<PAGE> 1
================================================================================
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 September 30, 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 No. 1-11680
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Exact name of Registrant as specified in its charter)
Delaware 76-0396023
(State of Organization) (I.R.S. Employer
Identification No.)
600 Travis
Suite 7200
Houston, Texas 77002
(Address of principal executive offices, including zip code)
(713) 224-7400
(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 twelve 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
----- ------
================================================================================
<PAGE> 2
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of September 30, 1996
(unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statement of Operations for the
Three and Nine Months Ended September 30, 1996 and 1995, respectively . . . 4
Unaudited Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . 5
Consolidated Statement of Partners' Capital for the Nine Months
Ended September 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Legal Proceedings
Changes in Securities
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- --------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,213 15,506
Accounts receivable 8,949 2,795
Accounts receivable from affiliates 8,232 6,595
Other current assets 708 762
----------- -----------
Total current assets 27,102 25,658
----------- -----------
Equity investments 118,788 82,441
Property, plant and equipment:
Pipelines 144,791 181,551
Platforms and facilities 73,924 71,586
Oil and gas properties, at cost, using
successful efforts method 99,081 47,993
----------- -----------
317,796 301,130
Less accumulated depreciation and depletion 34,739 15,855
----------- -----------
Property, plant and equipment, net 283,057 285,275
----------- -----------
Investment in affiliate 7,500 --
Other noncurrent receivable 8,250 --
Other noncurrent assets 5,006 5,322
----------- -----------
Total assets $ 449,703 $ 398,696
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 29,646 $ 70,717
Accounts payable to affiliates 304 178
Current portion of notes payable 14,882 2,000
----------- -----------
Total current liabilities 44,832 72,895
Deferred federal income taxes 1,956 2,539
Deferred revenue 9,918 --
Note payable 198,118 135,780
Other noncurrent liabilities 1,942 621
----------- -----------
Total liabilities 256,766 211,835
----------- -----------
Minority interest 109 20
Partners' capital 192,828 186,841
----------- -----------
Total liabilities and partners' capital $ 449,703 $ 398,696
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per unit amounts)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Transportation services $ 5,364 $ 4,709 $ 15,170 $ 14,976
Equity in earnings 5,787 6,953 14,591 15,580
Oil and gas sales 12,104 209 30,030 590
Platform access and processing fees 959 395 2,621 395
----------- ----------- ----------- ----------
24,214 12,266 62,412 31,541
----------- ----------- ----------- ----------
Costs and expenses:
Operating expenses 2,276 999 6,018 3,084
Depreciation, depletion and amortization 8,692 1,895 19,919 5,797
General and administrative expenses and
management fee 2,476 2,162 5,879 5,733
----------- ----------- ----------- ----------
13,444 5,056 31,816 14,614
----------- ----------- ----------- ----------
Operating income 10,770 7,210 30,596 16,927
Gain on sale of asset -- -- -- 1,247
Interest income and other 486 201 1,219 515
Interest and other financing costs (1,326) (202) (1,967) (531)
Minority interest in income (106) (77) (335) (193)
----------- ----------- ----------- ----------
Income before income taxes 9,824 7,132 29,513 17,965
Income tax benefit (182) (123) (566) (352)
----------- ----------- ----------- ----------
Net income $ 10,006 $ 7,255 $ 30,079 $ 18,317
=========== =========== =========== ==========
Net income per Unit $ 0.81 $ 0.59 $ 2.44 $ 1.49
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30,079 $ 18,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of debt issue costs 618 359
Depreciation, depletion and amortization 19,919 5,797
Minority interest in income 335 193
Equity in earnings (14,591) (15,580)
Distributions from equity investments 19,248 16,867
Gain on sale of asset -- (1,247)
Deferred income taxes (583) (210)
Other noncash items (5,494) 120
Changes in operating working capital (net of effect of
conveyance):
Decrease in short-term investments -- 2,000
Increase in accounts receivable (6,154) (2,792)
Increase in accounts receivable from affiliates (1,637) (1,162)
Decrease (increase) in other current assets 54 (131)
(Decrease) increase in accounts payable and accrued
liabilities (11,312) 15,685
Increase in payable to affiliates 125 22
------------- -------------
Net cash provided by operating activities 30,607 38,238
------------- -------------
Cash flows from investing activities:
Additions to pipelines, platforms and facilities (25,095) (83,618)
Equity investments (11,245) (4,936)
Acquisition and development of oil and gas properties (49,633) (33,175)
Proceeds from sale of asset -- 1,250
------------- -------------
Net cash used in investing activities (85,973) (120,479)
------------- -------------
Cash flows from financing activities:
Increase in restricted cash (91) (143)
Debt issue costs (1,718) (2,732)
Proceeds from note payable 75,220 96,000
Distributions to partners (24,338) (22,378)
------------- -------------
Net cash provided by financing activities 49,073 70,747
------------- -------------
Decrease in cash and cash equivalents (6,293) (11,494)
Cash and cash equivalents at beginning of year 15,506 17,422
------------- -------------
Cash and cash equivalents at end of period $ 9,213 $ 5,928
============= =============
Cash paid for interest, net of amounts capitalized $ 162 $ 1,636
Cash paid for income taxes $ 16 $ 13
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE> 6
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
Preference Common General
Unitholders Unitholders Partner Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Partners' capital at
December 31, 1995 $192,225 $(5,380) $(4) $186,841
Net income for the nine months
ended September 30, 1996 (unaudited) 22,078 7,700 301 30,079
Cash distributions (unaudited) (17,623) (6,135) (334) (24,092)
-------- ------ ---- -------
Partners' capital at
September 30, 1996 (unaudited) $196,680 $(3,815) $(37) $192,828
======== ======= ==== ========
Limited partnership Units
outstanding at December 31, 1995
and September 30, 1996 (unaudited) 9,038 3,146 (a) 12,184
======== ======= ==== ========
</TABLE>
(a) Leviathan Gas Pipeline Company owns a 1% general partner
interest in Leviathan Gas Pipeline Partners, L.P.
The accompanying notes are an integral part of this financial statement.
6
<PAGE> 7
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Basis of Presentation:
Leviathan Gas Pipeline Partners, L.P. (the "Partnership"), a publicly held
Delaware limited partnership formed in December 1992, is primarily engaged in
the gathering and transportation of natural gas and crude oil through its
pipeline systems located in the Gulf of Mexico (the "Gulf"). The Partnership's
assets include interests in (i) eight natural gas pipeline systems, (ii) a
crude oil pipeline system, (iii) five strategically located multi-purpose
platforms, (iv) three producing oil and gas properties, (v) an overriding
royalty interest and (vi) a dehydration facility. The Partnership's operating
activities are conducted through thirteen subsidiaries.
Leviathan Gas Pipeline Company ("Leviathan"), a Delaware corporation and
wholly-owned subsidiary of Leviathan Holdings Company ("Leviathan Holdings"),
an 85%-owned subsidiary of DeepTech International Inc. ("DeepTech"), was formed
in February 1989 to purchase, operate and expand offshore pipeline systems.
The remaining 15% of Leviathan Holdings is principally owned by members of the
management of DeepTech. DeepTech also owns and controls several other
operating subsidiaries which are engaged in various oil and gas related
activities. Leviathan is general partner of the Partnership.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, the statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of operations for the period covered by such
statements. These interim financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1995.
Note 2 - Oil and Gas Properties:
On June 30, 1995, Flextrend Development Company, L.L.C., ("Flextrend
Development"), a subsidiary of the Partnership, entered into a purchase and
sale agreement (the "Purchase and Sale Agreement") with Tatham Offshore, Inc.
("Tatham Offshore"), an approximately 38%-owned affiliate of DeepTech.
Pursuant to the Purchase and Sale Agreement, Flextrend Development acquired,
subject to certain reversionary rights, a 75% working interest in Viosca Knoll
Block 817, a 50% working interest in Garden Banks Block 72 and a 50% working
interest in Garden Banks Block 117 (the "Assigned Properties") from Tatham
Offshore for $30.0 million. All of the Assigned Properties are located
offshore in the Gulf. Flextrend Development is entitled to retain all of the
revenues attributable to the Assigned Properties until it has received net
revenues equal to the Payout Amount (as defined below), whereupon Tatham
Offshore is entitled to receive a reassignment of the Assigned Properties,
subject to reduction and conditions as discussed below. "Payout Amount" is
defined as an amount equal to all costs incurred by Flextrend Development with
respect to the Assigned Properties (including the $30.0 million acquisition
cost paid to Tatham Offshore) plus interest thereon at a rate of 15% per annum.
Effective February 1, 1996, the Partnership entered into an agreement with
Tatham Offshore regarding certain transportation agreements that increases the
amount recoverable from the Payout Amount by $7.5 million plus interest (Note
6). As of September 30, 1996, the Payout Amount was $90.4 million, comprised
of (a) the sum of (i) initial acquisition and transaction costs of $32.1
million, (ii) development and operating costs of $70.8 million, (iii) prepaid
demand charges of $7.5 million and (iv) interest of $10.1 million, reduced by
(b) net revenue of $30.1 million. At any time prior to December 10, 1996,
Flextrend Development may exercise either of the following options: (i) to
permanently retain 50% of the assigned working interest in either the Viosca
Knoll Block 817 property or the Garden Banks Block 72/Garden Banks Block 117
properties or (ii) to permanently retain
7
<PAGE> 8
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
50% of the assigned working interest in all three Assigned Properties in
exchange for forgiving 25% in the case of option (i) or 50% in the case of
option (ii) of the then-existing Payout Amount exclusive of the $7.5 million
plus interest added to the Payout Amount in connection with the restructuring
of certain transportation agreements discussed above. In the event Flextrend
Development elects to reduce the Payout Amount, it will become obligated to
fund any further development costs attributable to Tatham Offshore's portion of
the working interests, such costs to be added to the Payout Amount. Otherwise,
any further development costs will be funded by Flextrend Development on a
discretionary basis, such costs to be added to the Payout Amount. Further, in
the event Flextrend Development forgoes its right to permanently retain a
working interest in all or a portion of the Assigned Properties, it will be
entitled to recover from working interest revenues in respect of the Assigned
Properties all future demand charges payable for platform access and
processing, in their inverse order of maturity, prior to any reassignment to
Tatham Offshore. If however, Tatham Offshore (i) satisfies in full the future
demand charges payable for platform access and processing, (ii) delivers
evidence that it has received a rating of BBB-, or better, from at least two
reputable rating agencies or (iii) delivers evidence that an entity with a
rating of BBB-, or better, has agreed to guarantee, assume or, to the
reasonable satisfaction of the Partnership, otherwise become responsible for
such future demand charges payable, then Tatham Offshore would receive a
reassignment of the Assigned Properties upon satisfaction of the Payout Amount.
In the event the Payout Amount has been satisfied but none of the above
conditions have been met, Tatham Offshore is entitled to receive one-third
(1/3) of the revenues, net of operating expenses and platform access and
processing fees, until such time as one of the above conditions is met.
Note 3 - Construction and Acquisition Activities:
In February 1996, the Partnership and Texaco, Inc. formed Poseidon Oil Pipeline
Company, L.L.C. ("POPCO"), a Delaware limited liability company, which at
inception, was 50% owned by Poseidon Pipeline Company, L.L.C. ("Poseidon LLC"),
a subsidiary of the Partnership, and 50% owned by Texaco Trading and
Transportation Inc. ("Texaco Trading"), a subsidiary of Texaco, Inc. POPCO was
formed to construct, own and operate the Poseidon Oil Pipeline. Pursuant to the
terms of the organizational documents, Poseidon LLC initially contributed
assets, at net book value, related to the construction of the initial phase of
the Poseidon Oil Pipeline as well as certain dedication agreements with
producers and Texaco Trading initially contributed an equivalent amount of cash
as well as its rights under certain agreements.
The Poseidon Oil Pipeline will ultimately consist of approximately 200 miles of
16 to 24 inch diameter pipeline capable of delivering up to 400,000 barrels per
day of sour crude oil production to multiple markets onshore Louisiana. The
initial 117-mile segment, which extends easterly from Garden Banks Block 72 to
Ship Shoal Block 332, was placed in service in April 1996. The second phase,
an 83-mile segment, extending in a northerly direction from the Ship Shoal
Block 332 Platform to Calliou Island, Louisiana, is currently under
construction and is scheduled to be completed during the fourth quarter of
1996.
In July 1996, Marathon Oil Company ("Marathon") joined POPCO by contributing
its interest in 58 miles of nearby crude oil pipelines and dedicating its
portion of oil reserves attached to such pipelines to the Poseidon Oil Pipeline
for transportation. As a result, each of the Partnership and Texaco Trading
now owns a 36% interest in POPCO and Marathon owns the remaining 28% interest.
On July 8, 1996, the Partnership and affiliates of Marathon and Shell Oil
Company ("Shell") announced plans to build and operate an interstate natural
gas pipeline system and a connecting gathering system to serve growing
production areas in the Green Canyon area of the Gulf. The total cost of the
two systems, including the Manta Ray System, currently owned by the
Partnership, is approximately $270.0 million. The new jurisdictional
interstate pipeline segment of the project, to be named "Nautilus", will
consist of a 30-inch line
8
<PAGE> 9
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
downstream from Ship Shoal Block 207 connecting to the Exxon Company USA
("Exxon") operated Garden City gas processing plant. Upstream of the Ship Shoal
207 terminal, the Manta Ray System will be extended into a broader gathering
system that would serve shelf and deepwater production around Ewing Bank Block
873 to the east and Green Canyon Block 65 to the west. Marathon and Shell have
significant deep water acreage positions in the area, including the recently
announced Troika field (Green Canyon Block 244), and would provide the majority
of the capital funding for the new construction. The Partnership would provide
some funding along with the contribution of Manta Ray System. The consummation
of this joint venture is subject to the negotiation and execution of definitive
documents.
Note 4 - Equity Investments:
The Partnership owns interests of 50% in Stingray Pipeline Company
("Stingray"), 40% in High Island Offshore System ("HIOS"), 33 1/3% in U-T
Offshore System ("UTOS"), 50% in Viosca Knoll Gathering System ("Viosca
Knoll"), 50% in West Cameron Dehydration Company ("West Cameron Dehy") and 36%
in POPCO. The summarized financial information for these investments which are
accounted for using the equity method is as follows:
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996 For the nine months ended September 30, 1995
----------------------------------------------- --------------------------------------------------
Viosca Viosca
Stingray HIOS Knoll Other Total Stingray HIOS UTOS Knoll Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $17,895 $34,202 $9,344 $16,856 $27,477 $3,762 $5,189
Other income 958 122 -- 1,021 497 42 --
Operating expenses (9,704) (11,936) (329) (9,965) (14,954) (2,020) (121)
Depreciation (5,258) (3,581) (1,683) (6,875) (3,676) (540) (1,685)
Other expenses (1,293) (40) -- (897) (832) (52) (93)
------- ------- ------ ------- ------- ----- ------
Net earnings 2,598 18,767 7,332 140 8,512 1,184 3,290
Effective ownership
percentage 50% 40% 50% 50% 40% 33.3% 50%
------- ------- ------ ------- ------- ----- ------
1,299 7,507 3,666 70 3,405 395 1,645
Adjustments:
- - Depreciation (a) 776 683 -- 1,420 777 55 --
- - Contract
amortization (a) (255) (79) -- -- (167) -- --
- - Rate refund reserve -- (220) -- -- 7,762 218
- - Other (36) (63) -- -- -- -- --
------- ------- ------ ------- ------- ------ ------
Equity in earnings $ 1,784 $ 7,828 $3,666 $1,313(c) $14,591 $ 1,490 $11,777 $ 668 $1,645 $15,580
======= ======= ====== ====== ======= ======= ======= ====== ====== =======
Distributions (b) $ 1,423 $ 8,600 $4,350 $4,875(d) $19,248 $ 3,750 $10,400 $ 667 $2,050 $16,867
======= ======= ====== ====== ======= ======= ======= ====== ====== =======
</TABLE>
(a) Adjustments result from purchase price adjustments made in accordance
with Accounting Principles Board No. 16. "Business Combinations".
(b) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
(c) Includes the Partnership's share of equity earnings of West Cameron Dehy,
UTOS and POPCO of $564,000, $190,000 and $559,000, respectively.
(d) Includes the Partnership's share of distributions from West Cameron Dehy,
UTOS and POPCO of $475,000, $400,000 and $4,000,000, respectively.
Note 5 - Credit Facility:
On October 12, 1995, Flextrend Development and a syndicate of commercial
lenders entered into the Flextrend Credit Facility. The Flextrend Credit
Facility provided for borrowings of up to $32.0 million at any time prior to
March 31, 1996. As discussed below, all borrowings outstanding under the
Flextrend Credit Facility were repaid on March 26, 1996 from proceeds obtained
under the Partnership Credit Facility, as amended. For the nine months ended
September 30, 1996, interest and amortization of debt
9
<PAGE> 10
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
issue costs related to the Flextrend Credit Facility totaled $2.5 million, all
of which was capitalized in connection with drilling activities in progress
during the period.
The Partnership Credit Facility, as amended and restated on March 26, 1996, is
a revolving and term credit facility with a syndicate of commercial banks
providing for up to $220.0 million of available credit in the form of a $145.0
million revolving credit facility and a $75.0 million term loan facility. The
revolving credit facility has an initial maturity of three years, which
maturity can be extended in one-year increments, but not beyond March 31, 2001.
The $75.0 million term loan facility has a final maturity of March 31, 2001.
The first principal payment, in an amount of $2.0 million, is due on December
31, 1996. Subsequent payments are to be made quarterly in the amount of $4.3
million. The proceeds of the term loan were used to repay all of the
indebtedness incurred under the Flextrend Credit Facility and to repay a
portion of the debt outstanding under the former revolving credit facility.
All amounts advanced under the revolving credit facility and the term loan
facility will accrue interest at a variable rate selected by the Partnership
and determined by reference to the reserve-adjusted London interbank offer
rate, the average certificate of deposit rate or the prime rate. The current
average interest rate on both the revolving credit and term loans is 6.4% per
annum. A commitment fee is charged on the unused and available to be borrowed
portion of the revolving credit facility. This fee varies between 0.25% and
0.375% per annum and is currently 0.375% per annum. All amounts due under the
Partnership Credit Facility are guaranteed by Leviathan and each of the
Partnership's subsidiaries, and are secured by Leviathan's 1% general partner
interest in the Partnership, all of Leviathan's and the Partnership's equity
interests in the subsidiaries and most of the equipment, negotiable instruments
and inventory and other personal property of the Partnership's subsidiaries.
The Partnership incurred additional debt issue costs related to the amended and
restated credit facility of $1.5 million which have been capitalized and are
being amortized over the five-year remaining life of the credit facility. As
of September 30, 1996, borrowings totaled $75.0 million under the term facility
and $138.0 million under the revolving credit facility. For the nine months
ended September 30, 1996, interest expense related to the Partnership Credit
Facility totaled $2.0 million, which included commitment fees and amortization
of debt issue costs of $0.5 million. Additional interest expense and
amortization of debt issue costs related to the Partnership Credit Facility of
$8.7 million was capitalized in connection with construction projects and
drilling activities in progress during the period. As of November 12, 1996,
borrowings totaled $75.0 million under the term facility and $141.5 million
under the revolving credit facility. There are no letters of credit currently
outstanding under the revolving credit facility.
Note 6 - Related Party Transactions:
Management fees. For the nine months ended September 30, 1996, Leviathan
charged the Partnership $4.7 million pursuant to the Partnership Agreement
which provides for reimbursement of expenses Leviathan incurs as general
partner of the Partnership, including reimbursement of expenses incurred by
DeepTech in providing management services to Leviathan and the Partnership. In
addition, the management agreement requires a payment by Leviathan to
compensate DeepTech for certain tax liabilities resulting from, among other
things, additional taxable income allocated to Leviathan due to (i) the
issuance of additional Preference Units (including the sale of the Preference
Units by the Partnership pursuant to the secondary offering) and (ii) the
investment of such proceeds in additional acquisitions or construction
projects. During the nine months ended September 30, 1996, Leviathan charged
the Partnership $1.1 million to compensate DeepTech for additional taxable
income allocated to Leviathan. The management agreement has an initial term
expiring on June 30, 1997, and may thereafter be terminated on 90 days' notice
by either party.
Transportation and platform access agreements. Tatham Offshore was obligated
to make demand charge payments to the Partnership pursuant to certain
transportation agreements. Under these agreements, the Partnership was
entitled to receive demand charges of $8.1 million in 1996, $6.0 million in
1997, $3.0 million in 1998 and $0.7 million in 1999. In addition to the demand
charges, Tatham Offshore is obligated
10
<PAGE> 11
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
to pay commodity charges, based on the volume of oil and gas transported or
processed, under these agreements. Also, for the year ending December 31,
1996, Tatham Offshore is obligated to pay $1.6 million in platform access fees.
Production problems at Ship Shoal Block 331 and reduced oil production from the
Ewing Bank 914 #2 well have affected Tatham Offshore's ability to pay the
demand charge obligations under agreements relative to these properties. As a
result, effective February 1, 1996, the Partnership agreed to release Tatham
Offshore from all remaining demand charge payments under the transportation
agreements, a total of $17.8 million. Tatham Offshore remains obligated to pay
the commodity charges under these agreements as well as all platform access and
processing fees associated with the Viosca Knoll Block 817 lease. In exchange,
the Partnership received 7,500 shares of Tatham Offshore senior preferred stock
(the "Senior Preferred Stock"), which is presented on the accompanying
consolidated balance sheet at September 30, 1996 as investment in affiliate.
Each share of the Senior Preferred Stock has a liquidation preference of $1,000
per share, is senior in liquidation preference to all other classes of Tatham
Offshore stock and has a 9% cumulative dividend, payable quarterly. Commencing
on October 1, 1998 and for a period of 90 days thereafter, the Partnership has
the option to exchange the remaining liquidation preference amount and accrued
but unpaid dividends for shares of Tatham Offshore's Series A Convertible
Exchangeable Preferred Stock (the "Convertible Exchangeable Preferred Stock")
with an equivalent market value. Further, the Partnership has made an
irrevocable offer to Tatham Offshore to sell all or any portion of the Senior
Preferred Stock to Tatham Offshore or its designee at a price equal to $1,000
per share, plus interest thereon at 9% per annum less the sum of any dividends
paid thereon. The Convertible Exchangeable Preferred Stock is convertible into
Tatham Offshore common stock based on a fraction, the numerator of which is the
liquidation preference value plus all accrued but unpaid dividends and the
denominator of which is $0.653 per share, the lowest average of consecutive
five day closing prices for Tatham Offshore's common stock between December 26,
1995 and July 1, 1996. In addition, the sum of $7.5 million was added to the
Payout Amount under the Purchase and Sale Agreement. By adding $7.5 million to
the Payout Amount, the Partnership is entitled to an additional $7.5 million
plus interest at the rate of 15% per annum from revenue attributable to the
Assigned Properties prior to reconveying any interest in the Assigned
Properties to Tatham Offshore. Tatham Offshore waived its remaining option to
prepay the then-existing Payout Amount and receive a reassignment of its
working interests. Tatham Offshore and the Partnership also agreed that in the
event Tatham Offshore furnishes the Partnership with a financing commitment
from a lender with a credit rating of BBB- or better covering 100% of the then
outstanding Payout Amount, the interest rate utilized to compute the Payout
Amount shall be adjusted from and after the date of such commitment to the
interest rate specified in such commitment, whether utilized or not. Tatham
Offshore granted the Partnership the right to utilize the Ship Shoal Block 331
platform and related facilities at a rental rate of $1.00 per annum for such
period as the platform is owned by Tatham Offshore and located on Ship Shoal
Block 331, provided such use does not interfere with lease operations or other
activities of Tatham Offshore. In addition, Tatham Offshore granted the
Partnership a right of first refusal relative to a sale of the platform.
Oil and gas sales. The Partnership has agreed to sell all of its oil and gas
production to Offshore Gas Marketing, Inc. ("Offshore Marketing"), an affiliate
of the Partnership, on a month to month basis. The agreement with Offshore
Marketing provides Offshore Marketing fees equal to 2% of the sales value of
crude oil and condensate and $0.015 per dekatherm of natural gas for selling
the Partnership's production. During the nine months ended September 30, 1996,
substantially all of the Partnership's oil and gas sales were derived from
sales to Offshore Marketing.
Other. POPCO has entered into certain additional agreements with a subsidiary
of the Partnership to provide for use by POPCO of certain pipelines and
platforms owned by the subsidiary for fees which consist
11
<PAGE> 12
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
of a monthly rental fee of $100,000 per month for a minimum of six months and
reimbursement of certain actual capital expenditures not to exceed $2,000,000
incurred in readying one of the platforms for use.
Poseidon LLC managed the construction and installation of the initial 117 mile
segment of the Poseidon Oil Pipeline, which was placed in service in April
1996, and Texaco Trading is managing the construction and installation of the
remaining pipelines and facilities comprising the Poseidon Oil Pipeline. Each
of Poseidon LLC and Texaco Trading will earn a performance fee of $1,400,000
for managing the construction of a portion of the Poseidon Oil Pipeline, which
fee may be adjusted if either party manages the construction of any additional
facilities. Through September 30, 1996, Poseidon LLC has received $1,330,000
in performance fees from POPCO.
During the nine months ended September 30, 1996, Flextrend Development was
charged $4.9 million by Sedco Forex Division of Schlumberger Technology
Corporation ("Sedco Forex") for contract drilling services rendered by the
semisubmersible drilling rig, the FPS Laffit Pincay, at its Garden Banks Block
117 project. The FPS Laffit Pincay is owned by an affiliate of DeepTech and
managed by Sedco Forex.
Note 7 - Cash Distributions:
On January 22, 1996, the Partnership declared a cash distribution of $0.60 per
Preference and Common Unit for the period from October 1, 1995 through December
31, 1995. This distribution was paid on February 14, 1996 to Unitholders of
record as of January 31, 1996.
On March 26, 1996, the Partnership declared a cash distribution of $0.65 per
Preference and Common Unit for the period from January 1, 1996 through March
31, 1996. This distribution was paid on May 15, 1996 to Unitholders of record
as of April 30, 1996.
On July 18, 1996, the Partnership declared a cash distribution of $0.70 per
Preference and Common Unit for the period from April 1, 1996 through June 30,
1996. This distribution was paid on August 14, 1996 to Unitholders of record
as of July 31, 1996.
On October 16, 1996, the Partnership declared a cash distribution of $0.75 per
Preference and Common Unit for the period from July 1, 1996 through September
30, 1996. This distribution will be paid on November 14, 1996 to Unitholders
of record as of October 31, 1996.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Partnership's
consolidated financial statements and notes thereto included in Part I of this
quarterly report. Unless the context otherwise requires, all references herein
to the Partnership with respect to the operations and ownership of the
Partnership's assets are also references to its subsidiaries.
Overview
The Partnership's assets include interests in (i) eight natural gas pipeline
systems (the "Pipelines"), (ii) a crude oil pipeline system (the "Poseidon Oil
Pipeline"), (iii) five strategically located multi-purpose platforms, (iv)
three producing oil and gas properties, (v) an overriding royalty interest and
(vi) a dehydration facility.
The Pipelines are strategically located offshore Louisiana and eastern Texas
and gather and transport natural gas for producers, marketers, pipelines and
end-users for transportation fees. The Pipelines include 981 miles of pipeline
with a throughput capacity of 5.6 billion cubic feet ("Bcf") of gas per day.
The Partnership's interest in the Pipelines is owned through 100% interests in
each of Ewing Bank Gathering Company, L.L.C., a Delaware limited liability
company ("Ewing Bank"), Manta Ray Gathering Company, L.L.C. ("Manta Ray")
(formerly Louisiana Offshore Gathering Systems, L.L.C. ("LOGS")), a Delaware
limited liability company, Green Canyon Pipe Line Company, L.L.C., a Delaware
limited liability company ("Green Canyon") and Tarpon Transmission Company, a
Texas corporation ("Tarpon"); a 50% partnership interest in each of Stingray
Pipeline Company, a Louisiana general partnership ("Stingray") and Viosca Knoll
Gathering Company, a Delaware general partnership ("Viosca Knoll"); a 40%
partnership interest in High Island Offshore System, a Delaware general
partnership ("HIOS"); and a 33 1/3% partnership interest in U-T Offshore
System, a Delaware general partnership ("UTOS").
At inception, the Partnership owned a 50% interest in POPCO. POPCO was formed
to construct, own and operate the Poseidon Oil Pipeline. As designed, the
Poseidon Oil Pipeline will ultimately consist of approximately 200 miles of 16
to 24 inch pipeline capable of delivering up to 400,000 barrels per day of sour
crude oil production from the Gulf to multiple market outlets onshore
Louisiana. The initial 117-mile segment, which extends easterly from Garden
Banks Block 72 to Ship Shoal Block 332, was placed in service in April 1996.
The second phase, an 83-mile segment extending from the platform in Ship Shoal
Block 332 in a northerly direction to a terminus located in southern Louisiana,
is currently under construction and scheduled to be completed during the fourth
quarter of 1996. In July 1996, Marathon joined POPCO by contributing its
interest in 58 miles of nearby crude oil pipelines and dedicating its portion
of oil reserves attached to such pipelines to the Poseidon Oil Pipeline for
transportation. As a result, each of the Partnership and Texaco Trading now
owns a 36% interest in POPCO and Marathon owns the remaining 28% interest.
The Partnership owns interests in five strategically located multi-purpose
platforms in the Gulf that have processing capabilities which complement the
Partnership's pipeline operations. The multi-purpose platforms serve as
junctions in the pipeline grid and enable the Partnership to perform
maintenance functions on its pipelines. In addition, the multi-purpose
platforms serve as landing sites for deeper water production and as sites for
the location of gas compression facilities and drilling operations.
The Partnership owns an interest in and is operator of three producing leases
in the Gulf which were acquired by the Partnership on June 30, 1995 from Tatham
Offshore. The properties, which are subject to certain reversionary rights,
include a 75% working interest in Viosca Knoll Block 817, a 50% working
interest in Garden Banks Block 72 and a 50% working interest in Garden Banks
Block 117. The Viosca
13
<PAGE> 14
Knoll Block 817 project is currently producing an aggregate of approximately
100 million cubic feet ("MMcf") of gas per day. In addition, the Partnership
has placed on production four wells on the Garden Banks Block 72 lease and one
well on Garden Banks Block 117. The Garden Banks Block 72 wells, which began
producing in May 1996, are currently producing an average of 4,100 barrels of
oil and 14.5 MMcf of gas per day. The Partnership is in the process of
drilling a fifth well on Garden Banks Block 72. The Garden Banks Block 117 #1
well, which began producing in July 1996, is currently producing an average of
2,100 barrels of oil, 3.5 MMcf of gas and 3,100 barrels of water per day. The
Partnership is currently drilling a second well on the Garden Banks Block 117
lease.
The Partnership owns an overriding royalty interest in the six-lease block
Ewing Bank 915 Unit, which is operated by Tatham Offshore, as well as certain
other minority interests in oil and gas leases which are not material to the
business of the Partnership. The Partnership also owns a 50% interest in West
Cameron Dehydration Company, L.L.C., a Delaware limited liability company
("West Cameron Dehy"), which owns a dehydration facility located at the
terminus of the Stingray pipeline, onshore Louisiana.
The Partnership accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this
method, costs of successful exploratory wells, development wells and
acquisitions of mineral leasehold interests are capitalized. Production,
exploratory dry hole and other exploration costs, including geological and
geophysical costs and delay rentals, are expensed as incurred. Unproved
properties are assessed periodically and any impairment in value is recognized
currently as depreciation, depletion, amortization and impairment expense.
Results of Operations
Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995
Total revenue for the three months ended September 30, 1996 was $24.2 million
as compared with $12.3 million for the three months ended September 30, 1995.
Revenue from transportation services totaled $5.4 million for the three months
ended September 30, 1996 as compared with $4.7 million for the three months
ended September 30, 1995. The increase in transportation revenue of $0.7
million is a result of an increase of $1.1 million from the Green Canyon and
Manta Ray systems attributable to the connection of a new field located in
Green Canyon Block 136 and the use of a portion of one of the lines of the
Manta Ray System by POPCO offset by a decrease of $0.4 million related to the
Ewing Bank system due to the restructuring of the demand charges payable to
Ewing Bank from Tatham Offshore. Revenue from the Partnership's equity interest
in Stingray, HIOS, UTOS, Viosca Knoll, POPCO and West Cameron Dehy (the "Joint
Venture Companies") totaled $5.8 million for the three months ended September
30, 1996 as compared with $7.0 million for the three months ended September 30,
1995. The decrease of $1.2 million in revenue from the Partnership's equity
interest in the Joint Venture Companies primarily reflects decreases of $2.8
million related to HIOS and UTOS as a result of lower rates during 1996 offset
by increases of $0.8 million from Stingray and Viosca Knoll as a result of
increased throughput, $0.6 million from POPCO, which was placed in service in
April 1996, and $0.2 million from West Cameron Dehy, which was placed in
service in November 1995. Revenue from oil and gas sales totaled $12.1 million
for the three months ended September 30, 1996 as compared with $0.2 million for
the three months ended September 30, 1995. The increase in oil and gas sales of
$11.9 million is primarily attributable to the initiation of production from
the Partnership's Viosca Knoll Block 817 lease in December 1995, the Garden
Banks Block 72 lease in May 1996 and the Garden Banks Block 117 lease in July
1996. During the three months ended September 30, 1996, the Partnership sold
4,166 MMcf of gas and 168,766 barrels of oil at average prices of $1.93 per
thousand cubic feet ("Mcf") and $22.25 per barrel, respectively. Revenue
related to the Partnership's Viosca Knoll Block 817 Platform, which was placed
in service during the third quarter of 1995, totaled $1.0 million for the three
14
<PAGE> 15
months ended September 30, 1996 as compared with $0.4 million for the three
months ended September 30, 1995.
Total gas transportation volumes for the Joint Venture Companies increased
19.8% from the three months ended September 30, 1995 to the three months ended
September 30, 1996 primarily as a result of increased throughput on the Viosca
Knoll, HIOS, UTOS and Stingray systems. Total transportation volumes for the
Gathering Systems (Green Canyon, Tarpon, Ewing Bank and Manta Ray) increased
30.4% from the three months ended September 30, 1995 to the three months ended
September 30, 1996. This increase is primarily a result of increased
throughput on the Green Canyon system as a result of the addition of Green
Canyon Block 136 partially offset by lower production from the producing fields
attached to the Tarpon and Manta Ray systems.
Total costs and expenses for the three months ended September 30, 1996 totaled
$13.4 million as compared with $5.0 million for the three months ended
September 30, 1995. The $8.4 million increase in costs and expenses was
attributable to increases in (i) depreciation, depletion and amortization of
$6.8 million, (ii) operating expenses of $1.3 million and (iii) the
Partnership's management fees and other general and administrative expenses of
$0.3 million. The increase in depreciation, depletion and amortization results
primarily from depreciation and depletion on the oil and gas wells and
facilities located on Viosca Knoll Block 817, Garden Banks Block 72 and the
Garden Banks Block 117 leases, depreciation on additional platforms and
facilities constructed by the Partnership and accelerated depreciation on the
Ewing Bank flow lines. The increase in operating expenses is primarily
attributable to the operation of new pipelines, platforms and leases by the
Partnership. The increase in the Partnership's management fees and other
general and administrative expenses primarily reflects a $0.2 million
reimbursement to DeepTech for certain tax liabilities incurred by DeepTech as a
result of the Partnership's public offering of an additional 3,000,000
Preference Units in June 1994.
Interest income and other totaled $0.5 million for the three months ended
September 30, 1996 as compared with $0.2 million for the three months ended
September 30, 1995. The increase in interest income is due to accrued interest
of $0.3 million related to the $7.5 million that was added to the Payout Amount
in connection with restructuring the demand charges payable to the Partnership
from Tatham Offshore. Interest and other financing costs, net of capitalized
interest, for the three months ended September 30, 1996 totaled $1.3 million as
compared with $0.2 million for the three months ended September 30, 1995.
Interest and fees associated with the Partnership Credit Facility of $2.6
million were capitalized in connection with construction projects and drilling
activities in progress during the third quarter of 1996.
Net income for the three months ended September 30, 1996 totaled $10.0 million
as compared with $7.3 million for the three months ended September 30, 1995 as
a result of the items discussed above. Net income per Unit for the three months
ended September 30, 1996 totaled $0.81 per Unit as compared with $0.59 per Unit
for the three months ended September 30, 1995.
Nine Months Ended September 30, 1996 Compared with Nine Months Ended September
30, 1995
Total revenue for the nine months ended September 30, 1996 was $62.4 million as
compared with $31.5 million for the nine months ended September 30, 1995.
Revenue from transportation services totaled $15.2 million for the nine months
ended September 30, 1996 as compared with $15.0 million for the nine months
ended September 30, 1995. The increase in transportation revenue of $0.2
million was comprised primarily of (i) a $1.9 million increase from the Green
Canyon system attributable to the connection of a new gas field located in
Green Canyon Block 136 to the system and (ii) a decrease of $1.7 million
attributable to decreases in throughput on the Ewing Bank and Tarpon systems
due to normal production decline from the wells attached to such systems and
the restructuring of the demand charges payable to the Partnership from
15
<PAGE> 16
Tatham Offshore. Revenue from the Partnership's equity interest in the Joint
Venture Companies totaled $14.6 million for the nine months ended September 30,
1996 as compared with $15.6 million for the nine months ended September 30,
1995. The decrease of $1.0 million in revenue from the Partnership's equity
interest in the Joint Venture Companies primarily reflects increases of (i)
$2.3 million from Viosca Knoll and Stingray as a result of increased throughput
on the systems, (ii) $0.6 million from POPCO, which was placed in service in
April 1996, and (iii) $0.6 million from West Cameron Dehy, which was placed in
service in November 1995 offset by decreases of $4.5 million related primarily
to HIOS and UTOS. Revenue from oil and gas sales totaled $30.0 million for the
nine months ended September 30, 1996 as compared with $0.6 million for the nine
months ended September 30, 1995. The increase in oil and gas sales of $29.4
million is primarily attributable to the initiation of production from the
Partnership's Viosca Knoll Block 817 lease in December 1995, the Garden Banks
Block 72 lease in May 1996 and the Garden Banks Block 117 lease in July 1996.
During the nine months ended September 30, 1996, the Partnership sold 10,541
MMcf of gas and 193,982 barrels of oil at average prices of $2.36 per Mcf and
$22.16 per barrel, respectively. Revenue related to the Partnership's Viosca
Knoll Block 817 Platform, which was placed in service during the third quarter
of 1995, totaled $2.6 million for the nine months ended September 30, 1996 as
compared with $0.4 million for the nine months ended September 30, 1995.
Total gas transportation volumes for the Joint Venture Companies increased
13.1% from the nine months ended September 30, 1995 to the nine months ended
September 30, 1996 primarily as a result of increased throughput on the Viosca
Knoll, HIOS and Stingray systems. Total transportation volumes for the
Gathering Systems increased 15.7% from the nine months ended September 30, 1995
to the nine months ended September 30, 1996. This increase is primarily a
result of increased throughput on the Green Canyon system as a result of the
addition of Green Canyon Block 136 partially offset by lower production from
the producing fields attached to the Ewing Bank, Tarpon and Manta Ray systems.
Total costs and expenses for the nine months ended September 30, 1996 totaled
$31.8 million as compared with $14.6 million for the nine months ended
September 30, 1995. The $17.2 million increase in costs and expenses was
primarily attributable to increases in (i) depreciation, depletion and
amortization of $14.2 million, (ii) operating expenses of $2.9 million and
(iii) the Partnership's management fees and other general and administrative
expenses of $0.1 million. The increase in depreciation, depletion and
amortization results primarily from depreciation and depletion on the oil and
gas wells and facilities located on the Viosca Knoll Block 817, Garden Banks
Block 72 and the Garden Banks Block 117 leases, depreciation on additional
platforms and facilities constructed by the Partnership and accelerated
depreciation on the Ewing Bank flow lines. The increase in operating expenses
is primarily attributable to the operation of new pipelines, platforms and
leases by the Partnership. The increase in the Partnership's management fees
and other general and administrative expenses primarily reflects a $1.4 million
reimbursement to DeepTech for certain tax liabilities incurred by DeepTech as a
result of the Partnership's public offering of an additional 3,000,000
Preference Units in June 1994 offset by a $1.3 million reimbursement from POPCO
as a result of the Partnership's management of the initial phase of the
construction of the Poseidon Oil Pipeline.
During the nine months ended September 30, 1995, the Partnership recognized a
$1.2 million gain on sale of certain oil and gas mineral leaseholds.
Interest income and other totaled $1.2 million for the nine months ended
September 30, 1996 as compared with $0.5 million for the nine months ended
September 30, 1995. The increase in interest income is primarily due to
accrued interest of $0.8 million related to the $7.5 million that was added to
the Payout Amount in connection with restructuring the demand charges payable
to the Partnership from Tatham Offshore. Interest and other financing costs,
net of capitalized interest, for the nine months ended September 30, 1996
totaled $1.9 million as compared with $0.5 million for the nine months ended
September 30,
16
<PAGE> 17
1995. Interest and fees associated with the Partnership's credit facilities of
$11.2 million were capitalized in connection with construction projects and
drilling activities in progress during the nine months ended September 30,
1996.
Net income for the nine months ended September 30, 1996 totaled $30.1 million
as compared with $18.3 million for the nine months ended September 30, 1995 as
a result of the items discussed above. Net income per Unit for the nine months
ended September 30, 1996 totaled $2.44 per Unit as compared with $1.49 per Unit
for the nine months ended September 30, 1995.
Liquidity and Capital Resources
Sources of Cash. The Partnership intends to satisfy its capital requirements
and other working capital needs primarily from cash on hand, cash from
continuing operations and borrowings under the Partnership Credit Facility.
Net cash provided by operating activities for the nine months ended September
30, 1996 totaled $30.6 million. At September 30, 1996, the Partnership had
cash and cash equivalents of $9.2 million.
Cash from continuing operations is derived from (i) payments for transporting
gas through the 100% owned pipelines, (ii) cash distributions from the
Stingray, HIOS, UTOS and Viosca Knoll partnerships and from POPCO and West
Cameron Dehy, (iii) platform access and processing fees and (iv) the sale of
oil and gas attributable to the Partnership's interest in certain producing
wells.
Stingray, HIOS, UTOS and Viosca Knoll are partnerships and POPCO and West
Cameron Dehy are limited liability companies in which the Partnership owns an
interest. The Partnership's cash flows from operations will be affected by the
ability of such entities to make distributions. Distributions from such
entities are also subject to the discretion of their respective management
committees. Further, each of Stingray and POPCO is party to a credit agreement
under which it has outstanding obligations that may restrict the payments of
distributions to its owners. In December 1995, Stingray amended an existing
term loan agreement to provide for aggregate outstanding borrowings of up to
$29.0 million in principal amount. The agreement requires the payment of
principal by Stingray of $1.45 million per quarter. As of September 30, 1996,
interest accrued at the rate of approximately 6.4% per annum and is payable
quarterly. As of September 30, 1996, Stingray had $24.65 million outstanding
under its term loan agreement.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a group of commercial banks to provide up to $150.0
million for the construction of the second phase of the Poseidon Oil Pipeline
and for other working capital needs of POPCO. As of September 30, 1996, POPCO
had $77.5 million outstanding under the POPCO Credit Facility bearing interest
at 6.7% per annum. POPCO's ability to borrow money under the facility is
subject to certain customary terms and conditions, including borrowing base
limitations. The POPCO Credit Facility is secured by a substantial portion of
POPCO's assets and matures on April 30, 2001.
Flextrend Development has initiated production from the each of the Assigned
Properties. As discussed above, the Viosca Knoll Block 817 project is
currently producing a total of approximately 100 MMcf of gas per day. Flextrend
Development owns a 75% working interest in this property, subject to certain
reversionary rights. The Garden Banks Block 72 lease, which began producing in
May 1996, is currently producing an average of 4,100 barrels of oil and 14.5
MMcf of gas per day. The Garden Banks Block 117 #1 well, which began producing
in July 1996, is currently producing an average of 2,100 barrels of oil, 3.5
MMcf of gas and 3,100 barrels of water per day. Flextrend Development owns a
50% working interest in each of these properties, subject to certain
reversionary rights.
17
<PAGE> 18
Tatham Offshore was obligated to make demand charge payments to the Partnership
pursuant to certain transportation agreements. Production problems at Ship
Shoal Block 331 and reduced oil production from the Ewing Bank 914 #2 well have
adversely affected Tatham Offshore's ability to pay demand charges under these
agreements. Effective February 1, 1996, the Partnership agreed to release
Tatham Offshore from all remaining demand charge payments under certain
transportation agreements, a total of $17.8 million. Under these agreements,
the Partnership was entitled to receive demand charges of $8.1 million in 1996,
$6.0 million in 1997, $3.0 million in 1998 and $0.7 million in 1999. In
exchange, the Partnership received 7,500 shares of Tatham Offshore Senior
Preferred Stock. Each share of the Senior Preferred Stock has a liquidation
preference of $1,000 per share, is senior in liquidation preference to all
other classes of Tatham Offshore stock and has a 9% cumulative dividend,
payable quarterly. Commencing on October 1, 1998 and for a period of 90 days
thereafter, the Partnership has the option to exchange the remaining
liquidation preference amount and accrued but unpaid dividends for shares of
Tatham Offshore's Convertible Exchangeable Preferred Stock with an equivalent
market value. Further, the Partnership has made an irrevocable offer to Tatham
Offshore to sell all or any portion of the Senior Preferred Stock to Tatham
Offshore or its designee at a price equal to $1,000 per share, plus interest
thereon at 9% per annum less the sum of any dividends paid thereon. The
Convertible Exchangeable Preferred Stock is convertible into Tatham Offshore
common stock based on a fraction, the numerator of which is the liquidation
preference value plus all accrued but unpaid dividends and the denominator of
which is $0.653 per share. In addition, the sum of $7.5 million was added to
the Payout Amount under the Purchase and Sale Agreement. By adding $7.5 million
to the Payout Amount, the Partnership is entitled to an additional $7.5 million
plus interest at the rate of 15% per annum from revenue attributable to the
Assigned Properties prior to reconveying any interest in the Assigned
Properties to Tatham Offshore. Tatham Offshore waived its remaining option to
prepay the then-existing Payout Amount and receive a reassignment of its
working interests. Tatham Offshore and the Partnership also agreed that in the
event Tatham Offshore furnishes the Partnership with a financing commitment
from a lender with a credit rating of BBB- or better covering 100% of the then
outstanding Payout Amount, the interest rate utilized to compute the Payout
Amount shall be adjusted from and after the date of such commitment to the
interest rate specified in such commitment, whether utilized or not. Tatham
Offshore also agreed to grant the Partnership the right to utilize the Ship
Shoal Block 331 platform and related facilities at a rental rate of $1.00 per
annum for such period as the platform is owned by Tatham Offshore and located
on Ship Shoal Block 331, provided such use does not interfere with lease
operations or other activities of Tatham Offshore. In addition, Tatham
Offshore granted the Partnership a right of first refusal relative to a sale of
the platform. Tatham Offshore remains obligated to pay the commodity charges
under these agreements as well as all platform access and processing fees
associated with the Viosca Knoll Block 817 lease. For the year ending December
31, 1996, Tatham Offshore is obligated to pay $1.6 million in platform access
fees.
The Partnership Credit Facility, as amended and restated on March 26, 1996, is
a revolving and term credit facility providing for up to $220.0 million of
available credit in the form of a $145.0 million revolving credit facility and
$75.0 million term loan facility. Proceeds from the revolving credit facility
are available to the Partnership for general partnership purposes, including
financing of capital expenditures, for working capital, and subject to certain
limitations, for paying the Minimum Quarterly Distribution, as defined in the
Partnership Agreement. The revolving credit facility can also be utilized to
issue letters of credit as may be required from time to time. As of September
30, 1996, borrowings totaled $75.0 million under the term facility and $138.0
million under the revolving credit facility. As of November 12, 1996,
borrowings totaled $75.0 million under the term facility and $141.5 million
under the revolving credit facility. There are no letters of credit currently
outstanding under the revolving credit facility.
Uses of Cash. The Partnership's capital requirements consist primarily of (i)
quarterly distributions to holders of Preference Units and Common Units and to
Leviathan as general partner, (ii) expenditures for the maintenance of the
pipelines and related infrastructure and the construction of additional
pipelines and
18
<PAGE> 19
related facilities for the transportation and processing of gas and oil in the
Gulf, including the second phase of the Poseidon Oil Pipeline, (iii) management
fees and other operating expenses and (iv) debt service on its outstanding debt.
In addition, Flextrend Development's future capital requirements will consist of
expenditures related to the continued development of the Garden Banks Block 72
and Garden Banks Block 117 leases.
For every full quarter since its inception, the Partnership has declared and
subsequently paid a cash distribution to holders of Preference Units and Common
Units in an amount equal to or exceeding the Minimum Quarterly Distribution of
$0.55 per Unit per quarter ($2.20 per Unit on an annualized basis). Commencing
in the third quarter of 1993, the Partnership increased the quarterly
distribution to $0.60 per Unit. Beginning with the quarter ending March 31,
1996, the Partnership increased the quarterly distribution to $0.65 per Unit.
For the quarter ending June 30, 1996, the Partnership increased the quarterly
distribution to $0.70 per Unit. For the quarter ending September 30, 1996, the
Partnership increased the quarterly distribution to $0.75 per Unit. This
distribution will be paid on November 14, 1996 to Unitholders of record as of
October 31, 1996. At the current distribution rate of $0.75 per Unit, the
Partnership anticipates making quarterly Partnership distributions of $9.5
million in respect of the Preference Units, Common Units and general partner
interest ($38.1 million on an annual basis). The Partnership believes that it
will be able to continue to pay at least the current quarterly distribution of
$0.75 per Preference Unit for the foreseeable future.
In February 1996, Poseidon LLC and Texaco Trading formed POPCO to construct,
own and operate the Poseidon Oil Pipeline. Pursuant to the terms of the
organizational documents, Poseidon LLC initially contributed assets, at net
book value, related to the construction of the initial phase of the Poseidon
Oil Pipeline as well as certain dedication agreements and Texaco Trading
initially contributed an equivalent amount of cash as well as its rights under
certain agreements. The Partnership has fully funded its portion of the
capital requirements of POPCO for the construction of the first phase of the
Poseidon Oil Pipeline. In July 1996, Marathon joined POPCO by contributing its
interest in 58 miles of nearby crude oil pipelines and dedicating its portion
of oil reserves attached to such pipelines to the Poseidon Oil Pipeline for
transportation. As a result, each of the Partnership and Texaco Trading now
owns a 36% interest in POPCO and Marathon owns the remaining 28% interest. The
Partnership anticipates that POPCO's future capital requirements, including
amounts necessary to complete the second phase of the system, will be funded by
borrowings under the POPCO Credit Facility.
On July 8, 1996, the Partnership and affiliates of Marathon and Shell announced
plans to build and operate an interstate natural gas pipeline system and a
connecting gathering system to serve growing production areas in the Green
Canyon area of the Gulf. The total cost of the two systems, including the
Manta Ray System currently owned by the Partnership, is approximately $270.0
million. The new jurisdictional interstate pipeline segment of the project, to
be named "Nautilus", will consist of a 30-inch line downstream from Ship Shoal
Block 207 connecting to the Exxon operated Garden City gas processing plant.
Upstream of the Ship Shoal 207 terminal, the Manta Ray System will be extended
into a broader gathering system that would serve shelf and deepwater production
around Ewing Bank Block 873 to the east and Green Canyon Block 65 to the west.
Marathon and Shell have significant deep water acreage positions in the area,
including the recently announced Troika field (Green Canyon Block 244), and
would provide the majority of the capital funding for the new construction. The
Partnership would provide some funding along with the contribution of Manta Ray
System. The consummation of this joint venture is subject to the negotiation
and execution of definitive documents.
The Partnership anticipates that capital expenditures in connection with the
maintenance and enhancement of the service capabilities of the Ewing Bank and
Green Canyon systems will aggregate approximately $0.5 million per year
although the actual level of these capital expenditures may change from time to
time for
19
<PAGE> 20
many reasons, some of which may be beyond the control of the Partnership. Total
capital expenditures and equity investments for 1995 were $173.6 million. The
Partnership anticipates that its total capital expenditures for 1996 will
relate to continuing construction and drilling activities. The Partnership
anticipates funding such costs primarily with available cash flow and
borrowings under the Partnership Credit Facility. Capital expenditures of
POPCO are anticipated to be funded by borrowings under the POPCO Credit
Facility.
Interest and other financing costs, net of capitalized interest, related to the
Partnership's credit facilities totaled $2.0 million for the nine months ended
September 30, 1996. Such amount included commitment fees and amortization of
debt issue costs of $0.5 million. During the nine months ended September 30,
1996, the Partnership capitalized $11.2 million of interest costs in connection
with construction projects and drilling activities in progress during the
period.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon 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
None.
(b) Reports on Form 8-K
None.
21
<PAGE> 22
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 and thereunto duly authorized.
<TABLE>
<S> <C>
LEVIATHAN GAS PIPELINE
PARTNERS, L.P.
(Registrant)
By: LEVIATHAN GAS PIPELINE
COMPANY, its General Partner
Date: November 12, 1996 By: /s/ KEITH B. FORMAN
--------------------------------------
Keith B. Forman
Chief Financial Officer
Date: November 12, 1996 By: /s/ DENNIS A. KUNETKA
--------------------------------------
Dennis A. Kunetka
Senior Vice President - Corporate Finance
(Principal Accounting Officer)
</TABLE>
22
<PAGE> 23
INDEX TO EXHIBITS
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS AT SEPTEMBER 30, 1996 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,213
<SECURITIES> 0
<RECEIVABLES> 17,181
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,102
<PP&E> 317,796
<DEPRECIATION> 34,739
<TOTAL-ASSETS> 449,703
<CURRENT-LIABILITIES> 44,832
<BONDS> 198,118
<COMMON> 0
0
0
<OTHER-SE> 192,828
<TOTAL-LIABILITY-AND-EQUITY> 449,703
<SALES> 30,030
<TOTAL-REVENUES> 62,412
<CGS> 6,018
<TOTAL-COSTS> 6,018
<OTHER-EXPENSES> 19,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,967
<INCOME-PRETAX> 29,513
<INCOME-TAX> (566)
<INCOME-CONTINUING> 30,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,079
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.44
</TABLE>
