<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
--- ---
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<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 June 30, 1997 (unaudited)
and December 31, 1996...................................................3
Unaudited Consolidated Statement of Operations for the
Three and Six Months Ended June 30, 1997 and 1996, respectively.........4
Unaudited Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1997 and 1996.................................5
Consolidated Statement of Partners' Capital for the Six Months
Ended June 30, 1997 (unaudited).........................................6
Notes to Consolidated Financial Statements (unaudited)....................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................13
PART II. OTHER INFORMATION..................................................20
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>
2
<PAGE> 3
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,434 $ 16,489
Accounts receivable 4,375 6,237
Accounts receivable from affiliates 11,261 14,107
Other current assets 1,551 859
--------- ---------
Total current assets 18,621 37,692
--------- ---------
Equity investments 181,165 107,838
--------- ---------
Property and equipment:
Pipelines 76,317 151,253
Platforms and facilities 73,460 72,461
Oil and gas properties, at cost, using successful efforts method 120,062 109,047
--------- ---------
269,839 332,761
Less accumulated depreciation, depletion and amortization 79,517 46,206
--------- ---------
Property and equipment, net 190,322 286,555
--------- ---------
Investment in Tatham Offshore, Inc. 7,500 7,500
Other noncurrent receivable -- 8,531
Other noncurrent assets 4,272 5,410
--------- ---------
Total assets $ 401,880 $ 453,526
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 9,731 $ 17,769
Accounts payable to affiliates 1,529 3,504
--------- ---------
Total current liabilities 11,260 21,273
Deferred federal income taxes 1,564 1,722
Deferred revenue -- 8,913
Note payable 217,000 227,000
Other noncurrent liabilities 8,351 2,490
--------- ---------
Total liabilities 238,175 261,398
--------- ---------
Minority interest (179) 105
Partners' capital 163,884 192,023
--------- ---------
Total liabilities and partners' capital $ 401,880 $ 453,526
========= =========
</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>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 16,359 $ 8,619 $ 34,459 $ 17,926
Gathering and platform services 4,736 5,885 10,575 11,468
Equity in earnings 7,131 4,058 14,220 8,804
----------- ----------- ----------- -----------
28,226 18,562 59,254 38,198
----------- ----------- ----------- -----------
Costs and expenses:
Operating expenses 2,943 1,867 6,046 3,742
Depreciation, depletion and amortization 13,994 5,903 27,938 11,227
Impairment, abandonment and other 21,222 -- 21,222 --
General and administrative expenses and
management fee 3,377 2,068 5,851 3,403
----------- ----------- ----------- -----------
41,536 9,838 61,057 18,372
----------- ----------- ----------- -----------
Operating (loss) income (13,310) 8,724 (1,803) 19,826
Interest income and other 469 397 1,162 733
Interest and other financing costs (3,352) (26) (6,464) (641)
Minority interest in income 158 (96) 68 (230)
----------- ----------- ----------- -----------
Income before income taxes (16,035) 8,999 (7,037) 19,688
Income tax benefit (180) (162) (146) (385)
----------- ----------- ----------- -----------
Net (loss) income $ (15,855) $ 9,161 $ (6,891) $ 20,073
=========== =========== =========== ===========
Net (loss) income per Unit $ (0.64) $ 0.37 $ (0.28) $ 0.81
=========== =========== =========== ===========
Weighted average number of Units outstanding 24,367 24,367 24,367 24,367
=========== =========== =========== ===========
</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>
Six Months Ended June 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (6,891) $ 20,073
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Amortization of debt issue costs 481 383
Depreciation, depletion and amortization 27,938 11,227
Impairment, abandonment and other 21,222 --
Minority interest in income (68) 230
Equity in earnings (14,220) (8,804)
Distributions from equity investments 12,250 11,998
Deferred income taxes (158) (388)
Other noncash items (3,984) (3,654)
Changes in operating working capital:
Decrease (increase) in accounts receivable 1,862 (6,733)
Decrease (increase) in accounts receivable from affiliates 2,846 (3,503)
(Increase) decrease in other current assets (1,206) 37
Decrease in accounts payable and accrued liabilities (8,037) (16,990)
(Decrease) increase in payable to affiliates (1,976) 1,228
----------- -----------
Net cash provided by operating activities 30,059 5,104
----------- -----------
Cash flows from investing activities:
Additions to pipelines, platforms and facilities (3,420) (11,701)
Equity investments (22) (10,930)
Development of oil and gas properties (11,015) (30,365)
Other 185 --
----------- -----------
Net cash used in investing activities (14,272) (52,996)
----------- -----------
Cash flows from financing activities:
Decrease (increase) in restricted cash 716 (59)
Proceeds from note payable -- 55,220
Repayments of note payable (10,000) --
Debt issue costs (93) (1,718)
Distributions to partners (21,465) (15,540)
----------- -----------
Net cash (used in) provided by financing activities (30,842) 37,903
----------- -----------
Decrease in cash and cash equivalents (15,055) (9,989)
Cash and cash equivalents at beginning of year 16,489 15,506
----------- -----------
Cash and cash equivalents at end of period $ 1,434 $ 5,517
=========== ===========
Cash paid for interest, net of amounts capitalized $ 6,082 $ --
Cash paid for income taxes $ 2 $ --
</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 Unitholder Partner Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Partners' capital at
December 31, 1996 $ 196,224 $ (3,969) $ (232) $ 192,023
Net loss for the six months
ended June 30, 1997 (unaudited) (4,789) (1,681) (421) (6,891)
Cash distributions (unaudited) (14,912) (5,191) (1,145) (21,248)
------------ ------------ ------------ ------------
Partners' capital at
June 30, 1997 (unaudited) $ 176,523 $ (10,841) $ (1,798) $ 163,884
============ ============ ============ ============
Limited partnership Units
outstanding at December 31, 1996
and June 30, 1997 (unaudited) 18,075 6,292 (a) 24,367
============ ============ ============ ============
</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, is engaged in the gathering and transportation of
natural gas and crude oil through its pipeline systems located in the Gulf of
Mexico (the "Gulf") and in the development and production of oil and gas
reserves from its proved properties. The Partnership's assets include interests
in (i) nine natural gas pipelines, (ii) a crude oil pipeline system, (iii) five
strategically located multi-purpose platforms, (iv) three producing oil and gas
properties and (v) a dehydration facility.
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"), is the
general partner of the Partnership. 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.
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,
1996. All number of Units and per Unit disclosures have been restated to
reflect a two for one Preference and Common Unit split for the Unitholders of
record as of the close of business on December 31, 1996.
Other
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share", was issued in February 1997. SFAS No. 128 establishes new guidelines
for computing and presenting earnings per share and is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application of SFAS No. 128 is not permitted; however, pro forma
earnings per share may be disclosed in the notes to the consolidated financial
statements in the periods prior to adoption. Pro forma basic net income (loss)
per unit for the Partnership is equal to the primary earnings (losses) per unit
for the three and six months ended June 30, 1997 as presented in the
accompanying consolidated financial statements.
During June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 130 requires that all items
that are required to be recognized under the accounting standards as components
of comprehensive income be reported in a new financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is the change in equity of a business during a period from transactions
and other events and circumstances from nonowner sources. SFAS No. 131
establishes standards for the method public entities report information about
operating segments in both interim and annual financial statements issued to
shareholders and requires related disclosures about products and services,
geographic areas and major customers. Both statements are effective for fiscal
years beginning after December 15, 1997. The Partnership is currently
evaluating the disclosure requirements of these statements but does not
anticipate that adoption will have a significant impact on its consolidated
financial statements.
NOTE 2 - EQUITY INVESTMENTS:
In January 1997, the Partnership and affiliates of Marathon Oil Company
("Marathon") and Shell Oil Company ("Shell") formed Nautilus Pipeline Company,
L.L.C. ("Nautilus") to construct and operate an interstate natural gas pipeline
system. In addition, the same parties formed Manta Ray Offshore Gathering
Company, L.L.C. ("Manta Ray Offshore") to acquire an existing gathering system
from the Partnership. Such existing gathering system will
7
<PAGE> 8
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
be extended and connected to the system constructed by Nautilus. Nautilus and
Manta Ray Offshore were formed to serve growing production areas in the Green
Canyon area of the Gulf and are indirectly owned 50% by Shell, 24.3% by
Marathon and 25.7% by the Partnership. The total cost of the two systems is
estimated to be approximately $270 million. The Nautilus system, a new
jurisdictional interstate pipeline, will consist of a 30-inch line downstream
from Ship Shoal Block 207 connecting to the Exxon Company USA operated Garden
City gas processing plant, onshore Louisiana. Upstream of the Ship Shoal 207
terminal, the existing Manta Ray Offshore gathering system will be extended
into a broader gathering system that will serve shelf and deepwater production
areas around Ewing Bank Block 873 to the east and Green Canyon Block 65 to the
west. Affiliates of Marathon and Shell have dedicated for transportation to
each of the Nautilus and Manta Ray Offshore systems significant deep water
acreage positions in the area, including the Troika field (Green Canyon Block
244), and are providing the majority of the capital funding for the new
construction. The Partnership has provided approximately $10.4 million of
funding in addition to the contribution of the Manta Ray Offshore system.
In addition, the Partnership owns interests of 50% in Viosca Knoll Gathering
System ("Viosca Knoll"), 36% in Poseidon Oil Pipeline Company, L.L.C.
("POPCO"), 50% in Stingray Pipeline Company ("Stingray"), 40% in High Island
Offshore System ("HIOS"), 33 1/3% in U-T Offshore System ("UTOS") and 50% in
West Cameron Dehydration Company, L.L.C. ("West Cameron Dehy"). 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>
Six months ended June 30, 1997
------------------------------------------------------------------------------------------------------------
West Manta Ray
Viosca Cameron Offshore/
HIOS Knoll Stingray Dehy POPCO UTOS Nautilus Total
--------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 23,146 $ 10,156 $ 12,316 $ 1,299 $ 10,955 $ 1,875 $ 2,554
Other income 202 -- 500 -- 70 16 109
Operating expenses (7,874) (924) (6,046) (80) (2,139) (1,297) (838)
Depreciation (2,388) (1,173) (3,604) (8) (2,730) (283) (768)
Other expenses -- (911) (732) -- (2,451) -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings 13,086 7,148 2,434 1,211 3,705 311 1,057
Ownership percentage 40% 50% 50% 50% 36% 33.3% 25.7%
--------- --------- --------- --------- --------- --------- ---------
5,234 3,574 1,217 606 1,334 104 272
Adjustments:
- - Depreciation (a) 423 -- 477 -- -- 18 --
- - Contract (53) -- (170) -- -- -- --
amortization (a)
- - Other (68) -- (24) -- (180) (16) 1,472 (b)
--------- --------- --------- --------- --------- --------- ---------
Equity in earnings $ 5,536 $ 3,574 $ 1,500 $ 606 $ 1,154 $ 106 $ 1,744 $ 14,220
========= ========= ========= ========= ========= ========= ========= =========
Distributions (c) $ 6,400 $ 3,950 $ 1,100 $ 400 $ -- $ -- $ 400 $ 12,250
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
- -----------------
(a) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations".
(b) Represents additional net earnings specifically allocated to the
Partnership related to the assets contributed by the Partnership to the
Manta Ray Offshore joint venture.
(c) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
8
<PAGE> 9
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUMMARIZED HISTORICAL OPERATING RESULTS
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30, 1996
---------------------------------------------------------------------------------------------
Viosca West Cameron
HIOS Knoll Stingray Dehy POPCO UTOS Total
--------- --------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 22,110 $ 6,055 $ 11,882 $ 862 $ 608 $ 1,891
Other income 84 -- 700 -- -- 32
Operating expenses (8,631) (42) (6,459) (90) (808) (1,284)
Depreciation (2,387) (1,109) (3,466) (8) -- (280)
Other expenses (40) -- (886) -- -- --
--------- --------- --------- --------- --------- ---------
Net earnings 11,136 4,904 1,771 764 (200) 359
Ownership percentage 40% 50% 50% 50% 50% 33.3%
--------- --------- --------- --------- --------- ---------
4,454 2,452 885 382 (100) 120
Adjustments:
- - Depreciation (a) 455 -- 498 -- -- 17
- - Contract amortization (a) (53) -- (170) -- -- --
- - Rate refund reserve (52) -- -- -- -- --
- - Other (44) -- (24) -- -- (16)
--------- --------- --------- --------- --------- ---------
Equity in earnings $ 4,760 $ 2,452 $ 1,189 $ 382 $ (100) $ 121 $ 8,804
========= ========= ========= ========= ========= ========= =========
Distributions (b) $ 5,800 $ 2,700 $ 1,423 $ 275 $ 1,400 $ 400 $ 11,998
========= ========= ========= ========= ========= ========= =========
</TABLE>
- --------------
(a) Adjustments result from purchase price adjustments made in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations".
(b) Future distributions could be restricted by the terms of the equity
investees' respective credit agreements.
NOTE 3 - PARTNERS' CAPITAL INCLUDING CASH DISTRIBUTIONS:
As of June 30, 1997, the Partnership had 18,075,000 Preference Units and
6,291,894 Common Units outstanding. All of the Preference Units are owned by
the public, representing a 72.7% effective limited partnership interest in the
Partnership. Leviathan, through its ownership of all of the Common Units, its
1% general partner interest in the Partnership and its approximate 1%
nonmanaging interest in certain of the Partnership's subsidiaries, owns a 27.3%
effective interest in the Partnership.
Distributions by the Partnership of its Available Cash are effectively made 98%
to Unitholders and 2% to Leviathan, subject to the payment of incentive
distributions to Leviathan if certain target levels of cash distributions to
Unitholders are achieved (the "Incentive Distributions"). As an incentive, the
general partner's interest in the portion of quarterly cash distributions in
excess of $0.325 per Unit and less than or equal to $0.375 per Unit is
increased to 15%. For quarterly cash distributions over $0.375 per Unit but
less than or equal to $0.425 per Unit, the general partner receives 25% of such
incremental amount and for all quarterly cash distributions in excess of $0.425
per Unit, the general partner receives 50% of the incremental amount.
In February 1997, the Partnership paid a cash distribution of $0.40 per
Preference and Common Unit for the period from October 1, 1996 through December
31, 1996 and an Incentive Distribution of $0.4 million to Leviathan, as general
partner. In May 1997, the Partnership paid a cash distribution of $0.425 per
Preference and Common Unit for the period from January 1, 1997 through March
31, 1997 and an Incentive Distribution of $0.6 million to Leviathan. In July
1997, the Partnership declared a cash distribution of $0.45 per Preference and
Common Unit for the period from April 1, 1997 through June 30, 1997 which will
be paid on August 14, 1997 to Unitholders of record as of July 31, 1997.
Leviathan will receive an Incentive Distribution of $1.2 million for the three
months ended June 30, 1997.
9
<PAGE> 10
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - IMPAIRMENT, ABANDONMENT AND OTHER:
Pursuant to a gathering agreement (the "Ewing Bank Agreement") among DeepTech,
Tatham Offshore, Inc. ("Tatham Offshore"), an affiliate of DeepTech, and Ewing
Bank Gathering Company, L.L.C. ("Ewing Bank"), a subsidiary of the Partnership,
Tatham Offshore dedicated all natural gas and crude oil produced from eight of
its Ewing Bank leases for gathering and redelivery by the Partnership and was
obligated to pay a demand rate as well as a commodity charge equal to 4% of the
market price of production actually transported. Pursuant to the Ewing Bank
Agreement, the Partnership constructed gathering facilities connecting Tatham
Offshore's Ewing Bank 914 #2 well to a third party platform at Ewing Bank Block
826.
The Partnership and Tatham Offshore also entered into a gathering and
processing agreement (the "Ship Shoal Agreement") pursuant to which the
Partnership constructed a gathering line from Tatham Offshore's Ship Shoal
Block 331 lease to interconnect with a third-party pipeline at the
Partnership's processing facilities located on its Ship Shoal Block 332
platform. Pursuant to the terms of the Ship Shoal Agreement, and in
consideration for constructing the interconnect, refurbishing the platform and
providing access to the processing facilities, Tatham Offshore was required to
pay the Partnership demand charges and has dedicated all production from its
Ship Shoal Block 331 lease and eight additional surrounding leases for
gathering and processing by the Partnership for additional commodity fees.
For the years ended December 31, 1996, 1995 and 1994, Tatham Offshore paid the
Partnership demand and commodity charges of $0.3 million, $9.0 million and $7.0
million, respectively, under the Ewing Bank and Ship Shoal Agreements.
Effective February 1, 1996, the Partnership agreed to release Tatham Offshore
from all remaining demand charge payments under the Ewing Bank and Ship Shoal
Agreements, a total of $17.8 million. Tatham Offshore remained obligated to pay
all commodity charges related to production from these properties. In exchange,
the Partnership received 7,500 shares of Tatham Offshore 9% Senior Preferred
Stock, which was valued at $7.5 million, and added $7.5 million to the Payout
Amount under the Purchase and Sale Agreement as discussed below.
Pursuant to a purchase and sale agreement (the "Purchase and Sale Agreement")
with Tatham Offshore whereby the Partnership acquired Tatham Offshore's working
interests in Viosca Knoll Block 817, Garden Banks Block 72 and Garden Banks
Block 117 (the "Assigned Properties"), the Partnership is entitled to retain
all of the revenue attributable to the Assigned Properties until 50% of the net
revenue has reduced the Payout Amount to zero whereupon Tatham Offshore is
entitled to receive a reassignment of one half of the working interests in the
Assigned Properties subject to certain conditions. As of June 30, 1997, the
Payout Amount totaled $45.9 million.
The Ewing Bank 914 #2 well was shut-in in May 1997 as a result of a downhole
mechanical problem. Although Tatham Offshore is evaluating potential workover
or recompletion possibilities for this well, it has announced its intent to
reserve the remaining costs associated with the Ewing Bank 914 #2 well given
its current non-productive status. Production related problems resulting from
the completions of the three wellbores at Ship Shoal Block 331 have resulted in
only a minimal amount of production from the property and Tatham Offshore has
decided not to pursue further recompletion operations at this time.
In addition, the Partnership has determined that the designated revenue from
the Assigned Properties is not likely to be sufficient to satisfy the Payout
Amount. Under these circumstances, the Partnership would retain 100% of the
revenue from its working interests in the Assigned Properties, would bear all
abandonment obligations related to these properties and would not realize the
$7.5 million plus accrued interest that had been recorded as a noncurrent
receivable related to the settlement of the demand charge obligations under the
Ewing Bank and Ship Shoal Agreements.
Accordingly in June 1997, the Partnership recorded as impairment, abandonment
and other expense on the accompanying consolidated statement of operations a
non-recurring charge of $21.2 million to reserve its investment in certain
gathering facilities and other assets associated with Tatham Offshore's Ewing
Bank 914 #2 well and Ship Shoal Block 331 property, to fully accrue its
abandonment obligations associated with these gathering facilities, to reserve
its noncurrent receivable related to the prepayment of the demand charge
obligations under the Ewing Bank and Ship Shoal Agreements and to accrue
certain abandonment obligations associated with its oil and gas properties.
10
<PAGE> 11
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - RELATED PARTY TRANSACTIONS:
Management fees. For the six months ended June 30, 1997, Leviathan charged the
Partnership $3.9 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 public offering of additional Preference Units) and (ii) the
investment of such proceeds in additional acquisitions or construction
projects. During the six months ended June 30, 1997, Leviathan charged the
Partnership $0.4 million to compensate DeepTech for additional taxable income
allocated to Leviathan. The management agreement expires on June 30, 2002, and
may thereafter be terminated on 90 days' notice by either party.
Transportation and platform access agreements. Tatham Offshore is obligated to
pay commodity charges, based on the volume of oil and gas transported or
processed, to the Partnership pursuant to certain transportation agreements.
Tatham Offshore is also obligated to pay certain platform access fees and
processing fees to the Partnership. For the six months ended June 30, 1997, the
Partnership received $0.8 million from Tatham Offshore pursuant to these
agreements.
For the six months ended June 30, 1997, Viosca Knoll and POPCO charged the
Partnership $2.3 million and $1.0 million, respectively, for services relating
to gathering production from the Viosca Knoll Block 817 and the Garden Banks
Block 72 and 117 leases.
The Partnership charged Viosca Knoll $1.1 million for platform access fees
related to the Viosca Knoll Block 817 platform during the six months ended June
30, 1997.
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. During the six months ended June
30, 1997, oil and gas sales to Offshore Marketing totaled $34.5 million.
Other. During the six months ended June 30, 1997, the Partnership was charged
$3.1 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.
For the six months ended June 30, 1997, the Partnership charged $50,000 and
$137,000, respectively, to Viosca Knoll and Manta Ray Offshore pursuant to
management and operations agreements with each such party.
POPCO entered into certain agreements with the Partnership to provide for use
by POPCO of certain pipelines and platforms owned by the Partnership for fees
which consist of a monthly rental fee of $100,000 per month for the period from
February 1996 to January 1997.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
The Partnership hedges a portion of its oil and natural gas production to
reduce the Partnership's exposure to fluctuations in market prices of oil and
natural gas and to meet certain requirements of the Partnership Credit
Facility. The Partnership uses various financial instruments whereby monthly
settlements are based on differences between the prices specified in the
instruments and the settlement prices of certain futures contracts quoted on
the New York Mercantile Exchange ("NYMEX") or certain other indices. The
Partnership settles the instruments by paying the negative difference or
receiving the positive difference between the applicable settlement price and
the price specified in the contract. The instruments utilized by the
Partnership differ from futures contracts in that there is no contractual
obligation which requires or allows for the future delivery of the product.
Gains or losses on hedging activities are recognized as oil and gas sales in
the period in which the hedged production is sold.
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LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
At June 30, 1997, the Partnership had open natural gas hedges on approximately
41,575 million British thermal units ("MMbtu") of natural gas per day for the
remaining period in 1997 at an average price of $2.18 per MMbtu. In addition, as
of June 30, 1997, the Partnership had entered into commodity swap transactions
for calendar 1998 of (i) 10,000 MMbtu of natural gas per day at an average price
of $2.20 per MMbtu and (ii) 10,000 MMbtu per day at a fixed price to be
determined at the Partnership's option equal to the December 1997 Natural Gas
Futures Contract on the NYMEX as quoted at any time during 1997 to and including
the last three trading days of the December 1997 contract minus $0.14 per MMbtu.
At June 30, 1997, the Partnership had open crude oil hedges on approximately
2,135 barrels per day for the remaining period in 1997 at an average price of
$20.59 per barrel. In addition, the Partnership hedged 250 barrels of oil per
day at $22.03 per barrel for calendar year 1998.
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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) nine natural gas pipelines
(the "Gas Pipelines"), (ii) a crude oil pipeline system, (iii) five
strategically located multi-purpose platforms, (iv) three producing oil and gas
properties and (v) a dehydration facility.
The Gas Pipelines, strategically located offshore Louisiana and eastern Texas,
gather and transport natural gas for producers, marketers, pipelines and
end-users for a fee. The Gas Pipelines include 977 miles of pipeline with a
throughput capacity of 5.9 billion cubic feet ("Bcf") of gas per day. Each of
the Gas Pipelines interconnects with one or more long line transportation
pipelines that provide access to multiple markets in the eastern half of the
United States. The Partnership's interest in the Gas Pipelines consists of: a
100% interest in each of Manta Ray Gathering Company, L.L.C. ("Manta Ray"),
Green Canyon Pipe Line Company, L.L.C. ("Green Canyon") and Tarpon Transmission
Company ("Tarpon"); a 50% partnership interest in each of Stingray and Viosca
Knoll; a 40% partnership interest in HIOS; a 33 1/3% partnership interest in
UTOS; and an effective 25.7% interest in each of Manta Ray Offshore and
Nautilus.
The Partnership owns a 36% interest in POPCO which owns and operates the
Poseidon Oil Pipeline ("Poseidon"). Poseidon is a major new sour crude oil
pipeline system that was built in response to an increased demand for
additional sour crude oil pipeline capacity in the central Gulf. Poseidon,
which has a capacity of approximately 400,000 barrels per day, was placed in
service in two phases, in April and December 1996. In March 1997, POPCO began
construction of the third phase of Poseidon, a new 24-inch diameter pipeline
from Calliou Island to Houma, Louisiana, which is expected to be operational in
late 1997. Poseidon is currently transporting an average of approximately
52,000 barrels of oil per day.
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 facilitate maintenance functions on the Gas
Pipelines and Poseidon. 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. The properties, which are subject to certain reversionary rights
held by Tatham Offshore, 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 Knoll Block 817 project is currently
producing an aggregate of approximately 81 million cubic feet ("MMcf") of gas,
295 barrels of oil and 785 barrels of water per day. In addition, the
Partnership has placed on production five wells on the Garden Banks Block 72
lease and two wells on Garden Banks Block 117. The Garden Banks Block 72 wells,
which began producing in May 1996, are currently producing a total of
approximately 2,445 barrels of oil, 10 MMcf of gas and 240 barrels of water per
day. The Garden Banks Block 117 wells, which began producing in July 1996 and
May 1997, are currently producing a total of approximately 3,050 barrels of
oil, 8 MMcf of gas and 1,725 barrels of water per day.
The Partnership owns a 50% interest in West Cameron Dehy, which owns certain
dehydration facilities located at the northern terminus of the Stingray system,
onshore Louisiana. The Partnership also 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.
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<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
Oil and gas sales totaled $16.4 million for the three months ended June 30,
1997 as compared with $8.6 million for the same period in 1996. The increase in
oil and gas sales of $7.8 million is attributable to increased production from
the Partnership's oil and gas properties. During the three months ended June
30, 1997, the Partnership produced and sold 5,516 MMcf of gas and 206,000
barrels of oil at average prices of $2.18 per thousand cubic feet ("Mcf") and
$20.61 per barrel, respectively. During the same period in 1996, the
Partnership produced and sold 3,378 MMcf of gas and 25,200 barrels of oil at
average prices of $2.31 per Mcf and $21.57 per barrel, respectively.
Revenue from gathering and platform services totaled $4.7 million for the three
months ended June 30, 1997 as compared with $5.9 million for the same period in
1996. The decrease of $1.2 million includes decreases of $1.7 million as a
result of the contribution of a significant portion of the Manta Ray system to
Manta Ray Offshore in January 1997 resulting in revenue from these assets being
included in equity in earnings for the three months ended June 30, 1997 and
$0.3 million related to lower throughput on the Ewing Bank and Tarpon systems
offset by increases of $0.6 million in platform services revenue from the
Partnership's Viosca Knoll Block 817 platform as a result of additional oil and
gas volumes processed on the platform and $0.2 million from the Green Canyon
system primarily related to increased throughput. Gathering volumes for the
Green Canyon system increased 3% for the three months ended June 30, 1997 as
compared with the same period in 1996 due to increased production from the
Texaco operated Shasta field located in Green Canyon Block 6. Gathering volumes
from the Tarpon system declined 24% during the second quarter of 1997 as
compared with the second quarter of 1996 as a result of normal decline in the
producing fields attached to the system. Gathering volumes from the Ewing Bank
system declined 84% during the second quarter of 1997 as compared with the
second quarter of 1996 due to a downhole mechanical problem which shut-in
Tatham Offshore's Ewing Bank 914 #2 well in May 1997.
Revenue from the Partnership's equity interests in Stingray, HIOS, UTOS, Viosca
Knoll, POPCO, Manta Ray Offshore, Nautilus and West Cameron Dehy (the "Equity
Investees") totaled $7.1 million for the three months ended June 30, 1997 as
compared with $4.1 million for the same period in 1996. The increase of $3.0
million primarily reflects increases of (i) $1.2 million from Viosca Knoll,
Stingray, West Cameron Dehy and HIOS as a result of increased throughput, (ii)
$0.8 million from POPCO which placed Poseidon in service in two-phases, April
1996 and December 1996, and (iii) $1.0 million from Manta Ray Offshore related
to the Manta Ray assets contributed by the Partnership. Total gas throughput
volumes for the Equity Investees increased 12% from the three months ended June
30, 1996 to the three months ended June 30, 1997 primarily as a result of
increased throughput on the Viosca Knoll, Stingray, HIOS and UTOS systems as
well as the addition of the Manta Ray Offshore system throughput as an Equity
Investee, as discussed above. Oil volumes from Poseidon totaled 4.3 million
barrels and 0.2 million barrels for the three months ended June 30, 1997 and
1996, respectively.
Operating expenses for the three months ended June 30, 1997 totaled $2.9
million as compared to $1.9 million for the same period in 1996. The increase
of $1.0 million is primarily attributable to the operation by the Partnership
of nine additional oil and gas wells during the three months ended June 30,
1997 as compared with the same period in 1996.
Depreciation, depletion and amortization totaled $14.0 million for the three
months ended June 30, 1997 as compared with $5.9 million for the same period in
1996. The increase of $8.1 million is comprised of (i) an $8.3 million increase
in depreciation and depletion on oil and gas wells and facilities located on
the Viosca Knoll Block 817, Garden Banks Block 72 and the Garden Banks Block
117 as a result of additional production from these leases and (ii) a $0.2
million decrease in depreciation on pipelines, platforms and facilities.
Impairment, abandonment and other totaled $21.2 million for the three months
ended June 30, 1997 and consisted of a non-recurring charge to reserve the
Partnership's investment in certain gathering facilities and other assets
associated with Tatham Offshore's Ewing Bank 914 #2 well and Ship Shoal Block
331 property, to fully accrue the Partnership's abandonment obligations
associated with these gathering facilities, to reserve the Partnership's
noncurrent receivable related to the prepayment of the demand charge
obligations under the Ewing Bank and Ship
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<PAGE> 15
Shoal Agreements and to accrue certain abandonment obligations associated with
its oil and gas properties. See "Notes to Consolidated Financial Statements --
Note 4 -- Impairment, Abandonment and Other".
General and administrative expenses, including the management fee allocated
from Leviathan, totaled $3.4 million for the three months ended June 30, 1997
as compared with $2.1 million for the same period in 1996. The increase of $1.3
million reflects (i) a $0.6 million increase in management fees allocated by
Leviathan to the Partnership as a result of increased operational activities
and (ii) a $0.7 million increase in direct general and administrative expenses
of the Partnership primarily related to the appreciation and vestiture of unit
appreciation rights granted to certain officers and employees in 1995, 1996 and
1997.
Interest income and other totaled $0.5 million for the three months ended June
30, 1997 as compared with $0.4 million for the three months ended June 30,
1996.
Interest and other financing costs, net of capitalized interest, for the three
months ended June 30, 1997 totaled $3.4 million as compared with $26,000 for
the same period in 1996. During the three months ended June 30, 1997 and 1996,
the Partnership capitalized $0.6 million and $3.7 million, respectively, of
interest costs in connection with construction projects and drilling activities
in progress during such periods.
Net loss for the three months ended June 30, 1997 totaled $15.9 million, or
$0.64 per Unit, as compared with net income of $9.2 million, or $0.37 per Unit,
for the three months ended June 30, 1996 as a result of the items discussed
above.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Oil and gas sales totaled $34.5 million for the six months ended June 30, 1997
as compared with $17.9 million for the same period in 1996. The increase in oil
and gas sales of $16.6 million is attributable to increased production from the
Partnership's oil and gas properties. During the six months ended June 30,
1997, the Partnership produced and sold 11,707 MMcf of gas and 409,000 barrels
of oil at average prices of $2.16 per Mcf and $21.56 per barrel, respectively.
During the same period in 1996, the Partnership produced and sold 6,376 MMcf of
gas and 25,200 barrels of oil at average prices of $2.64 per Mcf and $21.57 per
barrel, respectively.
Revenue from gathering and platform services totaled $10.6 million for the six
months ended June 30, 1997 as compared with $11.5 million for the same period
in 1996. The decrease of $0.9 million includes decreases of $3.1 million as a
result of the contribution of a significant portion of the Manta Ray system to
Manta Ray Offshore in January 1997 resulting in revenue from these assets being
included in equity in earnings for the remainder of the six months ended June
30, 1997 and $0.2 million related to lower throughput on the Ewing Bank system
offset by increases of $1.4 million in platform services revenue from the
Partnership's Viosca Knoll Block 817 platform as a result of additional oil and
gas volumes processed on the platform and $1.0 million from the Tarpon and
Green Canyon systems primarily related to the deregulation of the Tarpon system
allowing the Partnership to recognize additional revenue during the current
period related to gathering fees collected in prior periods. Gathering volumes
for the Green Canyon system increased 2% for the six months ended June 30, 1997
as compared with the same period in 1996 due to increased production from the
Texaco operated Shasta field located in Green Canyon Block 6. Gathering volumes
from the Manta Ray system, prior to its contribution to Manta Ray Offshore,
declined 34% as compared with 1996 as a result of temporary platform related
production problems from two of the fields connected to the Manta Ray system.
Gathering volumes from the Tarpon system declined 29% during the six months
ended June 30, 1997 as compared with the same period in 1996 as a result of
normal decline in the producing fields attached to the system. Gathering
volumes from the Ewing Bank system declined 72% during the six months ended
June 30, 1997 as compared with the same period in 1996 due to a downhole
mechanical problem which shut-in Tatham Offshore's Ewing Bank 914 #2 well in
May 1996.
Revenue from the Equity Investees totaled $14.2 million for the six months
ended June 30, 1997 as compared with $8.8 million for the same period in 1996.
The increase of $5.4 million primarily reflects increases of (i) $2.2 million
from Viosca Knoll, Stingray and HIOS as a result of increased throughput, (ii)
$1.3 million from POPCO which placed Poseidon in service in two-phases, April
1996 and December 1996, (iii) $0.2 million from West
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<PAGE> 16
Cameron Dehy and (iv) $1.7 million from Manta Ray Offshore related to the Manta
Ray assets contributed by the Partnership. Total gas throughput volumes for the
Equity Investees increased 12% from the six months ended June 30, 1996 to the
six months ended June 30, 1997 primarily as a result of increased throughput on
the Viosca Knoll, Stingray, HIOS and UTOS systems as well as the addition of
the Manta Ray Offshore system throughput as an Equity Investee, as discussed
above. Oil volumes from Poseidon totaled 8.0 million barrels for the six months
ended June 30, 1997 as compared with 0.2 million barrels for the period of
inception of operations in April 1996 through June 30, 1996.
Operating expenses for the six months ended June 30, 1997 totaled $6.0 million
as compared to $3.7 million for the same period in 1996. The increase of $2.3
million is primarily attributable to the operation by the Partnership of nine
additional oil and gas wells during the six months ended June 30, 1997 as
compared with the same period in 1996.
Depreciation, depletion and amortization totaled $27.9 million for the six
months ended June 30, 1997 as compared with $11.2 million for the same period
in 1996. The increase of $16.7 million is comprised of (i) an $17.1 million
increase in depreciation and depletion on oil and gas wells and facilities
located on Viosca Knoll Block 817, Garden Banks Block 72 and the Garden Banks
Block 117 as a result of increased production from these leases which initiated
production in December 1995, May 1996 and July 1996, respectively, and (ii) a
$0.4 million decrease in depreciation on pipelines, platforms and facilities.
Impairment, abandonment and other totaled $21.2 million for the six months
ended June 30, 1997 and consisted of a non-recurring charge to reserve the
Partnership's investment in certain gathering facilities and other assets
associated with Tatham Offshore's Ewing Bank 914 #2 well and Ship Shoal 331
property, to fully accrue the Partnership's abandonment obligations associated
with these gathering facilities, to reserve the Partnership's noncurrent
receivable related to the prepayment of the demand charge obligations under the
Ewing Bank and Ship Shoal Agreements and to accrue certain abandonment
obligations associated to its oil and gas properties. See "Notes to
Consolidated Financial Statements -- Note 4 -- Impairment, Abandonment and
Other".
General and administrative expenses, including the management fee allocated
from Leviathan, totaled $5.9 million for the six months ended June 30, 1997 as
compared with $3.4 million for the same period in 1996. General and
administrative expenses for the six months ended June 30, 1996 included a
one-time $1.4 million reimbursement from POPCO as a result of the Partnership's
management of the initial phase of the construction of Poseidon. Excluding this
one-time reimbursement by POPCO, general and administrative expenses for the
six months ended June 30, 1997 increased $1.1 million as compared with the same
period in 1996. This increase reflects (i) a $0.9 million increase in
management fees allocated by Leviathan to the Partnership as a result of
increased operational activities, (ii) a $0.8 million increase in direct
general and administrative expenses of the Partnership primarily related to the
appreciation and vestiture of unit appreciation rights granted to certain
officers and employees in 1995, 1996 and 1997 and (iii) a $0.6 million decrease
in the reimbursement to DeepTech for certain tax liabilities pursuant to the
management agreement with Leviathan (See "Notes to Consolidated Financial
Statements -- Note 5 -- Related Party Transactions").
Interest income and other totaled $1.2 million for the six months ended June
30, 1997 as compared with $0.7 million for the six months ended June 30, 1996.
Interest and other financing costs, net of capitalized interest, for the six
months ended June 30, 1997 totaled $6.5 million as compared with $0.6 million
for the same period in 1996. During the six months ended June 30, 1997 and
1996, the Partnership capitalized $1.4 million and $8.5 million, respectively,
of interest costs in connection with construction projects and drilling
activities in progress during such periods.
Net loss for the six months ended June 30, 1997 totaled $6.9 million, or $0.28
per Unit, as compared with net income of $20.1 million, or $0.81 per Unit, for
the six months ended June 30, 1996 as a result of the items discussed above.
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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
(discussed below). Net cash provided by operating activities for the six months
ended June 30, 1997 totaled $30.1 million. At June 30, 1997, the Partnership
had cash and cash equivalents of $1.4 million.
Cash from continuing operations is derived from (i) payments for gathering gas
through the Partnership's 100% owned pipelines, (ii) platform access and
processing fees, (iii) cash distributions from Equity Investees and (iv) the
sale of oil and gas attributable to the Partnership's interest in three
producing properties. See "-- Overview" for current production rates from these
properties.
The Partnership's cash flows from operations will be affected by the ability of
each Equity Investee to make distributions. Distributions from such entities
are subject to the discretion of their respective management committees.
Further, each of Stingray, POPCO and Viosca Knoll is party to a credit
agreement under which it has outstanding obligations that may restrict the
payments of distributions to its owners. Distributions from Equity Investees
during the six months ended June 30, 1997 totaled $12.3 million.
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. This term loan agreement is principally secured by current
and future gas transportation contracts between Stingray and its customers. As
of June 30, 1997, Stingray had $20.3 million outstanding under its term loan
agreement bearing interest at an average floating rate of 6.4% per annum.
In April 1996, POPCO entered into a revolving credit facility (the "POPCO
Credit Facility") with a syndicate of commercial banks to provide up to $150
million for the construction of the second and third phases of Poseidon and for
other working capital needs of POPCO. 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. As of June
30, 1997, POPCO had $108.0 million outstanding under its credit facility
bearing interest at an average floating rate of 6.9% per annum. Currently,
approximately $37.3 million of additional funds are available under the POPCO
Credit Facility.
In December 1996, Viosca Knoll entered into a revolving credit facility (the
"Viosca Knoll Credit Facility") with a syndicate of commercial banks to provide
up to $100 million for the addition of compression to the Viosca Knoll system
and for other working capital needs of Viosca Knoll, including funds for a
one-time distribution of $25 million to its partners. Viosca Knoll's ability to
borrow money under the facility is subject to certain customary terms and
conditions, including borrowing base limitations. The Viosca Knoll Credit
Facility is secured by a substantial portion of Viosca Knoll's assets and
matures on December 20, 2001. As of June 30, 1997, Viosca Knoll had $34.4
million outstanding under its credit facility bearing interest at an average
floating interest rate of 6.4% per annum. Currently, approximately $32.5
million of additional funds are available under the Viosca Knoll Credit
Facility.
The Partnership Credit Facility is a revolving credit facility providing for up
to $300 million of available credit subject to customary terms and conditions,
including certain incurrence limitations. Proceeds from the Partnership 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 distributions to the Unitholders. The
Partnership Credit Facility can also be utilized to issue letters of credit as
may be required from time to time; however, no letters of credit are currently
outstanding. The Partnership Credit Facility matures in December 1999; is
guaranteed by Leviathan and each of the Partnership's subsidiaries; and is
secured by the management agreement with Leviathan, substantially all of the
assets of the Partnership and Leviathan's 1% general partner interest in the
Partnership and approximate 1% interest in certain subsidiaries of the
Partnership. As of June 30, 1997, the Partnership had $217.0 million
outstanding under its credit facility bearing interest at an average floating
rate of 6.5% per annum.
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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, including incentive distributions, as applicable,
(ii) expenditures for the maintenance of its pipelines and related
infrastructure and the acquisition and construction of additional pipelines and
related facilities for the gathering, transportation and processing of oil and
gas in the Gulf, (iii) expenditures related to its producing oil and gas
properties, (iv) management fees and other operating expenses, (v)
contributions to Equity Investees as required to fund capital expenditures for
new facilities and (vi) debt service on its outstanding indebtedness.
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 an amount equal to or exceeding the Minimum Quarterly Distribution (as
described in the Partnership Agreement) per Unit per quarter. At the current
distribution rate of $0.45 per Unit, the quarterly Partnership distributions
total $12.4 million in respect of the Preference Units, Common Units and
general partner interest ($49.4 million on an annual basis, including $16.9
million to Leviathan). The Partnership believes that it will be able to
continue to pay at least the current quarterly distribution of $0.45 per
Preference and Common Unit for the foreseeable future.
Distributions by the Partnership of its Available Cash are effectively made 98%
to Unitholders and 2% to Leviathan, as general partner, subject to the payment
of Incentive Distributions to Leviathan. As an incentive, the general partner's
interest in the portion of quarterly cash distributions in excess of $0.325 per
Unit and less than or equal to $0.375 per Unit is increased to 15%. For
quarterly cash distributions over $0.375 per Unit but less than or equal to
$0.425 per Unit, the general partner receives 25% of such incremental amount
and for all quarterly cash distributions in excess of $0.425 per Unit, the
general partner receives 50% of the incremental amount. For the six months
ended June 30, 1997, the Partnership paid Leviathan Incentive Distributions
totaling $1.0 million and will pay Leviathan an Incentive Distribution of $1.2
million in August 1997.
In January 1997, the Partnership and affiliates of Marathon and Shell formed
Nautilus to construct and operate an interstate natural gas pipeline system. In
addition, the same parties formed Manta Ray Offshore to acquire an existing
gathering system from the Partnership. Such existing gathering system will be
extended and connected to the system constructed by Nautilus. Nautilus and
Manta Ray Offshore were formed to serve growing production areas in the Green
Canyon area of the Gulf and are indirectly owned 50% by Shell, 24.3% by
Marathon and 25.7% by the Partnership. The total cost of the two systems is
estimated to be approximately $270 million. The Nautilus system will consist of
a 30-inch line downstream from Ship Shoal Block 207 connecting to the Exxon
Company USA operated Garden City gas processing plant, onshore Louisiana.
Upstream of the Ship Shoal 207 terminal, the existing Manta Ray Offshore
gathering system will be extended into a broader gathering system that will
serve shelf and deepwater production areas around Ewing Bank Block 873 to the
east and Green Canyon Block 65 to the west. Affiliates of Marathon and Shell
have dedicated for transportation to each of the Nautilus and Manta Ray
Offshore systems significant deep water acreage positions in the area,
including the Troika field (Green Canyon Block 244), and are providing the
majority of the capital funding for the new construction. The Partnership has
provided approximately $10.4 million of funding in addition to its contribution
of the Manta Ray Offshore system.
The Partnership anticipates that its capital expenditures and equity
investments for the remaining portion of 1997 will relate to continuing
acquisition and construction activities including the construction and
installation of a new platform and processing facilities at East Cameron Block
373. This new platform, which the Partnership anticipates will be placed in
service during April 1998 at a projected cost of approximately $32 million,
will be strategically located to exploit reserves in the East Cameron and
Garden Banks area of the Gulf and will be the terminus for an extension of the
Stingray system. The Partnership anticipates funding such cash requirements
primarily with available cash flow and borrowings under the Partnership Credit
Facility.
As previously discussed, POPCO, in March 1997, began construction of phase III
of Poseidon which is expected to be operational in late 1997. The majority of
these capital expenditures by POPCO as well as capital expenditures by Viosca
Knoll and Stingray are anticipated to be funded by borrowings under their
respective credit facilities. In addition, the majority of the capital
requirements of Nautilus and Manta Ray Offshore are anticipated to be funded by
the equity contributions of affiliates of Shell and Marathon. The Partnership's
capital expenditures and equity investments for the six months ended June 30,
1997 were $14.5 million, including $10.4 million related to the Nautilus/Manta
Ray
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Offshore project discussed above. The Partnership may also contribute existing
assets to new joint ventures as partial consideration for its ownership
interest therein.
Interest costs incurred by the Partnership related to the Partnership Credit
Facility totaled $7.9 million for the six months ended June 30, 1997. The
Partnership capitalized $1.4 million of such interest costs in connection with
construction projects and drilling activities in progress during the period.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
This quarterly report contains certain forward looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
typically punctuated by words or phrases such as "anticipate," "estimate,"
"project," "should," "may," "management believes," and words or phrases of
similar import. Although management believes that such statements and
expressions are reasonable and made in good faith, it can give no assurance
that such expectations will prove to have been correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. Among the key factors that may have a direct bearing on
the Partnership's results of operations and financial condition are: (i)
competitive practices in the industry in which the Partnership competes, (ii)
the impact of current and future laws and government regulations affecting the
industry in general and the Partnership's operations in particular, (iii)
environmental liabilities to which the Partnership may become subject in the
future that are not covered by an indemnity or insurance, (iv) the throughput
levels achieved by the Gas Pipelines, Poseidon and any future pipelines in
which the Partnership owns an interest, (v) the ability to access additional
reserves to offset the natural decline in production from existing wells
connected to the Gas Pipelines and Poseidon, (vi) changes in gathering,
transportation, processing, handling and other rates due to changes in
governmental regulation and/or competitive factors, (vii) the impact of oil and
natural gas price fluctuations, (viii) the production rates and reserve
estimates associated with the Partnership's producing oil and gas properties,
(ix) significant changes from expectations of capital expenditures and
operating expenses and unanticipated project delays and (x) the ability of the
Equity Investees to make distributions to the Partnership. The Partnership
disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof.
19
<PAGE> 20
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
10.1 Fourth Amendment to First Amended and Restated Management
Agreement between DeepTech International Inc. and
Leviathan Gas Pipeline Company dated as of May 1, 1997.
(b) Reports on Form 8-K
None.
20
<PAGE> 21
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.
LEVIATHAN GAS PIPELINE
PARTNERS, L.P.
(Registrant)
By: LEVIATHAN GAS PIPELINE
COMPANY, its General Partner
Date: August 12, 1997 By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Chief Financial Officer
Date: August 12, 1997 By: /s/ DENNIS A. KUNETKA
------------------------------------
Dennis A. Kunetka
Senior Vice President - Corporate
Finance (Principal Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
INDEX DESCRIPTION
----- -----------
<S> <C>
10.1 Fourth Amendment to First Amended and Restated Management
Agreement between DeepTech International Inc. and
Leviathan Gas Pipeline Company dated as of May 1, 1997.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FOURTH AMENDMENT TO
FIRST AMENDED AND RESTATED MANAGEMENT AGREEMENT
BETWEEN DEEPTECH INTERNATIONAL INC.
AND LEVIATHAN GAS PIPELINE COMPANY
This Fourth Amendment dated as of May 1, 1997 (this "Amendment") has
been executed and delivered by the undersigned for the purpose of amending and
extending the First Amended and Restated Management Agreement dated as of June
27, 1994 (the "Agreement", as amended) between DeepTech International Inc. and
Leviathan Gas Pipeline Company. Unless otherwise defined in the Amendment, all
capitalized terms herein shall have the meanings ascribed to them in the
Agreement.
WHEREAS, the parties deem it to be in their mutual best interests to
amend and extend the term of the Agreement.
NOW, THEREFORE, the Parties hereby amend the Agreement as follows:
1. Amendment of Article 1. Article 1 of the Agreement is hereby
amended by:
a. Adding the defined term "Extended Term".
"Extended Term" means the five (5) year period from the
end of the Initial Term.
2. Amendment of Subsection 5.1. Section 5.1 of the Agreement is
hereby amended by deleting it in its entirety and replacing
it with the following:
5.1 Initial and Extended Term. This Agreement shall be
effective from the Effective Date and shall continue for
five (5) years thereafter (the "Initial Term") ;
subject, however , to the terms of Section 5.2 hereof.
At the end of the Initial Term, this Agreement shall
continue in force and effect for the Extended Term;
subject, however to the terms of Section 5.2 hereof. At
the end of the Extended Term, this Agreement shall
continue in force and effect for subsequent one (1) year
periods unless terminated by either party pursuant to
Section 5.2.
3. Amendment of Subsection 5.2 (b). Section 5.2 (b) of the
Agreement is hereby amended by deleting it in its entirety
and replacing it with the following:
<PAGE> 2
5.2 (b) Optional Termination After the Extended Term, either
party may, ninety days prior to any anniversary of the
Effective Date, provide to the other Party written
notice of its intent to terminate this Agreement on such
anniversary date, whereupon this Agreement shall
terminate on the anniversary date specified in such
notice.
IN WITNESS WHEREOF, the Parties have executed this Amendment effective
as of the date first set forth in the preamble.
DEEPTECH INTERNATIONAL INC. LEVIATHAN GAS PIPELINE COMPANY
By: By:
------------------------------- -------------------------------
Donald V. Weir Grant E. Sims
Chief Financial Officer Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LEVIATHAN
GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
AT JUNE 30, 1997 INCLUDED IN ITS FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,434
<SECURITIES> 0
<RECEIVABLES> 15,636
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,621
<PP&E> 269,839
<DEPRECIATION> 79,517
<TOTAL-ASSETS> 401,880
<CURRENT-LIABILITIES> 11,260
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 163,884
<TOTAL-LIABILITY-AND-EQUITY> 401,880
<SALES> 34,459
<TOTAL-REVENUES> 59,254
<CGS> 6,046
<TOTAL-COSTS> 6,046
<OTHER-EXPENSES> 49,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,464
<INCOME-PRETAX> (7,037)
<INCOME-TAX> (146)
<INCOME-CONTINUING> (6,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,891)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
