<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission file number 1-10934
LAKEHEAD PIPE LINE PARTNERS, L.P.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1715850
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LAKE SUPERIOR PLACE
21 WEST SUPERIOR STREET
DULUTH, MN 55802-2067
(Address of principal executive offices and zip code)
(218) 725-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The Registrant had 20,090,000 Preference Units outstanding as at May 1, 1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAKEHEAD PIPE LINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three months ended
March 31,
(unaudited; dollars in millions, except per unit amounts) 1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Operating Revenue (Note 3) $ 68.0 $ 64.9
----------------------------------------------------------------------------
Expenses
Power 16.5 16.1
Operating and administrative 16.3 16.2
Depreciation 9.9 9.5
Provision for prior years' rate refunds 22.9
----------------------------------------------------------------------------
42.7 64.7
----------------------------------------------------------------------------
Operating Income 25.3 0.2
Interest Income 2.2 1.5
Interest Expense (10.6) (11.1)
Minority Interest (0.2) 0.1
----------------------------------------------------------------------------
Net Income (Loss) (Note 3) $ 16.7 $ (9.3)
============================================================================
Net Income (Loss) Per Unit (Note 2) $ 0.68 $(0.39)
============================================================================
Cash Distributions Paid Per Unit $ 0.64 $ 0.64
============================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE> 3
LAKEHEAD PIPE LINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
(unaudited; dollars in millions) 1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 16.7 $ (9.3)
Adjustments to reconcile net income (loss) to
cash provided from operating activities:
Depreciation 9.9 9.5
Accrued rate refunds and related interest (Note 3) 5.5 29.9
Other 0.5 (0.1)
Changes in operating assets and liabilities:
Accounts receivable and other current assets (2.6) 2.4
Materials and supplies - (0.1)
Due to General Partner 1.0 (0.4)
Accounts payable and accrued liabilities (1.5) (13.5)
Interest payable 7.2 7.1
Property and other taxes 2.0 2.1
--------------------------------------------------------------------------
38.7 27.6
--------------------------------------------------------------------------
Investing Activities
Additions to property, plant and equipment (5.5) (3.8)
Short-term investments, net (13.0) (25.4)
--------------------------------------------------------------------------
(18.5) (29.2)
--------------------------------------------------------------------------
Financing Activities
Distributions to partners (15.7) (15.7)
Minority interest (0.2) (0.2)
--------------------------------------------------------------------------
(15.9) (15.9)
--------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents(1) 4.3 (17.5)
Cash and Cash Equivalents at Beginning of Period 77.0 42.0
--------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 81.3 $ 24.5
==========================================================================
</TABLE>
(1) Cash equivalents are defined as all highly marketable securities with a
maturity of three months or less when purchased. Short-term investments
are those marketable securities which have a maturity of more than three
months when purchased.
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
LAKEHEAD PIPE LINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
(unaudited, except for December 31, 1995; dollars in millions) 1996 1995
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 81.3 $ 77.0
Short-term investments 88.7 75.7
Accounts receivable and other current assets 29.1 26.5
Materials and supplies 5.4 5.4
- - ------------------------------------------------------------------------------------------------
204.5 184.6
- - ------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets 5.2 5.5
- - ------------------------------------------------------------------------------------------------
Property, Plant and Equipment
At cost 814.4 808.8
Accumulated depreciation (93.7) (83.7)
- - ------------------------------------------------------------------------------------------------
720.7 725.1
- - ------------------------------------------------------------------------------------------------
$ 930.4 $ 915.2
================================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Due to General Partner $ 2.3 $ 1.3
Accounts payable and accrued liabilities 11.7 13.2
Interest payable 9.7 2.5
Property and other taxes 14.2 12.2
Accrued rate refunds and related interest (Note 3) 84.0 78.5
- - ------------------------------------------------------------------------------------------------
121.9 107.7
Long-Term Debt 395.0 395.0
Minority Interest 1.4 1.4
Contingencies (Note 4)
- - ------------------------------------------------------------------------------------------------
518.3 504.1
- - ------------------------------------------------------------------------------------------------
Partners' Capital
General Partner 1.6 1.5
Common Unitholder (units issued - 3,912,750) 22.3 21.7
Preference Unitholders (units issued - 20,090,000) 388.2 387.9
- - ------------------------------------------------------------------------------------------------
412.1 411.1
- - ------------------------------------------------------------------------------------------------
$ 930.4 $ 915.2
================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
LAKEHEAD PIPE LINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(unaudited, except for December 31, 1995; General Common Preference
dollars in millions) Partner Unitholder Unitholders Total
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Partners' Capital at December 31, 1995 $ 1.5 $ 21.7 $387.9 $411.1
Net Income Allocation 0.4 3.1 13.2 16.7
Distributions to Partners (0.3) (2.5) (12.9) (15.7)
- - ---------------------------------------------------------------------------------------------
Partners' Capital at March 31, 1996 $ 1.6 $ 22.3 $388.2 $412.1
=============================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
they contain all adjustments, consisting of normal recurring adjustments, and
a non-recurring adjustment to the first quarter of 1995 to reflect a 1995
Federal Energy Regulatory Commission ("FERC") decision, which management
considers necessary to present fairly the financial position as at March 31,
1996 and December 31, 1995; the results of operations for the three month
periods ended March 31, 1996 and 1995; and cash flows for the three month
periods ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 should not be taken as directly indicative
of the results to be expected for the full year. The interim financial
statements should be read in conjunction with the Partnership's consolidated
financial statements and notes thereto presented in the Partnership's 1995
Annual Report on Form 10-K. Certain comparative amounts are reclassified to
conform with the current year's financial statement presentation.
2. Net Income Per Unit
Net income per unit is computed on the number of outstanding Preference and
Common Units. The General Partner's allocation of net income has been
deducted before calculating net income per unit.
3. Accrued Rate Refunds and Related Interest
In 1995, the FERC issued a decision on a 1992 tariff rate increase filed by
the Partnership. A 1995 negotiated settlement between the Partnership and
representatives of its customers on 1993 and 1994 tariff rate increases was
also impacted by the decision. Although a number of issues were decided
consistent with
5
<PAGE> 6
the Partnership's position, the decision disallowed a portion of the income
tax allowance included in cost of service. The General Partner disagrees
with this aspect of the decision, and has petitioned the FERC for
rehearing. It is anticipated that the FERC will respond to this petition in
the near future. Judicial review could be sought of any final FERC decision.
If the 1995 FERC decision is upheld, the General Partner believes the
Partnership has sufficient cash liquidity to make refunds to customers and
maintain current cash distribution levels.
Through March 31, 1996 the Partnership has accrued rate refunds and related
interest of $84.0 million (includes interest of $12.2 million), which
reflects the 1995 negotiated settlement and the impact of the 1995 FERC
decision on all rates charged since the May 1992 increase. Of this amount,
$5.5 million (includes interest of $1.7 million) has been accrued in 1996,
with accrued rate refunds deducted from operating revenue and interest
reflected in interest expense. Amounts to be ultimately refunded are subject
to FERC review and approval. Results for the first quarter of 1995 were
restated to reflect the rate refunds and related interest accrued in response
to the 1995 FERC decision which were related to 1995's first quarter and
prior years. Net income for the first quarter of 1995 was therefore reduced
by $28.0 million, or $1.15 per unit.
4. Contingencies
Tariff Rate Refunds
Representatives of the Partnership's customers have also petitioned for
rehearing of the 1995 FERC decision, challenging parts that were consistent
with the Partnership's position. They disagree with the FERC's conclusions
that the Partnership is entitled to use the trended original cost
methodology, that the Partnership is entitled to a starting, or transition,
rate base and that refunds are limited to the Partnership's rates in effect
immediately preceding the May 1992 increase. In addition, they have sought
clarification of the tax allowance ruling, seeking to reduce further the tax
allowance recoverable in the Partnership's rates. Both the trended original
cost methodology and the application of a starting, or transition, rate base
are components of an industry-wide regulatory methodology employed by the
FERC since 1985. If the FERC were to reverse its position on those portions
of the decision, or if the FERC's position on those issues were not upheld
upon judicial review, it would have a material adverse effect on the
Partnership and its ability to make distributions to Unitholders. Such an
outcome could be expected to have significant industry-wide financial
ramifications. The General Partner will continue to vigorously oppose,
through judicial means if necessary, these assertions by customer
representatives. The ultimate outcome of the rehearing, or any judicial
appeals thereof, cannot be predicted with certainty at this time.
Environment
The Partnership is subject to federal and state laws and regulations relating
to the protection of the environment. Environmental risk is inherent to
liquid pipeline operations and the Partnership could, at times, be subject to
environmental cleanup and enforcement actions. The General Partner manages
this environmental risk, through appropriate environmental policies and
practices, to minimize the impact to the Partnership. To the extent that
environmental costs are normal costs of doing business, the Partnership may
recover these costs through its tariff rates. To the extent that the
Partnership is unable to recover environmental costs in its rates or through
insurance, the General Partner has agreed to indemnify the Partnership from
and against any costs relating to environmental liabilities associated with
the Lakehead System prior to its transfer to the Partnership in 1991. This
excludes any liabilities resulting from a change in laws after such transfer.
The Partnership continues to voluntarily investigate past leak sites for the
purpose of assessing whether any remediation is required in light of current
regulations, and to date no material environmental risks have been
identified.
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<PAGE> 7
5. Cash Distribution
On April 16, 1996, the Board of Directors of the General Partner declared a
cash distribution for the quarter ended March 31, 1996 of $0.64 per unit. The
distribution will be made on May 15, 1996 to unitholders of record April 30,
1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First quarter net income reflects the strong operational performance of the
Partnership, and was $16.7 million, or $0.68 per unit, an increase of $1.9
million, or $0.07 per unit, over the "recalculated" net income for 1995's first
quarter. The 1995 period included provisions for prior years' rate refunds
($22.9 million) and related interest ($1.5 million) recorded to reflect the
prior years' impact on the Partnership of the June 1995 FERC decision (see
Notes 3 and 4 to the Consolidated Financial Statements). Excluding these
provisions, recalculated net income for the first quarter of 1995 was $14.8
million, or $0.61 per unit. Net income for the first quarter of 1996 was
higher than 1995's recalculated amount largely due to higher operating revenue.
Operating revenue was $3.1 million, or 5%, greater than last year, primarily
due to the transportation of greater volumes. Deliveries averaged 1,445,000
barrels per day in the first quarter of 1996, up 5% over 1995's first quarter
which was impacted by internal pipeline testing on portions of the system in
February and March of last year. System utilization, measured in barrel miles,
increased only 2% over 1995's first quarter, reflecting a higher proportion of
shorter haul deliveries to the significant Minneapolis and Chicago area
markets. Increased deliveries of heavy crude oil over the first quarter of
1995 (up 32% to 431,000 barrels per day) also positively impacted operating
revenue. Due to its higher viscosity, which requires more horsepower to pump,
the tariff rate for heavier crude oil is greater than that for lighter crude
oils. The Partnership's current tariff rate for heavy crude oil deliveries to
the Chicago area is approximately 10% to 18% greater than that for lighter
crude oils.
Excluding the provision for prior years' rate refunds ($22.9 million) from
1995, total first quarter operating expenses increased $0.9 million over the
same period of last year primarily due to higher power costs and depreciation.
Higher power costs resulted from increased volumes and the transportation of
greater amounts of heavy crude oil, partially offset by efficiencies gained
from the Partnership's ongoing power cost management initiative. Higher
depreciation corresponded to the growth in property, plant and equipment.
Interest income increased due to higher investment balances. Interest expense,
excluding the provision for interest on prior years' rate refunds ($1.5
million) in 1995, increased $1.0 million due to higher balances with respect to
accrued rate refunds and borrowings under the Partnership's revolving credit
and term loan facility ("Credit Facility"). Borrowings made to fund 1995
capital expenditures which enhanced the service capability of the Partnership's
system led to higher borrowings under the Credit Facility.
The results of the first quarter should not be taken as an indication of
expected results for the full year as they reflect lower levels of repair and
maintenance activities due to the timing of such programs. Repair and
maintenance activities impact operating costs as well as system utilization as
a portion of the system may temporarily be taken out of service during the
activity. In addition, 1996 net income is expected to be impacted by
hydrostatic testing on the Interprovincial Pipe Line System in Canada (see
"Liquidity and Capital Resources").
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, cash, cash equivalents and short-term investments totaled
$170.0 million, up $17.3 million since December 31, 1995, as cash generated
from operating activities exceeded cash required for distributions and capital
expenditures. Of this $170.0 million, $84.0 million was set aside for accrued
rate refunds and related interest, $15.9 million ($0.64 per unit) for the cash
distribution payable May 15, 1996 and $8.1 million for interest payments, with
the remaining $62.0 million available for capital expenditures, distributions
or other business needs.
Cash flow from operating activities totaled $38.7 million for the three months
ended March 31, 1996, an increase of $11.1 million from the corresponding 1995
period. This was primarily due to higher operating revenue and lower working
capital cash requirements. Working capital cash requirements for the first
quarter of 1996 were lower than 1995's first quarter, as there were higher
payments last year for obligations accrued in the prior year.
Capital expenditures to March 31, 1996 totaled $5.5 million, and are expected
to total approximately $80 million for the entire year. The majority of this
year's anticipated capital expenditures are for the Partnership's 1996 system
expansion. As outlined in the Partnership's 1995 Annual Report on Form 10-K,
this expansion, which is expected to be operational by the end of 1996, will
increase delivery capacity into Chicago area markets by up to 120,000 barrels
per day at a cost of approximately $65 million. Approximately 40,000 barrels
per day of this added capacity will be required to offset the effects of moving
increased volumes of heavy crude oil, which can lower system delivery
capability. 1996 capital expenditures are expected to be financed with
internally-generated cash or borrowed funds.
The Partnership has a Credit Facility of $205.0 million. At March 31, 1996,
$85.0 million of the Credit Facility was utilized by the Partnership.
Interprovincial Pipe Line Inc. ("Interprovincial") filed a pipeline integrity
plan with the National Energy Board of Canada ("NEB") in March 1996 following a
line break on the Canadian portion of Line 3. The pipeline integrity plan
includes hydrostatic testing on portions of the affected line. Although
testing and related costs will be paid by Interprovincial, Partnership
deliveries will be impacted during the period of testing. While the full
impact of this testing program on Partnership deliveries, and correspondingly
net income, is not determinable at this time, the General Partner believes that
it will not have a material adverse impact on the Partnership.
The Partnership's net income, liquidity and capital resources will remain
sensitive to the full resolution of its rate cases. The outcome of any
rehearing by FERC will not completely eliminate the uncertainty surrounding the
Partnership's rates, as judicial review of the FERC's decision may be sought by
the Partnership or representatives of its customers.
OTHER MATTERS
The Partnership continues to evaluate an additional expansion proposed by
Interprovincial and the General Partner in January 1996. As reported in the
Partnership's 1995 Annual Report on Form 10-K, this $400 million system-wide
expansion includes approximately $300 million of expenditures in the U.S., and
would increase delivery capacity by approximately 170,000 barrels per day to
important U.S. Midwest markets. It is anticipated that this proposed expansion
would be financed with existing cash, borrowings or the proceeds from
additional equity offerings.
The NEB is expected to commence its review of Interprovincial's application for
approval of this additional expansion in Canada in June 1996.
Interprovincial's application anticipates commencement of construction
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in 1997 and an in-service date in 1998. As discussed in the Partnership's 1995
Annual Report on Form 10-K, Express Pipeline submitted a competing proposal to
the NEB for a 170,000 barrel per day pipeline to carry western Canadian crude
oil to the Wood River, Illinois market area as well as the U.S. Rocky Mountain
region. The NEB has completed its review of the application submitted by
Express Pipeline Ltd., and a decision on that application is pending.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership's tariff filings are currently under regulatory review and may
be subject to further regulatory and judicial review. For additional
information, reference should be made to Notes 3 and 4 (Tariff Rate Refunds) of
the Notes to the Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule as of and for the three months ended
March 31, 1996.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAKEHEAD PIPE LINE PARTNERS, L.P.
(Registrant)
By: Lakehead Pipe Line Company, Inc.
as General Partner
/s/R. L. Nichols
-----------------------------------------------
R. L. Nichols
Vice President and Controller
(Principal Financial and
Accounting Officer)
May 1, 1996
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 81,300,000
<SECURITIES> 88,700,000
<RECEIVABLES> 29,100,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 204,500,000
<PP&E> 814,400,000
<DEPRECIATION> 93,700,000
<TOTAL-ASSETS> 930,400,000
<CURRENT-LIABILITIES> 121,900,000
<BONDS> 395,000,000
<COMMON> 0
0
0
<OTHER-SE> 412,100,000
<TOTAL-LIABILITY-AND-EQUITY> 930,400,000
<SALES> 0
<TOTAL-REVENUES> 68,000,000
<CGS> 0
<TOTAL-COSTS> 42,700,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,600,000
<INCOME-PRETAX> 16,700,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,700,000
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0
</TABLE>
