,432 11,889 33,108 31,394
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures................................ (3,444) (5,107) (7,045) (14,638)
Cash flows from financing activities:
Cash distributions.................................. (15,352) (15,352) (30,704) (30,704)
-------- -------- -------- --------
Decrease in cash and cash equivalents................. (8,364) (8,570) (4,641) (13,948)
Cash and cash equivalents --
Beginning of period................................. 45,845 35,841 42,122 41,219
-------- -------- -------- --------
End of period....................................... $ 37,481 $ 27,271 $ 37,481 $ 27,271
======== ======== ======== ========
Interest paid......................................... $ 16,953 $ 17,703 $ 17,723 $ 18,150
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
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, 1996. 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 for the three-month periods
ended June 30, 1997 and 1996, respectively, is based on its percentage of cash
distributions from available cash at the end of each quarter.
(c) On July 10, 1997, the Partnership declared a cash distribution of $0.75 per
unit for the second quarter of 1997, to be paid on August 14, 1997 to
unitholders of record on July 31, 1997.
(d) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, 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 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 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.
In June 1997, the Partnership entered into agreements with two of the
complainants, Chevron U.S.A. Products Company and Tosco Corporation, to settle
their claims in the FERC proceedings by making certain reparations and settle-
ment payments to these parties over five years and establishing lower
prospective rates for certain East and West Line interstate movements. The
agreements, which are to be filed as a comprehensive offer of settlement, are
subject to the approval of the FERC. While the proposed rate reductions would
have a material adverse effect on the Partnership's results of operations,
management does not believe that the terms of this comprehensive offer of
settlement, should it be approved and applied to all of the complainants, would
have a material adverse effect on the Partnership's financial condition,
liquidity and ability to maintain its quarterly cash distribution at the current
level.
While the Partnership believes it has meritorious defenses in the FERC
proceedings, the complainants are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with the FERC rate-making methodology, management
cannot predict with certainty either whether the proposed comprehensive offer of
settlement will be approved by FERC or the ultimate outcome of the FERC
proceedings. As additional information becomes available,
-4-
<PAGE>
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,
liquidity and ability to maintain its quarterly cash distribution at the current
level.
In the remaining civil action, brought by El Paso Refinery, L.P. ("El Paso") and
its general partner, El Paso Refining, Inc. ("EPRI"), the Partnership has
entered into an agreement with the El Paso bankruptcy trustee to settle all of
the claims raised by El Paso and its general partner. The agreement was approved
by the bankruptcy court in April 1997 and, in July 1997, the time for any
further appeals expired, and the orders of the bankruptcy court became final. As
the amount of the settlement exceeded the amount that had previously been
reserved for this matter, the Partnership recorded a provision of $6 million to
reflect this settlement during the first quarter of 1997. Under the terms of the
settlement agreement, two equal installments of $8.0 million are payable by the
Partnership in September 1997 and June 1998.
(e) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, 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, 1997 Compared to 1996 Period
The Partnership reported net income for the three months ended June 30, 1997 of
$20.6 million, compared to net income of $19.8 million in the 1996 quarter.
Revenues for the second quarter of 1997 of $63.4 million were $2.6 million, or
4%, above the corresponding 1996 quarter's level. Trunk revenues were $1.9
million higher than in the 1996 period due to higher volumes. Total volumes
transported increased 5% compared to the 1996 period. Commercial volumes were
higher than in the
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<PAGE>
1996 quarter due to abnormally low product inventory levels at the end of the
first quarter which contributed to the second quarter's strong volume
performance. Military volumes were 16% below the 1996 quarter primarily due to a
change in the military's supply source from the San Francisco Bay Area to the
Pacific Northwest for certain bases and reduced military activity.
Operating expenses of $33.7 million were $2.0 million, or 6%, higher than in the
1996 quarter with higher field operating expenses ($4.4 million) being partially
offset by lower general and administrative expenses ($2.2 million) and
facilities costs ($0.2 million). The increase in field operating expenses is
primarily attributable to higher environmental costs and pipeline and tank
maintenance costs, partially offset by reductions in certain other field costs.
General and administrative expenses decreased largely due to lower outside legal
costs partially offset by higher employee benefit costs. Facilities costs
decreased due primarily to lower right-of-way rental costs.
Other income, net increased by $0.2 million compared to the 1996 period
primarily due to interest income received from property tax refunds.
Six Months Ended June 30, 1997 Compared to 1996 Period
The Partnership reported net income for the six months ended June 30, 1997 of
$30.8 million, compared to net income of $35.3 million in the prior year period,
with the variance being primarily due to a $6.0 million provision for litigation
costs recorded during the first quarter of 1997. Excluding the provision,
adjusted net income for the six months ended June 30, 1997 was $36.6 million.
Revenues of $119.4 million were $2.1 million, or approximately 2%, above the
1996 period. Trunk revenues were $1.6 million higher than in 1996 due to higher
volumes. Total volumes transported increased 2% compared to the 1996 period,
with commercial volumes 3% higher and military volumes about 20% lower than in
1996 primarily due to the change in the military's supply source from the San
Francisco Bay Area to the Pacific Northwest for certain bases, reduced military
activity and curtailed activity related to weather during the first quarter of
1997.
Operating expenses of $71.1 million were $7.5 million higher than in the 1996
period, due largely to the provision for litigation costs. Excluding the
provision, operating expenses would have been $1.5 million, or 2.4% higher than
in 1996, with higher field operating expenses ($5.9 million) being partially
offset by lower general and administrative expenses ($2.7 million), facilities
costs ($1.4 million), and power costs ($0.2 million). The increase in field
operating expenses is primarily attributable to higher environmental costs and
pipeline and tank maintenance costs, partially offset by reductions in certain
other field costs. General and administrative expenses decreased largely due to
lower outside legal costs. Facilities costs decreased due primarily to property
tax refunds and lower right-of-way rental costs. The decrease in power costs is
primarily due to reduced use of drag reducing agent.
Other income, net increased by $0.6 million compared to the 1996 period
primarily due to interest income received from property tax refunds.
Financial Condition
For the six months ended June 30, 1997, cash and cash equivalents decreased by
$4.6 million. Cash flow from operations before working capital changes totaled
$43.8 million for the six months, an increase of $6.6 million from the prior
year period due primarily to payment of settlement costs related
-6-
<PAGE>
to the Sparks, Nevada environmental site and deferred right-of-way lease
negotiation costs in 1996. Working capital cash requirements increased by $4.9
million from the corresponding 1996 period, primarily due to the purchase of
noncash short-term investments of $4.7 million, timing differences in the
collection of trade and nontrade receivables and payment of accrued obligations.
Significant uses of cash included cash distributions of $30.7 million and
capital expenditures of $7.0 million. Total capital expenditures for 1997 are
projected at approximately $28 million. Total cash and cash equivalents of $37.5
million at June 30, 1997 included $15.4 million for the second quarter 1997
distribution to be paid to unitholders in August 1997.
Long-term debt aggregated $355 million at June 30, 1997 and consisted of $305
million of First Mortgage Notes (the "Notes") and a $50 million borrowing under
the Partnership's bank term credit facility. The Partnership intends to
refinance some or all of the remaining Notes as the various series become
payable. To facilitate such refinancing and provide for additional financial
flexibility, the Partnership extended and expanded it's multi-year credit
facility to an aggregate borrowing limit of $175 million in August 1997.
Other Matters
Reference is made to Notes (d) and (e) 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 FERC
proceedings, El Paso civil litigation and certain environmental matters.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 in the Partnership's 1996 Annual Report on Form 10-K
for background information on certain litigation.
FERC Proceedings
As of June 25, 1997, the Partnership had reached agreements with two of the
complainants, Chevron U.S.A. Products Company and Tosco Corporation, to settle
their claims in the FERC proceedings. Those proceedings have been pending since
September 1992. The agreements which are to be filed with the FERC as a
comprehensive offer of settlement, are subject to the approval of the FERC.
Details of the terms of the agreements will be disclosed when filed with the
FERC. Broad based settlement discussions are continuing, but to date agreement
has not been reached with the remaining complainants.
In a separate proceeding at the FERC, Texaco Refining and Marketing, et al. vs
-----
SFPP, L.P., involving the issue of jurisdiction of the Partnership's pipelines
upstream of its Watson, California station origin point, the FERC, on appeal by
the complainants, in a decision issued August 5, 1997, reversed the March 28,
1997 decision of the Administrative Law Judge and found the Partnership's
pipelines at
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<PAGE>
issue to be subject to the jurisdiction of the FERC. The Partnership was ordered
to make a tariff filing within 60 days to establish an initial interstate rate
for these facilities.
East Line Civil Litigation
Settlement of the remaining civil action, brought by El Paso Refinery, L.P. ("El
Paso"), and its general partner, El Paso Refining, Inc. ("EPRI"), has been
finalized. On February 25, 1997, the Partnership entered into an agreement with
the El Paso bankruptcy trustee, which, subject to the approval of the bankruptcy
court, would settle all claims raised by El Paso and EPRI in exchange for the
payment of $16 million by the Partnership in two equal installments. On April
21, 1997, the bankruptcy court approved the settlement, but EPRI filed a notice
of appeal of the order imposing the settlement on EPRI. On July 16, 1997, the
bankruptcy court approved a settlement between El Paso and EPRI, which resulted
in EPRI withdrawing its appeal. On July 27, 1997, the time for any further
appeals expired, and the orders of the bankruptcy court became final. Under the
terms of the settlement agreement, two equal installments of $8.0 million are
payable by the Partnership in September 1997 and June 1998.
California Public Utilities Commission Proceeding
A complaint was filed with the California Public Utilities Commission on April
7, 1997 entitled ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. vs. SFPP, L.P. The complaint challenges rates
charged by the Partnership for transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. A procedural schedule has been established with hearings
before the Administrative Law Judge scheduled in mid-January 1998. Management
believes the Partnership has substantial defenses against the claims raised in
the complaint and intends to litigate this matter vigorously.
Other
With respect to the judicial reference proceeding to determine the rent payable
by the Partnership for the use of pipeline easements on rights-of-way held by
Southern Pacific Transportation Company ("SPTC"), the judge issued a Statement
of Decision and Judgment on May 7, 1997 that reaffirmed the conclusions set
forth in his January 1997 Statement of Tentative Decision. This Statement of
Decision and Judgment was filed on June 30, 1997 with the Superior Court for the
County of San Francisco, under which court's jurisdiction it is subject to
appeal by SPTC. On May 30, 1997, SPTC filed a motion for a new trial and the
motion was denied on June 26, 1997. SPTC filed a Motion of Appeal on July 21,
1997.
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, 1997.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997: None
-8-
<PAGE>
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, 1997 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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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SFP PIPELINE HOLDINGS, INC. AS OF AND FOR
THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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